Orders of the Day — Finance Bill

House of Commons, 18 July 2000.

STAMP DUTY: EXCEPTIONS FROM SECTION 119

Melanie Johnson (Labour, Welwyn Hatfield)

I beg to move, That the clause be read a Second time.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following: Government new clause 4—Stamp duty: relief for certain instruments executed before this Act has effect. Government new clause 5—Stamp duty and stamp duty reserve tax: transfers between depositary receipt systems and clearance systems. Government amendments Nos. 108 to 130.

Melanie Johnson (Labour, Welwyn Hatfield)

New clauses 3, 4 and 5 and amendments Nos. 108 to 130 respond to a number of representations about the Finance Bill provisions relating to stamp duty. New clause 3 makes some exceptions to clause 119. New clause 4 applies these exceptions to documents executed between the Budget announcement and Royal Assent, and similarly backdates the relief in clause 129 for transfers of local authority housing stock to registered social landlords. New clause 5 makes an existing relief more comprehensive in response to developments in the financial markets. The bulk of amendments Nos. 108 to 130 address a concern about the application of clauses 122 to 124. They align the definition of a stamp duty group with the definition of a group for the purposes of corporation tax group relief. Clause 119 ensures that there is a stamp duty charge based on market value on land or buildings which are transferred to a connected company. In Committee, I mentioned that I would be tabling measures to exempt land settled on an independent corporate trustee from the scope of that clause. New clause 3 ensures that trustees are exempted and also that transactions involving nominees and certain types of distribution of land in specie fall outside the scope of clause 119. New clause 4 provides for the effect of these exemptions to be backdated to 28 March, when clause 119 took effect.

John Burnett (Liberal Democrat, Torridge and West Devon)

Is that exemption on settlement where the settlement is for nil value?

Melanie Johnson (Labour, Welwyn Hatfield)

Perhaps I could come back to that, because I am not sure what point the hon. Gentleman is raising. New clause 4 also backdates the effect of the relief for transfers of local authority housing to registered social landlords. Clause 129 relieves these transfers from stamp duty with effect from Royal Assent. New clause 4 extends this relief to transfers after 21 March. This affects transfers under the large-scale voluntary transfer programme that has taken place since the date of the Budget announcement. New clause 5 is a response to representations from the financial markets. It concerns transfers between depositary receipt systems and clearance systems. Its purpose is to make the stamp duty and the stamp duty reserve tax reliefs for transfers between these systems more comprehensive to cope with market developments. Transfers of United Kingdom shares within depositary receipt systems or clearance systems are free of duty, in return for the payment of a 1.5 per cent. charge when the shares first enter the system. That is usually described as a season ticket charge. There are reliefs which ensure that no stamp duty charge arises when shares are transferred from one season ticket system to another of the same type. The new clause extends the reliefs to include transfers from one type of season-ticket system to another. Government amendments Nos. 108 to 125 deal with stamp duty group relief. The new clauses and amendments align the definition of "stamp duty group" with the definition of "group" for the purposes of corporation tax group relief. One of the effects of the new clause is that, when there are arrangements in place for a company to be sold out of the group, it ceases to be a group member. That provision blocks group relief for the transfer of assets between that company and the rest of the group, and it is needed to prevent assets from being transferred into the company leaving the group. I have received representations expressing concern about the blocking of relief for transfers from the company about to leave the group to another group member—in other words, when the company leaving the group is the transferor. I am persuaded that there are commercial situations in which an asset is transferred to another group company after arrangements are in place for the transferor company to leave the group; in a sense, therefore, the asset never leaves the original group. I am willing to make a concession for such cases, which will be useful to businesses, as their legal advisers have suggested. I have some worry that it might be possible to construct avoidance devices from the concession, so I have asked the Stamp Office to monitor carefully the use of the relief. If the concession is abused, the Government will not hesitate to act swiftly. As I said, the new clauses and amendments have been tabled in response to representations about the effect and timing of the measures in the Bill. They meet a range of reasonable concerns expressed to us on these matters—some of them by Conservative Members in Standing Committee. I commend the new clauses and amendments to the House.

Howard Flight (Conservative, Arundel and South Downs)

The Government amendments are welcome, as they deal with situations where no transfer of beneficial ownership takes place. A major aspect of some of the exemptions is that they will not get in the way of company reorganisations, but that will apply only when the transfer takes place entirely within the group. Company reorganisations involving joint ventures, for example, will attract full stamp duty at a likely rate of 4 per cent. Not long ago, I recall the Chancellor standing at the Dispatch Box and referring to the McKinsey report. He spoke about a difficulty in improving productivity that stemmed from the existing legislation in respect of property and planning. The report referred specifically to problems and delays in obtaining planning consents, and to the costs of property transactions. Those costs have now been increased still further, and there is an element of hypocrisy in that. I put it to the Government that, if the aim is for greater productivity and greater flexibility of property use in business, the amendments could go a lot further. The proposals amount to a major stealth tax on business. In essence, the later amendments deal with securities that move between depositary receipt systems and that contain exemptions as a result. That is the territory of the business of the City of London. I should declare an interest in that respect, as should all hon. Members who are members of the House of Commons pension scheme. I have a question for the Economic Secretary. At a public meeting two years ago, I asked Lord Simon, who was then Minister for Trade and Competitiveness in Europe, whether the Government were aware of the business that was being lost to Frankfurt as a result of the stamp duty that applies on securities in this country, and whether the Government intended to do anything about it. He responded that the Government were well aware of the issue and intended to address it. It is ironic that I am asking this question on the very day on which the Government have announced a massive and cynical splurge to buy votes ahead of an election. It is an age-old game to tighten taxation in the first three years in power and then splurge a year or so before an election. That tactic is as old as the hills. However, given the strength of the revenues, if there were any desire to protect them, the near future would be the time to address this issue. Unless stamp duty on securities is phased out, there will be a massive loss and haemorrhaging of business in security transactions away from the United Kingdom and to the other centres in Europe, especially Frankfurt, where no stamp duty applies. When will the Government honour the pledge that the previous Minister for Trade and Competitiveness in Europe gave on this issue? Have they considered the potential total loss of revenue if that issue is not addressed?

John Burnett (Liberal Democrat, Torridge and West Devon)

It might help the Economic Secretary if I mention that my earlier intervention related to exemptions on transfer into settlement. Let us make the question absolutely clear: is that exemption available only when there is no consideration and no passing of beneficial ownership? The Finance Act 1998 contained many anti-avoidance provisions for stamp duty and for stamp duty reserve tax. At that time, the Government trumpeted the effect of the anti-avoidance measures. Unfortunately, they were not very successful under that Act, and because transactions were channelled through American depositary receipts, significant amounts of revenue were lost to the Exchequer. I understand that in three major transactions—involving, I believe, BP Amoco, Vodafone and one other—some £1.5 billion was lost to the Treasury. To what extent does the Inland Revenue believe stamp duty and stamp duty reserve tax are being avoided, especially in international transactions? The Economic Secretary has told the House that the Stamp Office is monitoring transactions for avoidance. What has been the cost to the Government of avoidance of stamp duty since March 1998?

Melanie Johnson (Labour, Welwyn Hatfield)

I am interested by some of the remarks that Opposition Members have made, which do not entirely relate to the amendments. However, I shall do my best to answer them. In his earlier intervention, the hon. Member for Torridge and West Devon (Mr. Burnett) asked the question that he has now reiterated, which was whether the exemption to clause 119 is available when there is a nil consideration. The answer is yes, the exemption takes the transaction out of the scope of clause 119, whatever the consideration, including a nil consideration.

John Burnett (Liberal Democrat, Torridge and West Devon)

Does that mean that there is no change in the beneficial ownership, or can the exemption apply if there is no consideration but there is a change in the beneficial ownership?

Melanie Johnson (Labour, Welwyn Hatfield)

I shall await some further thoughts on that matter. The hon. Member for Arundel and South Downs (Mr. Flight) said that many opportunities for joint ventures will not be helped by the group relief. The relief will apply where a joint venture falls within the scope of the group relief provisions. The new clauses have not changed the rules for joint ventures. The new clauses and amendments are all about anti-avoidance measures and making those measures work properly, ensuring that they are effective but not too tight. None of the existing arrangements is changed, although it is always tempting for hon. Members to think otherwise.

Howard Flight (Conservative, Arundel and South Downs)

The key point is that the cost of the tax to business is enormously higher than it was three years ago. The rules may not have changed, but they are a far more powerful deterrent to corporate modernisation than they were.

Melanie Johnson (Labour, Welwyn Hatfield)

The only change in the Budget was to increase the upper limit to 4 per cent., and that has affected only those making transactions involving more than £500,000. That is a sizeable sum, so we are talking about large deals and not smaller businesses or individuals, unless they are quite wealthy. The Budget leaves 95 per cent. of stamp duty effects completely unchanged. I understand that the proportion of stamp duty revenue from shares and from property transactions has remained more or less constant. The hon. Member for Arundel and South Downs spoke about the changes in stamp duty reserve tax and the arrangements for depositaries to ensure that we reflect changes that we understand are likely to take place in the business environment. This has not been an issue for business to date. We are enabling a flexibility in the system which has not hitherto existed but which we believe will be necessary in the future. The hon. Gentleman asked about the future of stamp duty reserve tax in general, which is not directly relevant to the new clauses and amendments. We consider these matters every year in the Budget. We have not identified any need for action this year, so it was not a feature of the Budget or the Bill, but we always keep these matters under review. On the hon. Gentleman's little splurge of an attack on so-called splurge, let me remind him that it is the Government's prudence in managing the economy and public expenditure that has enabled us to announce today some very generous investment in public services. Instead of spending 42p in the pound of extra money on social security and debt repayment, as the previous Government did, we have brought the figure down to only 17p. I caution the hon. Gentleman not to return to the earlier discussion, because we would be delighted to have a further debate on those subjects.

STAMP DUTY: RELIEF FOR CERTAIN INSTRUMENTS EXECUTED BEFORE THIS ACT HAS EFFECT

STAMP DUTY AND STAMP DUTY RESERVE TAX: TRANSFERS BETWEEN DEPOSITARY RECEIPT SYSTEMS AND CLEARANCE SYSTEMS

CORPORATION TAX ON CERTAIN INSURANCE COMPANY PROFITS

Michael Jack (Conservative, Fylde)

I beg to move, That the clause be read a Second time. New clause 1 would make a small—some may even say technical—change to the method of taxing life assurance policies. That small change, however, represents an attempt to bring the way in which the taxation of such policies deals with capital gains tax, in terms of taxation within the policy, into line with the change in the impact of CGT on those with assets whose value increases outside life assurance policies. I was grateful to the Financial Secretary for writing me a courteous and helpful letter on 1 June, following my first foray into this area. When I raised the subject in general terms when clause 37 was debated in Committee, he agreed to consider my arguments, and wrote me that helpful letter. I was heartened by the beginning of the final paragraph, in which he wrote: I accept that the case for change is not totally without merit. I think I scored seven out of 10. The purpose of this debate is to establish whether we can bring that score nearer, or perhaps all the way, to reality. When preparing for today's debate—and, indeed, for the debate in Committee—I first wanted to identify the cost implications of my proposal. I therefore tabled a series of parliamentary questions to try to elicit some facts from the Treasury. I think it worth noting how the Treasury responded to a perfectly legitimate request for information. The taxation formula known as I minus E relates to life assurance policies, and my proposed change relates to that formula. I wanted to know how much it would cost. When I asked the cost of a 1 per cent. change in each rate of tax in the so-called composite that constitutes the life assurance tax rate, the Treasury told me that no estimates were available. When I asked what the tax yield from life assurance policies had been over the past eight financial years, in the context of the I minus E formula, I was told that the information was not available. I then tried a different tack in an attempt to elicit the truth. I asked for the individual rates that made up the composite taxation rate of life assurance returns each year. I managed to obtain that information from the Treasury, which pointed out that there was an inconsistency between the personal rate of capital gains tax and that used in terms of the I minus E formula. I have dwelt on those parliamentary answers for a reason. It is remarkable that, when the Financial Secretary finally got around to responding to my points on clause 37, he managed to find out how much my proposal would cost. Let me send this message to the Treasury: when Opposition Back Benchers ask legitimate questions to which they, the public and the insurance industry should be able to obtain answers, they should not have to go through the expensive process of tabling numerous parliamentary questions and being told that the information requested is not available, only to find that—magically—it is available when the Financial Secretary writes a letter. Some 25 million people, including me, have life assurance policies, which, for them, represent an important part of saving. Many, however, have seen the returns on their policies suffer as a result of changed economic circumstances. The new clause would enable the money saved through the change in capital gains tax—about which I shall say more in a moment—to go back into those policies and, in a modest way, to help increase returns on them, thus counterbalancing some of the market tendencies that have disadvantaged their holders. The proposal would have the advantage of not discriminating against the life assurance policy as a form of saving. As I have said, changes have been made under section 26 of the Finance Act 1999, which reduced the rate of capital gains tax paid by basic rate taxpayers to 20 per cent. People with assets outside a life assurance policy get that lower rate. Under the present arrangements, those with life assurance policies do not have that advantageous change in the capital gains tax regime incorporated in the composite rate of tax attached to the earnings of life assurance policies. Originally, when the Financial Secretary wrote to me costing out the proposal, he said that, in his estimate, the proposal would cost £30 million, but the Association of British Insurers observes that the basic rate of tax that has been proposed has dropped to 22 per cent. I should be grateful if the Economic Secretary confirmed that that change in the basic rate of tax reduces the cost of my proposal to £20 million or thereabouts. It is important that there be equitable treatment of capital gains tax within life assurance policies to bring them into line with the way in which capital gains apply outside life assurance policies. That is the purpose of the new clause. People value the life assurance policy because, effectively, the tax for which they would be liable had they made that investment in some other way is paid for them as the policy appreciates over time. If it is a qualifying policy—that is, one with regular payments lasting 10 years or longer—the situation of effectively receiving the money tax paid applies to both the basic rate and higher rate taxpayer. Therefore, it is a particularly, if you like, tax administrative-friendly form of saving, but I do not see why at this juncture the Government should not agree to make the small change that I propose: to bring into line the external capital gains treatment with the internal capital gains tax treatment in terms of life assurance policies. The Association of British Insurers, which was most helpful to me in analysing the situation, rightly drew my attention to the fact that, if the change were to come in instantaneously, there might be a problem because the gains within a policy build over time. It may be that the new clause has a technical deficiency that does not necessarily reflect that particular situation. I would take advice from the Economic Secretary on that, but it is the principle that is at stake. If they do not accept my proposal now, the Government should commit themselves to firm action to regularise the position with regard to capital gains tax.

Howard Flight (Conservative, Arundel and South Downs)

I support the new clause. The taxation of insurance companies is one of the mysteries of our culture. The number of people who understand it can perhaps be counted on the fingers of one hand. Time was when it was tax advantageous to save through insurance companies, which was unfair against other forms of saving. That was sorted out about 15 years ago. There is a powerful logic to the point of principle that my right hon. Friend the Member for Fylde (Mr. Jack) makes, which is that, given the changes that the Government have made to the capital gains tax regime, there should be a level playing field between saving within an insurance wrapper and without an insurance wrapper. The Government have commissioned the Myners report to look into institutional investment in venture capital and to identify why it is not greater. As the Minister will no doubt be aware, one of the main things that it has found is that there is a need for reform of the tax of insurance companies, which do not have the lower capital gains tax incentives on venture capital that are available outside. I believe, therefore, that the rather broad drafting of my right hon. Friend's new clause would address that issue, which the Government's own commission is asking to be addressed.

Melanie Johnson (Labour, Welwyn Hatfield)

I am not aware that the Myners review has reported yet. The hon. Gentleman must be getting his intelligence on that from his tea leaves. New clause 1 would reduce the rate of tax that life assurance companies and friendly societies pay on capital gains that will contribute to benefits payable to policyholders. As the right hon. Member for Fylde (Mr. Jack) said, the logic behind the new clause is to bring the rate of corporation tax on those gains into line with the rate of tax applied to the capital gains of individuals. There are already rules to ensure that the share of a life company's income needed to fund policyholder benefits is charged to tax at rates equal to the basic rate or the lower rate of income tax, whichever would apply if the income belonged to an individual policyholder. Before April 1999, the rate of corporation tax on a life company's policyholder gains and the rate applicable to an individual's capital gains did correspond. However, as the right hon. Gentleman said, under the Finance Act 1999 the rate applicable to individual gains was reduced from the basic to the lower rate of tax without a corresponding change in the rate applicable to a life company's gains. I can confirm that, because of cuts in the tax rates, the cost of the right hon. Gentleman's proposal would be £20 million annually. Therefore, at first sight, his proposal seems logical. However, a more detailed analysis shows that the logic applies only at a relatively superficial level. There are fundamental differences between the regimes for taxing gains made by companies, especially life companies, and the capital gains of individuals. When citing the formula I minus E, the right hon. Gentleman should really have said I plus G—for gains—minus E. That is the right formula. The right hon. Gentleman raised the same issue in the Committee's debate on clause 37. As he said, my hon. Friend the Financial Secretary wrote to him. In that letter, my hon. Friend set out some of the key differences between the way in which a company's gains are taxed and the way in which an individual's gains are taxed. For the benefit of the House, I shall outline those differences, as they are entirely relevant to whether parity could be achieved as the right hon. Gentleman suggests in new clause 1. Individuals enjoy taper relief, whereas companies have indexation. Another difference is that individuals have an annual exempt amount below which gains are not taxed. Additionally, life companies can deduct management expenses in computing their liability on chargeable gains, whereas individuals cannot. Life companies are also able to fund payments to policyholders from incoming premiums without realising assets and, therefore, making capital gains. That enables the companies to defer making taxable gains almost indefinitely, and so reduces the effective rate of tax that they pay on the policyholder gains. Those differences mean that a simplistic comparison, or a relatively simplistic comparison, of nominal rates of tax is not a very satisfactory way of comparing effective rates of tax on the gains of life companies and individuals. Another point is that policyholders who pay higher rate tax on their policy gains get a credit for the basic rate tax. It would be appropriate to reduce that credit if the rate of tax on life company gains were reduced. However, new clause 1 would not do that. Therefore, it would not achieve quite the effect described by the right hon. Gentleman. I grant the right hon. Gentleman that there are arguments both ways. If the changes that he seeks were to be made, it would have to be as part of a larger package than he is proposing. Although I am not persuaded that such a package would necessarily be right, we shall continue to bear in mind the possibility for future Finance Bills. What is clear is that new clause 1 does not present such a package. Therefore, should the hon. Gentleman press the new clause today, I shall urge the House to reject it. Nevertheless, I concede that, in his proposal, he has achieved seven of 10.

Michael Jack (Conservative, Fylde)

It was most generous of the Economic Secretary to agree with my own self-marking. I drew some comfort from her last few words, having tried to grapple with the complexities of life assurance taxation—not always with great success, although I got a general idea of what it was about. If the hon. Lady was indicating that there may be a possibility of further dialogue with the life assurance industry when she said that my proposal would have to be wrapped around by other measures as part of a wider package, is she willing to commit the Treasury and the Revenue to further dialogue with the life assurance industry on this and other points? The industry and I would certainly draw comfort from the fact that the door was not closed on this seven-out-of-10 proposal. Understandably, the hon. Lady drew attention to the taxation regime for life assurance companies and pointed out that certain tax advantages to companies negated the need for my proposal, but, tellingly, she did not mention that the treatment of capital gains within life assurance policies includes no equivalent to the personal allowance on capital gains. In other words, in respect of the composite rate for capital gains, the clock starts ticking from the first £1, whereas if the same asset were held outside the policy there would be an individual allowance before the capital gains clock started ticking. It is the view of the industry—certainly from my consultation—that that would counterbalance some of the hon. Lady's arguments in respect of the position of a company as opposed to that of an individual. It comes down to equity. If we make a change to benefit the individual outside the policy in respect of capital gains tax, is it equitable not to benefit the individual who holds their savings in the form of a policy? I am very conscious that on the wider front the savings ratio in the United Kingdom has fallen and that people with life assurance policies have faced particular difficulties. Many events in terms of an individual's future financial outgoings are predicated on good returns being achieved, and the new clause is a small and modest proposal that would help to improve the returns on life policies at a difficult time for that particular savings product. I would very much appreciate a response from the Economic Secretary on that point.

John Burnett (Liberal Democrat, Torridge and West Devon)

Is the right hon. Gentleman seeking to ensure that only one exemption is available per annum per individual, so that if the exemption is used outside the life policy no further exemption is available within it?

Michael Jack (Conservative, Fylde)

Very few individuals actually pay capital gains tax—I think that there are only a couple of hundred thousand. Putting that to one side, my proposal would deal on a continuing basis with a small change in the composite rate in respect of the way in which the formula to which the Economic Secretary referred—I plus G minus E—operates. That is the purpose of the new clause. It would become intolerably complex to try to relate an individual's capital gains tax position in respect of assets held outside the policy to those within it. That is certainly not part of my proposal. I conclude by asking the Economic Secretary to be kind enough to respond to my point about the proposal being part of a package and the possibility of opening dialogue with the industry so that, if necessary, the subject may continue to be discussed in the round.

Melanie Johnson (Labour, Welwyn Hatfield)

First, let me return to a point that I should have answered earlier, which was mentioned by the right hon. Member for Fylde (Mr. Jack) in his opening remarks. He referred to the answers he received to parliamentary questions. He formulated questions requiring breakdowns of figures that were not available; he did not ask the question that my hon. Friend the Financial Secretary then answered. My hon. Friend explained the costs of reducing the rate of corporation tax on policyholders' chargeable gains from 23 to 22 per cent., but the right hon. Gentleman had not asked that question. Therefore, the mystery that he attached to the fact that the answer was available is not a mystery at all. Also, in response to the right hon. Gentleman's argument about the exempt amount for life companies, I have already said that there is no exempt amount, but there are several factors pointing the other way. I have gone through the list and I am prepared to go through it again. It is a matter of balance. The right hon. Gentleman referred to equity. I think that he did not use the right word in this context and that his argument was more about parity. There are a number of factors which cut both ways. As I hope I have explained, the matter is more complicated than the issue that he is raising in new clause 1. I am not making a specific commitment to dialogue at this point; however, we will keep the matter in mind. Obviously, there will be future Budget rounds and discussions. As I am sure the right hon. Gentleman is aware, I regularly meet representatives of the insurance industry and the Association of British Insurers. I am sure that there will be opportunities for discussion, but I am making no commitment to introduce any future package. As I said, such a package would probably be the right way to achieve the right hon. Gentleman's objective, and I accept that there may be some arguments in favour of that objective. I hope that I have persuaded him to withdraw the new clause.

Michael Jack (Conservative, Fylde)

I accept what the Economic Secretary said about the word "parity" as that would achieve the same purpose. She has set a challenge to the insurance industry to use the opportunities of discussion with the Treasury and the Revenue to develop a package in which my proposal might find a place. However, I would not expect her to commit herself at this stage. As for my parliamentary questions, I think that those who draft the answers to questions were pretty clued up as to why I was asking them, so it was disappointing that rather than the negative answers that I received there was not a little more imaginative drafting. However, given the assurances about future dialogue and the fact that no doubt the industry will want to rise to the challenge, I beg to ask leave to withdraw the motion.

RATES OF DUTY, ETC.: REFERENCE TO RETAIL PRICE INDEX

David Heathcoat-Amory (Conservative, Wells)

I beg to move, That the clause be read a Second time.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss new clause 7—Timing of announcement of pensioner income tax allowances— 'In section 257C(3) Taxes Act 1988 add at the end "The order shall be made by 31st December following the preceding September referred to in subsection (1).".'.

David Heathcoat-Amory (Conservative, Wells)

An important part of the budgetary process is the uprating of tax rates and associated matters and, at other times of the year, the uprating of benefits and pensions. New clause 2 seeks to bring some honesty and transparency into the process and into Government finances more generally. It would require the Government to do what the previous Government did, and base the uprating of taxes, allowances and tax credits, and, by implication, benefits and pensions, on a single backward-looking or historical basis—in other words, to treat all upratings in the same way. Not only is that right in principle but it gives additional certainty and precision, because people can see that the increased rates are based on an arithmetical index that is generally published and available.

Stephen Timms (Labour, East Ham)

The right hon. Gentleman suggests that the Government should follow the practices of the previous Government. On a number of occasions, the previous Government froze the allowances altogether. Will he acknowledge that when he advocates that we follow their practices?

David Heathcoat-Amory (Conservative, Wells)

Not only did we freeze some of the upratings but we reduced certain duties. In our last two Budgets, we froze the duty on alcohol and reduced it on spirits. We did that for sound reasons, and it is regrettable that the incoming Labour Government failed to follow that practice and uprated alcohol duties again. Now we hear that a main cause of disorder in all our streets is abuse of alcohol, some of it bought from illegal outlets and undoubtedly smuggled across the channel. The Government should have tackled the cause of that crime rather than trying to tackle its symptoms; they should have tackled the severe smuggling problem. So the answer to the Minister is that on occasions we froze some tax increases. I commend the practice to him. The new clause ensures that where the Government increase taxes and benefits by reference to a prices index, they use a single historical one. I contrast that with what the Government are doing now. They pick and choose whether they use an historical or a projected index, purely for their own convenience. The most obvious example is the treatment of fuel duties. The basis of that treatment was changed in 1997 from an historical to a projected inflation assumption. That was a clear break with what had happened previously, probably caused by the fact that the Government sought to introduce an extra uprating. The Government introduced four upratings in three years before they finally came off the fuel duty escalator.

John Bercow (Conservative, Buckingham)

Given that 29.5 per cent. of the price of a pint of beer, 50.5 per cent. of the price of a bottle of wine and 61.3 per cent. of the price of a bottle of whisky goes directly to Treasury coffers, can my right hon. Friend offer the House a guesstimate of how much lower those proportions would be in the happy event that new clause 2 had been passed at the beginning of this Parliament?

David Heathcoat-Amory (Conservative, Wells)

My hon. Friend makes a good point, and most usefully broadens the debate. We are not discussing the increase in road fuel duty alone. As he has rightly spotted, the same system has been used to uprate tobacco and alcohol taxes in the Budget by far more than was justified. The figures are revealing. Fuel and alcohol duties increased by 3.4 per cent. immediately on Budget day. That was the anticipated inflation rate for the rest of the year. Curiously, that inflation rate does not appear anywhere in the Red Book, but that was undoubtedly the Government's estimate. By contrast, income tax allowances and tax credits, such as the tax credit for the disabled, all increased not by 3.4 per cent. but by between 1 and 1.5 per cent. That is all laid out on pages 138 and 139 of the Red Book. So the Government took a high inflation figure when it suited them for revenue purposes, but when they gave away some money to working families or disabled people, or simply uprated personal allowances, they used a far lower figure. The net benefit to the Treasury was simply colossal. The Government notoriously used exactly the same methodology to uprate pensions by only 1.1 per cent., leading to the 75p per week insult to pensioners with which the country is so familiar. Needless to say, there was not a word about the change in treatment of fuel duties in the Budget speech. The increases were all described as simply increases by the rate of inflation. Worse than that, when challenged, the Government denied it. I am glad that the Paymaster General is attending the debate. She will recall that this very issue was raised by my hon. Friend the Member for Arundel and South Downs (Mr. Flight), who is in his place now. On 6 April, he challenged her and pointed out that petrol duty had been raised by an inflation index of 3.4 per cent., whereas allowances had been raised by only 1.2 per cent. The Paymaster General replied with a mixture of patronising my hon. Friend and being wrong. She said: I think that I am right in saying that the hon. Gentleman has never been in government, so I suppose he can be forgiven for not knowing how the tax system works. That was the patronising bit. The false and wrong statement was as follows: The methodology used for this year's increase is exactly the same as that which has been used in previous years. It is the same methodology that the Conservative Government used.—[Official Report,6 April 2000; Vol. 347, c. 1145.] That was flatly untrue. I have already described how in 1997 the incoming Labour Government changed the methodology from one based on an historical index to one based on a projected index. I should be grateful if the Minister would apologise for misleading the House. Such examples show why people have lost faith in the Government and why the Government's assertions about taxes and benefits are simply not believed any more. Indeed, the contents of the memo leaked from No. 10, in which the Prime Minister whinges that no one believes him any more and he has lost touch with the instincts of the British people, are at least in part attributable to the fact that people have not been told the truth. When challenged, the Government flatly deny what is in fact the case. The practice of using two indexation procedures, simply for their convenience, has grown under this Government. I believe that that is not just wrong but probably illegal. Some of us served on the 1998 Finance Bill. I have done more Finance Bills than I care to remember, and I certainly attended all the debates on that one. Under what became section 155 of the Act, the Treasury is committed by law to certain key principles in the formulation and implementation of fiscal policy. One of those key principles is transparency. I do not know what happens if the Government break one of their own laws—who gets arrested, or who is responsible for ensuring that an Act of Parliament is obeyed. That we can leave for another time, but the Government are building up a good deal of case law of instances in which they are in breach of section 155 of the Finance Act 1998. The example of indexation subterfuges that are carried out and then denied comes in addition to other stealth taxes, and the House is familiar with many of them. The Select Committee on the Treasury, with its distinguished Labour Chairman and a Labour majority, drew attention in its report on the Budget this year to no fewer than five examples of a lack of transparency in the presentation of the national accounts. It pointed out that the Government used the term "tax burden" without making it clear that they were only talking about the direct tax burden. That conveniently omitted all the indirect taxes, which were increasing. The Select Committee asked that that be put right. The Committee also drew attention to the rather propagandist little document that the Government published at Budget time, again at taxpayers' expense. It asked that in future such a document should be independently audited.

John Bercow (Conservative, Buckingham)

Will my right hon. Friend confirm that the Select Committee's request was not spectacularly radical? It was merely asking the Chancellor to revert to the proper practice that was operated by Conservative Governments for 15 successive years, from 1981 to 1996.

David Heathcoat-Amory (Conservative, Wells)

My hon. Friend is right. We are not asking for the impossible or the unusual. We are merely asking the Government to revert to previous practice. I can give my hon. Friend another example. The Select Committee pointed out that the Government had dropped the previous practice of reporting on the effects of indirect taxes on households of various sorts. That was the subject of one of its recommendations. We all remember that in previous years that information was routinely published by Conservative Governments. However, it was dropped immediately and without explanation, because the results would be embarrassing. That is wrong, and conflicts with the Finance Act 1998. My final example is the working families tax credit, which is now being treated as a deduction from taxation, although it is part of the sum of social security expenditure. That fact is confirmed half way down page 220 of the Red Book, admittedly in small print: income tax credits … score as public expenditure under national accounting conventions. Despite that, in every other reference to working families tax credit in all other documents, and elsewhere in the Red Book, it is wrongly, confusingly—and, in my view, deceitfully—described as a deduction from income tax. I have provided some examples, and the new clause is designed to prevent the situation from becoming worse. It would require the Government, by law, to have one policy for uprating the various taxes and duties, and to stick with it. This is not simply a question of honesty in the presentation of the national accounts, important though that is. It is also about protecting the country from further damage. If the clause had been implemented last year, the Government could not have raised fuel duties or other indirect duties by 3.4 per cent. I will not say that they got away with it, because what they had done was discovered, but the 3.4 per cent. increase has made petrol and diesel in the UK the most expensive in Europe. If by some lucky chance the new clause is accepted this evening, the Government could find a way of paying back at least the windfall element in the money that they have netted since the Budget. Revenue from road fuel comes from hydrocarbon duty and value added tax. The Government's latest excuse for the rise in petrol prices is that the world price of oil has risen. However, that, too, nets the Government a great deal of extra revenue. It is calculated that VAT on the higher oil price since Budget day is netting the Government an extra £150 million a year. 6.15 pm That is bad for taxpayers, particularly for those who have to have cars. It is also bad for the haulage industry and for manufacturing. However, it is good for some. We are told that it is very good for the racketeers and paramilitary organisations in Northern Ireland. I have often asked the Treasury whether it has any estimates of the smuggling that takes place across the land border between Northern Ireland and the Republic—another EU member state. It always replies that it has no such estimates. That shows an extraordinary degree of complacency. Some other people have been doing some work. The Petrol Retailers Association has noticed that official deliveries of petrol in Northern Ireland have fallen from more than 160,000 tonnes in the last quarter of last year to less than 110,000 in the first quarter of this year. More than that, it has counted that more than 70 petrol stations in Northern Ireland have closed as a result of the smuggling. It believes that this is providing funds for racketeering and paramilitaries of various sorts. It is extremely disturbing that that should have been worked out by an outside organisation and not by the Government. I ask the Government and the Treasury, in all sincerity, to consider again the damage caused by the escalation in petrol prices. The Chancellor said this afternoon that he had come off the fuel duty escalator, but I have described a situation where he has done anything but that. There is no justification for the past increases and the extra budget that he has had in the past three years, which means that the cumulative effect will be even more damaging. In addition, he increased duty by 3.4 per cent. this year, which made a bad situation worse. The new clause, which I commend to the House, is designed to put some honesty and transparency back into the method of calculating duty rates. It would be good for the country if it helped to unwind the entirely unjustified duty increase on 21 March.

Malcolm Chisholm (Labour, Edinburgh North and Leith)

I shall make only two points given the pressure of business. The right hon. Member for Wells (Mr. Heathcoat-Amory) cannot get away with taking the high moral ground on such a spurious basis. First, we heard the nonsense about fuel duty. We have been hearing about it also in recent weeks from the Scottish National party in Scotland, and in a few minutes we may hear about it again from the SNP. There was a change because of the general election and a Budget soon afterwards. As the right hon. Member for Wells knows, the last Conservative Budget in November 1996 used the September 1996 uprating. Therefore, in July 1997, the Labour Government had to use September 1997 in accordance with the fuel duty escalator.

David Heathcoat-Amory (Conservative, Wells)

Why did they not use the prices index up to June 1997?

Malcolm Chisholm (Labour, Edinburgh North and Leith)

What they used was similar to that. September is the point that is always used for these indexes. It was natural to use September for the first Budget. Secondly, the right hon. Gentleman has praised previous practice. He knows that there were two different upratings under the Conservative Government. There was one for the headline rate of inflation for pensions and similar benefits, whereas income-related benefits have always been the subject of the Rossi index, as he knows. It would have been far better if he had acknowledged that fact. Perhaps he has forgotten because there is complete confusion in the new clause, in which he asks for tax credits to be governed by the retail prices index, when income-related benefits have always been governed, even by Conservative Governments, by a different index.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

New clause 7 relates to the timing of the announcement of the increase in income tax allowances. It is a modest new clause, but it would provide real benefits to pensioners who pay income tax. At the moment, because of the problems that there have been with the announcement in the past two years, pensioners are effectively paying an interest-free loan to the Chancellor between April and May. The new clause would reduce the Inland Revenue's administration costs when it sends out the various codings. Perhaps the most important benefit that it would bring would be to end the confusion and anxiety felt by many pensioners when they receive their changed tax coding later in the year. When the Budget was in March, the longstanding practice was for tax codings to be sent out to all income tax payers in January and February, based on the income tax allowance for that year. Then, after the March Budget, when the new income tax allowances had been announced, a new coding would be sent out to all taxpayers. That was the usual practice with which everyone became familiar, and it did not create a problem because it was done in time for the forthcoming financial year. But there has been a change which has gone unnoticed by many. When the Chancellor rightly aligned class 1 national insurance contributions with income tax, he decided that he would announce the following year's allowances in the November when he announced the changes to the national insurance system. The changes to the allowance for the following year for employed people—the non-pensioner income tax-paying community—were announced in November. The correct PAYE codes could be sent out in January and February, so there was no problem for them. However, because pensioners do not pay national insurance contributions, the Chancellor has not announced in the pre-Budget report of the previous two years the increases in the pensioner allowances. Therefore, the tax codings for pensioners have gone out in January based on that year's level of allowances, and when the Chancellor has announced the increases in the pensioner income tax allowances in the following March Budget, another tax coding has had to be sent out, in the main just to pensioners. That has meant that pensioners, for the months of April and May, have paid too much income tax, and the extra bureaucracy from the Inland Revenue has caused them concern and anxiety. They have had to ask their tax advisers what on earth it is all about, and when it has been explained to them, they have been flabbergasted. They wonder why on earth the Government are behaving in such a way, why all that bureaucracy is being created and why, they, the pensioners, have to have too much tax deducted from them during the month of April. New clause 7 would resolve that problem once and for all. It amends the famous section 257C of the Income and Corporation Taxes Act 1988, which was introduced by the Rooker-Wise amendment. The new clause would ensure that the announcement of the upratings for the income tax allowances was made by the latest by 31 December of the year before the tax year to which those upratings apply. I raised the matter in the House in an Adjournment debate on 9 June 2000. The Paymaster General was kind in replying to that point and to others. She admitted that the Government recognised that this was an issue. She said: It is something that I should like to address. She went on: The hon. Gentleman made a point on coding notices. We are aware of that matter and are examining it. We have not yet found a solution to it, but we are still looking for one.—[Official Report,9 June 2000; Vol. 351, c. 617–18.] I was grateful for that positive reply from the Paymaster General. New clause 7 is the solution to which the Government should be looking. The Minister may say that it would tie the Chancellor's hands, but it would not because the Chancellor would still be free in the March Budget and the future Finance Bill to announce changes over and above what was announced in December to the future uprating of income tax allowances, either up or down. The clause would not tie the hands of the Chancellor or restrict Parliament; it would simply make for good administrative practice. It would mean that low-income pensioners did not make interest-free loans to the Chancellor, which cannot be right. I hope that the Minister will consider this minor administrative matter, which is important to tens of thousands of pensioners and possibly more. I tried recently to elicit how many by various parliamentary questions, but I was unable to obtain exact figures. However, many are affected by this. It cannot be right that we and other taxpayers are spending money on bureaucracy for something that is completely unnecessary and further disadvantages some of the most disadvantaged people in our society. If the Government do not accept new clause 7 tonight, I hope that they will go away and make sure that the problem is addressed in the way in which the Chancellor makes future uprating statements for income tax allowances for the employed and for pensioners, and that they will provide statutory protection to prevent such a mistake from happening again. Liberal Democrats have nothing against new clause 2. It is one way of changing the uprating of the allowances and duties. The Conservative Government had more than one way of doing that, and this Government have more than one way. There is nothing sacrosanct about any particular process for uprating allowances and duties, so Liberal Democrats have no problem in supporting the new clause. There is a genuine case for it in the sense that the uprating would be based on a reality—a figure which could be proved, analysed and agreed upon, rather than a forecast figure, which might not be the eventual inflation figure for that period. One need not waste a huge amount of time on it. It is a relatively simple measure concerning a technocratic issue. The right hon. Member for Wells (Mr. Heathcoat-Amory) made a few political points, some of which were well made. There is no doubt that the two upratings in the Government's first year were rather stealthy. There is no doubt that pensioners think it rather odd that their pensions have gone up by 1.1 per cent. while fuel duty has gone up by 3.4 per cent. and council tax often by far more than that. People on incomes that are increasing only modestly are concerned. New clause 2 may be one mechanism by which to address that unfairness and ensure that people do not perceive that this Government or other Governments are treating them unfairly. However, new clause 2 is only a tiny measure to get rid of that unfairness. What we really need are higher basic state pensions for the ordinary pensioner. Unfortunately, we did not see that in today's statement or last April, and that is a shame. It is about time that the Government addressed that issue, which is a matter of a great deal more substance than new clause 2. However, as I said, Liberal Democrats have no problem with it.

Alasdair Morgan (Scottish National Party, Galloway and Upper Nithsdale)

I would like to speak briefly to new clause 2, specifically in relation to fuel duties. I am glad that you called me, Mr. Deputy Speaker, because I would have hated to disappoint the hon. Member for Edinburgh, North and Leith (Mr. Chisholm), who would not otherwise have had a chance to listen to the "usual nonsense", as he called it, from the SNP. It is a serious matter that fuel duties have been put up by more than the real rate of inflation, particularly for my constituency, which has the third lowest level of income of all the Scottish constituencies, but about the third highest level of car ownership. That is not because the people in my constituency, being of average lower income, are perversely buying cars and luxury items. It is because the ownership of a car, or often two cars in a family, is essential to earning a livelihood. Therefore, to increase one of the principal costs of car ownership by more than the real rate of inflation is insupportable. Because the tax, certainly in Galloway and in many other rural areas, is paid by those on lower incomes, regardless of what those incomes are, effectively it is a regressive tax which is being increased by more than the rate of inflation. That would be bad enough if tax were the only influence on the price of petrol, but it is not. The right hon. Member for Glasgow, Anniesland (Mr. Dewar), then Secretary of State for Scotland, said in the Scottish Grand Committee last year: The oil price is likely to stay at about $10 to $12 a barrel—at least in the foreseeable future—[Official Report, Scottish Grand Committee,1 February 1999; c. 8.] This June, the oil price touched $31 a barrel. The right hon. Gentleman does not seem to have displayed great foresight. Perhaps it is as well that he is not in charge of Treasury forecasts. In the light of that, perhaps the Government thought that they could get away with such increases and their mechanism for them when oil prices were very low, and they thought that they were likely to remain low. That is no longer the case. Petrol has gone up for other reasons; it has gone up because the price of oil has gone up. That is a very good reason why the Government should revisit the mechanism for taxing petrol. There are, therefore, three reasons why. First, as I have said, the price of petrol is going up anyway. Secondly, as the right hon. Member for Wells (Mr. Heathcoat-Amory) said, as a result Government revenues elsewhere are going up. They are going up from VAT on oil; they are going up increasingly from the petroleum revenue tax. I think it is estimated that £20 billion over the next four years will be gained from the PRT. Lastly, as the right hon. Gentleman also said, the Government are suffering a severe loss of revenue because of above-inflation increases in the price of diesel fuel and petrol here while there is cheaper fuel elsewhere. In my constituency, the nearest to Northern Ireland, we are very conscious that cross-channel hauliers—I am speaking about the north channel between Galloway and Northern Ireland—very often do not fill up in Galloway or in Northern Ireland, but fill up in the Republic, in places such as Dundalk. That means money lost to the Exchequer, because basically we are trying to be too greedy. The mark-up on what would be the retail price of petrol without the duty is, I believe, 333 per cent., which is fairly good by anybody's standards. It is not just ordinary people who are paying the tax. It is also heaped on to the police, the fire service, the ambulance service and school buses. Every time we increase the tax by more than the real rate of inflation, the costs of all those essential services go up at the same time. That is insupportable. The Chancellor has made much of the fact that he has done away with the automatic fuel escalator. I do not see that there is any point in doing away with an automatic escalator if what we get instead is a manual escalator. We need a much more sensible approach to the issue. I urge the Government to think again before it is too late for many businesses in the rural economy, and perhaps before it is too late for their majority at the next election.

Michael Jack (Conservative, Fylde)

I support my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory), who made a telling case for standardising indexation changes based on a retrospective look at the retail prices index. One feature that has not come out in the debate so far is the accuracy of the inflation forecast. If by chance inflation does not move ahead at the same rate as the forecast increase used for the various tax purposes that my right hon. Friend outlined, the Government have a windfall gain, but they do not give themselves an obligation to pay back to the taxpayer any of the extra money obtained through fortuitously lower inflation than forecast. As has been said in the debate, the windfall gain in VAT receipts as a result of the rise in oil prices, with its knock-on effect on petrol prices, bears witness to the fact that the present Government enjoy using every opportunity to take the people's money and put it into the Treasury's coffers to do with it as they think fit. Therefore, in terms of safety and equity, my right hon. Friend is correct. I should like to conclude by expressing a provocative thought. The whole question of uprating the Government's income is perhaps a disincentive to their making certain that they always make every pound of taxpayers' money work as hard as possible. The Government can simply say that they can guarantee that a certain amount of money will come in through uprating, but a company cannot assume that it will receive automatic price increases. A company will try extremely hard to make every penny work as hard as possible, because it cannot guarantee receipt of that extra income. We have got ourselves into the way of thinking that the Government's position must always be protected. From the individual's point of view, I can well appreciate why indexation should continue to be a regular feature, because he or she has less room for manoeuvre; in the real world an individual may well not receive a pay increase, but he still has his taxes to pay. Therefore, some form of price index-insulated indexation is important to him if he is not to be worse off year on year in real terms. But the Government's automatic assumption that they will receive money through indexation perhaps makes them a bit sloppy around the edges when it comes to spending the public's money. That may be a feature that the House will return to when it debates today's statement by the Chancellor.

Stephen Timms (Labour, East Ham)

We have been over the ground covered by new clause 2 on a number of occasions. This is probably the third time that we have heard the speech of the right hon. Member for Wells (Mr. Heathcoat-Amory). I had hoped that he might have something different to say on this occasion, but I was disappointed. He made his points in the usual way. I should like to set out the position again. It is standard practice for inflation increases in excise duties to be based on a forecast of September retail prices index figures, and for income tax allowances and pensions to be based on the previous September's out-turn figure for the retail prices index.

Michael Jack (Conservative, Fylde)

The Financial Secretary used the expression "standard practice". Why must it be the standard practice? Why could the hon. Gentleman not change the standard practice to a more equitable practice if he wished?

Stephen Timms (Labour, East Ham)

Of course, the practice could be changed, but I want to explain what the practice is. September is the date that has been used on both sides, in excise and in allowances, with a forecast in the case of excise duties and a look back at the previous year's figures in the case of allowances.

Alasdair Morgan (Scottish National Party, Galloway and Upper Nithsdale)

If that practice is followed, and if—heaven forbid—Treasury forecasters are always pessimistic, we shall continue to have an increase each year that turns out to be higher than inflation, and gradually the average prices index and the duty levels will diverge.

Stephen Timms (Labour, East Ham)

I am glad to be able to reassure the hon. Gentleman on that point. The duty increases since the election have been less than they would have been if inflation had been used. The duties being paid by the hon. Gentleman's constituents are less than they would be if we were to take up his suggestion. The Opposition have got excited about this matter on a number of occasions and have drawn attention to the fact that, this year, inflation increases for duties have been greater than for allowances and pensions. It is a matter of swings and roundabouts. Last year, the reverse was the case, and allowances and pensions went up by 3.2 per cent. while duties went up by 1.3 per cent. We heard nothing about stealth handouts in the debate at that time. In a era of stable inflation—the result of the extremely successful management of the economy that we have enjoyed over the past three years—things even out over time. As I have been able to point out, duties have increased by less than inflation over that period. All this fuss has been entirely misplaced. Announcement of the personal allowance in November means that the latest practical reference point for income tax allowance indexation is September—the month preceding November would not work. It would be impractical—this is a suggestion in new clause 2—for the Budget to be early in the month. If the Budget were in early March, the new clause would require the duty increase to be the change in the RPI in the year to February, which would not even have been published by that time. It is an unworkable proposal. Another difficulty with the proposal is that different indexation figures would be used for different allowances. Basic personal allowances would rise by the increase in RPI in the year to October, while the other allowances and the rate bands would rise in line with the RPI increase to February. That is just within the allowances. There is no sense in that. I should remind Conservative Members that it was their Government who introduced the Income and Corporation Taxes Act 1988, which requires the use of the September RPI for income tax as opposed to the much more arbitrary and less satisfactory proposition that they are advancing today. I noticed that, in response to my intervention, the right hon. Member for Wells was understandably shy when it came to talking about what the previous Government did with income tax allowances. The previous Government froze income tax allowances for 1993 and 1994; they did not uprate them at all. They also froze the basic rate limit, not just for those two years, but for 1990 and 1992 as well. As a result, they raised taxes by over £2 billion. The measures to freeze allowances and the basic rate threshold with effect for April 1993 and April 1994 brought in about £1.75 billion. The Chief Secretary responsible for that was the current shadow Chancellor. The Opposition are a great deal more vulnerable on this than the Government. The proposal is unworkable. The right hon. Member for Wells or it may have been his hon. Friends in Committee—said that the Red Book does not mention the figure of 3.4 per cent. It does. It appears several times in table A.9 on page 146 and the figure 3.41 per cent. appears in table A.12 on page 148. It is always worth reading the Red Book. It is a practice that I commend to Opposition Members. I was rather surprised by the fact that the right hon. Gentleman said that he had been unable to establish the figure for revenue lost through cross-border shopping and smuggling of oil in Northern Ireland. We have said on a number of occasions that we estimate that to be £100 million in 1998. That has been published in parliamentary answers and it was stated in Committee. We have published that figure on a number of occasions, and I am sorry that the right hon. Gentleman missed it. 6.45 pm The hon. Member for Galloway and Upper Nithsdale (Mr. Morgan) raised concerns, specifically about fuel duty. I hope that he will be reassured by what I have said about the impact of the method used for inflation uprating of duties. He expressed particular concern, for reasons that I well understand, about the position of low-income constituents in areas such as his. They will benefit particularly from the changes that we have announced to vehicle excise duty. We have extended the threshold for the lower rate from 1100 cc to 1200 cc vehicles. His constituents will also benefit from the new arrangements being introduced from next year for lower rates of vehicle excise duty on fuel efficient cars. Those measures will be particularly welcome to the hon. Gentleman and his constituents.

Alasdair Morgan (Scottish National Party, Galloway and Upper Nithsdale)

Will the Minister accept that those measures are much more likely to benefit those who can afford to buy new cars? People on low incomes tend to buy second-hand cars, often without a low engine size because such cars tend to be cheaper on the second-hand market.

Stephen Timms (Labour, East Ham)

The concession for vehicles of less than 1200 cc applies equally to new and old cars. I anticipate that the hon. Gentleman's constituents who are on a limited income and driving an inexpensive car will welcome those measures.

David Heath (Liberal Democrat, Somerton and Frome)

I wonder whether the hon. Gentleman can help me with a query from a constituent who points out that the differential between unleaded petrol and leaded petrol was introduced as a perfectly proper environmental measure. Why is that differential maintained between unleaded petrol and lead replacement petrol? That affects people who own older cars, which may not be able to run on unleaded fuel.

Stephen Timms (Labour, East Ham)

The differential with lead replacement petrol is a reflection of the different costs in the production process. I should be happy to drop the hon. Gentleman a line setting out the details of that arrangement. I am grateful to the hon. Member for Kingston and Surbiton (Mr. Davey) for his explanation of the new clause. I know that he takes a keen interest in the way that the tax system affects pensioners. As he said, my hon. Friend the Paymaster General had an opportunity to debate a wide range of issues of concern to pensioners with him in the Adjournment debate on 9 June and, in particular, to consider the proposals made by the low income tax reform group. For reasons that he spelled out, the hon. Gentleman would prefer the Revenue to reflect in the PAYE codes on occupational pensions, which are issued in January and applied in April, the increased amount of state pension and the increased amount of allowances resulting from indexation. His proposal is that the Revenue would be able to do that if the Treasury order setting out index values of allowances were published by the end of December rather than on Budget day the following March. Publishing that order earlier would not have that effect because it is always possible for Parliament to override indexation, as it did in 1999 when pensioner allowances rose by up to £200 more than the indexation required.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I understand that point, but surely in most years and in most circumstances there would not need to be a second tax coding because Parliament would usually go by the normal Rooker-Wise index.

Stephen Timms (Labour, East Ham)

I know that the hon. Gentleman feels strongly about this. My hon. Friend the Paymaster General gave him an assurance during the debate on 9 June that she would look into this matter. I know that she is doing so with great care and I hope that the hon. Gentleman will feel that he can accept that assurance and not press this issue.

David Heathcoat-Amory (Conservative, Wells)

The Minister started by saying that we had debated these matters before, but we have raised them again because we still have not got any answers. I will make a deal with him—I shall stop raising the subject if he starts giving some answers. The debate that we have just had illustrates my point because, for example, the Minister did not apologise on behalf of the Paymaster General for the flat untruth of her assertion that the previous Government had indulged in the same subterfuge. The fact is—I note that the Minister did not disagree—that we had an historical system for uprating all the allowances and duties. It was the incoming Labour Government who changed the rules to uprate according to a forward-looking estimate of inflation. That is why fuel duty and other indirect taxes went up by 3.4 per cent. this year, instead of increasing by the pension increase index of 1.1 per cent. I ask the Minister to correct that example of a Treasury Minister misleading the House. That is a serious enough point to draw the Minister into a late intervention, and I will give way to him if he will now agree that that was an example of a Minister giving an incorrect reply. The fact that he will not do so only confirms our allegation that no one believes what this Government say about taxes any more. It is no good the Prime Minister saying that he now wants a lot of eye-catching initiatives instead of policies, when he has already lost the trust of the House and of the wider public. The Government cannot even admit it when they have made a mistake. The Minister then boasted that there was no problem because the Government had achieved what he called low and stable inflation. If that is the case, why are they putting up alcohol and road fuel duties by nearly 3.5 per cent., when they have an inflation target of 2.5 per cent.? I do not call that either low or stable. The Minister also said that the figure of 3.4 per cent. appears in the Red Book so it is not a secret. I never said that it was. We spotted quickly the divergence and that the Government were putting up allowances by only 1.1 per cent. and all other duties by nearly 3.5 per cent. My point, which I repeat, is that the issue of inflation and the inflation index is discussed in no fewer than three places in the Red Book but at no point in those discussions does the figure of 3.4 per cent. appear. The Minister cannot contradict that point.

Nicholas Soames (Conservative, Mid Sussex)

Does my right hon. Friend agree that, with that eagle-eyed clarity and persistence that led him to seek out that figure, he has also drawn other inconsistencies in the Red Book to the attention of the House?

David Heathcoat-Amory (Conservative, Wells)

That was a typically sagacious intervention by my hon. Friend, who is clearly on form at an early point in our proceedings. We have said enough to demonstrate beyond doubt that on this issue we are right—and I include my hon. Friend in that observation. We are on the side of right and truth and it is the Government who have made a mistake. We shall divide the House on the issue.

MARRIED COUPLES ALLOWANCES

Richard Ottaway (Conservative, Croydon South)

I beg to move, That the clause be read a Second time. The new clause, which has been tabled by my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory), my hon. Friend the Member for Arundel and South Downs (Mr. Flight) and myself, refers to marriage. I do not know whether. you have received the married couples allowance, Mr. Deputy Speaker. If so, like millions of people in the country, you will have been sent a document in the past few weeks which consists of explanatory notes and a form that must be filled in if one is to claim children's tax credit. It states: The Children's Tax Credit is replacing the Married Couple's Allowance and the Additional Person Allowance. Are you likely to have a child under 16 living with you during the tax year starting on 6 April 2001? If yes, you may be able to claim Children's Tax Credit. I suspect that you are a normal citizen, Mr. Deputy Speaker. I do not know whether you have a child under 16, but the important point is that there are a heck of a lot of people in this country who do not have a child under 16. To say that the children's tax credit is replacing the married couples allowance is untrue, inaccurate and a distortion of what the Government intend. I am not sure whether it is spin or underspin but, whatever it is, that statement is wrong.

John Gummer (Conservative, Suffolk Coastal)

Has my hon. Friend noticed that the form, which is a document about marriage, insists on referring to one's "partner"? May I put it to him that many married women do not wish to be referred to as partners because they are married and have taken on the responsibility of a lifelong union to look after the children for whom the allowance is supposed to be paid? Is it not about time that people had enough respect for married women to refer to them as married, not partners, which can involve all kinds of arrangement, many of which are not the sort that my wife and many other wives wish to enter into?

Richard Ottaway (Conservative, Croydon South)

I am grateful to my right hon. Friend. The form goes far too far in political correctness. We have seen too much of that sort of stuff. As I happen to know my right hon. Friend's wife, I know that she would be offended by being described as a partner.

John Gummer (Conservative, Suffolk Coastal)

Did my hon. Friend notice the grins on the faces of Labour Members, especially those on the Front Bench, when he mentioned that many women do not share their loose attitudes towards marriage?

Richard Ottaway (Conservative, Croydon South)

rose—

Dawn Primarolo (Labour, Bristol South)

rose—

Michael Lord (Deputy Speaker, Central Suffolk and North Ipswich)

Order. The hon. Member for Croydon, South (Mr. Ottaway) must deal with one intervention before he takes the next, if he wants to do so.

Richard Ottaway (Conservative, Croydon South)

I will give way, but I will first answer the point raised by my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer). I have some respect for the Paymaster General and the Economic Secretary, who are sitting on the Front Bench; whether they wish to be described as a partner is entirely a matter for them.

Dawn Primarolo (Labour, Bristol South)

My objection is to being called a loose women. I am married and I consider my husband to be my partner—my partner in life. The suggestion made by the right hon. Member for Suffolk, Coastal (Mr. Gummer) was out of order. I am sure that he would like to correct the impression that he gave to women of his attitude towards them.

Richard Ottaway (Conservative, Croydon South)

I do not want to get caught in the crossfire. If the House does not mind, I shall move on. The deception of replacing the married couples allowance with the children's tax credit will hit millions of families very hard. Until April, every married couple was in receipt of £197 a year. That money is lost. Indeed, there is a gap between the two provisions because the children's tax credit does not come into effect until next year.

David Taylor (Labour/Co-operative, North West Leicestershire)

If the former married couples allowance was such a great idea—it was of course available to people who were not married but had children and lived together—why did the hon. Gentleman's Government reduce it in two stages to 20 per cent. and then 15 per cent? Are not this Government continuing that process? Does he not endorse the approach that his Government took?

Richard Ottaway (Conservative, Croydon South)

Whatever level the allowance got to, the important point is that the principle of marriage was recognised in the tax and benefits system. We undertake to maintain that, unlike the hon. Gentleman's party, which has, effectively, undermined the concept of marriage. Until April, one earner on a salary of £34,000 a year would have paid income tax last year at 23 per cent. and this year at 22 per cent., but the abolition of the married couples allowance has taken that person into the higher tax band. The House may not be aware that if one is in the higher tax band, one does not qualify for children' tax credit. We estimate that more than 1 million people in the higher rate tax band will not be entitled to the children's tax credit even if they have children under the age of 16. So, people will not qualify because they are paying too much tax and are being moved into different tax bands. The replacement system is an utterly inadequate form of compensation. That is why, when the Conservatives win the next election, we will reintroduce recognition of marriage in the system by reintroducing the married couples allowance. We shall do so for two reasons. First, we think that there are benefits to society from marriage. Families are where society starts and ends. Family breakdown weakens a free and ordered society. Parents do their best for their children in a wide range of circumstances, but, in general, children from two-parent families do better at school, have better chances in life and are less likely to end up ensnared in crime. Two-parent families are better units if the parents are married. The Government should not discriminate against the one institution that has been shown to help families stick together and help the process of raising children: marriage. The Government have attacked marriage; they have abolished the married couples allowance and discriminated against couples in the structure of the working families tax credit. That is why we are pledged to recognise the benefits of marriage in the tax system.

Geraint Davies (Labour, Croydon Central)

Will the hon. Gentleman give way?

Richard Ottaway (Conservative, Croydon South)

I will not give way to the hon. Gentleman. Secondly, we make the pledge to reintroduce the married couples allowance because of the defects in the children's tax credit. Two earners who live together and both earn £30,000 a year, with a household income of £60,000 a year, will qualify for the children's tax credit. Yet, one earner on £40,000 a year will not do so. What logic is there to that? The second anomaly in the children's tax credit is its ineffectiveness as a benefit. The Financial Secretary said in Committee: We have increased substantially support for families with children through the working families tax credit, through the increase in the children's premium income support and through child benefit.—[Official Report, Standing Committee H, 23 May 2000; c. 333.] The Minister failed to say that the payment of £8 a week in children's tax credit is substantially reduced by the impact of the working families tax credit and housing and council tax benefits. I am obliged to Mr. Roger Cockfield, reader in taxation at De Montfort university, Leicester, who has sent me copies of the model that he has compiled. He has demonstrated that a lone parent with two young children earning £180 a week—someone working for 12 hours at, say, £15 an hour is not an unusual example—faces a loss of £5.33 in housing benefit and £1.70 in council tax benefit when he or she receives £8.50 of children's tax credit. He or she is only £1.27 better off—not the £8.50 claimed. The children's tax credit is no substitute. It is available to the better off but not to the poorer people in our society. I was always under the impression that a Labour Government were there to protect the poorer people rather than to give tax breaks to the better off. If anything illustrates why they are losing support in their heartlands, it is much trumpeted measures such as the children's tax credit, which goes not to the poorer people but to the better off. The form sent in the past few weeks to families who used to receive married couples allowance also contains the following sentence: If you are likely to have a child under 16 living with you during the tax year— it goes on to describe the tax year— you may be able to claim the Children's Tax Credit. If not, please throw this form away and accept our apologies for troubling you. Do not return blank forms to us. I do not know how many blank forms might have been sent back, but I conclude by reading a letter that was sent to the Chancellor of the Exchequer, No. 11 Downing street from a gentleman in Merseyside. It reads: Dear Sir, Please find enclosed my claim form for Children's tax credit returned as my wife and I do not meet the criteria required. Like millions of similar couples, i.e. children grown up and gone, and not 65 before 5th April 2000, we feel that you have, dare I say, stealthily, removed the acknowledgement by the Government of the merits of being married. How you have the audacity to claim that that Children's Tax credit replaces the married couple's allowance and Additional Personal Allowance amazes me. I will be 65 in December this year, and as a result of your 1999 Budget changes, I, since April of this year, now pay approx. £20 per month tax on my modest company pension, and when I reach 65 I will be further taxed on my old age pension, unlike my elder brother, who is one of the privileged pensioners that you have created, i.e. 65 before 5th April 2000 who still retains the Married Couple's allowance. Hon. Members might think that that letter came from a Conservative party supporter—Labour Members are nodding their heads. They think they know what the letter says because it was sent to No. 11. However, it concludes: I find that as a lifelong socialist, an ex Labour party member, with a son who is a Labour councillor, that your new Tax changes are totally unacceptable, and unless some revision to these Fagin-like measures is made in this year's Budget, then my vote will go elsewhere. I can think of nothing else that better shows why the Government are losing support. They sit there like rabbits stuck in the headlights, watching the on-coming change in the political direction of this country which such proposed measures will cause. The Conservative party's tax system will provide benefits for rich and poor, because we are the party of one-nation conservatism. We shall stand up for the Mr. Speakmans of this world. We will not say that a tax credit is worth £8.50, when it is in fact worth £1.27.

Malcolm Chisholm (Labour, Edinburgh North and Leith)

I was tempted to speak because, during an earlier debate, those on the Conservative Front Bench referred to previous practice, as discussed when we first raised the issue when considering the 1994 Finance Bill. During the Division, I was able to read an interesting speech that the current shadow Chancellor made then, in which he justified taking more than £1 billion out of the married couples allowance. I invite Conservative Members to read that speech, as well as the previous one that I made, in which I said: Everyone knows that families have suffered most in tax terms over the lifetime of the Conservative Government.—[Official Report, Standing Committee A,22 February 1994; c. 345.] I was particularly referring to families with children. It is precisely their problems that the current Government have been reversing during the past three years. It is a simple fact that no additional costs are associated with marriage, but that many additional costs are associated with having children. That is why the children's tax credit, the working families tax credit and the record rise in child benefit have been introduced. People outside the House are more interested in targeting support on children, which is the Government's priority, rather than trying to make spurious party political capital out of the small sums that were involved in the married couples allowance.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The new clause is interesting not because it would introduce a married couples allowance, but because it would change the procedures of the House. We normally scrutinise tax provisions through primary legislation, such as the Finance Bill. However, under the new clause, we are asked to give the Treasury the power to vary or change income tax allowances by regulation, rather than by primary legislation. That is an interesting idea, but I am surprised that the Conservatives have proposed it. They usually want to avoid secondary legislation and prevent Governments from trying to hide stealthy tax changes in statutory instruments.

David Ruffley (Conservative, Bury St Edmunds)

Has the hon. Gentleman voted for or against any such measures since becoming a Member of Parliament?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I do not think that since I have been a Member the House has considered any such new clause, in which it is suggested that the Chancellor should be given the power to increase personal tax allowances. It is a very unusual new clause and I therefore began to wonder whether it represents a way to change the financial procedures of the House. Many right hon. and hon. Members will know that I take a particular interest in such matters because I believe that the House does not do its job properly. The Finance Bill procedure and the estimates and supply procedures are very inadequate. There are arguments for changing procedures in the way proposed in the new clause. Many hon. Members have already said that this Finance Bill is one of the longest in history and that that does not help the way in which the House scrutinises detailed financial legislation. Today and tomorrow, the House will debate many Government amendments and new clauses but they will not be given the scrutiny that they deserve, given that they involve significant changes. The House has become too used to dealing with detailed tax legislation on the hoof, very quickly and not properly. It is time that we changed that process, and perhaps the new clause represents a way of doing so. It would certainly reduce the content of future Finance Bills—perhaps Delegated Legislation Committees should deal with more tax legislation. Perhaps there would be proper scrutiny if individual Committees considered each change to tax legislation. That would certainly push the remainder of the Government's tax proposals into other legislation. I hope that such legislation could be debated in draft form, and perhaps Select Committees could take evidence on it. Such measures could be dealt with in a more leisurely way than the Finance Bill must be proceeded with because of the need to provide the Inland Revenue with statutory cover for taxes. We should separate that requirement—the need to provide statutory cover for the way the Inland Revenue and Customs and Excise go about their business—from the technical changes that we see in so many different forms in this and many other Finance Bills. There is a need for such reform, but I do not necessarily think that the new clause provides the best way to do it. I have suggested in previous debates that a small Finance Bill, which would cover the statutory requirements for collecting tax, should follow the Budget and that a tax technicalities Bill, which the House could take several months to pass, could also be introduced and, perhaps, considered by the other place, changing the current process. Such a Bill could be given proper scrutiny. That would be my preferred way to reform our financial procedures, but perhaps the new clause represents another way to do so. Having expressed surprise that the Conservatives tabled the new clause, I do not think it represents a bad route to follow and perhaps we should experiment with it. Whether the Liberal Democrats would use the power suggested in the new clause would depend on the regulations that were proposed. We might do so if the allowance that the Conservatives, or the then Chancellor of whichever party, proposed under that legislation took proper care of children. As the hon. Member for Edinburgh, North and Leith (Mr. Chisholm) said, the prime need is to ensure that children living in families receive the necessary support. Perhaps the proposal would be as wide as the former married couples allowance package, which recognised that some people who were not married still needed support. As the Chancellor said—indeed, the shadow Chancellor mentioned it too when in government—many people who were not married received the former married couples allowance. Perhaps the Conservative proposal would mimic many of the characteristics of the old system. The Conservatives might want to propose a tax allowance that was paid not only to married couples. However, they have not proposed such a measure so we cannot decide whether we would support it. Having listened to the hon. Member for Croydon, South (Mr. Ottaway), I am concerned about the motives behind the proposal. A good motive would be to focus on those elderly people on the cusp, who did not retire on whatever the date was, and therefore cannot continue to receive the married couples allowance. If the intention was to focus on their needs and the fact that they had been disadvantaged, that would be a good motive. The Conservatives sometimes suggest that theirs is the only party that supports marriage, but that is not a particularly helpful or mature approach. We should be less partisan and, frankly, less immature when discussing the welfare of families. If we want to support marriage, there are many things that we could do, such as investing in services like Relate, which try to support and save marriages that may be breaking down. We should think about other ways to support families, perhaps considering how we recognise the role of Churches and other religious institutions in supporting families and marriage. Ideas like those would make a positive contribution to the debate. 7.30 pm I do not believe that many people marry for tax reasons. Should we suggest that people marry for money? Is that the key message that the House wants to send? People should marry for love, not money. Perhaps the Conservatives are sending the wrong message.

Dawn Primarolo (Labour, Bristol South)

You old softie.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

As I am unmarried, my girl friend may not agree with the Paymaster General on that, but I am interested in hearing details of the Conservative proposals. I feel strongly about this matter. I lost my father when I was four. My mother was widowed, and cared for me and my two older brothers. Are the Conservatives saying that my widowed mother should not have benefited from an extra tax allowance? She was not married, and the new clause is not clear. Before the Conservatives get on their high horses about marriage, they need to flesh out their proposals with rather more detail. Would they penalise single parents, such as my widowed mother, rather than ensuring that she could benefit from extra tax allowances? I cannot believe that they would want that, but it sometimes sounds like it. The new clause might serve some purpose in promoting reforms of our financial procedures. To that extent, the Liberal Democrats have no problem with it; it is time those matters were addressed. In supporting the new clause this evening, however, we will not be saying that we support the Conservative position, because it has not been properly spelled out.

Geraint Davies (Labour, Croydon Central)

I am pleased to speak briefly about the married couples allowance, partly because my good neighbour, the hon. Member for Croydon, South (Mr. Ottaway), would not allow me to intervene on him. The new clause is completely incoherent. The hon. Gentleman suggested that the motivation for restoring the married couples allowance was not so much marriage as support for children in stable family relationships. Of course, the married couples allowance is not available to stable couples with children. It is available to married couples, often without children, or to single parents who are unmarried. That is completely inconsistent.

David Ruffley (Conservative, Bury St Edmunds)

Will the hon. Gentleman give way?

Geraint Davies (Labour, Croydon Central)

In a moment. The idea behind the allowance was support of children in marriage because, when it was introduced, the majority of those who had children were married. Relationships have changed, and many children are born out of wedlock. We must be even-handed about fiscal management, although I accept that, as the hon. Member for Kingston and Surbiton (Mr. Davey) said, we ought to think of ways to encourage stable relationships and marriage.

David Ruffley (Conservative, Bury St Edmunds)

rose—

Geraint Davies (Labour, Croydon Central)

I will give way in a moment. The most important way to do that would be to provide the economic well-being and independence that would keep couples together. Break-ups are often motivated by economic despair. The Government have brought 1 million children out of poverty and away from the legacy of despair and family destruction inherited from the rag bag opposite—talking of which, I will now take the hon. Gentleman's intervention.

David Ruffley (Conservative, Bury St Edmunds)

I thank the hon. Gentleman for giving way in his typically graceless way. He said earlier that stable couples who were not married but had children received the married couples allowance. Would he like to correct himself? He should know that the additional personal allowance is what non-0married stable couples with children receive.

Geraint Davies (Labour, Croydon Central)

The hon. Gentleman's hearing seems to have failed him. He may check Hansard to find that I said that people in stable relationships with children are not eligible for the married couples allowance. That was one reason why we got rid of it. To be fair, however, I should make it clear that it was being gradually phased out by the Tories—which merely exposes their opportunist cynicism tonight. They are offering an off-the-cuff, uncosted proposal that does not mention the corollary of the abolition of the children's tax allowance. The policy is entirely un-thought-out and intended merely to provide an electoral opportunity, as the hon. Member for Croydon, South revealed at the end of his speech.

Oliver Letwin (Conservative, West Dorset)

Will the hon. Gentleman give way?

Geraint Davies (Labour, Croydon Central)

Not for a moment. We appear to be talking about electoral bribery. That is extremely unfortunate. The Tory measure would cost £1.4 billion in 2000–01 and £1.85 billion the next year, and the cost would continue to rise. It is another example of the kind of expenditure cuts that we would face under a Conservative Administration. We have had a wider debate this afternoon, and the £2 billion or £3 billion that they propose to spend over two years would be taken away from the health service, the education system or other vital services for people in need. The money would be taken away from children to pay for tax cuts for the most well off—couples without children in which both partners earn. That would be quite wrong. The married couples allowance was being phased out by the previous Administration, but the Tories have suggested that we should reintroduce it. Those who hear our debate will realise that the Labour Administration have lifted 1 million children out of poverty, have put 1 million more people in work and have provided a record increase in child benefit. I urge all hon. Members to resist this stupid new clause.

Nicholas Winterton (Conservative, Macclesfield)

I am pleased to follow the hon. Member for Croydon, Central (Mr. Davies) who put his case very fairly, even if on odd occasions he indulged in rather vicious comments about what my hon. Friend the Member for Croydon, South (Mr. Ottaway) seeks to do for the Opposition. I endorse what my hon. Friend said in his excellent presentation. His case would have been stronger, however, if he had apologised to the House and to the people of this country for the fact that the Conservative party began this process when we were in government. At the time, a number of us criticised reduction of the married couples allowance. Like my hon. Friend, I have no doubt that the marriage of a man and a woman committed to each other in a ceremony that all people take seriously can create the most stable environment for children to grow up in. Problems for society arising from such a registered union are likely to be less than those arising from the situation of single parents. The hon. Member for Kingston and Surbiton (Mr. Davey) also made a thoughtful speech, but I was surprised to hear him suggest that these matters should be debated and decided in the House of Lords. I should have thought that all matters relating to the amount of taxation levied on an individual or family—I still think that allowances have something to do with taxation—should be decided by the elected Chamber. Like the hon. Member for Kingston and Surbiton, I am not sure whether the proposal of my hon. Friend the Member for Croydon, South should be decided by statutory instrument—secondary legislation. It is too important for that; it is a matter of serious philosophy. Should we encourage the formal presence of marriage, and because of the benefits that it brings society, should marriage be recognised through the allowance and tax system? I believe so. I am saddened that the previous Government started the reduction in the married couples allowance. With respect, my hon. Friend's case would have been stronger if he had apologised for that and said that in the light of experience, we realised that we made a mistake. I believe that the people out there whom we represent in this House are prepared to forgive a party when it shows that it realises that it has made a mistake. I accept the advice of the hon. Member for Kingston and Surbiton about children—their interests are absolutely vital. That does not mean, however, that this is an either/or situation. I believe that we could have both options. We could, where necessary, provide additional assistance for families and single parents with financial difficulties, while also recognising the estate of marriage as making a valuable contribution to the environment in which children grow up. The cost to the state when children do wrong and appear before the courts is likely to be less when children are brought up in a stable marriage. I share the views of my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer), who believes that marriage is very precious. I do not believe that marriage is often entered into lightly. The benefits to a civilised, stable society that emanate from marriage are very great indeed.

David Taylor (Labour/Co-operative, North West Leicestershire)

I am sure that many people in the House would agree with the hon. Gentleman—not least the hon. Member for Congleton (Mrs. Winterton). However, some £190 a year is not a strong incentive for an unmarried couple to troop along to the nearest church or registry office. Does the hon. Gentleman really think that many hundreds of thousands of people will change their status because of that tax incentive? I fear not.

Nicholas Winterton (Conservative, Macclesfield)

My views differ from those of the hon. Gentleman. I believe that the country benefits from children being brought up within a stable married relationship, and that the cost to Government and society is likely to be much less when that is the case. I regret that the previous Government started the reduction in the married couples allowance. I would have preferred the allowance to have been much higher than it was. However, I accept that there might be a contrary view. 7.45 pm As the hon. Gentleman said, I am married to my hon. Friend the Member for Congleton (Mrs. Winterton). She carries my name, so our outlook on these matters is very traditional, and there is nothing wrong in that. She shares my view that in a married family relationship, whether the husband and wife are married in a registry office or in a church—although I prefer the church service, as it is more solemn—the saving to society is greater than the total cost to the Exchequer of the married couples allowance, even at its original level before the previous Conservative and Unionist Government reduced it. I regret that the present Government have gone the whole hog and abolished the allowance. What they have replaced it with is less beneficial, although I appreciate that they have sought to target assistance on those whom they perceive as having the greatest need. However, I think that the principle spelled out by my hon. Friend the Member for Croydon, South is sound. I am delighted that we have learned from our mistakes in our previous period in office. The allowance means a great deal to people, and has a significance far greater than its cost to the Exchequer. Therefore, I strongly support the new clause.

David Ruffley (Conservative, Bury St Edmunds)

I am delighted to support the new clause. I do so for one simple reason—I believe that the family is an important part of the fabric of civil society, and needs to be supported and recognised in the British tax system. I was interested to hear the contributions from Labour Members. The one word that they did not use was "extremist". This is obviously an example of a U-turn, because on 16 April the Chief Secretary to the Treasury described Conservative proposals for recognising marriage in the tax system as "extremist". What folly that turned out to be. It was no accident, in my view, that in the leaked memorandum this week, of which we have heard so much, the Prime Minister described his policy on the family as weak. He was worried that the Government were looking weak on the family, and were hopeless at developing sensible policies to support the family. The new clause would go some way towards helping the Prime Minister out. Were the Government to adopt it, the Prime Minister would be able to demonstrate beyond peradventure that he believes that the family is worth supporting. He would be able to use the simple and direct mechanism described in the new clause.

Chris Leslie (Labour, Shipley)

Does the hon. Gentleman agree with the hon. Member for Macclesfield (Mr. Winterton), who has a high regard for parliamentary and legislative procedures, that it would be incorrect to introduce these measures through statutory instruments and orders? Can he justify why, under new clause 6, such changes would be made by order rather than in primary legislation?

David Ruffley (Conservative, Bury St Edmunds)

The answer to the hon. Gentleman's question should be clear to him; I am rather surprised that he bothered to ask it. He should scrutinise the proceedings of some of the Standing Committees on which I have had the pleasure, and sometimes the misfortune, to serve. Treasury orders of this kind are often to be found; our proposal is not especially unusual. I was rather surprised by the perplexity of the hon. Member for Kingston and Surbiton (Mr. Davey) about that. It is a device that those on the Treasury Bench have used on many occasions. To return to my original point, the Prime Minister has said that his Government's policy is weak on the family, and unconvincing and unappealing to the people of this country. He is quite right there. The new clause would remedy the defect in current Government policy. Before Labour Members get to their feet in a desperate attempt to win brownie points with the Treasury Whip, let me tackle head on the point made by my hon. Friend the Member for Macclesfield (Mr. Winterton) about the reductions in the value of the married couples allowance under the previous Government. I remember it well. In the March 1993 Budget, the Chancellor, Norman Lamont—Lord Lamont as he is now—set in train a two-tranche reduction in the married couples allowance from the basic rate of 25 per cent. to 15 per cent. That is a matter of record. However, the then Conservative Government did not go on to abolish the allowance, as this Government have. Why was the reduction in the MCA so necessary? It was an important part of deficit reduction. [Laughter.] The guffaws from the glove puppets on the Government Benches would lead one to think that they considered deficit reduction a bad thing—but it is a good thing. The Chancellor celebrated it today, and he is the proud heir and inheritor of the previous Government's sensible fiscal policies. What was the attitude of today's Ministers to the sensible but limited deficit-reducing measures in 1993, which stopped at 15 per cent? The present Government have gone for the next 15 per cent. What was the record of the Paymaster General on the 1993 Finance Bill? I hope that she will tell us when she winds up. I remind the House of the importance of the new clause in terms of the tax policy of the Conservative party. My right hon. Friend the Leader of the Opposition made it clear this week that the next Conservative Government will reintroduce recognition of marriage in the tax system. The Government have abolished it, and so have no claim to be the defenders of married couples and families. One issue has angered pensioners in my constituency. My mailbag is full of letters from them—I should be surprised if Labour Members had not received similar letters—about a decision in the March 1999 Budget. The Chancellor gave the distinct impression that pensioners would continue to receive the married couples allowance. However, we had to find in the small print one thing that he did not spell out—that pensioners reaching the age of 65 after April 2000 would not get any married couples allowance. That meant that those individuals found themselves some £500 worse off when that 1999 Budget tax change took effect. The Conservatives were not alone in being intelligent enough to read the small print. Help the Aged was on to the matter fairly rapidly. Mr. Mervyn Kohler of that organisation described the pernicious effect of the change on pensioners who reach the age of 65 this fiscal year: 600,000 people reach retirement age in a typical year … only a third of them exceed their personal allowances…. There will be quite a lot of rather cross people about when they realise they are affected, having planned on receiving the existing allowances. Whereas the Chancellor has been saying that he has lifted many older people out of paying taxes in previous Budgets, this could have the effect of putting many of them back into paying tax. This is very unfair because it is so arbitrary and it will squeeze the older generation. They are going to take a bit of a hammering. Many of my pensioner constituents who were 63 or 64 before the 1999 Budget change now realise that they will not get the £500 that they had counted on getting when they turned 65 this fiscal year. I have had many letters to that effect.

Geraint Davies (Labour, Croydon Central)

Will the hon. Gentleman give way?

David Ruffley (Conservative, Bury St Edmunds)

No, I will not give way to the hon. Gentleman. I may reconsider if he has something sensible to say. He rarely has. Mr. Mervyn Kohler said that pensioners would take a hammering, and many of. my pensioner constituents felt that they had been hammered by the Government, especially by the abolition of the married couples allowance. They had no warning or notice of the change, as Lady Greengross, the director general of Age Concern, said when she described how pensioners in their early 60s would have woken one morning to find out what was in the 1999 Budget. Lady Greengross did say: We welcome the fact that those already 65 will not lose the allowance…, but it was a rather limited welcome, as she went on to make it clear that she wanted the measure to be phased in for people who will not get the allowance when they reach 65 this year. The argument for some transitional relief for people turning 60 was rather callously ignored by the Chancellor. He has not rethought things, and as a result many pensioners in many constituencies are very aggrieved.

Nicholas Winterton (Conservative, Macclesfield)

One of my great concerns about what happened to people in the situation described by my hon. Friend is that the change, which they had not anticipated, occurred too late to allow them to make alternative financial arrangements to ensure that the quality and standard of their lives were not adversely affected. That is why I support my hon. Friend in his contention about transitional arrangements.

David Ruffley (Conservative, Bury St Edmunds)

My hon. Friend has made my day. I am supported by Help the Aged, by Age Concern, and now by him. I could want for nothing more. Labour Members have made no attempt to answer those important points in the debate. Age Concern and Help the Aged say that the change is a problem, and Labour Members who read their mail agree. It ill behoves them to smirk and grin and ignore the point. The Paymaster General owes the House an answer when she winds up.

Geraint Davies (Labour, Croydon Central)

Will the hon. Gentleman accept that any change in the tax system will be unplanned, in the sense that before the Chancellor stands at the Dispatch Box, no one knows what he will say? People plan for the world to go on as before. Does not the hon. Gentleman therefore agree that his is a rather silly argument?

David Ruffley (Conservative, Bury St Edmunds)

I am sure that the hon. Gentleman will be applauded in his constituency by Age Concern and Help the Aged when he refers to their arguments as silly, misplaced or misguided. Old people are vulnerable. They do not have large incomes, and we believe that they are a special case, as do Help the Aged and Age Concern.

David Taylor (Labour/Co-operative, North West Leicestershire)

Will the hon. Gentleman cast his mind back to 1980, when he might still have been in primary school? Then, the Administration of the lady now known as Lady Thatcher perpetrated one of the meanest acts of their 18 years in office. They broke the link between pensions and pay in the economy. Does the hon. Gentleman think that that showed due regard to a vulnerable group?

David Ruffley (Conservative, Bury St Edmunds)

This Labour Government have never said that they would reintroduce that link. There is a good reason for that. Baroness Hollis, the Under-Secretary of State for Social Security in the House of Lords, has said that if the link were restored now it would cost £25 billion by 2025. Not even this profligate Chancellor would be able to find that sort of money, which is why the Government have not decided to restore the link. The hon. Gentleman should know his party policy before he intervenes in that way. Non-pensioners have also lost their married couples allowance to the value of some £200 a year plus. Added to the other stealth taxes—the petrol tax, the personal pension tax, and increases in council tax—the net result is that the average hard-working family is £670 worse off. That is the tax bill they face. The abolition of the married couples allowance is part of that £670. It is for that reason, and the other reasons that I have adduced, that I strongly support new clause 6, and I urge hon. Members to support it.

Desmond Swayne (Conservative, New Forest West)

I shall not detain the House long, because the matter has been well aired by my hon. Friends and by Labour Members. Strangely enough, I share the view of the hon. Member for North-West Leicestershire (Mr. Taylor) that changes in the married couples allowance such as that made in the last Budget are unlikely to have any measurable effect on the incentive to marry. Indeed, it would pose profound questions about the nature of marriage if they were an incentive. Nevertheless, I share the view expressed by my hon. Friend the Member for Macclesfield (Mr. Winterton). This matter has a symbolic importance that rises well above the issue of how much the allowance may be worth. The attraction of the new clause is the speedy remedy that it provides. Previously, married people enjoyed a tax allowance that they no longer enjoy. In other words, there is now a tax on marriage.

David Taylor (Labour/Co-operative, North West Leicestershire)

Will the hon. Gentleman give way?

Desmond Swayne (Conservative, New Forest West)

No, I will not give way. The matter is fairly straightforward.

David Taylor (Labour/Co-operative, North West Leicestershire)

On that very point.

Desmond Swayne (Conservative, New Forest West)

No, not on that point. I will not give way.

David Taylor (Labour/Co-operative, North West Leicestershire)

rose—

Michael Lord (Deputy Speaker, Central Suffolk and North Ipswich)

Order. The hon. Gentleman has said that he is not giving way.

Desmond Swayne (Conservative, New Forest West)

I want to draw my remarks to a conclusion. For those of us who disapprove of the new penalty on marriage, the clause would provide a speedy remedy. It is obvious that the Government will shortly be sent packing, and my right hon. and hon. Friends on the Front Bench will take their place. They will readily use this new clause to remedy the matter.

Dawn Primarolo (Labour, Bristol South)

Those who watch and listen to the debates in the House will be greatly saddened by some of the contributions that have been made this evening. Value judgments have been made on those who choose to marry, whether in a civil ceremony or a church service, and on those couples who make a lifelong commitment to each other as partners, but who do not choose to marry. The debate is not about whether we are in favour of marriage or a commitment of individuals to each other: it is about a tax relief, and it needs to be set in that context. I applaud the honesty of the hon. Member for Macclesfield (Mr. Winterton) in saying that he opposed everything that the Conservative Government did when they were in power—[Interruption.] The hon. Gentleman is too keen; I was not going to make a sweeping claim on his behalf. He opposed the Conservative Government when they reduced the married couples allowance. In all honesty, I cannot remember how he voted on that issue. When the Conservative Government were in power, the number of children living in families in poverty rose to 3 million; that is what his party presided over. It now tells us that it is committed to marriage and to stable relationships, whether in a legal or a church ceremony.

Nicholas Winterton (Conservative, Macclesfield)

I want to clarify my position. I am sure that the Paymaster General will accept that during my short speech, I said that additional steps could be taken if it were necessary to help children in families in difficult financial circumstances. I wanted both the married couples allowance and, if necessary, additional help for children from families in difficult financial circumstances.

Dawn Primarolo (Labour, Bristol South)

I noted the hon. Gentleman's bid for more money, and I shall come back to that. He is quite right; he acknowledged that point. I want to put it clearly on the record that in my opinion, a commitment to a stable relationship or a marriage is reward in its own right, as the hon. Member for Kingston and Surbiton (Mr. Davey) said. The idea that a financial incentive in the tax system would encourage people to many and would provide a good, sound basis for a stable relationship shows little respect for the institution of marriage, because it does not fully recognise the commitment that is made.

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

I shall give way, but if the hon. Gentleman will allow me, I shall then explain why this allowance has never been about marriage: it is about taxable capacity.

John Burnett (Liberal Democrat, Torridge and West Devon)

I sincerely hope that the Paymaster General will assure the House that this measure is not a precursor to the abolition of inter-spouse exemption for inheritance tax purposes, which was established by the Labour party when it introduced capital transfer tax in the Finance (No. 2) Act 1975.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman is ever vigilant about the Government's possible future plans. I shall not stray beyond the new clause before us. We need to be reminded that the origin of the married couples allowance was the married man's allowance, which was meant to recognise a reduced taxable capacity when a man acquired a wife to support. Marriage is no longer the point at which taxable capacity is reduced; many couples continue to work. Taxable capacity is now reduced when children arrive and one partner reduces or gives up work, or the marriage or partnership faces the challenge of funding child care. It is right that the Government should shift support to the point at which that occurs, and should concentrate on the existence of children in that family unit. That is what the children's tax credit does. It is right to support the family with a child whatever their circumstances. It is important to invest in children, and to improve their life chances. We need to provide equivalent relief to one-parent families for many reasons. The parent may be bereaved or may have been deserted by the partner. A child needs to be fed whatever the circumstances of his or her conception. The old married couples allowance recognised that, as did the additional personal allowance. The children's tax credit recognises unmarried couples, as did the additional personal allowance introduced by the Conservative party. This is not about political correctness: it is a practical matter of preventing unmarried couples from getting more generous treatment than married couples. That can be avoided by using tapers and by preventing them from having two credits. The rules for additional personal allowance introduced by the Conservatives in 1988 covered exactly the same point as is now covered by the children's tax credit. The argument that this proposal is a departure in our tax rules from recognising only married couples to recognising unmarried couples is spurious.

Richard Ottaway (Conservative, Croydon South)

The Minister annunciated the benefits of the children's tax credit. Will she acknowledge that, in calculating that credit, housing benefit and council tax benefit are deducted?

Dawn Primarolo (Labour, Bristol South)

The children's tax credit is a tax relief and it is paid within the tax system. The hon. Gentleman is confusing it with working families tax credit.

Richard Ottaway (Conservative, Croydon South)

I am not confused in the least. It is a fact that a lone parent working for 12 hours at £15 an hour, which is a perfectly normal situation, faces a loss of £5.33 in housing benefit and £1.70 in council tax benefit when he or she receives £8.50 of children's tax credit. In other words, that person is only £1.27 a week better off, not £8.50, as the Minister claims.

Dawn Primarolo (Labour, Bristol South)

I think that the hon. Gentleman is referring to the position when the couple have an increased income because the amount of tax has gone down and there is a taper on any housing or council tax benefit. If they are on those benefits, they will have an income that is low enough to qualify them for working families tax credit, so the changes in the premiums in that credit will address those points. Conservative Members who were in the previous Government have selective amnesia about how much they reduced the value of the married couples allowance. For instance, in 1994–95, they reduced it by £83.25; in 1995–96, by £83.75; and in 1996–97, by £85.25. They removed it from the position in which it affected whether reliefs were given. Under the previous Administration, the married couples allowance was cut first to 20 per cent. and then to 15 per cent. Some taxpayers began to pay an extra £8 a week as a result of those changes. The right hon. Member for Kensington and Chelsea (Mr. Fortino), who was then Chief Secretary, said that the married couples allowance was the "most anomalous of allowances" with "no on-going justification". We agree with the right hon. Gentleman, although he apparently no longer agrees with himself. We have abolished the married couples allowance for under-65s from 6 April 2000, not because we do not support marriage, but because the allowance was not supporting marriage. When a couple can get twice the tax relief for splitting up that they could get for staying together, Opposition Members must explain how that is support for marriage. We have a better approach. We are investing in our future by providing more financial support for all families with children. Families face their greatest financial pressure when they have children. We have made record increases in child benefit—35 per cent.—which the Conservative party froze. We have introduced the working families tax credit to support hard-working families. We have increased the credits by another £4.35 a week from last month. We have increased income support for the poorest families. The working families tax credit will give families more money, and over the lifetime of this Parliament, about 1.2 million children will be lifted out of poverty. The hon. Member for Croydon, South (Mr. Ottaway) spoke about the claim form. The form is clear and expressed in neutral terms to cover both married and unmarried couples. The children's tax credit covers both, to ensure that married couples do not get less relief. It was the Conservative party that introduced, in the additional personal allowance, the rules to cover unmarried couples. 8.15 pm The hon. Gentleman went on to say that the form is overkill. The Inland Revenue does not hold details of children in families, so we needed to send the forms out to get to the people who had received married couples allowance and the additional personal allowance and who might be eligible. We wanted to ensure that they understood their entitlement and were alerted that they should claim it. The hon. Gentleman said that the children's tax credit was unfair to single-earner families. That is the effect of independent taxation. Single-earner couples will tend to pay more than two-earner couples on the same family income, because one uses one set of allowances and rate bands. We are trying to address that anomaly, which the Conservative party helped to create, in the integrated child credit. Now Conservative Members say that the taper is unfair, but we think that it is right that we should get the maximum benefit to those on the lowest incomes. They then say that 100,000 people will pay higher rate tax as a result of the changes. That is simply not true. Nobody will be brought into a higher rate of tax as a result of the abolition of the married couples allowance—unlike the 200,000 people who became higher rate taxpayers when the Conservative party cut the value of the married couples allowance to 20 per cent. in 1994–95. The hon. Member for Croydon, South says that the benefits of the children's tax credit do not get through to the families that really need them, such as those on working families tax credit. Again, he is wrong. It is not true. He ignores the fact that the child rate in the working families tax credit was raised in October 1999 to take account of the interaction between that credit and the children's tax credit, and the child credit for under-16s was raised again, by £4.35, from June 2000, on top of the indexation from April 2000. It is simply wrong to create the illusion that the money is not going to those who really need it. The new clause asks for rather odd things. It asks for powers to make regulations. Why does the Chancellor need powers to make regulations about tax allowances when he has at least an annual opportunity, in the Finance Bill, to make any changes that he wants, with the proper scrutiny of the House? In any case, what is to stop the Chancellor introducing another Finance Bill in a year? The Chancellor already has the power to make regulations. Conservative Members have revealed how out of touch and confused they are about how people organise their lives and bring up their children. I urge my hon. Friends to reject the new clause and ensure that the Government's sound policies for tackling child poverty, directing resources to the families who need it most, can continue.

Richard Ottaway (Conservative, Croydon South)

We tabled the new clause not for those reasons, but because of the deception being practised on the people of this country when the Government say that the children's tax credit replaces the married couples allowance. It does not replace that allowance, and millions of people will not receive it. Many will suffer financial loss as a result of the Government's proposals. For the Minister to say that the poorest people in our society are getting the entire benefit of the children's tax credit is plain misleading. Housing and council tax benefit have to be taken into account. The poorest people in our society will not get the funding that she says they will get. That is why we want to divide the House.

PAYE ADMINISTRATION OF RETIREMENT ANNUITY INCOME

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I beg to move, That the clause be read a Second time.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

This group contains some significant amendments. Government amendments Nos. 83 to 86, which cover pension contributions to pension plans running concurrently, are incredibly important. I believe that the hon. Member for Arundel and South Downs (Mr. Flight) raised the matter in Committee. Amendments Nos. 145 and 146 cover the annuity issue. I do not intend to cover those two important issues. I shall leave them to my hon. Friend the Member for Northavon (Mr. Webb), who is far more eminently qualified than I am to cover them in detail. I wish to speak to new clause 8, which is more modest. Again, it takes up the issue of unnecessary bureaucracy and the way in which that hits low-income pensioners. It makes a practice that is permitted by the Inland Revenue into a statutory requirement to help pensioners. In specific detail, new clause 8 deals with the way in which retirement annuity income is administered. At the moment, tax on retirement annuity income is deducted at source at the basic rate, with a non-taxpayer option for gross payment on submission of form R89. That is different from the way in which other sources of pension income are administered for income tax. I do not know how familiar tight hon. and hon. Members are with the amazing number of different ways in which different forms of pensioner income are administered for income tax purposes. I am grateful to the low incomes tax reform group of the Chartered Institute of Taxation for the way in which it has set that out in its paper entitled, "Older people on low incomes. The case for a friendlier tax system." It bears reference to because it shows how complex the administration of income tax has become for pensioners, who often rely on a wide variety of often very small income sources. Some sources of pensioner income are tax exempt: premium bonds, national savings certificates and, for National Savings bank ordinary accounts, the first £70 of interest. There are sources of pensioner income that are taxable, but paid without tax deducted at source. Those include National Savings bank ordinary accounts where the interest is more than £70, investment accounts, income bonds, capital bonds and pensioners bonds. There is a source of pensioner income that is taxable, but paid with tax deducted at source at 20 per cent: first option bonds. When we go into the wider general investment market, we see another set of tax administrative arrangements related to pensioner incomes. Personal pensions and occupational pensions are taxable and paid with tax deducted by the pay-as-you-earn code number. Retirement annuities—the subject of the new clause—are taxable and paid with tax deducted at the basic rate of tax, with the non-taxpayer options that I have described. The income element of the return from purchased life annuities is taxed in yet another way: tax is paid and deducted at 20 per cent. The non-taxpayer has the option to ensure that the income is paid gross upon submission of yet another form: R89. Building society and bank interest is taxable. The tax is paid at 20 per cent. at source. The non-taxpayer can apply to have it paid gross, but he has another form to fill in to do that: R85. United Kingdom company dividends are taxable and paid with a repayable credit of 20 per cent. The taxation on many overseas pensions and interest from overseas deposits is administered in yet another way. They are taxable, but received without tax deduction at source, because it is from an overseas source. I have not even begun to mention PEPs, TESSAs and ISAs, which we know are not taxable. We see from that long litany of examples what a complicated tax administrative system faces the ordinary pensioner. The result of all that is that pensioners often pay too much tax, because they are faced with forms that they do not understand, so they do not apply to have the income and interest paid gross, and with a system that is so complex and such a minefield that they are made anxious by it. That complexity does not serve the Inland Revenue. It increases its administration costs, so the Government do not win by that minefield. Let us look at different financial products for pensioners, be they ordinary pensions or other types. The administrative arrangements are so different, with some tax taken at source, some not, some taken at different rates and some with non-taxpayer options for payment gross. That complexity reduces transparency in comparing the returns from different financial products. Each marketing of each different product must try to explain the different tax arrangements to pensioners. There is absolutely no reason for the system that we have. It has just grown. It has been given to us by history. It is time that it was reformed. New clause 8 is a small step in reforming that over-complex system. It relates just to the tax on retirement annuity income. It seeks to enshrine in statute law and to make mandatory something that the Inland Revenue already permits. It ensures that retirement annuity income can be paid through the PAYE system, so that the correct amount is taken and so that pensioners who do not owe any income tax on that retirement annuity income do not have to fill in forms. It ensures that they do not have to pay tax that is not due to the Exchequer. It is simple. I am delighted that the Government were relatively positive when I raised the matter. In response, the Paymaster General said that the Government were in discussions with the industry on how to simplify the system and make it much more responsive to pensioners.—[Official Report, 9 June 2000; Vol. 351, c. 618.] I was grateful for that reply. I hope that those discussions with the industry have taken place, or are soon to take place, and that soon we can get a bit more logic in the system, so that poor pensioners—we are talking about non-income tax paying pensioners; some of the poorest pensioners—do not pay tax when they are not supposed to. I hope that the Government can make that relatively simple administrative change as a first step to reforming completely that bizarre aspect of the income tax system. If they do, pensioners throughout the country will applaud them.

Howard Flight (Conservative, Arundel and South Downs)

I believe that the debate on this group is one of the more important this evening. It covers several territories related to pension arrangements. I entirely support new clause 8, which addresses a practical issue. I cannot see why there should be any objections to it. I greatly welcome Government amendments Nos. 83, 84, 85 and 86, which, as kindly acknowledged, broadly address the issue of concurrent membership, which we discussed in Committee. I think that there will be some practical problems in establishing the demarcation level at £30,000. Although that figure will cause some injustices, at least it is a practical solution to the problem. It will be interesting to see how it works out, especially in relation to concurrent membership of final-salary occupational pension schemes and stakeholder schemes—which had previously been deemed not to be practical. I shall, however, use my time to speak to amendments Nos. 145 and 146. Amendment No. 145 deals with a straightforward issue. I confess that, when first trying to get my brain round schedule 13, I had not taken in the fact that paragraph 9 will remove section 633(2), so that a pension scheme cannot provide insurance covering contributions that have not been made because of a member's illness or temporary redundancy. There will, however, be a grandfather provision for those who already have such arrangements. I do not think that a case has ever been made why such a provision should not be part of the new tax rules covering stakeholder and other personal pensions. The removal of such a provision seems to be a bad idea. Surely it is thoroughly desirable that people have insurance to ensure that they are able to accumulate an adequate pension. I therefore ask the Minister at the very least to explain the logic behind removing the provision. Amendment No. 145 deletes that change. The major chestnut to crack is the issue of ending the obligation to buy an annuity by the age of 75. The Government seem to be burying their head in the sand. The official Opposition's policy on the issue has been clear for the past two years—to abolish the obligation subject to individuals having in place pension arrangements that will deliver a pension ensuring that they will not qualify for the pension guarantee. Therefore, we suggest—as the report commissioned by the Association of Unit Trusts and Investment Funds suggested—that the obligation should be abolished, subject to lesser annuities being taken out, when required, to deliver a pension up to a set level. Ministers must be aware that millions of people are concerned about the issue, and that we are living in an age in which there is an explosion in demand for money purchase pensions. Additionally, the Government's stakeholder measures will have a major impact in increasing the number of companies that end final-salary schemes and create money purchase schemes. In many ways, schedule 13 is extremely useful in providing a tax framework that encompasses both group personal pensions and occupational money purchase pensions. Many companies and their consultants have been waiting to see what the final stakeholder arrangements and obligations would be before taking the decision.

Steve Webb (Liberal Democrat, Northavon)

The hon. Gentleman said that this is an issue of importance to millions of people. However, one of the issues that I have wrestled with in our debates on this matter is whether that is so. Does the issue matter only to those who have whopping great pension pots? If there is a floor below which people will not be allowed to draw-down, and if stakeholder pensions will be targeted at those who are on modest earnings, will many people ever be affected by those income levels?

Howard Flight (Conservative, Arundel and South Downs)

I thank the hon. Gentleman for his question, which I shall deal with in detail in a few moments. However, the quick answer is that the issue has to do not only with a well-pensioned elite. As money purchase provisioning works its way through—it started only in the 1980s—the number of those who will be obliged to buy an annuity will run into the millions. Within the arrangements that I have discussed, they would not have to put all their pension money into an annuity. The issue affects not only a narrow body of people. However, I shall revert to that in a moment. 8.45 pm The key point is that the next few years will see a huge explosion in the number of people with money purchase pensions. Final-salary schemes operate essentially with a revolving pot of money—with accumulated pension assets usually invested predominantly in equities, although the equity-bond mix depends on the maturity of the scheme—out of which the pension is paid. Therefore, the capital that provides the final-salary pension should be prudently invested with scope to increase in capital value, and should not be locked into an exposure to bonds. The key investment problems with an obligation to buy an annuity is that an overwhelming number of people will be buying a guaranteed annuity; that most of the assets funding the annuity will be invested in bonds; and that, even at 75, one or other spouse will live for another 20 years. The Government's legislation forces annuity managers to invest all the capital available for pension provisioning in fixed-interest securities. As I have said in the House before, if a financial adviser had put all someone's capital into fixed-interest assets for 20 years, he or she would be hauled up by the Financial Services Authority for negligence and mis-advice. Investment only in gilts is simply inappropriate for the length of time that that pension capital has to provide an income. As the House will be aware, the combination of a Budget surplus, the subsequent repayment of national debt, increasing demand for money purchase pensions and—following the passage of the Pensions Act 1995—increasing demand for fixed-interest products by mature pension schemes have all created essentially a false market in long-dated gilts. In the past 12 years, not only has the nominal interest rate decreased with lower inflation, but the real interest rate has almost halved. The real interest rate has been close to 4 per cent. for quite a long time, but, now, it is down to 2 per cent. and a bit. So what is happening elsewhere is creating a false market and, as the law stands, people are being forced to buy investment pension products based on that false market. If and when that changes, irrespective of any change in inflation, such individuals will be seen to have been grossly unfairly—and I would argue negligently—treated by the law. I am pleased that many annuity providers have produced new products but, as the Minister will be aware, there are tax inflexibility problems associated with equity-linked annuities. In short, if an equity-linked annuity consistently performs well, the beneficiary is unable to take the full return. If the product performs poorly, investors face considerable problems if they wish to change their fund manager. Canada and Ireland have addressed the problem—Canada did so 10 years ago and Ireland has done so in the past two years—along the lines of the recent report by the Association of Unit Trusts and Investment Funds Committee which broadly envisages the creation of a pension account into which the capital goes. Everything that comes out of the account is taxed as income. Within that pension account, the beneficiary can determine the investment policy within sensible parameters analogous to those laid down for ISAs.

Barry Gardiner (Labour, Brent North)

I have been listening carefully to the hon. Gentleman. Does he accept that, just as tax relief is initially given on a pension fund in order to provide certainty and security in old age, an investor may wish to diversify the application of their fund at an early stage into other ways of financial management that do not attract the same tax relief, but are not subject to the same limitations? While the hon. Gentleman is considering that point, will he also say how he sees investors who are in the fortunate position of being able to consider their financial future and think of diversifying their fund in that way in light of the remarks of the hon. Member for Northavon (Mr. Webb) about the number of people involved?

Howard Flight (Conservative, Arundel and South Downs)

I thank the hon. Gentleman for his intervention, but I am not sure what point he is making. Could he please sharpen it up a little?

Barry Gardiner (Labour, Brent North)

I do not want to make a speech on the subject. As the hon. Gentleman is aware, quite simply, tax relief is given to help provide security and certainty of provision from the point of retirement until death. I accept the problem that the hon. Gentleman has outlined as it affects many people approaching retirement. Somebody seeking to achieve better returns than they were likely to get from an annuity could have made alternative provision that did not attract the same level of tax relief.

Howard Flight (Conservative, Arundel and South Downs)

With respect, the hon. Gentleman's intervention reflects completely wrong thinking. Tax relief is provided to help build up the maximum assets to create adequate provision for retirement. As the hon. Gentleman will be aware, a final salary pension scheme will have an appropriately balanced portfolio of equities and possibly some fixed interest investments, depending on the maturity of the scheme. That is an entirely sensible arrangement that maximises both the pension accumulation and, in due course, the tax take. Even with money purchase pensions, there is clearly an argument that the tax take would ultimately be greater to the Revenue if the assets were invested on a basis that would create better returns because everything that is drawn out is taxable as income. Under the present rules, if there is anything left when both spouses are dead, it suffers a 30 per cent. rate of tax and then becomes subject to inheritance tax as well. The rules can be changed if the Revenue wishes, but if the hon. Member is arguing that the correct moral price for the tax benefit must be that all the money should be invested in gilts for the last 20 years of someone's life, I do not see any logic here either in terms of maximising revenue to the Treasury, or in terms of doing the best for pensions in people's old age. I now turn to some of the issues that have been raised this evening and some of the alleged reservations by the Revenue and Treasury in respect of adopting the proposals from the AUTIF committee. It has been suggested that the AUTIF report reflects the vested interests of the investment management industry—I should declare an interest here as a member thereof—but that is a completely outdated view as the life offices that provide annuities are also substantially part of the fund management industry. Indeed, most of them would welcome the proposed changes as they provide ISAs, unit trusts and so on. There is no longer an investment management industry and a separate insurance industry. That is not how the industry is structured. The argument has been made about the interaction between the supply of gilts and the growing volume of pension funding that will eventually have to buy annuities. The arrangements that we propose would ease that problem because people would be free to buy guaranteed annuities if they wanted to, but everyone would not be forced down that route. Therefore, it should lead to real interest rates which are more normal and not the result of a false market, as they are at present. Some people have made the point that this territory largely involves only the better off. The average annuity purchase from each life office is between £25,000 and £30,000. The average has fallen largely because more people are using draw-down to postpone annuity purchase. I am afraid that the statistics are not particularly reliable. I might add that the Government's statistics go back to 1995. However, personal pensions have been in existence only since 1988 and most of those now retiring may not have held a personal pension for all of that time. So the numbers of people with reasonable amounts in personal pension schemes will rise. A survey recently conducted for the AUTIF study group found that more than 70 per cent. of annuitants had an income in excess of the proposed minimum. In other words, more than 70 per cent. of people with money purchase pensions would have capital with which they would not need to buy an annuity to take them up to a minimum pension income level. So the subject affects not just a narrow group of people but the overwhelming majority.

Steve Webb (Liberal Democrat, Northavon)

I broadly agree with the hon. Gentleman on this point, so I hope that he does not think that I am being critical. Which minimum is he referring to—the minimum income guarantee or the minimum in the McDonald proposals, which as I recall is roughly double the minimum income guarantee?

Howard Flight (Conservative, Arundel and South Downs)

I was referring, as I think I mentioned, to the minimum in the AUTIF report led by Dr. Oonagh McDonald. That is where the 70 per cent. figure bites. The hon. Gentleman will find that in the report. Of equal importance is the point that the percentage will change over time as people build up more in money purchase pensions. The proposals are aimed not at the wealthy but at all those who will be able to purchase the minimum income and will have some capital to invest thereafter. Such individuals would greatly appreciate the freedom so to do. A good case can be made for abolishing the obligation to buy annuities, at least for stage 1 because the Government's pension guarantee virtually requires abolition to be along the lines of the AUTIF report. The argument has also been levelled that the proposals would be a threat to defined benefit final salary schemes. My response is that they are already under threat as a result of the rising costs of final salary schemes, of companies trying to save money and, indeed, the attractions of the simple stakeholder schedule 13 legislation. In 10 years, I estimate that at least half of the existing final salary schemes will be closed. The shift to money purchase will be far greater than many realise. The Towers-Perrin survey of money purchase pension arrangements in the United Kingdom suggests that at least half the direct contribution money purchase schemes are associated with the closure of final salary schemes. That is a telling statistic. There has been some false concern within the Revenue, if not the Treasury, that the proposals in the AUTIF report would lead to people wanting to transfer in their last year or so from a final salary scheme into some form of money purchase pot, and that employees of the Government, in particular, would want to do that because their pensions are often not funded. It is argued that the proposals would create a funding problem. The answer is that it would be extraordinary if public sector pension schemes have rules to permit that. Most do not. If others do, the rules should be changed. This option is not the norm within a final salary pension scheme in the private sector. Revenue concerns that a wide range of civil servants would want to, and be able to, switch to a money pot are wrong. They would be much better off staying in their final salary schemes and receiving generous inflation-linked pensions. In terms of the rules of the scheme and the motivation, there is a false concern. Often, pension arrangements for spouses are considerably better within public sector schemes. 9 pm We are dealing with a major issue that has been under debate for two years. A great deal of work has been done. The Government said that they would respond to the AUTIF report, and there has been no response. Yet about two thirds of the electorate are 46 or older and are either focusing on their pension arrangements as they are about to draw them, or are already drawing them. The Government would be most unwise in their own interests to underestimate what has become a major issue. People are aware that standard guaranteed annuities are now extremely poor value. They do not want to be locked in whether the amounts involved are large or small, and there is no logical reason why they should. There need be no loss of revenue as a result of the changes and the revenue could be greater. There are also two small points that I would like to add to what is really the final debate on schedule 13. First, I referred earlier to the Myners report. As the Minister said, the final report is not out, but the consultative paper is. The Minister will be aware that this is all about encouraging investment in venture capital by pension schemes. Under the rules of all forms of personal pension schemes and the provisions in schedule 13, such schemes cannot invest in unquoted shares. If the Government wish to encourage greater venture capital investment by pension funds, this is an issue to be dealt with potentially within the terms of schedule 13. Since we discussed schedule 13 in Committee, the individual pension accounts announcement has been made by the Government, I think outside the House. We welcome that announcement, but I do not understand the logic of why an IPA has to be purchased via some form of money purchase pension scheme. There is more than adequate protection within financial regulation and potential investment rules to cut out the unnecessary costs of the pension scheme umbrella and to permit IPAs to operate on an entirely analogous basis to ISAs. We would then have specific rules about who could buy an IPA and how, and who could not. Why have the Government concluded that the IPA is simply to be a method of managing money for a form of money purchase pension scheme and not a pension packet in its own right, as it easily could be? I have strayed because, although those matters relate to the key schedule 13, they are not the key points raised by our amendments. I encourage the Government to bite the bullet and to follow Canada and Ireland, broadly to follow the AUTIF report, and to get a move on. There are hundreds of thousands of people, if not millions, who are now coming up to 75. They are extremely concerned about being forced to buy a bad annuity product. All of us receive letters from these people. The Department of Social Security is well aware of the issue, but it is ultimately a Treasury matter when it comes to reform. I fail to understand why the Government have not yet bitten the bullet.

John Butterfill (Conservative, Bournemouth West)

I should like to support the principle behind new clause 8, which is a well conceived proposal, but, in particular, to speak on amendments Nos. 145 and 146, to which my hon. Friend the Member for Arundel and South Downs (Mr. Flight) has just referred. If there is any justification at all for requiring those who are retiring to use their pension pot to buy an annuity, it can only be that tax relief has been given on the accumulation that provides that pot, so it is argued that it is not unreasonable for the Revenue to require such people to buy an annuity to make sure that they are no longer a burden on the state. The compact with the state is that the purchase will guarantee, or, hopefully, will go some way to guaranteeing, that such people will not be a future burden. But annuities are the only type of investment for the future, or virtually the only one that anyone would seriously contemplate, that carries that burden. The Government have introduced individual savings accounts, which have all the tax advantages that a pension product has, but without the disadvantages—without the requirement to buy an annuity at the end of it; without the requirement to lose one's capital at the end of the day. For the more sophisticated investors, to whom the hon. Member for Kingston and Surbiton (Mr. Davey) referred—those with large pots of money—there is the enterprise investment scheme or the venture capital trusts—much more sophisticated, perhaps more risky—in which they can invest and have even greater tax advantages. One is puzzled to know why successive Governments have continued to lay this particular burden on those who have prudently saved for their old age, who are doing a service to society by so doing, and yet are forced into purchasing an end product, the annuity, which, as my hon. Friend the Member for Arundel and South Downs said, is probably the worst investment that people could make for their on-going retirement future. People are living much longer now than they were. Something on the lines of the AUTIF report is not desirable but essential. The competition for the purchase of gilt-edged investments is becoming greater every year—in fact, every month. In a previous speech in the House I explained how the operation of the minimum funding requirement is creating a black hole. As gilt yields go down, so the minimum funding requirement requires institutions to purchase more gilts. By purchasing more gilts, they drive the yields down further, and so on. We have a downward spiral of gilt yields, which is becoming unstoppable. There is a way to remedy that, at least partially, and I know that the Government are considering the minimum funding requirement to see how it can be amended. There is a suggestion that, in addition to gilts, some corporate bonds might be added as appropriate investments. I still do not think that that will solve the problem because fewer gilts are still being produced and a limited amount of money can be issued through corporate bonds, yet, as I have explained, the demand is insatiable. What we should be doing in terms of the minimum funding requirement is what almost every other sensible fund does, which is to have a balanced portfolio where—prudently, of course—one makes sure that the appropriate ratios are maintained and looks at the total return on investment and not simply at what can be obtained from gilts. The people who are really suffering are those who are forced to purchase gilts at the time of retirement in a market that is going further and further against them, month by month, year by year. If we follow the suggestion in the AUTIF report, we can release people from at least part of that problem. If they are required to purchase a minimum income that will ensure that they are no longer liable to be a burden on the state—it will have to be on an indexed basis—we fully justify the tax relief; if indeed it needs justifying, because in the other forms of investment it is not required to be justified. They can then invest their money in any way they think prudent. At present we have a ludicrous situation, shown at its most perverse by a self-administered scheme. This applies usually, though not exclusively, to people with a larger pot. There are people who have bought property into a self-administered scheme and now at the end of the day have to sell the property, which gives them a secure and reliable income, and convert it into gilts. If anyone were advised to do that it would be blatant mis-selling, far worse than any scandal we have seen in any other area. Yet we in this House and successive Governments require people to behave in that way. At some time somebody will say "Let's sue the Government for making us do something so perverse and foolish". They might have a point, although I do not think it is possible to do it. Perhaps it should be. The best thing we can do this evening is to say that we have got it wrong, that we need to change the basis on which pensions are dealt with when they come to maturity. I hope that the Government will accept the amendment.

Frank Field (Labour, Birkenhead)

I also wish to speak to amendments Nos. 145 and 146. It was in the last Parliament that the first letters came from my constituents asking why they were forced into a financial arrangement that they thought was not the most beneficial that they could undertake to protect their retirement and possibly, as the hon. Member for Bournemouth, West (Mr. Butterfill) said, hand on wealth when they died. Although there has been a very important change since then—the election of our Government—I do not find it easier to answer that question when it comes from my constituents. Therefore, I make a plea to the Economic Secretary to address specifically, in replying to the debate, what is the defence of the status quo and to what extent the Government are thinking and moving and in what direction. The simple point that my constituents put to me, which I happen to agree with, and on which I have not been able to obtain a more sensible view from either the previous Government or the present one, is as follows. They accept that they have built up pension arrangements which have been supported by fellow taxpayers, and that therefore some restraints can be put on the way in which they spend the income, so that they do not receive a second injection of public funds to underpin their livelihood. In other words, they do not believe that they should be able to blow their capital and become dependent on welfare. But what they ask is this: if they make sure that they are in no way a responsibility on the state, why should the state lay down how they should behave with the capital that they have built up? In a sense my constituents' questions preceded the questions posed in the report that a previous Member of the House, Dr. Oonagh McDonald, recently successfully steered to publication. I am anxious to learn from the Government what their defence of the status quo is. All of us, on both sides of the House, can see that people should not be paid twice for doing the same thing, but if they are careful enough, or enter into specific arrangements, to ensure that some of their capital is put aside so that they in no sense become dependent on welfare, why should they not be able to spend the remainder, which probably, as the decades pass, will become a larger and larger proportion, in a way that suits them? My constituents' final point is that they have built up their capital, have been pleased to do so and believe that it is their duty to do so. They believe that they were advantaged in being able to do that. They are not being cocky and understand that other people have not been as advantaged and may not have been able to do so. They also believe that, if at all possible, it is a good idea to hand on capital to children and grandchildren. I must ask the Government whether that is the view that we hold. Do we believe that wealth is not something to be gobbled up by companies or Governments but, as far as possible, should be spread as widely as possible, through the entire community? If that is so, should we not be thinking—this has been debated by those on both sides of the House—along the lines of reforming the strict rules that govern the purchase of annuities? 9.15 pm The hon. Member for Bournemouth, West gave us a macro-debate on what is happening in the gilts market. He explained why it is a bad buy to purchase annuities now. Many of my constituents understand that argument. They are distressed by it and are fully aware of what is going on in the money markets in that respect. They believe that the debate involves a question of fairness in that they have done everything required of them as good citizens and wonder why the Government stop them from being even better citizens by not letting them become dependent on welfare. They want the freedom to choose how they spend their capital and, if possible, they want to pass it on to members of their extended family. After hearing my hon. Friend the Economic Secretary's reply, I hope that I will be able to write letters to my constituents that are different from those I have had to write since they began writing to me on this topic about five or six years ago.

Steve Webb (Liberal Democrat, Northavon)

Had I been asked a few years ago how I wanted to spend the evening of my 35th birthday, discussing the finer points of annuities might not have been at the top of the list. However, it is a privilege to contribute to the debate. I want to touch on Government amendment No. 83 and the associated amendments and amendment No. 146. On the concurrency amendment, like the Conservative party, the Liberal Democrats welcome the concessions that the Government have made. It would be churlish to describe this as a victory for the Department of Social Security over the Treasury—I am sure that it was a partnership—but as such victories are rare, one could describe it as such anyway. I have some questions about the detail of what is proposed in Government amendment No. 83, specifically the £30,000 threshold. It may be that I have missed it, but I wonder whether there has been a specific explanation for why £30,000 was chosen. Will the Economic Secretary clarify why that was chosen. Is it because it is something akin to the higher-rate threshold and that, therefore, higher-rate taxpayers are more likely to try to abuse concurrent membership of two pension schemes, or was the figure plucked from the air? I notice that the £30,000 figure is in the primary legislation. Does that imply that it will be capped? There is no suggestion that it is to be prescribed in regulations and then to be indexed. What is the thinking behind that? Given that earnings are rising each year, is there an attempt to clamp down? It is not clear why that figure has been chosen. My abiding impression of the concurrency issue is the recollection that, when I pressed the Financial Secretary at Social Security questions, in his halcyon days as the Minister responsible for pensions, as to whether he regarded simplicity in pensions as a virtue, he answered with a confident yes. Now that he is at the Treasury, I do not know whether he still holds that view. It is clear that we have a dog's breakfast, and concurrency with thresholds is just another aspect of that dog's breakfast. We have completely different tax regimes for personal pensions, occupational pensions and stakeholder pensions and we have different regimes for additional contributions. Far from getting simpler under the present Government, the options have got wider and the complications have increased. I fear that people will continue making the wrong choices. Concurrent membership certainly helps to prevent one wrong choice, and to that extent we welcome the amendment. I wonder sometimes whether the Government have lost the big picture. They probably came into office believing in simplicity, and it may be that the realities of office mean that simplicity will never be delivered. I hope to find that out for myself at some point, but in the interim I would be interested to learn whether the Economic Secretary still holds to the goal of simplicity. I wonder whether, with hand on heart, she can say that the strategy that the Government have adopted has created a simpler pension regime for the investor who, in the world envisaged by the Government, will receive less advice, not more. The stakeholder pension purchaser will probably have to get by, at best, with a decision tree, but often it is suggested that the person seek advice. Government amendment No. 83 moves in the right direction of clearing up a mess that the Government have created, but I wonder whether the big picture has been lost. On amendment No. 146, the hon. Member for Arundel and South Downs (Mr. Flight) has become associated with this issue in this Parliament and I praise his efforts and persistence in keeping it before the House. The Liberal Democrats broadly sympathise with his concerns, but I had an informative conversation this morning with Evergreen Retirement Assurance, a company which has written to several hon. Members and met some of them. It raised some significant issues that are germane to amendment No. 146. The first is the issue of the compulsory purchase of annuity, but the question is whose annuity is purchased. Is it the annuity provided by the company with which a person has saved or is it the best annuity on the market? The point that the company, and others, make is that choosing the wrong annuity can cost one 10 per cent. of one's income for the rest of one's life. That could be hundreds, if not thousands, of pounds a year and potentially tens of thousands of pounds over a lifetime. However, the issue appears to have received almost no attention. I asked the company what was needed to resolve the problem, because it appears that too many people, out of inertia, condemn themselves to too low an income for the rest of their lives and, potentially, cost the taxpayer money by ending up on the minimum income guarantee or housing benefit. The answer I was given was that the problem could be addressed if the Financial Services Authority were to say that the letter to those who had accumulated a pension pot and were about to purchase an annuity had to include the statement in great big bold capitals, "You have a choice and it may be that your provider does not provide the best product, " before any mention of the product of the company that had provided the pension. Or perhaps companies could be obliged to include a freephone number for an Inland Revenue helpline that would provide the telephone numbers of five annuity bureaus. That could make a big difference to the incomes in retirement of many people. I asked why those solutions had not been tried and the answer was that the FSA would be keen to do so, but it has not been pushed by the Treasury. I hope that that is wrong and the Economic Secretary will tell us that she has taken a stick to the FSA and it will act. If that is not the case, I hope that she will assure us in her response to the debate that those people who have taken out annuities are getting better value for them. One of the legitimate concerns expressed by the hon. Member for Arundel and South Downs was that the annuities are bad enough value as it is for many people and if they buy one that is not the best available, it is a double whammy. I do not wish to go too deeply into the question of how important the issue is and to how many people, but I wonder whether its importance to the general public is overstated.

Frank Field (Labour, Birkenhead)

It may be an issue that will grow in importance.

Steve Webb (Liberal Democrat, Northavon)

I agree, for some of the reasons given by the hon. Member for Arundel and South Downs, but I wonder how quickly it will grow and for how many people. The hon. Member for Arundel and South Downs said that 70 per cent. of those with money purchase pensions who are now retiring are living on incomes above the threshold recommended in the AUTIF report. However, that is not the test of whether draw-down would be attractive to someone. If one had a combined income just above the guaranteed threshold and had £1,000 left in the pot, one would not gain very much by drawing down £1,000, which one might just as well convert, given the costs of fiddling around with that sum. Seventy per cent. of people with money purchase pensions may be above that threshold, but I would have thought that the number who are sufficiently above it to want to start fiddling around with draw-down is still quite limited. I know that stakeholder pensions have not yet started, but I would have thought that those who will get such pensions and for whom this will be a serious issue will not be affected by it for a long time, as the target market is people who will struggle to get clear of the first guarantee, let alone the second. Clearly, there is a drift to money purchase schemes, which are affected by the issue, which will grow in importance. I believe that I have had three letters about the matter which, multiplied by the number of Members, is about 2,000. Perhaps I do not attract letters about annuities—I am sure that the hon. Member for Arundel and South Downs does—but I wonder whether the scale of the problem has been overstated. The problem is, however, significant, and we support the general stance of the hon. Member for Arundel and South Downs. This morning, a worry was expressed to me, and I am concerned about risking another mis-selling. We talked about mis-selling and forcing people to invest in gilts for the last 20 or 30 years of their life, which is not an optimal strategy. However, will people end up with draw-down policies that are not right for them? Again, Evergreen Retirement Assurance tells me that it has surveyed the investment strategy of those draw-down policies. It turns out that a good chunk of the investment strategy of a draw-down policy—about a third, Evergreen told me—is in gilts. Therefore, if people try to get hefty returns from the remaining 70 per cent, a good chunk having had to be left in the fund to cover the double guarantee level, one starts to wonder how they will make the sort of returns that are being talked about. A point made to me that has some force is that it is wrong to look at the issue of annuities in isolation and say that it is just about an age limit of 75. I am sure that the hon. Member for Arundel and South Downs does not do that. However, it was pointed out to me that the matter involves an age limit of 75, the open-market operation and long-term care. Why cannot one buy an annuity which, if one has to go into nursing care, can be converted into a much higher annuity to cover the fees? At present, that is not allowed. There is a danger that, if we pick at bits of the matter in amendments, we shall miss the big picture, which takes me back to my starting point of simplicity. We welcome the amendment on concurrency as far as it goes, as it is a step in the right direction. However, it is a symptom of a messy system, which is messier than it was three years ago. We generally sympathise with the point on annuities, but we want the matter to be responded to in the round, as more issues are involved than just compulsion at 75. I am grateful for the chance to put my concerns on the record and I hope that the Minister will respond specifically to the point about the open-market option and put a rocket under the FSA.

Melanie Johnson (Labour, Welwyn Hatfield)

I should like to thank right hon. and hon. Members on both sides of the House for their thoughtful contributions to our debate and the knowledgeable points that they have all made. May I start by responding to new clause 8 before turning to the amendments? I shall do my best to cover the points that Members have made in the course of our debate. I thank the hon. Member for Kingston and Surbiton (Mr. Davey) for his clear exposition of the reasoning behind new clause 8. I have recently corresponded on this very issue with his colleague the hon. Member for Northavon (Mr. Webb). However, for the reasons that I shall outline, I hope that it is a probing proposal that will be withdrawn. The problem is of long standing and has been reviewed on several occasions by the Government in office. On the last occasion, in 1995, the Institute of Chartered Accountants in Scotland put forward a proposal that was very similar to the new clause, but it withdrew it after talking to various Scottish annuity providers, who suggested that switching to schedule E would be an onerous administrative task for insurers. As drafted, the new clause would impose the requirement to tax annuities arising from retirement annuity contracts under schedule E from the date of the Bill's Royal Assent. That is—hopefully—only days away. So, there is no provision for agreeing later implementation dates with the Inland Revenue, as was allowed when the schedule E requirement was placed on providers of personal pension annuities. The new clause would therefore place a considerable burden on financial institutions, which would be particularly difficult for them at the present time and within the time scales about which I have spoken. 9.30 pm In the past, the insurance industry was against operating tax codes for annuities from retirement annuity contracts because some companies had paper-based systems that were not up to the task. That is not a reason for never making changes. As computerised systems are increasingly replacing older systems, the matter could usefully be looked at again. I hope that the hon. Member for Kingston and Surbiton will accept my assurance of interest in the topic and of the value of the points that he has raised. I am asking officials to discuss the matter further with the Association of British Insurers and to report back to me. I am grateful to the hon. Gentleman for raising the issue. I appreciate his comments about on-going discussions, but they will be given a further ministerial boost. For the reasons that I have given, I hope that he will feel able to withdraw the motion. Government amendments Nos. 83 to 86 are all connected with the issue of concurrency. I acknowledge that they are the result of the very helpful and constructive series of discussions with representatives of employers, employees and the pension industry. In particular, my thanks go to the ABI, the National Association of Pension Funds, the Trades Union Congress, the Confederation of British Industry, AUTIF and the Pensions Management Institute for their contributions. There was very much a partnership between the Treasury and the Department of Social Security in trying to find a way forward on concurrency with the industry and interested groups. I hope that hon. Members accept that that is a fine demonstration of effective cross-departmental work in government in partnership with the private sector. At the moment, a member of an employer's pension scheme cannot normally contribute to a personal scheme. The amendments will change that. They will allow someone who is not a controlling director and who does not earn more than £30,000 a year to pay up to £3, 600 into a stakeholder or personal pension in any one of the subsequent five years assessed. Perhaps I should at this point reply on the issue of the £30,000 limit; it is easiest to address that question at this moment. We picked the figure of £30,000, after some considerable thought, to try to strike the right balance between cost, ease of administration and coverage. A lower figure would increase complexity by excluding more individuals, whereas a higher figure would reduce complexity but increase Exchequer costs. We decided that £30,000 struck the right balance. It will reach nearly 90 per cent. of those in occupational schemes, which seems good coverage, and will cost £150-odd million by 2010. I should like to make several responses on the issue of simplicity, but perhaps that would take too long. I should like to tax the remarks of the hon. Member for Northavon on simplicity by saying that I believe strongly that we have simplified several matters, not least tax arrangements for stakeholders. Indeed, the concurrency arrangements themselves make matters much easier. It is true that the £30,000 limit is in the Bill, as the hon. Gentleman said, but that is not say that it will not be reviewed from time to time. Indeed, we have no intention of lowering the figure. We have not index-linked the figure partly because it gives people a degree of simplicity in their arrangements. Once a person has earned under the £30,000 limit in one year, they know that they will for five years be able to pay in on a concurrency arrangement. Therefore, the provision has the built-in simplicity that the hon. Gentleman was demanding and that we have succeeded in delivering in a number of changes since we came to government. Stakeholder pensions have been extended to about 8 million more people, 90 per cent. of whom are in occupational pensions. Many of those employees do not expect to receive a large pension, but they are currently putting off making further provision because they consider existing AVCs and FSAVCs to be complicated and inflexible. They also worry about those products because of past pension mis-selling. We are offering those employees the opportunity to use a new, good value stakeholder pension to increase their retirement savings. It is worthwhile remembering that 40 per cent. of those who have AVCs are currently below the £30,000 income level. It is not the case that those with incomes of less than £30,000 do not already pay into AVCs. Some have argued that we should allow concurrency for everyone, but such an approach would not be focused and would not represent good value for money. We therefore worked with the pensions industry earlier this year to produce the more focused approach set out in the amendments. We have followed the points made to us during those discussions. The proposal will help more individuals to save more money for their retirement, but it will also remove some of the practical problems that might otherwise have arisen when people change jobs. Again, simplicity is important. The proposal should help pension providers to offer lower-cost pensions by increasing the benefits of scale. That will help to open up the pensions market, and it will offer consumers more choice and better value products. It has had an excellent reception, and therefore we are confident that we are right to believe that there is merit in the open approach that we have adopted and in the details of the changes that we propose to make. I turn next to some of the issues raised under amendment No. 145. It is worthwhile saying that that amendment deals with points made in Standing Committee under what was then amendment No. 181, which Opposition Members tabled but then withdrew. They are returning to the matter under cover of a technically deficient amendment. I hope that I shall persuade them not to press it to a Division for two reasons. Up to 25 per cent. of pension contributions can be used to insure future contributions against sickness and incapacity. That reduces the amount of contributions going into pension funds. The changes that we have included in the Bill will directly boost money entering peoples' pension funds, rather than subsidising insurance contributions. That is achieved by stopping tax relief up front, but giving it when the payment arising from a claim under the insurance policy is paid into the pension fund. In effect, that involves recycling. Like all other contributions, tax at the basic rate will be added to the payment into the pension fund. In turn, that means that a lower sum can be assured. The change in the tax treatment of waiver insurance will not increase what is paid overall for the insurance cover, and some companies have suggested that it might reduce the premiums. Similarly, because tax relief is given on the use of the proceeds of the insurance, there is no need for restrictions on what can or cannot be insured. So providers can extend the insurance to cover situations that they could not cover before, such as unemployment and not just ill-health. I hope that I have fully explained the attractiveness of those arrangements. Many people accept that they represent a more flexible, better deal. Overall, the changes that we have introduced will improve the existing arrangements. We know from questions addressed to the Revenue that companies are already engaged in imaginative product design based on our proposals. We cannot therefore support amendment No. 145, under which the existing arrangements would be re-introduced. Under amendment No. 146, the requirement for the holder of a tax approved pension plan to purchase an annuity with the proceeds of the plan not later than age 75 would be removed. I assume that the intention is to permit income draw-down arrangements to continue indefinitely. Amendment No. 146 is flawed, but I do not place much weight on that, because it would not amend the section in the existing legislation that requires income draw-down to cease by age 75. The result would be that the holder of a personal pension could not continue income draw-down, but would be compelled to buy an annuity so that benefits could cease altogether. I am sure that that is not what is intended. Many people have raised general concerns about whether annuities are good value. That was discussed in the Budget debate, and I recall hearing the hon. Member for Bournemouth, West (Mr. Butterfill) discuss the minimum funding requirement and I know of his connections with the topic. We have also discussed these matters in the Standing Committee. I shall explain why the amendment would not provide a solution, although I accept that many interesting issues relating to points raised in debate remain to be explored fully. The main purpose of a pension scheme is to provide secure income for scheme members for the whole of their retirement. It is worth highlighting that point because the hon. Member for Bournemouth, West suggested that the principal purpose might be recouping tax relief. A key feature of annuities is that they provide income for the remainder of a pensioner's life. Variations on the basic product, such as with-profits annuities, already exist, but they all have that essential core characteristic. Tax rules therefore require personal pensions and other money purchase pension schemes to buy out their benefits as annuities to guarantee a continuing income, no matter how long the scheme members may live. To give flexibility, the tax rules allow members of money purchase pension schemes to take an income from their pension funds from 50 and to defer the annuity until they are 75. People are familiar with the detail of those arrangements. Income draw-down is theoretically available to all members of money purchase pension schemes. However, the perceived wisdom is that it is suitable only for those with larger funds—at least £100,000—who can afford to bear associated risks. Depending on the investment returns achieved, someone who chooses to take maximum income from his or her fund might see a substantial reduction in income at age 75 in comparison with what he or she might have been able to secure by buying an annuity at, say, 60. The age limit of 75 strikes a balance between flexibility in the timing of the annuity purchase and the increasing danger of the fund being exhausted as the person continues to draw on it as he or she grows older. Particular issues have been raised and I shall try to address the main ones. First, my right hon. Friend the Member for Birkenhead (Mr. Field) commented on inheritance and the defence of the status quo. It is not clear that the underlying value of annuities has in fact fallen once all other factors are taken into consideration. We could have a lengthy debate about that, but other factors should be taken into consideration. [Interruption.] Notwithstanding the mutterings of the Treasury Whip about my ideas of a lengthy debate, we accept that those factors exist. We have sustained low inflation, which looks set to continue, and that is one factor in enabling annuities to retain their real purchasing power far better than did higher headline annuity rates paid in a higher inflation environment. We all know that life expectancy is increasing, and, as it is the hon. Member for Northavon's birthday, we can hope that that will affect him. People can expect to draw an annuity income for longer in their retirement. The value of a guaranteed income for life should not be underestimated. Many pensioners will still enjoy secure income as they grow older. The Oonagh McDonald report accepts that annuity arrangements work well for many people. 9.45 pm My right hon. Friend the Member for Birkenhead said that pensioners should be able to pass on their remaining funds, at death, to their dependants. Generous tax reliefs were provided to support that. Annuities are not supposed to be tax-advantaged inheritance vehicles, however—they are insurance products. One way in which they work—a point that sometimes gets lost in this debate—is as a pooling of pension funds, enabling those who live longer than the average life expectancy to go on receiving the guaranteed income because, sadly, some people do not live that long. That is an important point about the way in which annuities are structured. Increased longevity means that annuities are paid out for longer. A number of right hon. and hon. Members have remarked on the need to purchase more gilts to maintain the same income stream to back an annuity and on the availability of long-dated gilts. The MFR review has not yet reported; we will want to consider it when it reports, which I believe is not a long way off. As the hon. Member for Arundel and South Downs (Mr. Flight) said, the outcome of the Myners review will provide another aspect to all the matters being considered. The hon. Gentleman and others have commented on the new products that are being produced. We are very interested in those new products and in new ideas for tackling the issues that the topic raises. We are looking at the Oonagh McDonald report and also at the more recent report of the Social Market Foundation. There are a number of issues surrounding the purchase of annuities and the supply of gilts, so there are many matters to be considered. When we have got all the information together and given it due consideration, if we think that there is a new way forward, we will consult people about those arrangements. I can give no undertakings to do so, but I hope that right hon. and hon. Members will have gathered from the tone of my responses that we believe the issue to be worthy of full consideration. We have been asked why we made the changes to waiver insurance. I believe that I have already covered this point, but let me say again that our approach is better because it is better focused by boosting income going into the pension. Rather than tax subsidising insurance arrangements, it provides better cover against eventualities, and is better value and cheaper overall. The hon. Gentleman expressed the view that annuities lock people into bonds and that equity-linked annuities cause problems. A number of innovative non-bond-based annuities are coming on to the market. These will benefit the majority with small to medium pension pots. Removing the requirement to purchase an annuity could stifle that development. As I said, Oonagh McDonald's report recognises that an annuity will remain the best option for many people. The Inland Revenue is working with financial institutions to aid the development of equity-based annuities. We are giving all these matters our full consideration.

Steve Webb (Liberal Democrat, Northavon)

Perhaps I have pre-empted the Minister regarding the open market option. Can she reassure us that she will push those who send out the letters to make sure that people are more aware of their choices than they are at present?

Melanie Johnson (Labour, Welwyn Hatfield)

I am happy to give the hon. Gentleman the assurance that I will look at that issue. I cannot go further than that at this point, but I will in due course study in Hansard the points that have been made in the debate by right hon. and hon. Members. I hope that none of the Opposition amendments is pressed to a vote, and that the House will support the Government amendments.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The debate has been interesting and useful. The Minister has put on record the Government's thinking on some of these matters. I am sure that hon. Members and people outside the House will want to consider her words with care. She has helped explain the direction of Government policy in this area, and I am grateful for that. The Minister made some welcome comments about new clause 8. I hope that she will urge her officials to produce genuine solutions to the problem of how the income from retirement annuities is administered for tax, and to the related problem that pensioners face extra complexity in their tax arrangements. However, I do not want to detain the House so I beg to ask leave to withdraw the motion.

AMUSEMENT MACHINE LICENCE DUTY

VEHICLE EXCISE DUTY

CLIMATE CHANGE LEVY

Oliver Letwin (Conservative, West Dorset)

I beg to move amendment No. 98, in page 20, line 4, leave out from "until" to end of line 6 and insert— 'one year after the expiry of a twelve month period during which UK emissions of CO2 show an increase on the previous year'. I do not want to detain the House, not least because my voice is failing. The arguments on the climate change levy are well rehearsed, but we could not let pass this opportunity to explain to the House why the Opposition consider that the implementation of this dreadful new tax should be delayed. A much better solution would be its withdrawal. Given the mood of co-operation in the House, perhaps the Financial Secretary will have a Damascene conversion and withdraw this dreadful tax before the evening is out. Page 108 of the Red Book contains chart 6.2, which shows the root of the conceptual problem with the climate change levy. The number of millions of tonnes of carbon released through greenhouse gas emissions has been falling steadily since 1990 and remains on a declining trend. The new levy is being introduced at a time when there is no need for it. What is worse, it will be entirely ineffective, not least because all the industries most able to respond to it, through the elasticity of price in relation to production, will be exempt, for one reason or another. The levy is a classic example of a new tax that is misnamed and misdesigned. With the exception of the companies whose behaviour it might affect, it applies to all companies of all sizes. It will be widely regarded as a supreme example of a stealth tax. I doubt whether the Financial Secretary will, even now, be able to mention any small business in Britain that is yet aware of what is about to hit it—but hit it this tax will. The tax is not neutral, particularly because the offsetting national insurance contributions reduction, even if that were real, would not be coincident with the effect of the tax. Firms will be either gainers or losers. As the Financial Secretary is well aware, we are by no means persuaded that the offsetting NIC reduction will remain as an effect of the introduction of this levy. In any event, the offsetting NIC changes could have been introduced without the levy. The levy is a tax. It is not a neutral tax. It is not neutral either in its particular or in its general effects. Its effect will be to raise the Government's tax income. The levy is complicated. We became aware, as we went through it in Committee, that it is probably the most complicated tax that the Government have ever introduced—and that is saying something. If I remember correctly, its provisions extended to 55 pages. The situation has been made worse rather than better by Government amendments, which have made the tax significantly more complicated. This tax hits our competitiveness. As we explained repeatedly in Committee, it is not levied outside the European Union, and many EU states have exemptions from comparable taxes. It is unnecessary, and it is the more unnecessary because other more effective means, such as voluntary agreements and emissions trading, could have been used to achieve our Kyoto targets of further reductions in greenhouse gas emissions. Most important, and most directly germane to the amendment, is the fact that the policy represents work in progress—actually, I am doing the Government undue justice in saying that, because it is actually a mess in progress. It may be making gradual progress towards coherence, but it certainly has not got there yet. No one knows how combined heat and power schemes will be affected, and no one understands how the rebate mechanisms will work. No one knows whether the EU clearances on state aid will work. In that connection, I draw the Financial Secretary's attention to a letter, which he may also have received, from the Chemical Industries Association. It states the real "showstopper" for industries such as chemicals is that the Government may be unable to get its existing package of Levy concessions…past the European Commission. The tax is hugely complicated, not neutral, and does not achieve anything that needs achieving. Even if it were necessary to achieve something, the levy cannot achieve it as well as other measures could. It is also undeveloped both structurally and legally. All we seek with this modest little amendment is to delay this dreadful measure until there is evidence that it is required, that it has been sorted out and is legally feasible, and that it will work. Until that has been done, I do not see the slightest shred of justification for the application of the tax. I hope that the Financial Secretary will have seen as much light as his colleagues have seen on double tax relief. By changing their minds, they have mercifully spared British industry from one of the worst disasters that could have befallen it. I hope that he will tell us that he will accept this amendment—this life-saving device that we have thrown him—with the open arms with which it would behove him to accept it.

Andrew Stunell (Liberal Democrat, Hazel Grove)

As the hon. Member for West Dorset (Mr. Letwin) has said, the climate change levy was extensively debated in Committee. The Conservatives and the Liberal Democrats tabled amendments. The Liberal Democrats sought to improve and develop the tax. It is right to call it a tax—I certainly agree with the hon. Gentleman on that point. The Conservatives were consistently ambiguous in their intentions and in the amendments that they tabled.

Michael Jack (Conservative, Fylde)

Does the hon. Gentleman accept that my amendment on a 100 per cent. exemption from the climate change levy for the horticulture industry was clear and utterly unambiguous?

Andrew Stunell (Liberal Democrat, Hazel Grove)

The right hon. Gentleman is absolutely right, and he will recall that I supported that amendment.

Oliver Letwin (Conservative, West Dorset)

I hope that the hon. Gentleman will recognise that any ambiguity in our remarks in Committee was entirely due to our ineptitude as orators, because in fact our position is wholly unambiguous. We regard the climate change levy as an aberration that should never have been brought before Parliament.

Andrew Stunell (Liberal Democrat, Hazel Grove)

There we have it. That, in a nutshell, encapsulates why we cannot support the amendment. Whatever the defects of the climate change levy—I shall mention one or two in a moment—the fact is that it is just about the Government's only visible policy for fulfilling our Kyoto obligations. Hundreds of consultation papers have been issued and many sensible proposals have been mooted, but nothing has been done. The levy, with all its defects, should in general terms be supported and developed rather than opposed and defeated. We supported the principle on the Floor of the House and in Committee, but we voted against the schedule because of the manifest difficulties in its operation. The Conservative case against the tax is unclear. It is founded on an assertion about what is best for business, but entirely leaves out what might be best for the environment, and therefore for business too. Substantial opportunities exist for United Kingdom businesses in the vigorous pursuit of climate change policy. There is the opportunity to be a world leader, and for jobs and investment to flow from a positive response to the Kyoto protocol. In all honesty, the climate change levy is only a small brick in the wall of such a policy, and it is by no means perfect—but the Conservatives owe it to themselves to say clearly whether they think there is a problem with climate change or whether they now repudiate the stance taken by the right hon. Member for Suffolk, Coastal (Mr. Gummer) when he first set the United Kingdom Government on the track of responding to this fundamental issue. If they do, they should say so, and if not, they should say what policies they think should be in place.

Oliver Letwin (Conservative, West Dorset)

We accept that there may be a serious problem in the long run, although we are currently meeting the Kyoto standards, but the hon. Gentleman should accept that we have specifically mentioned emissions trading and voluntary agreements as serious ways forward. We do not accept that the corner shop, which cannot turn off its lights and reduce its electricity use, or do anything else to achieve the Kyoto targets, should be subject to a levy with no environmental purpose whatever, designed solely to increase the amount of money in the Chancellor's coffers—although I admit that after this afternoon, that will be very necessary.

Andrew Stunell (Liberal Democrat, Hazel Grove)

This afternoon I had the benefit of meeting representatives of Sainsbury's—not exactly a corner shop, I concede, as it has about 800 premises in this country—and they made the point that some of the ways in which the levy is coming into force could have been improved, in particular by accepting some of the amendments tabled by Liberal Democrat Members in Committee. I am thinking in particular of the need for the tax to be introduced at a low level, along with a clear long-term signal that the intention is to raise it. I know how businesses respond when they know the direction in which Government policy is going—when they see that it is starting at a level that is not punitive and will not damage competitiveness, but signals to them that they must make investment decisions that will take them in the right direction. Every shop in the country can save energy, whether its current activity involves refrigeration, lighting, insulation or simply controlling the flow of heat from its premises through open doors in winter. There is a tremendous gap between good practice and bad practice. Most professional experts say that between 20 and 35 per cent. of the energy currently used could be saved, so we know that there is scope for savings. The first question is, "Is that necessary?" The hon. Gentleman has said he accepts that it is. The next question is, "If it is necessary, and if it is possible, is the climate change levy a useful vehicle?" The answer is that it is a vehicle with some use, but that it does not give the complete picture, and is certainly not perfect. Liberal Democrats have criticisms of the climate change levy. We have pointed out, for instance, that it is not a tax on carbon emissions, which are what it was designed to prevent. We have also pointed out that it is being introduced at too high a level, and, in that sense, too abruptly, and that it gives no clear signals for the future. We established in Committee that the Treasury expected the tax to rise by the rate of inflation—in other words, to be inflation-linked. We do not think that that is the right approach. We think that we should have introduced the tax at, say, 50 per cent. of its current level, and that the Bill should have indicated clearly that a series of steps were involved. We believe that it should be clear to industry and commerce that in 10 years' time—by 2010, which is becoming a magic environmental date—they will need to take the levy into account, because it will constitute a significant impost on their fixed costs. We also criticised the proposal for another reason. Not only does it not tax carbon, it does tax some renewables—in particular, large-scale hydro-electricity generation schemes involving more than 10 MW. In Committee that consideration was dismissed as not being particularly important, but such schemes provide about half the country's current renewable energy resources. The Government do not seem to have recognised that in the new market—in the new electricity trading arrangements—those hydro schemes will be competing in a very different world from the world in which they were designed and built. At least some operators are concerned about their capacity to sell into that new market in a way that will enable them to remain viable. Because large-scale hydro schemes will be hit by the levy, there is a serious risk that they will be driven out of the market and replaced by the use of another fuel—inevitably, a fossil fuel. That would increase carbon emissions. We have also criticised the tax because it is undoubtedly complicated. So far its provisions cover 83 pages, and I assume that subsequently, all the additional pages of Government amendments will be attached. I think that that will add up to 86 or 87 pages. Anyway, clearly this will be a phenomenally complex piece of legislation. It must also be said that we shall deal later with Government amendments responding to some of the criticisms made in connection with combined heat and power, and, to a limited extent, horticulture. I find it surprising that, having decided to table just one amendment, the Conservatives should base that amendment on the assumption first that we do not need to start as soon as possible, because there is not enough evidence for us to know what we are supposed to be doing now, and secondly, apparently, that the longer we put off any action in the House, the better it will be for business and the environment. The Liberal Democrats reject that completely. We do not accept an argument for delay—an argument that is founded on disbelief. We do not think that the House should accept an argument that is so disingenuous and self-serving. We shall vote against amendment No. 98 not because we think that the Government have come up with a perfect vehicle, but because the planet faces a situation in which any vehicle is better than no vehicle.

Alasdair Morgan (Scottish National Party, Galloway and Upper Nithsdale)

I should like to pick up on the points that were made by the hon. Member for Hazel Grove (Mr. Stunell) and to address—and to ask the Minister to respond to—the particular problems faced by Scottish and Southern Energy and those of its plants that formerly belonged to the North of Scotland Hydro-Electric Board. The board was set up to generate electricity from renewable resources, which in itself was unusual. It also had a specific social responsibility in the highlands of Scotland: to provide electricity to remote glens where electricity was not available. The company has a significant number of small and medium hydro plants operating in the highlands; those are plants with between 10 and 25 MW capacity. It is my understanding—I have to take it on trust because, having read schedule 6, I am none the wiser about what it means—that plants under 10 MW will be exempted from the levy. From talking to Scottish and Southern Energy, I believe that it feels that plants of over 25 MW can compete commercially with the implications of the levy. Most of the plants that we are talking about were built during the early 1950s; some were built in the late 1950s in the great spate of hydro building in the highlands of Scotland. Therefore, they are reaching the end of their useful life. It may come as a surprise to some tourists, but Scotland is not a particularly wet country. It certainly is not in terms of hydro generation; I was speaking to the chairman of the Scottish tourist board at the end of last week, and he wished me to emphasise that point about the weather. Those plants operate at a load factor of about 30 per cent. If the climate change levy is imposed on them, the renewal of their equipment—which is due as we speak and which would extend their life for a further 30 years—would not, in the estimation of Scottish and Southern Energy, be economic in current market conditions. It would be tragic for the highlands if that investment, much of which was the brainchild of the first post-war Labour Government, elected in 1945, was lost. We would lose that valuable resource to the highlands. It would be ironic if a levy that was designed to encourage renewable energy led to the scrapping of some of the most significant and successful renewable energy schemes ever in this country. Therefore, I urge reconsideration, if for no other reason than to avoid disappointment for the Scottish Executive—the Scottish Labour-Liberal Executive—which as recently as 11 July, issued a press release on an agreement that was signed at Lubreoch power station in Killin, near where I was brought up. If I remember rightly, that is one of the power stations that I am talking about: it has a fairly small capacity and was built in the early 1950s. The press release says: SSE will provide 100 per cent. of the Executive's requirements from renewable resources.

Margaret Ewing (Scottish National Party, Moray)

On a point of order, Mr. Deputy Speaker. May I point out that no one on the Front Bench appears to be listening to the significant points being made by my hon. Friend the Member for Galloway and Upper Nithsdale (Mr. Morgan)?

Michael Martin (Deputy Speaker, Glasgow Springburn)

So long as I am listening, that is the important thing.

Alasdair Morgan (Scottish National Party, Galloway and Upper Nithsdale)

I thank you for your attention, Mr. Deputy Speaker. I continue with the quote from the Scottish Executive, which I am sure everyone on the Front Bench listens to: This is a first for central government and it underlines our commitment to the promotion of renewable energy as outlined in our draft Scottish Climate Change Programme. We are moving in the right direction and I am delighted to note that SSE are able to provide the public sector with a supply that is 100 per cent. renewable. I ask Ministers not only to spare the blushes of the Scottish Executive, but especially to encourage the renewal of existing renewable energy supplies by reconsidering their current approach to those particular power stations.

Denis MacShane (Labour, Rotherham)

I should like to make a few comments on behalf of the United Kingdom's electric arc furnace users. Electric arc furnaces consume recycled material—scrap metal—to produce steel, but those steel producers are concerned about the climate change levy. I pay tribute to my hon. Friend the Financial Secretary for receiving many deputations and representations from the steel industry. However, although the levy has been negotiated down to help the industry—which is going through very great difficulties—one anomaly remains. I had planned to table an amendment on the anomaly, but prefer to make a few comments about it. I hope that my hon. Friend will reply to them. I ask the Minister to consider narrowly the very few companies that use electric arc furnaces, which consume scrap metal—which is recycled material. There is a fear that, as currently formulated, the climate change levy will force the sector to close those furnaces and to use iron ore. It would be perverse if the tax, instead of encouraging the use of recycled material, caused the sector to return to raw iron ore to produce the steel that our economy wants. I ask my hon. Friend the Minister to consider whether—when fine-tuning the Bill, before it goes to another place and becomes law—he might receive a delegation of me and other hon. Members representing the steel communities where electric arc furnaces are being operated, to discuss whether the legislation might take on board those considerations.

Michael Jack (Conservative, Fylde)

May I remind the hon. Member for Hazel Grove (Mr. Stunell)—who chastised Conservative Members for having no alternative to the climate change levy—not only of my own remarks in Committee, but of the answer to a parliamentary question that elicited the fact that we would save 2 million tonnes of CO2, which was the original target of the climate change levy, if the gas-fired power station moratorium were lifted and only one third of those power stations were built? If we achieved that saving, the Government would have no need for the bureaucracy that they are proposing. Conservative Members take entirely seriously the state of the planet. However, lifting the gas moratorium would deliver in a much more straightforward manner what the Government's great cumbersome tax is supposed to do. In Committee, I also proposed a biomass alternative which, admittedly, needs more work. However, the conversion of 0.05 per cent. of the cultivable land area of the United Kingdom to short rotational coppice would, at a stroke, save more than 2 million tonnes of CO2. Recently, I received a letter from Shell International in support of that proposition. Therefore, Conservative Members need no lectures from Liberal Democrat Front Benchers that we do not take the subject seriously and that we have no alternatives. I shall not make a lengthy speech now about the virtues of nuclear power—fuel for which comes from my own constituency—but simply say that nuclear power is CO2-free. However, the Government do not have a proper nuclear strategy. I am speaking to this amendment to record once again, despite Government amendments, my deep disappointment that Ministers have done nothing to relieve the horticulture industry of a wholly unnecessary new tax. I am delighted to see my hon. Friend the Member for Broxbourne (Mrs. Roe) in the Chamber. On 15 June 2000, in an Adjournment debate, she reminded the House that the National Farmers Union had estimated that the climate change levy was effectively a tax of £3,750 per acre on glasshouses in this country. The Government talk about competitiveness; I heard the Chancellor's speech today. If representatives of the glasshouse industry were in the same room as the Chancellor, they would think that he was from another planet. The climate change levy has visited on the glasshouse industry a tax that is wholly unnecessary for an industry that consumes its own output of carbon dioxide and has the potential for saving more. The levy really does not apply and it makes the industry uncompetitive. There is no levy in Spain, Belgium, Ireland or Portugal. In the Netherlands, negotiations are taking place with the industry to reduce emissions, but no tax is envisaged. Here, however, the Government are imposing a tax on our horticulture industry which will diminish its competitiveness. At the same time, they claim to have the interests of British industry and commerce at heart. In areas where the horticulture industry is important in employment terms, the levy is disproportionately important. When the Financial Secretary argues the case for the levy, he will put yet another nail in the coffin of the British horticulture industry. We and the industry will know who is responsible. In Standing Committee, I put on the record, enterprise by enterprise, a list of small-scale businesses. The Chancellor said this afternoon that small-scale businesses were the engine room of our economy. It seems to me that the Government are stripping out the oil and the pistons, and they will soon be getting rid of the operator because the engine-room companies in the horticulture industry will have to bear a substantial extra burden which, as I said in Standing Committee, they cannot and should not bear. Even at this late stage, I make this appeal on behalf of the British horticulture industry. Instead of providing little tiny bits of help which do not address the issue, the Minister should recognise that the horticulture industry is genuinely a special case and find some way of absenting it from more than the proposed 50 per cent. reduction.

Christopher Gill (Conservative, Ludlow)

I shall speak briefly in support of the amendment. I find the case for the climate change levy quite unsatisfactory. We keep hearing from Ministers that it will be revenue neutral. It may be revenue neutral as far as the Government are concerned, but it certainly will not be for individual businesses. Although it could be claimed to be revenue neutral in respect of companies that are eligible for the rebate and employ a large number of people, as my right hon. Friend the Member for Fylde (Mr. Jack) has just said, it will be far from revenue neutral for companies that employ very few staff. The hon. Member for Kingston and Surbiton (Mr. Davey) said that the climate change levy would not affect competitiveness. That is absolute bunkum. Any tax affects competitiveness. Last Thursday at Question Time, the Minister for Energy and Competitiveness in Europe tried to maintain that the levy would not affect competitiveness. The Government are living in cloud cuckoo land if they think that they can impose a tax that will not affect British businesses. In effect, the climate change levy will impose a poll tax on employment, and its effect will be to export production that is currently carried out in Britain, and the jobs associated with it, to other parts of the world where environmental considerations are ignored. My right hon. Friend the Member for Fylde rightly mentioned other European countries where there is no equivalent of the climate change levy, or if there is, it is not being imposed in such a dramatic way. As was made clear on Second Reading, there are anomalies. For example, in several industries the prime producer is eligible for the 80 per cent. rebate, but processors in the same industry are not. That is totally unacceptable. The Liberal Democrat spokesman was good enough to admit that the tax was complicated. To my mind, that makes it a bad tax in any case, but the Government's assumption that companies and employers are not doing their level best to reduce the cost of energy is equally spurious. Everyone in business today realises that they have to keep bearing down on overheads. As energy is one of the most significant overheads, companies automatically bear down on energy costs without the incentive of the proposed tax. This is a bad tax. It is a poll tax on jobs in this country, and I shall support the amendment.

Simon Thomas (Plaid Cymru, Ceredigion)

I say, with much regret, that Wales is plenty wet enough for hydroelectricity schemes. That is why, in my constituency, I have the largest hydro-electricity scheme in Wales and England. I support the comments made by the hon. Members for Galloway and Upper Nithsdale (Mr. Morgan) and for Hazel Grove (Mr. Stunell). Hydro-electricity has been overlooked in the workings of the climate change levy, and I hope that the Government will review how the tax impacts on hydro-electricity schemes and the renewable energy that comes from it. However, I hope that the Government will resist the amendment. I am sure that they need no encouragement from me to do that. The hon. Member for West Dorset (Mr. Letwin) correctly pointed out that the rate of carbon dioxide emissions was going down, but he did not go on to say that the emissions are expected to rise significantly again after 2005. That is not in the Red Book, but it is in the Government's predictions. That has been borne out by the royal commission on emissions, which issued its report last month.

Desmond Swayne (Conservative, New Forest West)

Part of that rise may be consequent on the strangling to death of British horticulture and the importation of the products that it previously produced by air, with a great use of aviation fuel, which is one of the most serious carbon dioxide pollutants.

Simon Thomas (Plaid Cymru, Ceredigion)

I accept the hon. Gentleman's latter point, but his former point was somewhat peripheral to the argument, although I support the point made by the right hon. Member for Fylde (Mr. Jack) about the horticulture industry. There is an obvious carbon-negative factor that should be taken into account in the workings of the tax. The tax is complicated, and it is right to call it a tax, not a levy. However, none of the complicated difficulties with it persuade me to oppose it in principle. In fact, having heard the comments of the Opposition Front-Bench Treasury spokesman, I feel even more strongly that we should put the tax through as a marker of the changes that we need to see in this country. The amendment tabled by the Opposition is poorly drafted from a party that purports to want to form a Government at some stage in the countries of the United Kingdom. It shows a lack of understanding of what the Kyoto targets mean and of how we can move to achieve that international obligation. The time scale for the changes that we want to see in the environment and in carbon dioxide emissions is between 15 and 25 years. The magic year 2010 has been mentioned and 2020 is increasingly coming on the horizon in working out the targets. Legislation that pivots around some environmental blip from year to year would send out a tremendously bad signal to business, the public at large and our international partners. The poor understanding within the Conservative party is reflected in the way in which it has approached the issue. It has not come up with an alternative scheme for meeting the Kyoto targets. Many of us who have serious doubts about the complexity of the climate change levy and what it leaves in and leaves out would have liked to hear alternative methods of achieving the Kyoto targets, but I regret to say that that has not come forward from the Opposition party.

Oliver Letwin (Conservative, West Dorset)

Is the hon. Gentleman seriously advancing the proposition that lifting the gas moratorium would not do more to achieve the targets than this tax?

Simon Thomas (Plaid Cymru, Ceredigion)

It would in the very short term, but we are talking about a 25-year period. As the hon. Gentleman knows, there would not be the natural gas to pump into stations in 25 years' time. We have to start planning now for the changes that we want to see in 20 or 25 years. That is why the right hon. Member for Fylde was correct in referring to biomass and short coppice rotation. Elephant grass, willow or whatever might be grown, but that is not an answer to the situation that we are in now. I spent three hours with a biomass group in my constituency on Monday morning discussing how we could get a biomass plant established in the area. The members of the group were arguing strongly that they need a lead-in of four to seven years for the coppice rotation to take effect before the plant can be efficient. 10.30 pm I say to those on the Government Front Bench that I hope that Energy Ministers will be informed that there are still pieces missing in the Government's picture on renewables, especially in terms of renewable energy and the price that may be involved. I understand that the Department of Trade and Industry will be discussing next week how it might address the issue. It is part of meeting our climate change obligations that the left hand knows what the right hand is doing. The Government are pressing on with the levy without necessarily bringing in all the other benefits that need to come on stream. For that reason, they are giving the impression that they are introducing a tax without the benefits that should accompany it. It is incumbent upon them to work hard over the summer to produce for industry ideas about the use of renewable energy that will fit the jigsaw and produce a much more complete picture. The Government's view is at least robust, if nothing else, and linked to environmental aims. I welcome the later amendments on combined heat and power. I hope that they will improve a deficiency in that area. I hope that everyone in the House accepts that there is climate change and that it brings problems. Certainly the occupants of the Conservative Front Bench are starting to accept that, although they do not accept the levy. However, climate change demands vision and political bravery. It is regrettable that, on the whole, we politicians are short-termist. We do not like to plan ahead for 10 or 15 years, because on the whole we shall not then be around to reap the benefits. However, the Government have shown a little bravery in this context and I hope that they will resist the amendment, stick to their guns and review the workings of the climate change levy to ensure that some of the other points that have been raised are taken into account, particularly the future of renewable energy.

Stephen Timms (Labour, East Ham)

The hon. Member for West Dorset (Mr. Letwin) asked me to withdraw the tax. I wish I could withdraw the huge problem of climate change which faces the world and requires an effective response throughout the world. The hon. Gentleman said in an intervention on the hon. Member for Hazel Grove (Mr. Stunell) that it might be a problem. Well, it is a problem. That is the reality that we face, and we are taking effective action to respond to it. The hon. Member for West Dorset seems to be labouring under some straightforward misapprehensions, and in a brief contribution I shall attempt to correct them. He said that the problem could be solved alternatively by lifting the restrictive consents policy. We have announced that that policy will be lifted, and that is reflected in chart 6.2 of section 6 of the Red Book about the projections for carbon dioxide emissions. The levy is needed in addition to that to meet our objectives. Annual emissions are expected to be about 15 per cent. below 1990 levels this year, but it is forecast that they will start rising again as a result of continuing economic growth and because of factors such as the decommissioning of nuclear power stations. The projected increase in emissions takes into account the expected impact of the levy. That is why it is vital that the levy and all the other measures within the climate change programme are implemented in full to prevent any slippage. The hon. Member for Ceredigion (Mr. Thomas) rightly said in an effective contribution that a wide range of measures is required, of which the levy is one.

Oliver Letwin (Conservative, West Dorset)

If the Minister believes—I am sure that he is right—that the decommissioning on a substantial scale of nuclear power stations will have a significant effect on emissions, why is it that the so-called climate change levy does not exempt power produced from nuclear stations?

Stephen Timms (Labour, East Ham)

I do not know whether it is the policy of the Conservative party to promote new nuclear development. We know what is happening to nuclear power over the next 10 or 15 years, and that is one of the factors that we should take into account in projecting the future of carbon dioxide emissions. It is not a matter, as the amendment suggests, of watching some statistics to check whether we might need to take action to deal with climate change. That is wilfully to ignore the seriousness of the problem of climate change when, in reality, urgent action is imperative. The hon. Member for Galloway and Upper Nithsdale (Mr. Morgan) asked about hydro-electric plants with a capacity of more than 10 MW. He is right to say that the exemption for renewables in the climate change levy applies to hydro schemes with a capacity of less than 10 MW. That is because we want to promote new renewable energy sources. There is a great deal of scope for new forms of renewable energy generation, and that is what the exemption is designed to promote. We want to incentivise new activities rather than subsidising existing activities that have competed successfully with other forms of generation for a long time. I have had a number of discussions on the issue with the organisation that the hon. Gentleman mentioned and others, and no one has suggested to me, as the hon. Member for Hazel Grove did, that big hydro-electric operators will shut down when the levy comes into effect. It would be wrong to suggest that. I recognise that there is a concern about a band of hydro-electric schemes, perhaps in the 10 to 25 MW capacity range, that, at some point in the future, they may want to carry out refurbishment, and that may well be a point that needs to be considered at that stage. But we are right to focus the exemption for renewable generation on new forms of renewable energy so that we can substantially increase the extent of that.

Andrew Stunell (Liberal Democrat, Hazel Grove)

Will the Minister give way?

Stephen Timms (Labour, East Ham)

I shall not give way again as I need to make some progress. My hon. Friend the Member for Rotherham (Mr. MacShane) raised some questions about electric arc furnaces for steel. I do not anticipate the problems that he fears because the 80 per cent reduction will be available. There will also be significant reductions in the price of electricity because of the new electricity trading arrangements. There is not an amendment on the subject before the House tonight, so the Bill represents the position that will prevail when the levy takes effect next April, but I shall be glad to meet my hon. Friend and others to discuss the concerns of the steel industry. To the right hon. Member for Fylde (Mr. Jack), I would say that we have fully recognised the special case of horticulture. The 50 per cent. concession that we have announced is unique. No other industry will enjoy the benefit of that, and that is being extended through a later group of amendments tonight to include lighting and heating. Belgium is working up an energy tax, and I anticipate that most, if not all, of the EU states will, in due course, need to introduce such a measure to meet their Kyoto objective. That trend is clear. As I have said, I welcome the support of the hon. Member for Ceredigion. He is right to recognise the importance of taking the step that is contained in the climate change levy. We are permanently improving energy efficiency across the business and private sectors, providing a continuing incentive to innovation aimed at improving energy use. The burdens on business will be kept to a minimum. I repeat what I am sure I have already said many times to the hon. Member for West Dorset, that we are recycling all the revenues from the levy in full to business through equivalent cuts in employer national insurance contributions and schemes to promote energy efficiency, including additional support for renewable sources of energy. There is no net gain to the Exchequer from the levy package. If the projection of an increase in carbon dioxide emissions after 2000 is correct, the amendment could delay the onset of a levy only until 2002, but we need the levy in our fight to reduce greenhouse gas emissions. Any delay in implementation of whatever duration would prove deeply damaging to our aims. The problem of climate change remains a great challenge and a challenge that the Government are prepared to face up to. I am pleased that, on this occasion at least, the hon. Member for Hazel Grove can support us in taking the levy forward. I have one last point. The hon. Member for West Dorset talked about emissions trading as an alternative to the levy. It is not an alternative; it is a complement. We are taking forward an emissions trading scheme. The amendment is inconsistent with our key long-term goal of reducing greenhouse gas emissions and improving energy efficiency in business. I urge the House to reject it.

Oliver Letwin (Conservative, West Dorset)

We have tried to save the Government from themselves. Alas, we have failed. Although this is sad for the country, it is marvellous politically. We look forward with glee to the moment when literally hundreds of thousands of businesses up and down the country discover that they will be subject to this ghastly tax, and we look forward to the Financial Secretary's doing little else for months than dealing with them.

GIFT AID PAYMENTS BY INDIVIDUALS

John Burnett (Liberal Democrat, Torridge and West Devon)

I beg to move amendment No. 101, in page 25, line 39, leave out— 'donor shall be assessable and' and insert— 'charity receiving the gift shall be'.

Michael Lord (Deputy Speaker, Central Suffolk and North Ipswich)

With this it will be convenient to discuss amendment No. 102, in page 25, line 41, at end insert— 'as if it were being assessed as the donor.'.

John Burnett (Liberal Democrat, Torridge and West Devon)

We have also discussed these amendments at length with the Chartered Institute of Taxation's low incomes tax reform group. We warmly welcome the new rules for relief for charitable giving, but in one major respect they do not go far enough. The only people whose gifts will not qualify for relief will be those who do not pay tax—if they do not pay tax, they should not give a gift aid declaration. However, that presupposes that during the tax year everyone will know whether, at the end of it, it will turn out that they are liable to pay tax. All sorts of thing can happen. Individuals may fall ill, lose a job—part-time or otherwise—or start a baby and go on maternity leave. They will not know how their income relates to the personal allowances appropriate to their status. Everyone in the House knows how complex the tax rules are, but they are even more complex in this area than we had thought. It transpires that, even though an individual is no longer able to claim payment of the tax credit attached to a dividend that he or she receives, a charity is not able to do so either. Nevertheless, a charity will be able to receive payment of the tax credit attached to a dividend received by an individual who gives it as a donation. The purpose of the amendment is to provide that if an individual who turns out to be a non-taxpayer makes a gift that is subject to gift aid declaration to a charity and the charity claims the tax, the liability to repay that tax will fall on the charity and not on the donor. 11 pm We do not believe that that is as burdensome as it may sound. The Inland Revenue has made it clear that it would look first to the charity to repay the tax and that it would look to the donor only in the unlikely event that the charity refused. The amendment would give effect in law to what the Revenue has said would happen in practice. It is surely better that practice should be the servant of the law and the law should put matters right.

Howard Flight (Conservative, Arundel and South Downs)

I agree with the amendment, which is designed to address important matters that we raised in Committee. Individuals giving to charity but not paying tax could find themselves being pursued for tax that a charity had reclaimed accidentally. That would clearly be undesirable and unjust. The remedies that we suggested were, we felt, the best means of dealing with the problem, but this remedy at least addresses the problem.

Barry Gardiner (Labour, Brent North)

The relief proposed by the Chancellor could be both extended and maximised. At present, shares that can be given and qualify for relief are limited to those listed or dealt in on a recognised stock exchange. That leaves out a significant category of potential donors—namely, the entrepreneur who has built up a business to the point at which he is about to sell a significant part of it but at which the company is technically still unquoted. I recognise that the Inland Revenue would not want to become involved in the administrative burden of valuing small parcels of shares—indeed, charities would not want to receive them—but the relief could be improved if it were to include other categories of donor. I would ask my right hon. Friend the Chancellor to extend the kind of shares or securities that would qualify for relief to include those effectively able to be traded or realised. An existing definition is used for the purpose of pay-as-you-earn.

Roger Casale (Labour, Wimbledon)

I am following my hon. Friend's argument with care and it contains much of merit. I wonder, however, whether it might not be more appropriate to make these points under amendments Nos. 132 and 133, which appear later on the amendment paper.

Barry Gardiner (Labour, Brent North)

My hon. Friend has made an extremely good point, for which I am very grateful.

Melanie Johnson (Labour, Welwyn Hatfield)

The intention of the amendments is to save people on low incomes from having to face a tax bill because they have mistakenly used gift aid when they had paid insufficient tax to allow the charity to reclaim the tax on their donation. In those circumstances, the donor would be liable to be assessed on any shortfall. I agree that that is not a position in which we wish people on low incomes to find themselves, but I do not believe that the amendment is the best way in which to deal with the problem. The gift aid scheme works by allowing charities to reclaim basic rate income tax paid by donors on payments made to the charity. That means that, under the changes that we have introduced this year, a donor must have paid basic rate tax on income equal to the amount of his gift to the charity under either a deed of covenant or gift aid. We have extended gift aid so that a donor need pay only an amount of income tax or capital gains tax at any rate equal to the amount reclaimed by the charity. The changes allow more people to use gift aid, but it is still not suitable for non-taxpayers, or, except for modest gifts, for those who pay very little tax. For those people, prevention is better than cure. We will be publishing information for donors that will make it clear that gift aid is not appropriate for those who pay little or no tax. The declaration must contain a suitable explanation of the requirement to pay sufficient tax, as we discussed in Committee. The charities need to give the same message when recruiting donors. The scheme is not designed to trap the unwary into a tax charge. People for whom the gift aid scheme is not appropriate can still give to charity outside the scheme. Let me deal with why the amendments are not a suitable way in which to tackle the perceived problem. The gift aid scheme is very straightforward. The donor simply gives a gift aid declaration which must contain the health warning about having paid sufficient tax to cover the tax that the charity will reclaim. The donor needs to disclose nothing further about his or her tax affairs. The charity can then, with certainty, proceed to recover tax on the gift. I hope that, as a matter of practice, charities will remind the donor from time to time of the need to meet the tax to cover the requirement. The onus to comply with that requirement is on the taxpayer. If the charities were made liable for any shortfall, they would need to know more about the donor's tax position as well as any other gift aid payments to other charities in the year in question so that they could satisfy themselves that everything was correct. That would be a most unwelcome burden for charities and an unacceptable intrusion for donors. We believe that it is more important for people to be made aware by Inland Revenue leaflets and in the charities' own literature about the requirements of the scheme. The amendments would add complexity to the gift aid scheme, which we have endeavoured to make as simple and straightforward as possible. I believe that they would be most unwelcome to charities and donors alike. For those reasons, I hope that the hon. Member for Torridge and West Devon (Mr. Burnett) will withdraw the amendment.

John Burnett (Liberal Democrat, Torridge and West Devon)

This matter was discussed in Committee, and I think that all right hon. and hon. Members are aware of how gift aid works. We do not claim that the amendment is perfect. However, my point is that the circumstances of individuals can change dramatically during a tax year. I was hoping that there would be rather more sympathy for individuals who had suffered a dramatic change in their circumstances. The Minister says that the Inland Revenue will be publishing information to donors making the pitfalls clear should they cease to be taxpayers during a year of assessment and if they enter into a gift aid scheme. Given that that information will be available, I beg to ask leave to withdraw the amendment.

GIFTS OF SHARES AND SECURITIES TO CHARITIES ETC

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 132, in page 31, leave out lines 31 and 32.

Howard Flight (Conservative, Arundel and South Downs)

The amendments are designed to give the same relief to all forms of security, property and art treasures gifted to charity as the Bill proposes for quoted equities. In Committee, the Government resisted the proposed extension of the new relief for gifts of quoted shares to charities to include unquoted shares on three grounds. The first was that charities should not be encouraged to hold unquoted shares as they were not easily realisable. The second was that unquoted shares were difficult to value, making the relief more complicated to administer for both donor and donee. The third was that the relief provided was already generous enough. The first point does not stand up to scrutiny. Charities have always held all sorts of assets, some of them more easily realised than others. The Trustee Bill will give most charities subject to proper standards of prudence the power to invest in any property capable of producing an income or capital return. The Government cannot, on the one hand, promote a measure that will allow charities to invest in almost any type of property and in broader categories of property, and, on the other, argue in the other direction in connection with this Bill. The second objection is also unconvincing. The Inland Revenue has no difficulty valuing all sorts of assets gifted to charities for inheritance tax purposes. The Government are clearly not willing to commit the resources to facilitate evaluations for widespread giving to charity. An independent valuation can be obtained easily by a donor and donee for any type of property. The problem is the Government's unwillingness to commit resources to enable the Revenue to scrutinise the valuation. The third objective was repeated consistently by the Government in Committee. They believe that they have been more than generous already with the reliefs that they have offered, and that those reliefs will serve as adequate compensation for the withdrawal from charities of the recovery of dividend tax credits and irrecoverable value added tax. That conviction relies on two broad assumptions—that all charities are fundraisers, and that measures in the Bill will make a real difference to the amount given to charity. The first of those assumptions is not correct, and the second is debatable: the Government's estimate of the value of the changes to giving is less than the collective losses sustained by charities of some £500 million a year when advance corporation tax recovery phases out. Since the Bill was considered in Committee, I have been approached by several entrepreneurs involved in key universities in this country. They told me that they had already purchased property that they had intended to give to the various universities but which they will not give if it does not enjoy the same tax position as listed shares. The entrepreneurs also said that the argument against unquoted shares—that the right time to give them is when they are listed and their value fructifies—does not apply to many of the new high-tech industries. Those shares get bought for cash or loan stock by other businesses, and so would never qualify for gift aid reliefs. The debate is especially relevant to gifts made to institutes of higher education. In the United States, giving amounts to some 2 per cent. of gross national product, but only to some 0.6 per cent. in this country. Do we want our universities to get really large gift aid from successful alumni? If so, it must be logical to extend to unquoted securities and all other forms of property the relief now being offered to quoted securities. I do not believe that any good argument exists for not accepting the amendments.

Barry Gardiner (Labour, Brent North)

The parliamentary day begins with the prayer "Prevent us, 0 Lord", and I have learned this evening the appropriateness of that sentiment. I prevented the hon. Member for Arundel and South Downs (Mr. Flight) from speaking to this amendment earlier, but I was prevented from continuing in my error by my hon. Friend the Member for Wimbledon (Mr. Casale). However, my comments on the amendments and on the extension and maximisation of the relief proposed by my right hon. Friend the Chancellor are now apposite. At present, shares that can be given and which qualify for relief are limited to shares traded on a recognised stock exchange. That leaves out a significant category of potential donor—the entrepreneur who has built a business, such as a dot.com company, up to the point at which he is about to sell a significant part of it. Technically, such a company would remain unquoted on an exchange. 11.15 pm Although I recognise that the Inland Revenue would not want to get involved in the administrative burden of valuing small parcels of shares, and indeed charities would not want to receive them, I believe that the relief could be improved if it were to include this category of donor. I ask my hon. Friend the Economic Secretary to consider extending the definition of the shares or securities that can qualify for relief to include those that are able to be traded or realised. An existing definition is used for the purposes of pay-as-you-earn. In practical terms, donors are most likely to consider using the relief when they know what their income tax bill is, as that represents the limit of the gift for which they can obtain the tax deduction. That happens at the self-assessment deadline of 31 January each year in respect of the income to the previous 5 April. I believe that donors would increase their gifts if they were able to obtain relief against their income of the previous tax year. Under the present rules, a donor who wants to make a gift has to anticipate his income for the current tax year to 5 April. That inevitably prompts individuals, or most certainly their advisers, to adopt a cautious estimate in order not to give more than is available for relief. A carry-back facility would encourage larger gifts. A number of individuals realise significant capital gains in a particular year, and again entrepreneurs spring to mind. For such individuals, the amount they may be willing to give to a charity could be a proportion of their capital gains rather than of their somewhat smaller income. Again, by allowing the relief to be given where necessary as a deduction against capital gains in addition to income, it would encourage certain donors to give considerably more when they feel able to afford it. Experience passed on from America, where there is a similar tax relief, is that a large proportion of the funds going to charities comes from a small number of donors who give significant amounts. Any measure that encourages those individuals to raise the level of their generosity is likely to help the new relief that the Chancellor has introduced succeed even more. I commend it for my hon. Friend's consideration.

Melanie Johnson (Labour, Welwyn Hatfield)

I am grateful to my hon. Friend the Member for Brent, North (Mr. Gardiner) for his remarks and suggestions, and I shall give them due consideration. It is probably best that I do so at not such a late hour, when my mind is clearer. I assure him that I will then be able to give him the benefit of total clarity. I shall address the general point that has been raised in the debate on these two amendments. The point that we have made in Committee and that I reiterate now is that we designed the relief to ensure that it is applied to investments that are readily realisable and easy to value. I have made that point many times, and I know that it will be familiar to the hon. Member for Arundel and South Downs (Mr. Flight). That will allow a charity to make an unfettered decision on whether to add the gift to its investment portfolio, or to realise the gift immediately and use the proceeds for charitable purposes. Amendment No. 133 would extend the range of qualifying investments that a donor can give to charity and get relief on to include all assets as defined in the Taxation of Chargeable Gains Act 1992, to which amendment No. 132 makes a consequential change. I do not think that the amendment achieves the hon. Gentleman's intention. It would mean that certain investments, such as gilts, which qualify for relief under the provision as drafted, would no longer do so as they are not chargeable to capital gains tax. He may not be aware of that. In addition, certain other assets, such as cars, would not qualify for relief, as they are not defined as assets for the purposes of capital gains tax. Many assets would come within that wider definition that would not be as easy to value or as readily realisable. There are no markets for some assets, so charities would be constrained in realising the value of the assets and using them for charitable purposes. That goes back to the basic principles that I mentioned earlier. Clause 43 will introduce an exciting new relief for charities and their donors. We would like to see how that works in practice. There is already a very generous relief for works of art. There are additional significant reliefs from capital gains tax, inheritance tax and stamp duty for gifts of assets to charity. There are also already extremely generous reliefs from capital gains tax and inheritance tax for gifts and sales of pre-eminent works of art and heritage assets to museums and galleries. We have a tax relief for businesses that make donations to charities of trading stock and items of equipment that are used in business. The assets that qualify for the new relief were carefully chosen to fulfil the criteria that I have already set out, so I hope that the hon. Gentleman will allow the full effect of the new changes to be seen in practice and will withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I will not press the amendment to a vote at this time of night, but I exhort the Government to step back and take the point that property in particular is an absolute natural for donation to higher education institutions. On the whole issue of unquoted investments, here we are in an age in which the Government want to encourage venture capital—the age of the internet and so forth—and if the issue is not addressed quickly, charities will lose out on a particular economic phase. It is by no means certain that venture capital investments will turn into licit investments suitable for relief. If the Government are not willing to address the issue right now, which clearly they are not, I will put strong pressure on them to ensure that it is addressed next year, if they are still in power. I beg to ask leave to withdraw the amendment.

Medical students

Evan Harris (Liberal Democrat, Oxford West and Abingdon)

I am pleased to present this petition on behalf of no fewer than 3, 779 medical students from medical schools up and down the country. The petition states: The ineligibility of medical students who started at medical school prior to 1998 to receive full student loans in the final year of study is inequitable. Final year medical students are unable to work to support themselves during their course as academic years can be up to 50 weeks long and they incur far greater expenditure than students in other disciplines. Medical students maintain that the Government's continued refusal to recognise this is unjustifiable. The petitioners therefore request that the House of Commons calls upon the Government to ensure that all final year medical students are eligible to apply for the full financial support that they so urgently need. To lie upon the Table.