Orders of the Day — Finance Bill

House of Commons, 19 July 2000.

EMPLOYEE SHARE OWNERSHIP PLANS

Stephen Timms (Labour, East Ham)

I beg to move amendment No. 57, in page 240, line 12, leave out from "must" to end of line 13 and insert— 'form part of the ordinary share capital of—'.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following: Government amendments Nos. 10 and 11. Amendment No. 135, in page 248, line 28, at end insert— 'Where an employer pays on behalf of an employee any Class 1 national insurance contributions which would have been due from the employee but for the deduction of partnership share money not be an emolument or benefit chargeable to tax under Schedule E.'. Government amendments Nos. 12 and 13.

Stephen Timms (Labour, East Ham)

The amendments deal with the new employee share ownership plan whose rules are set out in schedule 8. Paragraph 60 provides a rule for the type of share that must be used in the plan. As it stands, the paragraph restricts that to the share capital of a single company. The legislation for the new plan inadvertently changes the position for consortium companies. Currently, it would not be possible for shares in more than one consortium company to be used at the same time for the purposes of the new plan. It was not our intention to change the position for such companies; we want the new plan to be open to as many companies and employees as possible. Amendment No. 57 ensures that, in the new plan, shares in consortium companies can be used in exactly the same way as under the existing Inland Revenue-approved schemes. I hope the House will welcome that change. I deal now with amendments Nos. 10 to 13. The new plan is designed to give employees a genuine stake in the company for which they work. Under Inland Revenue-approved share schemes, redeemable shares do not normally count as qualifying shares because they do not entail a full-blown stake in the company—employees can get their money back whenever they want to do so. Members of retail co-operatives hold redeemable shares, as do those in workers' co-ops. Shares in retail co-ops are bought at their face value. They carry a small amount of interest, providing a dividend based on the company's profit that varies according to the amount of purchases made by the member—often known as a divvy. The shares are also normally redeemable by the company at the same value. Retail co-ops want to improve their employees' participation in their business. They want to use the redeemable shares that they issue to other members in an all-employee share plan. Without an amendment to the legislation, such shares would not qualify for the new plan. The amendments extend the current exception whereby workers' co-ops may use redeemable share capital in a new plan to all co-ops that are registered industrial and provident societies. The Co-operative Union estimates that at present very few employees are members in this way—perhaps as few as 2 per cent. of the 40,000 employees in the 37 United Kingdom consumer co-ops. These changes will enable retail co-ops to encourage their employees to take a stake in the business, using the same redeemable share capital available to other members. Many more employees working in co-ops will be able to benefit from the tax reliefs in the plan. That will help us to achieve our goal of doubling the number of companies that offer shares to all their employees, and it will extend to co-operatives the substantial advantages that the new scheme offers. Several right hon. and hon. Members have advocated an amendment along these lines. It has been welcomed as a real boost by the chair of the Co-operative Union, and I am delighted to commend it to the House. If I may, Mr. Deputy Speaker, I will seek in a few moments to catch your eye to respond to what is said by Conservative Members on their amendment.

Howard Flight (Conservative, Arundel and South Downs)

We agree with the amendments as outlined by the Minister. I do not know whether this is the right time to mention this, but the issue of consortiums and different shareholdings of companies that are not owned by one single company owning more than 51 per cent. also came up in Committee in relation to investment management incentives. We had a letter of undertaking that the Government would be tabling a relevant amendment. I am not clear whether amendment No. 57 is intended to relate to enterprise management incentives as well as to the employee share ownership plans. However, perhaps we can deal with that point later. Amendment No. 135 raises, in a slightly different way, a point that we sought to have addressed in Committee. It would cure an anomaly. Under the employee share ownership plan, lower-paid employees could, by having partnership share money paid before tax, have lower earnings in terms of their national insurance contribution liabilities, and thus pay lower personal NIC contributions, in turn receiving lower reduced earnings-related state benefits. That cannot be the Government's intention, given that the employee share ownership scheme is designed to benefit relatively lower-paid employees in particular. This amendment to cure the anomaly is slightly different from our previous proposal.

Andrew Love (Labour/Co-operative, Edmonton)

I welcome the amendments to extend the all-employee share plan to co-operative organisations. Before I say a little about that, I should make a declaration. I am a Labour and Co-operative Member of the House, with a long-term interest in and involvement with the co-operative movement. In the foreword to the Government's initial consultation document on employee share ownership plans, the Chancellor of the Exchequer stated: Share ownership offers employees a real stake in their company with shareholders, managers and employees working towards common goals. I agree with that statement. Research shows that employee share ownership plans, when linked with other means of employee participation, can do a number of things. They have a positive effect on productivity; they link the owners with the workers in the objectives of the successful company; and they make employees more aware of the overall performance of the company. Today's co-operative movement is interested in reform of its structures which are, in effect, stakeholder models of co-operation. The amendment will assist in achieving that reform by achieving real partnerships between the members who are the owners and their employees. It will enable the employees to participate in the activities of the co-operative by voting at meetings, becoming members of the boards of directors and sharing in the profits of the organisation. I welcome the Government's move in this respect. It will create a level playing field in the industries in which co-operatives are involved. Why should it be that other retailers can have such plans, but the co-operative movement cannot? These amendments will extend such plans to the co-operative movement and give the work force a more inclusive role. The press release issued by the co-operative movement states: The Government's recognition that our workers deserve to be included is a real boost to those leading exciting reforms in the co-op movement. I certainly welcome these amendments; they will help to achieve those reforms in the co-operative movement, and I commend them to the House.

Stephen Timms (Labour, East Ham)

I welcome what my hon. Friend the Member for Edmonton (Mr. Love) has said, and I commend his work in the House on behalf of the co-operative movement to promote the interests of co-ops. The hon. Member for Arundel and South Downs (Mr. Flight) asked about amendment No. 57 and the impact on enterprise management incentives. There is no read-across from that amendment to such incentives. I am not sure to which amendment in Committee he was referring, although a later group of amendments deals with enterprise management incentives. On amendment No. 135, I understand that the intention of Opposition Members is to ensure that, where the employer pays the employee's national insurance on the amount used to buy partnership shares, that amount would not be chargeable to income tax on the employee, but the underlying assumption is that the employer would be able voluntarily to pay the primary national insurance contributions on the employee's behalf. That is not the case. Current legislation does not permit the employer to pay class 1 contributions that he is not liable to pay, so the employer would not be able to pay those contributions as is implied in amendment No. 135. Without changing the underlying law, which would be a task of significant technical complexity, that amendment would have no effect so I hope that Opposition Members will not press it to a Division.

PHASING OUT OF APPROVED PROFIT SHARING SCHEMES

PHASING OUT OF RELIEF FOR PAYMENTS TO TRUSTEES OF PROFIT SHARING SCHEMES

FURTHER PROVISIONS ABOUT SHARE OPTIONS

Richard Ottaway (Conservative, Croydon South)

I beg to move amendment No. 131, in page 40, line 19, after "be", insert "multiplied by 2.5 and". I make no apology for the fact that the amendment would largely negate the impact of imposing national insurance contributions on share option schemes. I want to talk about entrepreneurial activity. We are well aware of what this Government measure will do. The problem has been rightly identified by all involved. A start-up company that has little capital or that makes little profit, and whose shares may be quoted or are at least tradable, may employ many staff on a contractual basis that includes large share options. On the exercise of those options, the national insurance contributions are levied not only on the employee, but on the employer. That imposes a large capital liability on the employer, which he may not have the funds to meet. The Government recognise the problem and have made a gesture, but in our eyes the proposal merely takes things from very bad to bad. 5 pm I want to talk about entrepreneurial activity largely because that is what the measure will hit. After the election, the Government produced a competition White Paper that built on the efforts of my right hon. Friend the Member for Henley (Mr. Heseltine) when he was Deputy Prime Minister, and a document on the knowledge-driven economy, of which my right hon. Friend was the driving force until 1997. The Institute for Public Policy and Research produced a report entitled "The Entrepreneurial Society", the launch of which the Prime Minister attended. He supported the teaching of entrepreneurship in schools, which was one of the report's main themes, and I shall return to that point. The Government may talk the talk, but do they walk the walk? [Interruption.] Well, that is important and we want to know. At first blush, the Government do not do too badly for entrepreneurs. There have been changes to capital gains tax, capital allowances for small and medium-sized enterprises are now 40 per cent. and, for the next three years, allowances for certain information technology equipment will be 100 per cent. for small companies, which will go a long way to help the sort of company that the measure will hit. However, medium-sized companies seem to have dropped out of that relief. Research and development reliefs were discussed upstairs in Committee, and a couple of weeks ago the Government announced a 55 per cent. increase in public expenditure on science. Although I am prepared to give the Government the credit for that, I do not want to go too far or be too kind and generous. The point is that these measures are finely tuned and focused. They address a particular sector, but what of the colossal burden of corporate taxation and regulation that has been dumped on business overall? It will completely swamp everything that these measures will introduce. Since 1997, business has had to absorb the cost of union recognition and the additional costs of maternity leave and paternity leave, which have been much publicised. It has also had to absorb the cost of rights to time off, rights for part-time workers, the national minimum wage and the working time directive, so it comes as no surprise that the Institute of Directors has said that the additional regulatory burden is costing business £5 billion a year. However, the Labour party election manifesto said: We will provide stable economic growth with low inflation— so far, so good— and promote dynamic and competitive business and industry at home and abroad.

Melanie Johnson (Labour, Welwyn Hatfield)

And we have.

Richard Ottaway (Conservative, Croydon South)

I disagree. for the reasons that I am setting out, the effort to promote dynamic and competitive business is being stifled by measures such as those we are debating. If the hon. Lady talks to industry and business, she will find that they agree. There is extra taxation on business—the pension fund liabilities, for example. It is dawning on millions of people around the country that there has been a raid on their pensions that will cost them and their employers substantial sums. The Government have introduced the windfall tax on the utilities, corporation tax changes and the climate change levy, which we have discussed. The infamous IR35, which is having a colossal impact on the IT sector and the way it behaves, is not stimulating business in the way that the Government claimed in their manifesto. Stamp duty, which was debated in the House yesterday and upstairs in Committee, hits business particularly hard. It took heavy pressure from the Opposition for the Government to amend their double taxation relief proposals. The proposals that they originally came up with were outrageous. Thanks to the Conservative party, which is business's friend, the Government have largely climbed down on the measure, but why they should dream of introducing it in the first place is beyond me. We have had the additional fuel duty, which is having a big impact on industry that relies heavily on transport. We have the aggregates tax and also the national insurance contributions on share options. It comes as no surprise that Sir Clive Thompson, chairman of the Confederation of British Industry, drew attention to Labour's stealth taxes just before the March 2000 Budget. He said: The Government has introduced a series of well-camouflaged taxes which has put the tax burden firmly onto business. Changes by the Chancellor since 1997 will push up business taxation by almost £5 billion a year for the first five years of the Labour Government. Given that sort of reaction, and if that volume of taxation is going on business, why on earth do the Government bring in such a measure, which will stifle entrepreneurial actively, not help it? Ministers must get out there and talk to the people who are at the coal face, who have a wage bill to meet every week and who are up against the heavy burden of corporate taxation and regulation, and listen to them. They would then think twice about putting such a burden on Britain's entrepreneurs. What sort of message does the proposal send to entrepreneurs in this country? There is no doubt that entrepreneurial activity has an impact on the economy. If we have more entrepreneurs, it tends to generate more economic activity and the economy grows. Whatever side of the political debate we are on, we all want the economy to grow. In the United Kingdom, we are not doing badly with entrepreneurial activity—at least until we compare ourselves with other countries. Just 3.3 per cent. of the people of this country are trying to start a business, but in the United States it is twice that number—more than 6.5 per cent. of people are engaged in entrepreneurial activity. Only 16 per cent. of entrepreneurs in this country think that there are good opportunities that are worth having, whereas in the United States it is 57 per cent., so why do we have those big gaps? What is going on? What lessons can be learned about entrepreneurial activity?

John Bercow (Conservative, Buckingham)

Before we accept clause 56, which my hon. Friend wisely seeks to amend, would it not have been helpful if members of the Treasury Bench had spoken to the director general of the British Chambers of Commerce, Mr. Chris Humphries, who said as recently as 20 January this year that, despite their rhetoric, the reality is that the Government have dramatically increased the regulatory burdens that threaten small business competitiveness?

Richard Ottaway (Conservative, Croydon South)

My hon. Friend makes his point very well. That is the thrust of the argument. That theme was taken up by the Institute of Directors, whose assessment was that regulatory burdens on business amounted to about £5 billion per annum. I was talking about entrepreneurial activity in this country. When the Prime Minister attended the launch of the report published last year by the IPPR, he said that entrepreneurship should be taught in schools—no doubt the message went out to the relevant Ministers. It is worth looking at a written answer from the Secretary of State for Education and Employment. It spoke about the introduction of consumer and education entrepreneurial skills in the national curriculum and went on: At Key Stage I, children will be taught that money comes from different sources and can be used for different purposes. At Key Stage 2, they will be taught to look after their money and realise that future wants and needs may be met through saving. At Key Stage 3, they will be taught what influences how we spend or save money, and how to become competent at managing personal money.—[Official Report, 24 January 2000; Vol. 343, c. 25W.] At key stage 4, there will be more lessons in managing personal money. That shows that the Government's vision of entrepreneurial lessons and teaching entrepreneurial activity in schools involves telling children how to handle their own money. That is off-beat, and it is not the answer. It will not promote entrepreneurial activity or change the culture. The Prime Minister and the Ministers concerned should revisit the report entitled "The Entrepreneurial Society" and address far more seriously the points that are raised. To return to national insurance contributions on the exercise of share options, I am grateful for a memo from Mr. Stephen Allott of Micromuse, a software and hardware company in this country, with considerable experience in the United States. In his briefing paper this month he states: The vast majority of technology start-ups are done in the US rather than Europe for many reasons including customer proximity, supplier and labour base, the tax regime and culture. He goes on: New Economy businesses are built on good people not assets. Building a new business from the UK or persuading a multinational to locate a major business unit in the UK means that top talent will have to be happy to locate in the UK. Mr. Allott continues: For the UK to be an attractive base for a global technology business (such as Micromuse or the next Cisco) it has to offer something substantial to redress the balance over the United States. The go forward effective personal tax rate of 47 per cent. in the UK compares unfavourably with 26 per cent. in the US for ISO stock options and 46 per cent. for other stock options. There we have an experienced business man contrasting the United States with the United Kingdom, and demonstrating how unattractive such a comparison is.

Stephen Timms (Labour, East Ham)

I am grateful to the hon. Gentleman. Will he confirm the last figure that he gave to the House? Did he say that there was an effective rate of taxation of 47 per cent. in the UK on unauthorised options and that in the United States it is 46 per cent?

Richard Ottaway (Conservative, Croydon South)

I said that in the United States for ISO stock options, which are considered important, the rate is 26 per cent., and that for other stock options, it is 46 per cent.

Stephen Timms (Labour, East Ham)

We are, of course, speaking about unauthorised share options, so let us compare like with like. The comparison is, as the hon. Gentleman rightly said, 47 per cent. in the UK and 46 per cent. in the US. The arrangements for authorised options are different in both countries.

Richard Ottaway (Conservative, Croydon South)

The Minister is more familiar with the matter than I am. However, ISO stock options are considered important by companies such as the one that I mentioned, and they attract a tax rate of 26 per cent. That must be taken into account.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful to the hon. Gentleman for giving way. Although the Financial Secretary is right with respect to the measure under discussion, is the hon. Gentleman aware that the Financial Secretary admitted in the Standing Committee on 29 June: There is an alternative regime for approved options in the US, as there is in the UK and that the terms of the approved scheme are more generous in the US than in the UK—[Official Report, Standing Committee H, 29 June 2000; c. 1033.]?

Richard Ottaway (Conservative, Croydon South)

The hon. Gentleman makes a good point, and the Minister must take account of the weight of opinion. He may receive advice about ISOs before the debate is wound up, just as I may pin down the specific facts. I quoted a business man who finds it far more attractive to build up his company in the United States than in the UK. A message must be sent from the Government to entrepreneurs. 5.15 pm I shall conclude by referring to a report from the "Global Entrepreneurship Monitor" produced by the London business school, with which I suspect the Minister is familiar. It is sponsored by Apex Partners and Co., which I suspect has given advice to the Government on entrepreneurial activity. The report was produced in 1999, and includes a clear and specific recommendation in terms of assessing Government policies. It states: Rules on share option schemes need to be improved to give incentives to people to join young entrepreneurial businesses and go on to build large, world-class enterprises. If someone is prepared to take a risk with his career and a risk in establishing a business, what message are the Government sending out? It is one that is hostile to entrepreneurs. The Prime Minister has made it clear that entrepreneurship should be encouraged. The Government's advisers have recommended change yet I suspect that the Government will persist in pressing on with activity that is hostile to entrepreneurship instead of encouragement.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

When, two years ago, the Government introduced measures to apply employers' national insurance contributions to share options and gains on those options, I do not think that they realised the mess into which they were getting themselves. In the Child Support, Pensions and Social Security Bill and in the Finance Bill in clause 56, they have tried to alleviate the problems that they have created. However, they have not gone far enough. The amendment would help to improve the relief but it would go significantly against the Government's intentions. When we debated these matters in Committee, the Minister admitted that a real problem had been caused by the Government's previous legislation. He admitted that the problems would lead to some high-tech companies having to assess the unpredictable future liability of employees' national insurance contributions.

Michael Fabricant (Conservative, Lichfield)

Is the hon. Gentleman aware that many high-tech companies—some of the dot.com companies—are offering profit-share schemes that are related to profits rather than dividends? They are not providing shares for some of their employees even though they are offering bona fide profit options. Is the hon. Gentleman aware also that that is excluded in clause 56, which the amendment is designed to amend?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I was aware of that, but I am not sure whether it is germane to my argument or to the issues on which we should focus during the debate. I shall develop my argument, which I hope is germane to the issues. A problem is created for high-tech companies when it comes to predicting liability and having to account for that. The Minister was up front and honest with the Committee in explaining that problem. High-tech companies often have to go to capital markets to secure extra funds to compete in a highly competitive and dynamic industry, and they have to convince investors that their balance sheets are at least moving in the right direction even when profit and loss does not look too good in the near future. Unpredictable liabilities on balance sheets create great problems in winning the confidence of investors. The Government admitted that that was the problem and they are seeking to deal with it in clause 56. Have the Government dealt with the problem? In the Child Support, Pensions and Social Security Bill, they introduced an unusual technique in British tax law, which was that there could be an election and an agreement between the employer and employee to switch the liability for employers' national insurance contributions to the employee, thus getting round the accounting proposal. However that creates another difficulty, which is that of attracting labour. The skilled employees in the industry are internationally mobile. If a UK or US company tried to attract them, they would consider the various stock options and salaries on offer and the tax regimes that applied to salaries and stock options. In Committee, we focused on whether the provision made the tax regime for stock options for employees of high-tech companies in the United Kingdom worse than the regime in the United States. There was a huge debate about that, and it has been reflected in our proceedings today. I do not think that the Government have gone far enough to make sure that the UK remains attractive enough to internationally mobile labour. The provision will deter skilled employees from joining UK companies instead of those in the United States. That will inevitably encourage high-tech companies to set up in the United States and not in the UK The Financial Secretary might say that the tax differential—between 46 and 47.3 per cent. for approved share option schemes—is rather small. It might seem a small differential, but the key point is the change. Many companies have set up in the UK or are considering setting up in the UK because they previously viewed the tax regime here as beneficial. They could encourage skilled internationally mobile employees to work for them in the UK, because the tax regime was favourable for share options. However, in a stroke—by applying class 1 national insurance contributions to stock options—the Government have removed that advantage. One could argue that there was a tax loophole that needed closing, but was it necessary to remove it altogether? Was it not necessary to give some competitive tax advantage to the UK's information technology industry to attract companies and internationally mobile labour here? By not recognising that important fact, the Government are doing down that sector and doing this country a disservice.

John Bercow (Conservative, Buckingham)

I agree with the hon. Gentleman's observation that the fact of the change is significant. However, does he agree that the other significant fact is that a substantial proportion of the companies that will be affected are small companies? Given that 99.6 per cent. of Britain's firms employ fewer than 100 people and that they account for about 50 per cent. of the private sector work force and generate 40 per cent. of national output, that point is of the most dramatic significance.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

As always, the hon. Gentleman comes to the House with a barrage of statistics, the veracity of which I cannot confirm at this time. However, I am more than happy to agree with the thrust of his point. Small firms are active in this sector. When we debated this issue in Committee, I put some of these points to the Financial Secretary. He said that the Government had chosen to get the marginal rate of the relief in clause 56 down to 47.3 per cent. because they wanted to get it below 50 per cent. He said that it appeared from the negotiations that had been held with the companies affected that the figure of 50 per cent. was "psychologically significant". I am sure that it is "psychologically significant", but is that the test that we should apply? We want to ensure that this country is the most competitive—even vis-a-vis the United States—in the world. One could argue that we are talking about percentage points, but they are important in such decisions.

Stephen Timms (Labour, East Ham)

Can the hon. Gentleman confirm that, in addition to the liability for the employee, employers in the United States also have to pay a 1.5 per cent. Medicare charge? That works in exactly the same way as national insurance liability works in this country, but it is not an issue for companies here. In that respect—indeed, in many others—the UK is in a better competitive position than the United States.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I happily admit that. The Financial Secretary made that clear in Committee. However, he should consider the change. The United Kingdom was in a tax-competitive position, which may have approached becoming a loophole and a matter of concern to the Treasury. I accept that it needed to ensure that its finances were not undermined; I imagine that hon. Members from all parties would accept that. However, admitting that a tax loophole requires tackling is different from deciding to throw away all tax competitiveness and to pick a rate that happens to be the equivalent of a United States rate plus Medicare and so on. We must ensure that this country is internationally competitive, especially in the IT sector, and that it can attract mobile capital and labour. We are debating a Bill that contains many provisions that will hit the UK economy through mobile labour and capital, for example, IR35, which the hon. Member for Croydon, South (Mr. Ottaway) mentioned in his speech. One or two other provisions have the same effect. The Minister must address the change. Why did not the Government keep some advantage in tax competition for the UK? The Financial Secretary developed his thinking in Committee when he compared the US and the UK from the point of view of a French company, the director of which he had met at a recent conference. The Financial Secretary said that the French director had considered and rejected the rest of Europe because the UK was the best place in Europe to set up an IT company. The French entrepreneur then compared the UK with the US. According to the Financial Secretary, the overriding factor for the French director was that the US skilled labour market in IT was rather tight and that he believed that there was a greater supply of such people in the UK. The Financial Secretary was trying to say that there were other considerations about location. That was an interesting argument, which I do not believe that anyone would dispute. However, people locate in one place rather than another for many reasons. We want to make sure that Britain is best for all those reasons, yet the Government have chosen to throw away our tax competition advantage. Perhaps the relief needs to be only slightly greater than that for which clause 56 provides, and perhaps amendment No. 131 would be too generous. However, if the Financial Secretary had granted only a slightly higher level of relief, he would have received plaudits from the industry and been able to defend his proposal more effectively today. I hold the Financial Secretary in high regard, and I hope that he will take account of the points that I have made. Many people have been pleased with the way in which he has taken seriously the issue that we are considering, listened to the industry and tried to devise an elegant solution. I am not sure whether it is that elegant, and I hope that he will, in all humility, reconsider that solution to ascertain whether it could be rather more generous next year to ensure that this country remains the world centre for doing business.

Michael Fabricant (Conservative, Lichfield)

The hon. Member for Kingston and Surbiton (Mr. Davey) rightly points out that businesses need to be competitive in the world market and that there should also be some certainty about investment for future expansion. My hon. Friend the Member for Croydon, South (Mr. Ottaway) has already pointed out that the Government have not helped the position of new companies—or, indeed, mature companies—that operate in the UK market. The Institute of Directors has acknowledged that union recognition, maternity and paternity leave and the working time directive have added an extra £5 billion in regulatory burdens on such companies. Furthermore, fuel duty has not helped. I should like briefly to explore another area, which the Government have neglected, despite promises made before the last general election by the Secretary of State for Health when he was in the shadow Treasury team. 5.30 pm Amendment No.131 has been designated by Madam Speaker, as is shown on the selection list, as dealing with "Employee share options: tax relief to employees". Employees benefit not just from share options but from profit-related pay to which the Government have not sought to restore tax relief. Dividend is not the only way by which the employee—

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. The matter that we are discussing relates to share options only; nothing else.

Michael Fabricant (Conservative, Lichfield)

I am aware of that, and I know that the Clerk is aware of it, too. Clause 56 deals with tax relief to employees, as designated by Madam Speaker. Both main Opposition parties have referred to new sunrise businesses; such as dot.com, high-tech companies. For all sorts of reasons, many of those companies are unable to offer share options at an early stage of their existence. Instead, they offer profit-related pay. Similarly, such companies as the John Lewis partnership—which employs 45,000 people—have a bona fide profit-related pay scheme. Before the election, the Prime Minister, having visited the John Lewis store in Oxford street, described John Lewis as an example of a stakeholding company. I simply want to ask the Minister this—

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. I am sure that the hon. Gentleman will accept some guidance. It is not a question of the selection of amendments; we are talking about clause 56, to which the amendment relates. The clause clearly deals with provisions for share options.

Michael Fabricant (Conservative, Lichfield)

Thank you, Mr. Deputy Speaker. I conclude by saying that I hope that, in future Finance Bills, the Government will decide to honour their promise, made before the election, to extend the provisions of clause 56 not only to share options, but to bona fide profit-related schemes, such as that operated by the John Lewis partnership and many sunrise companies.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Is the hon. Gentleman aware that the previous Conservative Government did not propose tax advantages for share options that might apply to people working for John Lewis and, indeed, took away tax relief on profit-related pay?

Michael Fabricant (Conservative, Lichfield)

I am aware of that. I am aware also that the present Secretary of State for Health said that this would be restored within the first year of a Labour Government. That was yet another Labour lie made before the last general election.

Stephen Timms (Labour, East Ham)

The hon. Member for Croydon, South (Mr. Ottaway) was misinformed about a number of his points. He asked whether we had fixed the technical problem. The answer is yes; we have entirely resolved the technical difficulty. The hon. Gentleman was mistaken about other matters as well. There is a new spirit of enterprise abroad across the UK, fostered precisely by the measures that the Government are taking. Helpfully, he listed a number of them, to which I would add a number of other changes that we have made, such as the cut in capital gains tax. The hon. Member for Kingston and Surbiton (Mr. Davey), who is well informed on this matter, will know that the 10 per cent. rate of capital gains tax after four years is significantly less than the comparable rate in the US. On that front, we have made good progress—which the hon. Gentleman will welcome—in terms of competition in attracting investment relative to the United States.

John Burnett (Liberal Democrat, Torridge and West Devon)

Does the Minister regret that the Finance Act 1998 took away the complete exemption for the first £250,000 chargeable gains on retirement?

Stephen Timms (Labour, East Ham)

On retirement! We are now on rather different territory. The answer is no. Let me draw attention to our reductions in corporation tax rates. We have cut both the main and the small business rates, and have introduced a 10p rate. We now have the lowest-ever small business corporation tax rates, and the lowest in the industrialised world. Since 1997, small companies have received an average corporation tax cut of nearly 25 per cent. That is why there are now 100,000 more small companies than there were at the time of the general election. Those developments were created by the new spirit of enterprise fostered by all the Government's measures. That is why we are making such excellent progress, and that is why there are 1 million more new jobs than there were at the time of the election.

Michael Fabricant (Conservative, Lichfield)

The Minister has told us how many new companies had been founded since the election, and the figure was impressive. Will he now tell us how many small companies have gone into receivership since the election?

Stephen Timms (Labour, East Ham)

There has been a net increase of 100,000 in the number of small enterprises. That is my point: there are significantly more, in total, than there were at the time of the election. As we have heard, clause 56 gives relief to the employee in respect of the cost of bearing the secondary national insurance liability, either through an agreement allowing the employer to recover the contributions or by means of an election whereby the liability is transferred. The clause allows a deduction from the amount of the share-option gain that will be chargeable to income tax. In effect, it moves to the employee the corporation tax relief that would have been due to the company if it had borne the cost. As the hon. Member for Kingston and Surbiton pointed out, that means that the total tax and national insurance charge will be, at the most, 47.32 per cent. As the hon. Member for Croydon, South said, 47.32 per cent. is very similar to the rate that would be paid by a United States employee exercising an option when the uncapped US Medicare contributions and state income taxes are included. It is also a lower top rate of tax than that applying in many other European countries. France, Germany, the Netherlands, Spain and Sweden all have higher top income tax rates.

Richard Ottaway (Conservative, Croydon South)

I can clarify what was said by the chief executive of Micromuse. He said that companies in the United States with ISO stock options attracted a 26 per cent. tax rate. The Minister must recognise that there is a difference between the ways of approving schemes here and in the United States. Here, the Government decide whether a scheme can be approved; in the United States, the company decides. The schemes that we are discussing would attract a 20 per cent. rate in the United States.

Stephen Timms (Labour, East Ham)

Schemes approved in the United Kingdom will benefit from the lower rate of capital gains tax—10 per cent. after four years. That is significantly lower than the rate in the US. The rules for approval of schemes in the US are well defined. They specify a limit of $100,000 worth of options that can be provided for under an approved scheme. The ISOs that the hon. Gentleman mentioned are not popular with many US companies, because they do not carry a company tax deduction. The figure in the UK is £30,000 over three years. As I said in Committee—the hon. Member for Kingston and Surbiton mentioned this—that is indeed less generous than the US limit, but it was the previous Government who reduced the UK limit from £100,000 to £30,000 in order to solve some of their "fat cat" problems. I do not think that we should take lessons from the Conservative party on that.

Howard Flight (Conservative, Arundel and South Downs)

I think that the Minister is unintentionally slightly misleading the House in comparing United States and United Kingdom schemes and applying the word "unapproved" to both types of scheme, because the two are not entirely similar. As he rightly said, the United Kingdom-approved scheme has a £30,000 limit and, therefore, can be used only modestly. Many United States businesses use the ISO scheme. The meaning of "approved" and "unapproved" in United States schemes is different from that in United Kingdom schemes. As the Minister will discover, the bottom line is that the great majority of options issued to management in the United States end up being taxed at 26 per cent., not 46 per cent. In the United Kingdom, the great majority of options will now be taxed at 47.3 per cent., which is 20 per cent. higher than the rate applicable on most options in the United States.

Stephen Timms (Labour, East Ham)

The principles are not that dissimilar between the United States and the United Kingdom. Approved schemes in the United States have to comply with USA tax law and USA regulations, just as United Kingdom schemes have to comply with our tax law and regulations. Many of the most successful dot.com start-up companies in the USA use not ISOs, but unapproved arrangements that have various advantages. That is how—depending on the state tax rate—the overall rate of 46 per cent. is arrived at. If the hon. Gentleman is suggesting that the arrangements being provided for in the Bill are significantly less competitive than those applying to many fast-growing United States firms, he is wrong. We are proposing a package that is already helping to attract business and jobs to the United Kingdom and to help United Kingdom firms compete in the global market. It recognises the importance of share options for employers and employees, particularly in the new economy. It removes barriers to their use in recruiting and retaining employees, and it meets our aims of a fairer tax and national insurance system by ensuring that tax relief is given for the national insurance contributions on share options to whoever bears that cost. Although I do not want to make too much of it, amendment No. 131 is deficient in various ways. Even if the defects could be resolved, the changes suggested in the amendment would considerably distort the use of share options compared with other forms of remuneration—such as cash bonuses—which would remain fully subject to national insurance, and they would provide an unwelcome opportunity for the re-emergence of widespread national insurance avoidance. It is estimated that, all together, the proposed provision could cost at least £1 billion annually in lost revenue. Therefore, bearing in mind that substantial cost, I urge Opposition Members to think long and hard before pressing the amendment to a vote. Abolition of the upper earnings cap on employers' national insurance contributions was another step taken by the previous Government. That action led to companies seeking inventive ways of avoiding national insurance on big cash bonuses, particularly in the City. Share options were being used in that way. As I said in Committee, that is one of the reasons why the rules were changed for share options granted after 5 April 1999, to make national insurance payable on the gain made on the option when it was exercised. The change brought the tax and national insurance treatment into alignment and removed scope for such avoidance, which was an important and worthwhile step forward. The net effect of the proposed change would be to leave the employee paying combined income tax and secondary national insurance at the employee's marginal tax rate on the share option gain. However, although it would do that for higher-rate taxpayers, as it results in a total tax and national insurance contribution charge of 40 per cent, it would not have the same effect on basic-rate taxpayers—who would be left paying income tax at 27.49 per cent, not the 22 per cent. that would apply to their ordinary salary. Therefore, the amendment also discriminates against the low paid. 5.45 pm The clause is simple and fair. Employing companies will get a corporation tax deduction from their profits if they pay the secondary national insurance contributions as part of the cost of employment and, if the liability is transferred to the employee or if the money is recovered from the employee, there will be no corporation tax deduction. Instead, the employee who bears the cost will get the benefit of an income tax relief for that cost on the same basis as a deduction for the amount paid in calculating the profit chargeable to tax. I urge the House to reject this costly amendment.

Richard Ottaway (Conservative, Croydon South)

If amendment No. 131 is extremely costly, and I do not believe that it is, the burden of taxation that the Government are taking out of Britain's entrepreneurs' pockets is a darn sight more than we thought that it was. We will divide the House on the issue and the reasons for that are clear. The Government have to send a message to Britain's entrepreneurs. It is no good whacking on the taxes and just expecting those entrepreneurs to pay up, but at the same time hoping that more people will engage in entrepreneurial activity. All the research that the Government have shows that an entrepreneurial culture is lacking in this country. That comes as no surprise if the Government are intent on penalising Britain's entrepreneurs. The Financial Secretary says that he has resolved the technical problems, but that means—as I said—that the solution has gone from very bad to bad. That is not a resolution of the problems. He says that he has cut taxes on business. Why then does the CBI talk of an extra £5 billion stealth tax on business? Why does the Institute of Directors say that there is an extra £5 billion a year in regulatory burden? Those are real issues that are hitting Britain's industry today. The Financial Secretary said that he has now fostered a new spirit of entrepreneurial activity. If he has, it is despite these measures and not because of them. For those reasons, I urge the House to support our amendment.

EDUCATION AND TRAINING

OCCUPATIONAL AND PERSONAL PENSION SCHEMES

ENTERPRISE MANAGEMENT INCENTIVES

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 144, in page 313, line 34, at end add 'Where an option does not qualify by reason of an error in the scheme pursuant to which it has been granted, but would otherwise have been capable of being a qualifying option pursuant to paragraphs 9 to 17 inclusive of this Schedule, then that error may be corrected and be deemed to have been always corrected from the date of grant of the option.'.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following: Amendment No. 143, in page 314, line 24, at end add— '(4) In the event of the requirements of this Schedule being found not to be met in relation to an option, whether upon enquiry by the Inland Revenue or following an appeal, there shall be no right of action in tort or contract either in favour of or against the relevant company or any employer company.'.

Howard Flight (Conservative, Arundel and South Downs)

At first glance, the enterprise management incentives appear to be extremely generous and attractive schemes to encourage entrepreneurs and key leaders of business. Regrettably, however, as we pointed out in Committee, there are several problems, one of which is that a large number of business areas have been excluded, based on views founded in the past. A larger problem has been raised by several accounting and law firms specialising in the matter: that if the business in which people are granted EMI options succeeds—and therefore the options become worth something—it will almost certainly have disqualified itself by that stage; so, although individuals might enjoy EMI tax advantages for a year or two, they will quickly cease to do so. Our amendments relate to the issues thus raised, which reveal the proposal as being more spin than reality—perhaps I should call it underspin. What is the estimated tax cost of the scheme? That would provide a reasonable measure of the extent to which the Government expect it to be effective. According to Government calculations, are EMI schemes a major means of fiscal incentivisation, or am I right to fear that they are merely a case of nice presentation with limited practical application? Before addressing our amendments, I should say, in passing, that the Opposition support the Government amendments, which, as the House will agree, are practical measures. Our amendments are further practical measures that relate to the themes that I have identified. The first issue is the self-certification system, to which amendment No. 144 relates. Business wanted self-certification, which is a good idea, but it might engender some unnecessarily wrong outcomes. Currently, both employee and employer have to take a chance that the option scheme might not qualify; they have to wait to see whether the Revenue agrees with the employer's view that it does qualify. Therefore, the amendment embodies a reasonable suggestion whereby the correction of technical errors should be allowed where it is clear that the company and its arrangements should have been capable of qualifying. There is a difference between a scheme that is clearly outside the key parameters and rules, and one that contains, say, a drafting error that has resulted in the Revenue not granting its approval. Past comparable arrangements provide precedents whereby the Revenue is permitted retrospectively to correct what are described as remediable errors, as opposed to major errors of principle. Amendment No. 143 relates to similar territory. Because it is not known at the time of grant whether a scheme will qualify, there is clear scope for legal action if an employee has been led to believe that it will qualify and then finds that it does not. The employer is asked to bear the risk, so we suggest that it should be permissible to give an indemnity against such actions, to avoid the process being impeded by legalese and caveats, which might discourage genuine cases of schemes that should have qualified. I am referring to our amendments in reverse numerical order, as they appear on the selection list, which means that amendment No. 142 is next. It represents our attempt to create somewhat greater flexibility within the basic parameters whereby no more than £1.5 million can be awarded under EMI options. The amendment would introduce the principle whereby, instead of there being an inflexible maximum of 15 employees, there should be an aggregate limit constituting the total sum of all qualifying options. As Ministers will note, our amendment is worded so that one person will be prevented from awarding himself the whole lot. The current provisions might produce unnecessary anomalies, given the contrasting nature of different businesses. If a company needed to recruit 16 key people and a perfectly adequate market allocation was £50,000, it could not do so under the present rules; similarly, if the key number of people required was seven, but in the very competitive, new economy area, where £100,000 as an allocation was on the low side, it would not be permitted. Our amendment would provide a little flexibility within a limit of £1.5 million and would cater for the different needs of businesses. Amendment No. 141 proposes arrangements that have been used quite successfully in this country in the past, which, in essence, stagger the payment of tax. It relates to the situation in which after an individual has enjoyed EMI terms for the first two years, the company grows and the individual ceases to enjoy the terms. When he or she exercises the options, there will be substantial income tax liability. The amendment would introduce the principle of instalment payments for the income tax that would fall due on the exercise of the EMI option, and it follows the provisions on payment of income tax on share options that prevailed before 6 April 1984, updated to reflect the introduction of self-assessment, which was not then in operation. The amendment also removes the gain from the operation of pay-as-you-earn, providing for payment in five instalments. The first would be on the normal self-assessment date and the others on successive anniversaries of it. It is necessary to take account of the special nature of EMI companies. If the tax were collected via PAYE, the employer would have 30 days to raise it to avoid an additional tax charge under section 144A of the Taxes Act 1988, which states that if an employer receives benefits that are non-cash but PAYE-able, such is the gain made on the exercise of share options that a second tax charge on the amount of the PAYE due would be levied if the employee had not paid to his employer the amount of tax due within 30 days. In practice, the amendment will force the employee to sell shares to raise the PAYE. PAYE applies where shares are readily convertible assets, which the Revenue defines and interprets widely, and which catches any listed company, and even unlisted companies in which it is considered likely that the employee might be able to realise cash from the shares, such as businesses that are about to be sold or in which flotation is pending. Our proposal is designed to stop what would effectively be mandatory sales arising in situations in which a company has been successful and the EMI qualification has ceased. The Government will be advised by the professions that several problems arise in what is in principle an attractive scheme. Companies offering membership of a scheme to key staff will suffer uncertainty as to how long qualification will last, as to approval by the Revenue after the company's self-certification and as to the potential tax liability. Our amendments are designed to address those uncertainties and make the scheme more workable as regards its basic intent, which we support.

Melanie Johnson (Labour, Welwyn Hatfield)

I do not intend to speak to the Government amendments as they are technical, correcting unintended double negatives and so forth. The hon. Member for Arundel and South Downs (Mr. Flight) got a number of things quite wrong in his speech, and I hope to reassure him. He mentioned costs. The anticipated cost is given at page 154 of the Red Book—£45 million for a full year—and we anticipate that 2, 500 companies will take up the incentive in the first three years, which involves about 18,000 employees. That is the basis on which our figures were constructed. Amendment No. 144 demonstrates a misunderstanding of how enterprise management incentives work. An EMI option is granted as part of a share option scheme, but it is possible that a company may wish to grant EMI options to key employees under the rules of such a scheme. Nothing in the schedule requires that, however, and the schedule does not refer to a scheme as such. In addition to the reference to a scheme in the amendment, the hon. Gentleman spoke about schemes a few moments ago, but the schedule does not require the establishment of a share option scheme with rules to govern the granting and exercise of options. 6.15 pm One requirement is that a company is carrying on a qualifying trade, but if it was not, it would not be possible to go back in time to suggest that it had been carrying on a qualifying trade at the date when the option was granted. That being so, we would not want to deem the option as having been a qualifying option from the outset, if the company decided that not carrying on a qualifying trade was an error and changed its trade to correct it. That would set an extreme and unwelcome precedent, and I cannot think that Conservative Members would think that sensible or desirable. if, however, amendment No. 144 indicates concern that the company will be unfairly penalised if it has accidentally provided incorrect information when notifying the option to the Inland Revenue, I can allay that concern. The schedule already makes provision, at paragraph 3, for errors to be corrected in the notice to the Revenue. The provisions are equivalent to those provided under self-assessment for companies or individuals to correct any mistakes in their return. The schedule also makes provision for the grant of an option over shares with a market value exceeding the individual limit of £100,000. Paragraph 10 allows any excess to fall outside the EMI provisions without disqualifying the whole of the option. Any error in the option agreement itself would be a matter between the grantor of the option and the employee. If they agreed to change the terms of the option, and the change related to something not required by the schedule, that would not in itself be a reason to disqualify the option, unless the effect were to increase the value of the shares under option. Amendment No. 144, with its reference to correcting errors in a scheme, in fact addresses an issue not relevant to the schedule. For those reasons, it is unwelcome and unnecessary. Amendment No. 143 would have far-reaching consequences that the hon. Gentleman may not appreciate. It seeks to prohibit claims in tort or contract from being brought by or against any relevant company in the event that an option fails to meet the requirements of schedule 14. It is not clear why anyone would wish to protect companies against civil actions taken against them, or prevent them from bringing such actions, simply because the action was in connection with an option that failed to meet the criteria for EMI. I can see no reason why the employee—or employer—should lose his or her rights under civil law because he or she has become involved in the grant of an option intended to qualify under EMI. If, for example, a company had deliberately misrepresented an option to an employee as qualifying for EMI, that employee might well feel that he or she had a legitimate right to challenge the actions of the company in court. That could lead to an anomalous situation. An employer may grant two identical options to two employees—one notified to the Revenue under EMI and the other not. It might be that neither would meet the EMI conditions, but once it was discovered that the first option did not meet the EMI criteria, the employee would have no redress against his employer for any failure to meet his contractual obligations, or any negligence or deceit involved in granting the option. The other employee—with exactly the same right to acquire shares—would retain his rights under civil law. The amendment would give too many powers away as well as raising questions under the European convention on human rights. Amendment No. 142—it was dealt with as amendment No. 194 in Committee—would allow a company to grant options under the EMI provisions to as many employees as it wished, up to a limit of £1.5 million. The amendment goes against the whole aim of EMI, and against all the recommendations made to us by business experts. As I have already explained in Committee, EMIs are a targeted measure for key employees—those who really make a difference to smaller, high-risk companies. In Committee, I provided details of the reports backing EMI which appear at column 515 of Committee proceedings on 6 June. I could list them again, but I did list them all then. A report by the Bank of England on financing technology-based firms, a report by the Confederation of British Industry on technology stars, and the Government's own study group, chaired by Sir Peter Williams, chairman of Oxford Instruments plc, all found that the main barrier to growth experienced by smaller high-risk start-up businesses was a lack of highly qualified and motivated key employees. Those studies recommended targeted tax relief to help solve that specific problem, not general relief for employees to pay less tax. EMI is the response to that and provides targeted tax relief. If companies want to, they can grant options to all their employees under not one, but two tax-advantaged share schemes: the company share option plan and the save-as-you-earn savings-related share scheme. A third such scheme is not necessary, as the matter is not about companies being to able to grant those options to all employees. Amendment No. 142 would produce another unsatisfactory result. EMIs are simple and quick to operate, and do not require an approvals process. They have been designed that way because smaller companies have told us they want an incentive that is simple to operate and flexible, so that it can be designed to suit the individual needs of a particular business situation. If EMIs could be extended to all employees, having a company limit of £1.5 million rather than a limit of £100,000 per individual would require much more administration or red tape. I am sorry that the hon. Member for Buckingham (Mr. Bercow) is no longer in his place, as he was complaining earlier about red tape. The amendment would increase the amount of red tape and would involve keeping track of all option grants and exercises to ensure that the limit was not breached and all the employees' tax relief lost as a result. The hon. Member for Arundel and South Downs asked about disqualification. He claimed that the options will almost certainly have disqualified themselves by the time that the company is successful. There is no disqualification if the company grows above the initial limit of £1.5 million of gross assets. The test applies only at the time that the options are being granted, so the issue foreseen by the hon. Gentleman does not arise. During our extensive consultation, everybody, including an advisory group of experts that helped the Inland Revenue to draw up the legislation, commented that smaller companies have only a limited number of key employees and welcomed the increases that we made to the number, initially from six to 10, and then from 10 to 15. There has also been a welcome for the great flexibility of this incentive. Amendment No. 141 addresses issues which, again, are based on a misunderstanding. For the most part, no one will pay any tax as the result of being granted EMI options. Under normal circumstances, people will not pay tax when they exercise the option, if they were granted the option at market value. EMI is a very flexible instrument and allows companies to structure option agreements that could provide a gain to employees for reasons other than the intrinsic growth of the company. For example, companies can offer employees an option at a discount or at no cost at all, or can offer them an option that is immediately exercisable. Normally, there is no charge to tax under EMI on the exercise of a market value option. But when the option is granted at a discount, the normal taxing provisions apply to the part of the gain that relates to the discount. Only the discounted element will then be taxed. The charge arises under the normal charging provisions on share option gains, including section 135 of the Taxes Act 1988. EMI option holders are treated in exactly the same way as any other taxpayer in relation to the chargeable amount. EMI has been deliberately designed to target the relief on gains arising from genuine growth in the value of the company. That rewards the employee's contribution to making the company grow, rather than any gains that he may make because he has been granted options at a discount on the market price. If a discountable amount is taxed, we would defend that as being not part of the incentivisation, as it has been granted as part of the arrangement, as opposed to growth. In all other regards, under normal conditions, people are unlikely to pay tax. Therefore the proposal envisaged in the amendment is not necessary. I cannot see a case for providing for EMI option holders a special rule for paying tax over five years on taxable gains which do not fall within the schedule's targeted tax reliefs. In fact, we agree that the revived rules seem to fall in with the rules that the previous Conservative Administration looked at and which they acted against in the Finance Act 1984, when they restricted any payment in instalments to options granted before 6 April of that year. We agree with the previous Government's conclusions that the advantages available to companies under the approved schemes mean that there is no need for special rules for paying tax on other gains. Any taxable gains arising from EMI options are in exactly the same position as gains from other unapproved options, and should be taxed after allowing for EMI relief under the same rules. The problems envisaged by the hon. Member for Arundel and South Downs will not normally arise and, when they do, that does not present a difficulty, but an arrangement that fits in with other arrangements that we would defend. I hope that I have reassured the hon. Gentleman on a number of counts. On those counts on which I am not reassuring, but arguing that his proposals are unnecessary, unhelpful or complex, I ask him not to press his amendments.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister for her full response to the matters that I have raised. I make the point upfront that the issues that I raised have been raised with me by Cisco, which is now called the Quoted Company Association, as well as several leading lawyers in the matter. For better or worse, they communicated to me that their key worry on EMI legislation as it stands is the lack of certainty. They will find what the Minister said helpful in addressing that worry. Without misdescribing the matter as a scheme, however, when an individual gets his EMI qualifying options, there is an issue arising from self-certification. It is possible that the company may have made a minor mistake, which the Revenue will pick up when it looks at it a year later and say, "Terribly sorry, there is something wrong." Consequently, the individual will not qualify. There is clearly an issue of materiality versus non-materiality. The Minister may be able to give me further comfort, as it is not entirely clear whether a relatively minor issue can be put right retrospectively.

Melanie Johnson (Labour, Welwyn Hatfield)

I have already covered that point. As with self-assessment returns, there will be a period when the Inland Revenue or those on the other side can correct any matters. It is perfectly possible for genuine minor mistakes to be sorted out in that period.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister for her clear and extremely helpful explanation. I agree that, if that is the case, the risk of EMI agreements getting cluttered with all sorts of legalese to protect businesses against the risk of being sued is probably not a major one. Therefore, amendment No. 143, which sought to address that risk in a rather heavy-handed fashion, is not necessary. As the Minister said, the tight rules about 16 people and a limit of £1.5 million were discussed in Committee. Our amendment certainly is not intended to undermine the scheme's objective. The simple point is that how many key executives one needs in a business varies enormously, depending on the nature of the business. If the business is very much a selling business, there will be more key people, especially in the flat structure of companies, who will be the makers of success in that business. If the business is a concentrated high-tech producer and the selling is subcontracted, there will be infinitely fewer key employees. The tariff of key people in different areas and different businesses varies considerably. As we said in Committee, we think that it is sensible to permit flexibility. We are glad that the Government have raised the number to 15, but in some areas there may be eight key people and the tariff may be £200,000, and in other areas there may be 20 key people and the tariff will be much less. I understand why the Government want to stick with the simplicity of the rule—that has its logic—but in consultation with companies, as opposed to venture capital professionals, they would find that there is unhappiness about this issue. 6.30 pm I shall repeat our point about instalment payments to get it on the record. When an individual gets his grant of EMI options and the company qualifies, can he be sure that he will retain EMI tax status as long as he holds those options, even though the company may subsequently cease to qualify because of significant growth or for another reason? If the EMI status can change relatively easily beyond the date of grant, and the individual who has EMI options is not certain of retaining his EMI tax advantages, my basic concerns stand.

Melanie Johnson (Labour, Welwyn Hatfield)

I repeat my earlier point, which answered the hon. Gentleman's question. There is no disqualification if a company grows above the initial limit of £15 million of gross assets. The tax-exempt status applies only at the date on which the option is granted. Obviously, it has to apply at that point so that the options can be granted under the EMI incentive. Subsequent growth by the company will not invalidate the fact that the options were granted at that point.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister for that reply. The key issue is growth and success, but one could think of other factors that could invalidate the status. On the other hand, there is a question of principle: if there is qualification at the time of grant, does that make the EMI status valid for so long as the individual holds the options? If so, we do not take issue with the proposal. I shall give an example: the Minister, later in her career, will get her EMI options, but she cannot know whether anything will happen to her business or the way in which it conducts itself that will render her options non-EMI, and that will affect her perspective of their value when she receives them. My understanding, and that of the lawyers to whom I have spoken, is that one's EMI tax status is not safe on all counts simply because the status applies at the time of grant. There are factors that could subsequently negate that status. The Minister kindly responded to my question about growth, but what about other issues?

Melanie Johnson (Labour, Welwyn Hatfield)

I understand that change would not normally alter that status, but I am happy to write to the hon. Gentleman to cover any other eventualities. I cannot, at the moment, foresee any, but there may be some. Under normal circumstances, the individual who receives the tax advantage will continue to receive it through the EMI incentive. In the case of a disqualifying event other than company growth, the employee has 40 days to exercise and keep the relief; otherwise, the answer is yes: the individual will continue to receive the tax advantage through the EMI incentive.

Howard Flight (Conservative, Arundel and South Downs)

We do not intend to press the amendment to a vote. There has been a useful airing of the issues. I look forward to further modest correspondence on the subject. It is clearly in the country's interests that the measures succeed in their objective. I merely say to the Minister that companies have expressed concerns to me and if the scheme is to work, they must be laid to rest. I beg to ask leave to withdraw the amendment.

TAPER RELIEF: TAPER FOR BUSINESS ASSETS

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 136, in page 47, line 10, at end insert— '(2A) Following subsection (7) add— (7A) Where any individual retires or dies or ceases employment due to ill health, injury or disability, and as a result an asset ceases to be a business asset, then on a subsequent disposal of that asset taper relief shall be applied as if— (a) there had been a disposal of a non-business asset which had been acquired for a consideration equal to the market value of the asset at the time it ceased to be a business asset, and which had been acquired two years prior to that time; and (b) there had been a disposal of a business asset for a consideration equal to the market value of the asset on the date it ceased to be a business asset.".'.

Michael Martin (Deputy Speaker, Glasgow Springburn)

With this it will be convenient to discuss the following: Government amendment No. 97. Amendment No. 137, in clause 67, page 49, line 10, leave out "2000" and insert "1998". Amendment No. 138, in page 49, line 12, leave out— 'at a time before that date' and insert— 'in respect of a disposal prior to 6th April 2000'.

Howard Flight (Conservative, Arundel and South Downs)

Government amendment No. 97 concerns the issue to which I referred when we were discussing Government amendment No. 57, but I could not find my notes on Government amendment No. 97. We support the amendment, which addresses what we described as the GKN point. Older, larger companies, in particular, have joint ventures and shareholdings below 51 per cent., which would have disqualified many from the taper relief. The amendment resolves that, and I am sure that the Government will have had discussions with those who raised the issue. We are pleased to support the amendment. The combination of taper relief, business asset definition and the need to find some method of apportionment will easily result in potential injustice. The unfortunate complications created by those three issues give rise to problems that may be insoluble, and we discussed them at length in Committee. We have considered many formulae, and we may settle on one formula, only to find that we create another injustice. Amendment No. 136 is designed to deal with one injustice and to produce a slightly fairer result than that produced by the Bill. It tackles the anomaly in the new business taper relief for employees. As soon as they cease to be employees, their assets, which are principally shares, will cease to be business assets and will receive the less favourable taper based on time apportionment. If the employee retires or resigns of his own free will, that is fair enough, but if he is wrongfully dismissed, he should be able to recover damages from the company. That would be fair, although he would have to go through the legal hassle of doing that. I am well aware that the principle on which the Government rest is that in either case the employee has departed and is not contributing to the business. There is, however, a middle set of no-fault departures, or what in business are now called "good leavers", and it would be unfair to cause those employees to be in a less favourable capital gains tax position because there is no voluntary departure or justifiable ground for divorcing them from the business. For those individuals, our amendment proposes an apportionment of gains on the basis of market value at the relevant time, with an acceleration of the non-business clock post-departure. If that produces a worse position than time apportionment, we would accept that it is fair because it means that value has increased more significantly after their departure than when they were present, but they were not contributing to that value. We accept that the negative aspect of the amendment is that it adds further complications, but the rough justice of the present arrangements is the worse of the two options. Our amendments Nos. 137 and 138 address the larger problem. As the House is aware, there are new rules relating to assets acquired in the period between April 1998—when the taper started—and April 2000 when, under the present Finance Act, there was a change to business assets. As the new definition of business assets applies only from 6 April 2000, assets acquired prior to that date, and thus held longer than assets held after that date, are eligible for lower taper relief, if they did not qualify as business assets under the old rules. We discussed that matter at some length in Committee. As the whole period of ownership is considered for the 10 years prior to disposal, and then divided into periods of business and non-business asset holding, each portion is taxed on different tapers. That seems to be contrary to the Chancellor's policy of encouraging long-term asset holding. As we illustrated in Committee, it produces extremely unfair anomalies in tax bills and would favour people who had acquired their business assets later. We concluded that the only solution was to backdate the new rules to April 1998 when the taper started, but that confining them to disposals after April 2000—the intention of the measure—would achieve a fairer result. The Government's main opposition to that proposal was its cost. However, I am not sure whether the figures that Ministers quoted would have been confined—as we propose—to disposals made after 2000. I cannot help but comment that, given the splurge announced yesterday, the amount referred to by the Government as the cost was not hugely significant. Our proposal would sort out the extremely unfair and anomalous situations that could arise.

John Burnett (Liberal Democrat, Torridge and West Devon)

As the hon. Member for Arundel and South Downs (Mr. Flight) has pointed out, we probed this matter extensively in Committee. However, it is worth revisiting. I speak to amendments Nos. 137 and 138, because they are designed to correct a glaring anomaly that directly contradicts both the Government's principles and the philosophy that underlies their capital gains tax changes—that an individual should be rewarded according to the length of time that he has held an asset. The longer he holds the asset, the less tax he pays. A simple example of the mischief to which the Bill would give rise is that if an individual, a Mr. Smith, had acquired shares before 6 April this year—now converted by the Bill into business assets, and we welcome that—he would have to wait until about 2010 to receive full CGT relief. However, if a Mrs. Brown acquires the same class of shares in the same company, she will receive full relief in 2004. The continuance of that anomaly is preposterous. In Committee, I suggested that the problem could be remedied by a simple election by the taxpayer, who could then be deemed to have sold and reacquired the value for no gain, no loss as at 6 April 2000, thus allowing that individual, on those shares converted into business assets, to have the time running from 6 April this year. That would have given that taxpayer no advantage whatever. I am sure that the Economic Secretary understands that the intention is not to advantage the person who acquired his asset before 6 April 2000, but to put that person in exactly the same shoes as a person who acquired an asset after 6 April 2000. I do not have exact costs for the amendment, but I do not think that they would be significant. Does the hon. Lady have any information about the costs of those proposals to the Treasury? The Economic Secretary was good enough to give the matter a fair airing in Committee. I hope that she will have had a chance to think again, and that she can avoid that dramatic anomaly and put all such shareholders in the same position, at little or no cost to the Treasury.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Notwithstanding the comments of my hon. Friend the Member for Torridge and West Devon (Mr. Burnett), I thank the Government for tabling amendment No. 97—especially on behalf of my right hon. Friend the Member for Yeovil (Paddy Ashdown). We raised the matter in Committee—as did Conservative Members. It hits GKN and Westland especially because of the nature of the defence industry and the need for companies to enter joint ventures. I understand that the Government—through their officials—have held detailed discussions with GKN and Westland that, partly, resulted in the amendment. We are grateful to the Government for listening on that point. Will the Minister confirm that it is the Government's understanding that, in such joint ventures, employees of GKN and of Westland will benefit from taper relief under the amendment? Clearly, that is the Government's intention; that is why they have worked so hard on the provisions. It would be helpful—especially if a Pepper v. Hart challenge were mounted—for the Government to make it clear that it is their intention that employees of GKN and Westland, and similar companies involved in joint ventures, should benefit from taper relief. I am advised that amendment No. 97 would provide for that, but—adopting a belt and braces approach—will the Economic Secretary confirm the point?

Geraint Davies (Labour, Croydon Central)

I speak briefly on amendments Nos. 136 and 137. There seems to be no indication of the cost impacts of the provisions. Furthermore, they might offer a slightly perverse tax incentive for premature retirement.

John Burnett (Liberal Democrat, Torridge and West Devon)

That would not be the case. The provisions would operate on a straight line basis. The period during which a person has held an asset is the period for which he receives relief. If the asset was held for four years, full relief would be obtained if the person had acquired it after 6 April and it was a business asset.

Geraint Davies (Labour, Croydon Central)

I am not completely convinced by that point. Under amendment No. 137, it would not be very beneficial to backdate the more generous taper for business assets, if the idea behind such a taper is that it would produce a positive effect on behaviour. By retrospectively backdating it, the asset holder would receive a windfall profit without any special benefit in respect of behaviour—because the event would already have taken place. There would thus be a windfall tax loss with no investment benefit.

Howard Flight (Conservative, Arundel and South Downs)

Whether there was a windfall would obviously depend on what happened to the asset. The problem lies in another direction. Let us consider the case of two individuals who work for a company in which they hold shares: one is a loyal employee who first acquired his shares two years ago and the other has only just joined and obtained his shares. During the next eight years, the performance of the shares will be the same, but under the apportionment rules, the longer-serving employee, who bought his shares first, will end up paying more tax than the person who held them for a lesser period. If the hon. Gentleman reads the debate we held in Committee, where that point was illustrated, he will appreciate the problem. We considered how to address it, and the only way is to backdate business asset relief to April 1998, when the taper started. We can argue whether there may be a windfall gain, but we must work from the point when taper relief started.

Geraint Davies (Labour, Croydon Central)

I accept that there is an issue about fairness in the way in which the provision applies. The difficulty arises once one starts going into retrospective benefits. As we cannot change previous behaviour, there is no benefit in terms of future investment and its duration and depth. It simply means a tax loss. Again, I do not know whether any costings have been done.

John Burnett (Liberal Democrat, Torridge and West Devon)

In relation to amendments Nos. 137 and 138, if an individual acquired a class of shares in one company before 6 April this year and subsequently acquired shares in the same company of the same class, the recently acquired shares would get full relief in four years, whereas the previously acquired shares would get full relief in 2010. Does the hon. Gentleman not agree that that is glaring anomaly and that it should be corrected?

Geraint Davies (Labour, Croydon Central)

No, I do not agree. Over time, the tax system will change, and different tax regimes may apply. I do not think that the hon. Gentleman makes a compelling argument for the proposals. What is more, as soon as one opens the Pandora's box of retrospective taxation as a precedent, difficulties will arise. It would mean that if a portfolio of assets had been sold under a previous regime, the people affected would immediately want a tax reassessment. That would be a tax man or woman's nightmare and an accountant's dream. I do not think that the benefits proposed are compelling. The costs have not been thought out and the administrative overheads would be ridiculous. I urge right hon. and hon. Members to resist the amendment.

Melanie Johnson (Labour, Welwyn Hatfield)

I thank Conservative Members for their welcome for the change outlined in amendment No. 97. We said that we would bring forward such a measure when we discussed the matter in Committee. Officials have consulted GKN and the Chartered Institute of Taxation in drafting the amendment, and have consulted more widely among other companies. My understanding is that everyone is content with the amendment. It would be rash for me to say definitely that GKN employees will benefit, but the company is well aware of the amendment. There has been much communication, both formal and informal. I wrote some days ago to various notable members of the Standing Committee—including, I think, the hon. Member for Kingston and Surbiton (Mr. Davey)—and to right hon. and hon. Members with a local interest who had raised the matter with me. We believe that GKN is content with the amendment. That is as far as I can go in giving the hon. Member for Arundel and South Downs (Mr. Flight) an assurance, but I am sure that he will find it as satisfactory as is possible at this stage. Of the three Opposition amendments, amendment No. 136 stands on its own, while amendments Nos. 137 and 138 stand together. Amendment No. 136 is unnecessary and unfair, because it would add unwelcome cost and complexity. It would make some people worse off, and is technically defective. I think that the hon. Member for Arundel and South Downs accepted that it would make some people worse off. With regard to the amendment being unnecessary, where the employee's shares are in an unlisted trading company, or in a listed company in which the employee owns at least 5 per cent. of the voting rights, the assets will continue to be business assets after retirement. Where the assets change their status, as long as the retired employee disposes of them within 10 years of retirement, he or she will obtain some credit for the period for which those assets were business assets under the normal apportionment rules. So the amendment addresses only a small sub-set of cases. The amendment would add complexity. If it was accepted, there would be two different systems of apportionment. They might apply to the same asset. Right hon. and hon. Members have indicated that one system of apportionment is already too complex. I cannot accept that, but I am nervous about expecting taxpayers to apply two different systems. Adding a bonus two years to the period in which the asset has been a non-business asset seems to be wrong in principle and to add further complexity. The bonus year added in 1998 for assets held at 17 March 1998 was added for quite different reasons. The amendment would increase taxpayers' resource costs. Taxpayers would need to value the asset at the time of retirement. For listed shares, that is a hassle rather than a cost, but the amendment could also apply to some unlisted shares and securities, and to assets other than shares. Valuations would be needed, and taxpayers would have to bear the cost. The amendment would make some people worse off. I quite understand that some would be made better off—broadly, those who keep their assets for a long time after retirement and those whose gains are unevenly distributed and arose predominantly when they were employed. However, there would be losers too—people whose gains arise mainly after retirement, people who acquire their shares shortly before they retire and people who sell their shares soon after they retire, for whatever reason. Let us consider an employee who acquires shares 11 months before retirement and disposes of them one month after retiring. Under the amendment, that employee would receive no taper relief at all. Under the normal rules, he would pay tax on only 88 per cent. of the gain. Let us consider—I will exaggerate to make the point—an employee whose shares do not increase in value at all in the four years that he or she is an employee, and then double in value in the four years after retirement. It is possible. Under the normal rules, he or she would pay tax on 47.5 per cent. of the gain; under the amendment, he or she would pay tax on 80 per cent. of the gain. My point is not that the normal method of time apportionment always leads to winners. There are winners and losers under both systems of apportionment. However, it is fairer to have a single system that applies to all apportionment cases across the whole taper system. The amendment is technically defective. What if the asset later becomes a business asset again? Perhaps the employee returns to work for the company or a listed company becomes unlisted. It is not clear that the amendment would allow a further period of business assets status to accrue. The amendment does not define its terms. What are "ill health", "injury" and "disability", and who will decide? Is the amendment meant to cover all retirement or just retirement due to ill health, injury of disability? The interaction of the amendment with the normal market value uplift on someone's death is less than clear. No capital gains tax is payable on that uplift at death. The personal representatives of the deceased pay tax only on gains after the death. Under the amendment, however, they might have to pay tax on gains pre-death as well. The amendment is similar to one put forward in Committee. It is a better and more worthwhile version, but I still give it only seven out of 10 and do not feel moved to support it. The purpose of amendments Nos. 137 and 138 is backdating, so that the period between 6 April 1998 and 5 April 2000 is counted as a period of business use. That would produce no increase in productivity or benefit to the economy, as my hon. Friend the Member for Croydon, Central (Mr. Davies) remarked a few moments ago. It would be expensive, which I shall come on to shortly. I will therefore ask the House to reject the amendments if they are pressed. In clause 67 we are providing a real and positive encouragement to entrepreneurial investment and greater employee share ownership in the future. The amendments seek to reward past activity, where there is no scope for incentivisation. 7 pm It has been suggested that there is something unfair about apportioning gains between the part that is attributable to a time when the conditions for the business asset treatment are satisfied and the part that is not. However, it is perfectly fair and reasonable that an asset that has not been a business asset throughout the relevant period of ownership should be treated less generously than one that has. That is the whole point of the more generous business asset taper. To compare the case of a person who acquired the asset when it was not a business asset, but was later converted to one, with a person who has held the asset throughout as a business asset is to compare apples and pears. We discussed that in Committee at considerable length.

John Burnett (Liberal Democrat, Torridge and West Devon)

Does the Economic Secretary agree that the Government amendments that convert non-business assets to business assets are thoroughly worth while and that, if that is so, they would have been worth while two or three years ago?

Melanie Johnson (Labour, Welwyn Hatfield)

Of course I agree that those changes are worth while, but we cannot incentivise past activities by backdating the measure. That is the crux of the matter, and it is the reason why hon. Members are comparing apples and pears. The apportionment is right in principle because it treats both cases alike by enabling them to receive business asset taper for the time they held the shares as a qualifying business asset. Therefore, I do not agree that the clause is in any way unfair. It is perfectly fair to give business asset taper relief to those who qualify for such relief for the time that they so qualify and not for times that they do not. That is a benefit to all those who hold, and continue to hold, business assets. It has been argued that the amendment would simplify assessments by ending the need for apportionment. That is true up to a point, but apportionment would still be necessary if assets changed their status for another reason. The complexity of apportionment has been much exaggerated. The Inland Revenue will set out clearly the series of simple steps that taxpayers should follow. Moreover, such a backdating amendment would be very expensive. There would be a cost of more than £300 million in the next three years. That cost would be all deadweight; it would not act as an incentive and would have no impact on future behaviour. The amendments would direct money away from the new enterprise economy, rather than provide further incentives for growth. Therefore, if the amendment is not withdrawn, I shall urge hon. Members to vote against it.

Howard Flight (Conservative, Arundel and South Downs)

It is not our intention to press the amendment to a Division. The Economic Secretary is aware of the fact that the arrangements contain unfair anomalies and that citizens who are treated unfairly will not be happy. The problem is extremely complicated and the alternative solutions would create other difficulties. We have given the issue an airing, and the Government would be well advised to consider it further, but I beg to ask leave to withdraw the amendment.

TAPER RELIEF: ASSETS QUALIFYING AS BUSINESS ASSETS

TONNAGE TAX

TRANSFERS OF VALUE BY TRUSTEES LINKED WITH TRUSTEE BORROWING

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 147, in page 66, line 21, leave out "that are" and insert— 'who are not trustees of a settlement for the benefit of the persons named in paragraphs (a) and (b) of section 86 of the Inheritance Tax Act 1984 but who are'.

Howard Flight (Conservative, Arundel and South Downs)

There was a fairly full discussion in Committee of the territory that these amendments cover. A matter of principle is ultimately involved: whether the Government's objective is fundamentally to prevent tax avoidance or to change a principle of British law. It is understood that the purpose of clauses 92 and 93 is to try to stop tax avoidance, but they are widely drafted and apply to all trusts, irrespective of their purpose and operation. Employee trusts frequently take out a series of loans from employing companies within a group as part of their disposal of shares to employees. The loose wording of schedule 25 could be applied, more or less, to anything to which the Inland Revenue wanted it to apply. Under amendments Nos. 147 and 148, we suggest that employee trusts should be excluded from the scope of the measure, putting beyond doubt that wider employee share ownership should not be hindered inadvertently by such ambiguously worded legislation. The same point arises in relation to amendment No. 148. Employee trusts could make both gains and losses as they pass to employees shares that have been warehoused for a period. It is possible for them to receive shares from, for example, a retiring controlling director. They could be exposed to higher than necessary capital gains while engaged in perfectly legitimate activity, which the Government wish to encourage. Similarly, amendment No. 149 is drafted to exclude employee trusts. Why should employee trusts be penalised because they happen to be established for United Kingdom employees where the parent company is located overseas? The Government may say that that is highly unlikely, but business is increasingly global and an employee trust could hold 5 per cent. or more of a company—the minimum threshold to receive a tax bill under clause 94. However, an employee trust would be unlikely to hold more than 5 per cent. of such a company as part of a tax avoidance scheme. Amendment No. 150 focuses on different territory. The Paymaster General has helpfully confirmed in correspondence that the provisions under clause 94 will apply only to investment gains; it is not intended to apply to gains on tangible assets used in a trade. That relates to section 13 of the Taxation of Chargeable Gains Act 1992, but the defences in that section are not sufficient. Therefore, why have only tangible assets been included? What about software? The principle set out in the Paymaster General's letter could be best safeguarded by making it clear that those provisions will apply only to non-trading groups. Amendment No. 151 is somewhat larger in scope, so I hope the House will excuse me if I deal with the arguments in total. Those subsidiaries of United Kingdom companies that make gains on the disposals of their assets pay tax in the appropriate location. If the proceeds are used to invest overseas, it is right that no UK capital gains tax arises. UK tax is payable when the proceeds are brought back to the UK or distributed to UK shareholders. Those general rules are overridden only where necessary to prevent avoidance. The Government say that clause 94 is focused on avoidance, but their definition of avoidance includes any cases in which trustees are shareholders in a close company. Unless, as I have said, the intention is to change an underlying principle of tax law, that definition is too sweeping and unfair. It could significantly reduce the ability of UK-based groups to reinvest overseas and to create continuing flows of income, which would be taxable when brought back to the UK. We have received a number of representations from taxpayers who are clearly not involved in avoidance and who will be damaged by the new rules. For example, a pension fund may want to invest in property overseas and find that it can take a stake in a non-UK company, the rest of which is owned by a UK private group. Under clause 94, if such overseas property were sold—that would be outside the control of the pension fund—the pension fund would be deemed to be a tax avoider and a notional gain would be charged even if the proceeds were invested overseas and thus not available. Another example is a charity with significant assets represented by a gift of shares in a private company. If the status of the private company changed to close—which, by definition, would be outside the charity's control—the charity would have deemed gains visited on it. Thus, it would have a tax liability even when it had no taxable proceeds. A more glaring anomaly is represented by the example of a close company at present controlled by individuals who will be outside the scope of the new rules introduced by clause 94. If those individuals believe unreservedly in the values of employee share ownership, they might create a trust for the permanent benefit of their staff and transfer to it the majority of the shares in the company. Under clause 94, the situation would change totally so that the trustees would be deemed guilty of tax avoidance. Overseas gains would be attributed to them even if they had no money with which to meet the tax. The Baxi Partnership, to which we referred extensively in Committee, is an example of that. A company that has had investments abroad for 20 or 30 years might decide that the time has come to realise those investments and reinvest the proceeds in either a different asset or another overseas country. Again, there would clearly be no UK tax avoidance motive, but if the company committed the heinous crime of having trustee shareholders, deemed gains would be attributable through to those shareholders if the company was close and the funds available for reinvestment would be reduced. In Committee, we urged the Government to accept that they had to identify commercial cases, including such examples as I have described, to meet what we understood to be their intention to focus on avoidance situations. Our amendment, which draws on long-standing precedents, offers an acceptable way to achieve that. One of the oldest anti-avoidance provisions in our tax code was originally section 18 of the Finance Act 1936, which became well known through the Vestey case in the 1980s. Even that provision, the severity and breadth of which has been commented on by a number of distinguished judges, provides an exemption when the taxpayer has invested overseas for bona fide commercial reasons or not to avoid UK tax. In the narrow area on which the Government are focusing, we ask that they afford the same protection that extends to that wide income tax avoidance provision. To sum up, a recent Revenue technical note said: Certain aspects of the current tax code for capital gains can hinder businesses' international competitive position and distort their commercial decisions, forcing them to adopt structures that they would not have needed otherwise. It may also act as a disincentive to companies that are investing to innovate and to modernise. We ask the Government to see that justice is done.

Dawn Primarolo (Labour, Bristol South)

I shall respond briefly as we had a similar debate in Committee, and I must admit to a feeling of déjà vu as the hon. Member for Arundel and South Downs (Mr. Right) has made exactly the same arguments. I remind the House that the proposals represent an important package of measures that we have introduced to counter a large number of tax avoidance schemes involving the use of trusts, which have been devised to enable individuals to sell valuable assets without paying any tax on their gains. Our proposals, which are specific and tightly drawn, deal with avoidance. 7.15 pm Although this may disappoint the hon. Gentleman, I am no more convinced by his amendment than I was in Committee, even though we have had extensive discussions. Towards the end of his remarks, he referred to three aspects on which there was a meeting of minds in Committee: charities, pension funds and whether the operation of section 13 of the Taxation of Chargeable Gains Act 1992 is harsh. Particular discussion centred on the Baxi company. Before I respond on those points, which are the ones on which the hon. Gentleman seeks the comfort of a reassurance given on the Floor of the House, I say to him that the proposals deal with avoidance. In Committee, he agreed that he would not want himself or his party to be associated with activities deliberately designed to allow someone not to pay tax. I accept his point about the amendment, but in the knowledge that there is much to agree on with respect to the broad sweep of the proposals. However, I recognise that the Opposition feel strongly as they have returned to these issues yet again.

Oliver Letwin (Conservative, West Dorset)

For only the third time.

Dawn Primarolo (Labour, Bristol South)

Third time lucky, perhaps. As I said in Committee, I have asked the Inland Revenue to review without prejudice the operation of section 13 of the 1992 Act in respect of charities. I have also asked it to consider pension funds, which the hon. Member for Arundel and South Downs also mentioned. I have some sympathy—I would not like to overstate the point—with the view that section 13 may operate harshly in some circumstances, so I have asked the Inland Revenue to extend the remit of the review, again without prejudice, to see whether there is a case for widening the categories of gain not caught by section 13. May I put out a general statement? People concerned about those matters, including the hon. Gentleman, will have the opportunity to make their points to the Revenue. I take a great deal of pleasure in my correspondence with him, and I am sure that the Revenue will do likewise. I shall consider carefully the points arising from the review and there is no reason why there should not be further correspondence at that time. I trust that my remarks have helped to allay the fears expressed by Conservative Members and that they will withdraw the amendment and await the outcome of the Inland Revenue's considerations.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister for a most constructive response. Both of us seek justice and fairness and, with pleasure, I beg to ask leave to withdraw the amendment.

TRANSFER OF VALUE: ATTRIBUTION OF GAINS TO BENEFICIARIES

DOUBLE TAXATION RELIEF

Dawn Primarolo (Labour, Bristol South)

I beg to move amendment No. 103, in page 513, line 11, at end insert—

Dawn Primarolo (Labour, Bristol South)

I have not moved the amendment formally because it is necessary to comment on the double taxation relief issues before the House. I recognise that the hon. Member for West Dorset (Mr. Letwin) is not feeling as well as he might. I therefore hope to be succinct in my comments and, at this point, perhaps he will agree with our proposition. The amendments will change the system of double taxation relief for companies in order to reinforce the Government's policy of removing the tax advantages that the biggest multinationals get from using offshore companies to route dividends into the United Kingdom. At the moment, that enables them to avoid UK tax on profits on which little or no tax has been paid elsewhere, and to avoid the impact of the legislation on controlled foreign companies—a matter that we will come to subsequently. Most of the provisions introduced by the amendments are new. Some, however, are a reordering of amendments that were agreed in Standing Committee; they need to be repeated because of the other changes that we are making. I turn specifically to the new proposition in the Government amendments, which basically deals with onshore mixing. That brings me to new sections 806A to 806K. I shall mention briefly what they do. The Inland Revenue has produced a very detailed explanatory note with dozens of worked examples. To make this aspect of very complex legislation as clear as we possibly could, the Government thought that it would be helpful to have a full explanatory note for business and, indeed, hon. Members to refer to. The Inland Revenue will publish further detailed guidance about the legislation later this year, well in advance of when the legislation starts to apply at the end of March next year. New sections 806A to 806G allow underlying tax that is excluded by the 30 per cent. mixer cap, or that cannot otherwise be allowed in the UK, nevertheless to qualify for credit relief, subject to an upper maximum limit of 45 per cent. That will effectively prevent low-taxed profits from being mixed with high-taxed profits, while still allowing relief for foreign tax paid at rates of up to half as much again as the UK rate. A rate of 45 per cent. is generally above the main corporate tax rates in, for example, virtually all the European Union, the United States and a very large number of other countries, which I am more than happy to read into the record if hon. Members wish. However, I do not think that they would wish me to do that, so I will use just those examples. The proposals would remove the tax advantages of holding overseas subsidiaries through offshore holding companies. They prevent avoidance of UK tax on low-taxed profits from controlled foreign companies by the current practice of mixing them with high-taxed profits earned by different companies in different countries. They stop the UK giving unlimited relief for foreign tax paid at rates well in excess of the UK rate, while nevertheless giving companies scope for obtaining relief for foreign tax paid at rates that are up to half as much again as the UK corporate tax rate. They introduce more flexible forms of relief than UK companies have enjoyed before. The old system of mixing offshore was extremely complex. Dividends had to be timed perfectly. One had to have the right dividend in the right place at the right time in the right year in the right amount. The mixer system was very complicated and entirely artificial. We are putting in place a system whereby new companies investing overseas will in future have a new system that is simpler and more flexible, although taxation in this area is never simple; however, it will be simpler. It will influence behaviour. Some companies already investing overseas have complicated structures. If they want the maximum benefit from the arrangements, they will need to restructure. In the Financial Times today, the Chartered Institute of Taxation said that the compromise was "generous and flexible". Hallelujah! Peter Cussons, partner of PricewaterhouseCoopers, said of the proposals, "90 per cent. there, " although he would have liked to have seen the cap set a little higher, but he would say that, wouldn't he? I think the House will agree that the arrangements that will be in place following all the changes in the Finance Bill on double taxation relief, on capping and to prevent offshore mixing, and the arrangements for onshore mixing give a sound basis to move forward in this policy area. I commend the amendments to the House.

Oliver Letwin (Conservative, West Dorset)

It seems as long as I have been alive since we started making representations about the matter. Hon. Members present will remember that the initial proposals by the Government followed a consultation paper in which two options were put forward, one of which was onshore pooling. From that moment to this, we have argued that onshore pooling was an appropriate response. I can only say with heartfelt thanks that the Paymaster General and her colleagues have now given us a system of onshore pooling. We could all have been spared a lot of time and bother had that been done in the first instance. This is very good news for British industry, for parliamentary democracy and for those who are contemplating establishing headquarters of multinational companies in the UK. Indeed, I will go so far as to say that I think the system of onshore pooling is superior in principle to the system of mixer companies, which has informally and quasi-formally operated to date. It is very good news. Indeed, it overwhelms the points that I am about to make, although they are also important. I hope that the Paymaster General will take them in the spirit in which they are intended—not as party politics, but as a recommendation for serious action over the next year. if I can be forgiven a Dickensian allusion, the drafting of these particular amendments, which I recognise has been done in an almighty rush given the complexity of the subject matter, is worthy of the Circumlocution Office and may on reflection engender a certain amount of Jarndyce v. Jarndyce legal action. I hope that the Paymaster General will allow the next few months to be taken up in part by a review of those provisions to see whether a certain element of the spirit of the tax rewrite might not enter some of them, and whether they might not be brought back, not substantively altered necessarily—except in relation to a point that I shall come to—but altered in the drafting, so that there is some hope of people who have to operate the system in future years roughly understanding them. Many hours spent going through the provisions in the past few days with expert help have convinced me that it is almost impossible to understand quite large sections. One or two of the most distinguished accountants in Britain are unable to determine the precise meaning of some of the paragraphs. Perhaps the parliamentary counsel who wrote them is unable to determine their meaning. In any case, I am sure that they could be improved upon with the lapse of time. We are grateful for the offer that the Paymaster General makes to produce a kind of guide for the uninformed in due course. I hope that that guide, which will have the benefit again of a much greater amount of time than the notes on clauses have had, will benefit from a little application of Fowler's plain English—not just plain English, but conceptual clarity. I do not mean to be abrasive about the people who had the laborious task of drafting the notes on clauses, at what must have been astonishingly high speed. The notes are voluminous, but I must say that they are an extraordinary example of the art form. They make issues that were already complex obscure, and in some cases, issues that were already obscure incomprehensible. In some cases, it was only by returning to the clauses themselves that I could make out what was going on. The problem is remediable. There are plenty of people in the Treasury and at the Paymaster General's disposal who know how to do such things, given a few more weeks. I hope that time will be taken and that when the guide is produced, it will be comprehensible. So far, we are probably ad idem on the matter on both sides of the House. 7.30 pm I shall deal with one grave matter of substance, but, before that with one comparatively minor matter. First, I must declare an interest. I have never been able to work out what it was, but I am sure that I do have an interest in some way, and it would be remiss of me not to declare it. The Paymaster General said—and she was right—that the preponderance of the relevant other jurisdictions have tax rates that fall within the 45 per cent. limit. However, the current drafting of the amendments will, rightly, also capture withholding tax. The hon. Lady will discover, or she may already know, that in relation to, for example, subsidiaries held in Tokyo or in the state of New York, the composite effect of underlying tax and withholding tax rates will exceed 45 per cent.—not by very much, but by a little. That is why, I think, Mr. Cussons was arguing for a slightly higher rate. I believe that 48 per cent., for example, would capture almost all the effects to which I am referring, and certainly 50 per cent. would. I do not want to stress that point unduly. Throughout the debate, I have never sought to use hyperbole where there are serious arguments and serious issues at stake. The old system that was introduced by the previous version of the Bill would have destroyed Britain as a location for multinational headquarters. The difference between 48 and 45 per cent. as a cap on onshore pooling will not destroy—I repeat, will not destroy—Britain as a headquarters for multinationals. It is, however, a minor irritant and I hope that the Paymaster General will reflect on that. There is time enough between now and next March or April to revise the limit to 48 per cent. That would be helpful, without much cost to the Treasury. My major point relates to a matter which the Paymaster General acknowledged, to a degree, but I am not sure whether she has yet, or even that we have yet, fully grasped the scale of the problem. I refer not to new companies that are considering locating their headquarters in the UK, but to multinational companies that are already headquartered in the UK. Those multinationals are largely shackled by the provisions that ensure that there will be a significant crystallisation of capital gains, should they seek to leave the UK. It has never been our argument that any change of double tax relief will send packing companies that are already headquartered in the UK, for that very reason—they are shackled by the provisions of capital gains realisation. I am not saying that the effects that I am about to describe will send companies packing, but those effects may cost companies currently headquartered in the UK very large sums of money. That is the worry. Currently headquartered in the UK are multinational companies which, for tax-mixing purposes or for other purposes, or both, have been structured around intermediate holding companies, very often Dutch BVs, but in some cases other kinds of mixer companies. They have indirect subsidiaries—subsidiaries of subsidiaries—often in countries such as Japan and the United States. The great bulk of the most important subsidiaries of multinationals headquartered in the UK, both originally UK-based and immigrants to the UK, have holdings through intermediates and sub-subsidiaries in the US and Canada. For various cultural and business reasons, our major area of outward investment has been north America. Under the provisions for onshore pooling, in order to benefit fully from the mixing or pooling—in order to get the unrelieved portion dealt with and to be able to use it—those companies will have to restructure their activities in such a way as to bring the current sub-subsidiaries and sub-sub-subsidiaries under the direct ownership of a UK-based company. That is the point of onshore pooling. We have no objection to that. There are restructuring costs associated with that. but I do not dwell on them—I suspect that, in the context of those companies, those costs will not be major. However, the UK is not alone in having rules that crystallise capital gains upon restructuring. Other countries do, too. Some of the jurisdictions in the US have very great penalties on restructuring under certain circumstances. The Paymaster General is helpfully nodding, so the subject has evidently been aired inside the Treasury. I have had the opportunity in the past few days to discuss the matter with some distinguished auditors and also with some of the most important company treasurers in multinationals headquartered in the UK, which have not just substantial but enormous sub-subsidiaries and sub-sub-subsidiaries in north America. I can assure the Paymaster General that a proper investigation of the matter will in due course reveal that the possible losses to multinationals headquartered in the UK associated with the transitional restructuring, so to speak, required to get the benefit of the onshore pooling may be enormous. Bizarrely, that takes us back to a slightly sterile debate that we had right at the beginning, long before I at least, and perhaps even Ministers, properly understood what we were debating. That was the sterile debate about how much the Treasury would or would not raise by moving from mixing to no mixing. It was a sterile debate then as, in fact, the Treasury would not raise anything because sooner or later companies would not come to the UK. The long-term effect of the old proposals would have been that no revenue was raised and no multinationals were headquartered in this country. Now there is the question not of new companies coming, but of existing companies that are shackled in the UK. There is the possibility not of the Treasury doing too well, as it will not gain by the restructuring, but of the US Treasury gaining from the provisions. I know that throughout the proceedings in Committee and on Report, the Paymaster General has been generous and I do not doubt her generous instincts, but I suspect that they do not stretch to trying to make the US Treasury richer at the expense of UK-headquartered multinationals. A brief inspection of The Economist this week will show that the US Treasury is rich beyond the wildest dreams of man. It is getting to the point where presidential candidates vie with one another to explain to US taxpayers how much tax relief they will undertake. We do not need to shed tears about the US Treasury, and we do not need to make it any richer at the expense of multinationals headquartered in the UK. The practical question arises: how serious is the problem? The honest answer is that I do not know, and there is no one else who knows, as we have had only a few days to study the amendments. It will take time for accountants and treasurers in those large companies to get to grips with what will be required and to work out in detail what the costs will be. What are the practical steps that can be taken if it transpires that the problem is serious, as I suspect it may be? I think that I can suggest a course of action that may be acceptable to the Paymaster General and which she would have an opportunity to put on the record today. We could then rest easy, broadly, and, in the spirit of amity, claim joint victory over the forces of evil. I do not suggest in any way that that would be a victory over the Government—no, no, far be it from me. I suggest that over the next few months, companies be given the opportunity to calculate the tax costs arising in other jurisdictions; that some consultative process be established so that they can bring to the attention of the UK Treasury on a confidential basis the broad effects; and that the Paymaster General and her colleagues should consider those and judge whether the effects are serious. If they are, the Paymaster General or her successor should bring forward in next year's Finance Bill—that will be just in time—transitional amending provisions to provide more time or to make such other changes as are necessary to allow multinational companies currently headquartered here not to suffer the effects that we are discussing, or not to suffer them too dramatically. I say "just in time" because, as the Paymaster General rightly said, the provisions will come into force next March. Unless my colleagues or successors are peculiarly inadvertent, next year's Finance Bill will not have been taken through the House and passed into law by March. If the hon. Lady were now to announce that she is at least willing to go through some such process, and to agree that if it transpires that there is modification required she will bring forward in next year's Finance Bill retrospective legislation to allow for that, companies could proceed in the next few months in the knowledge that if they can show that there is a real problem, action will be taken retrospectively to allow them to engage in restructuring at a pace and in a way which minimises that problem.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman is making an important point. One way to assist companies as they plan for the next financial year would be if the Government were, in a pre-Budget report, to pre-announce at that early stage their intention to allow retrospective taxation and the possible shape of it.

Oliver Letwin (Conservative, West Dorset)

Yes. I think the hon. Gentleman's suggestion is an improvement on mine. I agree that it would be helpful if these matters were made clear in a pre-Budget report. I am sure that there will be time enough to do that. If there really is a problem, the scale of it will then have become clear. I do not ask the Paymaster General to make a firm commitment on Report to a particular series of steps. However, if she will agree to reflect on these matters and to work out a scheme of action that will ensure that there are not unnecessary, significant and crippling costs—crippling is perhaps an exaggeration—for multinational companies currently headquartered in the UK, we shall have achieved a reasonable solution. This is a textbook case of why it is worth while going through the rather ghastly and laborious process of Second Reading, Committee and Report—it has given the industry and the professionals time to bring out the real problem. I give due credit to the Paymaster General because she has shown considerable forbearance and understanding as we have gone through the parliamentary process. In the end, she has produced a sensible and workmanlike solution. She will not go down in history as the sort of Agrippa that we feared. On the contrary, she will be recognised as the kindly aunt of British industry.

Barry Gardiner (Labour, Brent North)

We have come a long way over the past few months, and the amendments reflect that. I pay a sincere tribute to the work of the hon. Member for West Dorset (Mr. Letwin), who, in a powerful speech at the beginning of our consideration of these matters on the Floor of the House, drew attention to the problems that stemmed from the original drafting. He did his cause nothing but good by the way in which he argued rationally and reasonably throughout consideration in Committee, not taking the line of party political advantage. I have been impressed by that, and I pay him tribute for adopting that approach. I pay tribute also to my hon. Friend the Paymaster General for the way in which she has consistently responded to, and taken on board, the points that have been made. With the amendments, we shall end up with much improved legislation. As the hon. Member for West Dorset said, that is a tribute to the parliamentary process of Second Reading, Committee and Report. 7.45 pm In Committee, I recall the Paymaster General making some fine points about the way in which changes to double taxation must be considered, together with all the other elements of the tax system. We must take account of that. I say in response to the comments of the hon. Member for West Dorset about US Treasury gain that business has repeatedly pointed out that there is extreme reluctance to take on board aspects of the US taxation system in this country. Relief for interest is restricted, capital gains are taxable and double taxation relief is extremely complicated in the US. On that basis, I do not think that the amendments will he the windfall for the US Treasury that the hon. Gentleman might have led us to believe. We have ended up with 16 pages of highly complex legislation, and, at short notice, we have had to come to terms with how that will impact on industry. There is still the opportunity for pause for further reflection. When we consider the revised figure of 45 per cent., it seems that companies using overseas holding companies to hold trading companies in higher tax countries are penalised. An example would be if a German subsidiary were held below a holding company. A capped rate of 30 per cent. would apply to double taxation relief. That is the UK corporation tax rate. If the subsidiary company were held directly, the cap is 45 per cent., and can therefore be pooled against more lowly taxed profits. There are areas that need further consideration. There can be commercial reasons for holding companies other than simply tax reasons. These will restrict the ability to mix and pool dividends when shares are held under a holding company. A UK company using an EU holding company is now worse off than if foreign trading companies were held directly in some situations. I question whether that is in line with the free movement of capital that is demanded within the EU. However, the movement that we have seen over the past few months has been enormous. We have ended up with much better legislation than would have been the result had we proceeded on the basis on which we started. I pay tribute to my hon. Friend the Paymaster General for the work of her team and for her willingness to listen to all the arguments that have been presented to her.

Oliver Letwin (Conservative, West Dorset)

What the hon. Gentleman says is true. However, I hope that I shall not be accused of disloyalty to my right hon. and hon. Friends if I defend the Paymaster General against the hon. Gentleman's accusation. It is an inherent part of the logic of onshore pooling that the holding should be direct for the unrelieved portion to be mixable. It is almost necessary that there should be strict compulsion that all the mixing should be done onshore for the regime to be clear. I accept the hon. Gentleman's point that that will mean that the subsidiaries of trading subsidiaries, rather than controlled foreign companies, will also be caught. I accept also his point about the effects in Germany, for example. However, that is an inherent part of the logic and we must accept that consequence, whereas the restructuring that I was talking about is transient.

Barry Gardiner (Labour, Brent North)

I accept those points. Where we have ended up may have certain consequences that are disadvantageous but, on balance, we have a package that is a huge improvement on the original drafting, and one that should be welcomed by the House.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

If only, on the odd occasion, Prime Minister's Question Time could be as consensual as this debate. It has been quite amazing. There has been a great deal of agreement between both sides, and that is welcome. I associate myself and the Liberal Democrats with the comments of the hon. Members for West Dorset (Mr. Letwin) and for Brent, North (Mr. Gardiner). The way in which this debate has been conducted has shown how Parliament, when it is at its best, can help to defend British industry and the interests of our country. It is not often that I say that about the way in which the House scrutinises financial matters. On many other occasions, I have criticised the way in which it has dealt with expenditure, and the way in which it deals with tax matters is not often to be praised. We often consider new clauses and amendments late in the day and do not have sufficient time to debate them. One could apply that criticism to some measures in the Bill, but the Government have consulted recently and that has assisted us in our work. I add my support to the call of the hon. Member for West Dorset that the Government continue with that consultative process as we wait to see how these complex measures work in practice. If the Paymaster General can assure us that they will deal with the issue in the pre-Budget report and that they will at least consider the need for possible retrospective legislative change, that will be incredibly helpful. One could, at this point, make several party political points about the whole process and say that lessons need to be learned. However, those lessons probably have been learned—I certainly hope so. It would be a wise idea for Ministers to listen to their officials and not just to their political advisers. If officials had been in charge of drawing up the Bill, we would not have faced the problems of the past few months. We would have had better legislation if the proposal that we are now examining had been introduced in a more considered fashion. The hon. Gentleman is probably right to say that onshore pooling is probably superior to the old offshore regime, but it would have been better if such a move had been made after substantial consultation and had not been rushed through in a short time. I wish to reflect on one or two details that give rise to slight cause for concern. The first appears in Government amendment No. 106 and in the proposed new section 806H to the Taxes Act 1988 which is headed "Surrender of relievable tax by one company in a group". The arrangements for group provisions for other areas of taxation are often made by primary legislation, but the proposed new section 806H suggests that that should be done by regulation in this case. That is unusual. Perhaps when the parliamentary draftsmen were trying to put such detailed legislation together, they felt that they had no other alternative. One can have sympathy for that view. However, it is not necessarily a good precedent and it is not how group relief is dealt with for other taxation purposes. I associate myself with a point made about how the cap relates to subsidiaries in Tokyo. That issue is a cause for concern. The current proposal relates to both the cap and to the underlying withholding tax. Perhaps it should be reconsidered at a later stage. A separate point on the relief of capital gains on the sale of shareholdings has been brought to my attention. It may relate to the point that the hon. Gentleman made about the United States tax regime, but my point applies to Dutch mixer companies. It is my understanding that, when a subsidiary held via a Dutch mixer is sold, there is no UK tax on that gain. Is the Paymaster General concerned that, when a UK onshore mixer company sells a subsidiary, it will face a capital gains tax liability that would not exist if a Dutch mixer company is closed and moves onshore as the result of restructuring? I am not sure whether that is so, but I would be grateful if the Government could reassure me on that point.

Oliver Letwin (Conservative, West Dorset)

I am sorry to return the hon. Gentleman to his point about the proposed new section 806H. On re-examining it, I do not understand his argument. It seems appropriate that the surrender by one group to another of the relievable tax should be organised by regulation. Is he suggesting that there should be a statutory provision describing exactly how that should be done?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

My point was that group relief in other areas of the tax system and tax legislation tends to be provided for by primary legislation. Therefore, there is no parallel with this provision. I wanted the Government to explain their thinking. Because this proposal was made in a hurry, I can understand why it will be made through regulation, but I hope that it does not set a precedent. One normally wants group taxation to be provided for by primary legislation.

Oliver Letwin (Conservative, West Dorset)

In that case, I agree with the hon. Gentleman. In due course, the proposal should be put into statute. However, can he and I not agree that it would be better to assess experience and to understand what the rules should be before we enact the measure? It is right that there should be some rules, but they need to be in regulations at the outset. However, we hope—next year or the year after—to put them into statute.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am more than happy to concede that point.

Dawn Primarolo (Labour, Bristol South)

I intend to follow in the spirit of agreement that has broken out. If the hon. Gentleman reads the provisions of the proposed new section 806H(3), he will see that the regulations made under 806H(1) may make different provision for different cases … may contain such supplementary, incidental, consequential or transitional provision as the Board may think fit. Given the complexity of the issue, it is appropriate to put such measures into regulations that we will have an opportunity to discuss. That does not set precedent. The House has used regulations in that way for some time. Given the complexity of the points made by all the contributors to the debate, and what the hon. Gentleman has said in the past about consultation, that is the most sensible way to proceed.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I did not wish to make this a major issue. I was merely trying to make sure that the Government realise that they have approached group relief arrangements differently from the way in which they have dealt with other tax legislation. I understand that there are special circumstances and I am sure that the Government are right to wish to consult on the detail. That is why I shall certainly not vote against the amendment. I return to the point that I may not have been making terribly well. I mentioned Dutch mixer companies and capital gains tax liabilities on the sale of subsidiaries. If such companies move onshore into UK mixer companies, will the Government introduce measures for CGT relief on the sales of the overseas subsidiaries of the UK-based onshore mixer companies? It is possible that I have not understood the point properly, but I would be grateful if the Minister could try to explain it to me.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman may be struggling with the concept of a mixer company. It is simply a vehicle and its location is determined by where its board meets and by the nationality of those on the board. Its sole function is to funnel profits to the UK having mixed them offshore. He is making a point about mixer companies that does not apply because the provisions relate to payments that come directly to the UK.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Paymaster General may be right, but I have been led to believe that some mixer companies have subsidiaries; Dutch mixer companies have had subsidiaries. The way in which those companies are constructed is often complicated. The complexity is not necessarily driven by tax reasons. I should be grateful if the Paymaster General reflected on that when she replied to the debate. Does the Paymaster General have a forecast or estimate of the expected yield of the proposals? We heard a range of forecasts for the expected yield of the original proposals. The Government have spent much time on the matter, and I wonder whether the Paymaster General could tell the House the expected revenue yield, or whether no Exchequer gain is expected from the proposals. When the Government propose major changes to the tax system in future Finance Bills, I hope that they will have learned lessons from this year and that they will abide by their code on consultation. If they do that, we will not again get into the current mess over double taxation relief.

Dawn Primarolo (Labour, Bristol South)

I shall reply briefly to the points that were made by the hon. Member for West Dorset (Mr. Letwin), my hon. Friend the Member for Brent, North (Mr. Gardiner) and the hon. Member for Kingston and Surbiton (Mr. Davey). I am sure that hon. Members who have spoken will agree that it is especially important that none of my comments add uncertainty to an extremely complex aspect of taxation. They will therefore forgive me if I do not respond as fully as they would like to some of their points. We are considering large companies making decisions about their structure and about their best interests in maximising the benefits that are available in, for example, the new arrangements for onshore pooling. I shall therefore be careful about what I say on that. The hon. Member for West Dorset mentioned drafting. I hope that it will be possible to clear up several points in the guidance so that, for now, at least the guidance will be clearly understood by the Revenue and the relevant companies. The hon. Gentleman also mentioned withholding tax. I have considered the point that he made and I examined the January 2000 KPMG corporate tax survey. It considers corporate tax rates and withholding, if it exists. I am not surprised that the hon. Gentleman picked the one place where the combination of withholding and corporate tax might create a higher level than the 45 per cent.

Oliver Letwin (Conservative, West Dorset)

I mentioned two places: Tokyo and New York. I feel more confident that I am right about New York than about Tokyo. However, will the Paymaster General admit that New York is not any old place? It is where the largest number of major subsidiaries of UK-based multinationals are located. The point that I made is therefore of some importance.

Dawn Primarolo (Labour, Bristol South)

I would not want to insinuate that Tokyo or New York were "any old place"—heaven forbid! The 45 per cent. rate is extremely generous. While the difference that may arise is not insignificant to companies, it is only just above the cap. In fairness to the hon. Gentleman, and to provide certainty about the matter, the answer to his direct question about whether I would review the 45 per cent. rate is no. The hon. Member for West Dorset also mentioned company structures. He concentrated on the United States preferred company structure as opposed to that in the United Kingdom; the flat structure that the US operates rather than what could be described as a chain structure. The hon. Gentleman mentioned costs in the US. A company may consider it necessary to move the US company so that it has a completely flat structure, which would relate to the UK, to maximise the benefits. That would entail costs. The relevant company would have to consider the benefits of restructuring its operations. That would be a commercial decision for the company, which would have to balance the costs of restructuring with the benefits that might accrue from it. Companies are already doing that in terms of the acquisitions of US-UK groups. We are considering vast companies. The decisions are always complex and involve vast amounts of money and much consideration. The hon. Member for West Dorset kept saying, "if there is a real problem". I do not deny that restructuring will involve costs for some companies. I do not believe that that is a real problem in the way in which the hon. Gentleman suggests, although, as with any legislation, the Government have to be watchful about its operation. We have an annual opportunity to consider whether the measure is operating correctly and to remedy it if not. We are considering complex matters, which we will supervise closely. I am not currently attracted to helping with transitional costs. The benefits to the companies of being linked directly to the UK are enormous. Apart from the 45 per cent., there is the carry-back of three years to offset a liability, indefinite carry-forward and the ability to surrender to another company in the group for use against uncapped lower dividends. Holding those assets directly is greatly beneficial to the company and the UK economy.

Oliver Letwin (Conservative, West Dorset)

I accept that the carry-back and carry-forward provisions, and the relief provisions in general, may be attractive. Will the Paymaster General at least give us an assurance that, if representatives of major multinationals with their headquarters in the UK wish, they will have the opportunity to see her or her senior officials to explain the tax consequences, as the year progresses, in the US, or north America generally, of restructuring so that sub-subsidiaries of current Dutch BVs—limited companies—and other vehicles are brought under the direct ownership of the UK headquarter company? Will she assure us that she will consider those representations seriously and take them into account when drafting next year's Finance Bill?

Howard Flight (Conservative, Arundel and South Downs)

rose—

Dawn Primarolo (Labour, Bristol South)

I shall deal with the point raised by the hon. Member for West Dorset before giving way to the hon. Member for Arundel and South Downs (Mr. Flight). One at a time, please. The Government have clearly demonstrated in the development of their policy that they are prepared to hold discussions and listen to the points that companies and many other people want to make about our proposals. There is no reason why that practice should not continue. Indeed, we have met a huge number of representative groups and large companies. The hon. Gentleman asks whether the Treasury and the Inland Revenue will engage in discussions with companies; of course we will, but we should do so anyway.

Howard Flight (Conservative, Arundel and South Downs)

It is perfectly reasonable that British-based multinationals should not have everything all ways round. However, much as I support our alliance with the United States, I would not wish to stimulate a massive gratuitous payment of tax to the United States authorities. It would be better if that tax came to the UK authorities.

Dawn Primarolo (Labour, Bristol South)

Indeed. As strong as our cultural, historical and business ties with the United States might be, our friendship would not extend to providing income for them. The hon. Gentleman knows a great deal about how complex the matter is, and he will have appreciated my points on providing certainty. I agree with my hon. Friend the Member for Brent, North about the way in which the debate has been handled. It has been fraught at times for me at the Dispatch Box, but I feel that I have accounted for myself and the Government's policy clearly. We have developed a good policy. My hon. Friend is right to pay tribute to the officials who have supported Ministers in that exercise at the Inland Revenue and the Treasury. I know that the hon. Member for Kingston and Surbiton does not believe everything he reads in the newspapers, so I can tell him that the scurrilous remarks about a division between political advisers and officials inside the Treasury and the Inland Revenue were not correct. The Treasury, the Inland Revenue, Ministers and special advisers work as a superb team to develop good policy—as we have done in this respect—with assistance from some others en route. I have dealt with the point about regulation and why section 806H of the Taxes Act 1988 deals with that. The hon. Member for Kingston and Surbiton asked about capital gains tax on mixer companies. There may be a slight misunderstanding about that. The Inland Revenue is currently consulting on the roll-over relief for capital gains on sales of substantial shareholdings. He will have heard me refer to that in Committee. That will include shareholdings in trading companies that would have avoided capital gains in the mixer companies. That is subject to current consultation by the Government, and would cover the point raised by the hon. Gentleman. Finally, the hon. Gentleman asked about yield. I direct him to the Inland Revenue's press release of 16 June. There have been huge estimates, with great variations, of how much would be raised or lost. I have explained how the Government systematically tried to measure the cost by looking at previous years. The Inland Revenue made it clear that given the scale of avoidance that has come to light since the Budget, the impact of the overall package represented by the changes—including onshore provisions—would be broadly similar to the estimates provided in the "Financial Statement and Budget Report". The hon. Gentleman wondered whether the Government were going to raise tax, but the figures are approximately the same. I hope, therefore, that I have dealt with all the issues that have been raised. I hope that this closes the chapter on double taxation relief for this Finance Bill.

CONTROLLED FOREIGN COMPANIES.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 14, in page 72, line 23, leave out clause 104.

Howard Flight (Conservative, Arundel and South Downs)

We believe that there are some major deficiencies in the schedule, which we did not address in Committee.

Oliver Letwin (Conservative, West Dorset)

The charade that we have just witnessed is necessitated by the fact that I must declare an interest. Again, I am not quite clear which, but I am sure that there will be one. Therefore, I am prohibited by the rules of advocacy from moving the amendment. I do not know what relationship my interests have to schedule 31. However, the rules of the House do not let one speculate, so we will, as always, play by the rules. We did not discuss schedule 31 in Committee and the sole responsibility for that lamentable fact lies with me. I was so concerned with schedule 30 that I did not notice that schedule 31 was on the agenda and failed to leap up in time. However, nothing much has been lost, because the right answer on Report is the same as the right answer would have been in Committee, which is that schedule 31 needs to be no part of this Bill. It is radically misconceived and the Government have just as good an opportunity to remedy it now by accepting the amendment to delete it as they would have had in Committee. I want to put on the record two critical points. The first is that the Conservative party has no truck whatever with the idea of people being able to construct arrangements for avoiding tax out of controlled foreign companies as a way of going about something quite other than trading business. That is the reason why we introduced controlled foreign companies provisions 16 years ago. There is nothing between us and the Government on the general principle that where a UK company seeks to engage in Bermuda cashbox activities or the like with a straightforward controlled foreign company, that needs to be stopped. The whole purpose of CFC legislation is to stop it. So far, so good. The second point is that, unfortunately, this is an area of great delicacy and complexity, involving a huge range of different transactions. As a consequence, it is extraordinarily difficult to disentangle entirely legitimate business manoeuvres from tax avoidance manoeuvres. I do not hold it against Ministers or officials that they have made a muck-up of schedule 31 because it is difficult to separate the two matters. However, the fact is that they have made a muck-up of it and, as a consequence, it needs to be withdrawn. That is not to say that some better constructed analogue of it could not come forward next year and do some good in the service of the British taxpayer. This, however, is not that analogue. It is a schedule that does some very wrong things—albeit, I think, unintentionally. I think that the Paymaster General is aware of some of those things, but she may not be aware of all of them. If she is aware of all of them, I apologise for going through them rather laboriously; but as, if she is aware of them, she should have done something about them, I think I can be forgiven for assuming that she is not. That is the only charitable explanation for the existence of schedule 31. I wish to draw attention to two problems in particular. The first is caused by a combination of paragraphs 4 and 8 of the schedule, and relates to the 50:50 joint venture. Let us suppose that there are two corporations, one UK-based and the other US-based, each of which holds an interest of more than 40 per cent. and less than 50.1 per cent. of a joint venture vehicle. If each corporation holds an interest of 50 per cent., both will fall into the category of companies holding an interest of more than 40 per cent. and less than 50.1 per cent., and will therefore be caught in the nexus of paragraphs 4 and 8. I am sure that the 40 per cent. rule is intended to capture certain nefarious tax-avoidance practices—practices unknown to me but, doubtless, known to the Minister and her officials. I do not doubt that such practices exist; nor do I doubt that we should find ways of dealing with them. The problem is that the Minister, I think unintentionally, will also catch an entirely legitimate set of business practices which I consider particularly important. Let us imagine that the UK and US companies that I mentioned earlier are involved in internet communications, or telecommunications generally. Let us suppose that they operate on the basis of a joint endeavour to provide major multinational customers with voice telephony or data transfer between the US and the UK, and that—not unnaturally—the UK partner seeks to service the UK-based elements while the US partner seeks to service the US-based elements. A standard voice telephony call along a straightforward transatlantic cable with indefensible rights of user attached has three components. There is the local and long-distance domestic access within the UK; there is the local and long-distance domestic access within the US, which involves two people, or sets of people, picking up their telephones; and there is the transatlantic component. A perfectly rational business structure to be used in such circumstances—a structure that may emerge from detailed negotiations in the setting up of a joint venture—may be the holding of three "pick and mix" sets of accounts. One may relate to the part of the pool charge that originates from the UK caller, and represents the resource cost of providing the UK domestic section of the call facilities. Another may relate to the US termination. The third may relate to the transatlantic element—and the transatlantic element may be accounted for through a 50:50 joint venture. It would be perfectly reasonable for that joint venture to be registered in, for instance, the media. We are not talking about a cash box: there is no intention to stuff the system with earnings from the UK in order to collect tax-free interest. The intention is simply to identify a low-tax jurisdiction, for legitimate taxpaying purposes and as part of a legitimate business structure, in which a 50:50 joint venture can be sensibly located—a venture in which the shared part of the call revenue can be placed, and in which the cost of that shared part will be recognised. In this instance, we are talking about the cost of the IRUs on the transatlantic cable and, perhaps, associated transmission equipment. I have described an entirely legitimate business practice and an entirely legitimate business structure. I do not know whether such things currently exist, although I speculate that they do, and if they do not they soon will. There are many other such cases, some of which I know exist, from personal experience. All those cases will be captured by the intersection of paragraphs 4 and 8. The joint venture that I have described will be regarded as a controlled foreign company, and that is wrong. The Financial Secretary will smile at this, inwardly or outwardly, but the effect of the provision is irrational. Moreover, it is unintentional. At least, I assume that it is; the Bill cannot have been intended to clobber such legitimate business practices. That is the first defect of schedule 31. I thought long and hard—and, more importantly, tried to persuade experts to do the same, as my capacities in this respect are distinctly limited—about the possibility of tabling specific amendments to deal with that defect, but I am afraid that it defeated us. I think that the structure of the schedule militates against a solution, and that is my first reason for believing that the schedule should be rewritten. I am mindful of the fact that, as the hon. Member for Kingston and Surbiton (Mr. Davey) said repeatedly in Committee, we do not want to complicate the situation by tabling "right" amendments on top of "wrong" schedules, ending up with a provision that no one understands. I fear that that would be the very result of trying to weave a solution into schedule 31 as it stands. Surely it would be far better to scrap the schedule, and bring it back next year. The amount that the Government will lose as a result of loopholes they have discovered will not be hugely significant in one year. Over time it may prove important, but I am sure that over time a solution can be found to whatever problems the Paymaster General considers to be real—and arise from tax avoidance manoeuvres—without the need to clobber the joint ventures to which I have referred. I do not know whether the Paymaster General already knows about the problem that I have identified. As I have said, if she does, she should have killed it already. I shall charitably assume that she does not.

Dawn Primarolo (Labour, Bristol South)

If the hon. Gentleman looks at the Bill, he will see that the motive test would apply. He has described a situation that revolves around not an intent to avoid tax, but the structure of the joint venture. The motive test, and other exceptions, would exempt a case of non-avoidance. I do not understand the hon. Gentleman's point. He says that he is against avoidance, but that there are some structures that do not fit the 50:50, 40:40 arrangement. Ours is the only country with the motive test and the other exemptions. If the purpose was not to avoid tax, presumably such structures would be all right.

Oliver Letwin (Conservative, West Dorset)

I hardly dare suggest it, but we may be making progress. If I tell the Paymaster General what I find worrying, perhaps she can lay my fears to rest for Pepper v. Hart purposes. I freely admit that I only dimly understand how the motive test will be applied by the courts. Indeed, I am not convinced that the great lawyers understand that yet. As I dimly understand it, however, the test does not distinguish clearly between two things. We need such a distinction here, and if the Minister can make the right statement we may be able to achieve it. The test does not distinguish clearly between manoeuvres designed purely to avoid tax—I agree that they should be clobbered—and arrangements of the kind I have described. While such arrangements are perfectly legitimate business manoeuvres, an element of them will have been the hope that—through onshore pooling and other legitimate means; by causing the subsidiary to be chosen to be in a low-tax jurisdiction—the net effect would be beneficial. That constitutes tax planning of a legitimate kind, not tax avoidance. if the Paymaster General is saying that the motive test—not only as she plans it but, much more importantly, as she intends it to apply to this case—would mean that, in the type of circumstances I was describing, that would be regarded not as an avoidance mechanism but as legitimate tax planning, as part of legitimate business activity, I think that we probably do have a solution to this particular problem.

Dawn Primarolo (Labour, Bristol South)

The motive test has been in place since 1984, when the previous Government introduced it, and has consistently worked perfectly well without the problems that the hon. Gentleman is describing. I assure him that the type of structures that he is identifying are not new ones. He has advanced two arguments, the first of which deals with what would happen if the activity was not avoidance under the 40:40 test. As I told him, the motive test is the key to determining how to deal with the matter. Secondly, the hon. Gentleman questioned whether the motive test was adequate. As I said, it has been working perfectly well since 1984 and has withstood the test of time. I think that I am right in saying that we use it also in transfer pricing. However, I shall double check on that to ensure that I am correct. I apologise for making a rather long intervention. Nevertheless, both the hon. Gentleman's points are answered in the legislation.

Oliver Letwin (Conservative, West Dorset)

There is no need to apologise for the length of the intervention. I think—as long as I am thinking straight through the haze of my indisposition—that the Paymaster General is probably saying what needs to be said. We shall later entirely discover. However, I think that she may have succeeded in removing my anxiety on that score.

Dawn Primarolo (Labour, Bristol South)

I think that we can certainly clear up these points, and it is important that the explanation is on the record. The motive test exempts controlled foreign companies that do not have United Kingdom tax avoidance as one of the main—I emphasis, the main—reasons for their existence or the transaction. I think that we can see a clear audit trail—involving motive, motive test, exemptions and current and past interpretation—that deals with the point that the hon. Gentleman is making. Clearly, CFC legislation takes account of legitimate activity, but—putting it very directly—nails those who are avoiding tax and for whom the CFC exists purely to help them to do that.

Oliver Letwin (Conservative, West Dorset)

If the hon. Lady is putting the emphasis that I think she is putting on the word "mainly", I think that it probably will capture the case that I was describing and similar cases, and that we probably will have a solution. Therefore, I think that we can probably rest easy on that—although, as I said, time will tell, as we go through the courts and hear how these matters are interpreted. Nevertheless, the hon. Lady's comments were very helpful.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I believe that the Paymaster General is right on this point. My only concern with the motive test in the legislation is whether, in the Inland Revenue's examination of a company's motive, there should be an appeal procedure. There is an appeal procedure in other spheres in which the motive test operates. Does the hon. Gentleman think that the absence of such a procedure is a deficiency in the Bill?

Oliver Letwin (Conservative, West Dorset)

I agree with the hon. Gentleman that if the motive test is to have placed on it the weight that the Paymaster General has most helpfully placed on it, it would also be helpful if there were an appeal procedure within the Inland Revenue—as the courts already have one. I certainly agree on that point. Let us turn to the second problem with schedule 31, which I think that the Paymaster General became aware of at a considerably earlier stage in our deliberations on the Bill. I think that she became aware of it through the representations of one particular company. In Committee, at a certain moment in the discussion of something quite else, the Paymaster General sounded as if she was saying that there was only one company in the whole of the United Kingdom that really was affected in the way that I am about to describe. I think that that was incautious and, in fact, false. Certainly, however, one company has brought to her attention the problem that I am about to bring to her attention. I can only assume that she thinks that the problem is not serious enough to worry about. It is serious enough to worry about. What is this particular problem? It is the problem of the Swiss-Lux Finance Company being used as part of a structure whose basic intention is not to avoid United Kingdom tax, but to benefit from the tax shield on interest costs of a higher-tax jurisdiction where the subject of an acquisition resides in the higher-tax jurisdiction. Let me try to disentangle that absolutely ghastly sentence.

Dawn Primarolo (Labour, Bristol South)

I think that I may be able to help the hon. Gentleman to untangle that ghastly sentence. Is he describing the transfer of losses into a country where the losses were not generated, to get the benefit of that country's relief?

Oliver Letwin (Conservative, West Dorset)

In a word, no. I am describing a situation in which a United Kingdom company, as a perfectly ordinary part of its business, acquires a company in another jurisdiction that has a higher corporate tax rate—it is a standard merger and acquisition by one trading company of another trading company; there is no question of any type of sheer financing manoeuvre—and in which it funds that acquisition, as many acquisitions are funded, partially or wholly through debt. Because company A, the United Kingdom company, is the acquirer, it will naturally fund the acquisition through debt raised by itself from its bankers. Therefore, stage 1 of the transaction is that the United Kingdom company—which was previously, for example, debt free—has acquired a huge lump of debt as a result of raising the money to buy company B in, shall we say, Germany, which has a high corporate tax rate. So far, there would be nothing between the Paymaster General and the Opposition. Everyone would agree that that is a completely legitimate acquisition activity. It may even lead to the creation of a great United Kingdom company. In fact, there is one instance in recent British history when it has led precisely, as I have described, to the creation of a great United Kingdom trading company. The next stage of the transaction is that the United Kingdom company in question—having acquired, first, the German subsidiary, and, secondly, the lump of debt in the United Kingdom—wants to find a way of refinancing that debt in the German subsidiary, so that—

Dawn Primarolo (Labour, Bristol South)

It can transfer losses.

Oliver Letwin (Conservative, West Dorset)

No. We are talking about transferring not losses, but acquisition debt. There is no reason on earth why the United Kingdom tax authorities should object to the transfer of acquisition debt from a United Kingdom acquirer to a subsidiary in a higher-tax jurisdiction. I cannot see any reason at all why that should be something to which the United Kingdom Treasury objects. I should point out that, if it really is something to which the United Kingdom Treasury and the Paymaster General object, they are signalling to all such potential acquirers in the United Kingdom that they should do reverse takeovers and end up with their headquarters in the higher-tax jurisdiction. I know that the Paymaster General is the chairman of an important—to my mind rather misguided, but, nevertheless, important—committee of the European Union that looks into these things, and I understand that she may have other interests and motives in the matter—which certainly are not illegitimate in any personal sense, but are part of an agenda that the Opposition do not share. None the less, just dwelling on this particular type of case, I cannot see any United Kingdom interest in trying so to arrange things that, in the circumstance that I have described, the United Kingdom acquirer prefers to have headquarters located in the high-tax jurisdiction by doing a reverse takeover. Such an arrangement would be a great disadvantage to the United Kingdom, its financial institutions, its accountants, its lawyers, its office cleaners and all the rest. It is all part of the same syndrome that we thought we had got over when the Government reversed the double tax relief provisions. What we are all trying to achieve, I hope, is attracting—not repelling—companies from locating their headquarters here. It is clear to me that I do not need to explain to the Paymaster General—I shall therefore only very briefly explain to the House—that, currently, the manoeuvre of locating acquisition debt in the high-tax jurisdiction subsidiary proceeds by means of having a Swiss-Lux Finance arrangement, whereby the Luxembourg company effectively lends money to the subsidiary in the high-tax jurisdiction and receives interest from it. That money is then used by the subsidiary to purchase shares in the acquirer so that the acquirer can pay off its UK debt. By those means, the debt is effectively relocated to the high-tax jurisdiction. That manoeuvre will be prevented by schedule 31(7). However, it is not in the interests of the UK to arrange matters so that such a manoeuvre is illegitimate, because the effect will be to persuade companies to locate their headquarters in the high-tax jurisdictions, which are likely to be other European countries. That cannot be to our national advantage. Having said all that, I am most preoccupied by the unfairness involved. Although the disadvantages are considerable, they are not as great as in the case of the double tax relief. Schedule 31(7) is an important, but not a catastrophic, mistake. What makes it necessary for us to oppose the provision is the fact that companies have already performed the manoeuvre in the legitimate expectation that it would not be clobbered retrospectively. The least that the Government should do—which would reduce the schedule from being appalling to merely very bad—is to agree that the provisions will not apply retrospectively. People will know in future that they need to plan around the provisions, but to apply them retrospectively is unfair and the Opposition cannot concur to that. I expect that the Paymaster General has received intensive briefing and clear explanations from at least one company. I happen to know that it is not the only one that will be affected, but it is the only one that has stuck its head above the parapet. The Paymaster General will probably admit—while displaying the same delicacy as I am in not naming the company—that the company is a reputable company. It is not a fly-by-night tax avoidance mechanism, but one of Britain's great trading companies. I disagree with the Paymaster General on many things, but I know that we share the patriotism that means we wish to encourage business to locate here. I cannot think that she wants to send out the message that if companies based in the UK behave in certain ways based on legitimate expectations, they will be retrospectively clobbered by Acts of Parliament. That has not been part of the tradition of our tax legislation and the Paymaster General cannot wish to see it happen now. if the Paymaster General can tell us, in the same tremendous spirit of co-operation and sympathy that she displayed in relation to earlier problems, that the legislation will not apply retrospectively, for some reason that I have missed, it will at least not be catastrophic, although it will militate against future acquirers locating in the UK. A much better solution would be to redo schedule 31(7) so that it would not have that effect. That is the solution that we seek and the reason why we shall push the amendment to a vote.

Dawn Primarolo (Labour, Bristol South)

I shall clear up a couple of points before I turn to the issue of acquisition. It was, I believe, the hon. Member for Kingston and Surbiton (Mr. Davey), as well as the hon. Member for West Dorset (Mr. Letwin), who raised the issue of whether the motive test was appealable. The answer is yes. Under self-assessment, it is for companies to assess whether their controlled foreign companies pass the motive test. They have been capable of doing that since 1984, as I explained. If the Inland Revenue disagrees with the self-assessment, it can amend it. As in any other case in which the Inland Revenue makes such an amendment, the company can appeal against it. The case goes to the commissioners and can then go to the courts.

Oliver Letwin (Conservative, West Dorset)

That is helpful.

Dawn Primarolo (Labour, Bristol South)

Thus far, but no further. I have a feeling that we will have to agree to disagree on the rest, because we do not accept the amendment. To remove in their entirety the anti-avoidance measures on controlled foreign companies would be crazy. I am a little surprised that the hon. Gentleman suggests doing so because he is otherwise clear on the issues of avoidance. The amendment is reckless and the beneficiaries would be those multinationals which wish to avoid paying their fair share of UK tax. The losers would be the hard-working families of this country and other companies which would face increased taxation or poorer services because of lower tax receipts. I am sure that the hon. Gentleman does not wish to be seen to support the corporate tax scams and wheezes that the amendment would allow. The hon. Gentleman will be familiar with the opinion in the International Tax Review, which in September 1998 specifically highlighted the fact that the use of the controlled foreign company and exempt international holding companies was a method of avoiding tax. Indeed, the article expressed surprise that the arrangements were not being blocked and it was written by none other than the leading accountant at the then Price Waterhouse, which the Opposition have been keen to quote during these debates. On the issue of acquisition, I shall make a few preliminary points and then deal specifically with debt transfer. There are four sets of changes in the arrangements for controlled foreign companies, and the point about acquisition is pertinent to the fourth. That change stops the automatic exemption for holding companies from being abused to avoid UK tax on intra-group interests and royalties. As we have discussed, holding companies are generally outside the controlled foreign company rules if at least 90 per cent. of their income comes from companies that meet one or more of the controlled foreign company exemptions. Generally speaking, that makes sense when the income is a dividend paid out of post-tax profits. There is a logic in saying that, from the point of view of the UK Exchequer, it is largely immaterial whether the post-tax profits of a non-resident subsidiary are held in the subsidiary or in the non-resident holding company. However, the current rules are not restricted to holding companies that receive their income from post-tax profits. They apply equally where the income consists of interest and royalties paid from pre-tax profits. In those circumstances, pre-tax profits are shifted from the subsidiary to the holding company. There is a tax deduction in the subsidiary, and a new source of income in the holding company. The current exemption distorts the way in which some investments are structured, and is leading to a loss of tax for the UK. Multinational companies use offshore holding companies to extract tax-free profit from overseas subsidiaries. They then keep those profits outside the UK tax net. That is part of the problem that the Government are dealing with, but I hope that the hon. Member for West Dorset will accept that several relationships are involved. The Bill will ensure that the automatic exemption for holding companies is passed only when more than 90 per cent. of the holding company's income is received in the form of a dividend that is not tax deductible. The change does not introduce any new principle to the controlled foreign company rules. Other ways of diverting the pre-tax profits of overseas subsidiaries into tax havens and preferential regimes are already covered. The Bill will introduce a logical and coherent set of rules by applying to the holding company exemption the same principles that apply to the rest of the controlled foreign company legislation introduced by the Conservatives in 1984. It has been suggested that some multinationals—I shall not name them for reasons of taxpayer confidentiality—are using loans from holding companies to reduce foreign tax, rather than UK tax. That is the point that the hon. Member for West Dorset is focusing on, and I hope that he will be happy with what I have to say next. If a company is not seeking to avoid UK tax it will, of course, get through the motive test—end of story. However, holding companies typically use debt finance to reduce both foreign tax and UK tax. It is in those circumstances that the controlled foreign company legislation would bite. I hope that the hon. Gentleman appreciates the distinction. He said that he does not agree with avoidance of UK tax, and that he was talking about the transfer of debt into foreign jurisdictions. As long as that transfer does not lead to a reduction in UK tax liability, the CFC legislation will not bite.

Oliver Letwin (Conservative, West Dorset)

That is helpful, but although the main purpose of the manoeuvre that we are talking about was to reduce costs through reducing tax in a foreign jurisdiction, the by-product was that tax in the UK was also reduced. Does not the Paymaster General think that it would be wrong retrospectively to clobber people who had made plans based on legitimate expectations regarding the law as it previously existed?

Dawn Primarolo (Labour, Bristol South)

With respect, I do not understand how the hon. Gentleman can say that the Bill will clobber such people retrospectively. The rules have made it clear that companies could not use controlled foreign companies to reduce their UK tax liability, or to avoid it completely. The Bill proposes amendments to our controlled foreign company legislation because some have sought to circumvent the clear intent of that legislation. The hon. Member for West Dorset will know that controlled foreign company legislation is used throughout Europe and north America. The UK is the only country in the world that has a motive test, and we recognise that it can be commercially legitimate to use such companies. However, a company that is avoiding its UK tax liability will be caught by the controlled foreign company legislation. I make no apology for that, as such a company should pay to the Government the tax for which it is liable.

Oliver Letwin (Conservative, West Dorset)

I persist in believing that the Paymaster General is missing a point. The fundamental purpose of the manoeuvre that we have been discussing is to obtain a reduction in the foreign jurisdiction tax by displacing the debt to the subsidiary; in that case, the CFC is being used not to avoid UK tax, but to reduce tax in the other jurisdiction. However, it may be that a by-product is to reduce UK tax liability, and in that case it seems quite unfair retrospectively to deal a blow.

Dawn Primarolo (Labour, Bristol South)

I do not agree. As we discussed in our previous debate, there has been much comment and many representations on the double taxation relief set out in schedule 30. We have received far fewer observations on the controlled foreign company provisions in schedule 31. Indeed, without breaking any confidences about which companies were involved, it is accurate to say that the majority of companies that made representations on the double taxation relief entirely supported our measures in respect of legislation on CFCs—in fact, some thought that we should go further than we have done. A small number of companies were attempting to use CFC legislation to avoid UK tax, and they have, of course, been quite vocal, but their comments are not representative of the far larger number of companies and professional advisers who have discussed these matters with us. The hon. Gentleman should not expect us to make legislation for the exceptions that attempt to reduce their tax liability in the UK when every other multinational is paying that liability. Therefore, should the hon. Gentleman push his amendment to a vote, I shall ask my hon. Friends to reject it.

Oliver Letwin (Conservative, West Dorset)

Although I appreciate that the Paymaster General is attempting to block off a species of tax avoidance that we agree should be blocked off, she is also blocking off manoeuvres that are perfectly legitimate, and I am bound to say that I persist in believing that she is doing so retrospectively and unfairly. In the circumstances, we shall press the amendment to a vote and I urge my right hon. and hon. Friends to vote against the schedule and in favour of our amendment. I hope that the Paymaster General will reconsider the measure, as she has on double taxation relief, because its long-term effects will be severely deleterious to our industry.

Dawn Primarolo (Labour, Bristol South)

I shall urge my hon. Friends to support the Government amendments, including Government amendment No. 91, because I am not persuaded by the hon. Gentleman's arguments. We shall not be able to reach agreement on the matter.

FOREIGN EXCHANGE GAINS AND LOSSES: USE OF LOCAL CURRENCY

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 155, in page 77, line 11, leave out clause 106. This is a probing amendment. We have been approached by the Chartered Institute of Taxation and the Law Society, which are still concerned about the wide scope of the wording of proposed new section 135A of the Finance Act 1993. In their opinion, the new provision is still capable of catching many companies that prepare their accounts in foreign currency for perfectly normal, commercial reasons rather than because of tax factors. Both organisations expressed the concern that the test remains an expected main benefit test as opposed to a purpose test. The question posed is what is the main benefit that might be expected to accrue from exchange gains having to be computed for tax purposes by reference to a particular currency, rather than the relevant question as to what is the main benefit that might be expected to accrue from drawing up commercial accounts in a particular currency. The expected benefits of a transaction is the expected result, whereas a purpose test is a motive test. A company's motive in choosing to use a particular reporting currency might have been to avoid exchange fluctuations where the majority of its assets or liabilities are denominated in that currency, but, applying the proposed new section 135A, it may be possible to conclude that the expected main benefit of using the currency was that the company would avoid realising an exchange gain under the foreign exchange legislation. 9.15 pm The key concerns about this anti-avoidance provision are whether wider commercial factors can be taken into account and at which time the expected main benefit test is to be applied. Those issues exercised the institute and the Law Society; both expressed concern that the new test could catch a large number of the investment companies that the reforms in clauses 106 and 107 are introduced to assist. Will the Minister offer assurances that commercial factors can be taken into account, and that the expected benefit is to be judged at the time when a company first prepares its accounts in foreign currency? Will she also confirm that the provisions of the section will not apply when a company is preparing its accounts in foreign currency, in accordance with normal accounting practice, in order to avoid its results being distorted by exchange rate fluctuations? The current provisions are widely drawn, and it would be most welcome and helpful if the Minister would give us a clear statement on the cases to which the anti-avoidance provision might be applied.

Dawn Primarolo (Labour, Bristol South)

The amendment would remove clause 106. That clause contains several provisions to support changes introduced by clause 105 to improve the tax system for international companies. Those changes have been widely welcomed because they will make the United Kingdom a more attractive base for international companies. As those supporting measures are necessary to enable the new system to fit in with the existing law, I realise that the Opposition's attempt to drop the whole clause is not serious. Indeed, the hon. Member for Arundel and South Downs (Mr. Flight) admitted that the amendment is a probing one, and that the real concern is about the part of clause 106 that deals with the new anti-avoidance measures in the clause: the new section 135A of the Finance Act 1993, designed to stop the new rules established under clause 105 being exploited to avoid tax. As the hon. Gentleman knows, the effect of section 135A is to undo the application of the new rules where the main benefit that might be expected to accrue to a company from using a particular currency in its accounts is that a taxable currency gain would not be recognised. In Committee, the Government made it clear that the rule will apply only where net exchange gains would be cancelled out. That demonstrates that we are interested in the overall position of the company and not in the effect of individual transactions considered in isolation. The hon. Gentleman continues to express concerns about the scope of the rule, however, so I shall try to reassure him with some comments that I prepared earlier—as they say on "Blue Peter". These comments will also cover points of interest to others who read our proceedings. Let me emphasise first that the new rule is intended to catch avoidance. It is not aimed at any particular type of company or business, but seeks to ensure that the new system of calculating tax, based on a company's accounts, cannot be abused to avoid tax. So trading companies and investment companies conducting their business in a normal, commercial way will not be affected. The point of the test is to establish whether the main benefit that might be expected to accrue to a company from the structuring and accounting of assets and liabilities in a particular currency is that a net exchange gain would be avoided. The wording of the test allows for commercial considerations to be taken into account. For example, even if the currency adopted in the company's accounts was particularly weak or strong, if it made commercial sense to use that particular currency and the company's assets and liabilities in that currency were broadly matched, no net exchange gains would have been expected to have been avoided, and the section would not apply. Where a net gain has been avoided, the test would still be whether the main benefit from using the currency was the furtherance of the commercial purposes of the company or the avoidance of that exchange gain. The Government believe that a company will normally be able to judge whether it would pass or fail this test. In particular, a company will know whether the decision to account in a particular currency makes commercial sense or whether the structuring and accounting of the company's affairs has been skewed to avoid generating taxable exchange gains. To conclude, let me reiterate that the new rule is intended to tackle avoidance. It will not affect legitimate business undertaken by any company, whether that company is a trading company or an investment company. However, it will affect companies that aim to exploit the new rules for a tax benefit. I hope that those remarks clarify the scope of the provision and give the hon. Gentleman some of the reassurances that he and others seek on the implementation of the clause. The Inland Revenue will also be providing some written guidance on how the provision will be applied. Given this clarification, perhaps the hon. Gentleman will now feel able to withdraw his amendment. It is only regrettable that we did not have an opportunity to cover these points more fully in Committee.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Paymaster General for her helpful comments. I beg to ask leave to withdraw the amendment.

OVERSEAS LIFE ASSURANCE BUSINESS

Melanie Johnson (Labour, Welwyn Hatfield)

I beg to move amendment No. 64, in page 79, line 29, leave out from beginning to "an" in line 30 and insert "Where".

Melanie Johnson (Labour, Welwyn Hatfield)

Clause 107 deals with tax deductions for general insurance reserves and introduces the principle of discounting. It consists mainly of regulation-making powers, and this use of regulations has allowed for consultation with the insurance industry, which has been undertaken, and which good continues—to good effect. The amendments will allow regulations made under the clause to incorporate a change to the original proposals which was suggested in the course of consultation. In order to explain the amendments, I will briefly explain the effect of the clause. Regulations made under the clause will introduce a process of recalculation of the tax deduction for a year. If it turns out that the tax deduction exceeded a discounted value of actual costs, additions will be made to taxable profits. The additions will be calculated like interest charges, so the effect will be to charge interest on tax that has been delayed because tax deductions have been too large. This leads to the question of what should happen if it turns out that a deduction was too low. It is right that this situation should be recognised, alongside the case where a deduction is too high. If a deduction was too low, an amount of interest will also be calculated and it will be given as a tax relief for the insurer. The consultation paper for the secondary legislation proposed allowing this relief only against interest additions made under the clause, and only in the same year or a later year. In Committee, I agreed that this relief should be made more widely available than was originally proposed, and suggested two options—that relief be available against all trading profits, or that it should be available to carry back to an earlier year. Industry representatives have suggested that the two options should be combined, with a general right of set-off in the same year, combined with a limited right of set-off in an earlier year. Of the two options, their preference was for an unlimited set-off in the same year. The amendments to the clause will make this change, by providing that interest on overpaid tax will take the form of additional trade expenses. The expenses will be available in the normal way against all taxable profits arising in the same year. If they create a loss, there will be the usual one-year loss relief carry-back. The amended clause also leaves open the possibility of a limited form of carry-back of relief to an earlier year. This is, however, a matter for secondary legislation, and will be decided following further consultation, along with other matters of detail. The amendments create an even-handed approach in the way the clause deals with overpayments and underpayments of tax. In this way, the clause will ensure that the tax outcomes are fair to the Exchequer and fair to insurance companies.

Michael Jack (Conservative, Fylde)

When we discussed this in Committee, concern was expressed that the clause as originally drafted would disadvantage UK insurance companies in comparison with world competitors because of the global nature of the insurance market. In the discussions that were subsequently held with the industry, did the Economic Secretary receive positive assurances from the industry that the amendments addressed the competition issue to its satisfaction?

Melanie Johnson (Labour, Welwyn Hatfield)

Many countries, including the United States, Canada, Australia and Germany, already require discounting for tax purposes. France has rules very similar to our proposals to counter over-reserving. The UK has the lowest rates of corporation tax of any major industrialised nation. The long-term costs of the clause to the industry will be far less than the cost of typical European corporate tax rates, which are about 10 per cent. higher than in the UK. The cost is also much less than the industry would pay if insurance premium tax were increased to typical European rates. Our rates are well under European rates. Companies can choose to base their tax deductions on discounted liabilities. That will cost them more in the short term, but it will reduce or eliminate their long-term costs. They can choose to do that all at once, or to spread the costs over several years. Therefore, the clause will not produce a competitive disadvantage for UK insurers. I hope that that answers the right hon. Gentleman's question.

John Greenway (Conservative, Ryedale)

I beg the Paymaster General to revisit what she has said because companies do not pay insurance premium tax; consumers do. If I am lucky enough to catch your eye, Mr. Deputy Speaker, I shall acknowledge that the current provision represents a significant improvement on the original proposal. However, such issues are still not entirely resolved to the satisfaction of those of us who are concerned about the continuing competitiveness of the UK insurance industry.

Melanie Johnson (Labour, Welwyn Hatfield)

The point that the hon. Gentleman makes about insurance premium tax is correct. Nevertheless, if we were to raise the rate of insurance premium tax, he would say that that would, in effect, cost the companies money, or that the cost would be passed on to the consumer. The cost is not lost depending on the point at which it enters or leaves the system; it affects the entire system. That point would always be made in such circumstances. On the general principle of such discounting, there is an increasing acceptance that the proposal represents the right way to proceed. In Committee, I put on record the joint response to the proposal of the International Accounting Standards Committee. Perhaps it is worth while briefly reminding hon. Members of that comment on discounting. The IASC's steering committee concluded that the use of the present value in measuring general insurance claim liabilities is consistent with the emphasis on information that is relevant and decision-useful. A claim that is payable within one month imposes a higher economic burden than a claim for a similar amount that is paid two years in the future. The use of present value allows financial statements to provide information that differentiates those claims from each other. The steering committee found no basis to exempt general insurance claim liabilities from the present value measurement. That was not a lone voice, as was suggested in Committee. The IASC's view has been widely endorsed by UK accountants, actuaries and companies. There has been a joint response to the proposals on insurance accounting from the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants in Scotland, the Faculty of Actuaries in Scotland, the Institute of Actuaries and the Association of British Insurers. Their joint comment on discounting was simple. They agree that the use of present value in measuring general insurance claims is appropriate. That is the key issue. Our large insurance companies agreed with that view. CGNU expressed support for the joint response, and Royal and Sun Alliance commented: We do not think there is any argument for not discounting general business under a fair value basis of measurement of liabilities. There is overwhelming support for the principle of discounting. That is at issue here, and the matter is being dealt with even-handedly in response to those representations. 9.30 pm I appreciate that the hon. Member for Arundel and South Downs (Mr. Flight) has not yet spoken to his amendments, but perhaps I might comment briefly. Amendment No. 152 would allow companies to elect to reduce their tax deductions to a discounted best estimate of liabilities, creating what has been called a safe harbour. In return, a company that so elected would be given immunity from later interest charges. However, that change would not sit well with the other provisions in clause 107, which sets out a wholly automatic approach to determining tax liabilities. The clause would not require matters of judgment to be decided on or argued about between the insurance company and the Inland Revenue. I could go into much more detail in response to whatever points the hon. Gentleman makes, but the amendment would add an element that could be disputed. I suggest that it might be subject to considerable legal activity, which would probably not benefit anyone except the lawyers. Under amendment No. 153, the discount rate would not be prescribed by secondary legislation. Indeed, it suggests that the legislation should merely specify that the discount rate should be the "commercial" rate. That seems to be a recipe for disagreement. Requiring that the rate be commercial is not good enough properly to describe what is needed and companies, tax inspectors and the courts would have insufficient guidance. To avoid ambiguity, the rate must be prescribed in secondary legislation. Perhaps a commitment is being sought that the discount rate will include an allowance for risk. I await clarification. I gave such a commitment in Committee, but, if that is the issue, I am pleased to do so again and reassure Conservative Members that it holds just as true.

Michael Jack (Conservative, Fylde)

The Minister said that an allowance for risk would be made, which is an important point. Will she be kind enough to develop that by saying how the amount is to be calculated?

Melanie Johnson (Labour, Welwyn Hatfield)

The allowance for risk in the discounting calculation could be made either by including a margin for error in the undiscounted value and then discounting the result, or by including an allowance for risk in the discounted rate. There may be some combination of the two. If the legislation did no more than specify that the discount rate should include commercial allowance for risk, that would be ambiguous. It would not specify the commercial purpose, as is suggested by a commercial allowance for risk, nor would it deal with the related question of the margin for error. The proper allowance for risk will be prescribed in secondary legislation, along with the determination of a proper margin for error and other matters of detail. Draft regulations will be made available for comment at the appropriate time.

Michael Jack (Conservative, Fylde)

The Minister says that the question of risk will be the subject of secondary legislation. Will she give an assurance that the insurance industry will be consulted on the legislation's detailed points so that it may have an input?

Melanie Johnson (Labour, Welwyn Hatfield)

I have no difficulty in giving the right hon. Gentleman that assurance as we want to achieve legislation that is workable and right. I have given a commitment on the discount rate and the way in which it will be considered. Amendment No. 154 would insert "or rates" alongside the reference to a discount rate. The amendment is not necessary, but perhaps clarification is being sought and I hope to provide it. I can confirm that clause 107 would allow secondary legislation to specify different rates for different types of business. For example, it would allow discounting to proceed according to a non-sterling rate when the liabilities were denominated in another currency. In view of those assurances, I trust that the amendment will be withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I begin by welcoming the Government amendments and the concessions. Despite those, the industry still feels that clause 107 is damaging to UK competitiveness and, ultimately, not worth the candle of the revenue that it will generate. The amendments are to permit insurers to treat the negative adjustments arising from under-reserving as expenses of the trade. Those are welcome. The Revenue has also indicated that, if the negative adjustment remains unrelieved, it should be allowed to be carried back against previous positives. It has suggested that subsection (5)(c)(i) and (ii) as amended permits that. It would be helpful if the Minister confirmed that understanding in responding. What is particularly welcome is that the recognition of risk in the discounting calculation will be on a commercial basis. As well as the references made by the Minister, I mention her letter to my hon. Friend the Member for Ryedale (Mr. Greenway). It states: I agree that the discounting calculation should proceed on a commercial basis, which is why I gave a commitment during the debate that the discount would include a risk margin. I take a few minutes to put on the record a summary of why the industry is still not happy with clause 107 and remains opposed to it in principle. As we know, the clause introduces both discounting and a retrospective recalculation regime for tax purposes for insurers. The proposals create a harsher regime than those applicable to other UK companies, even after the concessions and amendments that have been announced. Unlike other UK companies, insurers are required to compute claim provisions on the basis of 100 per cent. accuracy, with interest charges where that is not achieved. The Revenue's initial proposals were to allow a small—some 5 per cent.—margin of tolerance. The Revenue has indicated that that margin may not be necessary on the basis of the discount rate taking account of risk, but the industry continues to believe that the discount rate and the margin achieve different, although connected, objectives and that the margin should remain. The insurance industry, unlike other businesses, will be taxed on its liabilities, which is different from being taxed on its accounts, and required to discount in all circumstances. In our view, the proposals remain harsher than the rules on discounting applying to other insurance markets. Indeed, many other businesses—banking in particular—make reserves, but have no requirement to discount. However, the proposals are harsher in the sense that the ability to write insurance cross-border in European insurance markets and the developments in telephone and e-commerce mean that insurers in other European Union member states must be seen as domestic competitors not subject to these measures, which will apply to UK-based insurers. While the Government have argued correctly that UK corporation tax rates are among the lowest in Europe, there is a general move to lower company taxation in Europe. As the Government know, Ireland is the main threat to the UK industry; it is rapidly expanding its financial services and the insurance sector, which has not introduced discounting, and it is reducing its corporation tax to 12.5 per cent. as of January 2003. As was pointed out in Committee, comparisons with insurers in other countries such as the United States are difficult because of the different regulatory rules and more protected domestic markets. The international business, meanwhile, is highly mobile, and the proposals are negative for the continued success of the UK as the centre for both national insurance and reinsurance. The compliance, regulatory and administrative aspects of the proposals are complex and can lead to uncertainty. They are burdensome and make operating in the UK difficult. The Government have calculated the cost of the proposals to insurers at £250 million, but that does not include the effect on insurers' balance sheets, and therefore the cost of capital. Under the regime, insurers have two choices: to pay more tax later and recognise a future liability both in their accounts and for regulatory purposes now, or to pay more tax now and set up a deferred tax asset not normally recognised for solvency purposes. With regard to the weakening of the capital base of companies, one leading group estimates that the effect on it will be some £140 million, in line with estimates by other groups. In summary, despite the Government's welcome attempts to make their proposals more realistic to operate, the proposals are harsh on short-tail business compared with other sectors, and particularly harsh on long-tail, largely international and increasingly mobile lines of insurance, where competitiveness is of the utmost importance. As the Minister pointed out, our amendment No. 152 is designed to create a safe harbour. Contrary to the hon. Lady's comments, we remain of the view that that is appropriate within the regime that the Government seek to put in place. The amendment would allow insurers to elect for an alternative to the hindsight test in the Government's proposals. The proposed freedom to pay more tax liability will not relieve insurers from the requirement to make retrospective recalculations. Any insurer electing to pay tax earlier can therefore still be subject to prolonged uncertainty about the eventual tax position. The amendment would allow the industry to explore with the Revenue whether an alternative arrangement might be available as an option. It has been described as a "make your bed and lie on it" approach, and could be based on previous years' experience. The industry's aim is, indeed, to agree a safe harbour arrangement, which would satisfy the Revenue's concerns and protect insurers and pension funds investing in insurance companies from the uncertainty and significant additional compliance costs involved in the retrospective recalculations. Without the amendment, clause 107 would not permit an election for a safe harbour. The amendment permits such an option to be available if subsequent consultation between the Revenue and the industry shows that arrangement to be feasible. In amendment No. 153, the intent of the word "commercial" is not, as the Minister suggested, to create a confusing situation, but that the rates prescribed should be commercial which, as the Minister kindly confirmed, is the Government's aim. Amendment No. 154 is designed to seek confirmation that more than one rate of discount could be applied, as different rates are likely to be appropriate to different classes of business. The two amendments aim at the same objective. In short, although there appear to be those in the Treasury or Revenue who are determined to achieve their long-term objective of shifting to a discounting regime, we do not see that in terms of revenue—the Minister made it clear that the £250 million was the total over time, not a per annum figure—that is worth the candle, compared with the damage, albeit not huge, to the international competitiveness of the industry. If, as seems likely, the Government intend to pursue their objective, we look to them to co-operate with the industry, as they have done, to make their proposed new regime as workable as possible and to minimise the damage to the industry's competitiveness.

John Greenway (Conservative, Ryedale)

It is some time since I spoke on Report on a Finance Bill. As a Front-Bench spokesman with other responsibilities, I felt it convenient and right to leave my right hon. and hon. Friends on the Opposition Front Bench, who have done an admirable job with the Bill, to deal with the issues of the day that arise from the measures that the Government have brought forward in the Finance Bill. However, as the chairman of the all-party group on insurance and financial services, I have been on the receiving end of probably more concerned lobbying on the issue raised by the amendment than any that I can remember for quite some time. I am happy to remind the House of my interests in the insurance industry.

Graham Allen (Labour, Nottingham North)

Ah!

John Greenway (Conservative, Ryedale)

None of my interests affects the issue that is before us. The insurance broking and intermediary profession, unlike insurance companies, have no interest. The insurance company interest is the interest of us all because most of our constituents are policy holders with those companies. I shall make a brief contribution. I do not wish to take up the admirable speech of my hon. Friend the Member for Arundel and South Downs (Mr. Flight), who has handled the issue with his typical expertise. Nor do I wish to deny the Minister gratitude that the Government have been listening to the concerns of the industry. I wish merely to ask, now that we have narrowed the Government's proposals down to the small point that they intend to pursue, whether it is worth while to continue with what is proposed. If, as the Minister and my hon. Friend the Member for Arundel and South Downs say, the amount of revenue that is to be raised is small, what is the point of potentially disadvantaging our general insurance industry, which is one of the great earners on our balance of trade? I am talking of invisibles, but they are important. I hope that I shall make three telling points. First, the regime that is being imposed is both retrospective and harsher in its nature than comparable regimes in other countries within the European Union. The Minister shakes her head, but that is what I am advised. That must mean that there is a competitive disadvantage. The hon. Lady talked about fair value, but the issue is fair competition. No one denies that there are other mechanisms in place in other member states which we do not have. It is understandable that the Treasury wants in some way to balance things up. Revenue has to be raised, and there has to be fairness in so doing. However, I urge the hon. Lady to view these matters on the basis of fairness and competition. The second and crucial point is that insurance companies will now be taxed, even on what has been agreed so far, on a basis that is different from their accounts. I do not see the logic of that. I again ask the Minister to consider the mischief that the Government are) to deal with. The third and most important point of all, given that this is not the final stage of the process, is to ask the Minister to continue to be receptive to contributions and consultations from and with the industry on the final outcome of secondary legislation. I understand that some of the features with which the industry remains concerned can be ironed out. We accept that the Government intend to go ahead, and before the night is over the Bill will receive its Third Reading. The Bill will set out the law with which the industry will have to work. I simply plead with the Economic Secretary not to hamper the competitive advantage that our general insurance industry—one of this country's success stories—enjoys because that would inevitably lead to more business moving offshore. My hon. Friend referred to e-commerce and internet business, and that is a matter for the future. We are dealing with this issue from an historic perspective and not considering how business will be done in the future. The House should ensure that our great insurance industry remains not just competitive, but capable of competing in every market throughout the world and of maintaining its predominant market share in general insurance in this country. That should be our objective. I understand that, from time to time, we must consider how insurance companies are taxed. However, we must not hamper them in a way that drives business away and allows competitor companies overseas to gain a bigger share of our market than is justified.

Melanie Johnson (Labour, Welwyn Hatfield)

So that Opposition Members are clear about the position, let me reiterate what I said in Committee about the costs involved. The hon. Member for Arundel and South Downs (Mr. Flight) remarked on the figure of £250 million. That sum builds up over a 10 or 11-year period and it is the figure per annum from that time. Hon. Members have referred to fairness. The issue comes down to the fact that the insurance sector uniquely has not had its liabilities discounted previously. That is unique to the United Kingdom and it means that the sector has obtained its tax deductions on a wholly undiscounted basis.

Howard Flight (Conservative, Arundel and South Downs)

I wish to make two key points on the fact that the industry is apparently unique. First, the banking industry is a greater maker of provisions against bad debts. Those provisions are sometimes inadequate and sometimes too high but, as far as I am aware, they do not need to be discounted. Secondly, it is the normal practice of the insurance industry to discount its own provisions; they are already discounted. In Committee, the Economic Secretary made the point that the data of the Department of Trade and Industry have generally shown a tendency to under-provisioning and not to over-provisioning as a tax avoidance measure.

Melanie Johnson (Labour, Welwyn Hatfield)

This is getting complicated. I said that the DTI's reports are based on non-discounted reserves, so one cannot draw the conclusions that the hon. Gentleman wants to draw from those reports. I was comparing insurance companies and I said that their position was unique in the UK. At this hour, it is perhaps wise not to start a debate on banking at the same time as a debate on the insurance industry. However, to base tax deductions on the discounted value of liabilities, it is necessary for the tax to move on to a different basis for that account. The position has been unusual. Although the hon. Gentleman says that, in effect, the companies have discounted in any case, the point is that that has not been a requirement of the system. They have therefore been in an unusual position. He mentioned the way in which the proposals could add significantly to companies' capital requirements on balance sheets However, the clause will give companies a choice and I thought that I had made that point clear. If they wish, they can choose to base their tax deductions on the discounted liabilities. If they do that, they will not be obliged to include any tax liability on their balance sheets through the clause and the amendment. There will be no effect on capital requirements if companies make that choice. If they do not, capital requirements will be affected. However, that is not inevitable. The hon. Member for Arundel and South Downs also asked for confirmation about the allowance for risk in the discount rate and whether a margin of error would continue to exist. An allowance for risk may be combined with a margin of error. However, two sorts of allowance for risk are related. The existence of a margin of error may therefore have a bearing on the extent of the allowance for risk in the discount rate. It is important to achieve a proper balance in secondary legislation between the different means of recognising risk. There will probably be further discussion with the industry and the Inland Revenue to achieve the right balance. We do not need to determine it today. I hope that that reassures the hon. Gentleman. Let me revert briefly to safe harbours because I did not argue much of the case on them. I do not believe that the hon. Member for Arundel and South Downs has taken account of a couple of central points. First, a safe harbour depends on the notion of a discounted best estimate. Integral to that notion is some method of determining what constitutes a best estimate. I suggest that that simply moves the question a stage further down the line. It would therefore be a matter of determining the calculation, which could involve extensive debate between insurance companies, the Inland Revenue and possibly the courts. Tax inspectors in the courts are not well placed to make decisions about insurance reserves. Certainty would not therefore ensue. Let us consider certainty. Even for, for example, oil rigs and nuclear decommissioning, where matters are uncertain, all the provisions are discounted. There should probably always have been discounting in the insurance industry, too. On safe harbours, there is no way of creating certainty for something that is inherently uncertain, namely the insurance business. Companies accept uncertainty from their business. Nobody is certain about future tax charges. Apart from uncertainty about future business results, there is always the possibility of changes to tax law. Whenever deductions are made for unpaid liabilities, it inevitably adds to uncertainty about future tax. Some uncertainty is inherent in the insurance business. I do not believe that Conservative amendments would have the intended effect of removing the tax uncertainty. However, they have great potential for litigation. They would increase uncertainty and lead to greatly increased costs for the insurance companies and the Inland Revenue. I hope that hon. Members accept that the assurances that I have given will be helpful to them and the industry. We have reached greater agreement with the industry through our discussions in the past few weeks. I hope that hon. Members will support the amendment. Amendment agreed to. Amendments made: No. 65, in page 79, line 33, leave out "and (b)" and insert— '(a) subsection (2) below applies if. No. 66, in page 79, line 35, at end insert— 'and (b) subsection (2A) below applies if it becomes apparent in such a period that that amount was insufficient.'. No. 67, in page 79, line 40, at end insert— '(2A) For the purpose of making good to the general insurer the loss occasioned by the deficiency, an amount calculated by applying, for a prescribed period, a prescribed rate of interest to the amount of the deficiency shall be treated as an expense of the general insurer's trade in computing for tax purposes the profits of that trade for the later period of account.'. No. 68, in page 80, line 7, leave out "and (2)" and insert "to (2A)". No. 69, in page 80, line 8, after "excessive" insert "or insufficient". No. 70, in page 80, line 9, after "excess" insert "or deficiency". No. 71, in page 80, line 12, leave out "and (2) " and insert "to (2A)". No. 72, in page 80, line 17, after "receipt" insert "or expense". No. 73, in page 81, line 39, leave out— 'above is treated as a receipt' and insert— 'or (2A) above is treated as a receipt or expense'. No. 74, in page 81, line 47, after "(2)" and insert "or (2A)". No. 75, in page 82, line 4, leave out "and (2)" and insert "to (2A)". No. 76, in page 82, line 7, leave out— 'period of account mentioned in paragraph (a) of and insert— 'first period of account mentioned in'. No. 77, in page 82, line 9, leave out "paragraph (b) of".—[Mr. Allen.]

PAYMENTS UNDER DEDUCTION OF TAX

TRANSFER OF PROPERTY BETWEEN ASSOCIATED COMPANIES: GREAT BRITAIN

TRANSFER OF PROPERTY BETWEEN ASSOCIATED COMPANIES: NORTHERN IRELAND

GRANT OF LEASES ETC BETWEEN ASSOCIATED COMPANIES

FUTURE ISSUES OF STOCK

COMPANY ACQUISITION RELIEFS: REDEEMABLE SHARES

SURRENDER OF LEASES

SUPPLIES TO WHICH REDUCED RATE APPLIES

VALUE ADDED TAX: CHARGE AT REDUCED RATE

REPEALS

Dawn Primarolo (Labour, Bristol South)

I beg to move, That the Bill be now read the Third time. I say that with great pleasure and true feeling on behalf o f a number of hon. Members who served on the Finance Bill Committee. This Finance Bill continues to deliver Labour's promises and enacts Budget decisions to deliver opportunity and security for the hard-working families of Britain. Working families are seeing the benefit of that. Thanks to sound economic management, we have been able to cut their taxes. We have brought in not only the working families tax credit and the new lop tax rate but now, in clause 31, we have cut the basic rate of income tax to 22p—its lowest level for nearly 70 years. By April next year, personal tax and benefit changes in this and previous Budgets will mean that, on average, households will be £460 a year better off and that families With children will, on average, be £850 a year better off. The tax burden on a single-earner family on average warnings with two children will be the lowest since 1972. Coupled with low inflation, low interest rates, low mortgage rates and economic growth, that adds up to a substantial increase in living standards, which is what really matters. For a single-earner family on average earnings with two children, living standards will have risen by more than 10 per cent. during this Parliament. Our measures will help to achieve our goal that.every child should have the best possible start in life. That is why we have set out in the Budget our ambition to halve child poverty by 2010 and to eliminate it altogether by 2020. The measures introduced so far in this Parliament will lift 1.2 million of Britain's children out of poverty and by next year the Government will be spending an extra £7 billion a year on support for children. The Finance Bill takes a further step to increase support for children with the introduction in April 2001 of the children's tax credit, which is worth up to £442 a year for a family claiming it. Rising living standards and tackling child poverty will be reinforced by further improvements in public services. The immediate boost for health in the Budget of £2 billion this year is partly funded by the real increases tobacco duties in clauses 12 to 15. The decision of the Conservative party not to vote for the tobacco tax on Budget day is another confirmation that their sums do not add up and that they could not deliver Labour's pledges on health and education, as we saw yesterday. Businesses and jobs will benefit from our commitment to enterprise in the Bill. We have cut main and small business rates of corporation tax to their lowest levels and to the lowest levels of any industrialised economy. The Finance Bill contains a number of measures to promote enterprise and help business: the cuts in capital gains tax in clause 37; the research and development tax in clauses 68 and 69; and the permanent 40 per cent. capital allowances for small and medium-sized enterprises in clause 70. Those provisions especially help manufacturing business. The new all-employee share ownership plan in clause 47 and the enterprise management incentives in clause 62 help high-risk companies recruit key personnel. The share option provisions in clause 56 and the corporate venture provisions in clause 63 are also important. These measures have been widely welcomed by business, along with the introduction in the Budget of a three-year 100 per cent. capital allowance for investment in information and communications technology equipment and the extra £100 million for the new £1 billion target umbrella fund for enterprise growth across the regions. That is a huge commitment to business success, from a Government who believe that enterprise and economic prosperity can and must go hand in hand with fairness. Clause 82 introduces an optional ring-fenced regime for so-called tonnage tax, whereby shipping companies can opt to work out taxable profits on the basis of the tonnage of the ships that they operate. That innovation, which follows Lord Alexander's inquiry, is part of the Government's commitment to encouraging the British shipping industry. As was said earlier, the Budget introduces changes in the corporation tax rules, such as limiting the use of so-called offshore mixer companies to shelter low-taxed foreign profits from UK tax. The new arrangements cap the relief on dividends at 30 per cent., and ensure that no UK tax benefit can be gained from "mixing" in an offshore holding company. As was also said earlier, the introduction of offshore mixing with a cap of 45 per cent. will benefit companies greatly. For the first time, the UK will allow onshore mixing in non-abusive circumstances. That answers industries' concerns about international competitiveness. The UK will be in a position similar to that of the US, but the UK rules are less complicated and therefore better for business. The Bill also helps us to meet our international commitments to the environment. Following last year's Budget, it is an important part of the largest package of environmental tax measures to be introduced in the UK. Clause 30 introduces the climate change levy. Clauses 20 to 23 reform vehicle excise duty for cars. Clause 59 fundamentally reforms the company car taxation regime, providing an incentive for low carbon dioxide emissions and removing the perverse incentive for people to clock up business miles to achieve more generous thresholds. Clauses 137 and 138 increase the landfill tax rate, and clarify liability. The changes in the affordable warmth programme in clause 79, and the reduced rate of VAT on the installation of energy-saving materials and grant-funded installation of heating systems in clause 132, will help to ensure that pensioners feel the benefit of warmer homes and cheaper fuel bills, as well as the £150 winter allowance. That programme implements the Government's commitment to combat fuel poverty by supporting the installation of energy-efficient heating systems and insulation in up to 1 million low-income homes. The Bill also does a great deal for charities and charitable giving. It helps communities to become more democratic, more open and more socially inclusive. Clauses 38 to 46 give effect to our radical package of measures to boost donations to charities, and to improve the operation of the tax system for charities. Clause 39 abolishes the minimum limit on tax relief for donations. Clause 138 boosts payroll giving with the three-year 10 per cent. Government supplement, and abolishes the maximum limit on donations. Clause 40 cuts red tape in regard to corporate donations, and clause 43 introduces new income tax relief on gifts of shares and securities. The Bill frees charities from the need to set up subsidiaries for small trading and fundraising ventures, and broadens the VAT zero rate for the sale or hire of donated goods. It is a good package, which has been widely welcomed by charities. Along with the new children's fund which we announced yesterday—it will have a £450 million budget over three years—these measures point to how we can help our country to make the most of one of our greatest strengths: the readiness of our people to give so much of their time and money to voluntary and community activity, for the benefit of all. The Bill demonstrates that the Government are working hard for a purpose—to build a Britain that is strong, modern and fair. At last, economic prosperity and fairness are no longer seen as opponents; instead, they are seen as partners in the process of building Britain for the future. The Bill also demonstrates that, with a Labour Government, there is more enterprise, more opportunity, more fairness and more investment in Britain. Britain is better off with a Labour Government, and I commend the Bill to the House.

David Heathcoat-Amory (Conservative, Wells)

This is not quite the worst Finance Bill that the Government have produced in the past three years, but it comes very close to it. It is certainly easily the longest Finance Bill. It is now a two-volume monster which has grown during our proceedings to 572 pages—most of which raise taxes in one form or another, and all of which make the British tax and benefits system a great deal more complicated. Contrary to what the Paymaster General has just said, this is a tax-raising and tax-increasing Finance Bill. It comes as the last in a series of tax-raising Budgets. Taken together, this Government's Finance Bills have increased taxes on the hard-working families of Britain by £670 per year each. That is not just damaging to individuals, but involves piling taxes on to the business sector, which in itself undermines the competitive advantage that the previous Government built up during our period in office. The country and the Government will pay dearly for the mistake of eroding those advantages that our firms enjoy in international markets—in which, until fairly recently, they were comparatively lightly taxed and lightly regulated. The Government's instinct is to tax, to regulate and to intervene. They believe that their decisions are superior to those made by free people and free companies operating in a free market. This two-volume Bill contains its full quota of stealth taxes. Stamp duty on more expensive properties has quadrupled since the previous general election. The Chancellor is fond of pretending that that increase is borne entirely by the private householder but, in fact, the great majority of stamp duty is paid by businesses. The Government's refusal even to contemplate removing stamp duty from share transactions is again threatening to cause an erosion of business—indeed, a migration of business from this jurisdiction to the continent. There is another stealth tax that has not been introduced yet, but has been announced. Indeed, we spent many hours debating it in Committee. It is the energy tax, or climate change levy, which the Government now seek to put into law in the Bill and which will come into effect in Apr it 2001. I declare an interest in that I have registrable interests in companies that will pay that tax. I am in fairly good company, however, because every single business of whatever size and in every part of the United Kingdom will pay that energy tax. It will be particularly damaging for the manufacturing sector, and most especially for those companies struggling to earn a living and make a return in international markets.

Stephen Timms (Labour, East Ham)

At an earlier stage in our consideration of the Bill, the right hon. Gentleman told the House that the companies in which he has an interest will—like the majority of United Kingdom companies—be better o because of the climate change levy package. Will he confirm that that is the case in the instance of the companies that he is involved in?

David Heathcoat-Amory (Conservative, Wells)

No; not for the first time, was misled by the Government. They told me that the sectors in which my companies operate would in fact be better off. On further investigation, however, I am assure' by the management that we—along with most other businesses in the United Kingdom—will be substantially worse off. What is particularly unfortunate is that the tax, although in the Bill and supposedly in its final form, is still undergoing an evolution. We are told by outside interests and the CBI, for instance, that certain companies will be eligible for rebates of up to 80 per cent., but that man other companies in the intensive energy sector will not The reason for that is truly bizarre. In order to qualify for the rebate, a company has to be part of a polluting industry. It has to be regulated by the integrated pollution prevention and control directive. So a company such as' British Oxygen, which separates air—a highly energy-intensive, but non-polluting operation—will not qualify for the rebates and will have to pay the full tax. British Oxygen operates in an intensely competitive environment and such firms will increasingly invest overseas and not here. At the same time, the Government talk about the need to improve productivity and promote competitiveness. They are good at lecturing other people about such things, but what they do undermines the very competitiveness that they urge on others. The tax may also fall foul of the European Commission on grounds of state aid. Companies that are negotiating in good faith to try to obtain rebates are uncertain about whether the whole thing may be torpedoed by the European Commission. The companies have been told that they have to wait until the end of the year before they receive any assurances, and perhaps—even at this late hour—the Government could provide certain assurances. Above all, it is an unnecessary tax. We believe in meeting our Kyoto obligations, just as the previous Government met the Rio convention obligations, but there are many other ways to maintain the downward trend in carbon dioxide emissions, such as voluntary agreements, emissions trading and increased use of gas burning for electricity generation. The House will recall that IR35 was announced last year, not—typically—by the Chancellor or a Minister at the Dispatch Box, but in the 35th press release put out on Budget day by the Inland Revenue. It amounts to an attack on people who provide services through companies, especially in the high-tech sector that the Government say that they wish to encourage. The Government are obsessed by tax avoidance, but their approach in this case is hitting legitimate businesses that set up companies to help the companies that they serve. They are not avoiding tax and, what is more, they provide the very flexibility in the labour market that the Government say is an asset. The Government criticise other European Union countries for their lack of labour market flexibility, but domestically the Government are piling on more regulation and bringing out more tax measures that undermine that national asset about which they boast. I turn to the saga of double taxation relief, which has been ably tackled by, among others, my hon. Friend the Member for West Dorset (Mr. Letwin). He spotted early on that the proposal was a tremendous own goal. The Government seem to recognise that we need to be a magnet for overseas investment and business, but in their attack on double taxation relief they are eroding that possibility. Companies based here do not have an advantage, because they are effectively on the same taxation basis as their counterparts in the United States and on the continent. By removing the existing double taxation provisions, the Government will put companies based here at an actual disadvantage compared with those based overseas. After much bluster, the Government conducted a series of inelegant retreats during consideration of the Bill. First, they postponed the measures until next year. Then they tabled some highly complicated amendments to their own provisions which have gone a long way to reversing the damage and preventing the folly. However, the damage had been done with the business sector. Last year and the year before, businesses consulted in good faith with the Inland Revenue about how to tackle issues of tax avoidance. The Government ignored that consultation, and brought forward their own clumsy provisions. They ignored the warning signals when they were published. The Government and the Chief Secretary to the Treasury owe a particular apology to Peter Wyman, a senior partner in PricewaterhouseCoopers, who was the first to point out that the Government had got the matter wrong. Instead, he was insulted by the Chief Secretary, who told the House that the Treasury was entirely right and that the accountancy world had got the matter wrong. It is now clear that Mr. Wyman was right—and not about that matter alone. One of the first of what has turned out to be a series of leaks from officials at the centre of government came from Andrew Fraser, head of the Invest in Britain Bureau. A memo from him to the Secretary of State for Trade and Industry found its way into the popular prints. It stated: We can do better to avoid shooting ourselves in the foot … at a time of real pressures on manufacturing it must make sense to (a) to be careful about the impact of new initiatives—especially from the Treasury and (b) extremely sensitive over their presentation. Mr. Fraser was referring to three measures—the climate change levy, the imposition of national insurance contributions on share options and the changes to double taxation relief. All of them in their various ways are damaging, and a Government servant told a Minister the truth about that. In addition, the Bill does nothing to reverse the decline in savings in the economy. The problem is getting worse. When the Conservative Government left office in 1997, the savings ratio—the proportion of national income being saved rather than spent—was 11 per cent. That has fallen in every year since the election—to 7, 5.75, and 5.5 per cent, respectively. In the last quarter, it fell to 3.8 per cent. Yet the Government say that they want to promote self-reliance and long-term savings. They say one thing, but do another. Finally, I turn to indirect taxes. We debated yesterday at some length the Government's pick-and-choose attitude to indexation and uprating. They uprated pensions by 1.1 per cent., and fuel duty and other indirect taxes by 3.4 per cent. In Committee, we debated the fact that the tax on tobacco has risen relentlessly in every Budget. Those rises represent failures in the Government's health, crime and fiscal policies. The yield from tobacco duty fell last year, so it is just as well that we were not relying on that for national health service funding. Moreover, there has been an explosion in smuggling. All that was set out in a report that the Government commissioned from Mr. Martin Taylor. Where is that report? It is secret. We are not allowed to see it, even though we paid for it, because Mr. Taylor made the rather obvious observation that it is no good being tough on the crime of smuggling without being tough on the cause of that crime—the large and growing duty differential between Britain and the continent. That is getting worse, and it increases smuggling and encourages criminality. It encourages drink-related crimes, which the Government now say that they are worried about: when drink from smuggled sources is sold in uncontrolled outlets, it increases the danger of criminal behaviour following excessive alcohol consumption.

Chris Leslie (Labour, Shipley)

Are we hearing a guarantee that the Conservatives will cut tobacco duty?

David Heathcoat-Amory (Conservative, Wells)

The hon. Gentleman sounds rather worried, so I invite him to join us in the Lobby to express his concern. The Opposition have voted against those increases in every Finance Bill since the general election. I remind him that, even when we had a Budget deficit, in our last two Budgets we froze duty on alcohol and cut it on spirits precisely because of the problems that I have described. The Labour party entered office and reversed that policy; they increased duty on all those products and made smuggling and racketeering worse. If the hon. Gentleman cares to follow up his concern with a little action, he will have an opportunity to do so shortly. The abiding impression we have of the Bill is that it is another tax-raising measure; furthermore, it is a measure of almost stupefying complexity. In its excellent publication "Towards a Better Tax System", the Institute of Chartered Accountants in England and Wales gave the Bill marks out of 100 based on the institute's 10 principles of good taxation. The final score was 30. I am tempted to give the same score but, on reflection, I have decided that that would be over-generous. The Bill will continue to annoy and baffle taxpayers for many years after it has become law. We shall vote against it.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

One hundred and fifty-seven clauses, 40 schedules and 572 pages later, the House should consider striking medals for veterans of the Committee on the Finance Bill. With its complexity and length, the Bill does this country's tax system no good. We are left with the question of whether we should support the Bill's Third Reading, and I suggest that the House applies two tests to find the answer. The first is a cost-benefit analysis of the contents—the Bill contains some good measures, but, as I shall demonstrate, many bad ones as well—and the second is the wider role of the Finance Bill and what it adds or subtracts from the management of the public finances. As I said, the Bill contains some good measures, albeit small ones: for example, the change to amusement machine licence duty, which is a small measure, but one that will be welcomed in British Legion and nonprofit-making clubs throughout the country, and a measure which my hon. Friend the Member for Twickenham (Dr. Cable) pressed to be included in last year's Finance Bill. Air passenger duty exemptions are likewise welcome to those living in the Scottish highlands and islands. As I told the Financial Secretary in Committee, I hope that the exemption will be extended, for example, to cover the special case of the Scilly Isles, and to ensure that passengers benefit when they arrive at airports in the highlands and islands. Gift aid is also a welcome measure. A large measure that we support is the climate change levy, although we have had some concerns, which we have expressed in a forthright manner. My hon. Friend the Member for Hazel Grove (Mr. Stunell) moved amendments and spoke on various issues relating to the levy in an effort to improve it. Unfortunately, the Government did not listen, but we decided ultimately to support the schedule's inclusion in the Bill because we believe that, on balance, it is better to have the measure in the Bill than not to have it—it is certainly better than the status quo left by the previous Government. Those are the good things in the Bill, but, I am sorry to say, there are quite a few negatives.

Rosie Winterton (Labour, Doncaster Central)

Will the hon. Gentleman give way?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I will not give way. [Interruption.] Perhaps I will give way later. Fuel duty increases have raised costs for motorists, but have not been offset, as we have advocated, by substantial reductions in vehicle excise duty. The Government have also failed to sort out the employers' national insurance contributions impost on share options. The most significant negative point, however, is IR35, with which we disagree profoundly. The abuse on which the Government have tried to clamp down is far more narrow than Ministers have made it out to be. Measures to clamp down on tax avoidance could have been more narrowly targeted and far more effective. The way in which the Government have chosen to act means that many small companies in the information technology sector will be seriously hit. What has concerned us most is that the Government have at no stage admitted that market forces require many small firms—in the IT industry, the oil industry and the engineering consultancy sector—to form limited personal service companies. At no time were the Government prepared— [Interruption.]

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

Order. Far too many private conversations are going on. I cannot hear the hon. Gentleman.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Thank you, Mr. Deputy Speaker. At no time on Second Reading or in Committee have Ministers acknowledged the fundamental objection to IR35. Many companies are forced into the arrangements that they make by market pressures and by the larger companies. The Government seem unaware of that in spite of all our arguments. The wider role of the Finance Bill also raises some serious concerns. The Government have said many times that they have not sufficiently increased expenditure on our public services over the first two or three years of this Parliament because they were trying to get the public finances under control. There are three ways in which to do that—increasing taxes, restraining public expenditure and taking benefits from the growth dividend. Over the past few years, tax rises have been introduced and there has been significant growth. Those measures, coupled with tax rises introduced by the Conservative Government, have ensured that the public finances are extremely healthy. No objective observer could say otherwise. That is why there was no need for the Government to curb public expenditure in their first three years. There have been problems in the health service and a loss of police officers, and our schools have been starved of the funds that they need. The real reason why the Government imposed that public expenditure restraint was that they were trying to build up an election war chest. That was one of the major political reasons for their decision, and that is a great shame given the need in our public services. A second political reason was that the Government felt the need to convince the City that they could be trusted on public finances. That is their legacy, through no fault of the people who use the public services. They have played politics with our country's public services. The Government are offering tax cuts in the Bill. There is a penny cut in the basic rate of income tax in clause 31. But that is being done ahead of the huge and very welcome investments in public transport announced in the comprehensive spending review yesterday. Why is income tax being put ahead of investment? The Chancellor talked about deficit reduction. That was necessary, and he is right to point out the mismanagement of the economy by the Conservative Government. Frankly, however, deficit reduction is becoming almost a fetish for the Chancellor. Why must pensioners wait for an increase in the basic state pension when the Chancellor is using a lot of money to reduce the deficit? He has his priorities wrong.

Rosie Winterton (Labour, Doncaster Central)

Is the hon. Gentleman saying that we are taxing the country too little?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Liberal Democrats have often argued that targeted tax increases are necessary for public service investment. The House cannot say that that is a secret. There is one argument for supporting the Finance Bill and the overall management of the public finances, which is that the Conservatives' proposals are even more ludicrous. They have been saying that the Government's spending proposals are reckless and that spending is getting out of control. Unfortunately, nothing could be further from the truth, and when they look at the facts, the Conservatives will be unable to continue making that point. In this financial year, total managed public expenditure, as a proportion of GDP, is at a level that has not been seen since 1963–64, so it starts at a low base. At the end of the comprehensive spending review period, 2003–04, it will reach 40.5 per cent. of GDP. In only three years of the Conservatives 18 years in Government was public expenditure as a proportion of national income lower than that. If the Conservatives claim that public spending is out of control, they must acknowledge that it was out of control for 15 of their 18 years. There is no way that we could support the Conservatives' approach to the management of public finances. The problem, however, with the management in the Finance Bill is that the Government's proposals are too modest and do not put public services first. We shall vote against Third Reading because the Bill puts a tax cut before public service investment and includes an outrageous measure in IR35.

Michael Jack (Conservative, Fylde)

At the conclusion of consideration of the longest Finance Bill in history, I would like to put on record my appreciation of the way in which my Front-Bench colleagues have solidly and resolutely attacked and unmasked the Government's tax-raising agenda. They have done it despite all the difficulties that any Opposition face in dealing with highly technical and complex matters, and they have done it with great skill and exposed the truth of the Bill. It is a pity that when we tried to use modern equipment such as laptop computers in the Standing Committee to assist us in our job of probing the Government, and suggested having the notes on clauses in a modern electronic form, the somewhat arcane rules about what one may or may not bring into a Standing Committee meant that I got my knuckles rapped because I was out of order in bringing in a laptop. I hope that the Chairmen's Panel will consider that matter in due course because we ought now to be allowed to use modern aids further to enhance the ability of the Opposition—and, indeed, right hon. and hon. Members on both sides of the House—to have access to the complex information needed to consider the Bill. I want to put on record my appreciation of the Inland Revenue for drafting excellent notes on clauses, which helped us to understand the Bill. I wish that the same clarity of explanatory information about the Bill had been available to the Chancellor of the Exchequer yesterday, when I challenged him on the tax burden that results from these measures. In this House, he denied that this country's tax burden is rising. For the record, I point out that in the financial year that ended in April, total Government receipts, excluding the windfall tax, came to 39.6 per cent. of GDP; in the current financial year, that proportion rises to 39.7 per cent., and by the end of the Parliament, it will have reached 39.9 per cent. I wish that the Government had the honesty to admit what their own figures say and what will result from the Bill. The Bill contains a number of measures on energy saving. As my right hon. and hon. Friends have said, they are too complex and will not work. I make this prediction: the climate change levy will, if the Government continue, be turned into a nice little earner. They say that it is fiscally neutral because of the national insurance rebate, but that claim will go out of the window, as it has with the landfill tax. The Government's increase in that tax did not result in a corresponding decrease in national insurance payments. The Bill has worsened Britain's international competitiveness, as clauses 103 and 104 bear testament. The Government have taken little note of the impact of that aspect of the measure on their tax policies. I conclude—[HON. MEMBERS: "Hear, hear."]—on one important point. I am glad to hear the cheers of Labour Members. My right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) and the hon. Member for Kingston and Surbiton (Mr. Davey) pointed out the length and complexity of the Bill. Even if Treasury Ministers do nothing else in response to what the Opposition have said, they should expand, with immediate effect, the remit of the tax law rewrite project to begin the much needed task of mapping out how we simplify, shorten and improve the operation of our tax system. Every company would welcome that and every citizen certainly deserves it. If the Government want to do something for tax—other than raising it—they should make its operation simpler.

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

I want to make only two points—[HON. MEMBERS: "More, more."] I am tempted to filibuster so that my hon. Friend the Member for Banff and Buchan (Mr. Salmond) will have to begin his Adjournment debate in the early hours of the morning. However, I shall continue. I suspect that the Government will not take on board my first point. As I pointed out in yesterday's debate on fuel duty, the Government have continued on a course set out by the previous Conservative Government that is detrimental to many people, especially those in rural constituencies such as mine. I regret that the House did not discuss the amendment proposed by my hon. Friends and myself, which suggested that the latest increase in fuel duty, introduced in the Budget, should be suspended until there had been a report on its effect on the Scottish economy and that of the UK. There is no doubt that fuel duty is one of the major issues affecting the rural economy and the economy at large. The Rural Affairs Committee of the Scottish Parliament, of which I have the honour to be a member, recently held six or seven hearings throughout rural Scotland—from the far north to the far south—to consider employment prospects. Despite the efforts of the Countryside Alliance to claim that the main issue affecting employment prospects was fox hunting, at all those hearings the foremost issue was fuel tax. The Government make much of targeting benefits on the poorest of society, so it is a matter of deep regret that, at the same time, they are imposing a tax that hits the poorest people in rural society. I hope that the Government will take on board my second point. It relates to the effects of the climate change levy on medium-sized hydro-electric stations in the north of Scotland. When we debated amendment no. 98 yesterday, the Financial Secretary responded to my speech by noting the concern about a band of hydro-electric schemes … in the 10 to 25 MW capacity range, that, at some point in the future … may want to carry out refurbishment, and that may well be a point that needs to be considered at that stage.—[Official Report, 18 July 2000; Vol. 354, c. 331.] I point out to the hon. Gentleman that many such schemes were constructed in the late 1940s and the early 1950s. They have a lifespan of about 50 years, so investment decisions to refurbish them must be taken now. If the Financial Secretary is to reconsider the climate change levy on such stations, it must be done within the next year or so. When he responds to the debate, will he give some consideration to the genuine concerns of the hydro-electric industry in the north of Scotland?

Stephen Timms (Labour, East Ham)

In this year's Budget and with yesterday's spending review, my right hon. Friend the Chancellor set out the next steps on the road to a modern and decent Britain, where security and opportunity are open to everybody. The Bill and the spending review maintain the commitment to stability and prudence, ensuring that we remain on track to meet our fiscal rules and to deliver the steady growth we need. That is why we can make progress and look forward after 18 long years of catastrophic underinvestment in public services under the Tories In the Budget, we announced sustained increases in resources for improving our public services. As the spending review shows, we are putting in sustained investment to improve standards and deliver modern, responsive services—in health, education, transport, and law and order. What is the Tory response? Some £16 billion worth of cuts. The Government's aim is for every child to have the best possible start in life. That was clear from what was announced yesterday. That is why we set out in the Budget and in this Bill our ambition to halve child poverty by 2010 and end it altogether by 2020. We are continuing to ensure fairness for pensioners. This package targets help at the least well off pensioners, while boosting the incomes of those who have managed to put a little aside and do not currently qualify for help. We are making huge progress towards full employment. The number of people in jobs is at a record level, up by 1 million since the election. Long-term unemployment is at its lowest for 20 years, and the Bill contains a series of measures to improve things further still. There are action teams to help match people in areas where pockets of high unemployment remain close to vacancies nearby. We are rolling out nationally the new deal for the 50-plus. Employment zones are providing tailored support to around 50,000 long-term unemployed individuals in 15 areas of high unemployment. There is also the cut in the basic rate of income tax. All those measures are promoting employment and moving us further towards full employment. The platform of stability that we have built is essential for businesses as well. We now have the lowest rates of small business corporation taxes ever—the lowest in the industrialised world. Since 1997, small companies have received an average corporation tax cut of nearly 25 per cent. We have made further progress on protecting the environment. We have introduced the vehicle excise duty discounts for small-engined cars, the incentive for ultra-low sulphur petrol and a whole range of other important measures. When growth made a fleeting appearance under the previous Government, their response was reckless and irresponsible. They blew the proceeds of North sea oil and privatisation on current spending instead of investment. We are making sure that that catastrophic mismanagement will not be repeated. We are locking the stability in. Our prudence over the past three years has been for one purpose and one purpose only—to build a Britain that is decent as well as modern, where, acknowledging that we all depend on each other, we provide opportunity and security for all. The Bill takes us a giant step closer to that goal, and I commend it to the House

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