Finance Bill

Public Bill Committee, 26 April 2001.

Standing Committee A

(Except clauses 1 to 3 and 16 to 53 and - schedules 4 to 11)

Michael Clark (Conservative, Rayleigh)

Before I call the Minister, I will make an announcement to avoid points of order. It is traditional that Finance Bill Committee members are given green boxes in which to put their papers, which can be taken away and treated as souvenirs. Some people did not expect a Finance Bill this year, so the boxes have not been specially made and prepared as usual. However, we rallied round to produce the boxes and they are in the Room. They are special because they are red rather than green, and Committee members will be able to take away a unique souvenir, unlike the green ones that have been had year on year. I hope that there will be no points of order on that; boxes are available.

Michael Jack (Conservative, Fylde)

On a point of order, Dr. Clark. This is on a different subject. In last year's Finance Bill proceedings, I fell foul of a ruling from you about electronic aids in Committee. So that no Committee member falls foul of the Chair, I should be grateful for your guidance on which electronic aids may be brought into Committee.

Michael Clark (Conservative, Rayleigh)

I shall come back to the right hon. Gentleman with a more complete ruling but, as I recall from meetings with the Chairman of Ways and Means, any electronic device on which one can see the clauses and schedules to the Bill is not allowed in the Committee Room. In fact, electronic devices such as laptops are not allowed in the Room at all. I will check with the Chairman of Ways and Means to find out if anything has changed in the past three months. I hope that, until I have double checked, the Committee will respect that ruling.

Andrew Smith (Labour, Oxford East)

I beg to move,

That—

(1) during proceedings on the Finance Bill (except Clauses 1 to 3 and 16 to 53 and Schedules 4 to 11) the Standing Committee do meet on Tuesdays at half-past Ten o'clock and at half-past Four o'clock and on Thursdays at half-past Nine o'clock and at half-past Four o'clock;

(2) 18 sittings in all shall be allotted to the consideration of the Finance Bill by the Standing Committee;

(3) the proceedings to be taken on the sittings shall be as shown in the second column of the Table below and shall be taken in the order so shown;

(4) the proceedings which under paragraph (3) are to be taken on any sitting shall (so far as not previously concluded) be brought to a conclusion at the time specified in the third column of the Table;

(5) paragraph (3) does not prevent proceedings being taken (in the order shown in the second column of the Table) on any earlier sitting than that provided for under paragraph (3) if all previous proceedings have already been concluded.

TABLE SittingProceedingsTime for conclusion of proceedings 1stClauses 4 to 6, Schedule 1, Clauses 7 to 9, Schedule 2, Clauses 10 to 15, Schedule 3, Clauses 54 to 56-- 2ndClauses 4 to 6, Schedule 1, Clauses 7 to 9, Schedule 2, Clauses 10 to 15, Schedule 3, Clauses 54 to 56 (so far as not previously concluded)7 p.m. 3rdClause 57, Schedule 12, Clauses 58 to 61, Schedule 13, Clause 93, Clause 62, Schedule 141 p.m. 4thClause 63, Schedule 15, Clause 64, Schedule 16, Clause 65, Schedule 17, Clause 66, Schedule 187 p.m. 5thClause 67, Schedule 19, Clause 68, Schedule 20, Clause 69, Schedule 21, Clause 70, Schedules 22 and 23, Clause 71, Schedule 24, Clauses 72 and 7311.25 a.m. 6thClauses 74 and 75, Clause 104, Clause 76, Schedule 25, Clauses 77 and 787 p.m. 7thClause 79, Schedule 26, Clauses 80 and 81, Schedule 27, Clause 821 p.m. 8thClause 79, Schedule 26, Clauses 80 and 81, Schedule 27, Clause 82 (so far as not previously concluded)7 p.m. 9thClauses 83 to 8511.25 a.m. 10thClause 86, Schedule 287 p.m. 11thClauses 87 to 891 p.m. 12thClause 90, Schedule 29, Clauses 91 and 92, Clause 947 p.m. 13thClauses 95 and 9611.25 a.m. 14thClause 97, Schedule 30, Clause 987 p.m. 15thClause 99, Schedule 31, Clauses 100 to 103, Clause 1051 p.m. 16thNew Clauses, New Schedules, Clauses 106 and 107, Schedule 32, Clause 108— 17thNew Clauses, New Schedules, Clauses 106 and 107, Schedule 32, Clause 108 (so far as not previously concluded)— 18thNew Clauses, New Schedules, Clauses 106 and 107, Schedule 32, Clause 108 (so far as not previously concluded)7 p.m.

Oliver Letwin (Conservative, West Dorset)

That was a charming exposition from the Chief Secretary and we shall remember him for it as we continue our deliberations, which we expect, I fear, to be rather abbreviated. I will confine myself to speaking for a moment about the programming motion. It is unusual at this stage to talk about the subject for debate, but is worth doing so briefly on this occasion.

We are grateful to the Government for having programmed this phase of the proceedings generously and sensibly. Regrettably, we were not able to debate the new clauses that we wished to debate on the Floor of the House. Liberal Democrat Members join us in that thought. We considered the possibility of trying to accelerate our perusal of the clauses and schedules in the Bill in order to move onto the new clauses more expeditiously, and in the anticipation of an early announcement from the Prime Minister. However, we rejected that possibility and have chosen instead with the Government to proceed in the normal workmanlike fashion through the various clauses and schedules.

That means that we will not be able, in all likelihood, to debate important new clauses. However, Parliament should have the opportunity to go through the details of as much as possible of the Bill before we are cast into a general election. I hope, as we proceed, given the short time available to us, that all Members, as well as Ministers, will seek to investigate the Bill in the true spirit of a Committee stage—that is, looking at the details and not at broad general principles, and trying to get the best possible outcome in a number of detailed respects.

I fear that the amusements purveyed by the Chief Secretary were on this occasion purely amusements, because I do not think that anyone could take any actual interest in any of the remaining clauses as a matter of high politics or general policy. It is without exception the most boring Finance Bill that any Government have produced for a very long time. There is nothing wrong with that. In fact, it is much better that it should be so than that it should contain a large number of exciting items such as the aggregates levy, which we were forced to consider on the Floor of the House, which is a catastrophic measure. There is nothing totally catastrophic in the remaining 250-odd pages. It is, therefore, sad that we shall all be boring ourselves to extinction, but it is necessary, because there are details in the Bill that need addressing.

We must remind ourselves, somewhat piously, that the lives of many of our fellow citizens will be affected by this boring material, so it behoves us to attempt to get the Bill as right as we can. I hope that Ministers will exhibit the same flexibility as on the previous Finance Bill, where they allowed substantial amendments. That may be all the more difficult in view of the likely high speed of our proceedings.

I echo the Chief Secretary's sentiments in welcoming you to the Chair, Dr. Clark, but I cannot think that the reason advanced for your presence by the Chief Secretary is correct. It must be in the spirit of self-sacrifice that you offered your services on this occasion. The self-sacrifice is likely to be great, but brief.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Continuing the theme of the hon. Member for West Dorset, I also believe that a spirit of self-sacrifice has brought you to this arduous task, Dr. Clark. You may well be pleased if our proceedings are cut short. Will you pass on our greetings to the other two Chairmen—Mr. O'Hara and Mr. Hood?

As the hon. Member for West Dorset said, there is little that is controversial in the Bill, and he fairly described it as boring. Some of the flaws in our procedures are worth noting. The Bill may be boring and relatively uncontroversial, but it is also complex, and we have little time to find the problems lurking within the complexities.

Problems that the parliamentary draftsmen have not foreseen may escape our attention because we are debating a long Finance Bill—particularly in comparison with the Finance Bills of the 1960s, 1970s and 1980s. In the short time available, we may fail to pick up the problems. I regret any failings and apologise to those who may be affected by them. It is less a failing of our abilities than of the whole process. I have long felt that it is a key and urgent task for this House to reform that process and I hope that the Government will give it serious thought. Let us hope that whoever is returned to power after the forthcoming election, will also give serious thought to reforming it.

Oliver Letwin (Conservative, West Dorset)

I just want to put on record how much we agree with that. I also hope that after the election a political consensus will emerge across the House. There is no doubt about the need for deep reform of the procedure. Much more strenuous and detailed examination is required in a different format.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful for that outbreak of consensus and I suspect that the hon. Gentleman and I might find other reasons to agree as we progress through the Bill. I am also grateful for the Chief Secretary's warm and amusing remarks. Sometimes when reading Hansard, irony does not immediately strike one from the page, so let us make it clear that there was a degree of irony in the right hon. Gentleman's comments. When I first served on a Finance Bill Committee I was surprised at how long debates could last. That being the case, I shall now sit down.

Michael Jack (Conservative, Fylde)

I also welcome you to the Chair, Dr. Clark, and the other Chairmen who will be presiding over our proceedings.

I rise to express a note of sadness because the programme motion breaks a long tradition in the way in which Finance Bills have been handled in this House. In days gone by, Standing Committees would sit through the night. There was a robustness about the debates that will sadly be lacking under the more forensic approach outlined in the programming motion. Sometimes we alight upon a point on which it is right to spend a little more time examining what a Minister may say to justify a position. With the constraints of a timetable, that facility will not be afforded to us, except at the expense of some other part of the Bill. I record my sadness that we must have a programming motion on a Bill that has always proceeded with a degree of consensus and tradition.

Andrew Smith (Labour, Oxford East)

Does the right hon. Gentleman acknowledge that both the out-date of the programming motion and its structure have been determined by his hon. Friends? Moreover, are his comments made in the conservative spirit of wanting to leave things as they were or in the radical spirit of reform that the hon. Member for West Dorset advocated just a few moments ago? It is very early on to have such a serious Opposition split.

Michael Jack (Conservative, Fylde)

If the Chief Secretary wants to debate the reform of the tax system, I will gladly detain him, but it would be unfair to do so in the light of the programming motion. Having been involved in the tax law rewrite exercise since its inception, I know that there is a great deal to commend the approach mentioned by my hon. Friend. I just wish that the Government had shown enthusiasm similar to that of the Chief Secretary for doing something about the subject. One item not included in the motion, and therefore not in the Bill, is a commitment to do anything to report to the House on possible simplification of the tax system and our procedures. I welcome the Chief Secretary's conversion to the subject. Perhaps before the end of the Bill we might even see some tangible sign that we are going to deal with the issue.

My purpose in commenting was not to criticise the allocation of time in the motion, but to acknowledge the passing of a tradition under which we agreed on the conduct of the Bill by consensus, giving us time to alight where necessary to debate in detail some fact that emerges in debate. That facility could be lost as a result of the programming motion.

Alun Michael (Labour/Co-operative, Cardiff South and Penarth)

For the sake of the record, should the right hon. Gentleman's regret at the passing of those late night debates in which he and I took part on occasion and which were of dubious quality and forensic outcome, especially on the Conservative side, be read as irony or humour?

Michael Clark (Conservative, Rayleigh)

Order. The right hon. Member for the Fylde should respond briefly. I have so far been listening to items that are not in the motion or the Bill. Now we are reverting to a historical review of the proceedings of the House. Unless the right hon. Gentleman is brief, I shall have to call him to order.

Michael Jack (Conservative, Fylde)

Thank you, Dr. Clark. In recent times, the amount of time that we have spent on undue late sittings has reduced. One could argue that the quality has improved.

The programming motion refers numerically to the clauses that we must debate. Although, as my hon. Friend the Member for West Dorset pointed out, this is supposed to be a non-controversial Finance Bill, it still contains 180 clauses and 28 schedules. It shows no indication of the reforming zeal that the Chief Secretary enunciated a moment ago towards the way these procedures are taken. Finally, when Ministers come to present their case for these clauses, I hope that they will be prepared to give us detailed evidence to justify the policy positions being advanced.

Question put and agreed to.

Michael Clark (Conservative, Rayleigh)

Before we proceed I have several announcements to make. First, copies of the ways and means and money resolutions agreed to by the House on which the Bill is founded are available in the Committee Room. Secondly, in view of the resolutions of the House relating to the declaration of interests, right hon. and hon. Members are required to declare relevant interests when they table amendments, as well as when they speak to them. Copies of the rules are available from the Committee Clerk. Thirdly, I referred earlier to the boxes behind me to my right. If hon. Members wish to make use of them, they can be locked in a filing cabinet when the Committee is not sitting. Finally, adequate notice must be given of amendments. Neither I, nor my co-Chairmen Mr. O'Hara or Mr. Hood, will as a rule call any starred amendments, including any starred amendments that may be reached during an afternoon sitting. Clause 4 Rates of tobacco products duty

Clause 4 - Rates of tobacco products duty

Stephen Timms (Labour, East Ham)

I join my right hon. Friend and other hon. Members in welcoming you back to the Chair, Dr. Clark. Your immense experience of our proceedings as well as your well known fairness will help us greatly.

Smoking is the single largest cause of preventable illness and premature death in the UK, killing 120,000 people every year. The increase in duty on cigarettes has encouraged existing smokers to smoke less or to quit and has discouraged children and young people from taking up the habit. Maintaining the real price of cigarettes and tobacco is an important contributor towards our health objectives. The clause therefore increases rates of excise duty on all tobacco products by approximately 1.8 per cent., in line with inflation, with effect from 6 pm on 7 March 2001.

We had many discussions last year about the discrepancy between the indexation rate for excise duties and allowances. We argued that it was swings and roundabouts. This year's figures demonstrate that that is the case. Allowances are being uprated by 3.3 per cent. and excise duties by only 1.8 per cent. I suspect that we will hear a good deal less about that in this Committee. I commend this clause to the Committee.

Oliver Letwin (Conservative, West Dorset)

I do not intend to spend an undue amount of time on the clause. There is nothing terribly new to say about it, but I want to rehearse the reasons why the Opposition believe that it is a mistake to go on raising the rates for tobacco. I accept the point that the Financial Secretary makes about relative indexation, and if I can be allowed so unusual a departure, I confess to having made the mistake last year of believing that the Government intended to continue with the asymmetry in a direct line rather than following the swings and roundabouts principle. This year they have followed the swings and roundabouts principle, and we should be grateful for that. I withdraw some of the remarks that I made last year on that subject.

Our underlying difficulties with the idea of progressive nominal rises in tobacco duties remain. There is a particular force to this argument, because this year appears to be the year in which the fiscal crossover, which I believe that the Liberal Democrat Members, alongside the Government, thought would not happen, has happened. The Financial Secretary might give an explanation for the decline in revenues that differs—it would be worth listening to—but, as far as we can determine, the duty differentials that have opened up because of the UK's poor competitive position on duty have led to yet another significant increase in smuggling, as we expected.

Let me begin by stating a few points on which we agree with the Government, before moving on to those on which we clearly do not agree. We agree that smuggling is a bad thing. I know that we agree because we both support taking considerable steps to try to stop it. The Government would not be spending large sums of money to try to stop smuggling if they did not think that it was a bad thing. I suspect that we agree that the reason why people smuggle is not that they enjoy it as a pleasant pastime on a Saturday afternoon but because they are trying to make money from it, which they are able to do because of the duty differential. So far, I am being uncontroversial—at least I hope so.

I suspect that we agree with the Government—we certainly agree with the hon. Member for Truro and St. Austell (Mr. Taylor); his report remains in obscurity, but the contents of it become clearer and clearer over time—that the cause of the intensity of the smuggling is the size of the duty differential. In other words, normal market economics, albeit in a subterranean and illicit form, have prevailed. The supply of smuggling has arisen because the price advantage of smuggling has grown. So far, I suspect that we are on common ground.

I believe that we also agree—I have never been sure about the Government's position, but whether or not they agree, it is true—that the effect of that kind of smuggling not only deprives the Revenue of money but criminalises large numbers of people in the UK who probably lead perfectly blameless lives otherwise, at least in relation to the law.

Tony Banks (Labour, West Ham)

It is absolute nonsense to say of someone who breaks a law that they would be innocent if not criminalised by the Government. One might as well say that a law-abiding citizen who commits murder has been criminalised. If someone breaks the law, he has broken the law.

Oliver Letwin (Conservative, West Dorset)

I completely agree with the hon. Gentleman that the fault for breaking the law lies not with the Government but with the lawbreaker, and I completely agree with his implicit assertion that the lawbreaker should be punished if caught. However, the fact remains that large numbers of our fellow citizens who otherwise obey the law engage in the criminal activity of buying roll-your-own—one can see that happening in many pubs around the country—from someone who got it off the back of a lorry. I attribute the blame for the action to the people who engage in it—I agree with the hon. Gentleman about that—but mortal flesh is weak. It is regrettable that they break that law, because they begin to put themselves on the wrong side of the law in general. To be a law-abiding person—I exempt parking tickets and speeding fines— [Hon. Members: ``Oh.''] Well, I certainly exempt parking tickets. I do not believe that by getting a parking ticket an individual puts himself into a different relationship with the state. Perhaps I am wrong about that.

Alun Michael (Labour/Co-operative, Cardiff South and Penarth)

Will the hon. Gentleman give way?

Oliver Letwin (Conservative, West Dorset)

In a moment. I agree with the hon. Member for West Ham (Mr. Banks) that when someone starts buying illicit cigarettes, they take a deep, and wrong, action and put themselves in a position where their whole relationship to the state and to authority begins to go wrong. That is not to say that everyone who buys illicit cigarettes moves on to other more serious crimes—that would be a crazy assertion—but it is very dangerous. The blame lies fairly and squarely with that individual, but there is something wrong about an arrangement in which many of our citizens engage in that blameworthy activity.

Alun Michael (Labour/Co-operative, Cardiff South and Penarth)

The hon. Gentleman is going down a dangerous path. He referred to parking and speeding. For many years, not having insurance was considered a lesser offence. However, that meant that the victim of a serious accident might not have been able to gain compensation. If the hon. Gentleman is asserting that some offences do not really matter, he needs to be clear about what he means.

Oliver Letwin (Conservative, West Dorset)

I am not saying that they do not matter or should not be punished. On the contrary, they should. If there is a law, it should be obeyed. If it is disobeyed, the person who disobeys it should bear the penalty. There is no doubt about that. What I am saying is that it is possible for people occasionally to overstay in a parking spot without necessarily changing their entire relationship to the state. It is also possible for people to buy roll-your-own off the back of a lorry and not change their whole relationship to the state, although that is a slippery slope.

If Opposition Members think that I am taking some kind of cheap party political shot, they are wrong. If they examine their consciences, they will find that they agree with me. There is a real danger to our society if large numbers of our fellow citizens engage in activity that is fundamentally illicit and dishonourable, and come to feel that they are on the wrong side of the law.

The present duty is the cause of the smuggling, and the smuggling is the cause of the criminality alongside the blameworthiness of the criminal. We must ask whether that situation can be allowed to continue. Is it fiscally proper? Does it result in higher fiscal revenues? Is it socially proper? Does it result in a better society? Is it a proper result from the point of view of the nation's health? Does it make us healthier?

Let me take those questions in reverse order. There is no doubt that the prevalence of smuggling, and of smuggled and often inferior tobacco, is not improving the nation's health, but is making it worse. All the evidence suggests that whereas licit smoking is under control, illicit smoking is burgeoning. That is not to the advantage of the nation's health. I have already made the social point. I suspect that Opposition Members will agree that there is a grave danger to our society arising from the extent of the smuggling.

Now we turn to the new and interesting development. So far as we are able to determine, the fiscal effect of those rising differentials has now turned against the Government, and I await the Financial Secretary's comments on that. That seems to undermine the whole case that the Government have been making in the past three or four years. It is always asserted that, whatever else one may say, the protection of the revenue was secure, and that with each increase in the duty differential the elasticities were such that, despite increasing smuggling, the revenue would rise. That no longer seems to be the case.

Finally, I come to a point usually made by the Paymaster General rather than the Financial Secretary, although it will perhaps be made again today by the Financial Secretary. A great part of the structure of the argument in defence of the Government's continued nominal increases in duty has been that the duty differential of which I am speaking, between, for example, a purchase in Calais and a purchase in Dover, is largely irrelevant, because, so the Paymaster General frequently asserts, the big and organised smuggling is often from countries of origin with duties that are way below ours. I suspect that my hon. Friends have also heard her argue that repeatedly. If her argument were carried to its conclusion, it would assert that even a 10, 20 or 30 per cent. reduction in our duties would not make a significant difference to smuggling, because the big smuggling is from countries where the duty is 20 per cent. or similar to ours and there would still be profit in it. Therefore, she argues, huge amounts of Government money should be spent on enforcement rather than on attempting to decrease the duty differential.

Tony Banks (Labour, West Ham)

I am listening carefully to what the hon. Gentleman says. He implies that smuggling has arisen because of the differential in duty on cigarettes between this country and the continent. However, that differential has always existed. We have all the disadvantages of a single market, but not the advantages. When there was a duty differential in the past, people were allowed to bring in only 200 cigarettes; now, there is the nonsense of people going to the continent in a white van, getting as many as they like and bringing them back. The problem was bound to arise. The issue is not so much the difference in duty as the single market with regard to cigarettes.

Oliver Letwin (Conservative, West Dorset)

Before I respond to that, let me say how much I welcome the fact that a Government Back Bencher on the Finance Bill Committee, albeit a distinguished former Minister, is actively taking part in proceedings. That is a welcome development.

Tony Banks (Labour, West Ham)

I just wanted the hon. Gentleman to know that he was not on his own.

Oliver Letwin (Conservative, West Dorset)

I fear, however, that the hon. Gentleman's arguments are not at one with those of his hon. Friends on the Front Bench.

Tony Banks (Labour, West Ham)

There's a surprise.

Oliver Letwin (Conservative, West Dorset)

They have argued that the problem arises from smuggling not across the channel with people being able to move back and forth and buy cigarettes at will in Calais, but from much further afield and on an organised basis from countries with deeply discounted regimes.

I believe, however, that the problem resides in great part in informal smuggling from just across the channel. The hon. Gentleman is wrong to think that the problem arises from the single market. There is duty to be paid on entry to this country if the cigarettes are brought here for resale. An illegal act is occurring. That has nothing to do with the single market, which does not permit people to enter this country without paying duty on the differential.

Mr. Banks rose—

Oliver Letwin (Conservative, West Dorset)

I shall give way in a moment.

The cause of people seeking to bring cigarettes across the channel is the scale of the differential. The industry tells us—I hope that these figures are accurate—that the total tax in the UK per 20 cigarettes is £3.37. The average for the rest of the EU is £1.39. In France, it is £1.61. When a duty differential is well over 100 per cent., there is a problem, but it is not the single market. The problem is geography and competitive taxation.

Tony Banks (Labour, West Ham)

I did not say that the single market was a problem. I said that, in this regard, we get the disadvantages. Movement is allowed as a result of the increase in the amount of tobacco and alcohol that people can bring in for personal consumption, but we do not have the advantages of the equalisation of taxation, which is why I passionately believe in a single market. When the hon. Gentleman's party was in government and the trade started, I remember saying as a Back Bencher that it would escalate as soon as the amounts of tobacco and alcohol that could be brought in were increased and that that would have a damaging impact on the tobacco and alcohol retail industries, especially in the south-east. That was pooh-poohed by the Government, who said that it was perfectly within their control.

Michael Jack (Conservative, Fylde)

On a point of order, Dr. Clark. May I elicit your guidance on the appropriate length of interventions?

Michael Clark (Conservative, Rayleigh)

I, too, had been wondering about the length of the interventions. I think that they are about right. If hon. Members have several interventions to make, they should catch my eye and make their own contribution.

Oliver Letwin (Conservative, West Dorset)

I do not have the slightest doubt that the hon. Member for West Ham (Mr. Banks) will catch your eye in due course, Dr. Clark. If what the hon. Gentleman said is right, and I do not doubt his word, that his assertions were pooh-poohed, my hon. Friends, who were then responsible for managing such matters, were in the wrong. [Interruption.] My right hon. Friend the Member for Fylde (Mr. Jack) will speak for himself.

We should perhaps have been more alert to the evolution of such proposals, but that does not rescue the Government from a more serious accusation. Some years later the trends were more evident and the retail industry, especially the small, independent retailers, began to be crucified by the difficulties so presciently identified by the hon. Member for West Ham. At that time, instead of responding by saying, ``Ah yes, our hon. Friend pointed that out some years ago. We must recognise the force of his observations because they have clearly come to pass,'' the Government said, ``We are now the Government. We are going to continue merrily increasing the differential.'' The Conservative Government's lack of prescience has become this Government's blindness to the facts, which is regrettable.

We should abandon our party badinage and agree that the time has come to end the lunacy; we must move away from an ever-widening differential and try to find the means to enforce the regime against smugglers, as the Government are trying to do, although not sufficiently effectively. We must also ask ourselves how we can possibly justify widening the differential.

I hope that the Financial Secretary will illuminate the Paymaster General's arguments, to which I referred. It would be helpful to understand whether there is a solid, intellectual and statistical basis for her assertion. What proportion of smuggling is from countries with very low duty? What countries—or set of countries, if discretion forbids direct identification—are involved? How low is their duty? What proportion of smuggling is judged to come from countries nearby which have a significant duty differential but one that is so great that it becomes impossible to imagine significantly diminishing it by a different set of policies for our own duties? We need answers to those questions. Instead of rehearsing the general argument we must consider whether a serious policy option is to do something about the matter in the light of the facts. We may begin to do something when the Financial Secretary has given us the facts, as I hope he will. We are urgently in need of them.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Notwithstanding the Financial Secretary's excellent skills, I regret the absence of the Paymaster General who is, I am sure, detained on serious business in Brussels. She played a leading part in previous Finance Bill Committees and on the Floor of the House in respect of the important matter of policy, which is the substance of the clause. The hon. Lady has a detailed knowledge of the subject and has appeared before several Treasury Committee hearings. Despite the Financial Secretary's exceptional skills, the debate is the poorer because of the Paymaster General's absence. The reasons behind those opening remarks will become clearer as I detail some growing concerns about the Government's handling.

The hon. Member for West Dorset was right to say that the Liberal Democrats have supported the Government year in, year out on their policy of raising excise duty on tobacco products. We support also their policy objectives on health and cracking down on fraud through legal means, such as new technology, the recruitment of more Customs and Excise staff and having new stamps on packets, which we debated last year. We do not want to give tacit support to lawbreakers. If they break the law passed by Parliament, they should be punished; at no stage should we give any succour to them, even on a parking ticket. Sometimes people park cars in dangerous places, which can be a threat to other people's lives. It might seem a small offence, but it can be significant.

In previous debates, as the hon. Gentleman mentioned, we discussed in detail the elasticities of tax revenue with respect to duty. We also discussed cross-price and demand elasticities, and had debates using reports by the Institute for Fiscal Studies and rejoinders to those reports from industry. They were some of the best tax debates that we have had in this Parliament because they were extremely well informed. We have debated various enforcement techniques, and the Government have made strides on smuggling, which should be recognised.

On a recent trip to the Crown court in Kingston, I was regaled by judges who were almost fed up with having to try tobacco smuggling cases. They complained that such cases took up too much of their time but I had to say that, although I understood their frustration, they were engaged in enforcing the law. Their work was not only bringing lawbreakers to justice by fining and imprisoning them properly, but sending out a wider signal that is a key part of the Government's strategy to deter future smugglers.

It is being made clear that the Government will take a hard line on smuggling and that, if people smuggle, they will be caught, punished and imprisoned. That will bring to an end that illegal traffic, and I support the Government and Customs and Excise in cracking down on it in every possible way.

Despite those remarks and that past support, I want to enter a note of caution and a caveat to our support for the Government's policies on this matter, because several issues about the Government's handling of it are leading to our support wearing thin. They are detailed issues, but must be aired before we pass the clause. As has been mentioned, the Government failed to publish the Taylor report. I will not go into that in detail, because it has been covered in the past and I do not want to go over old ground, but the Government also have not published a more recent and potentially more damaging report—the Rocques report, which was set up by the Paymaster General. Customs and Excise announced on 7 July 2000 that John Rocques, ex-senior partner of Deloitte & Touche, would lead the inquiry and report to Mr. Broadbent and the Minister by the end of November 2000. Indeed, I believe that the Minister received a preliminary report in November and, after John Rocques had asked for more time, the final report in the new year. However, that report has not been published and the Treasury Committee on which I serve criticised the Government for their failure to do so. The Paymaster General was good enough to give the Committee an informal briefing on progress with the Rocques inquiry, but she has gone no further and the report has not been published. We received a letter explaining why not. Many reading it gained the impression that Customs and Excise had rejected the conclusions of the Rocques report—it was too critical of the Department—and asked him to draw fresh conclusions

In the Financial Times on 5 February this year, Mr. Rocques affirmed that there were no reasons why his report should not be published and acted upon. So here we have a second major report commissioned by the Government on this key area of policy that has not been published. That should help explain why I am concerned.

Furthermore, the Treasury Committee report was published on 22 March 2001, but the Government have yet to reply. This cross-party report—some Labour Members signed up to it—does not pull its punches. I shall not detain the Committee by reading all the conclusions—you would call me to order if I did, Dr. Clark—but conclusion (b) states:

``The Government owes Parliament an urgent statement about the scale of the loss of excise revenue between 1994 and 1998, the reasons for the loss and the steps taken to prevent such losses occurring again. The Government should also explain the current status of the Rocques report and indicate the date by which it aims to secure publication''.

So yet another senior House Committee wants the Government to come clean about what is going on.

The Public Accounts Committee is also interested and the National Audit Office registered a note of concern about the Government's handling of the problem. In a preliminary report, the Comptroller and Auditor General said on 9 February that he was unable to certify that

``adequate regulations and proceedings have been framed to secure an effective check on the assessment, collection and proper allocation of revenue'',

or that

``the sums brought to account in respect of such revenue are correct''

because of problems with the collection of excise duty. When the Comptroller and Auditor General publishes such a report, albeit preliminary, the House should stand up and take note. We are right to be concerned about further tax changes without clarification of where the Government stand.

The Comptroller and Auditor General is a servant of Parliament, not of Government. He has a superb staff working for him on behalf of this place and our constituents, so we must take his statement seriously. The NAO will move on from its preliminary report and produce a more detailed report to Parliament. Unfortunately, it is not yet concluded, but I know of its concerns about the weak controls of Customs and Excise.

A whole series of reports—written or part-written—could be before us to illuminate the debate and help us decide whether it was appropriate to continue with the tobacco duty escalator. The Government have the written reports, but they have not informed today's debate, which is scandalous. I speak as a Member who has supported the Government's policy throughout this Parliament, so I cannot be criticised as partisan or a Johnny come lately.

The hon. Member for West Dorset referred to other evidence that provided cause for concern. When the Government have provided an estimate of the loss of revenue due to smuggling—

Stephen Timms (Labour, East Ham)

I just want to pick up one of the hon. Gentleman's points. He said that the escalator is continuing, but it is not. It has been halted and the Bill contains only an inflation rise.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful for that intervention: I was incorrect. Excise duties are still being treated this year in terms of indexation. The question remains whether we have reached a point of diminishing returns. Are the elasticities such that increases in taxation lead to a reduced yield? I have argued against that in the past, because all evidence and analysis suggested that we had not reached that point, but I am now beginning to question that. I hope that we have not, because of the health signals that are so important to the Government's policy. We cannot bury our heads in the sand: if we have reached that point, we will need to review our strategy.

Before the Financial Secretary's intervention, I was talking about the Government's published figures. The hon. Member for West Dorset alluded to them when he said that more smuggled products than the Government acknowledge may come from the EU as a result of the differential between the UK and other member states.

The Tobacco Manufacturers Association says that the Government operate on a 20:80 rule. With 80 per cent. of the smuggled product coming from outside the EU, duty changes make no difference to the bulk of it. The association takes issue with the 20:80 rule of thumb that Customs and Excise uses to calculate the loss of revenue. It uses pack tests, an analysis of the packets that are thrown away, often after football matches. Various football stadiums have been swept up after the match and the packets have been counted in order to work out where the cigarettes were produced and imported. On the basis of several such detailed researches, the Tobacco Manufacturers Association believes that the split between extra-EU and intra-EU smuggled products is more likely to be 40:60 to 60:40. If so, the Government figures are wrong.

Oliver Letwin (Conservative, West Dorset)

That is precisely the difference to which I was alluding. It is hearsay that Customs and Excise operates on a 20:80 principle. I say hearsay advisedly because we have never had—certainly not in Committee—open acknowledgement of the figures on which Customs and Excise bases its estimates. That is what we need. At the moment, the pack tests provide the only evidence available in the public arena. As the hon. Gentleman rightly says, they suggest that the Government's analysis is deeply flawed.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman is right. We have not had that admission. The intellectual framework behind the Government's policy has never been clearly elucidated, so we have been unable to scrutinise it properly. That is the problem, and it stretches our patience too far. I am not sure whether there was a Division on the Budget resolution behind the clause; if there had been, we intended to support the Government. We want the Government to come clean—

Adrian Bailey (Labour/Co-operative, West Bromwich West)

I have heard assertions that Government policy is not scientifically based, but does the hon. Gentleman agree that that using what is swept up in stadiums after football matches provides an irrational and illogical basis on which to make Government financial policy?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I agree, but the hon. Gentleman's Government have published two reports: the Taylor report and the Rocques inquiry. They have commissioned them, they are there, they have been completed, and we would like to have them published so that we do not have to rely on such a ``poor''—I put that in inverted commas—amount of evidence. However, it is the only evidence that we have to go on.

Oliver Letwin (Conservative, West Dorset)

I am sorry to intervene again on the hon. Gentleman, but while I thoroughly endorse what he is saying about the reports and the need to have them published, I hope he would agree that we would not want to have on the record the assertion that the pack test is poor. It is an imperfect measure, but quite a statistically significant sample is being operated on and, as far as I am aware, there is a reasonable expectation that that sample is random.

One does not imagine that people going to football matches are particularly inclined to be smugglers. We do not know of any reason to suppose that the two are correlated. So if they are honest tests, and I do not think that it has been asserted that they are not, and if they are statistically significant tests, and it has been well established that they are, and if they are likely to be based on a random sample, and they probably are, then far from being poor, they are a reasonable basis for estimation, although I completely accept that it would be better if we had the Government figures.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman will agree that I put the word ``poor'' into inverted commas, because it is relative. Compared to some of the analysis I assume that the Government have done, it is not as good a test. However, the hon. Gentleman is right that it is potentially an extremely accurate test. We just do not know whether it is, though, because we have not seen any other evidence, and it is difficult to put it into context. Perhaps Customs and Excise have based their own analysis in these reports on such taxes. We do not know. I would like to have been able to give the hon. Gentleman a better answer.

Adrian Bailey (Labour/Co-operative, West Bromwich West)

Will the hon. Gentleman give way?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

In a moment. Because the hon. Gentleman's Government are failing to be open and transparent, we are unable to answer such questions. Before the hon. Gentleman intervenes, I hope he will criticise his own Government and have the courage of his convictions to say ``Look, I would like to know the truth behind this, so please publish these reports that you have already on your desks.''

Adrian Bailey (Labour/Co-operative, West Bromwich West)

To continue that line of argument, which I cannot help thinking has become somewhat convoluted, does the hon. Gentleman agree, given that most football grounds ban smoking, one could argue that the cigarette packets left in grounds after matches are from people who may be more predisposed towards illegal activity than would be normal. If one wants to take that as the basis of the test, it would be equally logical to make those assumptions in any further projections.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

That intervention is quite worrying. I hope that there are not many West Bromwich Albion fans among his constituents who might feel that that was a slur on their behaviour.

Tony Banks (Labour, West Ham)

There are not many West Bromwich fans, full stop.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am not sure whether the hon. Member for West Ham was privy to much information on that point when he was Minister for Sport. I must reject the intervention by the hon. Member for West Bromwich, West, and just repeat that the taxpayer has already paid for detailed work. Unfortunately that work is not before the Committee today, which I much regret.

If the clause is put to the vote, I will recommend to my hon. Friends that we abstain. In the past we have supported the Government, but if they cannot explain themselves and promise to publish the reports before Parliament is dissolved, so that the country can see the basis on which tax policy has been based, or at least before the election, even if hon. Members cannot do so before it is dissolved. At least that would move the debate on in a proper way. It is not right to continue to support the Government if they continually hide the reports and take the information away from the British people.

I shall listen with even greater attention than usual to what the Financial Secretary has to say. This is an incredibly serious issue involving millions, or perhaps even hundreds of millions of pounds, that should go to the Exchequer, and which affects thousands of businesses throughout the country. The Government cannot continue to hide behind excuses when they have the information to hand.

Tony Banks (Labour, West Ham)

I would normally come to the Finance Bill Committee to get a free box, which I am delighted to hear I will receive in due course. My membership of the Committee is made doubly worthwhile by some of the interesting points raised by the hon. Member for Kingston and Surbiton. I was unaware of the package test and sweeping up at football grounds as a way of producing evidence to evince arguments. I am a regular supporter of my club and a season ticket holder at Stamford Bridge, where the most that anyone sweeping up would find would be fingernails and broken hearts. It would be a very non-scientific way of discovering a correlation with the suicide level.

Smuggling, in technical terms, starts when someone brings in cigarettes that he may have declared are for personal consumption, but is then tempted to put them on sale, using friends in the tobacco industry and the retail trade in pubs and tobacconists to reprocess them. It started in the EU; as soon as restrictions on the amount of tobacco and alcohol for personal consumption were lifted as part of the single market, there was an irresistible temptation to claim that such goods were for personal consumption, when evidently they could not have been. Some people will always try to make money from opportunities that arise.

Can my hon. Friend say whether most of the smuggled tobacco products come from outside the European Union? The black market smuggling trade started within the EU. I warned the previous Government about that—it is all in Hansard—but they said, ``Nonsense. That will not occur.'' But it was so predictable; one did not have to be an expert to see what would happen.

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

Does my hon. Friend agree that at least this Government did what the previous Government did not do and invested real extra resources in combating tobacco smuggling? In the hour that this Committee has been sitting, another 2 million illicit cigarettes have been brought into the country. One per cent. of GDP is related to tobacco smuggling, and the Government are at least trying to combat it.

Tony Banks (Labour, West Ham)

My hon. Friend asks me an obvious question. Of course, I accept what he says; I speak as a party loyalist, for God's sake, but that does not mean that I cannot nitpick about Government policy from time to time. I want effective policy to be made more effective. However, enforcement measures are necessary only because of the problems caused by the differential duty rates between the United Kingdom and the rest of the EU. As a passionate and firm believer in the EU and the single market, I saw, down the line, one of the great advantages of an equalisation of duty rates across a range of products. It is nonsense for people to take vans from this country to France to load up with goods, many of which have been produced in this country, and to bring them back. It is about time we addressed the principle of tobacco duty, as well as its effect on the retail trades. Governments have always been disingenuous in their approach to tobacco duty. All Governments have at some point argued that tobacco duty should be increased on health grounds, to limit the consumption of tobacco, but would all Governments really want tobacco duty completely eliminated because no one smokes any more? I suspect not, because the duty makes such a significant contribution to Treasury receipts. If the Government were looking seriously at the issue from a health point of view, they should ban tobacco. As we know, tobacco-related diseases kill something in excess of 120,000 people—I do not know the precise figure—in this country alone.

Because no Government would want all tobacco duty eliminated, we have to be more honest. Are we looking at tobacco duty as a way of raising revenue or as a way of limiting consumption on health grounds? Are we looking at both? No Governments have responded to those fundamental questions. We want to be seen to be doing something to restrict smoking but do not want totally to eliminate it because of the revenue implications. I will get in and out of this point quickly: one reason why I have always believed in the legalisation of cannabis is because Governments could put duty on it. In response to arguments about health, I would say, ``Well, ban tobacco rather than cannabis''—but I do not want to embarrass my hon. Friend the Financial Secretary more than I have already.

The Government must address the issue. Governments should welcome reduced yields, providing the smuggling element has been reduced, because that would mean that not so many people were smoking—but, as I said, I am not sure that that is what Governments want. All Governments have got themselves into a problem over that and I am sure that when my hon. Friend replies he will explain the logical position of the Government.

Howard Flight (Conservative, Arundel and South Downs)

It is certainly sensible that the Government have got off the escalator but the 6p increase and pro rata equivalent increase in rolled tobacco still increases the price differential between here and continental Europe and in the bootleg market. I call for a stepping back and rethink because the policy on the taxation of tobacco has become counter-productive.

I should declare an interest as a smoker—I should also welcome your chairing our deliberations, Dr. Clark. Over the past four years, cigarette smoking has gone up by 6.5 per cent. The Government sneaked out some figures earlier this month announcing that the revenue loss has been £3.7 billion. Theoretically, the tax on cigarettes should be aimed at the most effective point on the curve, both to discourage smoking in terms of demand and price and to deliver Government revenue. The first reason is health-related, the second pragmatic. However, we have clearly gone massively too far in the other direction because we are in the territory of diminishing returns on both fronts. We are not achieving the objective of discouraging smoking and we are losing revenue like billy-oh.

On reducing smoking and associated matters, we are also causing harm. The group among whom smoking has most increased is the young, particularly young women. The policy on duty is divisive because the affluent can pop across to France and buy all the cigarettes that they want cheaply. Those that get sucked into smuggling are very much the less affluent and those who are not close to the channel ports. On Second Reading, the hon. Member for Barnsley, Central (Mr. Illsley) had the honesty to admit that in his constituency one can hardly buy cigarettes other than on the black market. Small shopkeepers have been driven out of business and the constituency has become a black market territory. I was slightly horrified—although I did not believe it—to hear the hon. Member for West Ham talk even of the suggestion of banning. In my mind is the United States experience of prohibition. Whether we have absolute banning or the existing taxing strategy, it inevitably leads to bootlegging; that fact is as old as the hills.

Tony Banks (Labour, West Ham)

I said ``logically''; I did not advocate banning, because that would clearly be completely unenforceable. If we think we have problems with drug abuse on our streets, try banning alcohol or tobacco and see what would happen. I was saying that banning would be the logical conclusion if we considered health alone.

Howard Flight (Conservative, Arundel and South Downs)

I thank the hon. Gentleman for that comment.

What have we done? We have created about 150 Russian-style professional smuggling organisers—serious heavy criminals—just as prohibition did on a far bigger scale with bootleggers in the United States. I may add that the United States has been substantially stuck with the drug mafia as a direct result of the prohibition policies of the 1930s.

Alun Michael (Labour/Co-operative, Cardiff South and Penarth)

Would the hon. Gentleman watch his language? The Government do not create criminals; they see an opportunity in a market. I am sure that he would agree that it is they who must take responsibility for that.

Howard Flight (Conservative, Arundel and South Downs)

Of course I agree, but with respect to the right hon. Gentleman, that is a rather self-righteous comment. If, as a result of Government policies--and given human nature--a criminal body emerges, the Government indeed have a role in creating an environment that leads to criminals.

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

Is that not just a classic example of the millennia-old logical paradox of post hoc ergo propter hoc? That fact that two incidents occur in sequence does not necessarily link the former to the latter.

Howard Flight (Conservative, Arundel and South Downs)

With respect to the hon. Gentleman, I think that a common sense issue is at stake. The result of the price of tobacco here compared to that on the continent, just as of the complete prohibition of alcohol in United States when lots of people wanted to drink it, is to create an environment that bad people will exploit. If hon. Members cannot see that that is likely, they are living in an unrealistic utopia.

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

The hon. Gentleman referred to the Government creating Russian-style mafias. That is the phrase to which my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Michael) and I especially object.

Howard Flight (Conservative, Arundel and South Downs)

The policies that the Treasury has pursued under both the present and the previous Administration have undoubtedly led to our current problems. It is widely believed that the reason why the Taylor report and the Rocques report have not been published is because they make exactly that point.

Alun Michael (Labour/Co-operative, Cardiff South and Penarth)

I think that the hon. Gentleman does not understand the point that my hon. Friend and I are making. Government policy may create an environment—as the hon. Gentleman said once—in which crime and offending increases. Government certainly has a responsibility to seek to reduce offending and therefore to minimise the environment in which it happens. In so far as the hon. Gentleman criticises Government policy on that basis, there is a reasonable point for debate. However, to say that Government action causes offending is to appear to condone that activity. That is something that parliamentarians of every party should be careful not to do.

Howard Flight (Conservative, Arundel and South Downs)

Yes, the Government have created an environment; the environment has led evil people to exploit it. With the greatest respect, I think that it is slightly pedantic not to accept that if Government policies—whoever is in power—lead to such things happening, the Government are responsible. My point is that that policy has led to the creation of such a mafia in this country.

Brian H Donohoe (Labour, Cunninghame South)

Are the Opposition arguing for the legalisation of cannabis, ecstasy and all other drugs as that is the direction in which the hon. Gentleman's argument logically takes us?

Howard Flight (Conservative, Arundel and South Downs)

We are debating the imposition of an increase in duty on tobacco. We are not debating cannabis but whether the duty policies that are being followed are being effective in their objective of both reducing smoking and generating the maximum revenue. My assertion is common sense and should be accepted by every hon. Member. Indeed, Government figures show that the results of the pricing policy to date have been counter-productive on both issues. While getting off the escalator is a good thing, widening the pricing gap is likely to worsen the present problems.

I turn now to another important point on which there is some muddled thinking. The starting point in terms of consumption is whether or not duty is paid. Within the non-paid category there is clearly that which is legal and that which is bootlegging and smuggling. No duty is paid on something like 80 per cent. of hand rolled. What proportion of that is illegal is not precisely known. The figure for packaged cigarettes is around 40 per cent. non-duty paid and again it is not precisely known how much is smuggled. We do not know whether the Rocques report had any evidence to offer on that point. Those figures show the counter-productive nature of the overall pricing strategy with regard to its objectives.

We all know from direct experience that there is a divisive situation behind what is bootlegged and what is legal. The pricing system broadly enables the more privileged members of society to buy tobacco easily at a lower price and then leads those who cannot afford to travel as much to break the law and to buy smuggled goods. That leads to the process that occurred under prohibition—an established criminal body managing to structure itself beyond the law.

Finally, I understand that the Government's target is to reduce the smuggling element to about 20 per cent. How idiotic. The target should be no smuggling. We should have a price strategy where the target is no smuggling. As many hon. Members will be aware, Sweden woke up to the problem a while ago and adjusted its pricing downwards by 30 per cent. to try to get closer to that position on the graph which would demonstrate that smoking is being discouraged without the duty straying excessively into the territory of diminishing returns.

Mark Hendrick (Labour, Preston)

Is the Opposition's policy one of tax harmonisation across the European Union? If not, is not what he suggests a de facto means of tax harmonisation?

Howard Flight (Conservative, Arundel and South Downs)

Before the UK joined what was then the common market, the price differential between tobacco here and tobacco in Europe was considerably less. The widening of that price differential has been entirely a decision of this country. It is self evident that where one lives in close geographic proximity it is unwise for politically correct or other reasons to have tax strategies that widen the pricing gap on retail goods because it leads to the distortions of which we are all aware. It has nothing to do with either tax harmonisation or common currencies. The power lies with this country and this Parliament to determine what is wanted.

I have gone on too long, so I shall conclude. The taxation strategy for tobacco went off the rails a long time ago. Instead of achieving its objectives, it has led to the undesirable development of a Russian-style smuggling mafia, and many more young people have taken up smoking than might otherwise have been the case. It is time for a breath of fresh air in both Westminster and Whitehall, and I hope that, by coming off the escalator, the Government are signalling a change in Treasury thinking.

Stephen Timms (Labour, East Ham)

We have had an interesting debate, which I have listened to carefully. I wish to comment on some of the points that the hon. Member for Arundel and South Downs (Mr. Flight) made. He misrepresented the Government targets, but I will come to that later. I draw his attention to the submission from Action on Smoking and Health, which was prepared in the run-up to the Budget. In section 2, entitled ``Tobacco taxation—a successful policy'', it describes how tobacco duty rises since 1997 have affected smoking:

``Over this period there has been a sharp drop in teenage smoking''.

The hon. Gentleman's point about increases in smoking is not right. Evidence from the general household survey is that, overall, smoking prevalence has not been increasing since 1997. The key indicator is the number of people who smoke, determined on the basis of personal interviews.

Howard Flight (Conservative, Arundel and South Downs)

I referred to evidence that showed a 6.5 per cent. increase in consumption since 1996 and, in particular, an increase in consumption by young people. With the greatest respect for the organisation that he quotes, I believe that what it is saying is wishful thinking.

Stephen Timms (Labour, East Ham)

The hon. Gentleman is wrong. It is true that trade estimates on the number of cigarettes consumed show a 6 per cent. rise, but that is based on debatable assumptions about how the amount of hand-rolling tobacco is translated into the number of cigarettes. The key measure is not the number of cigarettes consumed but the number of people who smoke. The general household survey shows clearly that that has not been increasing. Indeed, the data show a considerable drop in teenage smoking since 1997. His pessimism on both fronts is ill-founded.

Oliver Letwin (Conservative, West Dorset)

I am interested in the Financial Secretary's argument. Is he asserting that Her Majesty's Treasury's economists have advised him that the price level is more likely to have an elasticity effect on determining whether people smoke than it is on determining the number of cigarettes that they smoke? If so, it would be counter to every elasticity study that I have ever seen.

Stephen Timms (Labour, East Ham)

No, I am advising the hon. Gentleman that the general household survey shows clearly that the prevalence of smoking has not been rising. That is an observed fact. The key objective of the Department of Health, quite rightly, is that the number of people who smoke should be controlled.

Oliver Letwin (Conservative, West Dorset)

The Financial Secretary is too intelligent for that. Surely, he recognises that we are debating whether the duty has been responsible for, on the one hand, decreasing the number of people who smoke—I accept his evidence that that is not increasing—or, on the other hand, whether it has been connected with the fact that the amount smoked by those who smoke has risen. If the duty were effective in either case, one would expect it to have been effective on the amount smoked by smokers, and not on determining the number of smokers. That suggests that, rather than duty, a third party cause, such as social convention among the young, is limiting the growth in the number of smokers. Is that not the case?

Stephen Timms (Labour, East Ham)

The hon. Gentleman has missed the key point in my comments, which was that trade estimates rest on assumptions about how hand-rolling tobacco is translated into numbers of cigarettes. There is scope for debate about how that calculation is made, but it is important to place on the record that the catastrophic situation described by the hon. Member for Arundel and South Downs is not borne out by evidence and that the prevalence of smoking is not rising.

I agree with comments about the seriousness of tobacco smuggling and that no one should be doing it. I welcome the robust position taken on that by my hon. Friends and the hon. Member for Kingston and Surbiton. That is why we announced last March the tackling tobacco smuggling strategy. It is designed first to slow the growth in tobacco smuggling, which has recently followed a strong upward trend—that is a target point, to respond again to the hon. Member for Arundel and South Downs—and secondly to put it into decline within three years. We provided £209 million for investment in extra staff and new equipment to do that, and Customs has increased the deployment of front-line staff and investigators during the past year. An extra 650 people will be in post by the end of this month and another 300 during the coming year. Customs has also put in place X-ray scanners designed to detect bulk consignments of smuggled tobacco. Three are in operation and two more will follow shortly, and a second batch will be ordered in the next few months. My hon. Friend the Member for West Ham is right that the previous Government should have listened to his and others' warnings and put those measures in place earlier. I do not agree with him about cannabis, but I agree on that point.

The strategy is at an early stage, but it is beginning to show encouraging results. In the first nine months of the past financial year, Customs seized more than 2.1 billion cigarettes destined for the UK market. The scanners are starting to pay dividends as well, and we are confident that they will spot large numbers of cigarettes being brought into the country. In those nine months, Customs investigators broke up 38 major organised crime gangs. Targets have been set and we are achieving them. Tough policies on vehicle seizures are having a powerful effect: in the first nine months of the past financial year, almost 6,700 vehicles were seized by Customs, which was nearly double the number seized in the same period in the previous year.

We debated UK duty paid marks at length in Committee last year, and they are being introduced on packets of cigarettes and hand-rolling tobacco to help the identification of smuggled goods. From 1 July, it will be a criminal offence to transport, sell, offer for sale or allow the use of premises for the sale of unmarked cigarettes and tobacco. All packs will have to bear the UK duty paid marks, which will deter people from selling unmarked goods and encourage pub owners and workplace managers to prevent sales on their premises. The strategy is in its first year, but as more front-line staff are put in place, new X-ray scanners come on line and pack marks are introduced, we will be able to take even more effective action against criminals who are involved in tobacco smuggling. I am confident about the way in which the strategy is working.

The hon. Member for West Dorset asked about the overall take on tobacco tax receipts. The current expectation for tobacco receipts in the previous financial year—this has not been finalised, but I am pretty confident about it—is that we have collected £7.6 billion, which is a little more than the projection in the 2000 Budget. As we all recognise, far too much money is not being collected, hence the strategy. Nevertheless, the fact that receipts are above what we expected provides confidence that we have now got the measure of the problem and are making progress in addressing it.

There has been a good deal of discussion about the extent to which the problem is driven by the duty differential between the UK and continental Europe and about estimates by Customs of how much tobacco comes from outside the EU. Figures on that were published earlier this year in response, I think, to the Treasury Committee's inquiry. The estimate is that in 2000, total cross-channel tobacco smuggling was worth £1.36 billion. The figure for freight smuggling was £2.3 billion. Of that £1.36 billion, cigarettes and other tobacco accounted for £470 million. There is also hand-rolling tobacco and the tobacco smuggled by air passengers, internet and parcel.

Oliver Letwin (Conservative, West Dorset)

Will the Financial Secretary repeat those figures?

Stephen Timms (Labour, East Ham)

Gladly. In 2000, total cross-channel smuggling of tobacco was worth £1.36 billion, of which £470 million was cigarettes and other tobacco. The figure for hand-rolling tobacco was £890 million. Tobacco smuggling by air passengers, internet and parcel was worth £120 million. Freight smuggling of cigarettes was worth £2.3 billion. That adds up to £3.8 billion, so well over half is from freight smuggling.

I am happy to confirm and say on the record that Customs estimates that up to 80 per cent. of cigarettes smuggled into the country come in containers. Almost all of that comes from outside the EU. The hon. Member for West Dorset asked which countries those cigarettes come from. We think that they come from, for example, Dubai, China, some countries in southern Africa, Vietnam and Baltic countries, where it is likely that no duty, rather than a low level of duty, has been paid.

Oliver Letwin (Conservative, West Dorset)

Is the Financial Secretary saying that 80 per cent. of the £2.3 billion freight is cigarettes in containers? What percentage of that does he expect has come from countries with zero or very low rates?

Stephen Timms (Labour, East Ham)

No, 80 per cent. is the estimate of the proportion of smuggled cigarettes that enter the country in containers. Those would come mainly within the figure for freight smuggling of cigarettes. As I said, almost all of that comes from outside the EU.

Interestingly, the hon. Member for Kingston and Surbiton drew attention to the tobacco manufacturers pack survey. Customs takes account of the evidence from that in forming its views about what is happening. However, that includes cigarettes bought outside the UK and brought into the country legitimately as well as smuggled products. That factor must be taken into account in interpreting the survey. He also drew attention, rightly, to the work of the Treasury Committee in this regard, to which we pay close attention. Its view was that it was not clear that reducing duty rates would affect large-scale smuggling, which appears to be the major problem, and it is right. We shall continue to pay close attention to what the Treasury Committee says.

I shall go through the strategy's targets for the coming three years. We expect the share of cigarettes accounted for by smuggling in the current financial year to be 22 per cent., which we want to come down to 21 per cent. next year, and 20 per cent. in the year after. That reduction must continue. I assure the hon. Member for Arundel and South Downs that we will bear down on the problem for as long as it exists. We want realistic and measurable targets to tackle the huge problem that has grown over a long period and which we are now taking steps to turn round.

The hon. Member for Kingston and Surbiton asked me about publication of the Rocques inquiry. Some of the inquiry has already been published: the hon. Gentleman asked specifically about losses of excise duty in the period 1994 to 1998, which were reported by the National Audit Office on 9 February. The chairman of Customs and Excise made a full disclosure of Revenue losses in his statement on the 1999-2000 accounts. More work needs to be done on matters arising from the Rocques inquiry; advice must be assessed in order to inform Customs and Excise's detailed plan of action to tackle the problems. We need to take legal advice on some issues before deciding what can be published.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Minister says that he needs to take legal advice and that some issues are still being worked on. However, the Government and Customs and Excise have known about such matters for some time. In her evidence to the Select Committee on 8 February, when asked about the publication date, the Paymaster General said:

``As I have said, I think we need to have these answers on the public record as soon as possible.''

That was nearly three months ago, when the problems outlined by the hon. Gentleman were known about. That is not good enough. The Minister must say when the report will be published and why it has not been published already.

Stephen Timms (Labour, East Ham)

Much of the information has been placed on the record, not least in my hon. Friend's evidence to the Select Committee. I shall pass on to my hon. Friend the hon. Gentleman's expression of regret, which all members of the Committee will share, that she is not with us today. The subject of the Rocques inquiry was alcohol diversion fraud and although it refers to tobacco it was not the central thrust of the report.

In the report on tackling tobacco smuggling we set out clearly the estimates and assumptions on which we base our anti-smuggling strategy. I draw to the Committee's attention the fact that the most recent figures published by Imperial Tobacco suggest that cigarette smuggling accounts for less of the non-UK duty-paid element than Customs estimated. The full range of evidence on these matters must be taken into account.

The clause strikes the right balance between protecting health and protecting revenue. The strategy is now in place to tackle the serious problem of smuggling and I hope that the Committee will support it.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 14, Noes 7.

Clause 5 - Dilution of cider

John Burnett (Liberal Democrat, Torridge and West Devon)

I welcome to you to the Chair, Dr. Clark. I was fortunate enough to serve under your chairmanship last year, when I made the occasional guest appearance in the Committee considering the Finance Act 2000. I appeared to discuss tonnage tax, capital gains tax and one or two other points, but I served at the same time on the Committee considering the Limited Liability Partnerships Act 2000. It is difficult to judge exactly which Bill was the more riveting. I should declare an interest: I was a lawyer practising in taxation. I no longer practice, though I may, of course, practice again in the near future; we do not know.

The clause threatens 20 jobs in my constituency and other jobs elsewhere. I believe that it will yield about £150,000 in duty, although I look forward to hearing the Financial Secretary's estimate of the yield. The clause could not have come at a worse time for my constituency, which, the Committee will know, has been disastrously impacted by foot and mouth. Indeed, we have had about 120 confirmed cases; but that is just the tip of the iceberg; we have had hundreds and hundreds of contiguous culls. Farming has been almost wiped out in my constituency and the effect on tourism—allied trades and tourist attractions—is catastrophic. To have the clause on top of that is asking too much.

Dilution post-duty is not a process used by the two large cider-making companies—Bulmers and Matthew Clark, who control about 90 per cent. of the cider market. It is used by smaller cider makers who cannot afford a bond of £250,000. The Treasury has described the process as tax avoidance. It involves taking duty-paid cider and diluting it slightly, by no more than about 6 per cent. The total duty paid is on the diluted amount, so obviously there is a small duty saving. That is an anomaly, but a perfectly legitimate one that has been used continuously since cider duty was introduced in 1976. So I am speaking for small cider producers—quality producers who make their cider from genuine apple juice and not from imported apple concentrate. I believe that the anomaly— I acknowledge that it is an anomaly—should be phased out slowly, not suddenly. It helps the small cider producer who cannot afford the cost of a bond. Secondly, the small cider producers pay duty on ullage and spillages, which they would not do if they bottled with the benefit of a bond or had the benefit of a bonded warehouse. Thirdly, the small cider makers pay their duty up front. Larger manufacturers who have the benefit of a bond do not have to do so.

I hope that the Financial Secretary will think again about the clause, and that he will give at least 12 months notice before implementation. I remind the Financial Secretary that there are existing contracts, with existing prices. Companies must have time to allow existing contracts to determine by a fluctuation of time. This has been a legal activity until now and there should be reasonable and commercial notice of change, so as not to prejudice small companies. It is suggested that big business has sought to impose its views on Government. Those views, if enacted suddenly and without notice, would prejudice and damage many small producers up and down the country.

Michael Jack (Conservative, Fylde)

I support the hon. Gentleman's remarks, and am concerned about signs of dissent from other Committee members.

John Burnett (Liberal Democrat, Torridge and West Devon)

I detect support from the Committee.

Michael Jack (Conservative, Fylde)

I am grateful to be put right, because I have received a letter from Devon Contract Packing Ltd of North Tawton, Devon.

John Burnett (Liberal Democrat, Torridge and West Devon)

North Tawton is in my constituency.

Michael Jack (Conservative, Fylde)

Indeed it is. What struck me was that if a company has a bond, it cannot operate the dilution post duty process. It is an either/or situation. Given that it has been legal for 25 years, there is no justification for the Government's move in paragraph (2) of the Customs and Excise press release issued on Budget day. What particularly caught my eye was the definitive statement that

``this has the full support of the National Association of Cider Makers'',

as if they are the ones who are justifying work in this area. Mr. McIlwraith—the chairman of Devon Contract Packing Ltd—says, however, in his letter:

``The largest Cider producers in the UK have sponsored this proposed change in the law for their own commercial benefit. The change was not put forward, as has been suggested by the National Association of Cider Makers but by the two largest manufacturers, privately, after an NACM meeting.''

I ask for the Financial Secretary's observations on that point. It would be a sad day if the proposal had resulted from big cider makers ganging up on small, less vociferous opponents. What the cider makers are doing is supposed to be a tax-avoidance measure, but the press release states:

``The Government also announced that it would be tackling a tax avoidance practice.''

That practice has been going on for 25 years, so it happened under the previous Labour administration. They did not think it was a bad deal, and nor did we in our 18 years. There is no indication of the level of abuse. The cider makers themselves calculate that £150,000 of duty is at stake. However, there is no justification whatsoever in terms of the Government's position—

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o'clock.

Standing Committee A

(Except clauses 1 to 3 and 16 to 53 and - schedules 4 to 11) - Clause 5 - Alcoholic liquor duties

Michael Jack (Conservative, Fylde)

I welcome you to our proceedings, Mr. Hood. When we broke from the morning session, I was observing that the Customs and Excise press release C&E2 stated that the measure had the full support of the National Association of Cider Makers. However, the representation that I received from Devon Contract Packing Ltd makes it clear that the measure was not put forward by the National Association of Cider Makers but, as the letter says,

``by the two largest manufacturers, privately, after an NACM meeting.''

The letter makes a further point:

``The worst part of the proposed legislation is the immediate implementation date. As there was no prior warning that this legislation was pending, or indeed no consultation with any of the firms who currently use DPD, we will be put in an impossible commercial position.''

That does not seem to me to be a very sensible way to go about things. Devon Contract Packing Ltd is a small enterprise and, as the hon. Member for Torridge and West Devon (Mr. Burnett) said, it is in an area that is suffering the economic ravages of the foot and mouth outbreak.

I hope that the Financial Secretary will give us some hard facts as to why the measure has been put forward. There is no specific information in the Government's propaganda about the potential duty losses. Devon Contract Packing Ltd says that it gains financially from the status quo to the same extent that the big cider manufacturers gain from their deposit arrangements. The letter concludes by proposing a complete review of cider duty, and that would be right way to discuss the measure.

Richard Ottaway (Conservative, Croydon South)

I welcome you to the Chair, Mr. Hood. I endorse the remarks made by the hon. Member for Torridge and West Devon and my right hon. Friend the Member for Fylde (Mr. Jack). They made their points succinctly.

In truth, the argument boils down to two fundamental points. First, pre-existing contracts are in place. If the 12-month moratorium that has been suggested were allowed to come into effect, the small producers would not be put at a disadvantage. Secondly, the position of wine producers has not yet been addressed, and the small cider manufacturers feel that that is unfair. They argue that the regulations have been in place for 25 years and, if the wine producers are entitled to consultation before the rules are changed, they should have the same entitlement. My right hon. Friend the Member for Fylde made the point about consultation. Under the circumstances, we hope that the Financial Secretary has listened to the points that have been made.

Stephen Timms (Labour, East Ham)

I, too, welcome you to the Chair, Mr. Hood.

Clause 5 provides for an amendment to the Alcohol Liquor Duties Act 1979, which will give Customs and Excise the power to tackle tax avoidance practices in the production of cider and perry. I want to give a careful account of that, because the position is a little different from the one that we have been informed of so far.

The measure provides power to make regulations regarding operations and processes performed on cider and perry. In addition to regulating those activities, it will enable Customs and Excise to prohibit operations after the duty point that would, if they had been carried out before it, have resulted in greater duty being payable on the finished product. The most common example is the dilution of cider after duty has been paid. As we have heard, cider is dutied in bands according to strength. Dilution is a straightforward tax avoidance practice whereby cider is produced at the top end of a band and duty paid on that volume, and then diluted to decrease its strength but increase its volume, effectively reducing the duty liability of the finished product.

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the Financial Secretary give way?

Stephen Timms (Labour, East Ham)

Before giving way, I must point out that dilution before the duty point is indeed standard practice in the industry but dilution after the duty point did not, as far as I know, begin until 1999. Neither the National Association of Cider Makers nor Customs and Excise are aware of any cider maker diluting after duty point—which would, if it were legal, be an obvious duty-avoidance technique—prior to February 1999. I will explain in detail how that process arose.

John Burnett (Liberal Democrat, Torridge and West Devon)

I also welcome you to the Chair, Mr. Hood. It is a pleasure to serve under your chairmanship. I shall make a concise intervention and hope that I might catch your eye thereafter.

The situation is not as clear-cut as the Financial Secretary has asserted because, as I said this morning, there are at least three aspects: the small cider makers who dilute post duty cannot afford a bond; they pay duty on ullage and spillage—while the contrary is not the case for the large bonded companies; and they pay their duty upfront.

Stephen Timms (Labour, East Ham)

I shall come to each of those points. The smallest cider makers do not pay duty at all. We are talking about an operation whereby a medium-sized cider producer sends product in bulk to a bottling operation, rather than making cider. Small cider makers—the real cottage industry—do not pay any duty.

Cider makers have long been aware that the dilution of cider after the duty point is, in the eyes of the law, a tax avoidance scheme and that legislation to outlaw the practice would be introduced at the earliest opportunity. The National Association of Cider Makers—reference has been made to two large companies who belong to it—has fully supported that practice and has included a statement to that effect in its own code of practice. In the letter that it sent to all members of the Committee the association said:

``Ever since 1976, it has been a condition of NACM membership that no cider maker should indulge in this practice.''

I am not therefore sympathetic to any cider makers who have decided to engage in the practice and obtain a short-term gain over their competitors in a duty benefit. If cider makers have invested on that basis, they have done so entirely at their own commercial risk.

Cider duty was reintroduced in 1976. The Customs interpretation of the law at that time was that dilution of duty-paid cider was not allowable and, as I have said, that was fully supported by the National Association of Cider Makers. With the introduction of the single market and the adoption of the European Union structures directive, it was confirmed that operations performed after the duty point, which would result in more duty being payable, are not permitted.

In February 1999, PricewaterhouseCoopers, a company of some ingenuity in these matters, challenged the Customs' interpretation of UK law on behalf of a bottling company—not the one that hon. Members were talking about. Legal advice to Customs, taken in response to that challenge, was that legislative amendment would be necessary to make the practice clearly illegal. However, until February 1999 no one had thought that it was not illegal. In March, Customs informed PricewaterhouseCoopers that steps would be taken to prohibit the practice and, concurrently, the National Association of Cider Makers was informed; it fully supported the Customs' position, and in April 1999 issued advice to its members to that effect.

Sitting suspended for a Division in the House.

On resuming—

Stephen Timms (Labour, East Ham)

I shall resume the chronology of events that I was running through. I referred a moment ago to a letter that I said had been sent to all members of the Committee. I understand that that is not the case; it was sent to members of the parliamentary cider group.

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

Would that be termed in-cider trading?

Stephen Timms (Labour, East Ham)

It probably would. If only I could think that quickly myself. However, as I said, the letter said that it had been a condition of NACM membership since 1976 that no cider maker should indulge in that practice. In April 1999, the NACM issued advice to its members outlining its support for Customs' position. It reads:

``In line with its established policy, NACM members are asked to ensure that wittingly or unwittingly they do not become involved in the supply of bulk duty-paid cider that may then be diluted and resold.''

The notice also pointed out that as consistently advised by Customs and Excise, the provision of duty-paid cider for resale is an offence. So the position was clear.

We did not include the provision in last year's Budget because of pressure on space in the Finance Bill, but Customs became aware last September of another bottling company—the one that operates in the constituency of the hon. Member for Torridge and West Devon—diluting duty-paid believed to be supplied to them by a then member of the National Association of Cider Makers. Customs wrote to Devon Contract Packing on 13 September explaining that although nothing in current law prevents that practice,

``We plan to legislate against the practice at an early opportunity.''

So the position was made clear to the company concerned seven months ago.

In the run-up to the Budget, the National Association of Cider Makers pressed for the law to be clarified. On Budget day, the NACM held its annual general meeting, during which the resignation of the company that is supplying the company in the hon. Gentleman's constituency was demanded, and the company ceased to be an NACM member from that date.

John Burnett (Liberal Democrat, Torridge and West Devon)

May I clarify just one quick point of detail? Did the Financial Secretary say that the letter of 13 September was written to Devon Contract Packing?

Stephen Timms (Labour, East Ham)

Yes, it was sent to a Mr. R. Jackson at that company.

Our view is that that activity is duty avoidance and that that has been known for 25 years. Our intention to legislate to achieve legal clarity has been known for at least two years. Devon Contract Packers was informed by letter more than seven months ago, so we are proceeding today in precisely the way that we said we would and that everybody has known that we would.

The hon. Gentleman and the right hon. Member for Fylde raised concerns about the position of the bond. Customs has the power to require a bond from an excise trader operating a duty suspense warehouse.

As the hon. Gentleman said, a figure of £250,000 was discussed with that company for a bond. However, after clarifying with the company what it wanted to do, Customs concluded that no bond was needed. The company is free to obtain duty suspended bulk cider, bottle it and to send it back to the supplier, and no bond will be required. I hope that that is helpful. A contrary view was put to the company at an earlier stage but that is the current position. In that light, I hope that the Committee will see that there is no disadvantage to this supplier or any other doing something similar.

How much money is at stake? No doubt the amount for that company is small, but if Parliament decided by rejecting the clause that this practice was, contrary to the understanding of the last 25 years, legal, all cider makers would do it, and why not since it would be a way of reducing their duty bills? Tens of millions of pounds would be at stake. We must make the position clear. I hope that the hon. Gentleman will accept that there is no disadvantage, either intended or in practice, to the company to which he referred, or to anyone practising similar activities.

Howard Flight (Conservative, Arundel and South Downs)

I have a brief question. The Minister kindly advised me after our initial discussions this morning that the limit for small cider makers is 7,000 litres. In the case of genuinely small cottage industries, will the Government consider that limit with a view to reviewing it upwards? My understanding of the cider cottage industry is that sales of 10,000 to 15,000 litres are more typical than as little as 7,000 litres.

Stephen Timms (Labour, East Ham)

The generous relief given is not available to brewers, although we have made an announcement about progressive beer duty. It is important that it is clearly targeted on the smallest producers. If the hon. Gentleman wants to make a case to me, I will have a look at it.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am grateful to the Financial Secretary for a clear exposition of the problem and the solutions as he sees them. The crucial point is that there is no prejudice against small cider makers as to the time when they pay the duty, whether or not they are bonded. That important point goes some way towards assuaging my doubts about the clause. He also told us a little more about the extent of duty that could be lost.

According to the Financial Secretary the practice of dilution, post duty, did not take place before 1999. I cannot contradict him, but that differs from the advice that I and others have received. If there are significant differences between the Financial Secretary's instructions and ours, we will revisit the point on Report.

Our cider market is dominated by two operators who have 90 per cent. of the market and considerable influence in the National Association of Cider Makers. I advise the Financial Secretary and any other Treasury Minister to ensure that a national body reflects the views of all its members. Having said that, I do not propose to vote against the clause and believe that my fellow Opposition Members are more content than they were.

Richard Ottaway (Conservative, Croydon South)

I shall not detain the Committee as there is much to be done, other than to say to the hon. Member for Torridge and West Devon that one cannot put a razor blade between us on the points that he has made. We agree with his sentiment on consultation, timing, and the method of implementing the proposal. Nonetheless, we will not be voting either.

Question put and agreed to.

Clause 5 ordered to stand part of the Bill.

Clause 6 - General betting duty

Jimmy Hood (Labour, Clydesdale)

With this, with the agreement of the Committee, we will consider schedule 1 and the following amendments: No. 2 in page 84, line 30, leave out `3' and insert `2'.

No. 3 in page 84, line 33, leave out `10' and insert `8'.

No. 4 in page 85, line 23, leave out first `to' and insert `or'.

No. 5 in page 85, line 32, at end insert:

`(1A) For the purposes of a charge under a provision of section 3 in respect of the class of bets to which the provision applies, the amount of a person's net stake receipts for an accounting period is X minus Y, where—

(a) X is the aggregate of amounts which fall due to that person in the accounting period in respect of bets of that class made with him, and

(b) Y is the aggregate of amounts paid by the person in that period by way of winnings to persons who made bets of that class with him (irrespective of when the bets were made or determined) minus any losses incurred in the previous accounting period.'.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

On a point of order, Mr. Hood. How should the rules of the House apply to the Conservative amendments on spread betting since the Conservatives benefited from a £5 million donation from Stuart Wheeler?

Jimmy Hood (Labour, Clydesdale)

Order. That is not a point of order.

Richard Ottaway (Conservative, Croydon South)

I had every intention of addressing the point that the hon. Gentleman just sought to make. I make no declaration of interest, other than to say that I have received advice in preparing my contribution to the debate from the Sports Spread Betting Association, one of whose members is a company that has a shareholder who has made a donation to the Conservative party.

It is clear that there is growing public resistance to paying taxes. We have seen that in the fuel protests, in the reluctance by any political party to commit themselves to raising income tax, and on the levying of general betting duty. It is a phenomenon of the past two or three years that internet and telephone betting from Gibraltar have grown extensively because firms wish to remain competitive against others that offer bookmaking services offshore, because of the growth of the use of the internet. However, the upshot is that bets placed in Gibraltar will not attract the betting duty of 6.75 per cent., nor the horse race levy of 1.25 per cent., nor the administrative costs of implementing those duties, which have resulted in bookmakers levying a tax of 9 per cent. We agree with the Government that reform is needed. The measures have been in place for around 40 years, and as I understand it, internet betting is growing and it is estimated that by 2005 off-course betting will constitute some 9 per cent. of all betting.

The proposal, as I am sure the Minister will explain in some detail, is to switch the tax from a general betting duty to a tax on gross profits, even though it is still called a general betting duty. As far as the bookmakers are concerned, the tax will be on the difference between the sums bet and the winnings. At present, if one puts £1 on at 10 to 1, one either pays £10.90 or, if one sticks at £10, one is deemed to have bet £9.10 and if one wins one gets 10 times the amount staked. What will differ is that the winnings will be subtracted from the sums bet at the bookies and a 15 per cent. tax will be levied per accounting period on the difference between the two amounts.

The tax will not be levied on the punters, but absorbed by the bookies. It will not be passed on, though I understand that the code is voluntary. Will the Minister explain what would happen if a bookmaker broke the voluntary agreement? The purpose is to encourage high-volume betting through the telephone and internet. The new levy applies per accounting period, provisionally on a monthly basis, though the Treasury has the power to vary it.

Fixed odds bookies rarely have losing months. The profit is fairly continuous from one month to the next. The competitive pressures come from rival bookmakers, but that does not apply to spread betting, which is why I tabled the amendments. I hasten to tell the Minister that they are probing amendments, designed to draw out his attitude to spread betting.

Let me explain exactly what a spread bet is. It allows people to bet not on a result, but on the incremental aspects of a result. For example, someone might bet on how many runs England will make in a cricket match.

Tony Banks (Labour, West Ham)

Or how long the hon. Gentleman will speak.

Richard Ottaway (Conservative, Croydon South)

Yes. I would be interested to hear from the hon. Member for West Ham (Mr. Banks) what spread he would consider in that respect. To return to my cricket example, the spread might be that England will score 300 to 320 runs, and someone might bet a pound that England will score more than 320. If England scored 340 runs, there would be 20 runs at a pound a go and the winnings would be £20. If England scored only 250 runs, the bookies would be owed £70. Someone might bet that England will gain fewer than 300 runs and the same principle applies.

Cricket is only one example: it also happens with football scores, the number of corners in a football match, the distance of a winner in horse racing and even the number of seats by which a political party will win an election. If you would like a tip, Mr. Hood, the IG index for political betting at the moment is that the Conservatives will secure between 208 and 212 seats at the next election. If you would care to stake £10 per seat, when the Conservatives gain 350 seats—[Laughter.] I am sorry, Mr. Hood. Hon. Members may be interested to know that in future political betting will fall under the category of sports betting. Spread bets are sometimes made on the movement of the FTSE or Dow index or of an individual share price. As we shall see, that will be treated differently from sports betting.

Spread betting is different from the bookies. First, it is regulated by the Financial Services Authority, which results in substantially higher levels of compliance costs. Secondly, the key players among the staff are registered and regulated by the FSA. They are highly skilled people who attract disproportionately high salaries. Thirdly, the general betting duty is currently absorbed by spread betters and is not passed on by the bookies. Fourthly, with financial spread betting, hedging is necessary to offset the exposures of rapid financial movements, which also has a cost. At present, only two spread betting companies are profitable. We welcome the Government's recognition that spread betting is different. Fixed odds betting will attract a levy of 15 per cent., sports spread betting one of 10 per cent. and financial spread betting one of 3 per cent., but I put it to the Minister that those figures distort the position.

The industry calculates that the levy of 10 per cent. on sports betting could represent an increase in taxation and revenues paid of 26 per cent. on the calendar year 2000. The 3 per cent. levy on financial spread betting will result in an increase of 180 per cent. compared with the calendar year 2000. If we take one company, Sporting Index, the 10 per cent. for sport represents an increase of 69 per cent., and the 3 per cent. represents an increase on financial spread betting of 170 per cent. Those are quite dramatic increases in revenues to be taken from individual companies. In the previous year, Sporting Index made a fairly modest profit of £2.5 million given its turnover. The extra tax that it will have to pay under the Government's proposals is £740,000. I hope that the Minister realises that it will not be a small incremental increase and that he will say that his object is to be financially neutral.

The situation is exacerbated when we learn that, in respect of fixed odds, it is estimated that the amount of tax paid will be halved. With spread betting, it will in some cases be doubled or nearly trebled. That is unsatisfactory and explains the thinking behind amendments Nos. 2 and 3, which simply ask for a level playing field and fiscal neutrality. After all, we do not want yet another stealth tax on spread betting.

Amendments Nos. 4 and 5 relate to the accounting period. As I said, fixed-odds profits at the bookies are fairly stable. With spread betting, they tend to be rather volatile, and it is not uncommon to have losing months. The legislation proposes that the accounting period is one month and there is no ability to carry forward losses from a previous month. That does not affect fixed-odds betting, but it affects spread betting. Let me illustrate that. If a financial spread betting company loses £2 million in one month but makes £2 million in the next, it is neutral, not up or down. However, it will have had to pay 3 per cent. on the £2 million profit, so it will end up paying a tax of £60,000 when it has made no profit whatever. The situation becomes worse when hedging is also taken into account.

Although the measure is welcome, the amendments must be taken seriously. Spread betting is an infant industry. It is a success story and brings in earnings from overseas. The industry is growing, but the legislation threatens its livelihood to quite a serious extent. I hope, therefore, that the Minister will consider our proposals seriously.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I have some sympathy with the amendments, despite my attempt at a point of order, which you rightly ruled out of order, Mr. Hood. Although I have concerns that the Conservatives have arguably benefited indirectly from the industry. That should not affect how we discuss tax law. It is irrelevant how individuals or companies decide to organise their financial affairs with respect to politics, and our debate should not be prejudiced thereby. Although I wanted to check that the hon. Member for Croydon, South (Mr. Ottaway) would make such a statement, I welcome it. How we debate the issue should be completely independent of that donation.

On public policy, as the hon. Gentleman said, we have received briefings from the Sports Spread Betting Association, which made it clear that few firms in the industry currently make healthy profits. The Government have recognised in their reform of gaming and betting duty that because of the internet, such companies can easily go offshore. It is indisputable that we must organise the tax system to prevent many jobs and businesses leaving this country as people seek to reduce their tax liability through technological change.

The Government must respond to the probing amendment and prove to the Committee that the rates that they propose are appropriate and will not lead to business leaving the country. If that happens, the net effect for the Exchequer will be negative, and the yield that it hopes to reap from the tax will not be realised. It is our job in the House to ensure that self-defeating tax policies are not implemented. I hope that the Financial Secretary will take seriously the amendment tabled by the hon. Member for Croydon, South explain to the Committee the Treasury's analysis and thinking about the level of the rates, answer the association's points and convince us that the rates should not be lower than the Bill provides.

Michael Jack (Conservative, Fylde)

I first congratulate my hon. Friend the Member for Croydon, South on such a lucid explanation of betting matters. I should not say that he could well find alternative employment, but certainly on the one day a year when most of us visit a betting shop to place a wager on the Grand National, having my hon. Friend to explain the tax position would have been of great assistance—I might even have won, which I did not.

In fairness to the Government, and interestingly, in the Customs and Excise press release announcing what we are debating, there is an acknowledgement that the spread betting industry operates ``in a different way'' and, as my hon. Friend rightly said, it is subject to different regulatory requirements. The Government made their statement about how they thought they ought to equate spread betting with normal betting by revised arrangements of the gross profit tax. However, once the industry saw the proposals, its perception of the impact of the revised arrangements clearly differed from that of the Government.

When the Minister first read the Budget, I am sure that he saw cogent arguments why the numbers in the Bill were right. I should be grateful if he would explain what detailed assessments were made in the real world of the impact of the proposals on spread betting companies. Had the illustrations of my hon. Friend been taken into account, a revised and more generous regime would have been devised, but it was not so. In the interests of understanding our the Government's position, perhaps the Financial Secretary will take us through the calculations or assessment of the spread betting industry that led to his conclusion and tell us whether he feels that maintaining the Bill's status quo may tempt companies to go offshore, with a consequent total loss of tax.

Andrew Tyrie (Conservative, Chichester)

I shall not detain the Committee long because almost all the points that I wanted to make have been made already. I congratulate my hon. Friend the Member for Croydon, South on his excellent exposition of the subject, which shows personal experience on one or other side of the industry. I note that agreement is breaking out on the Opposition benches, even agreement that the point of order made at the beginning was out of order, which is refreshing.

It is clear to anyone who has examined the industry that it is likely to see huge growth. The introduction of new technology will almost certainly ensure that. The industry will also benefit enormously from improved worldwide communication technology and become an increasingly international industry. The UK has a competitive advantage in the industry; we have people who know how it works, are good at it, have thought about it and have been in the game from the start. We have a particular interest in ensuring that we do not kill off the industry or seriously damage it at an early stage. Bearing in mind the industry's unique features, we are probably setting the rates too high, and there must be something in the point made by the industry that taxation on a month-by-month basis, without any provisions for the carrying forward of losses, is unacceptable. I will be grateful if the Minister bears those points in mind; he will probably not want to move too far on them, but if he can at least say that he is considering them, that will be a step forward.

Stephen Timms (Labour, East Ham)

I, too, enjoyed the account given by the hon. Member for Croydon, South, which was a helpful explanation of the issues in the clause. The hon. Member for West Dorset (Mr. Letwin) said this morning that there was nothing exciting in the Bill. Clearly he has not read recent issues of the Racing Post because, if he had, he would have seen that there has been much excitement about what clause 6 will make possible. It will radically reform the way in which betting is taxed and create the right competitive environment for UK-based bookmakers to develop their businesses domestically and internationally. It will give punters a better deal and secure for the Exchequer the revenue stream from betting in the long term.

The largest UK bookmakers have made it clear that, as a result of the reform, they will be able to absorb the tax and end the 9 per cent. deduction that they charge on stakes. That will mean that punters will pay no tax. The clause will also allow UK bookmakers to develop their domestic and international business from an onshore base and therefore compete from a position of strength in a growing global market, in particular for telephone and internet betting. Many UK companies, including all the major ones, have gone offshore in the past year or so in order to offer low tax or tax-free telephone and internet betting.

The hon. Member for Croydon, South asked whether I thought that the bookmakers would deliver the zero deductions. They gave firm assurances before the Budget about removing reductions and have since restated them. Every major bookmaker quoted since the Budget has said that it will end the deductions, and there have been no conditions or caveats to those assurances. Any failure to deliver would be taken into account during future Budget processes, but I expect that competition in the industry will dictate that the reform will deliver deduction-free betting. One player in the industry would not be able to impose deductions if no other company was doing so.

The big UK bookmakers have said that they will relocate their offshore operations to the UK. The extra domestic and international betting turnover that the reform will generate should offer increased employment opportunities in the United Kingdom and benefit the betting and the racing industries. Government revenues will share in the gain from increased turnover in the medium term. I shall read out the reactions to the reform. Ladbroke's said:

``This tax reform will benefit everyone. It is a fantastic example of Government listening to business.''

Coral's described the reform as a

``bold and enlightened decision by the Government which will guarantee the long term prosperity and advancement of the UK betting and racing industry''

There was similar enthusiasm from William Hill, which stated that the reforms were

``Great news for the British punter and great news for UK plc.''

Revenue estimated at £25 million will be lost in the short term as a result of the changes, but in the medium and long term, we expect it to be more than recouped as international and online betting is increasingly captured by UK industry. As the hon. Member for Chichester rightly said, the UK industry is strong and highly respected. If we had not made the change, it is likely that revenue would gently and steadily have declined as online betting grew, almost all of it being hosted offshore.

In the last week we have received receipts for last year's betting duties. After a number of years of buoyant growth, general betting duty receipts fell slightly by about 1 per cent. It is widely accepted that if no change had been made that decline would have continued, perhaps at a faster rate, in the years ahead.

The amendments deal with the new spread betting industry. An objective analysis suggests that it has been more lightly taxed than other sectors of the betting industry, and we have carefully considered the fairest way to deal with it. At one point, the industry favoured leaving the old arrangements in place just for spread betting but that would not have been viable given that it is a minor part of the overall betting industry and that the money involved is a small proportion of the total. Having a separate regime for spread betting would not have made sense and hon. Members did not suggest that. However, Customs analysts considered the data provided by the spread betting firms, which calculated the right rate of tax within the new arrangements. They concluded that the figures quoted by the hon. Gentleman of 3 per cent. for financial spread betting and 10 per cent. for sport spread betting were right. That was fair to the spread betting firms and to other players in betting, as substantial extra costs are incurred by spread betting firms. For example, they pay significantly higher salaries; they face the cost of compliance with financial services regulations and, in the case of financial spread betting, they carry the substantial costs of hedging. That is why the rate that we propose for financial spread betting is so much lower.

Michael Jack (Conservative, Fylde)

I am following the Financial Secretary's analysis closely. He lifted the curtain on the way in which Customs determined whether the tax proposed in the Bill was fair. If the numbers that my hon. Friend proposed had resulted from that calculation, would the hon. Gentleman still have felt that the numbers were fair?

Stephen Timms (Labour, East Ham)

I am not sure that I follow the question. The numbers in the Bill are those that emerge from Customs' analysis as a fair level at which to set the tax. Obviously, if Customs' calculations had resulted in other numbers, they would have been quoted.

Richard Ottaway (Conservative, Croydon South)

I think that my right hon. Friend is saying that I gave him some figures that show that, for example, one company would be hit by £750,000 extra on a £2.5 million profit. If he had known of those figures at the time, would those advising him have thought that that treatment was fair?

Stephen Timms (Labour, East Ham)

Perhaps I should go further because I have a few more points to make.

The companies provided the data on which those calculations were based. There was no shortage of accurate data about spread betting firms when those calculations were made. We depend not only on the analysis of Customs and Excise. As hon. Members may know, we received useful advice in a report—which is in the Library—commissioned by Customs and Excise from Nottingham university business school and Nottingham Trent university. It said on the issue:

``Tax as a proportion of gross profits in sports spread betting has varied from just under 8 per cent. in 1999 to more than 10 per cent. in 1996. So we are sceptical that a gross profit tax of 10 per cent. would seriously threaten the viability of sports spread betting. Indeed, in 1999 William Hill index paid 16.4 per cent. of its turnover in tax''

—so a GPT of 10 per cent. would have significantly reduced the tax burden.

Richard Ottaway (Conservative, Croydon South)

The Minister will be aware that corporation tax comes in on top of the tax that we are discussing.

Stephen Timms (Labour, East Ham)

The Nottingham university analysis takes account of that. Customs and Excise came up with the figures and we have obtained the validation that the figures emerging from that research will not damage the industry, which has added a helpful validation of the analysis of Customs and Excise.

I wish to address the other group of amendments and the question of whether we should allow spread bet bookmakers to carry over losses, given the extra volatility to which members of the Committee have referred.

Michael Jack (Conservative, Fylde)

Would the Financial Secretary consider letting the Nottingham researchers who validated the Treasury position talk to the industry before the Bill concludes its passage to determine whether, in the light of the information that my hon. Friend the Member for Croydon, South has presented and which was calculated by the industry, the researchers are still as confident of the results of their earlier analysis?

Stephen Timms (Labour, East Ham)

I would be surprised if such discussions have not already taken place. I am confident that the Nottingham analysis was based on good information from the industry. Hon. Members are welcome to speak further to the researchers if they wish to do so.

Andrew Tyrie (Conservative, Chichester)

Before the Minister moves to the issue of the rate on carry overs, he say more about what he sees as the Government's objective in setting a rate? Is it to provide a rate that will enable the industry to grow as much as possible to enable revenue to be maximised in the long run? Or is it to secure historic continuity? The Minister referred several times to the rate of tax on the industry in the years prior to the decision taken by Customs and Excise to set the rates. What is his response to the industry's view that the financial spread betting rate of 3 per cent. would represent an increase on the historic rate of about two-thirds on the overall tax on the industry?

Stephen Timms (Labour, East Ham)

I reassure the Committee that the measure is not about short-term revenue maximisation for the Treasury. Our aim was to secure not only an attractive stream of revenue for the Exchequer in the long term but, more importantly, a strong industry. That concern applied to spread betting, which is the smaller part of the industry, and to the wider betting industry as well. I want a successful UK-based spread betting industry that benefits from the new regime, along with the wider betting industry. The objective of the exercise has been to establish a tax arrangement that is fair to all the industry players. It has not been particularly about continuity with the past but establishing a level playing field for the future.

We recognised that spread bet bookmakers face higher operating costs. Analysis of a large sample of bookmakers' returns indicates that there are very few instances in which a fixed odds bookmaker makes a loss in any month—a point made by the hon. Member for Croydon, South—and actually few months in which a sports spread bet bookmaker makes a loss, either. It is true that losses in a given month for financial spread bet bookmakers are more likely, but they are still relatively uncommon. However, some of those who are involved in the industry might not be aware that the law currently allows individual bookmakers or classes of bookmakers to apply to Customs and Excise for longer accounting periods. Customs and Excise will work with the trade to agree the criteria for the use of longer accounting periods to ensure that they are used only where there is a need and not as a means of duty avoidance. That arrangement will meet much, if not all, of the concern behind amendment Nos. 4 and 5. In the past year, one financial spread bet bookmaker made a net loss for three months running but had to pay tax on its turnover. Under the new system, no tax would have been payable in those circumstances, so there is an improvement over the present arrangement.

I have just one minor point in conclusion. There is a technical error in the drafting of the amendment so that it would not actually deliver its intention. However, the substance is clear, and I hope that I have responded to it.

Richard Ottaway (Conservative, Croydon South)

The Financial Secretary will be amused to know that a certain amount of deliberation took place as to whether the wording should be ``minus'' or ``plus''. Our view was that two minuses made a plus. None the less, I think he takes the point.

In dealing with the first group of amendments in respect of the levy of 10 per cent. on sports and 3 per cent. on financials, the Financial Secretary said that his objective is not to maximise Treasury revenues. However, the evidence that I presented indicates that that will be the case. He has been generous with my second group of amendments, but I hope that he will reconsider the first group, if he is not seeking to maximise revenues and if he wants to be fair to all players in the industry. The fixed odds people do not think that they will pay any more in proportion to turnover—we all agree that turnover will increase—and they believe that they will have a level playing field. However, the spread betting people think that they will be paying more and that they will be treated unfairly. The Financial Secretary genuinely believes that that will not happen. None the less, if it does, would he undertake to hear representations from the industry after, say, a year and perhaps give them some comfort, if it turns out that he is wrong and I am right?

As far as the second amendments are concerned, he is being very fair about the accounting periods, and I am sure that the industry will be pleased to hear that Customs and Excise are open to representations. We are content on that point.

Stephen Timms (Labour, East Ham)

Given that we expect a loss of revenue of £45 million more in the first full year of the new arrangements, it should be clear that the exercise is not about increasing income to the Treasury in the short term. Neither do we intend to increase revenue from a particular sector. We have tried to come up with an arrangement that is fair to everyone. That does not mean that we expect that everyone will pay the same in future. It is our view that the duty charged on spread betting has been low compared with what is charged elsewhere. The figures in the Bill, which are endorsed by the Nottingham research, reflect that view. The hon. Gentleman asked me whether after a year I would be prepared to have a look at how things are working out and assess the impact on the industry. I am grateful that he thinks that I will still be in a position to do that then and, yes, I would be glad to so.

Richard Ottaway (Conservative, Croydon South)

I am grateful. If I am sitting in the Financial Secretary's office, I shall do the same. There is a slight innuendo in what the Minister just said. The Treasury's view is that spread betting has been getting off rather lightly and they are trying to bring it up. That is a completely different argument and slightly inconsistent with his level-playing-field point of view. It is the nature of any tax change that there will be winners and losers. We can let it rest that the spread betting people feel that they are marginal losers.

Question put and agreed to.

Clause 6 ordered to stand part of the Bill.

Schedule 1 agreed to.

Clause 7 ordered to stand part of the Bill.

Clause 8 - Threshold for reduced general rate

James Clappison (Conservative, Hertsmere)

It is tempting to let this pass as it involves a reduction in vehicle excise duty, but I cannot do so without putting the reduction into some sort of context, given the remarks that Ministers have made about similar proposals. The clause would extend the scope of the lower rate of vehicle excise duty from 1,200 cu cm cars to 1,549 cu cm cars. The change will take effect on 1 July but it will be backdated to November 2000. The clause provides for a system of rebates.

I hope that the Minister will accept that the background to that is the pressure under which the Government came last autumn. The change must be set in the context of what took place before then. In the Budget last year the reduced vehicle excise duty rate was extended to cars with engines up to 1,200 cu cm. When last year's Finance Bill was being considered in Committee the Liberal Democrats moved an amendment to extend that reduced rate to cars with engines up to 1,400 cu cm. The Financial Secretary rejected the amendment saying that it was not well targeted, environmentally or otherwise and that as it would apply to almost half the cars on the road it would cost about £290 million more than the extension of the threshold

Given that what is proposed is an extension not just up 1,400 cu cm but to 1,549 cu cm, it would be interesting to know what change in environmental factors between May and November of last year led to a change in Government thinking. At the time of the pre-Budget statement when the Chancellor announced the reduced rate for vehicles up to 1,549 cu cm, the number of additional vehicles brought into the reduced rate had gone from being the vice that it had been in May, when the Financial Secretary addressed the Committee, to being a positive virtue, because on the day of the statement the Chancellor told us:

``All those who have a car from 1200cc to 1500 cc—that is, an extra 5 million cars—will be entitled to £55 off their annual licence fee from today.''

The Chancellor gave his rationale for the policy shift that had taken place as a wish to provide greater choice for rural dwellers:

``many—especially those in rural areas—have put it to me that greater choice would be available to rural motorists and motorists generally if the £55 deduction could be accessible not only for cars under 1200 cc, but for cars up to 1500 cc, including the Focus, Golf, Astra, Escort and Rover 214.''—[Official Report, 8 November 2000; Vol. 356, c. 323.]

I look forward to the Financial Secretary's reaction, and am tempted to speculate on the basis of the Chancellor's statement whether Ministers had hitherto been unaware that it was possible for those who live in the country to purchase and drive the Focus, Golf, Astra, Escort and Rover 214. One imagines that Ministers, even in this Government of city dwellers, may have been aware that those possibilities were open to them. [Interruption] No doubt the Financial Secretary will put me right. I suggest to him that, while country dwellers may not be concerned about their choice of car—and it was country dwellers that the Financial Secretary said he was responding to—and, to be fair, I am sure that they would be grateful to the Chancellor for being considerate about that choice, they are certainly concerned that they have no choice about the cost of the petrol they put inside those cars, and the fact that so much of that cost arises from tax and duty. That, however, is another story.

Can the Minister tell us the rationale for the policy shift that is so dramatic compared to the attitude of the Government last May?

Michael Jack (Conservative, Fylde)

I rise to pass an observation on the logic behind the proposal. When the change to excise duty was originally introduced, the Government told us that it was intended to encourage cars that had low carbon dioxide emissions. Yet we found that cars included in the original proposals produced higher carbon dioxide emissions than those excluded. The original argument was that the reduction in vehicle excise duty would in some way cause people to change their buying arrangements. However, the new arrangements at £55 a year are the equivalent of a saving of £165 over three years. That will not have a substantial effect on the car-buying decisions of those who pay for their cars out of their own pockets.

The proposal moves the threshold from 1,200 cu cm, which seems an entirely arbitrary figure anyway, to 1,549 cu cm. I am intrigued by 1,549 cu cm. Why 1,549 cu cm? Can the Financial Secretary give a detailed explanation as to why not 1,500 cu cm, or 1,449 cu cm or any other number? Why not relate the revised arrangement to the carbon dioxide emissions of cars, particularly of new ones, where the data are readily available? If the Government wanted to prove their green credentials, they would have proposed a different arrangement.

Stephen Timms (Labour, East Ham)

I remind the hon. Gentleman that we agreed in last year's Finance Bill that VED for new cars would be charged on the basis of CO2 emissions, and that has taken effect. That arrangement applies to older cars for which data are not readily available.

Michael Jack (Conservative, Fylde)

I do not know where new cars are concerned, but the arrangement appears arbitrary. I am always interested to know how decisions are reached. Perhaps the Financial Secretary will tell us why 1,549 cu cm was alighted on. For older cars, why is not the proposal for petrol as generous as for diesel? Many diesel car engines have more cubic centimetres than that, because they have a lower brake horsepower output, but have lower CO2 outputs than vehicles that benefit from the proposals. It appears somewhat harsh, if the Government's real interest is in carbon dioxide emissions, to hit diesel cars.

I should have said, incidentally, that I run a diesel car, so I have some experience of the matter, but I do not plead the case from a selfish point of view; I plead it from the rational point of view of the stated objective, which was supposedly to reduce carbon dioxide emissions.

Stephen Timms (Labour, East Ham)

The clause will indeed raise the engine size threshold below which the lower rate of VED—£105—is levied to 1,549 cu cm from 1 July. That means that 5.7 million additional cars will be taxed at the lower rate and the extension will be backdated to November.

That is the next stage of the reform of car vehicle excise duty that we have put in place during recent years. We started in June 1999 with a low rate for cars of below 1,100 cu cm; that rose to 1,200 cu cm on 1 March this year, backdated to March 2000. The Driver and Vehicle Licensing Agency recently wrote to about 3 million keepers of vehicles between 1,100 cu cm and 1,200 cu cm, and is currently making payments against licences for those cars taken out between March 2000 and February 2001. As I said, new cars registered on or after 1 March this year are taxed directly on the basis of their CO2 emissions—I shall return to the point raised by the right hon. Member for Fylde in a moment—the latest change taking effect on 1 July and being backdated to November.

James Clappison (Conservative, Hertsmere)

Has the Financial Secretary received correspondence from people who licensed their cars after 1 July last year—say last September or October, just before the announcement—during the period that was covered by the backdating but who were not eligible for it?

Stephen Timms (Labour, East Ham)

I cannot recall any letters specifically on that point, although there is certainly a great deal of interest in the matter. In a moment, when I respond to the point made by the right hon. Member for Fylde, I shall refer to some of the issues of boundaries, which certainly excite a good deal of attention, especially concerning the VED arrangements. In this case, the DVLA will write to everybody with cars of between 1,200 and 1,549 cu cm engines who have taken out licences between November 2000 and June 2001, inviting them to apply for a rebate against those licences. Those who have taken out a 12-month licence will receive £55; those with six month licences will receive £27.50.

The hon. Gentleman asked me: why this change of heart since our debate on the subject just under a year ago? The Government has of course listened to the concerns of rural and low-income drivers. We have received a large number of representations about the matter. Especial concern was prompted by the increase in petrol prices caused by the increase in crude oil prices last year, and this is one element in the package of the Government's response. We have listened and made a change that has been widely welcomed. I would hope that all members of the Committee would agree that the Government should be listening to what people say and making changes in response.

Michael Jack (Conservative, Fylde)

Will the Financial Secretary give way?

Stephen Timms (Labour, East Ham)

Let me make a little more progress, because I want to answer the right hon. Gentleman's questions in a moment. He asked specifically why we had chosen the figure of 1,549 cu cm and whether that was an arbitrary choice. Eagle-eyed members of the Committee may have spotted that the figure announced in the pre-Budget report in November was 1,500 cu cm. The Budget figure was higher at 1,549 cu cm.

When we first introduced the 1,100 cu cm threshold, Members of Parliament received many letters from constituents who drove 1,107 cu cm, 1,103 cu cm or other cars with engines slightly above the 1,100 cu cm threshold. They were angry that they were missing out on the lower rate. We were anxious to ensure that a similar problem did not arise with the present raising of the threshold. Now anyone driving a 1.5 litre car will benefit from the change. The increase from 1,500 cu cm to 1,549 cu cm brings 80,000 additional vehicles into the scheme. If we had stuck with the 1,500 figure, a significant proportion of those 80,000 would have been writing to their Members of Parliament to complain that they were missing out on the concession. We have addressed the problem, so I hope that no one will feel hard done by.

The right hon. Member for Fylde said that the change would not have much effect. From the letters across my desk, I know that people feel strongly about these matters and I suspect that this signal is effective in making people think about what car to buy. Some people have changed their decision accordingly, so we should not underestimate the potency of this measure as an incentive to opt for smaller cars.

The right hon. Gentleman asked about CO2 emissions as an alternative basis, but the data about emissions from older cars are inadequate. It is now a requirement that the figure appears on the registration document to make it easy for everyone to understand how much they will have to pay for new cars under the new scheme. As similar data for older cars are unavailable, such a system would be much more complicated, costly and bureaucratic process—and feasible only for cars made since 1997. In view of the difficulties, we decided that it was not worth while to proceed on the basis of CO2 emissions.

The right hon. Gentleman also asked about diesel. Diesel's position is fairly reflected under the new arrangements. Again, we did not want to introduce a complex system for older cars and, although it is not a perfect measurement, the size of a vehicle's engine is not a bad proxy for its environmental impact.

The clause provides relief and offers a significant additional tax deduction for car drivers. Car drivers have warmly welcomed it, and I hope that the Committee will, too.

Michael Jack (Conservative, Fylde)

I restrained myself from intervening on the Financial Secretary, who was kind enough to answer some of my earlier points, but I want to put on the record the fact that I found his comments interesting. He established a principle in which a minority group, in this case rural motorists—no definition was given as to who or what they were—managed to persuade the Treasury to alter universal car taxation for their benefit. I welcome that suggestion but it will be interesting to know what is the deadweight cost for the help that has been given to the urban motorist to achieve a clearly stated policy objective to assist the rural motorist. I am so intrigued by that that I shall write to Sir John Bourn of the National Audit Office asking him to evaluate the point.

Stephen Timms (Labour, East Ham)

I referred to rural and low-income motorists. Is the right hon. Gentleman suggesting that we should have different rates of vehicle excise duty for rural and non-rural motorist? Neither I, nor the right hon. Gentleman—who is a former Treasury Minister—would favour such action.

Michael Jack (Conservative, Fylde)

I take the hon. Gentleman's point. His emphasis was low-income motorists and we shall ask for that analysis. There are a fair number of deadweight costs but I shall not detain the Committee further on the matter.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.

Clause 9 - Rates of duty for goods vehicles

James Clappison (Conservative, Hertsmere)

We now come to the changes in excise duty relating to goods vehicles, which will be of interest to the road haulage industry. I cannot let the matter pass without making a few remarks about the industry and its state.

The changes in clause 9 were announced by the Chancellor as part of the package in his pre-Budget report, in response to the pressures that I described in the previous debate. At the time of the pre-Budget Report, the Chancellor said that the changes were equivalent in value to a cut of 3p in the price of diesel to the haulage industry. However, that 3p is only a small fraction of the total increase in the cost of diesel that has come about since the Government came to office, an increase that has meant that British hauliers are at a significant disadvantage compared with their European counterparts. British diesel prices are still the highest in Europe by some distance; they are substantially higher than they were in 1997 and three quarters of that price is made up of tax and duty.

That disparity is particularly significant in Northern Ireland. According to road fuel prices supplied by the House of Commons Library for 9 April, diesel is 47p a litre in the Republic of Ireland and 77p a litre in the North. The Minister will have seen the interesting article in yesterday's Financial Times outlining the effect on the petrol and diesel retailing industry of disparity in the North. Industry has gone into decline and smuggling is taking its place, controlled by groups in the Province.

Given that the changes are said to be part of a package to help the haulage industry in the face of European competition, has the Minister any statistics for the increase in the number of foreign trucks operating in the United Kingdom in the past four years? Will he also address the question of cabotage, by which foreign firms operate in the domestic business carrying freight from one destination to another in the United Kingdom? What is the extent to which foreign hauliers are taking a share of the internal United Kingdom market?

We were told in the pre-Budget statement that the Chancellor wanted to introduce a vignette system under which non-British companies and lorries would pay their share to Britain for using British roads. The Chancellor apparently adopted it in his pre-Budget statement, although he did not mention it. An accompanying press notice stated that the Government had consulted on the matter and that they would continue to develop their plans to set up a vignette in the coming months. Given that we have been calling for such a system, we should be grateful if the Financial Secretary would tell us what is happening about it.

On the detail of the proposed changes, I ask the Financial Secretary to consider one category of vehicle in particular. I appreciate that several categories relate to goods vehicles and vehicle excise duty. However, I invite the Financial Secretary to give an account of the history of one such vehicle and the reasons for the Government's thinking on the matter. The 40-tonne vehicle on five axles has only recently been allowed on to United Kingdom roads following a European Union directive. The UK Government took the view that that particular lorry causes much more wear and tear on UK roads than the previously permitted and common 38-tonne lorry. I cannot give the technical reasons for that, but the Government have previously placed that fact on the record.

The wear and tear is so great that the 1999 Budget set a relatively high rate of vehicle excise duty for 40-tonne five-axle lorries. That rate was £5,750, compared with £3,210 for 38-tonne five-axle lorries—a significant differential. A press notice said that it was set at that rate

``to discourage strongly the use of these vehicles in view of the additional road damage that they cause''.

The 2000 Budget reduced the rate for the 40-tonne lorry to £3,950, and this year's Budget will reduce it further to £1,850 from December 2001. In view of that dramatic change of the 40-tonne lorry's position in vehicle excise duty, will the Financial Secretary say whether the environmental factors that were enunciated in 1999 and the effect on British roads still apply? Why have both the absolute VED for the 40-tonnes vehicle and the differential with the more common 38-tonne lorry fallen? We would appreciate an outline of the Government's thinking, given that they previously said that the 40-tonne lorry causes wear and tear to, and expense for, our roads.

Howard Flight (Conservative, Arundel and South Downs)

I hope that all hon. Members are uncomfortable with a situation in which British trade or industry is put at an unnecessary competitive disadvantage to international competitors. The Minister will know that the British haulage industry has suffered badly during the past five or six years. Its costs have increased by some 16 per cent. since 1997 alone, and its profit margins range from 0 to 2 per cent. depending on the operators. Domestic trade has seen a substantial invasion by continental operators, which have increased their business by around 60 per cent. in Britain in the past five years. I recollect a KPMG study of two years ago that examined plusses and minuses for the British industry; it could point only to some labour cost advantages. Those are now under threat and there is a shortage of applicants for jobs because lorry drivers' pay is low compared with that in continental Europe.

In their consultations with the industry and representative bodies, were the Government able to argue that the proposal for a significant reduction in vehicle duty will restore any semblance of fair competitiveness in operating costs between the domestic industry and the continentals, which come into Britain after topping up with diesel in Calais? Is the reduction likely to shake off some of the bad practices that have gathered momentum—such as UK businesses moving their entire headquarters overseas, which is called changing flags—and some of the more criminal activities, such as the improper use of red diesel? There has been surprisingly little general media coverage. Obviously, the industry is pleased to have cuts. Having cuts is better than not having them, but I suggest that they are merely a temporary buying-off measure unless a robust case can be made that the British haulage industry will be put on a fair and competitive footing.

Harry Barnes (Labour, North East Derbyshire)

Will my hon. Friend the Financial Secretary respond specifically to the points raised about the situation in Northern Ireland? The United Kingdom has a land border with the Republic of Ireland, and the disparity between duty rates presents many serious problems. It is almost impossible for anyone to run a petrol station in a place such as Belfast without taking in illegal petrol to survive. Many people have turned to illegal forms of activity because of the arrangements there.

There is a loss to the Revenue, because if people are within 30 or 40 miles of the border, it is worth their while to fill up their vehicles at the stations that have grown up along it. A massive amount of diesel is purchased in the Republic of Ireland, where the duty is paid, and then smuggled into Northern Ireland. Doctored material is also brought in illegally. The Select Committee on Northern Ireland Affairs has produced a report on that. Although we are talking about only 3 per cent. of the population, it is a serious issue.

Stephen Timms (Labour, East Ham)

I shall respond first to the points on fuel tax that were made by my hon. Friend the Member for North-East Derbyshire (Mr. Barnes) and the hon. Member for Hertsmere. Those issues were dealt with on the Floor of the House when clauses 1 and 2, which deal with fuel duty, were debated. I am certainly aware of the problem in Northern Ireland; Customs and Excise has substantially increased the number of officials working on it. The information that I have from people involved in Northern Ireland is that the extra effort seems to be having a significant impact.

The hon. Member for East Londonderry (Mr. Ross) observed in the Chamber on Monday that the way in which the border has been regulated as a result of the difficulties with foot and mouth seems also to have had a significant impact on reducing the amount of illicit fuel crossing the border. I certainly recognise that that is a serious issue. I have seen petrol stations in rural parts of Northern Ireland selling petrol remarkably cheaply. I wondered how they could do that and guessed what the answer was. Resources are being dedicated to dealing with the problem, and we hope that it will be brought under control.

I shall focus on the issues around vehicle excise duty for lorries, to which this clause relates. The Budget contained a 3p a litre reduction in the price of diesel, but the figure for the whole package, to which I think the hon. Member for Hertsmere referred, is 7p a litre. The reduction is not just 3p if we take account of the full package, which includes the measures on lorry VED and the road haulage modernisation fund.

We are talking about a fundamental reform of the structure of VED for lorries. We consulted the industry on the principles of reform through our public consultation and through the Road Haulage Forum, which has been meeting for well over a year and at which I have represented the Treasury. Those principles have received wide support.

The competitive position of the UK haulage industry compared with continental European industries, taking full account of all the factors such as labour costs, social costs and corporation tax, which is apparently much lower here, is not at all bad. That was the position before these changes. However, we are making a substantial further reduction in the burden of taxation on road hauliers to improve the competitive position of the UK haulage industry, reducing the tax burden on that industry by £300 million and bringing the UK rates for lorry VED down to among the lowest in Europe for the cleanest lorries.

I was asked how much cabotage there was in the UK. We commissioned some work on that in the Road Haulage Forum and it appears that the figure is very small. The survey was carried out in the early part of last year and showed that 0.06 per cent. of domestic haulage is carried by non-UK lorries. There was a good deal of surprise about that but the methodology for that survey was carefully agreed with the industry organisations. There are many non-UK lorries on UK roads but they are not generally doing domestic haulage work: they bring goods into, or carry exports from, the UK. The proportion of cabotage is extremely small.

We are reducing the tax burden, bringing UK rates down to among the lowest in Europe for the cleanest lorries. Secondly, instead of the more than 100 tax rates that have applied in the past, the new system contains seven broad bands. It will mean greater flexibility for operators who will be able to operate at a wider range of different vehicle weights and axle configurations without the need to re-plate and re-license. That is an important step, but we will continue, in consultation with the industry, to look for ways in which the administration of lorry VED can be modernised to reduce further the administrative burden on hauliers.

The new system provides strong signals to hauliers about the environmental impacts and the road wear caused by their vehicles. It builds heavily on the important work that was commissioned by the Department of the Environment, Transport and the Regions from National Economic Research Associates. It produced a methodology for assessing those environmental impacts and road wear. Its work is reflected in this new structure, which will come into effect on 1 December. Until then, the interim arrangements for lorry VED, introduced from 1 December last year, will continue to apply where there is, subject to the minimum rates, a straightforward halving of the lorry VED that was being paid. That is a substantial change.

The hon. Member for Hertsmere asked me about the proposed vignette scheme. We remain committed to the principle that all lorries should contribute towards the costs that they impose in the UK. The priority that we have set in this work has been on the introduction of the lorry VED reforms and the rebate scheme, because they will be of immediate benefit to the haulage industry and certainly reflected the industry's priority. We have had some useful discussions on the introduction of a road user charge with industry representatives. We are continuing to examine the options necessary for setting up such a scheme. The new structure of VED has been designed to take account of the requirements of EC directive 62/99, which sets out both the parameters governing a vignette scheme and the minimum rates of VED. That work will continue.

The hon. Gentleman asked me about the way in which 40-tonne, five-axle vehicles have been dealt with. I repeat that the new rates reflect several factors, including the research that I mentioned on road wear and environmental impacts of different types of lorry, which have influenced our thinking. We closely considered the treatment of 40-tonne lorries. During last year's Budget process, we were especially concerned about the competitive position of United Kingdom hauliers operating such lorries compared to continental operators. It was concern on that score that led to the significant change in last year's Budget to which the hon. Gentleman rightly drew attention. The new information about road wear and environmental impact and our concern to reduce the level of lorry bed close to European Union minimums for the cleanest lorries are the factors that have determined our decision.

James Clappison (Conservative, Hertsmere)

On the last point, I must say that the technical side of the 40-tonne lorry is something of a mystery to me, but I took the Government at their word when they said in 1999 that, for some reason, the 40-tonne, five-axle lorry caused especial wear and tear on the roads. I should imagine that, if that were so then, the same applies today. No doubt those who are involved in such matters will want carefully to consider the Financial Secretary's words, but I am not sure that they provide a complete explanation. It appears that the concern that the Government themselves reflected by their differential rate for 40-tonne lorries has been allowed to subside, as the duty will be dramatically reduced.

I invite the Financial Secretary to take on board the comments made by the hon. Member for North-East Derbyshire in a previous debate about the effect of market forces on observation of the law. I do not want to go back over that ground, but when the differential in price is as striking—especially across a land border—as 30p a litre, that creates enormous strain, given the law and order situation in that part of the world. I hope that the Government will reflect on that. If foot and mouth has by coincidence brought about greater law enforcement, that is a good thing, but the underlying situation is serious, as the disappearance of petrol stations and the general state of trade in Northern Ireland attest.

I invite the Financial Secretary to consider that matter, which does not only affect Ireland, where the price difference is striking. United Kingdom firms face competition from foreign firms throughout Europe that pay much cheaper diesel prices. We have the highest prices by a mile, and whatever relief and mitigation the measure will give is only a fraction of the price difference under which United Kingdom firms must labour when competing with foreign firms. Across the channel, the pump price of diesel is 27p a litre cheaper. If companies go further afield, they can find even cheaper rates. Our diesel rate is by a long way the highest in Europe and has the greatest tax and duty component. It is because of that tax and duty that United Kingdom firms are in such a difficult competitive position. As we have made clear, we will continue closely to monitor the effects on the United Kingdom haulage industry of that desperate competitive position.

Question put and agreed to.

Clause 9 ordered to stand part of the Bill.

Schedule 2 agreed to.

Clauses 10 to 12 ordered to stand part of the Bill.

Clause 13 - Exemption of agricultural etc.vehicles

Michael Jack (Conservative, Fylde)

I seek the Financial Secretary's help on a constituency matter. One of my constituents, Mr. Marcus, is able to use a modern farm tractor for activities on and off the road. He has experienced considerable difficulties with the tax regime when his tractor changes from agricultural to haulage uses. I put down a marker here: as people in the rural economy seek innovative ways to use capital equipment at times of difficulty, anomalies may emerge. I shall write to the Financial Secretary and ask him to review Mr. Marcus's case with a view to helping people in the rural economy who are developing more entrepreneurial uses of their farming equipment.

Stephen Timms (Labour, East Ham)

I would be happy to consider the right hon. Gentleman's letter. We must be careful not to create a competitive difficulty when people carrying out rural haulage services find a different way of providing those services that works to their disadvantage. I shall certainly examine carefully the case of the right hon. Gentleman's constituent.

Question put and agreed to.

Clause 13 ordered to stand part of the Bill.

Clause 14 ordered to stand part of the Bill.

Clause 15 - Payments by Commissioners in case of error or delay

Richard Ottaway (Conservative, Croydon South)

I shall not detain the Committee long. The Economic Secretary was not present at the aggregates levy debate on the Floor of the House, but the clause reminds me of it. Can she provide some background to the clause? Why are payments by commissioners in cases of error and delay relevant and what has happened up to now? Commissioners have made errors and delays in the past, so what is new about the clause?

Melanie Johnson (Labour, Welwyn Hatfield)

The clause and the schedule provide for the payment of compensatory interests where excise duty has been overpaid or underpaid as a result of an error by Customs and Excise or where the payment of a claim to excise duty has been unduly delayed. It also provides for the repayment of excise duty or compensatory interest to persons or businesses incorrectly refused authorisation, approval or entitlement to goods relieved of excise duty.

The measure brings excise duties into line with other duties and taxes administered by Customs and Excise by providing a statutory requirement to pay compensatory interest. The difference is that provisions for tribunals to take measures have existed in the past, but there will now be a statutory requirement. Traders in excise goods have welcomed the measure and I hope that the Committee will support it.

Richard Ottaway (Conservative, Croydon South)

I am grateful to the Economic Secretary and would not disagree with her verdict. Would she confirm that the point is about shifting from a power possessed by tribunals to a statutory power of commissioners?

Melanie Johnson (Labour, Welwyn Hatfield)

I could write to the hon. Gentleman on that, but I believe that rates can be set by a value added tax and duties tribunal in judging individual cases, whereas the rate of interest will be determined by regulations set out in 1998 in respect of interest rates used for other indirect taxes. As the hon. Gentleman will be aware, the rate is 5 per cent. As I said, that is a discretionary power, whereas the provision in the clause is statutory.

Question put and agreed to.

Clause 15 ordered to stand part of the Bill.

Schedule 3 agreed to.

Clause 54 - Charge and main rate for financial year 2002

Richard Ottaway (Conservative, Croydon South)

I want a general debate on corporation tax in the remaining minutes of the sitting, but I am not sure whether it should be discussed under clauses 54, 55 or 56.

Jimmy Hood (Labour, Clydesdale)

Order. I suggest that the hon. Gentleman finds out quickly, as I am about to put the question on clause 54.

Richard Ottaway (Conservative, Croydon South)

I am grateful for your assistance and guidance, Mr. Hood.

On the face of it, the proposal is a planned announcement of the level of corporation tax levied on Britain's corporations. The Prime Minister repeatedly says that he is proud of the fact that he has reduced the headline level of corporation tax from 33 per cent. to 30 per cent. That appears to be a laudable claim; it is the sort of thing that Baroness Thatcher might be proud to say. But when one looks at the small print, and sees what is actually happening to the level of taxation on companies, the opposite is the case. The Chancellor's figures in table C7 on page 192 of the Red Book, show corporation tax rising by £5.7 billion from £32.1 billion in 2000-01 to £37.8 billion in 2001-02. The Chancellor could easily have chosen to moderate those vast increases by raising the corporation tax thresholds at least in line with inflation or by cutting other taxes for business, which is what the Government said they would do. The Labour party business manifesto in April 1997 stated:

``We will not impose burdensome regulations on business, because we understand that successful businesses must keep costs down''.

What absolute codswallop! What effort have the Government made to keep that pledge to the electorate? The manifesto continued:

``We will cut unnecessary red tape''.

In his speech at the Mansion House in February, the Secretary of State for Trade and Industry said:

``I guarantee that we will not allow regulation to stifle enterprise and innovation''.

At the annual dinner of the Confederation of British Industry, the Prime Minister said:

``Enterprise should be encouraged through a climate for business and a tax system which rewards success.''

The Chancellor was reported as saying that he wanted tax cuts for business, not tax rises.

The Government have singularly failed to keep any of those pledges; they have increased the burden on businesses and the level of taxation on companies. Members of the Committee need not take it from me, they can listen to the Confederation of British Industry—the voice of British industry. Commenting on the financial burdens that the Government have piled on business, Digby Jones, director general of the CBI said:

``Enough is enough. I really do say to the Government `no more'''.

What state have we reached when the director general of the CBI has to go to the Government and say ``Enough is enough'' after their pledges during the election campaign? Mr. Digby Jones also said:

``Ministers must do more to roll back the burden of business taxation, which has gone up £5 billion a year during this parliament''.

The CBI pre-Budget report submission complained of the

``hike in business taxation since 1997''.

It stated:

``We believe that several recent policy proposals are potentially damaging and must be amended.''

It is not only the CBI that holds those views. Ken Jackson, general secretary of the Amalgamated Engineering and Electrical Union said:

``We're not against taxation, but do you really hit business with new taxes when industry is already under pressure from the pound? Business should be treated more fairly.''

The Government are quiet when it comes to quotations like that from their own supporters. Those are the sorts of quotations that count, and the ones that they should be listening to. There is no doubt that the Government have done nothing but raise the levels of taxation and regulation on business. They cannot be proud of the burdens that British industry has to face today. It is a travesty for them to stand here quietly hoping that we would slip through the rise in corporation tax before 7 o'clock. The Minister should stand up and tell us what he is actually doing for business.

Peter Kilfoyle (Labour, Liverpool, Walton)

Does the hon. Gentleman accept that many of us would like us to see corporation tax rise even more?

Richard Ottaway (Conservative, Croydon South)

There speaks the truth. I respect the hon. Gentleman. There are not many hon. Members who have resigned from governments on points of principle. He speaks for the heartlands of the Labour party, and has seen that his party supporters are now paying more for their cars, cigarettes, and pint in the pub. He has seen tax rises on his supporters quite consistently over the past three years. The country's tax burden has been regressive and is hitting his supporters worst of all.

Peter Kilfoyle (Labour, Liverpool, Walton)

I thank the hon. Gentleman for his warm words, but will he take it from me that what the people that I represent have seen is the establishment of Tory-free zones, simply because they have no faith in the Opposition's plans to deliver anything material in their lives?

Richard Ottaway (Conservative, Croydon South)

What the hon. Gentleman needs is a few Tories around the place. It is the Conservative party that stands up for lower taxation, that voted against the tax rises and stood up for his supporters. Unless he breaks ranks and votes against this wretched Government, he will be replaced by a Conservative Member of Parliament. That is the consequence of the Government's levels of taxation.

I return to corporation tax. We are not happy about the levels of tax on business. The Minister should be announcing a whole raft of proposals that will relieve the burden of taxation on business. He should be seeing cuts on the motoring costs of business. [Interruption.]

Jimmy Hood (Labour, Clydesdale)

Order. Hon. Members should listen a little more, and speak a little less.

Richard Ottaway (Conservative, Croydon South)

The Minister should be announcing business rate relief; reforms of capital gains tax, share options, and venture capital; the abolition of the ridiculous double taxation relief proposals. He should repeal IR35 and replace it with more appropriate regulations. Those are the proposals of the Conservative party manifesto for the next general election. We are the party that believes in business, fights for business and stands up for business.

Michael Jack (Conservative, Fylde)

My contribution on corporation tax will not match the wonderful and aggressive speech of my hon. Friend.

Jimmy Hood (Labour, Clydesdale)

Order. I suggest to the right hon. Gentleman that if he wants to make a speech on corporation tax, he relates it to clause 56.

Michael Jack (Conservative, Fylde)

On a point of order, Mr. Hood. I seek your guidance. I understood that we were speaking to clause 54, and that we were to debate the main rate of corporation tax at 30 per cent. Is my assumption correct?

Jimmy Hood (Labour, Clydesdale)

The right hon. Gentleman is welcome to pursue his line, but he indicated that he was going to trespass into clause 56. I was trying to assist him.

Michael Jack (Conservative, Fylde)

I am not going to make a speech about the starting rate at 10 per cent. of corporation tax, the subject of clause 56. I want to look at the consequences of clause 54, which confirms that corporation tax will be charged for the financial year 2002 at a rate of 30 per cent. Intriguingly, the Red Book estimates corporation tax income for the financial year 2000-01 at £32.1 billion. The figure is £37.8 billion for the present financial year ending in 2002. Unfortunately, although the Government are inviting the Committee to confirm the rate at 30 per cent. for 2002, we have no idea what the economic consequences of that will be, because the Red Book does not appear to have a number against it.

I make that point in all seriousness, because we have seen a large number of profit warnings from British industry as it tries to cope with the downturn in world markets. Despite the Chancellor of the Exchequer's almost saying that the United Kingdom is insulated from developments in the world, the Committee is being invited to agree clause 54 in an information vacuum. We have no idea of the effects on the Revenue of a 30 per cent. main rate for corporation tax in the light of a worsening corporate financial situation. Will the Economic Secretary give the projection for corporation tax that will be raised in the financial year 2002-03 as a result of the 30 per cent. rate? How does it compare with the figures that I have given.

It is revealing that, on non-North sea corporation tax as a percentage of GDP, the Treasury is prepared to be a little more adventurous, in that table C9 of the Red Book gives an indication of the tax burden on business. In the financial year 2002-03, which is the subject of the clause, the tax burden on industry will remain constant at 3.4 per cent. Intriguingly, it will drop to 3.2 per cent. in the following financial year but rise thereafter. In the light of my query about the effect of the downturn in profitability, what assumptions lie behind those calculations? Assuming that the contents of clause 54 are maintained, the longer-term prospect—business likes to plan for the long term—is that business can look forward to a rising burden of taxation.

I apologise to the Committee for not declaring an interest as a non-executive director of a public limited company that pays corporation tax—[Interruption.] I remind those who question that that I declared my interests at the beginning of the Second Reading debate. I declare them again now. There is no material interest, because it says that there will be no change, and I propose no change.

Companies must pay mainstream corporation tax on a quarterly forecast basis. Will the Economic Secretary say how the revenues from corporation tax are projected with quarterly forecasting? Has the reality of today's estimates from companies shown to the Inland Revenue and therefore the Treasury started to move away from previous estimates that it had? I am anxious to know whether there will be an effect on the public purse of the declining profits on which the 30 per cent. corporation tax will be levied.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The right hon. Gentleman is advancing an interesting argument, but I am not sure whether, in the cold light of day, he would agree with the ultimate logic of what he is saying. Is he really suggesting that corporation tax rates should go up and down over the cycle if the yield of corporation tax to the Exchequer goes up and down in relation to that cycle?

Michael Jack (Conservative, Fylde)

No, I am certainly not suggesting that, because business requires a stable tax environment to undertake its planning. I asked my questions because we are being asked to agree a tax rate for 2002-03 in an information vacuum. Given that corporation tax is projected to yield £37.8 billion in the current financial year, I am interested in the effect of a diminution of revenue on the overall public finances. The Chancellor has said that they are robust; I want to probe and establish how robust they are in the light of reality.

Will the Economic Secretary be kind enough to comment on the relevant mainstream corporation tax issues raised by the CBI in its February 2001 report, entitled ``Business priorities for Budget 2001''? Paragraph 16 says:

``There have been a number of unwelcome surprises with regard to corporation tax since Labour came into office''.

It goes on to list those surprises and then comments:

``The CBI would argue very strongly that there is now a clear case for avoiding further shocks and giving some breathing space to take account of the impact of all these changes on the UK's international competitive position.''

It is clear that the CBI has taken into account such factors as previous changes on double taxation relief, controlled foreign companies taxation and the abolition of dividend credit taxes, and that it is feeling the pinch in competitiveness. It is all right for the Government to say that we should stick at 30 per cent., but business feels that its competitiveness, notwithstanding the proposal, has been adversely affected by the way in which the Government have dealt with corporation tax. I will be grateful if the Economic Secretary responds to those representations.

Melanie Johnson (Labour, Welwyn Hatfield)

I welcome you to the Chair, Mr. Hood.

We will maintain the corporation tax rate at the present 30 per cent. but we have reduced it twice since taking office—from 33 to 31 per cent. in 1997 and from 31 to 30 per cent. in April 1999. Our record on that is good.

I doubt that I will be able to address in the time available all the points that have been raised, but I will start with international competitiveness. The right hon. Member for Fylde has many concerns about that, but all Labour Members can be proud of our record. If we examine the tax paid by businesses, the UK compares extremely well with other Organisation for Economic Co-operation and Development and European Union member countries. We have reduced corporation tax to the lowest levels in UK history, and the total savings to companies from our tax cuts will be worth more than £3 billion per annum. Our top rate is just 30 per cent., while Germany, France, Japan and the United States of America all have effective top rates of around 40 per cent. That is based on additions of local taxes; for example, depending on the regions, corporation tax varies between 36 and 41 per cent. in Germany, between 35 and 36 per cent. in France, more than 40 per cent. in Japan and 35 per cent. in the USA—although there are a number of state taxes on top of that.

Andrew Tyrie (Conservative, Chichester)

Will the Economic Secretary give way?

Melanie Johnson (Labour, Welwyn Hatfield)

I shall, but I have only five minutes in which to respond.

Andrew Tyrie (Conservative, Chichester)

Does the Economic Secretary agree that we should take into account not only rates, but reliefs and allowances? Will she say whether she thinks that competitiveness should be defined by rates or by overall yield?

Melanie Johnson (Labour, Welwyn Hatfield)

We can examine the problem from a number of points of view, but, if we use company taxes as a percentage of expenditure based on gross domestic product in 1998, UK costs compare extremely well with those of France and Germany. Our overall position with those figures, which include corporate taxes, employers' social security contributions and other payments, is 9.4 per cent., compared with 17.5 per cent. in France and 9.2 per cent. in Germany. The EU average is 11.5 per cent.

Richard Ottaway (Conservative, Croydon South)

The Minister is praying all those figures in aid of Britain's competitiveness position. Will she explain why we have just slipped from 15th to 19th in the competitiveness league, behind Taiwan and Israel?

Melanie Johnson (Labour, Welwyn Hatfield)

That is a ridiculous assertion. In the hon. Gentleman's opening remarks, he disregarded entirely the extraordinarily favourable environment that we have created in the UK for businesses to flourish and the fact that we now have the lowest—[Interruption.]

Jimmy Hood (Labour, Clydesdale)

Order. Hon. Members must calm down.

Melanie Johnson (Labour, Welwyn Hatfield)

Thank you, Mr. Hood.

We now have the lowest inflation and interest rates, and the best tax levels for companies for decades. We have increasing employment and company profitability in the UK, as demonstrated by the statistics that I have given. It was interesting that the hon. Member for Croydon, South quoted barely any statistics in advance of his rant about the position of business in the UK. The right hon. Member for Fylde is right; stability is the key element that allows businesses to plan ahead and know where they are. The Government have provided such a framework for British industry, which was entirely disregarded by the hon. Member for Croydon, South. We have a record of which any Government would be delighted to stand in support.

Our aim is to do more than just cut corporation tax to its lowest ever levels. Our policies also aim to reinforce the fundamental advantages of investing and producing in the UK.

Michael Jack (Conservative, Fylde)

I hope that the Economic Secretary will answer my questions about the revenues on corporation tax in the remaining few minutes.

Melanie Johnson (Labour, Welwyn Hatfield)

If the right hon. Gentleman keeps intervening, he will make it much harder for me to do so.

The profits limit was mentioned. A company will get the full benefit of the small companies rate on profits of up to £300,000, but raising the profits limit, so that a company would benefit from the small companies rate on profits of up to £1.5 million, would benefit a relatively small number of businesses. It would not target the smallest companies, which we are keen to ensure are fully supported. The right hon. Gentleman also mentioned projections and forecasts in the Red Book. On page 196, at paragraph C 44, there is a projection of non-North sea corporation tax profits and the expected revenue. Profits are projected to rise by a further £1.5 billion in 2002 and then to fall by almost £0.75 billion in 2003-04. So there is a projection, despite the right hon. Gentleman's suggestion that there is not.

We are again setting the main rate a year in advance, to give notice to the small minority of companies that would otherwise have to pay one or two instalments of tax before the rate was set. I return to the point that I made a few minutes ago—that is all about helping British companies to plan ahead and know where they will be and creating a framework that provides stability and certainty. Once the transition to instalments is complete, our cuts in the main rate of corporation tax will have benefited large companies by more than £3 billion a year.

Our policy is to promote enterprise by keeping corporation tax low. That allows companies to make long-term investment decisions with confidence and to increase the post-tax returns on investments. Conservative Committee members appear to be objecting to the level of revenue being received, but that is largely a result of the fact that, having cut the corporation tax rate, we are benefiting from the fact that British industry is doing so well at present. Internationally competitive rates of corporation tax also help to maintain this country's position as an attractive location for inward investment. I strongly commend the clause to the Committee.

Question put and agreed to.

Clause 54 ordered to stand part of the Bill.

Clauses 55 and 56 ordered to stand part of the Bill.

Further consideration adjourned.—[Mr. Allen.]

Adjourned accordingly at Seven o'clock till Tuesday 1 May at half-past Ten o'clock.