Finance Bill

Public Bill Committee, 8 May 2001.

Standing Committee A

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

Michael Clark (Conservative, Rayleigh)

Before we start today's proceedings, envelopes addressed to members of the Committee are on the Table to be picked up at an appropriate moment. Also, today may be a different sort of day. If changes are made to our programme or times of sitting, we shall do our best through the normal channels to let the Committee know what is happening. Clause 79 Double taxation relief

Clause 79 - Double taxation relief

Oliver Letwin (Conservative, West Dorset)

I welcome you, Dr. Clark, to what is likely to be the last day on which the Committee sits. I must say on a personal level what a great relief that is. I do not want to trouble the Committee unduly on the clause, but I must raise one important matter. Before I do so, however, there has been some doubt about the calculation of the mixer cap.

I have read correspondence about the mixer cap between the Chartered Institute of Taxation and the Inland Revenue, which has largely laid our doubts to rest. Will the Paymaster General clarify, for the record, how the mixer cap is calculated when some part of tax is disclaimed? On the assumption that the Inland Revenue's interpretation of the current drafting is rational and in accordance with its letter to the Chartered Institute of Taxation, I shall rest easy on that point.

Although the construct is a vast improvement, it remains rather elaborate. I see the Paymaster General nodding. I am a huge optimist, which is useful when entering a general election period. My optimism leads me to believe that it will in future be possible to rewrite schedule 26. It would be wrong to complain about the drafting of clause 79, which is itself polluted and only one line long.

Dawn Primarolo (Labour, Bristol South)

Succinct.

Oliver Letwin (Conservative, West Dorset)

The schedule to which it gives effect is less easy to follow. I hope that it will in time be redone on tax law rewrite principles.

My complaint relates to the dog that does not bark. When the double tax relief saga began last year, a resolution of the problem of subsidiaries that are subsidiaries of subsidiaries was promised as part of the final package. Before I go on, I should declare an interest. I do not know that I have a specific interest, but it is possible that I might.

If a UK-based multinational has a subsidiary A in one country and that subsidiary has a subsidiary B in another country and, in order to move to arrangements that are suitable for the type of onshore pooling that is now implicit, the company decides to flatten the structural holding and to reorganise so that both subsidiaries A and B are held directly, a capital gain might be crystallised by the sale of subsidiary B by subsidiary A to the holding company. I envisage circumstances in which there is a 100 per cent. holding at both levels. Clearly, without a genuine third party sale or profit taken, there is no reason for a gain to be crystallised.

John Burnett (Liberal Democrat, Torridge and West Devon)

Is the hon. Gentleman predicating a circumstance in which the intermediate company effectively steps out?

Oliver Letwin (Conservative, West Dorset)

Yes, I am. It is not a judgment on the part of the intermediate company but rather of the holding company. The mechanism that would be dictated by such a decision is not the stepping out of the intermediate company but the sale by the intermediate company to the holding company of the subsidiary of the subsidiary. We are discussing the sale by the subsidiary of its subsidiary to the holding company. Nevertheless, the effect is exactly as the hon. Gentleman suggests. A direct relationship would be established between the holding company and what had been the subsidiary of the subsidiary. Two possibilities were mooted when the package was originally discussed: exemption from, or rollover relief for, capital gains tax under such circumstances. Exemption is preferable, but either will do. The total package will not work without one or other of the adjustments.

It is important that the Paymaster General puts something on the record about the Government's intentions. I have little foresight, but in this instance, I know that we will not reach the new clauses that we tabled, in which we advocate particular solutions. I do not place the slightest emphasis on the no doubt inadequate drafting of those new clauses nor do I expect that the Paymaster General will revise the ways and means resolution that will come before the House later today to include new Government clauses in the Bill. However, it would be a great help to everyone if we could at least have a statement from the Government that they will—should they still be in charge of the process—include a clause in the next Finance Bill to enact one or other of the effects that I describe. If, by any happy chance, we were to find ourselves sitting on the Government Benches and in charge of proceedings, there would indeed be such an adjustment.

Such an adjustment is needed, and industry needs to know that there will be one. The importance of a statement today is that it will, I hope, give some assurance to firms that need to plan around that over the coming years. I do not want to labour the point, as I hope that I have made myself clear. If the Paymaster General feels that I have left out something about our position that needs to be explained, I shall be delighted to do so.

John Burnett (Liberal Democrat, Torridge and West Devon)

For clarification, when we talk about A being the top company, B company being a subsidiary of A but overseas and similarly C company, is the hon. Gentleman predicating that B is a 75 per cent. subsidiary of A and similarly C?

Oliver Letwin (Conservative, West Dorset)

It is at least that. In general, we are talking about 100 per cent. holdings. I am certainly not trying to establish an uncovenanted bonus for minority stakes or anything similar, and the Paymaster General would not expect me to do so. I hope that there is common ground between the Government and the Opposition on the principle and that we are simply dealing with an administrative delay. I await with eager anticipation the hon. Lady's statement.

Dawn Primarolo (Labour, Bristol South)

The hon. Member for West Dorset (Mr. Letwin) referred rather kindly to the elaborate arrangements in schedule 26. For once, I shall go a little further than him by describing them as extremely complicated. He supports the principles around the move to onshore pooling, but made a specific point about the schedule's drafting in the hope that the provisions would be subject to tax law rewrite. I am sure that they will be at some stage, although that might be a long way down the track. Clearly, onshore pooling is a complicated part of tax arrangements. The United States of America, for instance, has about 1,000 pages of legislation for a system that is—dare I say it?—more complicated than ours.

Notwithstanding what the tax law rewrite will do, we intend to have further discussions with business to focus specifically on the delivery of the principles of onshore pooling and to consider the most straightforward way of delivering it. Without question, there will be further improvements in that area of tax, not to change the arrangements but to move towards clearer legislation, certainly as a first step. I was going to say that the legislation will be simplified, but that would be a misuse of the word ``simplified'' because the matter is so complicated. The hon. Gentleman will have felt that, as I certainly did, in examining schedule 26 over the weekend. It must be read in conjunction with last year's arrangements. It has to be read in conjunction with last year's arrangements. I am sure that there is room for improvement. We had intended to consult on some wider issues on company taxation in June, or whenever it may be feasible. The double tax improvements will be part of that. Like the hon. Gentleman, I should like to see a rewrite but there is room for improvement before that.

The Charted Institute of Taxation wrote to the Inland Revenue on 18 April and it responded on 26 April. That is the correspondence to which the hon. Gentleman referred. A follow-up query from another representative body was also received recently. The Revenue is happy that the drafting supports the interpretation that both it and business would expect: the tax that is excluded from a chain for credit relief will not endlessly recycle in the mixer cap formula to the detriment of the taxpayer. That is where to avoid triggering the cap lower down the chain the company can disclaim on what might be a smaller surplus. In the case of subsidiaries, as the hon. Gentleman rightly says, there is no reason why the cap should be triggered. It is unclear why that should be done. The double taxation arrangements meant that multinationals used offshore holding companies to avoid capital gains tax on the sale of the subsidiary. The hon. Gentleman is referring to other possibilities as a result of the changing legislation.

I need to take a little more advice before giving the hon. Gentleman a specific undertaking about rollover relief and exemption. The Government are consulting on changes to the tax on gains made by companies and disposals of substantial share holdings with a view to introducing either a deferral or an exemption. A gain made in a foreign company would be subject to foreign rather than UK tax rules. Instead of making a commitment here today, I shall flag up for the Committee the appreciation of the two points that the hon. Gentleman makes and the need for those consultations to take place in the context of changes to tax on gain.

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the Paymaster General address my point about the meaning of ``subsidiary'' for the purpose of the Bill? If she replies in writing, that is all well and good.

Dawn Primarolo (Labour, Bristol South)

I am extremely grateful for the hon. Gentleman's second sentence. If I write to him, I can be sure that I have the correct clarification. I was not aware that there was a problem there but I am happy to write to him and to circulate my letter to all members of the Committee. I undertake to do that as a matter of priority so that the matter is cleared up properly.

Question put and agreed to.

Clause 79 ordered to stand part of the Bill.

Schedule 26 agreed to.

Clause 80 ordered to stand part of the Bill.

Clause 81 - Life policies, life annuity contracts and capital redemption policies

Howard Flight (Conservative, Arundel and South Downs)

Clause 81 is the result of considerable work between the industry and the Inland Revenue to remove anomalies in the law and give policyholders greater certainty about their tax position.

Introducing the new requirements by April 2002 will involve insurers in a large task. There is a new rule that insurers must advise the Inland Revenue, not when a potentially taxable gain has arisen, but where there is a large gain; insurers will therefore have to separate out what is deemed large. Dealing with that efficiently over a one-year period could create problems, although it would not do so in the longer term. It might be helpful if the threshold for reporting to the Inland Revenue were optional for the first year.

The main point of the clause is to clarify the position where an insurance policy is held jointly and transferred into the sole name of one of the holders prior to the 10th anniversary of commencement. The transfer is then taxed as if part of the policy had been cashed in early. The key question is whether the clause and the relevant parts of the schedule will impose a new stealth tax on divorce where a policy supporting a mortgage is transferred into a sole name because only one of the parties is henceforth responsible for the mortgage. While we may be in favour of fiscal incentives in support of marriage, we are not in favour of fiscal stealth tax because people have the misfortune to get divorced. If, as we have been advised by various parties in the case, that is the impact of the Bill, the clause will have to be amended and should not be passed in its present form. It would be useful if the Minister could assure me that that will not be the effect in the event of divorce.

John Burnett (Liberal Democrat, Torridge and West Devon)

I have a small drafting point that the Law Society has raised with me, in relation to new section 546A.

Howard Flight (Conservative, Arundel and South Downs)

I think that that is covered by amendment No. 44 or 45.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am grateful to the hon. Gentleman. In that case, I shall wait for the matter to come up in due course.

Michael Jack (Conservative, Fylde)

This is a complex area of tax. The tax treatment for life assurance policyholders normally goes on autopilot, which is why the clause and its associated schedule deal with activities that must be undertaken by life assurance companies. Could the Minister say how things will be communicated to taxpayers so that they can know with certainty where they stand if they are either the holders or the recipients of a life assurance policy? Is that dealt with by clause 81?

Melanie Johnson (Labour, Welwyn Hatfield)

The hon. Member for Arundel and South Downs (Mr. Flight) seems to believe that the legislation changes the current position, but it will simply bring clarity to a confusing and unclear situation. We have always taken the long view that, in a transfer of interest in rights under a policy, the clear legislative intent is that what is transferred is only a part of the beneficial interest in the rights under the policy. In fact, difficulties have arisen because in transfers of interest in law, there are different ways in which co-owners may hold the rights under the policy. In England, Wales and Northern Ireland, those differences bring uncertainty to the tax treatment of a part transfer. The tax treatment of such a transfer in Scotland is certain and accords with the original legislation's intention. The measure will bring clarity to an unclear situation and help both the industry and individual policyholders.

A small gain in tax is projected as a result of the change, but only because of better communication between the life industry and policyholders, which will lead to greater compliance in self-assessment forms. That is the only way in which any tax change will result from the measure; there is no hidden tax, as the hon. Gentleman suggested there might be. Indeed, the tax charge on changes in the ownership of life policies has existed since 1968, so there is no intention to change the overall position.

If the assignment is exempt before the change, it will remain so after it. In fact, the measure introduces a new exemption if the share in the policy is gifted. It appears that the charge does not apply consistently, even though no relevant distinction in economic terms results from the different interpretations and forms of ownership. The clause and the schedule will bring consistency and certainty of treatment for insurers and policyholders alike, and I hope that that clarifies the position for the hon. Gentleman.

The right hon. Member for Fylde (Mr. Jack) asked what communication there would be. I can let him know in more detail, but the basic idea is that there should be an annual statement from the insurance company to policyholders to give them a much clearer understanding of what is happening and, by providing them with the necessary figures, to help them to complete their self-assessment tax forms. If that is not sufficient detail for the right hon. Gentleman, I will write to him with further information.

Howard Flight (Conservative, Arundel and South Downs)

I will expand a little on my point, because the Minister has not effectively placed on the record the fact that the measure will not bring a tax charge on divorce. Hon. Members should imagine a situation in which joint assets are split so that the wife keeps the family house subject to a mortgage and the endowment policy to cover that mortgage, while the husband retains immovable assets. In the past, it has been unclear whether and to what extent there is a chargeable gain on the transfer of the life policy from joint ownership to the ownership of one party. In most cases, the assignment escaped tax. The measure is an improvement on the current position, which is confusing, but the matter could have been more sensibly addressed than it is by the clause and schedule.

The schedule confirms that if a qualifying policy is transferred from joint ownership to that of one party, and the transfer occurs before the 10-year point, there will be a chargeable event, and it clearly identifies who should pay the tax. If the parties had remained married and the policy had been held beyond the 10-year hurdle there would have been no tax liability. In the vast majority of cases, when an insurance policy backs a mortgage, the remaining owner of the policy continues to pay the premium for the life of the policy. It would be simpler, more straightforward and more reasonable to ignore the transfer on divorce or separation and to make any tax change crystallise only if the policy is cashed in within the 10-year period by the party who ends up holding the policy. As drafted, however, the clause will impose a windfall tax on divorced or separating couples that would not arise if the couple stayed together.

Michael Jack (Conservative, Fylde)

I thank the Minister for her clear answer to my question. I am glad that companies will advise taxpayers on the basis of the information that she has mentioned.

Some small polices—small in financial terms—will be caught by the clause and the schedule. I am anxious that someone who may have no knowledge of these matters, and, unwittingly, may not complete a self-assessment form—he may in the end be a non-taxpayer—will suddenly be informed that he has a tax liability. What is being done about people who are not subject to self-assessment, who are non-taxpayers or who may unwittingly get the notice and worry about what they have to do if they are caught up in these arrangements?

Melanie Johnson (Labour, Welwyn Hatfield)

On the latter point, the form of communication has not yet been decided; it is too early to say exactly what will be sent out. However, I understand that it will cut the red tape involving insurance companies and give clearer information to policyholders about their gains and about the related tax. I shall be happy to listen to the right hon. Gentleman's representations if he has cause for concern in the future. He would agree that it is right in principle for all insurers to tell policyholders about their gains; that is the principle that underlies the proposal. The Association of British Insurers, which represents the insurance industry, already supports that policy.

Insurers cannot know whether there is tax to pay on a gain, however small it is, as that is a matter for the individual. The gains could affect an individual's entitlement to an age-related personal allowance, and may fall to be taken into account when calculating the level of tax credits. These are matters for us to consider as individuals when completing our self-assessment forms, or when deciding whether we need to make a return if we are not automatically subject to self-assessment. There is no reason for a gain to fall outside tax just because it is small; such matters must be dealt with on an individual basis, as is proper.

I make it clear to the hon. Member for Arundel and South Downs that what is proposed is not a new tax on divorce, although I am intrigued by the Opposition's anxiety about it. There is an existing tax charge when there are changes in the ownership of life policies, whether or not they are part of a divorce settlement; nothing is being changed in essence. The charge could be different, but it is not new.

The measure removes uncertainty about what and who is chargeable. No changes are being made in respect of Scots law. The only differences cover the ambiguities that have emerged in England, Wales and Northern Ireland, where at present there is considerable uncertainty; we are clarifying matters and bringing that uncertainty to an end.

Michael Clark (Conservative, Rayleigh)

The debate on the clause is going a little more slowly than I had anticipated, and members of the Committee will have to be quick if they want to catch the tea trolley, which is outside the Committee Room now. However, I remind the Committee that the quorum remains at 10—11 including the Chairman.

Howard Flight (Conservative, Arundel and South Downs)

Will the Minister confirm that the effect of the clause and the schedule in cases of divorce is as I explained? If so, at the very least I ask the Government to reconsider along the lines of my brief suggestions. Previously, there was a lack of clarity, as the Minister said, but as clarified, the proposal now highlights what seems to be an unreasonable tax on divorce.

Melanie Johnson (Labour, Welwyn Hatfield)

There are no general rules that ease the impact of tax charges that may arise in consequence of a divorce, and it is doubtful whether such rules would command universal support. However, the measure will make the treatment of policy assignment, whether on divorce or otherwise, clearer. When joint property is being divided, the measure will make it easier for parties to attribute a correct, and therefore fair, value to the life policy. That is a matter for the arrangements between the parties concerned in individual situations; it is difficult for us to generalise. I shall write to the hon. Gentleman if he has further questions.

Question put and agreed to.

Clause 81 ordered to stand part of the Bill

Schedule 27 - Life polices, life annuities and capital redemption policies

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 43, in page 226, line 41, after `jointly', insert `or in common'.

This is the matter that my hon. Friend the Member for Torridge and West Devon (Mr. Burnett) was about to raise in respect of clause 81. As the Minister said, the changes, especially section those in proposed new section 546A, are designed to align English and Scottish law when an insurance policy—

The Chairman's attention having been called to the fact that ten Members were not present, he suspended the proceedings; and other Members having come into the room and ten Members being present, the proceedings were resumed.

Howard Flight (Conservative, Arundel and South Downs)

As I was saying, section 546A in particular is designed to align English and Scottish law when insurance policies are held by more than one person. Subsection (1)(a) of the proposed new section refers to policies held jointly or in common, but subsection (1)(b) refers only to policies held jointly. The Law Society's opinion is that some words have been missed out of paragraph (b), which should similarly say ``jointly or in common''.

Melanie Johnson (Labour, Welwyn Hatfield)

The amendment would not have any effect, as existing legislation has the desired result. As the hon. Gentleman said, the measure relates to the application of the complex principles of property law to life insurance policyholders. Some whole assignments will be deemed to be assignments of a part for tax purposes. It covers assignments and insurance contracts where, economically, only part of the contract is transferred. It is not necessary to deem something to be a part assignment when it is already a part assignment in law.

The amendment deals with the transfer of an insurance contract by tenants in common when not all the tenants dispose of their interest in law. This is an assignment of a precise part of the contract by each tenant to reduce his own interest in the contract. It does not therefore need to be deemed to be a part assignment for tax purposes. The amendment is unnecessary and I urge the Committee to reject it.

Mr. Burnett rose—

Michael Clark (Conservative, Rayleigh)

This will be a speech, not an intervention, I believe.

John Burnett (Liberal Democrat, Torridge and West Devon)

It will, Dr. Clark, but the Committee will be relieved to hear that it will be a fairly short one.

I hope that I can remember my co-ownership rules from years past. If I remember correctly, in terms of legal ownership—equitable or beneficial ownership, as mentioned in the clause—only joint tenants or tenants in common are relevant. It is plainly defective not to allow for that, so I join my hon. Friend—as he kindly called me—the Member for Arundel and South Downs in supporting this important amendment. Without it, there will be confusion and unfairness when the transferee holds as a tenant in common.

Question put, That the amendment be made:—

The Committee divided: Ayes 5, Noes 12.

Clause 83 - Deduction of tax: payments between companies etc

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 44, in page 56, line 14, at beginning insert

`If the Board reasonably believes that neither of the conditions set out in section 349B is satisfied then'.

Michael Clark (Conservative, Rayleigh)

With this it will be convenient to take Government amendment No. 50.

Howard Flight (Conservative, Arundel and South Downs)

The clause is the fruit of much consultation by the Revenue, and it is generally welcomed by the accounting industry. However, there is a slight concern that taxpayers who, in accordance with the Revenue's guidelines, conscientiously check the status of their payees, could be liable for their payees' tax if it subsequently transpires that, contrary to all appearances, the pay is not within the charge to corporation tax. The payer can never know for sure that the pay is within the charge to UK tax. Only the Revenue will know that.

The clause is allegedly a deregulatory clause to remove the requirement to withholding tax on certain payments between companies where the requirements of new section 349A are satisfied, but new section 349C gives the Revenue an arbitrary power to overrule that and instruct a company to resume paying withholding tax. That surely cannot be right, and there should be a requirement for reasonableness by the Revenue. That is what amendment No.44 is designed to achieve, and I believe that it is also the objective of the undoubtedly more perfectly drafted Government amendment.

Melanie Johnson (Labour, Welwyn Hatfield)

I can confirm that the Government amendment is intended to achieve the same objective as amendment No. 44. Were things different, we might have introduced this amendment on Report, but as there are drafting problems in the Opposition amendment, it seemed sensible to do so now.

Amendment No. 44 was intended to spell out that the Board should give directions only where it reasonably believed that the conditions for making the payment gross were not satisfied. We agree that the Board's power should be limited in that way. We believe that it was implicit in the wording, but we accepted that it was desirable to make it explicit. Some aspects of the drafting of amendment No. 44 would have frustrated the purpose of new section 349C, so we tabled an alternative form of wording that achieves the desired result. I hope that the Committee can accept our amendment.

Howard Flight (Conservative, Arundel and South Downs)

I am more than happy to substitute amendment No. 50 for amendment No. 44. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 50, in page 56, line 20, at end insert—

`( ) Such a direction shall not be given unless the Board have reasonable grounds for believing as respects each payment to which the direction relates that it is likely that neither of the conditions specified in section 349B will be satisfied in relation to the payment at the time the payment is made.'. —[Miss Melanie Johnson.]

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 45, in page 56, line 25, leave out `Where' and insert

`This section applies where—

(a) an application has not been made under section 349E, or

(b) an application has been made under section 349E and the Board have

refused to give notice that they are satisfied as required in subsection (1) of

that section, or

(c) an application has been made under section 349E and within 30 days of

that application being received by the Board a payment of the nature

mentioned in subsection (2)(a) is made.

(2) Where this section applies and'.

Michael Clark (Conservative, Rayleigh)

With this it will be convenient to take amendment No. 46, in page 56, line 41, at end insert—

`349E. (1) The Board may, on the application of a company in the situation mentioned in section 349D (2)(a), notify that company that the Board are satisfied that the conditions in section 349B are satisfied.

(2) Any application under subsection (1) above shall be made in writing and shall contain such particulars as are relevant and known to the company making the application and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.

(3) The Board shall notify the applicant of their decision within 30 days of receiving the application or, if they give a notice under subsection (2) above, within 30 days of the notice being complied with.

(4) If the Board notify the applicant that they are not satisfied as mentioned in subsection (1) above or do not notify their decision to the applicant within the time required by subsection (3) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (2) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (1) above as if it were a notification by the Board.

(5) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (1) shall be void.'.

Howard Flight (Conservative, Arundel and South Downs)

These amendments try to correct the main points of concern about the new section that have been widely raised by lawyers and accountants. If a company in good faith pays without withholding tax, in other words it pays gross, and it subsequently transpires that that was incorrect, the Inland Revenue can recover the tax from it and in a sense it will lose out twice.

The provision effectively requires companies to police the tax affairs of people to whom they pay interest, annuities and royalties and to take the risk that they have not been provided with adequate and truthful information. Surely the Government should issue guidelines about what companies can rely on in deciding whether to withhold. They should provide a safer harbour than the clause provides.

The amendment would cure the defect by incorporating a fast-track clearance procedure, which would protect public revenue and withhold protection from a company that put in an application and immediately paid interest gross, to prevent applications for clearance from being used to further tax avoidance. The wording is modelled on an existing successful clearance procedure—capital gains tax rulings on corporate reorganisations under section 138 of the Capital Gains Tax Act 1979. The Law Society and the Chartered Institute of Taxation strongly support the need for a clearance procedure.

Melanie Johnson (Labour, Welwyn Hatfield)

In proposing amendments Nos. 45 and 46, the Opposition have made some play of the need for a clearance system to facilitate the operation of the regime introduced by clause 83. I am not clear on whether they think that the new regime is inoperable without a clearance system or whether such a system would slightly improve its workings. In either case, the Opposition's view is misconceived. The regime is not unworkable without a clearance system, and such a system would not improve the way in which the new rules work. In fact, it would place new burdens on business and reintroduce the bureaucracy that we have been so keen to avoid. I believe that the hon. Gentleman is also keen to avoid that.

Let me explain the situation in more detail. The clause is intended as a deregulatory measure and will cut red tape. It responds to calls that we have received to build on the reforms that we announced last year by lifting withholding tax on payments made between companies where the payment would be taxed anyway in the hands of the recipient. In making that change, it has always been the Government's view that the new system should be as light-handed as possible. That is why the new rules do not set an objective test, which would often be difficult for a paying company to verify. Instead, they simply require a paying company to act on its reasonable belief that the conditions for gross payments are met. A clearance system would place new burdens on business and the Revenue.

To protect the Exchequer, we have consistently taken the view that if it turned out that the tax was not deducted when the recipient was not in the categories entitled to gross payment, the Revenue should be able to recover its tax from the payer. We have recognised that payers would want to take steps to protect their position in the event of a Revenue claim for tax, but we believe—and have been told—that it will be perfectly possible for payers to do so by a system of indemnities as part of their normal contractual arrangements.

The Opposition's proposal to include a clearance system therefore runs completely counter to the clause's intention. It would not match the deregulatory objectives of the new regime, but would place significant burdens on the Revenue that we had not anticipated as part of the measure. It would also place burdens on business, because if a clearance system were instituted, everyone would feel bound to use it, perhaps incurring additional professional charges in the process.

A clearance system cannot give the sort of guarantees that the Opposition think it could. For example, if paying companies seek comfort from the Revenue because they have doubts about whether the recipient is the beneficial owner of the income to be paid, the Revenue will often be unlikely to have access to all the information that it needs to answer those doubts. As we announced on Budget day, we shall continue to work with the markets in developing guidance for the operation of the new rules. We are consulting on the need for and nature of any further guidance that the Revenue should produce. In that way, the Government can facilitate the regime's operation.

The amendments seem to contain flaws and would not achieve the Opposition's objectives. The result is that section 349D would apply in some circumstances when the Opposition wanted to disapply it; in other circumstances, it would not apply when the Opposition would presumably agree it should apply. For all those reasons, the proposals are unsatisfactory. I hope that I have explained the difficulties and that the Committee will reject the amendments.

Howard Flight (Conservative, Arundel and South Downs)

We claim not that the clause is inoperable without the amendment but that it is unreasonable for there to be no clearance system or some form of safe harbour. If a clearance system is not acceptable, could the Minister say more about the type of safe harbour guidance that the Revenue intends? It would be unreasonable to place paying companies at risk of having to account for tax when they have taken reasonable steps to check that recipients were within the charge to UK corporation tax. While it may be wrong and unrealistic to prescribe exactly what evidence a paying company should obtain, there should surely be some form of safe harbour guidance and companies that have made specified checks should be safe from potential subsequent claims for tax and penalties. Whatever guidance the Revenue produces needs sufficient status to give that safe harbour. Companies within the safe harbour should be safe from having to account for tax and from penalties. If that approach were taken, there would be no need for clearance as an alternative.

Melanie Johnson (Labour, Welwyn Hatfield)

I cannot help the hon. Gentleman greatly in that regard. The Revenue placed initial guidance on the website when the Bill was published. As I said, we will continue to work with the market to provide guidance. I am not sure about the term ``safe harbour guidance'' because I am not sure that we can provide safe harbours. However, we are committed to producing as much further guidance as possible, by working with the market. It would be premature for me to go into any more detail but I hope that the hon. Gentleman registers the fact that there are difficulties in taking a different approach and that we are doing what we can to make the legislation as straightforward as possible for those who are operating it. The fact that it is a deregulatory measure is a real gain to the industry.

Howard Flight (Conservative, Arundel and South Downs)

The Minister's comments are helpful but not helpful enough. The points were raised by the Law Society and the various accounting bodies. If a paying party has done its homework to ascertain whether it should stop withholding tax and there is a problem that it has not caused, it would be unreasonable for the Revenue then to charge it withholding tax and a penalty. I do not know about a safe harbour or a safe haven, but it should be made clear under the new streamlined arrangements—which are broadly welcome and the result of constructive discussion—that the Revenue do not intend to act unreasonably in situations where companies have been conscientious and professional about ascertaining whether they should be stopping tax.

Melanie Johnson (Labour, Welwyn Hatfield)

In some situations the measure can clearly work and in others it cannot. There will be areas in between—which is what the guidance relates to. As I said, the Revenue will often not have the information to provide the certainty that the hon. Gentleman seeks. In such circumstances, the companies concerned will have to operate on the basis of reasonable belief, and people must decide what they will do about that. Market operators who wish to protect against the Revenue making claims such as those mentioned by the hon. Gentleman might do so by seeking indemnities from those to whom they make such payments, but just on the basis of contractual arrangements between the concerned parties. I envisage that happening in some of the situations on which the hon. Gentleman seeks greater certainty.

Howard Flight (Conservative, Arundel and South Downs)

The point is well aired and not worth pressing to a Division. However, it is an operational issue and, if the new arrangements are to work satisfactorily, the industry and the Revenue will have more work to do to reach a common understanding of what I would broadly call safe harbour situations. If, as the Minister said, the complications and expense of indemnities are necessary, they should be kept to a minimum; otherwise, the measure will not be deregulatory. Having aired the point, I will seek leave to withdraw the amendment.

Oliver Letwin (Conservative, West Dorset)

I just want to set the record straight, because I misled the hon. Member for Torridge and West Devon in responding to his question on 75 per cent. holdings on double tax relief. Having re-examined my papers, I want to place on record the fact that the exemption or rollover ought to apply to any substantial shareholding. One could argue about how big a substantial shareholding should be, but I was wrong to say at least 75 per cent. and I apologise to him and to the rest of the Committee.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am grateful for that clarification.

Howard Flight (Conservative, Arundel and South Downs)

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 83, as amended, ordered to stand part of the Bill.

Clauses 84 to 86 ordered to stand part of the Bill.

Schedule 28 - Amendments to machinery of self-assessment

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 47, in page 243, line 27, after `jointly', insert `or separately'.

We broadly welcome the reforms in the machinery of self-assessment, as does business generally. Three amendments have been tabled to the schedule and they deal with specific points on its impact and interaction with previous legislation. Amendment No. 47 would change the part that deals with disputes on self-assessment and related litigation between taxpayers and the Inland Revenue. The procedure is commenced by a notice of referral to the special commissioners, but that must be given jointly by both sides. If they are already in dispute over another matter, why is it necessary to include a requirement for both sides to agree? Surely it would be more sensible to allow either side to start the process.

I want also to ask a question that others have posed, which is related to amendment No. 47. Why is the process reserved for the special commissioners and not included for the general commissioners?

Dawn Primarolo (Labour, Bristol South)

Schedule 28 provides for some changes to the self-assessment procedure. I will explain why we undertook them, before responding specifically to amendment No. 47.

The Government received a report on tax inquiries, as part of a consultation that was carried out jointly by the Chartered Institute of Taxation and Inland Revenue. The report's findings were widely discussed with the main representative bodies. The exercise was an excellent example of co-operation, and it has enabled the Revenue to improve the service that it provides to the taxpayer. I want to make it clear to the hon. Gentleman that I specifically requested that any proposed changes were agreed by all, because the aim was to tidy up the process. Given the views that have been expressed about self-assessment, I wanted to ensure that everyone was in agreement.

The measures fall into two main groups. First, it will be possible for the taxpayer and the Inland Revenue to agree to refer a disputed point to the special commissioners, and to the courts if necessary, before the inquiry is completed. I am sure that the hon. Gentleman knows that formal completion of an inquiry can take a long time. The joint report expressed the view that the measure would enable litigation of contentious points while the facts were still fresh and that that would assist in providing the taxpayer with certainty at an early stage.

The second set of changes seeks to make income tax return inquiries simpler and more straightforward. There are four stages at present, but there will be only two in future. The Inland Revenue will state its conclusions and make any necessary amendments to the tax return, and the taxpayer will then have a right of appeal.

The context of the changes was agreement, so I am a little surprised by the amendment. All representations on the amendments came specifically from KPMG. I hope that the hon. Gentleman will accept that I did all that was humanly possible—as did the Revenue—to ensure that there was agreement on what we believed were uncontentious improvements. His amendment is unnecessary and complicates what is already an involved piece of legislation; hence our moves to try to improve it. The information powers can be used only to obtain information and documents that might be relevant to the tax liability. It is very unlikely that documents relating to the conduct of a referral would be relevant to the tax liability.

As I said, the wording of the amendment was suggested in a letter from KPMG. I asked my officials to reply to explain why I thought that it was not necessary. It is extremely unlikely that the protection that the amendment would provide would ever be needed, but if KMPG were able to provide my officials with examples of cases, I would be prepared to consider them further. I am also happy to give the assurance that the Inland Revenue will not use section 20A to obtain documents or information relating to the conduct of a pending referral.

The hon. Member for Arundel and South Downs specifically asked about special commissioners. According to the joint study by the Chartered Institute of Taxation and the Inland Revenue, the new right is necessary because substantial and complex matters will benefit from early consideration by the commissioners. It is appropriate for the special rather than the general commissioners to consider such matters.

I hope that I have answered the hon. Gentleman's questions and that suitable assurances are now on the record. All Governments are constantly encouraged to consult, and we have consulted widely. We regarded this legislative provision as uncontentious, but three amendments were tabled, and the matters raised were settled through correspondence between the Inland Revenue and the relevant company. I wonder what more it is humanly possible for the Government to do than to introduce a measure that has found agreement; the problems came to light later in Committee. In the spirit of consultation and discussion, I hope that the hon. Gentleman will withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Paymaster General for her helpful comments. The Law Society as well as KPMG raised the issue. I agree that it is up to those affected to provide significant case evidence to justify pursuing the matter further. The door is open in that respect, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 48, in page 249, line 20, at end insert—

`( ) Before 31st December 2001 the Board of Inland Revenue shall present to the Chancellor of the Exchequer proposals to bring the law governing the procedure on completion of enquiries into company tax returns into line with that which applies for income tax self-assessment purposes as a result of paragraphs 8 to 10 above.'

The amendment is in no way critical of the changes in schedule 28, which introduces several welcome improvements in the administration of self-assessment for individuals. It is a probing amendment designed to suggest that a similar process could be introduced for companies in respect of corporation tax self-assessment, and to counter the argument that making such changes would mean administrative upheaval. A half-way house and a review is proposed.

Dawn Primarolo (Labour, Bristol South)

I suggest that the hon. Gentleman withdraws the amendment. He knows full well the differences between income tax and corporation tax self-assessment. The administration and timing is complex. He described his amendment as probing, so he may be trying to ascertain our intentions for corporation tax self-assessment.

It is too early to judge whether changes to the process and administration of corporation tax self-assessment are desirable. We need to scrutinise how the system works. The Government have not turned their face against reviewing how the corporation tax self-assessment inquiry has bedded in, and whether that, too, could do with some tidying up. For many reasons, however—one being that we are considering the Finance Bill at the moment—the time is not now. Given that I have said that the Government would want to look at the matter in the not too distant future, I hope that the hon. Gentleman will withdraw his amendment. I am sure that he will want to press us on the subject on future Finance Bills—from the Opposition Benches.

Howard Flight (Conservative, Arundel and South Downs)

As I said, this is a probing amendment, tabled so that when we occupy the Government Benches we shall have some idea of Revenue and Treasury thinking about corporate self-assessment. I thank the Paymaster General for her comments, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 49, in page 256, line 28, at end insert—

`21A.—(1) Section 20B of the Taxes Management Act 1970 (restrictions on powers under sections 20 and 20A) is amended as follows.

(2) In subsection (2)—

(a) after ``any pending appeal by him'', insert ``or any pending referral to the Special Commissioners under section 28ZA of this Act or paragraph 31A of Schedule 18 to the Finance Act 1998 to which that person is a party'', and

(b) after ``a pending appeal by the taxpayer'', insert ``or a pending referral to the Special Commissioners under section 28ZA of this Act or paragraph 31A of Schedule 18 to the Finance Act 1998 to which the taxpayer is a party'', and

(c) after ``a pending appeal by the client'', insert ``or a pending referral to the Special Commissioners under section 28ZA of this Act or paragraph 31A of Schedule 18 to the Finance Act 1998 to which the client is a party''.'.

This is a technical point that has been raised with me by KPMG. The introduction of the new provisions relating to referrals to the special commissioners extends the protection to taxpayers so that a notice under any of the relevant sections cannot oblige a taxpayer to provide documents or information relating to the conduct of any pending appeal by the taxpayer. However, there is apparently no extension of the protection that currently exists in section 20B of the Taxes Management Act 1970 to take account of the proposed referral procedure.

Dawn Primarolo (Labour, Bristol South)

I am extremely grateful for the opportunity to speak on this amendment again, Dr. Clark, as I have already inadvertently covered the point, in my rush to be helpful to the hon. Gentleman—

Peter Luff (Conservative, Mid Worcestershire)

Characteristically helpful.

Dawn Primarolo (Labour, Bristol South)

I am grateful to the hon. Gentleman for saying that.

I inadvertently covered this point in my comments on amendment No. 47. The hon. Member for Arundel and South Downs was characteristically gallant, and did not point that out to me. I therefore refer him to the comments that I made then, and specifically to the assurances about not using section 20 or 20A to obtain the documents or information relating to the conduct of a pending referral. As he was so gracious to accept that as a good explanation in response to amendment No. 47, I hope that he will accept it as an equally good explanation concerning the relevant amendment, and will withdraw that amendment.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Paymaster General, both for her kind words and for putting on the record the underlying point, which others have also raised. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 28 agreed to.

Clauses 87 to 90 ordered to stand part of the Bill.

Schedule 29 agreed to.

Clauses 91 and 92 ordered to stand part of the Bill.

Clause 94 - VAT: children's car seats

Richard Ottaway (Conservative, Croydon South)

May I make a serious point before my right hon. Friend the Member for Fylde, who has several points to make, catches your eye, Dr. Clark? [Interruption.] Does the Paymaster General wish to defer the discussion? If she does, no doubt she will let me know.

Paragraph 13 of the explanatory notes rightly states that the EC sixth VAT directive permits member states to apply a reduced rate of VAT to children's car seats. What is significant about the clause is that it does not include the Chancellor's much-heralded proposal for a 5 per cent. rate on the repair of churches. The pre-Budget report trumpeted the fact that VAT would be reduced to 5 per cent. on church renovations.

Dawn Primarolo (Labour, Bristol South)

May I seek clarification, Dr. Clark? I thought that we were considering clause 94, which is about children's car seats.

Richard Ottaway (Conservative, Croydon South)

We are also talking about the EC sixth VAT directive, which is referred to in paragraph 13 of the explanatory notes on clause 94. The Government's much heralded proposal to include church repairs in the Bill has not been made because they have fallen foul of that directive. It is inappropriate for the Chancellor to tell spin-like stories when he has not cleared the proposal with the EC. He made claims that he could not deliver. It is a classic case of the Government being all spin and no delivery. [Interruption.]

Michael Clark (Conservative, Rayleigh)

Order. I believe that the hon. Gentleman was just in order, which is why I allowed him to continue. He was right to stay in order for a minimum period, rather than trying to stay in order for a long time, which might have stretched the patience of the Chair. We are talking principally about VAT on children's car seats, but as the hon. Gentleman said, the clause refers to the 5 per cent. reduced rate, in the context of which he referred to churches. We shall now try to return to VAT on children's car seats.

Michael Jack (Conservative, Fylde)

Lest my criticism of the clause be misrepresented or selectively quoted outside the Committee Room, let me say at the outset that I am in favour of any measures that attempt to reduce child casualties and fatalities. If clause 94 contributes to the saving of one life that otherwise might have been taken as a result of a road vehicle accident, it will have had the right and proper effect.

I wish to examine the Government's motives for making the VAT change. I am sure that all right hon. and hon. Members know about extremely worthy causes for which value added tax should be changed. For example, along with other local Members of Parliament, I recently attended a discussion with people who were visually impaired. They asked whether there could be a lower rate of value added tax on a range of products that are of assistance to them. Those who represented the Government at that meeting explained why that was not possible. One could give other examples.

Paragraph 5.100 on page 100 of the ``Financial Statement and Budget Report'' states:

``Around 6,000 children under eight years old are killed or injured each year on Britain's roads.''

Perhaps that statement underpins some of the thinking behind clause 94. The report continues:

``It is vital that child car seats are correctly fitted''

and then makes some other observations. However, no connection is made with the Government's assertion in justifying clause 94 that in some way the position of a substantial number of those 6,000 children is affected by car seats.

I undertook some research on the subject. I pay tribute to the transport statistics section of the Department of the Environment, Transport and the Regions. I asked what data was collected to measure the impact of child car seats on the road casualty figure and how we might know whether the £5 million a year that the measure will cost is the right way to affect the number of child fatalities. I was told that no data is collected on that matter. I probed a bit further and tried to focus on cars. What do we know about cars? For example, is any data collected to establish whether front-seat or back-seat passengers are affected? General data is collected about where people sit, but it does not reveal anything about the car seat itself.

I began to wonder whether the clause was an attempt to improve the quality of child car seats. It attempts to define a child's car seat, but nothing in it differentiates between the good and the bad. In effect, the Government could unwittingly spend £5 million on value added tax reductions on children's car seats on the basis that they are the root cause of saving children's lives, but poorer quality seats would benefit as opposed to better quality ones.

What accounts for child fatalities? According to the transport statistics from DETR

``Child pedestrian fatalities account for half of all child casualties, making this the biggest child safety issue.''

Clause 94 is a well-meaning attempt to improve the safety of children in motor vehicles but, for whatever reason, the Government have driven straight past the biggest single cause of child deaths. How would we, as Members of Parliament, explain to the parents of a child who has been injured in a pedestrian incident the non-use of the £5 million that the measure costs? That money might have been used to develop strategies for child safety that might have had a beneficial effect.

To that end, I examined whether we could justify spending money in that area. In 1990, the Department of Transport produced an interesting document entitled ``Children and Roads—A Safer Way''. It described the scale and nature of child road accidents and set out a strategy to deal with them. It focused on the question of child pedestrians, pointing out evidence that properly funded education to help children develop better strategies to deal with pedestrian safety had a greater effect on child safety matters.

To justify the clause, the Treasury must produce solid facts showing that the use of the £5 million is the best way of dealing with child safety matters. I see no statistical evidence from the DETR that that would help. If a child is involved in a fatal car incident, it is because a car has got into a fatal situation not because there is something wrong with the child safety seat. The Government have produced no evidence that the money might be better directed towards car safety issues. The Government's intention was, on this occasion, well meaning but it is not backed up by any facts from the DETR and it ignores children as pedestrians, which is the situation in which the most child casualties and fatalities are caused.

Dawn Primarolo (Labour, Bristol South)

I presume that it would not be in order for me to answer the question of the hon. Member for Croydon, South (Mr. Ottaway) on annex H of the sixth VAT directive. I will say merely that representations on churches have been and continue to be made to the commission, which is reviewing the sixth directive in January 2003. The Chancellor took the view that a grant scheme would fulfil his commitment to assist churches and places of worship that came within the criteria, while continuing to press the commission to speed up its review before 2003. The grant arrangements are wholly in order and widely welcomed.

The hon. Gentleman introduced a sour note into what has been a good discussion. I am sure that he is not suggesting that the Government should withdraw the grant scheme to the churches and wait instead for the commission's view.

Richard Ottaway (Conservative, Croydon South)

Perish the thought that I should be considered sour. It was a legitimate point to raise. On a point that will come out in the next clause, it would be helpful if the Minister could tell us whether grants given instead of a VAT rebate are treated as public expenditure? The arrangements have been made accordingly.

My right hon. Friend the Member for Fylde touched on an issue about which every member of the Committee would be concerned: road deaths, not just of children but of many other individuals. He also raised the point of the many different ways in which we should approach reducing unnecessary deaths—although I consider all road deaths unnecessary. As the right hon. Gentleman has pointed out, cars can be involved in fatal crashes in a wide variety of circumstances. I think that he also raised the issue on Second Reading, when I explained that more than 1,000 children were killed or seriously injured while travelling in a car in 1999. Those figures came from the 1999 ``Road Accident Statistics Great Britain—The Casualty Report'', which I am told was compiled by the Department of the Environment, Transport and the Regions and the Office for National Statistics.

A particular issue is the use of appropriate safety restraints in cars. Clearly, the latest safety standards are always the most advanced and therefore the best. As the right hon. Gentleman will know, the standards are appropriate to the age, weight and height of the child. Such restraints can be expensive, so the Government took the view that there could be a reduction of up to £15 on the newer more expensive brands of seats. That is an extremely important contribution to assisting parents who, because of cost, use second-hand older seats and restraints, which are harder to install and not always the safest.

The right hon. Gentleman may have preferred the money that is to be used for the measure to be spent in other areas, but the Government believe that the incentive is correct. It is a relatively small amount, and safety is of great concern to us. The incentive forms part of a valuable set of measures also contained in the Budget to assist families with children, particularly small children. On that basis, we proposed a modest but important measure.

As the right hon. Gentleman knows, we could not reduce the VAT charge to zero. The lowest level to which we can now go is 5 per cent., and we have used that option. Although I am grateful—believe it or not—for his comments, I hope that he will accept that the Government's decisions are based on the information that we had. The measure's cost is modest, but it will contribute to child safety.

Michael Jack (Conservative, Fylde)

I am grateful to the Paymaster General for the careful and considered way in which she has responded to my observations, but the facts speak for themselves. According to the source of data from which she quoted, there was one child fatality in a car in 1999 in the age range 0 to one year. At the age of one, there were six fatalities; at age two, there were three; at age three, there were eight; at age four, there were three; and at age five, there were two fatalities. Thankfully, such fatalities in cars are very low.

Dawn Primarolo (Labour, Bristol South)

The right hon. Gentleman will know that car seats are compulsory for under-threes when they are carried in the front of a vehicle. We seek to address the use for children up to 11 in all parts of the vehicle, but how can we put a price on a child's life? If the use of the relief saved one child's life, I would consider that to have been a good investment.

Michael Jack (Conservative, Fylde)

I am grateful that the Paymaster General has repeated the second sentence that I uttered in this debate, because it is difficult to adjudicate in such matters where lives are saved. I ask those at the Treasury, when they have a moment to reflect, to re-examine the study by the Transport Research Laboratory in evaluating work undertaken by the universities of Strathclyde and Edinburgh into methods for training young children in pedestrian skills. They will see that, for a small sum of money, a disproportionate gain in the number of young lives that are saved can be achieved. Should there be a Division on clause 94, I will not vote against it. However, what is the best way of spending the money? As child pedestrian safety is not touched by the clause, perhaps the Government will address that in the future.

Dawn Primarolo (Labour, Bristol South)

The right hon. Gentleman will know that, in many parts of the country, life skills training projects are targeted at the age range to which he referred. They cover safety not only on the road, but in the home and around railway stations and tracks. He will welcome the fact that the Government will make £10 million available during the next five years, specifically to address child pedestrians and how to increase safety by using training and play situations in controlled environments to impress on young people the need to be safe. I hope that he will accept that the clause sits with several other issues that the Government are taking and will continue to take forward.

Question put and agreed to.

Clause 94 ordered to stand part of the Bill.

Graham Allen (Labour, Nottingham North)

I beg to move, That further consideration be adjourned.

This might be a useful moment to request an adjournment until this afternoon and to inform all Committee members that, should events outside take the expected turn, we would like to convene the Programming Sub-Committee at a time convenient to all members, including yourself, Dr. Clark, and the other Chairmen.

Michael Clark (Conservative, Rayleigh)

Thank you, Mr. Allen. We are doing well, and there is every likelihood that the Committee will be concluded by 7 pm on Thursday 24 May as set out in the programme motion.

Peter Luff (Conservative, Mid Worcestershire)

How will we know where the Programming Sub-Committee will meet?

Michael Clark (Conservative, Rayleigh)

As I understand it, the Programming Sub-Committee will meet in this room at a time convenient for us all. That will probably be 4.20 this afternoon.

Richard Ottaway (Conservative, Croydon South)

How are we to be notified?

Michael Clark (Conservative, Rayleigh)

Those of us who are involved will be here at 4.20 pm and, if there is not a Committee, we will do nothing for 10 minutes until the Committee sits at 4.30 pm.

Question put and agreed to.

Adjourned accordingly at thirteen minutes past Twelve o'clock 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)

Edward O'Hara (Labour, Knowsley South)

In the present circumstances, it might be useful if, for the convenience of the Committee, I pointed out that a resolution has been passed by the Programming Sub-Committee. I call the Minister to move the same motion formally now.

Resolved,

That the Order of the Committee of 26th April shall be varied as follows—

(1) the remaining provisions of the Bill shall be taken at this afternoon's sitting;

(2) the order of consideration at that sitting shall be as shown in the second column of the Table in the Order of 26th April; and

(3) the proceedings at that sitting shall (so far as not previously concluded) be brought to a conclusion at 7 p.m.—[Dawn Primarolo.]

Clause 95 - VAT: Residential Conversions and Renovations

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Before raising a point that the Charities Tax Reform Group has brought to my attention, I shall welcome the clause in general. The Government are right to introduce an extra relief for such building work. [Interruption.]

Edward O'Hara (Labour, Knowsley South)

Order. There is rather a lot of subterranean noise in the Room. As we are picking our way through drastically changed circumstances, the Committee's co-operation would be appreciated.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Thank you, Mr. O'Hara.

The Charities Tax Reform Group is concerned about quite a technical point, which relates to the definition of accommodation in the context of building work. The Value Added Tax Act 1994 distinguishes two types of residential accommodation: ``dwellings'' and buildings

``intended for use solely for a relevant residential purpose''—

or RRP. In the context of building work, a dwelling must be ``designed as a dwelling''. Most communal residential accommodation is not sufficiently self-contained to qualify, so it is treated as RRP accommodation instead.

That can cover a range of accommodation types that are significant for charities. I am sure that you are aware, Mr. O'Hara, that relevant residential accommodation may be for people with learning disabilities, or people whose carers are having a break. A range of charities run such accommodation, which could include accommodation for people who require personal care because of old age, past or present problems with alcohol dependency, drug abuse or mental disorder. It could also include hospices or even residential accommodation for educational purposes.

The current law, with VAT on building work at 17.5 per cent., does not discriminate between dwellings and buildings for a relevant residential purpose. The problem with clause 95 is that, in reducing the VAT rate from 17.5 to 5 per cent., it introduces discrimination against buildings with a relevant residential purpose. I can exemplify that rather technical point in several ways.

The clause proposes that the 5 per cent. VAT rate will apply to building works involving renovation of dwellings that have been empty for three years or more—that is excellent—conversions of non-dwellings, commercial or relevant residential purpose buildings into dwellings, conversions of dwellings into RRP buildings, and conversions of dwellings resulting in a different number of dwellings. All building works with accommodation in those categories will benefit from the VAT reduction, but most RRP buildings will not. As I said, some will benefit, if they are conversions in the direction of a relevant residential purpose, but others will not.

For example, the VAT rate will make it cheaper to convert commercial premises to dwellings than to RRP buildings, and cheaper to convert an empty RRP building to dwellings than to renovate it for RRP use. That is an oversight and a mistake, and I am flagging up a technical point to the Government, rather than criticising them. That failure could result in absurdities, as is demonstrated by the fact that conversions from offices to flats, and from flats to RRP use, will qualify for the 5 per cent. rate, but conversions directly from offices to RRP use will not; instead, they will be subject to VAT at 17.5 per cent.

The current law treats dwellings and RRP accommodation without discrimination. To maintain that state of affairs, we would need provision in tax law to ensure that the new 5 per cent. rate applied to renovations of RRP buildings that have been empty for three or more years, conversions of commercial and similar buildings for RRP use, and conversions of RRP buildings resulting in a different number of units.

The Minister will agree that it would be wrong to exclude such buildings from the preferential rate, because they are being used for charitable purposes and could be used for the social inclusion purposes that the Government have in their broader agenda. Therefore, the Government should re-examine the point again—or, ideally, clarify in Committee today that they are happy to take it as read that all RRP buildings will benefit from the reduced rate, and that they will tighten up the laws to clarify that in due course. The Minister may feel that she needs to write to me on the point, but if she assures me that she will be writing in a positive way, I will not press the Committee to divide on the clause.

Dawn Primarolo (Labour, Bristol South)

I am grateful to the hon. Gentleman for speaking to me about this issue just before the sitting started.

The changes do nothing for residential properties in the way that the hon. Gentleman suggested. A conversion of a non-residential building into an RRP unit already benefits from having no VAT burden, so there is no need for change there. There is no relief for renovations of RRP buildings just as there is no relief for general renovations, apart from for the special category of properties that have been empty for three years. The Government did not believe that we should introduce a general relief on all renovations, and we do not plan to make such a radical change. However, I listened carefully to the hon. Gentleman's comments and I know that he has had particular representations. I would like more time to consider his points, and I will ensure that my officials have discussions with the relevant organisation to determine whether a perverse incentive has inadvertently been put into the system. Naturally, we want to follow that up. I would be pleased to write to the hon. Gentleman when I have had time to examine it in a little more detail. I know that other members of the Committee, too, are interested in the issue.

Mr. Alun Michael (Cardiff, South and Penarth) rose—

Dawn Primarolo (Labour, Bristol South)

I shall give way to my right hon. Friend, who has a long history of interest in charities.

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

I am grateful to my hon. Friend for giving way to me. Sometimes, those who are involved with charities view such issues differently from those who are dealing with them in terms of taxation or legislation. The concerns set out by the Charities Tax Reform Group were intended to be helpful rather than critical, as the hon. Member for Kingston and Surbiton (Mr. Davey) made clear. Will the Paymaster General respond to the points that have been raised in the terms in which they were raised by the group concerned, to try to provide clarification? It would be helpful if all members of the Committee were to receive that information; we would then be able to engage in helpful discussion with those who contact us.

Dawn Primarolo (Labour, Bristol South)

I entirely accept the points that have been made by the Charities Tax Reform Group. It has been genuinely helpful in exploring the issues that are of concern to it, particularly when the Government undertook the review of charities taxation. Given our timetable, I will endeavour to reply as quickly as I possibly can to the hon. Member for Kingston and Surbiton and my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Michael), and also inform other members of the Committee.

My officials will discuss the issue again with the Charities Tax Reform Group. Obviously, in those discussions, we must clarify whether there is a problem. If there is not, further explanation and reassurance are necessary, but if there is, we must consider how to deal with it. As members of the Committee know, various vehicles are available to deal with inadvertent errors in the interval between Finance Bills.

I want to be helpful to the Committee, but I am sure that it appreciates that, rather than attempt a full explanation this afternoon, I would like to examine the point in detail to determine whether there is a real issue, or whether it would be wiser to ensure that full clarification is given to the Charities Tax Reform Group about how the measure will operate.

Question put and agreed to.

Clause 95 ordered to stand part of the Bill.

Clause 96 - VAT: museums and galleries

Howard Flight (Conservative, Arundel and South Downs)

My question to the Paymaster General is, if section 33 of the Value Added Tax Act 1994 can be extended to museums, why can it not be extended to other charities, or even all charities? When that suggestion has been made in the past, the Government's position has been that article 6 precludes it. Another issue that arises from the legislation is whether the specified museums and galleries will be leaned upon to give up charging, and whether their grant in aid will increase sufficiently to cover the loss from ceasing to charge. Those are not legislative matters but background to the proposed change. Finally, will the Department for Culture, Media and Sport have a role in identifying the museums? It should know more about museums than the Treasury.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I thank the Paymaster General for replying in such a positive way to our debate on clause 95, particularly given the time constraints. I wrote to her with a point about this clause from the Charities Tax Reform Group, to get clarification in the context of official advice. We, and the charities group, were concerned that if a person, in this case a charity, took up the special offer within the VAT refund scheme of being effectively zero-rated for VAT, but had previously sold assets when it transferred from being a business to a non-business, tax could be due and could be collected by Customs and Excise. That person would have had an incentive not to follow the Government's lead but to counter the Government's intention.

On 3 May the Paymaster General wrote to me saying:

``we accept that this should not happen of the bodies that will be the subject of the special VAT scheme. Customs and Excise are developing a workable solution to this so that when the museums and galleries in question do move to universal free access, there will be no clawback of the VAT correctly recovered while they have been charging for admission.''

The Paymaster General set out the reasons why that had not been covered in the legislation; they are incredibly complex, and involve three separate areas of VAT law. She went on to say:

``We have therefore decided to resolve this issue outside the current Finance Bill. Before the scheme is introduced on 1 September 2001, we will ensure that there are special arrangements in place for each museum and gallery affected in this way designed to suit their individual circumstances.''

It is important that we have that on the record, so that the staff of museums and galleries who read our proceedings do not have to worry about that point. In some cases it could involve hundreds of thousands, if not millions, of pounds. The Paymaster General's reply was extremely helpful and I thank her for her assistance.

Dawn Primarolo (Labour, Bristol South)

What a nice Committee it is this afternoon. Long may that last—although I have a feeling it is only a lull before the storm. I thank the hon. Gentleman for put my response on the record, so that it is clear.

I assure the hon. Member for Arundel and South Downs that extremely close consultation took place with the Department for Culture, Media and Sport on the issue of the list of the national museums and galleries to which the scheme would apply. We have to go slightly further than that Department. For one reason or another, other Departments sponsor national museums and galleries, all of which are being drawn together for a list that will be published no later than 1 September.

The hon. Gentleman's second question was why do we not simply admit the schemes to section 33. I am sure that he appreciates that section 33 provides for the refund of VAT to local authorities and similar bodies so that VAT does not fall as a burden on local taxation. To be covered by section 33, bodies must carry out a local authority-type function and have the power to levy directly on local taxation; that was the policy of the previous Administration, too. National museums and galleries do not undertake that type of function, so we shall publish a list of the museums that will have access to the scheme.

The hon. Gentleman asked why access to section 33 was so tightly controlled, but then he answered his own question. If it were not, everyone would want access, and that would not be permissible. That is the reason for our approach, which is entirely consistent with the arrangements that we can make within the nationally determined decisions in respect of the sixth directive. The exemption is, in effect, a grant.

Question put and agreed to.

Clause 96 ordered to stand part of the Bill

Clause 97 ordered to stand part of the Bill..

Schedule 30 agreed to.

Clauses 98 and 99 ordered to stand part of the Bill.

Schedule 31 agreed to.

Clauses 100 and 101 ordered to stand part of the Bill.

Clause 102 - Landfill tax: rate

Oliver Letwin (Conservative, West Dorset)

The purpose of the clause is to increase the landfill tax by £1. My intervention is aimed at a single project: to discover by what proportion and by what means the Government are cutting national insurance contributions equivalently. They must be doing so, because no less a person than the Financial Secretary has assured us on various occasions that the aggregates tax, the climate change levy and the landfill tax remain fiscally neutral measures. Therefore, it must be the case that the Government will introduce a proportionate decrease in national insurance contributions, or introduce some other measure to the same effect. Strangely, so far the Committee and the House have not been privileged to hear from the Government by what means they will achieve that.

I know that Hansard has difficulty in revealing the tone that hon. Members adopt, so I must explain that the tone in which I make these utterances is ironic. I do not expect such a statement from Ministers, but I would be delighted should they surprise me and genuinely prove that they intend this to be a fiscally neutral measure. I fear that there will be no such action. however, and this is the clause that gives the lie to the assertion that any of these measures are intrinsically fiscally neutral.

Andrew Bennett (Labour, Denton and Reddish)

Can the hon. Gentleman tell us whether the Conservative party still believes in the landfill tax? Does it believe that it should be going up?

Oliver Letwin (Conservative, West Dorset)

The Conservative party does not believe that the landfill tax should be raised, or that by raising it the Government are using it as an environmental measure. They are raising money. The Conservative party believes that the Government's intention is to do exactly the same thing in due course with the aggregates levy and the climate change levy.

Stephen Timms (Labour, East Ham)

The hon. Gentleman recently told the House:

``I was not in Parliament to vote for the landfill tax and I would not have voted for it if I had been.''—[Official Report, 23 April 2001; Vol. 366, c. 83.]

Can we infer from that that the Conservative party would reduce or abolish the landfill tax were there to be a Conservative Government after the forthcoming election?

Oliver Letwin (Conservative, West Dorset)

I have no intention of being dragged into making policy announcements by the Financial Secretary. The Conservative party does not believe that raising the landfill tax by £1 is a fiscally neutral measure. I repeat my challenge to the Financial Secretary to abandon the amusements of pre-election party games and tell us whether the assertions that we have repeatedly made over the past two years are true. The Government see such measures, as taxes and intend to raise the charges bit by bit, thereby giving rise to exactly the problems that I have always imagined might reside in such a form of tax.

Incidentally, that is precisely the reasoning that led Liberal Democrat Members and myself to believe that the suggestion put forward by the hon. Member for Kingston and Surbiton had real merit. What is needed is some hypothecation, a Rooker-Wise amendment, some transformation into charges, or something that makes such crypto-environmental measures have a genuinely fiscally neutral effect. We would then know that the Government were not just playing party games, but intended fiscal neutrality. As things stand, we have no such assurance. We have the revelation in clause 102 that the Government now intend to show that they are willing to raise one of the three taxes without an offset.

Andrew Bennett (Labour, Denton and Reddish)

Does the hon. Gentleman accept that the intention of the tax was to reduce the amount going to landfill and to encourage minimisation and recycling? If all those things had been achieved, would he not agree that even putting the tax up by £1 could have been fiscally neutral, as less money would be being paid?

Oliver Letwin (Conservative, West Dorset)

The hon. Gentleman is right. The aim was noble. That is common ground on both sides of the House. We all want to see a reduction in landfill. We are not having an environmental argument, but a fiscal argument. Secondly, I do not know, and I wait to hear whether the Financial Secretary knows— although I hazard a guess that he does not—whether the rather interesting proposition that the hon. Gentleman has just put forward is true. I doubt it. It certainly was not argued in that way by Ministers on the Floor of the House when we made those points on Second Reading. As far as I know, that case has not been argued in public.

If the Financial Secretary has an elasticity analysis that is rather better in quality than the elasticity analysis that he so signally failed to provide on tobacco duty, and it shows that the measure will be fiscally neutral, I shall withdraw my remarks. However, no such evidence has been produced, and I doubt both that the change is intended to be fiscally neutral, and that this will be the last rise. If the present Government are lucky enough—and the British public unlucky enough—and they are re-elected, all these taxes will be revealed in their true colours as items used by the Treasury to engage in taxation by stealth, which is wrong.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

In this year's Red Book—or, rather, the white book—table C7 sets out public sector current receipts. It shows landfill tax receipts of £0.4 billion in 1999-2000, rising to £0.5 billion in 2000-01 and staying there for 2001-02. Some rounding off may apply to those estimates, but they do not mean that the revenues are suddenly falling away as the hon. Gentleman suggested. The Government may need to continue to increase the rate of the tax.

Oliver Letwin (Conservative, West Dorset)

The hon. Gentleman has injected a degree of interest into the debate. Let us wait and find out the Financial Secretary's intentions in that regard. It would be interesting if it were established that the net effect is neutral—or, in the absence of such a rise, would have amounted to a reduction. I acknowledge that the Liberal Democrats genuinely believe in their policy. If the intention of Her Majesty's Government—the current Government, that is—is also to make the taxes work in that way, in the end they might disappear altogether. They could succeed to such an extent that people moved on to do things in a different way.

It does not follow from the likelihood that the receipts would fall if the rate is not raised, that the rate should be raised. That is a non sequitur. We would first have to have established that the reason why the receipts were falling was something other than the effect that the tax was originally intended to have. If the reason why the receipts were stabilising or falling was that the tax was having its intended effect, there would be no reason—if it were an environmental as opposed to a tax-raising measure—to raise it at that point.

The Financial Secretary may be in a considerable bind here, but the Committee is fortunate in that he is both clever and honest. At this late hour of the Committee's deliberations, a little piece of history could be made, and we could gain a genuine insight into what Her Majesty's Government mean by fiscal neutrality, why the rate is being raised, and how its rise relates to past and future receipts. We could ascertain whether any studies demonstrate that the measure is fiscally neutral. If we receive answers to those questions, I might feel that part of this afternoon's proceedings have been worth while.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I have been tempted by the hon. Gentleman's speech into debating the theory of how the tax will work to promote recycling, reuse and environmental improvements. He argued that if it is working, revenue will fall, and questioned the Government's motives. It is too early in the game to start reducing the landfill tax rate. The Conservative Government and the present Government were right to set a long-term strategy of gently ratcheting up the pressure with small incremental year-on-year increases in the landfill tax rate. That sent out a signal to industry and the private sector that they needed to change their ways.

The Conservative Government introduced the tax at a relatively low rate. That was correct. With green taxes, there should be no desire to penalise different parts of industry and the private sector suddenly. We want to win support for environmental measures, and say to people that such measures are not about penalties, but about changing the market signals so that our commercial behaviour will take sustainability into account. The tax should start at a low rate and people should be sent a determined and clear signal that it will be ratcheted up. Instead of penalising people, we must make sure that the incentive is there for them to change their behaviour and their commercial and domestic processes.

Oliver Letwin (Conservative, West Dorset)

Does the hon. Gentleman agree that, first, the optimality theory suggests that such a tax, if genuinely intended to have an environmental effect, should be set at the level of the externalities—the level of the damage caused to the rest of society? I recall that the aggregates tax is so intended to be set. That would show a settled rate rather than one that increases. Secondly, notwithstanding my first point, if his logic were right, does he agree that there should be an accompanying change downwards in national insurance contributions or in some other fiscal measure?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am happy to agree with the hon. Gentleman's second point. We believe strongly in the level of neutrality in respect of environmental measures. It is a significant issue because, hopefully, it wins more public support for such an important change that is being made to our economy and our society.

I am not sure whether I can agree with the hon. Gentleman's view on an optimal tax theory. If he does not mind my saying, his analysis of the position is static. Optimality theory in respect of tax should take in the dynamic picture. When trying to move an economy and a society from one form of behaviour to another, we cannot suddenly introduce a tax at a theoretical optimal rate. That would go against the grain of society, the grain of business and the grain of the private sector. We should aim towards what may possibly be calculated to be an optimal rate, but we cannot introduce a tax, especially the landfill tax, straight away at such a rate, partly because the information that would be required to calculate that rate does not exist. We need to see how the private sector and the public sector react as the tax is incrementally increased slowly and know whether it is sending out the right incentives.

There is a problem with the operation of a landfill tax in that it has created some perverse incentives. Fly-tipping has increased as people try to evade the tax. We cannot pass tax legislation in the House and assume that the net result will be positive. All the analyses suggest that it might be positive, but account is not taken of the externalities, the side effects and how people try to adjust. When people are adjusting to the tax by way of illegal activities, such as fly-tipping, we must ensure that the Government's policy is taking that into account elsewhere.

I have cited an example of how, if we had gone immediately into a high level of tax, we may have created some damage more widely in society. I believe that the Conservative Government got it right. The tax had a relatively low start, with a clear long-term signal. The Government are to be congratulated for continuing such a process. Their only failure is that they are not more radical in their recycling and reuse strategies. Such issues are crucial. They concern our constituents and members of all political parties. Conservative and Labour Members who want to improve the way in which businesses and organisation can recycle goods and the incentives for so doing have drafted several private Members' Bills. If there is a criticism of the Government on the matter, it is that they have not gone further with regard to wider aspects of environmental policy.

Oliver Letwin (Conservative, West Dorset)

Does the hon. Gentleman recognise that the Conservative position is not far from his, apart from in one important respect? We also want economic levers to be used to achieve desirable environmental goals, but we would prefer to see tax reductions, rather than tax increases. Where it must be so, we would rather see regulation than tax increases, and certainly any method rather than non-fiscally neutral tax increases.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful to hon. Gentleman, but I suggest that he stop digging. The former Conservative Government introduced the tax, raised it when in power, and argued at the time that the tax was good. They were not reducing taxes on the level argued, but using marking mechanisms—taxation signals—to try to promote good environmental behaviour. They were right then, but I am concerned that the hon. Gentleman does not share his former colleagues' support for the approach, and that he puts regulation above taxation. In some cases, regulation can be the optimum way of securing environmental benefits, but often it is not, and taxation is the most appropriate method providing—with the very important caveat—the receipts produced are given back to the wider tax-paying community for tax reductions elsewhere. That seems to us to be the economically, socially and environmentally optimum approach.

We will continue to support the policies, with two slight caveats from the Government. They should make the wider environmental policies in the area more ambitious than currently and, as the hon. Gentleman said, if there is an increase in receipts from the landfill tax as a result of the measures, the receipts should be given back to the private sector in reductions, presumably in employers' national insurance contributions.

Peter Luff (Conservative, Mid Worcestershire)

I am grateful to you, Mr. O'Hara, for allowing me to catch your eye. I am breaking the silence that I usually adopt in these proceedings because I have a strong and powerful constituency interest in the matter, and I am grateful for the opportunity to raise it.

I was a passionate devotee of recycling as a child. My Corona bottles always went back to the newsagent shop, and the deposit was duly collected. It grieves me no end that modern plastic bottles are thrown away into landfill sites, and I also grieve at the way our computers litter landfill sites of the United Kingdom, which represents a scandalous failure to recycle.

I am all the more a passionate devotee of recycling because the Hill and Moor landfill site is in my constituency—it is called a landfill site although it is actually a land rise site. A mountain is being constructed between the villages of Throckmorton and Wyre Piddle, and that is Worcestershire's major site for the disposal of household waste, particularly since Labour members of the county council voted against the incinerator, which is a crucial part of their own waste management strategy. Never mind—that is another matter.

My constituents in the villages around the Hill and Moor landfill site should have the bare minimum of transport going to that land-rise site—I must get my terminology right.

Mr. Andrew F. Bennett (Denton and Reddish) rose—

Peter Luff (Conservative, Mid Worcestershire)

I am delighted to give way, although I cannot think of what I said to prompt the hon. Gentleman.

Andrew Bennett (Labour, Denton and Reddish)

Is the Conservative party now for incinerators?

Peter Luff (Conservative, Mid Worcestershire)

The hon. Gentleman leads me into a full and frank confession of what happened at the party meeting in Kidderminster last week, when I am afraid that the Conservative party joined forces with the Labour party to vote against the incinerator. There you are, Mr. O'Hara, the truth will out, although I am not afraid of the truth.

As the hon. Member for Kingston and Surbiton remarked during his contribution—I thought that he contradicted himself but he was thoughtful—there are perverse incentives for the landfill tax. The hon. Gentleman dismissed the perverse incentives by supporting the Government's strategy that, as we read in the Red Book, is part of a strategy to increase the current standard rate of landfill tax by

``£1 per tonne for five years until 2004''.

Therefore, this is the first stage of a long and sharp increase that is well above any projected rate of inflation, and it has had serious perverse incentives in my constituency. While I welcome the fact that there may be fewer lorries on the roads of my constituency going to the Hill and Moor site, I worry profoundly about the fly-tipping that has occurred in my constituency on both a disorganised and highly organised scale.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

How does the hon. Gentleman believe that we should deal with those perverse incentives? Does he believe that we should reduce the tax, abolish it, or as I do, deal with such illegal activity in other ways?

Peter Luff (Conservative, Mid Worcestershire)

One should not be a single-club golfer in such matters. All such taxes can be benign at the right level and become offensive at the wrong level. The Government are moving the tax towards the wrong level. Already, at the current level, Worcestershire farmers complain to me regularly about the fly-tipping in their fields, typically by small building and gardening contractors, but in a more organised way, too.

Stephen Timms (Labour, East Ham)

I cannot resist the temptation to ask the hon. Gentleman the same question. In the House, the hon. Member for West Dorset said:

``I was not in Parliament to vote for the landfill tax and I would not have voted for it if I had been.''—[Official Report, 23 April 2001; Vol. 366, c. 83.]

The hon. Gentleman was in the House. Will he confirm that he voted for it?

Peter Luff (Conservative, Mid Worcestershire)

I was; I did, with a little reluctance, and in the hope that it would not be increased sharply above the rate of inflation, which is what is happening. My mental arithmetic is not what it used to be, but the increase is not far short of 10 per cent. Increasing £12, £13 or £14 rates by £1 is a smaller percentage increase, but still represents a significant increase over and above inflation each and every year.

One company in my constituency in particular has made a large sum out of the consequences of the landfill tax. A company called Ivory Plant Hire, of which the Financial Secretary has heard me speak before, systematically fly-tipped large quantities of building refuse around Worcestershire and Herefordshire—pretending to reputable building contractors that it was reputable, and callously dumping the muck that it gathered from building sites wherever it could.

The fines levelled by magistrates courts are lower than the landfill tax revenues that must be paid to take refuse to proper landfill sites. That is a huge issue. We managed to persuade local magistrates substantially to increase the fines, which is welcome, and that company now seems to have gone into liquidation, but only after two years of huge environmental damage to my constituency. I fear that it is likely, like a hydra, to re-emerge with other heads after the so-called liquidation, and more damage will be done.

The Financial Secretary must be extremely confident that the increase, and the further increase that the Government plan should we have the further misfortune of Labour winning the coming election, can be guaranteed not to cause further perverse incentives such as the hon. Member for Kingston and Surbiton described and further environmental havoc in my constituency. I am deeply worried about this sharp increase.

The Government plan that moneys raised from the landfill tax will, under the landfill tax credit scheme, be turned to different purposes. I find that highly objectionable. My constituents who live around the landfill site pay the price of the activity that goes on there in, I suspect, loss of value of their homes, and certainly in the environmental impact of lorries and the visual amenity of the extraordinary mountain of rubbish growing in their back gardens.

At present, there is at least the prospect of the landfill tax credit scheme and some of the extra money that the Government are trying to raise going back to that community. In fact, scandalously, that has not happened in Worcestershire. The money has gone all around the county, not to the local communities around the land-rise site. However, the Government now say that they will end all that and spend the money on broader schemes to encourage recycling in the county.

I have no objection to recycling, as I said, but when landfill sites have a substantial environmental impact on a local community, that community should receive some of the benefit of the landfill tax credit scheme. All the benefit should not go to the wider community in order to encourage greater recycling. I find it deeply offensive that my constituents will suffer increased fly-tipping as a result of the increase, while facing the prospect, if the Government press ahead with these ill-guided policies, of not receiving the benefits that should flow from the landfill tax credit scheme.

Michael Jack (Conservative, Fylde)

I rise to support my hon. Friend and others who have discussed fly-tipping. When I ask my local authority to respond to that problem, it says that it does not have the resources to mount in-depth observations and enforcement of the law to stop that nuisance.

I anticipate the Financial Secretary asking the same question for the third time. I was in the Treasury when the landfill tax was introduced; I approved of it and voted for it, but there was an important proviso. The proviso was that it was fiscally neutral when it was first introduced, by virtue of a national insurance rebate. Why do the Government choose not to replicate that fiscal neutrality? We have seen and heard nothing to suggest that, at the end of the period of the application of the escalator, a review would take place of national insurance payments and a corresponding reduction would be made.

Given the problems and constraints on areas, situations or techniques for the disposal of waste, it is right that we should raise awareness of these issues by economic signals. However, I find it difficult to relate the different strands of Government and European Union policy over the question of waste disposal to the role played by the landfill tax. In paragraph 6.95 of the ``Financial Statement and Budget Report'', we learn:

``Industry and commerce in England and Wales produce around 78 million tonnes of waste a year. Local authorities in addition collect a further 28 million tonnes''.

That 78 million tonnes of waste is of the kind that is by and large disposed of privately by contracting organisations levying the landfill tax from their commercial customers in their invoices. One can see an immediate cause and effect in that case. However, in the case of the 28 million tonnes of waste, most people would be unaware of the effect of the landfill tax on the collective charges that they pay their local authority for waste disposal. Household waste is increasing by 3 per cent. a year, so a significant part of waste in the United Kingdom is not immediately influenced by the landfill tax.

The same document states that the European Union landfill directive has set a series of targets supposed to affect the amounts of waste—especially biodegradable material—that can be disposed of. However, paragraph 6.95 does not appear to relate the effectiveness of the landfill tax to the numbers. A theme of the debate has been the attempt to establish whether there is a proper cause and effect. In other words, is it an effective tax? Is it doing its job in deterring people from producing more waste? I cannot disaggregate the effect on waste of the European Union landfill directive, the subsequent measures involving tradable permits, the outcome of waste strategy 2000 and the landfill credit scheme. It is a bit of a muddle—it has not been well joined up.

Governments can justify changes in taxes, in the sense that they are a price put on an activity, only if it possible to see the effect.

Andrew Bennett (Labour, Denton and Reddish)

Presumably the right hon. Gentleman knew what the expected effect would be. How far does it vary now from what he hoped that it would be?

Michael Jack (Conservative, Fylde)

The original imposition of an environmental tax in this area forced people to think, because an economic consequence ensued from an activity that was untaxed or unpriced—apart from the immediate marginal cost of tipping a load of waste into the local tip. The tax focused people's minds and assisted in their strategic thinking about ways of reducing a potentially avoidable cost. It was in action for a relatively short time; we were then removed from office, but we are invited to show our agreement for an increase when other measures have been introduced that may complicate the assessment of the success of the tax.

Andrew Bennett (Labour, Denton and Reddish)

Does the right hon. Gentleman that when he was in the Treasury, he must have made the decision whether £5, £10 or £15 was the right rate? Will he share with us the thinking that went into the introduction of the tax?

Michael Jack (Conservative, Fylde)

I do not want immediately to retreat to the excuse that the tax was not one of mine. Other hon. Members have recognised that a sensible lower rate would have a chance of being accepted. The tax was fiscally neutral, so perhaps the rate was less important than the signal that it sent. To be honest, I cannot remember the exact arguments about why the figure was chosen. In the Treasury, I often asked officials who came to brief me, ``Why this particular number?'' Had I been directly responsible for the tax under discussion, I suspect that I would have asked the same question. Had I been able, I would have been happy to share my experience with the hon. Gentleman, but he makes a fair point.

Mark Hendrick (Labour, Preston)

Will the right hon. Gentleman give way?

Michael Jack (Conservative, Fylde)

I should first reply to the hon. Member for Denton and Reddish (Mr. Bennett). As with any pricing arrangement, the question is which one will have an effect. If we had gone too far the other way, perhaps we would have had an even bigger debate on fly-tipping than we have had today.

Mark Hendrick (Labour, Preston)

How did the Government of whom the right hon. Gentleman was a member measure the effectiveness of the tax at whatever rate it was levied?

Michael Jack (Conservative, Fylde)

If the hon. Gentleman listens to what I am saying, he will know that that is my point. Normally, a tax is left in place for a number of years and then assessed. As Treasury Ministers say, taxes are kept under continual review, but the tax had not been in operation long enough to make the definitive assessment that may be required.

I am, however, delighted that the hon. Gentleman raises that point, because it supports my argument. The Committee is being asked to agree a further rise with the prospect of four additional rises, although it is quite difficult to know what the effect will be, particularly given the contents of paragraph 6.95, with which the hon. Gentleman will be familiar.

Mark Hendrick (Labour, Preston)

To follow up my previous question, if the right hon. Gentleman were still in government, how would he measure the tax's effectiveness?

Michael Jack (Conservative, Fylde)

With respect, the question is so hypothetical that I cannot answer it. As with all things, we started with a fiscally neutral tax. If the previous Conservative Government had continued and it was deemed that the rate should rise in order to have a further contributory effect, we might have maintained that fiscal neutrality. The important point is that the Government whom the hon. Gentleman supports are not doing that.

Given that waste from Preston comes to a rather large tip in my constituency that is becoming very full, the hon. Gentleman might be interested in the effectiveness of the Government's waste policy, because it will eventually have an impact on his constituents. When the Financial Secretary comes to justify the Government's position, he might be able to shed a little more light on the relative effects of the different constituent elements of their policy.

Stephen Timms (Labour, East Ham)

I welcome you back to chairing our proceedings, Mr. O'Hara.

I am optimistic that I can persuade the Committee that the irony expressed by the hon. Member for West Dorset (Mr. Letwin) was misplaced. It is indeed the proposal that the standard rate of landfill tax will be increased from £11 a tonne to £12 from 1 April this year. It is in fact the second of those increases, rather than the first. We are continuing the programme of pre-announced landfill tax increases set out in the 1999 Budget, which will lead to a standard rate of landfill tax of £15 a tonne by 2004. We want to send a strong signal to waste producers and waste management companies to switch away from landfill towards waste minimisation, re-use and recycling.

The Environment Sub-Committee chaired by my hon. Friend the Member for Denton and Reddish has carefully examined such matters. He has made a number of telling interventions in this debate and will have heard, as I have, calls from the waste management companies in the Environmental Services Association in particular for substantially higher tax levels than those proposed. Calls from the industry for £25 a tonne are not unusual; some players call for significantly more. It is an unusual experience as a Treasury Minister to be lobbied by those who pay the tax for it to be set at a higher rate. The Government took the view, which was expressed by the hon. Member for Kingston and Surbiton, that it is right to proceed cautiously and observe the effects of the steady £1 a tonne increases. That is the only way to find out what their consequences will be.

Oliver Letwin (Conservative, West Dorset)

I am interested in the Financial Secretary's remarks so far. Will he tell us why the Government argue—I have had time to check this—that the aggregates tax should be introduced immediately at the tax optimality point where its cost equals the externalities?

Stephen Timms (Labour, East Ham)

We have not done that; the hon. Gentleman is mistaken. The value arising from the research was £1.80 a tonne and we have set the rate at a conservative and cautious £1.60 a tonne, as I am arguing we should in this case. We are applying the same principle, which was rightly summed up by the hon. Member for Kingston and Surbiton.

Oliver Letwin (Conservative, West Dorset)

That will not do. I take it that the Financial Secretary is responsible for the relevant paper. His argument on the aggregates tax is that a cautious view was taken because there was some doubt about whether £1.80 was the figure for the externalities. That is not the same as arguing that a low rate should be chosen before being rammed upwards. He never argued that he intended to raise the aggregates tax hereafter.

Stephen Timms (Labour, East Ham)

No, I did not. My argument, in line with the comments of the hon. Member for Kingston and Surbiton, is that a cautious approach is right and that, by 2004, when we will have reached the £15 a tonne rate, we will be able to judge the correct tax rate for the future by using evidence and experience of the different tax rates.

Michael Jack (Conservative, Fylde)

The hon. Member for Denton and Reddish challenged me to say why £10 a tonne was the right figure under the Conservatives. Is the Financial Secretary saying that he cannot judge whether £15 will ultimately be the correct figure until he has sucked it and seen what the effect will be in the real world?

Stephen Timms (Labour, East Ham)

We must know the effects of tax at different levels so that we can make an informed decision—particularly in response to representations from industry for significantly higher rates.

The measure is already having a significant impact on waste management. The recycling of inert waste is at an all-time high, there is increased composting of biodegradable waste, and more than one third of businesses are introducing or considering minimisation and re-use of waste. Overall, as the right hon. Member for Fylde (Mr. Jack) said, increases in household waste are running at about 3 per cent. a year. Despite that, active waste disposals are quite static at about 50 million tonnes a year. We can deduce from those figures that the tax is stopping what would otherwise have been a rising trend in the use of landfill. On the inactive side, waste disposals on which the lower rate of landfill tax is paid have had a dramatic effect, with the landfill amount falling from 36 million tonnes in 1997-98 to 30 million in 1998-99, while the recycling of construction waste has grown.

The right hon. Gentleman rightly said that several different factors are at work, but the landfill tax has undoubtedly played an important role in moving people away from landfill. I was disappointed that the hon. Member for West Dorset was unable to explain the Conservative party's policy on the landfill tax. He outlined a policy, but I am unsure whether it was the official one. He has made it clear that he would not have voted for the measure. The hon. Member for Mid-Worcestershire (Mr. Luff) has made it clear that he voted for it with reluctance. Presumably, the right hon. Member for Fylde voted for it with enthusiasm, as the previous Government introduced the tax, and he was a Treasury Minister at the time.

The day after the hon. Member for West Dorset made it clear that he would not have voted for the measure, the right hon. and learned Member for Rushcliffe (Mr. Clarke), in the same debate, mentioned the landfill tax as one of his major achievements as Chancellor of the Exchequer. Most people who have studied the landfill issue would subscribe to the right hon. and learned Gentleman's view rather than to that of the hon. Member for West Dorset.

Oliver Letwin (Conservative, West Dorset)

The hon. Gentleman is selectively quoting. We could all have gladly signed up to the measure if it had contained a rule that enforced fiscal neutrality. The problem with the present construction is that it allows for precisely the move of which we are now accusing him. All hon. Members accept the benign environmental effects of the landfill tax; the problem is that it can be misused. The hon. Gentleman has been talking for several minutes—albeit with interruptions—but has not yet addressed whether the measure is fiscally neutral.

Stephen Timms (Labour, East Ham)

I am looking forward to reaching that part of my speech, but I must first give way again.

Andrew Bennett (Labour, Denton and Reddish)

I was hoping that my hon. Friend might have probed Opposition Members about how they would have dealt with the major defect of the tax when it was introduced: no money was given to the Environment Agency or local authorities to enforce the measure and to deal with fly-tipping. Another important defect is that 20 per cent. of the money raised is directed to environmental schemes managed by Entrust, which is one of the worst regulated bodies in the country.

Stephen Timms (Labour, East Ham)

I am grateful to my hon. Friend for his comments, and I now turn to the point about fly-tipping, because it was also raised by the hon. Members for Kingston and Surbiton and for Mid-Worcestershire and the right hon. Member for Fylde.

I agree with my hon. Friend that more resources were needed to deal with fly-tipping, and the Government have introduced several improvements in that regard. However, the Committee should be aware that the majority of fly-tipped waste is household waste, and, as the right hon. Member for Fylde said, householders do not pay the landfill tax. The Tidy Britain Group has conducted research on that matter. Householders are not provoked to fly-tip their waste because of the landfill tax.

The situation is different for commercial operators, such as the company in the constituency of the hon. Member for Mid-Worcestershire. However, I was heartened by his remarks about the effectiveness of measures such as extra fines and the work of the Environment Agency in dealing with the problem in that particular case.

The Government take the problem of illegal waste disposal seriously. The penalties are severe: they include unlimited fines and up to two years in prison. I hope that those measures enable us to deal with the problem. However, the majority of fly-tipped waste is household waste, which cannot be caused by the landfill tax.

Peter Luff (Conservative, Mid Worcestershire)

You would rule me out of order, Mr. O'Hara, if I entered into a debate on fly-tipping. My part of the world does not suffer from that problem, although large quantities of waste are produced by garden contractors, for example.

Money is not the problem with enforcement; money does not solve every problem. Lack of co-ordination of Government policy is the problem. In the case of Ivory Plant Hire, the Environment Agency, the district council, the county council, the police, the vehicle inspectorate, the traffic commissioners, the courts and, probably, others, were involved. If we are to tackle the problem successfully, that is how we should deal with it—rather than throwing money at it.

Stephen Timms (Labour, East Ham)

The Environment Agency has a free 24-hour hotline for the public to report any such incidents. That is the kind of measure that is required to tackle the problem.

The hon. Member for Mid-Worcestershire also asked about the landfill tax credit scheme, as did my hon. Friend the Member for Denton and Reddish. In the longer term, the Government are attracted to replacing all or part of the landfill tax credit scheme with a public spending programme to direct resources towards Government priorities on sustainable waste management. We will consult with interested parties on how the transition to that can be managed to ensure that worthwhile projects, of which there are many examples around the country, continue to attract funding under both the current scheme and any replacement regime. It is important that the resources available here are used to minimise landfill by encouraging recycling, a cause that is dear to my hon. Friend's heart. I am sure that it is dear to the heart of every member of the Committee.

The point that was made frequently by every Conservative Member who spoke, albeit in some cases with irony, was whether the increase of £1 a tonne would be fiscally neutral. I can confess that the landfill tax in the coming year will not be fiscally neutral. The Committee has me bang to rights on that. In fact we will give away a lot than we get. The reason is that the 0.2 percentage point reduction in national insurance contributions comes to £690 million. The forecast revenue from the landfill tax is £452 million. In other words, the revenue will be only two thirds of the amount that is being given away. I will gladly give way to the hon. Gentleman. I hope that he will apologise to the Committee.

Oliver Letwin (Conservative, West Dorset)

I may or may not be able to do that. Which 0.2 percentage point reduction in national insurance was it? I hope that it was not the item that we heard about in the context of the aggregates tax.

Stephen Timms (Labour, East Ham)

No, certainly not. When the previous Government introduced the landfill tax, they also introduced a reduction in employers' national insurance contributions of 0.2 percentage points. In the coming year—the year that we have just started—the loss of revenue that arises from that reduction is £690 million. The take from the landfill tax would be £462 million. That is the 0.2 percentage points reduction that was introduced at the same time as the landfill tax. [Interruption.] In other words, we are—

Edward O'Hara (Labour, Knowsley South)

Order. I am finding it difficult to follow the Minister because of the distractions on my left.

Stephen Timms (Labour, East Ham)

I am attempting to make the position as clear as I possibly can to assist Opposition Members. The revenue from the landfill tax is significantly less than the revenue foregone by the reduction in employers' national insurance contributions introduced by the previous Government at the same time as the landfill tax.

Michael Jack (Conservative, Fylde)

I will put my hands and apologise if I am wrong, but is not that mathematical argument that he has just announced just a direct consequence of the fact that the Government have put up employers' national insurance contributions?

Stephen Timms (Labour, East Ham)

No. The right hon. Gentleman is a former Treasury Minister. He knows how employers' national insurance works. The product of 0.2 percentage points on employers' national insurance is certainly not affected by the rest of the national insurance contributions. It increases because salaries and wages increase. I do not want to add to Conservative Members' embarrassment, but having been pressed I feel that I should make the position clear. When the tax was introduced the cost of the 0.2 percentage point cut in employers' national insurance contributions was costed at £505 million per annum. Even that is more than the revenue projected for the coming year in landfill tax.

Mark Hendrick (Labour, Preston)

Is my hon. Friend saying that the Government are giving tax cuts by stealth?

Stephen Timms (Labour, East Ham)

Some might say so. I fear that we will not hear many such allegations from Conservative Members. Having completely shot their fox, I urge the Committee unanimously to accept the clause.

Oliver Letwin (Conservative, West Dorset)

I am grateful to the Financial Secretary. Our proceedings have occasionally descended into torpor. It has sometimes been boring. This charming piece of casuistry has enlivened the proceedings and given us a memory to treasure. Never has a Minister illustrated the vacuity of his logic in so compelling a manner.

The Financial Secretary's argument is this: a particular cut in national insurance rates was made when the tax was introduced, which was, and was intended to be, fiscally neutral when allied to the tax itself. Fiscal drag has since increased the effect of that rate change. Therefore, according to his logic, it is fiscally neutral now to increase the tax. If that were a logic in which he believed, rather than one with which he chose to amuse the Committee, it would also follow that if the receipts from national insurance contributions at a given rate decreased, it would be correct to decrease the tax. Will the Financial Secretary observe that principle? No, he will not, because the two are wholly disjoined. He has made no change in the rate on national insurance contributions.

Sitting suspended for a Division in the House.

On resuming—

Oliver Letwin (Conservative, West Dorset)

National insurance contributions are set at a given level, and earn given receipts for the Treasury, in the prevailing economic circumstances. Should they produce more money because of fiscal drag due to prevailing economic circumstances, that in no sense validates the raising of any tax, landfill or otherwise.

The Financial Secretary was merely amusing himself at the expense of the Committee—or perhaps I should not say that, because he also provided some amusement for the Committee—in order to entertain himself in the dire straits of having to negotiate the Finance Bill. We are left with the same old problem that we started with. The tax increase is not accompanied by an equal and offsetting decrease in the rate of some other tax; therefore it is not a fiscally neutral measure. That is a harbinger that bodes ill, when we attend to the fact that the Government have introduced the climate change and aggregates levies.

Andrew Bennett (Labour, Denton and Reddish)

Where in Dorset does the hon. Gentleman plan to put the incinerator?

Oliver Letwin (Conservative, West Dorset)

It is clear that Labour Members have reached that stage of the Finance Bill at which they wish to amuse themselves. I assure the hon. Gentleman that I have no more desire than he does to see more incinerators. Nor, as I hope might become evident to the hon. Gentleman—who is expert in such matters—and to the Financial Secretary, have I the least desire to see more landfill sites. However, taxes should not be increased without fiscal neutrality obtaining.

Nick St Aubyn (Conservative, Guildford)

I am as opposed to incinerators as anyone in the Room; I spoke on the matter in the Westminster Hall this morning. The additional landfill tax would still leave landfill more attractive than incineration on economic grounds, ignoring the environmental grounds. Even the new level of landfill tax is not a disincentive to landfill as opposed to incineration.

Oliver Letwin (Conservative, West Dorset)

My hon. Friend makes telling points. The fact is that the Government are in a complete intellectual mess about such issues. They have no serious cross-elasticity studies or optimality analyses. The Financial Secretary has directly contradicted his own concessions on the aggregates tax this evening. We are facing a Government who make gestures towards environmental taxation, but who actually wish to establish a base for increasing fiscal revenues from whatever source they may, apart from income taxes. That is what we object to and will continue to object to, and I shall ask my hon. Friends to vote against the clause.

Stephen Timms (Labour, East Ham)

The hon. Member for Guildford (Mr. St. Aubyn) has obviously been listening to the organisations that have been calling for a higher rate of landfill tax. If he had been here earlier in the debate, he would have heard references to those representations. We should take a cautious step-by-step approach, so that we can see the consequences.

The position of the hon. Member for West Dorset is now completely incomprehensible. He is working with a definition of fiscal neutrality, but I have no idea what it is. The entire premise of his argument, and that of other Conservative Members, was that the increases in the rate of landfill tax meant that the Government's revenue from the tax was greater than the revenue forgone from the cut in employers' national insurance contributions. The hon. Gentleman has now, admittedly with speed, come up with a new but incomprehensible definition of fiscal neutrality. He should acknowledge that he was wrong and support the clause.

Oliver Letwin (Conservative, West Dorset)

If it were true that the Financial Secretary cannot understand me—which it is not—it would be necessary for me to do what I shall do in any case, which is to spell out the simple analysis of fiscal neutrality. When a tax is raised by the sum of x and accordingly collects revenues of the sum of y, another tax should be decreased so that it reduces the revenues by the sum of y. The two should offset each other. If the Financial Secretary were genuinely in doubt about the need for that marginal fiscal neutrality to maintain a serious intellectual case for environmental taxes, it would be necessary to explain it.

However, the Financial Secretary is well aware of such matters. The problem is that he does not want to admit it. It is inconvenient to his case, because he has increased the tax and then relied on the fact that some other item happens, through fiscal drag, to be increasing its effect on receipts. That is an intellectually disreputable position—just as disreputable as the position on optimality that he jettisoned so notably earlier. There is no basis left for such a measure, and I shall ask my right hon. and hon. Friends to vote against it.

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

The Committee divided: Ayes 17, Noes 6.

Clause 103 - Climate change levy

Michael Jack (Conservative, Fylde)

I was intrigued to read that paragraph 11 of the relevant section of the notes on clauses stated:

``If the electricity generated is for use in producing hydrocarbon oils, other taxable commodities and uranium, then relief can now be claimed on the input fuel.''

Will the Minister who is to reply enlighten the Committee as to what production of uranium is being carried out in Northern Ireland, and why it has been necessary to introduce a relieving measure for the production of this substance? Why has Northern Ireland been marked out for what appears to be special treatment?

Stephen Timms (Labour, East Ham)

The clause makes three changes to the climate change levy provisions. First, gas supplied and consumed in Northern Ireland is exempted from the levy, which was announced in last year's Budget. Secondly, and not just in Northern Ireland, generators and exempt unlicensed electricity suppliers can claim relief on the proportion of their input fuel that they use to generate electricity, which is ultimately for an excluded or exempt use. Thirdly, the exemption for combined heat and power stations is extended to those stations operated by third parties, subject to the status of the station. Those are the three changes being made in the clause, and I am confident that the Committee will welcome them.

Michael Jack (Conservative, Fylde)

That was a delightful reading of the brief, but the Financial Secretary has not answered my question. The explanatory notes state:

``If the electricity generated is for use in producing hydrocarbon oils, other taxable commodities and uranium, then relief can now be claimed on the input fuel.''

I want to know why that interesting group has been singled out? Will the Financial Secretary clarify whether an advantage will be conferred on third party combined heat and power operations in Northern Ireland, in terms of the climate change levy, which is not available to third party combined heat and power generators on the mainland?

Stephen Timms (Labour, East Ham)

The right hon. Gentleman may be suffering under a misapprehension. The second and third changes that I described are not confined in their effect to Northern Ireland. Only the first of the three changes—that gas supplied and consumed in Northern Ireland is exempted from the levy—is confined to Northern Ireland. The other changes apply throughout the United Kingdom.

On exempt unlicensed electricity suppliers, of which the right hon. Gentleman gave examples, unregulated electricity suppliers are taxed on their input fuels rather than on electricity generated. The provisions in last year's Finance Act meant that they could not claim relief on their input fuel for exempt uses of their electricity. The clause corrects that and ensures equal treatment.

Question put and agreed to.

Clause 103 ordered to stand part of the Bill.

Clause 105 ordered to stand part of the Bill.

New clause 16 - Limited liability partnerships: general

Edward O'Hara (Labour, Knowsley South)

With this it will be convenient to take the following: Government new clause 17—Limited liability partnerships: investments LLPs and property investment LLPs.

Government new schedule 2—Limited liability partnerships: investment LLPs and property investment LLPs.

Dawn Primarolo (Labour, Bristol South)

I understand the Committee's enthusiasm to conclude its business this evening, but it is appropriate for me to make a few comments on Government new clauses 16 and 17 and Government new schedule 2. The hon. Member for Torridge and West Devon (Mr. Burnett) raised some points on the Floor of the House earlier today, which I am sure that he will be anxious to put on the record in Committee, and to which I shall reply.

New clause 16 confirms that, in general, limited liability partnerships will be treated for tax purposes as partnerships. It will stop chargeable gains held over on business gifts from falling out of charge when the LLP goes into liquidation. The Government's intention has always been to ensure that existing trading and professional partnerships can convert to LLP status without generally incurring a tax penalty or obtaining a tax advantage. If LLPs were taxed as companies, partnerships would face tax complications and possibly tax penalties on conversion to LLPs.

New clause 16 amends some of the tax legislation originally introduced by the Limited Liability Partnership Act 2000 to give greater certainty for businesses adopting LLP status. It clarifies and makes explicit the general rule introduced by the Act so that, in general, LLPs are treated as partnerships for tax purposes. It gives clear legal backing to the exceptions to that rule. The new clause does not represent a change in our policy on the taxation of LLPs carrying on a trade or profession. That is illustrated by the fact that the guidance published by the Inland Revenue in the December edition of ``Tax Bulletin'' about LLPs that carry on a trade or profession with a view to profit remains unchanged. That guidance was issued after discussions between the Revenue and accountancy bodies. It has been well received.

There is a tidying-up provision in new clause 16 to deal with held-over gains on business gifts. It has a similar effect to the existing legislation introduced by the Limited Liability Partnership Act relating to gains deferred under the business asset roll-over relief provision. The new measure ensures that any gains deferred on the gift of business assets to partners do not fall out of charge when the LLP ceases to carry on a trade or other businesses with a view to profit. Without the measure, tax on the deferred gain would be lost.

When the guidance was sent to the parliamentary draftsman for inclusion in the Bill, there was discussion about how extensive the legislation needed to be. Parliamentary counsel considered that, even though new clause 16 represented the practice and translated it, it was not adequately underpinned with the necessary legislative backing. At the time, I was confronted with a large piece of legislation to be added to the Bill. Knowing how members of the Committee take exception to long pieces of legislation that may be unnecessary, I took some time to be convinced that the longer route now before us was correct. I apologise to the Committee, because that means that we have had to discuss the procedure today under a Ways and Means motion. I hope that members of the Committee will agree that, taking on board the comments that they have made to me over many years when discussing the Finance Bill, I needed to be sure that that was how we should proceed. The lesson that I have learned is that parliamentary draftsmen are always right. I follow their advice.

New clause 17 and new schedule 2 are designed to prevent tax loss when an LLP carries on the business of making investments generally, and property investments in particular. The Limited Liability Partnership Act 2000 sets out the rules for the registration and conduct of LLPs, although it does not restrict the sort of business that may be carried on by an LLP. It has never been the Government's intention that LLPs should provide opportunities for tax savings over the current entities used by business.

New clause 17 and its associated schedule are intended to prevent tax loss through investment and property investment LLPs. The provisions have no relevance to LLPs whose principal income is derived from carrying on a trade or profession.

Everyone appreciates that wide consultation has taken place on the proposals, and they have been welcomed. If a comment was made, it was about why the provision was not included in the Finance Bill when originally published. I hope that the Committee will accept that my role in creating that delay was motivated by the best interests of all members of the Committee in considering a long Bill. I commend Government new clauses 16 and 17 and new schedule 2 to the Committee.

Richard Ottaway (Conservative, Croydon South)

The Paymaster General is right that considerable consultation has taken place; the industry has a fair idea of what is coming. She is also right that the matter caused some problems. She has been gracious in her apology for what happened, and I am happy to accept that apology. I leave it to the industry for its reaction.

To touch on new clause 16, any change involves a law of unintended consequences. In this case, it is quite serious when a limited liability partnership tries to issue eurobonds. LLP legislation was designed to modernise the legal framework within which major international partnerships and joint ventures operate. As the Paymaster General will be aware, such partnerships rely heavily on several different methods of raising capital. One method for a United Kingdom plc to raise capital is through the eurobond market, to which it has ready access without difficulty.

The Paymaster General will be aware that in proposed new section 59A(2)(c),

``references to a company do not include ... a limited liability partnership''.

Therefore, a limited liability partnership that tries to raise money on the eurobond market will not be competitive, as it will not qualify for the UK withholding tax exemption for interest payments on those bonds—legislation precludes that. Is that intended? Is it an oversight? Is it a matter of policy? If not, the problem could be easily remedied by an amendment on Report tomorrow, placing the words

``except for eurobonds in section 59A(2)''

in the preamble. It is absurd that a major UK PLC should be able to access the eurobond market but a substantial partnership should not be. I hope that the Paymaster General will take that point on board.

My second point relates to new clause 17 and new schedule 2. As the Paymaster General said, the proposal is designed to prevent such partnerships being used by property investors, perhaps along the lines of the real estate investment trusts that are widely and commonly used in the United States. However, new schedule 2 leaves it open to non-UK taxpayers and non-UK tax-exempt partnerships to enjoy the benefit of investment in real estate through a UK LLP. She will be aware that tax returns to partner level. If the partner is offshore, that partner is exempt.

It is odd that a UK partnership will be precluded by proposed new schedule 2 from enjoying the possible tax-exempt benefits, yet an offshore company operating through a UK limited liability partnership will be caught. Is it the Paymaster General's intention to give that advantage to offshore companies, rather than to UK companies? If that is not her intention—I fully accept that it is difficult to anticipate all such arguments—we will happily table an amendment to be debated tomorrow.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am grateful to the Paymaster General for referring to the points that I raised on the Floor of the House earlier today. I shall add only one or two points to those.

The Paymaster General referred to when capital gains are deferred because of held-over relief. In those circumstances, the gains, by virtue of new clause 16, become charged when the business of the LLP comes to an end. I assume that the same goes for assets that receive roll-over relief, and when cash has been applied to the purchase of a business asset used by the LLP. Is the Paymaster General telling us that if the trade of the LLP comes to an end, the assets that have been rolled over will incur a charge to capital gains tax? Does the charge to capital gains tax arise if the asset in question is still used for a trade that may not be the trade of an LLP?

I do not know whether I have explained that adequately to the Paymaster General. Let me try again. If assets are purchased by a LLP and roll-over relief is applied for and given, what is the tax position of those assets when the LLP comes to an end? That is the simple question.

Additionally, will the Paymaster General comment on assets for which there is a deferred gain, for example because of a hold-over relief claim? Will she confirm that if the LLP changes its business rather than ceases to trade, there will be no attempt by the Inland Revenue to charge capital gains tax? Does the deferred charge tax crystallise only if and when the LLP ceases to trade, not if it changes its trade?

I raised one or two other points on the Floor of the House, and I am glad that the Paymaster General has confirmed that the tax principles behind LLPs should mirror those of existing partnerships. She will remember the 1998 Finance Act, when changes were made to the taxation of professions that were on the cash basis of assessment. In those circumstances, such professions must go on to the full earnings basis, and there are transitional provisions in that connection. In fact, the professions go on to a full earnings basis from a cash basis during a transitional period of about eight years.

Will the Paymaster General confirm that if a professional group—for example, a firm of solicitors—is four years down the road in that transitional period and becomes a limited liability partnership, there will be no adverse tax consequences, and transitional relief will still apply? I should say at this stage that I am a solicitor and was a partner in a firm. We were assessed on the cash basis, but I have not practised for some three years. I do not have a personal stake, but the points have been made to me by other members of my profession. Will she also confirm that members of an LLP will be taxed under capital gains tax in accordance with their beneficial interests in the disposed assets, rather than on their shares in the LLP?

[Dr. Michael Clark in the Chair]

I welcome you to the Chair, Dr. Clark.

Finally, certain extra-statutory concessions and statements of practice apply to partnerships. Will the Paymaster General confirm that they will still apply to LLPs? I ask particularly about assets that are owned by a member of an LLP and leased to that LLP. I hope that if the other conditions apply, those assets will attract 100 per cent. business or agricultural property inheritance tax relief. Similarly, on capital gains tax, I hope that those leased business assets will comply with and qualify for roll-over relief as well. Those are a couple of the fairly esoteric points that have been made to me about taxation of LLPs, and, as I mentioned them about an hour ago, I look forward to hearing the Paymaster General's response.

Howard Flight (Conservative, Arundel and South Downs)

I want to raise one other important point, because the clause deals with the taxation of LLPs. The LLP structure was put in place for the use of law firms, but I noticed that several leading London law firms have used a Delaware vehicle to achieve limited liability, so I made inquiries to find out why. One factor behind the substantial expansion of UK law firms into continental Europe—in essence, the acquisition of law firms in the EU by London companies—has been that under the partnership structure, when, for example, a company merges with a German law firm, the German lawyers joining the partnership may choose to pay UK tax, which is lower than prevailing rates in the EU. Indeed, that is one factor that has driven the aggregation of the mergers of law firms. For reasons that I do not fully understand, that does not work if the new LLP structure is used, which is why the Delaware vehicle is being used as an alternative.

It is quite important because this commercial development has been wholly in the interests of the UK, and UK law firms are acquiring businesses and considerable power in continental Europe. The LLP is intended to be useful and effective specifically for professional businesses, but on a rather important tax issue that underpins everything that is happening, it loses the structure that was previously available to partnerships.

The issue is not necessarily UK taxation, but tax treaty agreements between the UK and continental Europe. However, the Paymaster General and her advisers could usefully consider the matter, because unless we can achieve what is already in place, LLPs will not be much use for their primary objective.

Dawn Primarolo (Labour, Bristol South)

We could usefully consider the hon. Gentleman's point and we shall—subsequently.

The hon. Member for Croydon, South (Mr. Ottaway) talked about unintended consequences for eurobonds. In general, LLPs will be treated as partnerships for tax purposes. The tax consequences concerning eurobonds will be the same for LLPs as for current partnerships. The LLP changes are not designed to change the rules for eurobonds. The hon. Gentleman might want to press for more detail on that point. I think that he suggested an amendment. If, after consideration, I find that that is not the case, he is right that I have a route to deal with it.

The hon. Gentleman also made a point about offshore partners. An offshore partner or member will not necessarily be exempt if the property is in the UK. The same consequences will follow for offshore members of an LLP as for offshore partners in a normal partnership. He talked about discrimination, which is not there.

The hon. Member for Torridge and West Devon described his points as esoteric. I am not sure that I would describe them as such, but I will do my best to cover the details. My hon. Friend the Financial Secretary has offered to write to the hon. Gentleman, so perhaps I should leave it to him. He is right that we have had time to consider his points, so I can give him some answers on the record. If he is not satisfied, he can say so at the end. If he is satisfied, my hon. Friend will not have to rush back to the office and pen a letter to him before he is allowed to go home this evening.

The first question related to the transitional rules for abolition on a cash basis. If, on a conversion, the LLP succeeds to the business previously carried on by an old partnership, the spreading rules for catching upcharge will continue to apply as if the conversion had not occurred.

On the second point, while an LLP is carrying on a trade or business with a view to profit, capital gains will be computed according to the members' beneficial interests in the partnership's assets. Partners in a conventional partnership are taxed on exactly the same basis.

On the question of extra-statutory concessions and a statement of practice to cover LLPs, they will be amended when the law is settled. In particular, the Inland Revenue guidance in the tax bulletin, which I mentioned at the beginning of the debate, referred to the statement of practice D12 and extra-statutory concession A43, which will need amending for the reasons that the hon. Gentleman advanced on the Floor of the House. When gains are deferred under rollover relief, the gains will be clawed back when the LLP ceases to trade with a view to profit; that measure was included in the LLP Act. Gains deferred under gifts relief or rollover relief will be clawed back only when the LLP ceases to trade with a view to profit. If it switches from one trade to another, there will be no clawback.

I think that that covers the points raised by the hon. Gentleman, but if it does not spare my hon. Friend the Financial Secretary from writing to him, perhaps he could say so now so that I can pass the baton to him and a letter can be dispatched this evening.

John Burnett (Liberal Democrat, Torridge and West Devon)

It dealt admirably with my points, and I am grateful to the Paymaster General. However, I have an extra point, which is slightly tedious. A cash basis firm in transition may merge with a firm that is not in transition to form an LLP. Will the Financial Secretary or Paymaster General confirm, in due course, that there is no clawback in such a case?

I am especially pleased to note that under general law principles there should not be a problem for rollover relief in any event if a trade is changed. I am glad to hear that the gain will not be crystallised if the LLP changes its trade and there is a holdover gain.

Richard Ottaway (Conservative, Croydon South)

I put two clear points to the Paymaster General, to which she gave two clear responses, from which I can only conclude that the Government intend to pursue the policy they have advanced. All I would say is that it will erode Britain's competitive position and UK plcs will suffer to the advantage of offshore property companies and in the eurobond market.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

New clause 17 - Limited liability partnerships: investment LLPs and property investment LLPs

Dawn Primarolo (Labour, Bristol South)

On a point of order, Dr. Clark. What happens to new schedule 2?

Edward O'Hara (Labour, Knowsley South)

We have discussed it with new clause 16 and will vote on it in its proper order. New clause 18 Interest on unpaid tax, etc.: foot-and-mouth disease

New clause 18 - Interest on unpaid tax, etc.: foot-and-mouth disease

New clause 12 - Environmental protection rebates scheme

Malcolm Bruce (Liberal Democrat, Gordon)

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

The Committee will be aware that we debated this matter on the Floor of the House but were unable to debate the new clause. Many of us remain concerned about the slightly crude impact of the aggregates tax without any compensation and adjustment for the environmental impact. Representing, as I do, a rural constituency in Scotland, I am aware that there is a particular concern that the crudely imposed tax will fall disproportionately on those quarries that can produce at lower cost because it is a cash tonnage figure rather than a percentage. It penalises the more efficient operators. It may also cause smaller operators to be squeezed out in favour of the larger operators. As a consequence, the local authorities in the rural parts of the north of Scotland and the borders, which own many of these quarries, will find that the costs will go up from a squeezed revenue base with no offsetting benefit.

The clause would introduce a scheme to allow rebates for environmental improvements. I do not wish to detain the Committee, but this is important. I hope that the Minister can at least acknowledge that this concern continues and that there is a worry that the claimed environmental benefits of the tax will not turn out as the Government expect. I hope that the Government will be prepared to review the workings of the tax and to reconsider this proposal to ensure that a tax that is being introduced for claimed environmental reasons turns out to be environmental. There are many who believe that it will not. At the end of the day, it will be catalogued as just another stealth tax, just another opportunity to raise revenue from a particular sector that will cost local authorities money and will not achieve environmental gain. If the clause were adopted, environmental gain would be a condition of the implementation of the tax.

Stephen Timms (Labour, East Ham)

I can be helpful. We announced in the Budget that we are attracted to the idea of differential rates of aggregates levy for green quarries—the principle that is set out in the new clause. We are exploring with a variety of interested parties how such a scheme might be achieved in practice. There are some significant practical problems to be overcome, not least in defining exactly what a green quarry is. We need to know how those issues can be resolved in a practical and workable way before introducing legislation.

I recognise that the clause is enabling legislation and that accepting it would not commit the Government to very much, but further work is needed to resolve the practical issues surrounding the idea of a green quarry rebate. That work needs to be done before we legislate. The time to legislate is when we know exactly where we are heading, not when we are just guessing, which is what the new clause does. We are attracted to the principle that the clause sets out. We want to explore with all those affected how we can make this successful. When we have done that, we will introduce legislation if we can.

Oliver Letwin (Conservative, West Dorset)

Is the hon. Gentleman aware of the irony of his remarks? It would indeed have been better if the Government had known where they were heading before they implemented the legislation. Had they known where they were heading, they could have had a clause like this new clause.

Stephen Timms (Labour, East Ham)

The provision in the Bill is completely clear. It is important that we make progress to deal with an important environmental issue. That is what the introduction of the levy will achieve. Beyond that we think that it is right to look at ways in which we can introduce a scheme that deals differently with green quarries. We will certainly seek to consult all those parties that are identified in paragraph 4 of the new clause. The hon. Gentleman suggested that we are introducing a stealth tax. I refer him to an earlier debate in Committee, in which it was mentioned that the introduction of the aggregates levy will be revenue neutral, because there will be a reduction in employers' national insurance contributions plus the new sustainability fund, which will account for all the proceeds from the levy.

Malcolm Bruce (Liberal Democrat, Gordon)

I accept the Government's undertaking that the aggregates levy will be revenue neutral across the piece, but it will not necessarily be revenue neutral to the businesses that are directly affected. If it were, it would be pointless and would have no effect. Under different circumstances, I might take the matter a little further. However, I wish to put on the record that my hon. Friend the Member for Torridge and West Devon and I remain concerned that the Government are pressing ahead without addressing how we might find a solution to the problem. The Government have been forewarned about casualties—which might still materialise—and anomalies, in which quarries are encouraged to do things that are not environmentally friendly provided that they export their products and in which we actually choose to use import substitutions for things that we can produce domestically, to get around the levy. Such anomalies will emerge.

Generally, environmental taxes have merit. However, the more of them there are and the more complicated they are, the less impact they have and the more distorted the result. I accept that the Financial Secretary has acknowledged that there is a problem and that the Government are prepared to continue examining it. In the spirit of his response and assurances—and in view of the time—I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

Edward O'Hara (Labour, Knowsley South)

We now come to new clause 13, with which it will be convenient to debate new clause 14.

John Burnett (Liberal Democrat, Torridge and West Devon)

In view of the time constraints, and since we hope to have an opportunity to discuss the matters tomorrow, we will not move the new clause. New schedule 2 Limited liability partnerships: investment LLPs and property investment LLPs

New schedule 2 - Limited liability partnerships: investment LLPs and property investment LLPs

Dawn Primarolo (Labour, Bristol South)

On a point of order, Dr. Clark. As we appear to be moving swiftly to the 7 o'clock guillotine, I thought that it would be appropriate to put on record the Committee's thanks to you and to your Deputy Chairmen, Mr. O'Hara and Mr. Hood, for steering us expertly through the Committee. I thank the Clerks, the police, the attendants, and the Hansard staff. I also thank the civil servants of the Inland Revenue and Customs and Excise for their assistance encouragement, patience, forbearance and tolerance. They sat silently through the proceedings without wishing to enter into the discussion, which demonstrated their great reserve.

I also thank the Opposition team led by the hon. Member for West Dorset, especially as we have progressed through the Finance Bill in unusual circumstances. I cannot promise that we will proceed through it as swiftly in future years, but if he is prepared to assist us from the Opposition Benches next year, we will do our best to make similar progress.

All Opposition Members, including the hon. Member for Kingston and Surbiton and his team, have participated in the proceedings with patience and good humour. Some of them have displayed a little irritation with the Government on occasions, but Opposition Members are allowed to do that. The hon. Member for Arundel and South Downs is nodding. I do not understand why. He fell asleep in the Committee this afternoon and had to be woken by his hon. Friends, so he should be careful. However, he is about due for his nicotine fix, and a Committee would not be a Committee if he was not told that he should give up smoking, as it is bad for his health.

I also thank my hon. Friends. They are an excellent collection of politicians, and many of them are Members of Parliament of great experience. They have patiently assisted the progress of the Bill, and are now raring to leave the Committee to return to more pressing considerations, following the Prime Minister's announcement earlier today—except for my hon. Friend the Member for West Ham (Mr. Banks), who is desperate for a beer, and can now escape to the Terrace to drink it.

Finally, Dr. Clark, I again thank you for your support during the proceedings.

Oliver Letwin (Conservative, West Dorset)

Further to that point of order, Dr. Clark. I heartily reciprocate the Paymaster General's generous sentiments, and I join in her eloquent thanks to all the third parties, and to my hon. Friends, who have notably participated in the Committee, as they did, at greater length, in last year's proceedings. We look forward to a similar level of scrutiny and constructive participation from the Labour Opposition, following the events to which we are now drawn.

I also join the Paymaster General in thanking the Chairmen. However, I wish to conclude with a special tribute to you, Dr. Clark, as these are probably the last proceedings of the House with which you will be involved. I note that you have been a Member of Parliament for 18 years, and many of us hope to emulate that long service. Throughout that time, you have been an adornment to the House, and to the Committee. Indeed, there were even moments when one suspected that you understood what was happening in the Committee, when some of the rest of us doubted whether we did.

It has been a pleasure to serve under your chairmanship. We shall be the poorer at the next Finance Bill, as it will be the first one for a long while not to benefit from your chairmanship.

As on previous occasions, the ministerial team have done great duty by answering the points that have been raised, and by keeping us amused at times when our attention might otherwise have flagged.

John Burnett (Liberal Democrat, Torridge and West Devon)

I thank the Chairmen, for their marvellous chairmanship, but, in particular, I thank you, Dr. Clark. You have the good taste of knowing my part of the world very well, as you visit the west country. I also thank your staff, the Hansard staff, the officials from the Inland Revenue, the attendants, and so forth. It has been an enjoyable Finance Bill, and my party colleagues and I endorse the earlier comments.

Edward O'Hara (Labour, Knowsley South)

I thank hon. Members for their generous comments about me and my fellow Chairmen.

I offer personal thanks to Mr. Jimmy Hood for standing in for me when I was moving house last week. I, too, was taken by surprise at the fact that we did not have an early general election, and my house was sold, so I had nowhere to live.

Many hon. Members are part of the old team that met during the proceedings on last year's Finance Bill. The new team has also been good, and I thank all hon. Members for their co-operation. I also thank the Clerk for the assistance that he has given to me and the whole Committee

As events have proceeded at such great pace today and during recent weeks, I am afraid that I have not had the opportunity to arrange a room where Committee members can have a drink together to celebrate the end of consideration of the Bill. However, tomorrow will be a nice summer day, and I should be happy for people to join me on the Terrace for a glass of Pimms at lunchtime.

Bill, as amended, to be reported.

Committee rose at Seven o'clock.