Orders of the Day — Finance Bill

House of Commons, 8 May 2002.

[Sir Alan Haselhurst in the Chair.] — Clause 4 — Reduced rates of duty on beer from small breweries

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I should like to make a brief contribution on the clause before we consider the detailed amendments, as I think that we need to debate the principle of the Government's proposal to introduce progressive beer duty. We will deal with some of the problems through Conservative amendments that will have Liberal Democrat support. In introducing a new tax relief, we should debate the underlying principle before we deal with the detail that is the subject of the clause.

The Financial Secretary will be aware that the issue of progressive beer duty has had a long gestation before coming to the House. There has been a long campaign, and the introduction of such a duty has had many supporters in the House and outside, whether among brewers, beer drinkers or members of the Campaign for Real Ale. Hon. Members who have spoken to CAMRA members in their constituencies will know of the passion that is felt by many people about the new relief. It is not surprising, therefore, that the Government have been considering the issue. My hon. Friend the Member for Cheltenham (Mr. Jones), who is very active in the all-party group on beer, has been a champion for such a move in my party.

The question, however, is whether the proposed move is right. The key argument used in its favour has been that we need a level playing field for the brewers who will benefit from the measure. The idea is that there is currently no level playing field between the microbreweries and small brewers—the traditional brewers—and the very large breweries. The rationale for the lack of a level playing field is that the larger breweries can obtain many economies of scale. They can use fairly aggressive discounting methods. Sometimes, the question is asked whether those are against competition. Therefore, people have argued that reform is needed in the brewing industry to create a level playing field. Another important argument relates to competition: many proponents of progressive beer duty have argued that it will achieve greater proliferation of real ales and greater choice.

The previous Conservative Government and, indeed, this Government have considered reforms of various aspects of the beer industry to try to create a level playing field and to increase choice. We have seen the beer orders and Office of Fair Trading inquiries. Different measures and ideas have been put forward to try to create extra competition. The Government's analysis for reform is based, I hope, on that notion. Many past reforms have not worked. Therefore, in deciding whether it wants to go down this road, the Committee must ask a few pertinent questions and put the policy to a few stringent tests.

The first obvious question is whether the duty reform will maintain and indeed increase the choice of real ales and the quality of beer available to consumers. Will the rebate enable that? What financial analysis has Her Majesty's Treasury done to show that the relief is needed to meet those objectives? Will the relief improve the position of the brewing industry and improve choice for consumers?

I assume that the Treasury has undertaken such research. Clearly, before one spends taxpayers' money, one will want to be certain that the policy is going to produce the benefits that it is alleged it will produce. I hope that the Minister can reassure the Committee that the research has been done. Moreover, I hope that he will promise to publish that research, so that it is in the public domain and so that, before we get to Report, we will all have a chance to examine what the boffins in the Treasury have been working on to justify the policy.

I hope that the Minister will go further and reassure the Committee that the relief will be examined to check that it is meeting its objectives. We all wish it well. We all hope that it will work, but the Government need to ensure that when reliefs are created they are meeting their objective.

The evidence that we have seen from sources in the industry, from consumers and from CAMRA is fairly compelling. We have looked at that research and been fairly impressed by it, but the Government have a different job if they are to represent the interests of the taxpayer. They must ensure that the research from the industry and from CAMRA is valid. They must do independent research to convince hon. Members on both sides of the Committee that the relief would be a good use of taxpayers' money. I hope that the Minister can assure us that the research has been done, and that this was not a last minute, tabloid-pleasing, rabbit out of the hat policy decided at the last minute, with the World cup taking place this summer.

Mark Field (Conservative, Cities of London and Westminster)

The hon. Gentleman suggests that the argument for the proposal is compelling. What proportion of British beer would be covered by clause 4?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful for that intervention. I believe from research that I have seen that less than 2 per cent. of beer brewed in the United Kingdom will benefit, but that will not necessarily go against the thrust of what the Government are doing, if their research shows that the proposal will improve competition and choice. It will have a big effect on more than 350 breweries, so it may be welcome, but we need to see the evidence to be reassured.

Let us be clear. If Parliament passes the clause and the schedule that is linked to it, it will agree to expenditure of £15 million, which is an awful lot of money. It is also being asked to agree to put on the statute book nine new pages of tax law to back up the £15 million tax concession. We should also bear it in mind that private sector companies and Customs and Excise officials will have to spend hours ensuring that the money works properly and is not abused. In due course, as the wily minds of the private sector find ways around the nine pages before us, we will doubtless be asked to pass anti-avoidance legislation.

Although I am trying to provoke a debate on the principle behind clause 4, I do so in a spirit of acceptance of the policy. I hope that it will bring about the claimed advantages, and that the Minister can reassure us that it is well researched. Who in this House would oppose cheaper beer and greater choice in the pub? It is a popular notion that we would want to support in general terms, but we need reassurance on the detail.

I have one final point for the Minister. According to some sources, the Chancellor's presentation of the policy on Budget day was rather misleading. He implied that it would result in a 14p reduction in the price of a pint of beer, but those hon. Members who have examined the policy in detail will know that the cut in duty is unlikely to be passed on to the consumer. Many brewers have told me that they are concerned about the way in which the policy is portrayed. They believe that most breweries will try to invest the money, given that they—particularly small independent microbreweries—operate on very tight margins. That would be a laudable use of the money, and with that in mind I hope that the Minister will present the policy in a slightly different way to that deployed by the Chancellor on 17 April.

If the policy will not in fact result in a 14p reduction in the price of a pint of beer, those beer drinkers who, hopefully, will be watching us massacre Sweden in the World cup will want to know why they cannot buy beer at that price. If the answer is that breweries will invest the money in providing a greater choice of beers, in premises through which to sell beer, and in independent outlets, that might well be a good thing, but we want to know whether that was the Government's intention. We do not want to hear the spin that we heard on Budget day; we want to know the reality behind the proposal. I hope that the Minister can give serious answers to those serious questions.

Christopher Chope (Conservative, Christchurch)

I am delighted to hear that the hon. Member for Kingston and Surbiton (Mr. Davey) supports our amendments, and we, too, support clause 4. He was in fact being rather kind to the Government in arguing that the Chancellor has said one thing but that the reality is rather different. I wonder whether he is aware of today's statement by the Independent Family Brewers of Britain, which consists of 33 family-owned and family-run brewers and pub retailers:

"The way the Chancellor announced the reductions was a complete con. We estimate that approximately 0.5 per cent. of pubs will be able to take advantage of the change in beer duty—any England fan looking for cheaper beer at the time of the World Cup will have a very long (and thirsty!) search. The public has been misled into believing that village pubs will offer cheaper beer and that is only the case in a tiny, tiny minority."

In identifying the fact that, as so often in the past, the Chancellor's Budget is all clever words designed for a wider audience, the hon. Gentleman has made a good point. As we always say, we must look at the small print. The Chancellor said in his Budget statement:

"I have decided that the duty paid on their own beer will be halved. This is a cut equal to 14p off each pint, to be implemented for village pubs and small breweries by this summer—in time for the World cup."—[Official Report, 17 April 2002; Vol. 382, c. 584.]

However, that is far from the truth.

Howard Flight (Conservative, Arundel and South Downs)

As usual.

Christopher Chope (Conservative, Christchurch)

As my hon. Friend says, that is usual. I hope that we will hear an explanation of why the Chancellor spoke at such length to give the impression to people listening to his Budget that they would be able to get cheap beer after 1 June, when the reality is very different.

I shall not say any more about clause 4, because it is important to get on to the amendments. If we accept the principle, we need to ensure that we come up with a workable system. At the moment, it is not workable.

Paul Boateng (Labour, Brent South)

The Opposition were characteristically carping, cavilling and mealy-mouthed. After many years of campaigning for this change by many sectors of the industry and the pub-going public—backed by some Liberal Democrat and Conservative Members—when the day finally arrives, we hear nothing but whining and attempts to undermine a real achievement for the industry. It will bring new hope to nine out of 10 UK breweries, which will make savings of up to £120,000 as a result of this measure. That includes all microbreweries and local breweries.

What we should have heard from the Opposition was some acknowledgement that they supported the change. Successive Governments have sought to support the diversity of the British beer market, notably by use of regulations allowing independent brewers access to tied estates. As the number of tied estates has fallen and pub companies have come to the fore, it has become increasingly difficult to promote diversity and market access through regulation. When we are asked for the rationale behind the scheme, it is an attempt to meet that concern and recognise the particular difficulties that small breweries face when seeking to grow their business and compete for access in today's beer market.

We estimate that the savings will help small breweries to remain profitable when selling beer to pub companies at discount rates and, for many, will allow them to invest in their own pubs, which will offer them a more secure and stable outlet for their products. Of course, the choice is theirs; it is not for the Government to dictate how small breweries should make use of the savings now available. Some may choose to cut their prices, but others will seek to re-invest the savings to enable them to compete against medium and large breweries. That is why we, too, found convincing the arguments put to us by the Small Independent Brewers Association.

The scheme has been under active consideration by successive Governments since at least 1989, when it was recommended by the Monopolies and Mergers Commission. Indeed, we have been in close consultation with the brewing industry since announcing that we were considering the scheme in the 2001 Budget. That consultation demonstrated exactly what we have announced and the veracity of the rationale that lies behind the measure. The suggestion by the hon. Member for Kingston and Surbiton (Mr. Davey) that this was a Budget wheeze thought up a few days before to grab some headlines does not do him justice. He gives these matters greater consideration than that cheap jibe would suggest. I hope that he does not intend to continue in that vein for the rest of the consideration of this Finance Bill.

John Bercow (Conservative, Buckingham)

I hope that he does.

Paul Boateng (Labour, Brent South)

The shadow Chief Secretary says from a sedentary position, "I hope that he does." I wonder how often the hon. Gentleman will turn up in Committee. He will not have to endure the hon. Member for Kingston and Surbiton—

John Bercow (Conservative, Buckingham)

I will be there.

Paul Boateng (Labour, Brent South)

Good. We look forward very much to the continued attendance of the shadow Chief Secretary, as we want to put him to the test. He has not had any testing yet, and it is time that he had some.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

rose—

John Bercow (Conservative, Buckingham)

rose—

Paul Boateng (Labour, Brent South)

I see the shadow Chief Secretary is itching to respond, but he will have plenty of time to do so in the Committee's deliberations. He must restrain himself just a little longer, while I give way to the hon. Member for Kingston and Surbiton.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful to the Financial Secretary for giving way, although I am sorry to stop him in his rather tedious tracks. So far, he has failed to say whether he will publish the analysis performed by the Treasury before the policy was decided. The right hon. Gentleman has said that there has been consultation. Have the results been published? If so, where are they available? If not, when will they be published?

Paul Boateng (Labour, Brent South)

I am not going to fall for that one. I would not want to be tedious and bore the Committee this afternoon in the way that the hon. Gentleman suggests. I am only too happy to write to him to outline the general nature of the consultation, but I do not intend to publish the details. The hon. Gentleman can do what he will with the letter that I shall write to him on the subject, but he needs to understand why the small breweries so welcome the measure.

The measure will help to level the playing field. Small brewers will be able to compete more effectively with the big regional and national breweries. They will be able to use the savings that they make to invest in their own pubs, or to offer increased discounts when selling their beer.

The proposed relief will provide support for small brewers throughout their growth—from the first barrel that they produce until they reach the £2.5 million turnover of regional brewers. The relief is focused and will meet the needs of those who require it most. It will retain for the UK the rich diversity of its brewing industry, and protect consumer choice in an age when multi-million pound pub companies dominate the retail market.

We want a beer industry in which 500 brewers have access to the market, and not just the largest 50. That is why the small brewing industry has welcomed the measure with such warmth. The proposal is right in principle, which is why it will be capable of withstanding the detailed scrutiny of the Committee.

I commend the principle and its outcome to the Committee.

Question put and agreed to.

Clause 4 ordered to stand part of the Bill.

Schedule 1 — Beer from small breweries: reduced rate of duty

Christopher Chope (Conservative, Christchurch)

I beg to move amendment No. 17, page 110, line 32, at end insert—

'(3) Beer produced in a small brewery for export shall not count towards the maximum production levels specified for small breweries elsewhere in this Part.'.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following amendments: No. 4, page 112, line 2, leave out "30,000" and insert "200,000".

No. 5, page 112, line 14, leave out "30,000" and insert "200,000".

No. 7, page 112, line 17, leave out "30,000" and insert "200,000".

No. 6, page 112, line 20, leave out from "that" to end and insert—

'beer produced under licence is not small brewery beer'.

No. 8, page 112, line 26, leave out "30,000" and insert "200,000".

No. 9, page 113, line 9, leave out "30,000" and insert "200,000".

No. 10, page 113, line 13, leave out "30,000" and insert "200,000".

No. 11, page 114, line 19, leave out "30,000" and insert "200,000".

No. 12, page 115, line 10, leave out "30,000" and insert "200,000".

No. 13, page 115, line 13, leave out from "that" to end and insert—

'beer produced under licence is not small brewery beer'.

No. 14, page 115, line 22, leave out "30,000" and insert "200,000".

No. 15, page 116, line 42, leave out "30,000" and insert "200,000".

No. 16, page 116, line 46, leave out "30,000" and insert "200,000".

Christopher Chope (Conservative, Christchurch)

The amendments would introduce common sense into the eligibility rules entitling small breweries to a reduced rate of duty on their first 5,000 hectolitres of production. In this debate, we shall have to refer quite a lot to hectolitres. People following the debate may wish to know that a hectolitre is 100 litres—almost 22 gallons, or 176 pints. Unfortunately, the Bill refers to hectolitres.

Amendment No. 17 would exclude from the calculation of annual production for the purpose of assessing eligibility production for export, which is already exempt from the penal rates of beer duty on domestic sales. However, the amendment is not as far reaching as amendment No. 4 and the consequential amendments Nos. 5, 7, 8, 9, 10, 11, 12, 14, 15 and 16. Those amendments would extend relief to all brewers producing up to 200,000 hectolitres per annum, instead of limiting it to those producing up to 30,000 hectolitres per annum. It is because amendment No. 4 goes to the core of the argument that I shall seek to divide the Committee on that amendment rather than amendment No. 17.

Amendment No. 4 would make about another 25 small breweries eligible for relief at a cost to the Exchequer of about £3 million or £3.25 million—about one tenth of 1 per cent. of total beer duty yield. The Financial Secretary referred to regional brewers as though only they were excluded from this scheme. He may be interested to know about the Ringwood brewery, close to my constituency. It is not a regional brewery but a popular local brewery and it produces between 40,000 and 50,000 hectolitres per annum. It is a family firm, founded in 1978; it originally had one employee and now employs 44 people. Within any definition, it is a small business and a small brewer. It was gravely misled, because it assumed that the benefit would apply to it, but it will not.

The Chancellor told the House and the nation in the Budget that he would

"encourage one group of small businesses, the nation's small breweries".

He went on to say:

"I have decided that the duty paid on their own beer will be halved."—[Official Report, 17 April 2002; Vol. 382, c. 584.]

The Ringwood brewery thought that it would be one of those small breweries, but the small print shows that it does not qualify.

The situation is pretty serious, not just for the Ringwood brewery but for a number of other independent family breweries. The Independent Family Brewers of Britain says:

"We had asked the Government to follow the European model and allow tax relief for small brewers producing up to 200,000 hectolitres a year . . . The 30,000 hectolitre limit proposed in the Budget affects under 2 per cent. of the market and will leave many small brewers out in the cold."

The letter continues:

"We are delighted that the Conservatives are asking the Chancellor to help brewers like ourselves and fully support their suggested amendments to raise the production threshold for tax relief to 200,000 hectolitres from the proposed 30,000 hectolitres and also to allow beer produced in small breweries for export not to count towards these maximum production levels."

That is a good third-party endorsement for the common sense encapsulated in the amendments.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful to the hon. Gentleman for giving way, especially after reading out that press release. Did it go on to say what it thought about the Conservatives' record in failing over 18 years to introduce a reduced rate?

Christopher Chope (Conservative, Christchurch)

No, it did not. I understand that my right hon. and noble Friend Lord Cope went to Europe and signed a document on this in 1993 or 1994. Unfortunately, he was not in a position to bring a measure before the House. However, it ill behoves the Government to suggest that they have been quick to remedy the situation.

Robert Key (Conservative, Salisbury)

Five years.

Christopher Chope (Conservative, Christchurch)

It has taken them five years, as my hon. Friend the Member for Salisbury (Mr. Key) says. What did they do when they first got into office? They added 2p duty to a pint of beer—a further anti-competitive measure introduced by this Government. Now, late in the day, after five years in office, they propose this measure. Although we welcome it, let us not delude ourselves into thinking that the Government were quick off the mark as soon as they got elected in 1997. I am sure that, had we been returned to office in 1997, we would have introduced such a measure much sooner.

One of the key elements of the proposal is a cliff edge that will adversely affect breweries as soon as production exceeds the 30,000 hectolitre point. A brewery that crosses that threshold will immediately forfeit £120,000 in duty relief. I have been advised that to compensate for that, a brewery would have to double its production to about 60,000 hectolitres before it became worthwhile to stay in business at that level of production, instead of reverting to a production level of less than 30,000 hectolitres. That is why the measure is so damaging to breweries in the production range of 30,000 to 60,000 hectolitres. It will act as a perverse incentive on those breweries to reduce their production, which is quite the reverse of what the Chancellor seemed to intend. Moreover, it will provide no incentive whatever for breweries that are below the 30,000 hectolitre limit to push up their production and expand to beyond that level.

Robert Key (Conservative, Salisbury)

My hon. Friend hits the nail on the head. What were once microbreweries have grown, and the cliff-edge approach is wholly wrong. I thank him, on behalf of the management, work force and customers of the Hopback brewery in my constituency, for tabling the amendment. The Ringwood brewery is pretty good, but of course Hopback is much better, and is acknowledged to be so all over the country.

The amendment is wholly sensible, and I hope that the Minister will listen to our argument. The tapered approach is much more likely to achieve what the Chancellor wants—a level playing field for smaller brewers.

Christopher Chope (Conservative, Christchurch)

I am grateful to my hon. Friend and pay tribute to the work that he has done with the Hopback brewery in promoting the amendment and in trying to get the Government to listen. That brewery is expanding, and wants to do so in order to become significant in the marketplace.

Total production by breweries that produce less than 200,000 hectolitres a year is only about 5 per cent. of overall total beer production. Only the six very large breweries, which are largely international, and six or seven other large breweries, which are quoted on the stock exchange, have production levels of substantially above 200,000 hectolitres a year. If the Government are really interested in helping small breweries, they should extend the definition of a small brewery to cover all those with production levels below 200,000 hectolitres. European legislation refers to that 200,000 limit. As we have by far the highest beer duty of any country in Europe, why are the Government so churlish about introducing the European maximum level for allowing such concessions to be made? That would not involve much cost to the Exchequer.

I hope that the Government will accept this common-sense amendment, which would allow the Bill to work to the advantage of small and growing breweries and redound to the benefit of those breweries and their loyal customers.

This is not a matter only of breweries in general or of beer in general; it is very significant for those of us who enjoy real ale, because about half of the total production of real, or cask, ale comes from small independent brewers. They are the ones who have introduced choice; they are maintaining a key element of our British way of life. Some of their beer may be served warm and some of it may be served at cricket grounds where our former Prime Minister can sip it as he watches the game.

The amendments, if accepted, will ensure that there is more growth in cask ale production than heretofore. They will be good for British brewing. I commend them to the Committee.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

My right hon. and hon. Friends and I support the amendments proposed by the Conservative Opposition. If it is right to support small and microbreweries, the Government must get the legislation right. They must get their analysis right, which is why, in our previous debate, I called for their analysis to be published. At least we would then have information that would help us to debate the issue.

If the Financial Secretary to the Treasury writes to me with acceptable evidence, there will be no problems with the schedule on Report. However, like the hon. Member for Christchurch (Mr. Chope), we have some concerns about what the Government are doing. The 30,000 hectolitre limit seems wrong. Not only does it run counter to the European directive that allows an upper limit of 200,000 hectolitres—it is surprising that the Government have not given the industry the support that it is allowed under that legislation—but it is a bizarre use of taxpayers' money. In the first year, the 30,000 hectolitre limit will cost the taxpayer £10 million, and in subsequent years, £15 million.

Evidence from the brewing industry shows that raising the limit from 30,000 to 200,000 hectolitres would cost only a further £3.2 million. If the Government challenge that figure, perhaps Ministers will give us further information on those costs. There are only 27 breweries in that sector of the market, while 350 breweries would fall below the 30,000 hectolitre limit. The tax advantage would apply only to a small number of breweries, so the extra cost would be relatively small. There cannot, therefore, be a cost argument against increasing the limit as the cost is marginal.

The brewing industry is concerned about the measure's impact on competition. The hon. Member for Christchurch touched on that, but did not go into detail. I do not pretend to be an expert on the brewing industry, but it seems to be divided into three groups: at one end, there are microbreweries—small local breweries and pubs that brew their own tipple; at the other end are the huge brewing companies that have developed during the past decade or so; and in the middle, there are medium-sized independents. Some of them have a brewing capacity of more than the 200,000 hectolitre limit, so they would not benefit from the amendments. However, at least such breweries would accept the restrictions imposed by the EU legislation.

The 27 breweries to which I referred include Brakspear, St. Austell brewery, in the constituency of my hon. Friend the Member for Truro and St. Austell (Matthew Taylor), Harveys brewery, in the constituency of my hon. Friend the Member for Lewes (Norman Baker) and Hook Norton brewery. Those breweries would benefit if the Government extended the limit. In order to ensure that an important segment of the brewing industry is not disadvantaged and that we do not create distortion in the market, the Government would be well advised to accept the amendments.

On a political point, I would counsel the Government not to be too concerned by the contents of the press release that the hon. Member for Christchurch read out. Although the amendments were tabled by Conservative Front-Bench Members, I believe that they enjoy the support of hon. Members in all parts of the House; I hope that Labour Back Benchers will take part in the debate. If the Financial Secretary realises that, he will not be frightened out of accepting the amendments simply because they were tabled by Conservative Front-Bench Members.

Kelvin Hopkins (Labour, Luton North)

I am not familiar with the economics of running breweries, although I have toured two in my time, but it seems possible that economies of scale are much more critical for very small breweries than they are for the breweries that the hon. Gentleman is speaking about, and that the Government's proposals are aimed at helping very small breweries to survive and proliferate—we hope, to make beer even more varied than it is now.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman makes a fair argument, but if he talks to those particular brewers he will find that they still have problems competing with the larger breweries, who have huge economies of scale and huge selling power, and can therefore operate at an extreme competitive advantage. Thus many of the breweries that we are arguing for tonight would benefit. Moreover, many of them, because they are traditional brewers, occupy very traditional premises, which are in themselves almost part of the cultural heritage. If they are to reap some of the modern benefits of economies of scale that the hon. Gentleman referred to, many of them would have to move premises, leave their traditional roots and, possibly, their local setting, which often gives its name to their brew. If the hon. Gentleman were to talk to brewers in that category, he would be reassured.

Finally, I want to raise a point of principle. Obviously, any limit creates distortions against growth, because some brewers will naturally come up against that limit as they expand. However, we have a cross-Europe limit, imposed by the European Union, of 200,000 hectolitres, so it is odd that the Government have chosen a lower one.

Mr. James Staughton from St. Austell Brewery Company Ltd. explained to me that his brewery was currently looking to expand. Its total production is just under 30,000 hectolitres, so it would benefit, but if it expands as it intends to, its production would go over the limit. The company is in the very difficult position of having to decide whether to halt its planned expansion in order to get the benefit of the reduced duty rate, or go ahead with the expansion and lose that new advantage. Thus the limit has already affected a commercial decision by that brewer.

I am sure that many other brewers, either currently or in the future, will have to make that difficult decision. It is bad when the Government produce a tax relief that affects ordinary commercial decisions. There would be a logic to a 200,000 hectolitre limit, because that would fit EU legislation; there is no logic to the 30,000 hectolitre limit.

Chris Bryant (Labour, Rhondda)

Does the hon. Gentleman accept that subsection (10) of proposed new section 36C on page 112 would not create the cliff-top situation mentioned by the hon. Member for Christchurch (Mr. Chope) earlier? Actually, the individual brewery will receive the benefit up to 30,000 hectolitres in that year, and then will pay duty only on the amount in excess of the limit. Future decisions might be affected, but in the specific year the brewery will not suddenly face that collapse.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The information that I have received from the brewers is that many will have their commercial decisions affected in the way that I describe, so I cannot necessarily agree with the hon. Gentleman. There is a taper in the new relief, but it applies below the threshold, not quite in the smooth way that he seemed to imply above the threshold.

Moving away from the principle behind the amendments, may I seek clarification from the Minister on one or two specific points? Many brewers who are reading the Bill do not understand what the Government are trying to do. For example, the first condition, which is set out on page 114 in proposed new section 36E(4), refers to the eligible amount of beer produced in the previous year. Obviously, breweries can calculate that amount from their sales figures, but the second condition refers to the amount that is expected to be brewed in the future. Brewers will have to try to work out whether they are eligible for that relief, but they are not sure which production level will count. So they need guidance from the Minister, or from Customs and Excise officials, to work out whether they will be eligible. What baseline should they use to judge their eligibility?

Other concerns have been raised with me. For example, some people have queried the fact that the Government have chosen to use the figure 365 in the calculation that appears on page 114 in proposed new section 36E(5). Obviously, that figure refers to the number of days in a year, but the Independent Family Brewers of Britain informs me that no brewer brews every day of the year. That association wonders why the Government have based their calculation on something unrelated to brewers' production schedules.

The final point on which various brewers have asked me to seek clarification relates to proposed new section 36C(3), in which the Government try to define a relevant brewery—for example, whether it can consist of a group of breweries and how the brewery is formed. The concern is that the Government suggest in part of that section that the definition relates to the employees. If an employee is a member of a brewery or a group of breweries, he or she can attract the relief. However, the implication is that if that person decides to change jobs in that year and works for another brewery that is not a member of the group of breweries, the first employer will not be entitled to the relief.

The hon. Member for Buckingham (Mr. Bercow) laughs, but that is the commercial reality. People want to know whether their employment decisions and the decisions that their employees take will change their eligibility for the relief. I hope that the Government will provide clarification on that matter.

Boris Johnson (Conservative, Henley)

I rise in wholehearted support of the amendment moved by my hon. Friend the Member for Christchurch (Mr. Chope). I speak on behalf of one of the 27 breweries not to be favoured by the Bill, unlike the other 320 that are to be favoured by it. Like my hon. Friend, my heart leapt when I heard the Chancellor speak of measures in the Budget to help small breweries, because I thought that he must mean Brakspear in my constituency.

Hon. Members will be familiar with Brakspear's bitter. If they are not, they jolly well ought to be. I do not mean to cast aspersions on any of the other excellent beers that are brewed in my hon. Friends' constituencies, but they will agree that Brakspear's is the finest because it is brewed by the traditional double-dropping method and therefore contains a higher quotient of hops than most normal beers. Indeed, when I was at school, my school had a contract with Brakspear. We were supplied with Brakspear's beer every Sunday. I am a living testament to the benefits of that drink.

Andrew Mitchell (Conservative, Sutton Coldfield)

It was not Ashdown house, was it?

Boris Johnson (Conservative, Henley)

No, it was not Ashdown house.

Imagine how surprising and saddening it is not just for me, but for a great many people in my constituency and elsewhere, to find that Brakspear is now, after more than 200 years, at serious risk of ceasing to brew. It is highly likely that Brakspear will no longer be able to brew the bitter for which it is famous. Inspector Morse used to drink Brakspear's bitter. It is a great shame that that traditional English beer should be coming to an end.

Why is it coming to an end? Brakspear is facing adverse trading conditions in many different ways. I had a long conversation on Friday night with a chief executive who is extremely alarmed about the national insurance hikes, and so on. He is extremely upset by the Chancellor's decision to favour 320 microbrewers and not to favour the 27 other brewers about which the hon. Member for Kingston and Surbiton (Mr. Davey) spoke eloquently. Plainly, the 27 others—including Brakspear—should be included in the exemption outlined in the Budget. I see absolutely no reason why the threshold cannot be raised to 200,000 hectolitres, given that, as has been repeatedly pointed out, that falls in line with European Union recommendations anyway.

Brakspear is a small brewery, it is a local brewery and it is under serious threat of ceasing production. It makes an absolute nonsense of the Government's claims to favour choice, diversity and old businesses to push through a measure that could expedite its closure. It should be helped, and I hope that the Financial Secretary will respond creatively and imaginatively to the sensible amendments that have been supported by both main Opposition parties, and do his level best to save Brakspear in Henley from ceasing to brew. That would be a great disadvantage not just to my constituency but to the brewing community and to the drinking public.

Paul Boateng (Labour, Brent South)

Tempting though it is, I shall not be drawn into discussing the merits of individual brews and breweries—

John Bercow (Conservative, Buckingham)

Go on.

Paul Boateng (Labour, Brent South)

The shadow Chief Secretary will appreciate the problems of discussing the individual tax affairs of individual companies at the Dispatch Box. He would be the last person to encourage me to go down that route. Hon. Members who have breweries in their constituencies are perfectly right to raise their constituents' concerns, however, and I know that Customs and Excise is still in discussion with several of those breweries. We await with interest and eager anticipation the outcome of that discussion as to whether those breweries qualify, at least in part, for relief.

I have heard the heartfelt pleas of the hon. Member for Henley (Mr. Johnson), who opined about the imminent demise of a brewery that served his alma mater. I would hate to go down in history as the Financial Secretary responsible for depriving the boys of Eton college of their favourite brew. Deprived and underprivileged as they are, to deprive them of their beer would really be the last straw. We have all heard, with varying degrees of sympathy, the pleas made by hon. Members about individual breweries, but they will understand why I cannot deal with those individual cases.

John Bercow (Conservative, Buckingham)

I am just a poor state school product from Finchley, so I would not know about the highfalutin matters being described by the Financial Secretary. The commercial pressures faced by brewers on the one hand, and the financial costs incurred by beer drinkers on the other, represent the context of our discussion. Will the Financial Secretary therefore demonstrate his grasp of the issue by telling us, for the current financial year, what proportion of the price of an average pint of beer is accounted for by tax and excise duty?

Paul Boateng (Labour, Brent South)

It would be most unwise, in considering this question, to suggest that small regional breweries are likely to go out of business as a result of anything that this Government have done. [Interruption.] I shall come to the hon. Gentleman's question in a minute. However, it is hard to accept that a brewery with an annual production of 70,000 hectolitres and a turnover of £8 million will be threatened if it does not receive relief worth just 1.5 per cent. of its total turnover. It is similarly hard to accept that such a brewery will be priced out of the market because brewers with a turnover of less than half that receive some relief. To suggest that, as a result of the measure, some brewers will be put at a competitive disadvantage is to over-egg the pudding a bit.

Kevin Brennan (Labour, Cardiff West)

My right hon. Friend has hit the nail on the head. Can he explain the logic behind the Opposition's argument? They suggest that the measure will not result in a fall in the price of the beer produced by small brewers and yet they claim that the fall in the price of the beer produced by small brewers will put slightly larger brewers out of business. How can the Opposition sustain both propositions at the same time?

Paul Boateng (Labour, Brent South)

I find it very difficult to fathom the logic in the arguments of Opposition Members. They are opposing for the sake of opposing, and that is their right. I suppose that, if we were in their position, we would do likewise. However, we are not likely to be in their position for a very, very long time—partly because of the success of the measures outlined in the Budget.

What got me in the questions of the hon. Members for Buckingham (Mr. Bercow) and for Christchurch (Mr. Chope) was the suggestion that this Government were something other than the friend of the beer drinker and the brewer. I hope that the hon. Member for Buckingham knows what has happened to duty, because it is dangerous to ask a question the answer to which one does not already know. That is why his question is surprising. I feel constrained to point out to him that duty, as a proportion of the retail price of a pint of beer, was 32 per cent. in 1991. Today, it is 29 per cent. That is a fall of 3 per cent. Beer duty has been frozen for the last two Budgets, and that has saved British beer drinkers a very large amount of money.

I challenge the hon. Member for Buckingham—perhaps he will be so good as to take note of the challenge—to write to me to show whether, in any period of the Conservative Administration, he can point to a similar record of support for the industry.

John Bercow (Conservative, Buckingham)

I will do that.

Paul Boateng (Labour, Brent South)

Good. The hon. Gentleman is going to take me on. He will have plenty of time in Committee to share with us the outcome of his research.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

rose—

Paul Boateng (Labour, Brent South)

I must make progress, because I want to come to the points that the hon. Member for Kingston and Surbiton (Mr. Davey) raised.

The hon. Gentleman asked why the limit has been set at 30,000 hectolitres. It is an interesting question, because there are at least 115 reasons in an early-day motion that show why the limit should be set at 30,000 hectolitres. The early-day motion has been signed by Members on both sides of the House, including leading members of the Liberal Democrats.

John Bercow (Conservative, Buckingham)

Is there such a thing?

Paul Boateng (Labour, Brent South)

Yes, there is. We must be fair to the Liberal Democrat party. It has some distinguished members, and a number of them have signed the early-day motion. However, I do not see the signature—perhaps I have missed it—of the hon. Member for Kingston and Surbiton. Still, all who signed the motion call for a limit of 30,000 hectolitres, and that is not surprising. They show a great deal of good sense by calling for that limit, because it is supported by the Society of Independent Brewers. Hon. Members know that that society rather than any other represents small local brewers. It is the voice of the small local brewer and the measure is designed to support them.

The hon. Member for Kingston and Surbiton said that he does not know much about the beer industry but thinks that it is divided into three sectors. It is possible to do that. The 400 microbrewers and the local brewers are usually described as small brewers. If we link them with the 40 regional brewers and the handful of national brewers, that makes three sectors. It is, of course, also possible to divide the industry into four sectors if we disengage the microbrewers and the local brewers, as some people would prefer.

We know, however, that the 40 regional brewers and the handful of national brewers have a different interest from the local brewers and microbrewers. We need to be open and up front about that. The measure is designed to benefit local brewers and microbrewers. Although there is undoubtedly some overlap at the margins—perfectly fair points can be made about that—it is generally accepted that the break between local brewers and regional brewers is at about 30,000 hectolitres.

John Bercow (Conservative, Buckingham)

I think I have got the point.

Paul Boateng (Labour, Brent South)

Good, because in that case the Conservatives will not divide the Committee.

John Bercow (Conservative, Buckingham)

We will divide the Committee.

Paul Boateng (Labour, Brent South)

So the Conservatives will divide the House even though they have got the point. That simply does not make sense.

Boris Johnson (Conservative, Henley)

I do not understand how the right hon. Gentleman can repeat that the measure is intended to benefit local brewers when it is clearly playing a part in expediting the demise of Brakspear's brewing in south Oxfordshire, something that it has done for 200 years. How can that be helping local brewers?

Paul Boateng (Labour, Brent South)

I understand and applaud the hon. Gentleman's perseverance on behalf of his local firm, but when he reflects on the measure and the figures, he will realise that the suggestion that it will put his local brewer out of business is a travesty of the truth.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Will the right hon. Gentleman give way?

Paul Boateng (Labour, Brent South)

I want to finish the point. At 30,000 hectolitres, brewers have a turnover of more than £2.5 million. It is fair to say that a measure to benefit small businesses should focus on a break-off point of about £2.5 million. I do not think that that is unreasonable, as I hope the House will recognise in the fullness of time.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The right hon. Gentleman told us that the Government have listened to the Society of Independent Brewers. I do not want him or his colleagues to doubt that we applaud the fact that, unlike the last Conservative Government, they have listened. In that spirit, therefore, and as part of their desire to be open to argument, will he agree that if the amendment is withdrawn and there is no Division, he will consult the brewing industry further to determine whether the welcome reduction in beer rates can be extended in the small way that is proposed, and allow us to debate the matter again on Report?

Paul Boateng (Labour, Brent South)

No, I will not. The hon. Gentleman did not table the amendment and he is in no position to make such an offer. I see no response to his suggestion from the hon. Member for Christchurch. It is Liberal Democrat presumption at its height.

Amendment No. 17 attempts to reduce the amount of beer that is taken into account when assessing eligibility for a scheme by excluding exports. Whatever its merits, it would have the fatal drawback of being outwith EC law, the very law that Opposition Members pray in aid in relation to the higher limit and the very law that governs the scheme.

Chris Bryant (Labour, Rhondda)

Is it not also true that the argument of the hon. Member for Henley (Mr. Johnson) holds water, or perhaps beer, only if Brakspear is determined that any competition from microbreweries—those we are keen to support—will be a problem for it, so it is trying to prevent competition?

Paul Boateng (Labour, Brent South)

I must maintain my self-denying ordinance and not comment on the tax arrangements for specific sectors and companies in the industry, but my hon. Friend makes a trenchant point in his usual trenchant way.

Roger Casale (Labour, Wimbledon)

I simply want to confirm to the Minister that I have today spoken to the Society of Independent Brewers, and it has confirmed that this measure will help independent brewers to survive and flourish. Furthermore, they have been fighting for this measure for over 21 years; indeed, this Bill will amend the Alcoholic Liquor Duties Act 1979. Year after year since then, at Budget time the society made suggestions to Conservative Governments, but those suggestions were rejected and the society was not listened to. Now we are introducing the measure that will help independent brewers, and that is exactly the moment when the hon. Member for Henley (Mr. Johnson) opposes it.

Paul Boateng (Labour, Brent South)

I am very grateful to my hon. Friend. I could not have put it better myself. On that note, I ask the Committee overwhelmingly to reject the amendment.

Christopher Chope (Conservative, Christchurch)

The Minister says that amendment No. 17 would not work because of European law, so obviously I accept that and I will seek to withdraw the amendment.

The problem would not be so bad if the limit were lifted from 30,000 to 200,000 hectolitres. I am disappointed that the Minister has not addressed the point about small local breweries. The Ringwood brewery is a small local brewery; it is also a successful brewery, which is why it can produce as much as it does with only 44 employees. If the Minister takes the view that a brewery with 44 employees is the equivalent of a regional or international brewery and should be exposed to unfair competition from much smaller breweries, he has failed to address the arguments. Ringwood is a founding member of the Society of Independent Brewers and of the campaign for progressive beer duty, and it falls pretty hard on it now to find itself disadvantaged by the measure.

The Minister was unfair to my hon. Friend the Member for Henley (Mr. Johnson), because he was articulating the views of the management of that fine brewery, Brakspear, not off the top of his head but as they were expressed in a press release on 19 April. Jim Burrows, the chief executive, said:

"This clumsy tinkering with beer duty could eliminate the very British heritage the Chancellor claims to defend."

He went on to say how vulnerable his firm will be to unfair competition from microbreweries.

The Government are obsessed with microbreweries' competition with slightly larger breweries, such as Ringwood and Brakspear. The biggest problem in brewing and the pub trade is the dominance of the very large breweries. By accepting amendment No. 4 and the other consequential amendments, the Minister would enable this great cohort of expanding independent brewers to expand even further and to make an even larger collective impact on the market. They would be able to take on the large breweries that get a great deal of protection because they can offer deep discounts.

I am disappointed by the Government's response and the fact that they have not listened to our points; I hope that the Committee will vote for amendment No. 4 and, when it has a chance, will look at early-day motion 1047, to which the Minister did not refer; 61 Members support a duty on production of up to 200,000 hectolitres, with a concession for brewers producing beer less than that volume. The signatories include quite a lot of Labour Members; it will be interesting to see whether they join the Minister in the Lobby or vote for amendment No. 4, which is consistent with the early-day motion.

On that basis, I beg to ask leave to withdraw amendment No. 17.

Amendment, by leave, withdrawn.

Amendment proposed: No. 4, in page 112, line 2, leave out "30,000" and insert "200,000".—[Mr. Chope.]

Clause 19 — Registered vehicles etc

Howard Flight (Conservative, Arundel and South Downs)

I would expect cross-party agreement on the need for effective measures to deal with the problem of abandoned cars, of which there are some 350,000 each year. The Government's proposals amount, broadly, to clause 19, which implements the terms of schedule 5.

The crucial issue is whether the proposals will be effective. The problem of abandoned cars is growing because scrap yards are not interested in taking clapped-out cars and tend to demand payment for doing so. In turn, that has resulted from the fall in scrap prices. There has been broad support for the DTLR consultation and broad agreement that measures are needed to incentivise and provide proper arrangements for the disposal of old cars, and to ensure that the keepers of cars are made responsible for the registration formalities of transfer and disposal.

Without reform and implementation by the Driver and Vehicle Licensing Agency of a proper receipting system, clause 19 and schedule 5 will not satisfactorily address the problem of abandoned vehicles and could indeed compound it. At the heart of the matter is the fact that the DVLA does not have a records system that carries accurate real-time information to enable the tracing of vehicles' owners at the time of abandonment.

The problem is major. There are some 12 million old vehicles on the road without proper registration papers. For example, the number of vehicles registered in 1989 totalled some 2.3 million, of which about 624,000—some 27 per cent.—are not accounted for. That takes into account all those that have already been scrapped or for which SORN—statutory off-road notification—has been given.

The DTLR has indicated that the schedule 5 measures, which clause 19 implements, may be used to pursue the last keeper on record if the car in question is not taxed or recorded as being off the road. Many of the cars making up the numbers that I have just cited will have changed hands several times through the back door or may be sitting on rotting land. We take the view that it would be a monstrous travesty for the last official recorded keeper of such a vehicle, who may be entirely innocent, to be accused and charged with non-payment of road tax and failure to notify that the vehicle is off the road, and even given speeding fines, when that person may be two, three or four people back in the vehicle's chain of ownership. Indeed, the measures could worsen the problem of car abandonment, as there is a greater incentive to dump non-roadworthy cars rather than store them on private land in order simply to avoid vehicle excise duty liabilities.

If the proposals are to be practical and not potentially unfair, the DVLA must be reformed significantly and be in a position to issue and record accurate receipts of information about change of ownership, so that individuals who have duly notified it of changes have evidence to show that they have done so. I understand that a recent court case on that territory found against the DVLA. Hon. Members will be aware that the Automobile Association has advised that it would be wrong to press ahead with the proposals until the DVLA can offer a real-time customer service and provide receipts on change of ownership.

There are other problems. The liberal UK vehicle registration system allows any name to be recorded as the keeper, even a child's, which can make deliberate false registration relatively easy. If the proposals are to work, we need a timetable on DVLA modernisation. Vehicles that have not changed hands since March 1997 have old registration papers, which do not provide for dual registration. Again, that issue needs to be dealt with if clause 19 and schedule 5 are to be implemented fairly and effectively.

The abandonment problem requires a carrot-and-stick approach. It also probably needs the provision of easy and free take-back facilities for cars that have reached the end of their lives, and it needs effective but fair pursuit of the owner at the time cars are dumped. That can happen only if the DVLA has the necessary records.

Is the intent of clause 19 and schedule 5 to include veteran cars and cars that may have been kept on a farm all their lives? I still find the wording unclear, but there is the implication that both might be covered.

We believe that much more consultation is necessary, especially on the detailed proposals in schedule 5, which if implemented as they stand could have a contrary and grossly unfair impact on innocent parties. We fear that the Government may be rushing through measures in the name of spin—to be able to say that they are doing something about abandoned vehicles—and without reforming the DVLA to ensure that the necessary information is available.

We would like to hear that the Government will consult further before they implement clause 19, noting the latitude given to them in terms of implementation, and that in principle they do not intend to implement the clause and schedule 5 until the DVLA has been reformed adequately. We will want to return to this issue on Report. If the issues that I have raised are not satisfactorily addressed, we will want to oppose the proposals, but we cannot imagine that the Government intend to implement these measures without the necessary reforms of the DVLA.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Liberal Democrats sought to have clause 19 debated in a Committee of the whole House because we are extremely concerned about the problem of abandoned vehicles. We recognise that the Government have taken action and that the clause is part of the strategy for dealing with the problem.

My constituency of Kingston and Surbiton has experienced an epidemic of abandoned vehicles, which has caused huge problems for many residents. They are literally fed up of contacting the council or the DVLA and getting nowhere. I have many examples. [Interruption.] Unfortunately, the hon. Member for Buckingham (Mr. Bercow) says that it is a Liberal Democrat council. It is a Liberal Democrat council now because last Thursday the Liberal Democrats made 11 gains and took over from an incompetent minority Tory administration in Kingston upon Thames. As we now have a Liberal Democrat administration in Kingston upon Thames we will see improvements in the removal of abandoned vehicles.

The problem of abandoned vehicles is exceptionally serious, as such vehicles give rise to significant health and safety concerns. Children are often hurt playing on them, and they are sometimes set alight by vandals, causing significant damage. The Financial Secretary and the Paymaster General should therefore not make light of this serious issue. To some hon. Members, it may seem like pavement politics, but it is a real issue.

The Government are to be congratulated on the consultation document—published last October by the Department for Environment, Food and Rural Affairs and the Department for Transport, Local Government and the Regions, to which I responded on my party's behalf—which proposes various ways of tackling the problem of abandoned cars. It contains many measures that I support, such as reducing notice periods for the removal of abandoned vehicles, and for their destruction once removed. I am particularly in favour of empowering local authorities to remove unlicensed vehicles; currently, such powers lie only with the DVLA. As the DVLA is rather stretched and does not have as great a local presence as councils, unlicensed vehicles often remain undealt with. Under current legislation, local authorities cannot deal with such vehicles because they are not abandoned. Bizarrely, the problem is ping-ponged between statutory agencies, one passing the buck to the other. The Government have recognised that fact in the consultation document and are taking steps to deal with it.

Another key proposal that I fully support is giving local councils greater access to the DVLA's database, which I have advocated for my constituency for many years. I once persuaded the then head of enforcement at the DVLA, Haydon Madoc, to travel from Swansea to witness the epidemic of abandoned vehicles in my constituency. One solution that I discussed with him was enabling my local council to access the DVLA's database. It took a long time, but I believe that that key solution is now in place.

The consultation document contains many useful proposals, and although the proposal before us is a step in the right direction I have some concerns about the detail. I make that point in a spirit of genuine, constructive and effective opposition. The document states that the Government wanted to consult widely, and it mentions some of the measures now included in clause 19 and schedule 5, but it describes them as longer term. I shall quote from it to give hon. Members an idea of the Government's thinking last October. Paragraph 36 of section 5, headed "Longer term proposals", states:

"In the longer term, the Government believes that stringent measures are needed to ensure that all vehicles can be associated with a registered keeper who has clear responsibility for ensuring that the vehicle is operated legally, and who remains responsible for civil and criminal penalties arising from misuse of that vehicle while it is in his possession."

The document predicts that the Government will consult on the measures before us, but to my knowledge their conclusions have not been published. They have not responded to the consultation process, or to submissions from people such as me.

I share the concerns of the hon. Member for Arundel and South Downs (Mr. Flight) that the Government are ploughing ahead without hearing the results of the consultation. They may be going in the right direction, but as long ago as October we were told that the changes were longer-term reforms on which the Government would consult. I should like to see the results of the consultation before we enact the new powers.

Clause 19(2) says that the provision

"shall not come into force until such day as the Secretary of State may appoint by order made by statutory instrument".

Therefore, the Government are allowing extra time for consultation. They have produced the enabling legislative framework and will introduce the orders bringing the provisions into effect later. The Government may have realised that they are acting too quickly, but there is a protection against that in clause 19(2). If that is the case, I would like the Minister to say so. When will the Government introduce the orders in question? Will it be before the summer recess, and what will happen before the orders are considered by the House? We need to know, because they could implement significant changes.

The Government need to consult on the orders beforehand. It is right to require people to retain fiscal responsibility for a motor vehicle unless and until they register the fact that they have sold the vehicle or it is no longer used on the road. However, if the Bill is passed, it will be the first time that VED will apply to vehicles not kept on the public road. What will that mean in practice? Will it mean that all the exemptions that currently apply—whether to classic cars or any of the other long list of exemptions in schedule 2 (a) to (q) of the Vehicle Excise and Registration Act 1994, which I shall not list but which includes vehicles used on tram lines and electrically assisted pedal cycles—will continue to apply? I hope that the Minister can assure us that they will.

The effect of the provision will be to enable excise duty to apply to vehicles not kept on public roads. I hope that that is only a device to ensure that abandoned cars that are not on the public road have to be registered so that the owner can be tracked down and held liable for any fines. Can the Minister reassure us that the Government have no intention of extending the tax net? If that is the object of the exercise, many right hon. and hon. Members will object.

The most serious concern is whether the proposals introduce an element of retrospection. Many people in the last 10 or 20 years might have passed on a vehicle to a relative or friend but not registered the change in ownership properly and, when the change took place, the extra duties and penalties were not in force. Those people could be linked to one of the many millions of vehicles no longer on the DVLA's register and thus fall foul of the new legislation. The Government need to convince the House that they will not apply those provisions in a draconian way.

The Minister could reassure the Committee by saying how many licensed vehicles are on the DVLA register. Of that number, how many have statutory off-road notification? For how many vehicles has there been no recent activity or registration? A note from the Library leads me to understand that there may be as many as 2 million vehicles in the latter category. As a result, if we are not careful, 2 million owners could become liable for fiscal penalties under this retrospective measure.

The matter is complex. I read through the 1994 Act and must admit that I had to put a hot towel around my head to understand its intricacies. However, it is clear that some proposals in the Bill may not have been thought through as completely as might be necessary.

My final point touches on a matter, raised by the hon. Member for Arundel and South Downs, that is key to the Government's aim of using the Bill to deal with abandoned cars. The hon. Gentleman noted that the DVLA does not provide receipts when cars are registered: a person who notifies the DVLA that a car has been sold on receives no receipt for that notification.

The problem was at the heart of the court case to which the hon. Gentleman referred. In November last year, Mr. Phil Davies from south Wales took on the DVLA in the magistrates court, the county court and the Court of Appeal. Eventually, he won the case. The DVLA had tried to fine Mr. Davies £35 for not returning a form in July 2001. Mr. Davies was adamant that he had returned the form, but he cold not prove it as the DVLA issued no receipt for it. However, the Court of Appeal finally found in favour of Mr. Davies, on the grounds that the DVLA had been remiss.

If the Government are trying to use the Bill to deal with the problem of abandoned cars by developing continuous licensing, they will probably enjoy the support of the House. However, the problem with continuous licensing is that the DVLA would need to work out how to provide receipts for those members of the public who wanted to receive them. The receipts would prove that a person had notified the DVLA of a transfer of ownership.

I suggest that the question of issuing receipts is at the core of the clause. I hope that the Minister will assure the Committee that the Government will take on board the legitimate concerns that have been expressed. If they do, they will enjoy the support of hon. Members of all parties. The move is important, and such an assurance would allow the Government to promote the objectives of their policy that much more strongly.

Greg Knight (Conservative, East Yorkshire)

Abandoned cars are a blight on the landscape, and action is clearly needed. Some local authorities find the cost of dealing with the problem to be great. I do not see why local council tax payers should have to foot the bill when irresponsible citizens dump their property in public places. Therefore, I begin by saying that I wish the Government well in their quest for a solution to the problem, but I share some of the doubts expressed by my hon. Friend the Member for Arundel and South Downs (Mr. Flight) about whether—I hope that the Minister will pardon the pun—the proposed measure is the correct vehicle for dealing with the problem.

The proposal seems rather akin to a sledgehammer. Will the Minister say why the Bill does not contain a requirement that the duty would be payable only when a vehicle had clearly been abandoned, or left on a public highway or on public land? I am worried about the scope of the provisions. I hope that the Minister will be able to reassure the Committee that my fears are groundless.

Clause 19 refers to schedule 5 of the Bill, which provides

"for vehicle excise duty to be charged in respect of vehicles registered under the Vehicle Excise and Registration Act 1994 that are neither used nor kept on a public road,

for vehicle excise duty to be charged in respect of things that have been but have ceased to be mechanically propelled vehicles".

Does the phrase "to be charged" necessarily mean that a fee has to be charged? Alternatively, when a particular class of registration under the 1994 Act gives rise to payment of a nil duty, would the clause also give rise to payment of a nil duty? My concern is about historic, classic and veteran vehicles. Not every Member may be aware that such vehicles are classified under a different category.

Most right hon. and hon. Members who travel to this place by car do so in a vehicle that is registered under the class "private light goods". To put that vehicle lawfully on the road, one has to pay an annual fee to obtain one's tax disc. In 1994 or 1995, when my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) was Chancellor of the Exchequer, a new provision was introduced whereby a vehicle that was roadworthy but was more than 25 years old could be classed as "25 year exempt". That category has since been renamed "historic". Owners of vehicles manufactured before 1 January 1973 must still go through the process of producing their insurance documents and MOT certificate for their vehicle to obtain a tax disc, but they do not pay a fee for it.

It used to be the case that as soon as a vehicle became 25 years old, it was entitled to claim exempt status, but the present Chancellor of the Exchequer froze the exemption so that only vehicles manufactured before 1973 can claim historic status. It is not automatic, however: the owner must go through the process of changing the taxation class on the logbook. Will the Minister give us an assurance today—or if he cannot, will he look at the issue and come back before Report—to make it clear that it is not the Government's intention to use the clause to introduce taxation on historic vehicles that currently pay a nil duty?

The Bill's wording gives me cause for concern. The provisions will catch not only the historic vehicle owned by a member of the public but every vehicle housed in a motor museum or other historic collection. Many of those vehicles are not in working condition. They may look pristine, but in many cases the engine or part of the fuel system has been removed, usually for insurance purposes.

I hope that the Minister is prepared to say that the Bill is not intended to hit those who own, maintain and cherish historic vehicles, and that it will not do so.

Paul Boateng (Labour, Brent South)

We should, I suppose, be grateful to the hon. Member for Kingston and Surbiton (Mr. Davey) for giving us the opportunity to debate the clause. However, it is always the way with Liberal Democrats that even as they enable us to share with the wider world the benefits of an action taken by this Government alone to tackle the menace of dumped and abandoned cars, one is struck by the piety, self-satisfaction and smugness that all too often, I am afraid, characterises Liberal Democrat interventions in any debate. I am afraid that this debate is no exception.

I detected something else that all hon. Members who are to serve on the Standing Committee will want to bear in mind. I am thinking particularly of the shadow Chief Secretary, the hon. Member for Buckingham (Mr. Bercow), who will share our many hours of deliberation on these matters. As Liberal Democrat Members share their reflections in Standing Committee, we will find time and again that every word they utter is designed to be replicated at street level in "Focus". The hon. Member for Kingston and Surbiton gave that impression: I sensed "Focus" coming on. It is therefore only right, to lighten the hours that lie ahead of us, that we should introduce what I would describe as "Focus"-watch. A prize should be initiated for the member of the Standing Committee who is able to identify the most frequently repeated strictures that show a direct link with subsequent publication in "Focus".

Roger Casale (Labour, Wimbledon)

I am grateful to my right hon. Friend for giving way. He has issued the sort of challenge that I find almost irresistible. However, I should tell him that the hon. Member for Kingston and Surbiton (Mr. Davey) is genuine in his desire for measures to aid the removal of abandoned cars. His constituency borders mine, and he has visited with me abandoned and dumped cars in New Malden on my side of the border. I have done likewise on his side of the border. I hope that the support that he gives to the measures that we are taking to deal with the problem through the tax system will be replicated when we discuss the other measures that we are taking to make it easier for local authorities and other bodies to work together to remove abandoned cars—an exercise in joined-up government to tackle this pernicious problem in our communities.

Paul Boateng (Labour, Brent South)

Liberal Democrats are often genuine—they have a genuine desire to see their good works replicated in "Focus". I promise to donate to the member of the Standing Committee who identifies the most frequent references for subsequent publication in "Focus" one twentieth of a hectolitre of real ale produced in a micro-brewery of their choice, in any constituency. I fear that I must exempt Liberal Democrat Members from that genuine prize, because that would undermine the whole point of it.

With that challenge, I turn to the substance of the points that the hon. Member for Kingston and Surbiton raised. Hon. Members on both sides of the Committee—my hon. Friend the Member for Wimbledon (Roger Casale) rightly drew attention to the no doubt genuine concern of the hon. Member for Kingston and Surbiton—have long been worried about the menace of dumped vehicles. We issued a consultation paper on the matter. As the hon. Gentleman should know, in March this year the summary of responses to that paper was published and placed in the Library. It was entitled, perhaps not surprisingly, "Report on responses to the consultation paper on Abandoned Vehicles 2001–2002".

The provision must be seen in the context of the wider range of measures for tackling the problem of abandoned vehicles announced by my right hon. Friend the Secretary of State for Transport, Local Government and the Regions on 10 April. They include powers to remove vehicles abandoned on the street anywhere in England after 24 hours, instead of the present seven days; increased opportunities to work with the DVLA to remove unlicensed cars; powers to dispose more quickly of unlicensed vehicles removed under DVLA powers after seven rather than 35 days; and easier tracing and clarification of vehicle ownership through additional funding from the invest to save Budget. That will be seen as a comprehensive response to the menace.

I want to reassure the hon. Member for Arundel and South Downs (Mr. Flight) and the right hon. Member for East Yorkshire (Mr. Knight) that the new measures in no way affect current policy on vehicles that are exempt, for whatever reason, from payment of vehicle excise duty. That includes classic cars manufactured before 1973. The right hon. Gentleman has a distinguished track record as regards his interest in the preservation of historic cars. Keepers of classic cars who want to take their vehicles off the road, thus paying no duty, will continue to be able to do so, provided that they make a statutory off-road notification, as required at present. There is no intention to bring classic cars into taxation. I hope that reassurance sets minds at rest.

The hon. Member for Arundel and South Downs suggested that DVLA systems might not be capable of handling the proposed change. The DVLA makes strenuous efforts to ensure that the information on its vehicle record is as up to date and accurate as possible. However, we are all fallible; there is always the risk of mistakes at the DVLA, as there is in every human institution. Most vehicles are relicensed at post offices and errors might also be made there. We are taking steps, including the piloting of measures such as the use of bar codes on licensing reminder forms, to ensure that the vehicle record can be updated instantly when the vehicle is relicensed.

We have no intention of hitting the honest trader or dealer. If the vehicle is taxed, or if the DVLA has been notified of changed circumstances that mean that tax is no longer due, there is no risk that an offence will be committed. I do not accept the charge that this is a motorist-bashing measure, although, to be fair, I do not think that the hon. Member for Arundel and South Downs was making that claim.

The measure is certainly not designed to catch people who have genuine reasons for licensing their vehicle a few days late. We are not out to hit the honest motorist, but we believe that the motorist who plays by the rules has everything to gain when those who abuse the system are brought to book. Honest motorists will welcome the reforms. Motorists are citizens, too, and they are affected by that abuse.

The hon. Member for Arundel and South Downs asked what would happen to vehicles currently wrongly recorded, and said that it was unfair to go after the keepers. It is not our intention to act against keepers who have acted in good faith. We shall need to consult with motorists' organisations and others on the best and fairest way to implement clause 19. It is our intention to consult. We shall focus our attention on ensuring that vehicles that are correctly recorded do not become incorrectly recorded.

The hon. Member for Kingston and Surbiton asked about issuing receipts; that suggestion could certainly be considered as part of our further consultation. I repeat that we recognise the need to protect the keeper who acts in good faith.

Howard Flight (Conservative, Arundel and South Downs)

In addition to vintage cars, I raised the issue of cars that are used on farms. May I also ask what would be the position of firms whose business is dealing in second-hand cars? I understand that, under the measures, in future they would need to pay VED while such cars were on their forecourt pending sale.

Paul Boateng (Labour, Brent South)

I will certainly write to the hon. Gentleman on the latter issue. I believe that in his speech he referred to vehicles that have lived on farms all their lives, which raised the spectre of Chitty Chitty Bang Bang. I am sure that, with this measure, it is not our intention to bring into the arena those vehicles that were previously outside it, but we must ensure that we have an effective regime, whose integrity is respected. I will write to the hon. Gentleman on those points to ensure that we get things absolutely right.

Bearing in mind our intention to ensure that we get the clause right and to consult with the motoring organisations and others on the detail of its implementation, I am sure that, on reflection, hon. Members will find that it has much to commend it. Before finalising the details of the system and bringing it into effect, we will consult on the implementation of a supplementary penalty for late renewal or non-renewal, and the levels of that penalty. Those will be subject to affirmative resolution, and the House will have an opportunity to debate them in due course.

We are adding this measure to the series of practical measures that are being taken to address a menace that, we have all agreed, can be the bane of our constituents' lives. It degrades the quality of life in all too many communities and is a spur to crime, including arson and vandalism. Action in this area is long overdue and I commend the clause to the Committee.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful for the Financial Secretary's reply, which has reassured me on many points. I am glad to hear that he is consulting. When he and his colleagues and officials consult, will they particularly look at retrospection, which he was not able to deal with in his reply?

Will the Financial Secretary deal with another issue? I have been told by people in the AA that it is an increasing practice for people to register vehicles at an address that they do not live at. The solution is not legislative change but tighter practices governing registration at post offices or by post to the DVLA to ensure that identity is checked more rigorously. I hope that the Financial Secretary will ensure that that point is also covered in the consultation.

Question put and agreed to.

Clause 19 ordered to stand part of the Bill.

Schedule 5 agreed to.

Clause 23 — Flat-rate scheme

Paul Boateng (Labour, Brent South)

The clause represents the latest and, I believe, the most significant step that we have taken to simplify the administration of VAT for hundreds of thousands of small businesses.

Since VAT was introduced, the vast majority of registered firms have been obliged to keep a record of the VAT charged on each individual purchase and sale, and go through the often laborious process of totting up their inputs and outputs when filling out their VAT return. The flat rate that is being introduced on 25 April does away with that requirement for more than 500,000 small businesses with turnovers of up to £100,000. Instead, those businesses will have the option to work out their VAT liabilities as a simple percentage of their total turnover. Instead of making hundreds of calculations each quarter, they will simply have to make one. Instead of spending hours sorting through old receipts, they will be able to concentrate on running their business.

Christopher Chope (Conservative, Christchurch)

Will the right hon. Gentleman give way?

Paul Boateng (Labour, Brent South)

May I just develop the argument a little? We estimate that, by reducing the time that those businesses spend filling in forms and reducing their reliance on accountancy services, the scheme will cut compliance costs for the average business by up to £1,000 per year.

Christopher Chope (Conservative, Christchurch)

Does this scheme already apply beyond the 32,000 small manufacturers, 15,000 small agricultural firms, 11,000 small pubs and 22,000 transport companies that, I have been informed, are the only beneficiaries of the scheme at the moment?

Paul Boateng (Labour, Brent South)

I do not quite follow the point. The scheme, which I should have thought anyone would welcome, reduces for 500,000 small businesses with turnovers up to £100,000 the burden of making those calculations and digging out old receipts. If the hon. Gentleman suggests that we should be doing more, he is of course entitled to say that, but to him must go the question, "What did you do when you had the opportunity to make a difference by relieving this burden on small businesses?" and answer comes there back, "Not very much." I do not think, therefore, that at this stage it would be right for the hon. Gentleman to cavil at what the Chancellor announced in the Budget, because what—

Christopher Chope (Conservative, Christchurch)

rose—

Paul Boateng (Labour, Brent South)

The hon. Gentleman will have his opportunity.

What the Chancellor made clear in his Budget—in response, in some sense, I suppose, to the point that the hon. Gentleman makes—is that we intend to go further next year, extending the scheme to a further 200,000 businesses with turnovers of up to £150,000. Therefore, from next April the scheme will be available to some 700,000 small firms in total: more than 40 per cent. of all VAT-registered businesses.

This is one issue on which it should be possible for the whole House to say, "Good; there is something here that is of benefit to small and medium-sized businesses and not something to cavil about." Anyway, we shall find out when we hear Opposition Members' speeches.

Let me give the Committee a sample of the reactions that the Budget announcement has received from individual businesses. Jamie Rowland, who set up a bike repair shop in Gwynedd in Wales—he did so last year, so he is still wrestling with the issues—said:

"The extension of the flat-rate VAT for small business will definitely help me and others, because sorting out VAT takes up a lot of time. The more time I can put into the shop in the early days the better."

Joanna Marshall, who runs a business designing and making ties in Nottingham, said:

"I think this is an excellent idea for small businesses. I set up my company two years ago and there is a lot to learn. Taking away a burden like this will make a big difference."

This valuable and radical measure has been much welcomed by small businesses and their representative groups. It will remove a compliance burden that has been in place for the past three decades. In that spirit, I commend it to the Committee.

Christopher Chope (Conservative, Christchurch)

I am sorry that the Financial Secretary mistook my request for information as cavilling. I asked him for information because I have an article written by someone called Richard Murphy and I was unsure whether what he states in his article represents a misunderstanding. However, he asserts that

"the scheme is only available to 32,000 small manufacturers, 15,000 small agricultural firms, 11,000 small pubs and 22,000 transport companies",

making a total of about 80,000 firms. Yet the Financial Secretary referred to about 500,000 small firms, so has Mr. Murphy got it wrong?

Paul Boateng (Labour, Brent South)

Mr. Murphy is absolutely right to identify four categories in that 500,000, in giving an approximation of the numbers concerned.

Christopher Chope (Conservative, Christchurch)

I am grateful to the Financial Secretary for that information. Is Mr. Murphy also right to imply that no other group of firms yet qualifies?

Paul Boateng (Labour, Brent South)

Mr. Murphy is not quite right. Slightly more than 500,000 small businesses in all sections of the economy will benefit from this measure.

Christopher Chope (Conservative, Christchurch)

I am grateful to the Financial Secretary for that clarification. I hope that he will now be equally helpful in answering a question that has been asked by someone whose daughter owns a hairdressing salon in a small town. He says:

"Under current VAT rules she pays to Customs & Excise around £7,500 per annum on a turnover approaching £70,000 after deducting the VAT on her supplies etc., and in her own spare time keeps all the required books and receipts."

He says that under the

"new scheme she would not keep any records, but would have to pay about £9,000 to Customs & Excise. What sort of help is this?"

He questions how a scheme has been designed that is

"meant to help someone where they end up paying more"

and how has it been worked out

"that 13 per cent. of turnover would be less than anyone's current VAT payment"

in the hairdressing business. He also says:

"To be of any help to my daughter the flat rate for hairdressing should be about 10 per cent., which would leave her about £500 better off. She could then give herself a pay rise of £10 a week, something which she has not had for the last 4 years."

I make no political point, but I hope that the Financial Secretary can deal with that specific example.

If the scheme turns out to provide a significant reduction in the burden on business, it will be very welcome. I notice that the estimates as to exactly how much time will be saved have changed significantly from the earlier estimate, but any time that small businesses save is valuable and worth while. However, I should be grateful to the Financial Secretary if he could explain what happens in relation to the records that have to be kept for income tax and corporation tax purposes. If a firm does not have to keep VAT supply invoices for the purposes of VAT accounting, is it exempt from having to keep them for other accounting purposes? If not, what is the purpose of the exemption? Again, that issue has been greeted with some scepticism by several people involved in the very important small business sector.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

We welcome the clause.

Paul Boateng (Labour, Brent South)

Let me deal with the hypothetical question asked by the hon. Member for Christchurch (Mr. Chope) in relation to the need still to collect receipts for other taxes. There will still be a need to do that because VAT is a real-time tax; people will not need to collect receipts for that purpose, but they may well have to collect them for another purpose.

The specific issue is that small businesses are understandably concerned that they are collecting the tax on our behalf—that we are using them as tax collectors. We are recognising that fact and saying that, because VAT is a real-time tax, they do not have to collect receipts for that purpose, but they may well have to do so for the other purposes.

The hon. Gentleman's specific example of a hairdresser strays into individual tax concerns. I do not feel that it would be appropriate for me to give advice on such matters at the Dispatch Box, but I will happily ensure that Customs and Excise writes to him, or indeed to the individual taxpayer, to outline the proposal's impact on that individual. However, Customs and Excise has given me an illustrative example of the categories of people who would benefit from this measure, and it estimates that hairdressers will save about £1,000 in compliance costs. As that information does not relate to the hon. Gentleman's specific example, it is right to share it with the Committee, but I shall write to the hon. Gentleman about it in the way that I have outlined.

On the general point about small businesses paying more tax, the proposed flat-rate scheme will operate on an optional basis, so only those businesses that believe they will benefit from joining the scheme will opt to take part. Therefore, some businesses may well say that they do not want to take part in the scheme because they and their accountants have calculated that it would not benefit them to do so. Businesses that do not believe they will benefit can continue to account for VAT in the way that they always have done.

The rates have been calculated to produce a broadly revenue-neutral outcome in each sector, but that clearly means that there will be a net reduction in the amount of tax many businesses pay, as well as significant compliance cost savings. For all those reasons and bearing in mind the general, broad welcome that the measure has received in all quarters, I commend it to the Committee.

Roger Casale (Labour, Wimbledon)

I wish to make two or three brief comments on the clause. I welcome the new measures, and I am pleased that the Opposition welcome them too, but I rise to speak because the welcome has been distinctly tepid and lukewarm from the Opposition Benches. If the truth were known, there is probably quite a lot of repressed enthusiasm for the measure. After all, it will save small businesses much time and cost. Small businesses make up a growing part of our economy, especially in the service sector, and are great creators of employment.

That is certainly the case in my constituency, as I know from my dealings with the Merton chamber of commerce, the Wimbledon business group and other small businesses, not least Ad Hoc Business Support, which helps me in my work when I have a particularly heavy case load. I have seen that business grow in the past three to four years. One of the things that held it back initially was the onerous task of having to work out its VAT liability. Indeed, being eligible for VAT at all held it back in the early stages. Increasing the threshold and introducing the flat-rate scheme will save that and similar businesses a great deal of time and could save it up to £1,000 a year, which will make a difference to its competitiveness. I hope that that will underpin such companies' future success.

My second reason for wanting to speak in favour of the new measure is that it is part of a series of measures that the Government are taking to boost competitiveness and to support small businesses. For example, there was a recent statement by my right hon. Friend the Chancellor of the Exchequer on the reduction of bank charges for small businesses. There are many thousands of small businesses in my constituency, and they will disagree with us about some things, but on the other side of the equation they will also recognise that we are taking a raft of measures, of which this is one, that demonstrate that we are on the side of small businesses, that we want to support them and that we will make the necessary changes to the tax system, as we are doing now in relation to VAT, to cut red tape and to cut business costs. All of that has come from the dialogue between this Government and the small business community, which was completely unknown under the previous Administration. In that regard, I mention the work of the Small Business Council in particular.

I was in touch with the Federation of Small Businesses just today, and it welcomed the measure. It has always made the point that many small businesses feel that they have the onerous task of acting as tax collectors in relation to VAT. This measure demonstrates that we have taken their concerns on board. The small business community wants to work with the Government to improve things, not just in its own interests but because it recognises, as we do, that small businesses will continue to drive our economy in the future and create jobs, and that, by working together, we can reach a solution that works for everybody.

I very much welcome these measures, which come out of that dialogue between the Government and business. As I said, they are one more demonstration of this Government's support for and commitment to the small business community, and our determination, when possible, to introduce the changes necessary to make small businesses more successful and more competitive in the future.

Mark Hoban (Conservative, Fareham)

I welcome the introduction of a flat-rate scheme for small businesses, although I want to raise one concern in that regard.

One of the issues that small businesses in my constituency have raised with me in recent months is the administrative burden of VAT. Any action taken to lift that burden will be welcomed by those businesses. My only caveat is the process by which the flat rate is set for particular businesses, and what consultation there has been with trade bodies on whether that rate is appropriate. One of the issues that small businesses will consider—my hon. Friend the Member for Christchurch (Mr. Chope) referred to the circumstances of a hairdresser who would lose out as a consequence of adopting the flat-rate scheme—is whether they would feel obliged, on a regular basis, to calculate their VAT liability if they did not elect to use a flat-rate scheme. Would compliance costs continue because businesses would feel the need, every so often, to re-check whether they would be better off using the flat-rate scheme or the more conventional scheme?

I hope that the Financial Secretary will speak to trade representatives to ensure that the flat rate that is set is relevant to those businesses and encourages them to take advantage of it, so that they benefit from the lower compliance costs on offer through this scheme.

Mark Field (Conservative, Cities of London and Westminster)

I, too, would like to speak briefly on this point. I am sorry that the hon. Member for Wimbledon (Roger Casale) feels that the Opposition's support for this measure is somewhat tepid. In principle, we are comfortable with the measure, which is a positive step forward. The small business sector, in which I operated prior to joining the House, has not been terribly well served by this Government. It is not fair to say that there is a monopoly of good will towards the small business sector on either side of the political divide. It is fair to say, however, that, in essence, these changes, although welcome, represent only a small part of the burden faced by many small business people.

VAT is one matter on which I have spoken previously in the House—I always felt that I was one of the worst paid pro bono for my tax-collecting skills when I dealt with VAT in my business—and it is an important fund raiser for the Government. There are great concerns, however, about the amount of time that must be spent by any small business man on the various other payroll taxes, which are not affected by the measure.

Much as I understand the Government wishing to make much of this measure, it is very small. As has been pointed out in various interventions, there will no doubt still be a great burden on many small business men in terms of having to deal with receipts for Inland Revenue purposes, if not necessarily for Customs and Excise. I would be interested, however, to receive guidance from the Financial Secretary on his comments to the effect that the whole process would be revenue neutral. Will he tell us which businesses are likely to suffer under the new provision?

Paul Boateng (Labour, Brent South)

I am very grateful to my hon. Friend the Member for Wimbledon (Roger Casale) for stressing the importance that the Government attach to consultation with industry, business and the relevant affected sectors. I first recall meeting him many years ago, when I was an Opposition Front-Bench spokesperson on Treasury affairs. If he was not then a parliamentary candidate, he was at least very active in Wimbledon, and he was noted, at a time when it was not as commonplace as it is now, as someone who always bothered to reach out to small businesses in his constituency and to learn and listen to their concerns. I have no doubt that that contributed to his subsequent success in 1997 and to his re-election last year. That is a lesson that the Labour party has learned, and that we sometimes had to learn the hard way in the years of opposition.

We have been engaged in a process of consultation in order to arrive at these rates. In response to the points made by the hon. Members for Fareham (Mr. Hoban) and for Cities of London and Westminster (Mr. Field), the rates are based on information from previous VAT returns submitted by all traders who would be eligible to join the scheme. The rates have been calculated on the basis of producing a broadly revenue-neutral outcome across each sector. We consulted on all these rates, talked to the sectors concerned, and, in some cases, responded to the consultation by reducing the rates proposed for an individual sector. For example, we now have two rates for construction services, instead of one. That was a result of listening to the industry and its concerns to ensure that we got it right and that we met its needs.

For reasons that hon. Members on both sides of the House have outlined, it would have been a nonsense to set a single flat rate for all small businesses. Either it would have been set so low that there would be a substantial loss of revenue, or so high that the sector would simply not opt to participate. We want businesses to have a real choice. The rate for a particular business will therefore depend on what trade sector it is in, but, clearly, there will be only one rate for each business. If a business is engaged in two or more sectors with different rates, the flat rate to be applied will be that for the main business sector based on turnover generated. The businesses and trade associations that we consulted felt that that was the best solution to this problem. I think that we have got it right, and we are determined to make sure that it is helpful to small businesses.

As my hon. Friend the Member for Wimbledon said, the measure should be seen as part of a wider Government commitment to support small businesses and to promote an entrepreneurial culture. No doubt there is still more to be done, and we are determined to do all that is necessary to ensure that we have a culture that promotes the creation of jobs, that helps bridge the productivity gap, and that recognises the vital role that the entrepreneurial spirit plays in creating a sound and dynamic economy.

I hope that, as a result of this debate, the enthusiasm that—as my hon. Friend pointed out—Conservative Members have so ably repressed will re-emerge. One does not often associate the hon. Member for Buckingham (Mr. Bercow) with repression in any sense of the word; his enthusiasms are normally plain for all to see. It is unusual for his enthusiasm to be as successfully repressed as it has been on this occasion. However, in the many hours that lie before us in Committee, we will no doubt draw out that enthusiasm. My hon. Friends the Paymaster General and the Economic Secretary cannot wait to have a go at drawing out—"repressions" may be going too far—the enthusiasms of the hon. Member for Buckingham. With that, I commend the clause to the Committee.

Question put and agreed to.

Clause 23 ordered to stand part of the Bill.

Clause 26 — Charge and rates for 2002–03

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I and my colleagues wish to debate this clause because it goes to the heart of the Budget strategy and the choices that faced the Chancellor and his team in preparing the Bill and the Budget. We agree with the Government that extra resources are needed for the national health service and for public service investment in general—in our schools, police forces, transport system and care homes. There is a long list of where investment is needed, and there is some agreement that services, particularly the health service, have been deprived of essential investment for far too long. It is our understanding from the analysis in the Wanless report and from the brouhaha and trumpeting of the Budget that it is the Government's intention to find extra resources. We are delighted that, at long last, they have admitted that and have found the money.

It is interesting that we are debating a clause that introduces the income tax charge and rates for 2002–03. On the same clause in previous Finance Bills, I and other Liberal Democrats have argued the case for extra investment in our public services, such as the health service and schools. We have led the debate and the political argument for extra resources funded by fair taxation. In previous Budgets, we have argued for the rates to be higher than proposed or to reverse the cuts that have been proposed in previous Finance Bills. We did that to try to ensure that precious resources were available for investment in public services.

This year, the debate is slightly different, because the Government have found the resources in another way. The debate on this clause is about how we should find the resources and about which taxes should be increased so that we can put money into public services. As is well known, the Government have chosen to do that by increasing employees' and employers' national insurance contributions, and we differ from them on that point. We accept their objective of increasing investment, but we are concerned about their tax strategy and about the taxes that they have chosen to increase.

Although we are forced by the procedures of the House to vote on clause stand part, we would ideally have liked the clause to contain a proposal to put up the basic rate of income tax by 1 per cent. to fund education investment. There should also be a new top rate of tax of 50 per cent. on incomes of more than £100,000 a year to raise the resources that are needed for the investment that we have talked about. Unfortunately, the procedures of the House do not allow us to table such amendments, so we have to signal our intentions by voting on clause stand part. That is what we have done in previous years, and our approach is totally consistent with that.

Why are we suggesting a different tax-raising strategy from that adopted by the Government? If one compares the proposal for an increase of 1p in the basic rate of income tax with an increase of 1 per cent. in employees' national insurance contributions, we believe that it becomes clear that the income tax rise is fairer and more efficient. It is clear from the analysis carried out after the Budget by the Institute for Fiscal Studies and others that the rise in employees' national insurance contributions involves a narrower net and imposes a burden on a narrow group of people. It excludes pensioners and those who live off unearned income or who have substantial unearned income.

Most pensioners would not pay the extra penny on income tax. They are not income tax payers, because of the age allowances. However, pensioners with substantial incomes would pay the extra penny in the pound and the wealthiest pensioners would pay the most. We are willing to argue the case that, if pensioners are wealthy, they should contribute as well. We believe, like the Government, that the poorest pensioners and those on modest incomes should be protected, and they would be protected under Liberal Democrat proposals just as they are under Government proposals. However, the wealthier pensioners would escape under the Government's proposals but not under ours. We do not see the justification for the Government's approach. In the Budget debate and on Second Reading, we asked them to justify why wealthier pensioners were excluded, but justification came there none. That means that we must debate the issue again tonight.

More serious for the Government—I am sure that Labour Back Benchers, in particular, feel this—is the fact that those with a significant unearned income are excluded from the rise in employees' national insurance contributions. They are not being asked to contribute any more towards the health service, and that is difficult to understand. We agree with the Government that resources must be raised to turn round the years of underinvestment and underspending in the health service, so we should surely ask the better-off in society to make their contribution. However, the Government's Budget strategy deliberately excludes some of the wealthiest people in society, and that is why we stand firm in saying that a 1p increase in income tax is the best approach. It would ensure that everyone, particularly those with the greatest means, would be asked to contribute to a service that is provided to people equally and according to their need.

Chris Grayling (Conservative, Epsom and Ewell)

I do not want in any way to support the principle of tax increases. However, does the hon. Gentleman accept that—in contrast to the national insurance route—his argument would place an increased tax burden on, for example, a pensioner with an income of £10,000 to £12,000 a year? That burden will not occur if the Government proceed with their proposals.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman is, of course, right. However, the amount of money asked from those on modest incomes would be relatively small because, as I am sure he will accept, income tax is a proportionate tax. People on low incomes will, by definition, pay a very small amount. Most pensioners do not pay income tax, because they are protected from it by the higher age allowances. Therefore, the vast majority of pensioners would not pay under our proposals.

Dawn Primarolo (Labour, Bristol South)

I know the hon. Gentleman is aware that only four out of 10 pensioners pay tax, but is he also aware that nearly 3 million pay it at the 22p rate which, by definition, means that they are on a low income? He is proposing to hit that group of people on fixed low incomes. Only 230,000 pensioners pay the higher rate of tax. His argument about spreading the burden does not work because he would spread the burden disproportionately on pensioners on fixed incomes.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

That last phrase is incorrect. We are talking not about spreading the burden disproportionately, but about asking a wider group of people to pay. I am more than prepared to admit that the Liberal Democrats would ask more people to contribute than the Government are asking. I am not hiding that fact. Indeed, I was the person who raised it in the first place; it did not require an intervention to drag that information out of me. Our proposal is fairer. The extra amount that pensioners on £10,000 would have to pay would be tiny. Extremely wealthy pensioners, however, would pay much more under our proposals.

I note that the Paymaster General did not say why wealthy people with a larger share of income from investment income—unearned income—should be protected from making an extra contribution. It is extraordinary that they are not being asked to contribute to the important endeavour to put the health service in a sounder fiscal position.

Chris Grayling (Conservative, Epsom and Ewell)

The hon. Gentleman still misses the point about the financial predicament that many pensioners face. They have retired on fixed incomes, perhaps with a small pot of savings. The income from those savings has fallen as interests have decreased to an historically low level. They have experienced yearly increases in council tax which are vastly above the rate of inflation and have no ability to increase their income. So every time another slice is taken out of their income, it is another handicap to them making ends meet. That would be the consequence of the hon. Gentleman's proposal. It is easy to get caught up in an attempt to deal with the very small number of high earners, but the hon. Gentleman's proposals would have an impact on lower-income pensioners.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am glad that the hon. Gentleman mentions council tax. The Liberal Democrats are the only ones who have pledged to abolish council tax and to replace it with a local income tax. That would significantly help pensioners. They would be much better off as a result of the combination of our policies. The hon. Gentleman is right to say that many pensioners on fixed incomes are significantly hit by council tax. That is why we need to reform that pernicious tax, which his party introduced.

The second part of the Government's tax strategy in the Budget is the 1 per cent. increase in employers' national insurance contributions. We propose a new top rate of tax of 50p in the pound on incomes above £100,000, which would raise an amount similar to that in the Government's proposal. Indeed, it would probably raise more on a net basis because the Government would not have to pay the higher tax for the many people who are employed in the health service and other public services. Our proposal would liberate an equal amount or more for public service investment. In addition, it would be fairer and more efficient: fairer because it would ask those people who can afford to pay to make their contribution, and more efficient because it would not increase the costs of business.

We all know from the press reports and the analysis after the Budget how worried business is by the increase in its cost base because of the increase in employers' national insurance contributions. It is a real concern that that might hit jobs, investment and the competitiveness of UK plc. Once again, the Government have ducked out of the hard decisions. They have put a major burden on business when they had an alternative way to raise revenue. That is why I urge Members on both sides of the Committee to ask the Government to think again about their tax strategy by voting against the clause.

The Committee knows that the Liberal Democrats have been consistent on this matter since, I think, 1989. That is 13 years of consistency on tax policy. In that time, we have argued for increases. Our plans have been fully costed and we have put them before the British people a number of times. Although a majority have not voted for them, some of them have proved in opinion polls to be the most popular policies. We believe that had the Government adopted them, they would have received much greater support and would not have lost the support of British business in particular.

I do not know whether the Conservative Front-Bench spokesmen will participate in the debate, but if they do I hope that they tell the Committee how they will find the money for the NHS, our schools and our police. If they do not do that and then vote against the national insurance legislation, they are being disingenuous—indeed, dishonest—with the British people. They say that they want to back the money for the health service, but they do not will the means. Both before and after the Budget, we stood by our election manifesto proposals of June last year to show where the money would come from to pay for our policies. Like the Government, we think that the investment is vital. The Conservatives have yet to produce proposals on that.

John Bercow (Conservative, Buckingham)

The hon. Gentleman is uncharacteristically confused. For the avoidance of doubt, I put it on the record, as has been articulated by my right hon. and hon. Friends before, that it is the position of the Conservative Opposition that although this country needs to spend more on health, it is by no means clear, through an examination of the systems of health provision across continental Europe, that that expenditure is best made on the basis of moneys raised through tax. Unlike the hon. Gentleman, who has a closed mind, my hon. Friends and I have open minds. We will explore the alternatives, see what is best and produce a credible, detailed, costed and attractive alternative to the failures of the Government, which is a damn sight better than the Liberal Democrats have ever managed.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am delighted to have provoked the hon. Gentleman. That is what I intended to do, but he has failed to clarify the Conservative party's policy. As usual, he promised us that some day soon—or perhaps not so soon—we will hear how they propose to raise the billions of pounds.

John Bercow (Conservative, Buckingham)

rose—

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I will give way if the hon. Gentleman holds steady for a moment.

It is all right for the hon. Gentleman to say that the Conservatives will clarify their policy in a year or two, but what about the billions that are needed now for the health service? How would he ensure that the billions going into the health service over the next one, two or three years are funded? It is fine if he supports the Government's approach or our approach, but if he does not support either because he does not support a tax-funded NHS, he needs to say how the money would be found now. If he cannot, the implication is that there would be cuts to the health service in every constituency up and down the country. He has to have an alternative. [Interruption.] Conservative Members groan in their usual way, but they have to tell the people where the money would come from. Will the hon. Gentleman tell me where it would come from this year?

John Bercow (Conservative, Buckingham)

The problem from which the Liberal Democrats suffer is that they have been undergoing a process of intellectual retardation without interruption for some years. If the hon. Gentleman is in the business of offering to the Committee his prescription to remedy the ills of the health service before there has been a proper diagnosis of what those ills are, I can only say that it is extremely fortunate that he did not opt for a career as a general practitioner. At the moment, large sums of money that are allocated to the Department of Health are not spent. As a consequence, treatments that could be provided are not being provided. We will do our homework. If the hon. Gentleman thinks that it is sensible, 11 months after losing the last election on the last manifesto, to be expected to produce tonight the contents of the next, that only underlines why his party is the minority party and why it will remain so.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

If the hon. Gentleman continues to perform like that, I will continue speaking and provoke him even more because it will elucidate for the Committee more information, or lack of information, about the Conservatives' position. The Liberal Democrats are engaged in a major policy review of our public services. We have already produced a consultation paper, which went to our conference in Manchester.

Joe Benton (Labour, Bootle)

Order. The hon. Gentleman can continue his party competition outside the Chamber. I should like us to return to clause 26.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful for that remonstration, Mr. Benton. I was just trying to help the hon. Member for Buckingham (Mr. Bercow), but of course I will return to the matter in hand. The Committee will be pleased to learn that I was just coming to a conclusion.

The Government did not adopt our proposals for income tax increases instead of national insurance increases simply because of the little card that they had at the 1997 election. It is about grubby politics, and not about what is best, fairest and most efficient for this country, and I deeply regret that.

Dawn Primarolo (Labour, Bristol South)

In advancing his views, the hon. Member for Kingston and Surbiton (Mr. Davey) often talks a good talk, but he does not always follow through. It is a regular claim of the Liberal Democrats that they thought of an idea first, but when looking at this Government's investment, particularly in the health service, we find that we have, at every point, invested more than the Liberal Democrats wanted, and more than would have been yielded by their 1p on income tax or any of their other little ruses.

The hon. Gentleman says that he does not disagree with the Government that extra money is needed for the NHS, but he disagrees about the method of investment, and he focuses tonight on income tax rates. He says that he would have liked to table amendments to raise the 22p tax rate to 23p and to increase to 50 per cent. the tax on annual incomes of £100,000 or more. What is extraordinary is that he tabled an amendment, which was not selected, to put an extra 1p on the 22p rate, but he tabled no amendment on a 50 per cent. rate for incomes of £100,000 or more.

The hon. Member for Epsom and Ewell (Chris Grayling), who intervened on the hon. Gentleman, made the point, which the hon. Gentleman did not seem to understand, that because of the freezing of allowances, pensioners on higher incomes will be contributing, but when we consider the distribution of income among the small number of pensioners who pay tax on their fixed income, we see that the vast majority would be hit by the 1p rise in the 22p rate which the hon. Gentleman advances.

As we have said a number of times, the Government's view is that ever since Beveridge, the national insurance system has depended, rightly, on the principle that people contribute while in work for the benefits and services that they need when they cannot work—a sound principle that is being continued by this Government.

Chris Grayling (Conservative, Epsom and Ewell)

I suspect that this point is symptomatic of the Liberal Democrats' ability to change their story according to circumstance, but is the Minister aware that the 1p on income tax to which she refers was, at the last general election, designed to be spent entirely on education? I am therefore slightly at a loss as to how the hon. Member for Kingston and Surbiton (Mr. Davey) relates that 1p to the health service tonight.

Dawn Primarolo (Labour, Bristol South)

I am grateful for the hon. Gentleman's prompting. I was going to come to that point next, but I also wanted to make a point about savings. The hon. Member for Kingston and Surbiton talks about pensioners who have savings, but he makes no proposals in his speech or in any of the documents that the Liberal Democrats have produced to change the taxation rates on savings, which would be an issue for pensioners.

The point made by the hon. Member for Epsom and Ewell is also very interesting. The Government have specifically said that the rise in the national insurance rate will directly contribute to extra spending in the five-year plan for the NHS. The Liberal Democrats have put together a package of amendments on tax, and they spend the money everywhere. They do not match the extra spending that the Government are giving to the NHS; nor do they match our spending on education. Those amendments are just convenient little soundbites in which the Liberal Democrats fail to do precisely what they have implored the Government to do—be direct about what tax is being raised and what it will be spent on.

The Liberal Democrats then come up with the most extraordinary proposition. Income tax is an annual tax; it has to be renewed annually. Those who vote against this clause seek to prevent the Government from setting any rates for income tax, at a cost to the Exchequer of £102 billion this year and £117 billion next year. The hon. Gentleman needs to decide how he wishes to engage in this debate. My right hon. Friend the Financial Secretary said earlier that much of the Liberal Democrats' engagement in debates is not designed for a sensible discussion of the way forward; it is designed so that they can give the soundbites that will go into their "Focus" magazines to misrepresent the true choices facing the people of this country.

The Government say that a comprehensive health service, free at the point of need, will be funded through the Beveridge principles. We also say that we need more investment in our public services, and with all the work that we have undertaken to build a stable economic framework for growth and for sustainable public services, what is required now is a freeze on allowances and the setting of the tax rates this year at 10p, 22p and 40p again, as we promised at the election.

We said that we would use the tax credit system to help those in greatest need, to recognise the burdens and extra expenses of having children and to ensure that revenue is put aside for sustained investment, year on year, in the NHS to give us the first-class service that we need. It is about time that the Liberal Democrats stopped playing around with their 1p and faced up to the true magnitude of the investment in our public services that is necessary to make them first class. On that basis, I commend the clause to the Committee.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

That was a disappointing reply from the Paymaster General, who chose not to mention the fact that 60 per cent. of pensioners on low and modest incomes would not be hit by our proposals. She could have told the Committee that under parliamentary procedures it is impossible to table an amendment to increase the rate of income tax.

Dawn Primarolo (Labour, Bristol South)

Perhaps the hon. Gentleman could explain why he tabled an amendment to increase 22p to 23p, even though it was not selected for debate.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The amendment was included on the Order Paper so that people could be clear about our policy. Having taken advice from the Clerk, I knew when I tabled it that it was not selectable; I hope that that answers the Paymaster General's point. We want to get our policy on the record. Unfortunately, parliamentary procedures prevent some amending of expenditure and tax Bills—I am very much against those procedures—which means that one has to try to make one's point in other ways, which is what we did. The Paymaster General therefore does not have a strong case.

The Paymaster General and the Financial Secretary share an antipathy to "Focus" newsletters, which have been effective in Brent and Bristol, where Liberal Democrats made net gains last Thursday—[Interruption.]

Dawn Primarolo (Labour, Bristol South)

What irritates us so much is the fact that, in many of our constituencies, Liberal Democrats campaign locally on not increasing taxes and cutting public services, but in Committee their representatives have the audacity to argue exactly the opposite.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

There are some areas where council tax—an unfair tax supported by the Government and the Conservatives who introduced it—is too high and hits pensioners. Our Liberal Democrat colleagues around the country are right to campaign both to replace council tax and to cut it. In the House, we have argued for increases in fair taxes that spread the burden of the cost of paying for public services, and we shall continue to do so. That proposal is now before the Committee, which should consider whether it supports increases in the health service budget funded by an inefficient, unfair mechanism or increases funded by a fair and efficient method. I advise Committee members not to support the clause, and urge them to join the Liberal Democrats in the lobby to vote for a fair and efficient way of raising money for our health service.

Eric Forth (Conservative, Bromley and Chislehurst)

On a point of order, Mr. Benton. Presiding, as you are, in the Chair so superbly, you may well not yet have heard the rumour that has been circulating over the past couple of hours, and which has also reached the media, that it is possible that the Secretary of State for Transport, Local Government and the Regions may seek to make a statement later this evening. That would be a welcome development, were it to be true. You will appreciate the slight difficulty that that would appear to cause: as we are in Committee under your excellent guidance, could you advise the Committee what procedure might be available, were the Secretary of State to make his expected statement and therefore come to the House at last and be accountable for his actions over the past few months? Such guidance would be very helpful not only to the Committee, but perhaps even to the Secretary of State.

Joe Benton (Labour, Bootle)

As the right hon. Gentleman knows, the House is in Committee. It is therefore inappropriate for me, as Chairman of the Committee, to comment on any of the issues that he raises in his point of order. It is not for me to express an opinion as to what might happen after the Committee has finished. I say simply that I know nothing of the matter to which the right hon. Gentleman refers. I am here as Chairman of the Committee of the whole House considering the Finance Bill, and I cannot rule on the matter.

William Hague (Conservative, Richmond (Yorks))

Further to that point of order, Mr. Benton. Respecting your position as Chairman of the Committee considering the Finance Bill, but noting that you represent the authority of the Speaker in the House of Commons at this moment, may I ask you to relay two questions from me, and from other Members, to the Speaker?

First, would it not accord with all precedent in the House for a Minister wishing to alter, withdraw or correct a previous substantive statement in the House to seek to do so in some way in the House? Is it not extraordinary, therefore, that the Secretary of State for Transport, Local Government and the Regions should do so in a statement made solely to the press, and then slink from the Chamber this afternoon while Members were pressing him to come here?

Secondly—

Joe Benton (Labour, Bootle)

Order. I think I have already ruled on this. I am happy to convey the right hon. Gentleman's wishes to Mr. Speaker, but I cannot do more than that, and I am sure that Mr. Speaker will have heard about this himself by now. I now propose to return to the Finance Bill. The Question is—

Andrew MacKay (Conservative, Bracknell)

Further to that point of order, Mr. Benton. It was quite correct, I am sure, for you to point out that you are chairing a Committee of the whole House. You mentioned the possibility of the Secretary of State's coming here at 10 pm. There are suggestions in the Lobby and elsewhere that there will be a statement at 10 pm, but, as you know, in Committee the debate on the Finance Bill can continue until any hour. Is there a facility that allows the Secretary of State to come here at 10 pm in those circumstances?

Joe Benton (Labour, Bootle)

I made no reference to time, or to a statement. If and when a statement is appropriate, the right hon. Gentleman will know in due course.

I do not propose to take any more points of order on this matter. I ask Members to leave the Chamber quickly and quietly.

Clause 27 — Indexed rate bands for 2002–03: PAYE deductions etc

Howard Flight (Conservative, Arundel and South Downs)

Clause 27 postpones the normal date for the implementation through PAYE of revised indexation of personal reliefs—17 May—to 17 June.

First, I want to know the reason for the delay. We realise that the Finance Bill was presented rather later this year, but the basic indexation data must surely have been available to the Inland Revenue in the expectation of its normal implementation. Secondly, I want to be absolutely sure that the month's delay will sort itself out over the year, and that citizens can expect the normal 12 months in relation to the new indexation. I assume that that is the case, but clause 27 does not make it entirely clear.

Dawn Primarolo (Labour, Bristol South)

The period for notification following the announcements in the Budget, and hence the necessary delay, are to allow all the tables and other material to be printed and collated, and properly checked, and to enable instructions to be issued to the 1.3 million employers involved. That is obviously necessary.

There is also provision for a CD-ROM version of the guidance and the tax tables, in accordance with the Carter recommendations. Employers will be given a pack, which we hope will encourage them to let computers do more of the work for them, that work being the administration of PAYE.

The delay, then, is simply a consequence of the later Budget. It is also intended to ensure that information given to employers is accurate, is in a form usable by them, and gives them enough time to forward the instructions. That will be the only consequence of the change.

Question put and agreed to.

Clause 27 ordered to stand part of the Bill.

Clause 28 — Personal allowance for 2003–04 for those aged under 65

Howard Flight (Conservative, Arundel and South Downs)

Clause 28 effectively abandons the 1977 Rooker-Wise amendment in relation to the indexation of personal allowances for 2003-04.

The freeze in both the national insurance primary threshold and personal allowances will raise £700 million in 2003–04 and £850 million in 2004–05. May I ask the Paymaster General whether there is any proposal to freeze the amounts for 2004–05 as well? That would raise an extra £1.6 billion in that year.

Our objections are based partly on principle, and partly on the fact that approximately 1 million more people—960,000, I think—will be paying top-rate tax. That is an increase of some 50 per cent., which will hit policemen, nurses and teachers particularly hard and, inevitably, is likely to drive up pay demands in the public sector. Moreover, although the official figures show an increase in the tax take between 1996–97 and 2006–07 of 35.3 to 38.3 per cent., there will be an increase of 5 per cent. if we take into consideration the accounting changes made since 1995.

I think we have made it abundantly clear that, while we accept the need for additional spending on health care, we oppose the raising of tax without a package of reforms that will deliver improved health care and ensure that the extra money is used effectively rather than simply resulting in extra costs. Only about 60 per cent. of the money raised through tax increases will be spent on health; 40 per cent. will go on tax credits, if we allow for the accounting fiddles in that regard.

Tom Harris (Labour, Glasgow Cathcart)

The hon. Gentleman says he opposes tax increases specifically to fund the health service unless reforms are made, yet his party and its Front Benchers have refused to specify the reforms that they want. Is it not the case that they are simply opposed to extra investment in the NHS, full stop?

Howard Flight (Conservative, Arundel and South Downs)

No, that is not the case. In all sincerity, hon. Members other than me have made the point many times. It involves an issue of principle. While we have a Soviet-style system of delivering health care, while hospitals do not have adequate independence to run their affairs properly and while only some 17 per cent. of expenditure is getting to the front line and there are more administrators than hospital beds—the statistics show clearly that that is the case in Scotland and Wales—merely increasing expenditure will not result in improved delivery.

Mark Hendrick (Labour/Co-operative, Preston)

Will the hon. Gentleman give way?

Howard Flight (Conservative, Arundel and South Downs)

Not for a second.

Our proposition is extremely simple: until we have in place a programme of adequate reforms that will do its best to ensure that extra expenditure delivers better health care, expenditure will risk being wasted. We have made the position clear many times—in essence, it is the reason why we are opposed to this little stealth tax of freezing personal allowances. Furthermore, the particular group that the measure hits is one that the Government are ill-advised to hit and, as I implied, the additional revenue that will be raised is likely fairly substantially to be swallowed up by additional pay demands.

Lynne Jones (Labour, Birmingham, Selly Oak)

Although I am certainly in favour of the Government increasing taxation so that they can invest more in the health service, I am very unhappy with the clause, which freezes the personal allowance.

I believe that far too many poor people are paying tax. Rather than freezing the personal allowance, the Government should be increasing it in order to take people out of tax. Some 69 per cent. of people on a third of median male earnings are paying tax. That is nonsensical; many people are paying tax and then having to rely not on tax credits, but on existing means-tested benefits.

That arrangement is unnecessarily complex. We need reform of the tax system substantially to raise the personal allowance and to reform tax rates so that they are simple. We need to raise the threshold at which middle income earners pay the higher rate of tax. We also probably need a rate of about 30 per cent. in the middle to compensate for the reduced tax that would result from a substantially higher tax allowance. I also believe that there should be a higher rate of tax than the current 40 per cent. and that such taxation should strike high earners, not moderate ones.

Such reforms are not on offer, but in the meantime, I will not support the clause or the abolition of the changes that took effect following the introduction of the Rooker-Wise amendment.

Michael Jack (Conservative, Fylde)

I am pleased to have the opportunity to speak in this interesting debate.

The hon. Member for Birmingham, Selly Oak (Lynne Jones), who I know takes a particular interest in tax matters, made a point that is central to this debate: in justifying the proposal, the Government have not declared any strategy about the number of people who should pay tax. Effectively, the measure has an impact on those who will remain at the basic rate or the 10p starting rate—points that I shall develop in a moment.

As the Paymaster General will recall, on page 75 of the Red Book, at paragraph 4.56, the Government have included a passage entitled "Making work pay for all":

"The Government has introduced a series of reforms to help make work pay at all levels of the labour market, but especially for those on low incomes."

In justifying that position, the Government pray in aid their 22p basic rate of income tax. I was delighted to read that that is the lowest rate for 70 years and to see that the Government are moving towards a basic rate of 20p in the pound, which was a Conservative policy. The paragraph also comments on the 10p starting rate.

If the Government are so proud—at paragraph 4.56 of the Red Book—of saying that they want to make work pay for all, why did they choose the method set out in the clause to raise revenue? People whose personal allowance is part of a gate-keeping exercise as to whether work pays will find that work pays less than it would have done if the allowances had been indexed. The policy seems to fly in the face of the Government's chosen course of action of making work pay.

As the hon. Member for Birmingham, Selly Oak indicated in her very perceptive remarks, the clause is about the number of people who are brought into the tax system and have to pay tax. I am intrigued to know why, even though only a small amount may be involved, the Government seem to have no regard to the fact that they are bringing into tax a few more people than would otherwise have been included.

While I considered the implications of the measure, I discovered one or two interesting things on which the Paymaster General might like to comment. Looking back to 1991–92, we find that the number of basic rate taxpayers as a proportion of the labour force was 91 per cent. By 1996–97, that level had fallen to 61 per cent., but under the current Government, it has risen to 74 per cent. We are finding that more basic rate taxpayers are in the tax system than were under the previous Conservative Government. If the number of basic rate taxpayers as a percentage of the labour force is rising, one way of avoiding that process would have been to index the allowances and seek other ways of raising the revenue.

Mark Hendrick (Labour/Co-operative, Preston)

Are not more people working now than ever before? As there are so few unemployed people now by comparison with 1990 and 1991, is it not probably a desirable consequence that more people are paying tax?

Michael Jack (Conservative, Fylde)

If the hon. Gentleman had listened, he would have heard me use a proportionate measure rather than an absolute one. If I had used an absolute measure, his line of argument would have been entirely correct, but I was aware that if I were to fall into that trap, an argument would be advanced to destroy the point that I am making. With respect to his analysis, he is wrong. I welcome the fact that there are more people in the labour force, which always has a beneficial effect on the tax take, but that is why I used a proportionate measure.

It is interesting to consider the number of basic rate taxpayers as a percentage of all taxpayers. That proportion was 94 per cent. in 1991 and 63 per cent. in 1996, and it went back up to 76 per cent. in 2001–02. The Government seem to have ignored that rise in the number of basic rate taxpayers, for whom the indexation of allowances at the margin is very important. They must do rather better than simply announcing the stark fact that the measure will happen, which is what the Red Book says; it effectively states merely that personal allowance rates will remain the same. No doubt the Paymaster General will try to justify the measure on the basis that it will raise an extra £700 million in 2003–04 and an extra £850 million in 2004–05, to help the Government's efforts to raise revenue for the health service.

There are, however, other ways in which the Paymaster General could raise substantially more, especially in relation to her responsibility for the indirect tax system. She could do so if she got to grips with the billions of pounds that seem to be disappearing out of the VAT system, as witness the recent report by the National Audit Office. The Government will no doubt respond that they have invested more resources at our ports to deal with smuggling, and that the Bill contains measures to tighten up on VAT, just as previous Finance Bills have done. But even with all that tightening up, it is calculated that over £7 billion is going missing. The question I would like to know the answer to is: what will the investment return be if the Government put in yet more resources? If they will get £7 billion, they can afford to spend £1 billion or £2 billion.

When we were in power, we were challenged about our spend to save initiative, but the principle remains. As the Paymaster General will know, over the years the application of more qualified senior inspectors at the Inland Revenue to some of the more difficult and complex areas of tax, particularly those involving large companies, has yielded considerable amounts of extra tax—well within the scope of this measure. If the Government are going to break faith with the low paid by not indexing their allowances, they have to explain to them why a relatively modest investment in extra facilities to bring in indirect taxes could not surpass by a large measure the amount of money that this proposal seeks to save. If the Government wish to remain true to their cause of making work pay, they have to do quite a lot of explaining of why they are asking the Committee to agree with a proposal that goes fundamentally against that chosen course of action.

Chris Grayling (Conservative, Epsom and Ewell)

The measure completely confuses me. I cannot for the life of me understand why a Labour Government are pursuing a policy that will clearly damage people on low incomes.

Let me tell the Paymaster General a story about a lady who came to my constituency surgery a couple of weeks ago. She was very confused about her tax affairs. She said, "I do not understand. I seem to be paying tax and I do not have much of a pension. I received bereavement allowance, which I have now lost, and I am paying £200 a year in tax. I have a low income, and £200 a year is lot of money to me."

We looked through that lady's papers. I am not a qualified tax expert but at first glance it looked as if her tax affairs were correct. Her income was just high enough to pay £200 year in taxation. However, I appreciated why she felt frustrated trying to make do on a low income in an environment where many other costs, such as council tax, are rising sharply. Gas prices have recently jumped upwards. I could understand why she felt under pressure financially.

Why on earth, then, have the Government introduced a measure that will put that lady's tax bill up? Freezing the personal allowance will mean that she will pay tax this year or next year that she would not otherwise have to pay.

Roger Casale (Labour, Wimbledon)

I wonder whether the hon. Gentleman has left out part of the story. Perhaps he would tell the Committee whether, when the pensioner came to see him, he informed her about the pension tax credit, which raises the income of people on modest incomes. I hope that he took the opportunity to point out that valuable benefit to her.

Chris Grayling (Conservative, Epsom and Ewell)

That may well be so. Indeed, for that lady's sake, I hope that she does manage to get back some of the money that she is paying in extra taxes; but she will have to get to grips with an extremely complex application process of forms and difficult bureaucracy in order to get back some of the money that the Government are taking away.

Dawn Primarolo (Labour, Bristol South)

rose—

Chris Grayling (Conservative, Epsom and Ewell)

Perhaps the Paymaster General can tell me the logic of taking money away and giving it back again.

Dawn Primarolo (Labour, Bristol South)

To help the hon. Gentleman out, we are discussing clause 28, which freezes the allowances. Clause 29 increases the personal allowances for pensioners. Pensioners are not included in clause 28.

Chris Grayling (Conservative, Epsom and Ewell)

Perhaps the Paymaster General can clarify the matter. My understanding is that the significantly increased amount is for those aged 75 and over. However, even if she is correct, let us look at the gamut of people on low incomes: a student nurse starting her first job, someone earning £4 or £5 an hour in McDonald's, a new graduate in their first job earning a relatively low salary, or someone who has left school and is following an apprenticeship. Freezing the personal allowance this year will increase the tax burden on those people, which should never happen. It is a tax on the low paid and on low incomes. As my right hon. Friend the Member for Fylde (Mr. Jack) has said, it will do nothing to help to get people into work; it will create a disincentive to work. It will create a burden on those who can least afford it.

Mark Hendrick (Labour/Co-operative, Preston)

On the concern about the low paid, why did the hon. Gentleman's party oppose the minimum wage and say that it would cost 1 million jobs, when in fact we have created 1 million jobs?

Chris Grayling (Conservative, Epsom and Ewell)

I remind the hon. Gentleman that during the years we were in government, year by year, Conservative Chancellors made a virtue of increasing the personal allowance, often above the level of indexation that was required, and of taking people out of taxation. As my right hon. Friend the Member for Fylde has pointed out, that tide is being reversed. More and more people are being caught by basic rate tax than were before.

Michael Jack (Conservative, Fylde)

Does my hon. Friend accept that, with their work in the field of family credit, the previous Conservative Government showed their regard for those who were in work but on low wages, and it is a tribute to that that the credit has now formed the basis of the various working families and successor tax credits that the Government have adopted?

Chris Grayling (Conservative, Epsom and Ewell)

I thank my right hon. Friend for those comments. He highlights a fair example of good Conservative practice being adopted by a Labour Government, but none of that explains why this Government have chosen to target a tax change on the lowest earners in society—on people with genuinely low incomes who have difficulty making ends meet. It makes no sense.

Howard Flight (Conservative, Arundel and South Downs)

May I make the point that a father on pay of about £13,000 will pay some £2,500 in tax and get back some £2,700 in child tax credit? What on earth is the point of that?

Chris Grayling (Conservative, Epsom and Ewell)

My hon. Friend raises an important point. Too much of what the Budget does involves taking with one hand, giving back with another and creating bureaucracy in the middle, which must ultimately cost money and reduce the amount available for spending on other services, or increase the amount that people have to contribute in taxation.

This measure represents an unwelcome extra burden on the low paid. It is a second tax burden on public servants and other people who are not in particularly highly paid jobs and who will pay extra as a result of the national insurance increases. As a result of the Budget, a student teacher on £14,000 or £15,000 a year, a student nurse on the same salary, a new policeman and a new doctor will face an additional tax burden of many hundreds of pounds a year. This measure will simply increase the burden on them. It will erode a part of our tax system, the indexation process, that has been there for a generation.

Michael Jack (Conservative, Fylde)

Does my hon. Friend find it odd that the present hon. Member for Preston (Mr. Hendrick) is opposing the actions of the previous hon. Member for Preston, the co-proposer of the Rooker-Wise amendment?

Chris Grayling (Conservative, Epsom and Ewell)

I thank my right hon. Friend for that interesting piece of history. It is certainly food for thought for the hon. Gentleman.

I commend the honesty and commitment of the hon. Member for Birmingham, Selly Oak (Lynne Jones), who has rightly pointed out that this is an attack on people who should not be placed in that position. Her concerns are shared by Conservative Members. On this issue, I will certainly join her in the Lobby.

Tom Harris (Labour, Glasgow Cathcart)

I did not intend to take part so early in the debate, but there is nothing like Conservative crocodile tears to stir me to righteous indignation. The hon. Member for Epsom and Ewell (Chris Grayling) said that the clause represents a break with the low paid. I have no idea whether he was on the Government Benches before 1997, but it does not sit well with any Conservative Member to uphold the rights of the low paid, when the Conservative party not only opposed the national minimum wage but opposed the 10p starting rate that this Government introduced in 1997. I believe that it still opposes the working families tax credit, which is aimed specifically at some of the poorest in our society. It opposed the minimum income guarantee for pensioners, and it will doubtless oppose the pension credit.

Michael Jack (Conservative, Fylde)

I wonder whether the hon. Gentleman might help me to understand the logic of his argument. Why does he prefer to help the low paid through the 10p starting rate, rather than using such resources to increase personal allowances? Under the latter method, such people would not have to pay tax at all.

Tom Harris (Labour, Glasgow Cathcart)

I am happy to discuss that later.

David Laws (Liberal Democrat, Yeovil)

Will the hon. Gentleman give way?

Tom Harris (Labour, Glasgow Cathcart)

If the hon. Gentleman does not mind, I shall continue for a while.

In a perfect world, we could raise thresholds yearly by inflation plus 10 per cent., but the fact that underpins this Budget is that the national health service was consistently underfunded for 18 years by the Conservative Government. We have taken a principled decision to raise tax in order to put into the NHS the extra money that is needed. Had the previous Conservative Government decided to freeze the thresholds, the consequences would have been far more serious. In an economy with inflation running at 10 or 15 per cent., such action would have constituted a far greater setback to the lowest paid, and to everybody else. Not only did the previous Conservative Government oppose the national minimum wage; they abolished wages councils as well.

The hon. Member for Epsom and Ewell spoke touchingly and with tears in his eyes about nurses being devastated by the freezing of allowances. He also said that, under the clause, any hope of a career for school leavers will disappear over the horizon. However, it is precisely nurses who will benefit from the Budget's general package. Thanks to this Government's handling of the economy, school leavers have been given hope of finding a job. They can find a job even in the health service.

Chris Grayling (Conservative, Epsom and Ewell)

The hon. Gentleman may not be aware of the practical consequences of tax increases for public servants in my area. It is proving increasingly difficult to recruit new teachers and health service workers, and one disincentive is the cost of living in the south-east. The more cost burdens that are added—be they increased council tax, higher national insurance contributions or adverse changes to personal allowances—the less incentive such people have to remain in public services. That is the real consequence of higher taxes.

Tom Harris (Labour, Glasgow Cathcart)

I agree with what the hon. Gentleman says about living in the south-east, but I should point out that it is far cheaper to live there today than it was 10 years ago, simply because interest rates are a third of what they were under the previous Conservative Government. The morale of health service workers is better today than it was at any point under the Conservatives, and it is likely to improve greatly in the next 10 years, as investment in the NHS comes through.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

The hon. Gentleman is making a brave attempt at defending the indefensible, but will he address the central point that was made by the hon. Member for Birmingham, Selly Oak (Lynne Jones)? Freezing the allowance is an extremely regressive form of taxation that will disproportionately hit the poorest paid in our society.

Tom Harris (Labour, Glasgow Cathcart)

I disagree. I have already mentioned several Government initiatives that will ensure that the lowest paid in our society have the best protection, even under the new regime that the clause will introduce.

In accusing the Government of attacking the lowest paid, the hon. Member for Epsom and Ewell mentioned one of his constituents. I should tell him that, before the national minimum wage was introduced, some people were being paid £1.40 an hour. To such people, it makes no difference whether thresholds have been frozen since time immemorial. They were being paid so little that work could not possibly pay. Thanks to the measures introduced by this Government, the lowest paid will continue to reap the benefits of a redistributive Budget, which are far more significant than anything that the Conservative party could have offered when in government.

Mark Hoban (Conservative, Fareham)

Is the hon. Gentleman aware of the view of Andrew Dilnot, director of the Institute for Fiscal Studies, that the most effective way to relieve poverty is to lift people out of the tax bracket by increasing personal allowances, rather than mucking about by introducing measures such as a 10p rate?

Tom Harris (Labour, Glasgow Cathcart)

The short answer is no, but the longer answer is that the IFS has also said that, even according to the lowest estimate, through positive economic and financial policy this Government have taken more children out of poverty than have any other Government.

Howard Flight (Conservative, Arundel and South Downs)

Why does the hon. Gentleman describe the Budget as redistributive, given that the Prime Minister said on "Breakfast With Frost" that it is not?

Tom Harris (Labour, Glasgow Cathcart)

The hon. Gentleman may be surprised to learn that I am not a spokesman for the Prime Minister. I am not an economist, but I can call a spade a spade, and I can tell that this Budget, like all its predecessors since 1997, is redistributive. That is why I support it, and why I will vote for the clause.

Mark Hendrick (Labour/Co-operative, Preston)

Does my hon. Friend agree that, in opposing the Government's proposed increases, and by talking about a Soviet-style system, the Opposition give the game away? They do not believe in state support for the health service, and the real reform agenda that they do not mention is a privatisation programme that dare not speak its name.

Tom Harris (Labour, Glasgow Cathcart)

The Conservatives cannot challenge my hon. Friend's comments, because they have refused to explain their plans for the NHS. That makes me extremely suspicious—

Joe Benton (Labour, Bootle)

Order. I ask the hon. Gentleman to come back to the clause.

Tom Harris (Labour, Glasgow Cathcart)

Thank you, Mr. Benton.

The clause is necessary. It will not harm the lowest paid in our society, and certainly not as much as it could have under previous policies. I am delighted to commend it to the Committee, and I shall cut my losses there.

Mark Hoban (Conservative, Fareham)

It is a pleasure to follow the hon. Member for Glasgow, Cathcart (Mr. Harris). It enables me to address some of his comments about how the money will be spent—an issue to which I shall return in a moment.

It is right to note that the number of higher rate taxpayers has increased by 50 per cent. since this Government took office, and like my hon. Friend the Member for Epsom and Ewell (Chris Grayling) I have spoken to constituents who are concerned about that. One constituent who wrote to me recently was horrified to discover that her husband had just breached the 40 per cent. threshold. She felt that his was not the sort of job that one would expect to incur tax at a 40 per cent. rate. Her point was that incomes that are low in the context of the area that I represent are getting caught in the 40 per cent. tax bracket. Of course, the freezing of personal allowances next year will exacerbate the problem. People who get reasonably small pay increases may well cross from the basic rate tax bracket to the higher one, and from the 10p starting rate to the higher rate.

The drift of people towards higher tax rates is a consequence of the freezing of the personal allowance—a point that all hon. Members should take on board. It impacts on incentives to work. It impacts on whether people can leave low-paid jobs to improve themselves and meet their aspirations for themselves and their families.

We need to be careful when we explain to those constituents who will slip into the higher rate tax bans exactly why personal allowances will be frozen in 2003–04. The hon. Member for Glasgow, Cathcart said that the money will go to save the NHS. I remember that in last week's debate on the national insurance paving motion he said that the money would be allocated to saving the NHS. If he had read the Red Book, he might have discovered that in fact the surplus on the Budget will increase over the 2003–04 financial year, as a consequence of the actions taken by the Government in the Budget. That is shown in table 2.4 and I am glad to see that the hon. Gentleman has his copy in front of him.

Table 2.4 states that the surplus on the previous Budget was £4 billion. In the current Budget, that surplus will increase to £7 billion—an increase of £3 billion. The cost to taxpayers of the freezing of personal allowances in 2003–04 will be £0.7 billion, so we will penalise the low paid and all those who will slip into a higher rate tax bracket simply to expand the Government's surplus. The money will be spent not on saving the NHS but on increasing the surplus that will be available for the Chancellor to release in later years. There is no apparent reason why personal allowances should be frozen for that financial year and it is difficult, therefore, for the hon. Gentleman to claim that it is being done to save the NHS. That argument is not reasonable.

The Chancellor will hit the very people—the low paid—he has set out to help in so many of his Budgets, simply to increase the surplus. If personal allowances are frozen, lower paid people who receive pay increases may start to pay the starting rate of tax or the basic rate of tax. It is a retrograde step. No party has a monopoly on compassion and Labour Members should consider the impact of an unnecessary tax increase of £0.7 billion on the very people they seek to help.

Roger Casale (Labour, Wimbledon)

The hon. Gentleman said that he was trying to explain the measure to one of his constituents, but he should explain to the Committee how he can speak on behalf of low paid people who will, he says, be adversely affected, and at the same time speak for a party that did nothing in government to help poor and vulnerable people. In fact, the Conservatives pushed millions of people and families into poverty. In opposition, his party has opposed every measure that the Government have taken to redress that wrong.

Mark Hoban (Conservative, Fareham)

I am staggered, because to my recollection the Conservatives did not oppose measures such as the Tax Credits Bill. In government, we took steps—as my right hon. Friend the Member for Fylde (Mr. Jack) outlined earlier—to alleviate poverty. We are now considering the record of this Government and the impact that this measure will have on the lower paid.

The freezing of tax allowances will also have an impact on the people whom the Budget did not help. Many childless couples and single people will have lost out through the 1 per cent. increase in NI contributions, and many of them are on relatively low incomes. The uprating of the personal allowances would have mitigated some of the impact of that tax increase. Those people will not benefit from the tax credits that the Government have introduced and they will be hit twice—by the increase in NI contributions and by the freezing of personal allowances. The Government are making a double dip into the pockets of childless couples and single people. Given that this tax increase is not necessary to fund public spending increases in 2003–04 and in subsequent years, the Government should take this opportunity to protect the interests of those who will suffer from this measure. The Government should recognise that there is more than one way to help those who are most in need.

David Laws (Liberal Democrat, Yeovil)

I considered not taking part in the debate, but so enlivening has it been that I cannot resist the opportunity. We have heard several contrasting contributions from Conservative Members. We started with the hon. Member for Epsom and Ewell (Chris Grayling), who expressed his concern about the effect of the change on people on very low pay, and then we ended with the hon. Member for Fareham (Mr. Hoban), who expressed his concerns about higher rate taxpayers.

Mark Hoban (Conservative, Fareham)

I wish to correct the impression that the hon. Gentleman is giving to the Committee and to casual readers of the daily—

Roger Casale (Labour, Wimbledon)

The Daily Mail.

Mark Hoban (Conservative, Fareham)

No, but I nearly said the Daily Record, which is a completely different newspaper. I meant to say the daily Hansard report. I did not speak only about higher rate taxpayers. In fact, I devoted much of my remarks to the impact on lower rate taxpayers.

David Laws (Liberal Democrat, Yeovil)

Those who read the hon. Gentleman's comments in Hansard tomorrow will see the slightly different emphasis that he placed on the matter compared with the hon. Member for Epsom and Ewell. We do not need to look to the future to judge the Conservatives' priorities, because we have their record in government over a long time when they placed the reduction of the basic rate of income tax and, to some extent—they will be pleased to hear me say this—the upper rate of income tax as a priority over raising the personal income tax threshold or introducing a lower rate of tax such as the 10p rate. That is on the record in their Budgets and in the memoirs of Lord Lawson, who specifically deals with that issue and states his preference for reducing the basic rate of tax—a less progressive measure—as opposed to increasing the personal tax allowance.

Howard Flight (Conservative, Arundel and South Downs)

Is it a good thing that another 1 million people, or 50 per cent. more, have been brought into the higher tax band? That band will now include people such as teachers and doctors.

David Laws (Liberal Democrat, Yeovil)

I am delighted that the hon. Gentleman has raised that point, because he will know that raising the personal tax allowance, as opposed to cutting the basic rate of tax or introducing a 10p tax rate, has been the policy of my party. I sought to contrast the present views of the Conservatives on freezing the tax threshold with the views that they held in office. Perhaps the hon. Gentleman will tell us—if the Conservatives have a tax strategy at the moment—whether they would still focus on reducing the basic rate of tax or on the more progressive measure of increasing the personal tax allowance.

Chris Grayling (Conservative, Epsom and Ewell)

The hon. Gentleman is devoting most of his remarks to the history of the Conservative party in government. I remind him that the Conservatives maintained indexation and, indeed, on several occasions increased the thresholds by more than the rate of inflation. Today we are talking about a Labour Government who have abandoned indexation and I suggest that he devotes his remarks to that topic.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the hon. Gentleman, but I did not want to mention the occasions when the Conservative Government froze the level of the personal income tax allowance—something that he has criticised this evening. I do not want to be drawn even further into the quandary that is Conservative policy on taxation and the health service, so—lest hon. Members feel that I am not being equitable in my criticisms—I shall move on to discuss the Government's position with regard to the personal income tax allowance.

The Government should take no pride at all from freezing the personal income tax allowance. As has been stated, that is a less progressive reform of the tax system than the 10p rate that the Government introduced. The hon. Member for Glasgow, Cathcart (Mr. Harris) said earlier that many people are on such low incomes that they do not pay a significant amount of income tax and that therefore they have been influenced more by the minimum wage and tax credits. That is true, but the Government's reforms of the personal tax system—in the past few years they have reduced the basic rate and introduced a 10p rate—contrast with the proposal to freeze the personal allowance, which is clearly regressive rather than progressive.

Why has the change been introduced in this Budget? It has not been introduced primarily to bolster the Government's surpluses, as the Government are projecting significant borrowing on their Budget accounts, on the old Conservative basis. I believe that the Government chose to freeze personal income tax allowances because they had made a commitment in two general election campaigns not to change the basic rate of tax. As a consequence, they had to find other ways to increase the tax burden.

As I have said, the freeze on personal income tax allowance is regressive, and the rise in employers' national insurance contributions will hit jobs. The changes are also unfair, as the Government have also increased employee national insurance contributions. That is a tax on jobs from which many wealthy people are exempt as, although they could afford to pay more tax, they may not be in work.

For all those reasons, my party opposes freezing the personal tax allowance.

Mark Field (Conservative, Cities of London and Westminster)

Mr. Gale, you have missed an enthralling debate on this matter over the past three quarters of an hour. However, I shall not detain the Committee for long.

Most of the important points on this matter have been made by those of my hon. Friends who have contributed to the debate. The hon. Member for Birmingham, Selly Oak (Lynne Jones) also made a helpful contribution. The hon. Member for Glasgow, Cathcart (Mr. Harris) is not present at the moment, but his contribution was also helpful, albeit rather more inadvertently.

Many people are worried that the proposal is too complicated. As has been noted by hon. Members of all parties, some people earning relatively small sums of money will find that they have to pay extra tax. I accept the point made by the hon. Member for Preston (Mr. Hendrick) that the tax credits scheme comes into play in this regard. People earning modest sums—say between £12,000 and £14,000 a year—will end up paying a large proportion—£2,000 or more—in tax, but they will get more than that amount in tax credits.

It is nonsensical to have so complicated a system. We need to be more honest in our approach to taxation, and the Chancellor's plans for tax credits are based on the fact that they do not count as public expenditure because of how they are implemented. That also muddies the waters of public spending.

I agree too with the hon. Member for Yeovil (Mr. Laws), who said that the complication introduced into the system over the past two or three Budgets results from the Government's pledge not to increase the headline rates of income tax at the basic and higher rates. However, although the strict letter of that pledge has been kept, one consequence of not increasing the allowances even to take account of inflation—they are not going to be indexed in any way—is that, in effect, tax rates will be increased.

As my hon. Friend the Member for Arundel and South Downs (Mr. Flight) pointed out, one effect of the Government's tax policy over the past five years is that the number of people paying the highest rate of 40 per cent. has risen from about 2 million to about 3 million. To that extent, the spirit of the 1997 pledge not to increase taxes has been broken, if not the letter.

Mark Hoban (Conservative, Fareham)

My hon. Friend represents a London constituency. As salaries rise to keep pace with living costs, will not more and more people in London fall into the 40 per cent. band?

Mark Field (Conservative, Cities of London and Westminster)

My hon. Friend is right. I do not want to indulge in special pleading, but that is a problem facing all hon. Members with London constituencies. The electorate of the hon. Member for Wimbledon (Roger Casale) is probably even more middle class than mine in Cities of London and Westminster. Hon. Members with seats in London and the south-east increasingly find that people in those constituencies on incomes that are comparatively modest find themselves in the upper tax rate band.

That is a real problem. My hon. Friend the Member for Epsom and Ewell (Chris Grayling) spoke earlier about how it affects people working in the public services. Nowadays, it is very difficult to attract people into the public services—or even into relatively low-paid jobs in private hospitals or private schools, or in shops—without paying some sort of London weighting. That could be the public sector London weighting, or a private sector weighting. All too often, people facing the very high costs of housing and of living in London and the south-east find themselves heading inadvertently for the upper tax rate.

I am sorry that the hon. Member for Glasgow, Cathcart is not present, as I thought that his comments about the NHS—about which he talked at great length—were a little rich. To a large extent, health matters as they affect his constituents are out of his hands, given the role of the Scottish Parliament. The pro rata tax expenditure on health in Scotland and Wales is much greater than it is in England, and it is ironic that there should be so little satisfaction about that. This is supposed to be a Budget for the NHS, but the Government must give close consideration to the question of how effectively the money may be spent.

Mark Hoban (Conservative, Fareham)

I should hate my hon. Friend to sit down without saying more about tax credits and low pay. Every low-paid person will be affected by the tax increases that will flow from the freezing of personal allowances. However, does my hon. Friend agree that an unusual aspect of the proposal is that not everyone will benefit from the system of tax credits? The take-up rate for tax credits is something like two thirds of all those who are eligible. Many people will therefore lose out as a result of the provisions in the Bill. Does my hon. Friend agree that they will not catch up through the tax credit system, as it is quite complicated?

Mark Field (Conservative, Cities of London and Westminster)

My hon. Friend makes an interesting point, and I shall be interested in what the Minister has to say in response. My hon. Friend is a former chartered accountant, and therefore a greater expert than I on these matters. I am afraid that I am one of those hon. Members who used to belong to the legal fraternity, but my hon. Friend can crunch the figures.

Paul Boateng (Labour, Brent South)

The hon. Gentleman does not have to apologise.

Mark Field (Conservative, Cities of London and Westminster)

The Financial Secretary is another former member of the legal profession. I served only as a solicitor, but I understand that the right hon. Gentleman was a barrister.

Mark Hoban (Conservative, Fareham)

He was a distinguished barrister.

Mark Field (Conservative, Cities of London and Westminster)

He was a distinguished barrister, so perhaps I should refer to the Financial Secretary as the right hon. and learned Member for Brent, South—but perhaps not.

Roger Casale (Labour, Wimbledon)

I am grateful that the hon. Member for Cities of London and Westminster (Mr. Field) has not tried to build his remarks on the crocodile tears of a Conservative defence of the low paid. The hon. Gentleman is basing his argument on the complexity of the tax system, and he has raised some interesting points. He is opposed to freezing the thresholds, but what would he propose instead? If he were to develop his argument further, I am sure that we would find him proposing something even more complex than what is contained in the Bill.

Mark Field (Conservative, Cities of London and Westminster)

That is a fair comment, and I thank the hon. Gentleman for complimenting me on touching on the question of complexity. I feel strongly that there should be indexation. The system has become increasingly complicated but, as my hon. Friend the Member for Fareham (Mr. Hoban) pointed out, roughly one third of those who qualify for tax credits do not claim them. There is a real risk that a significant number of people who pay tax by PAYE—they often do not realise just how much they are paying, as the money is taken straight out of their pay packets—will not claim the tax credits for which they qualify. I hope that the Minister will say something about that.

One thing that the Government can do is increase advertising to ensure that people are aware of the benefits to which they are entitled. Many elderly people, in particular, are unaware of the credits as they may not have been part of the work force for some time. None the less, this seems to be an idiotic system. If we had a blank sheet of paper before us, we surely would not design an income tax system in which millions of people on low incomes pay tax and can then claim even more than that in various credits.

Dawn Primarolo (Labour, Bristol South)

I have been a little startled at some of the assertions made by Conservative Members, but it has nevertheless been extremely refreshing to hear how deeply concerned some of them are about the plight of those on low incomes, families trapped in poverty and the crucial issue of ensuring that people are aware of their entitlements and rights. However, I was particularly startled by the speech of the hon. Member for Cities of London and Westminster (Mr. Field) when I recall that social security legislation under the Conservative party, when in government, meant that there was no obligation on the Department of Social Security to notify people of their rights. Instead, they had to guess them. Therefore, it will be of enormous benefit if all Members of all the political parties in the House can agree that eradicating child poverty from our society is a principle to which every Member is committed, even if we disagree on the methods of doing so.

Whenever I have challenged Conservative Members, outside the Chamber, to make such a commitment, they have declined to do so.

Mark Field (Conservative, Cities of London and Westminster)

Will the Minister give way?

Dawn Primarolo (Labour, Bristol South)

I am more than happy to give way if the hon. Gentleman will put on record his pledge to see the scourge of child poverty eradicated from our society, even though his party doubled the number of children living in poverty.

Mark Field (Conservative, Cities of London and Westminster)

Everyone on both sides of the Committee is in favour of eradicating child poverty, but one difficulty with child poverty is definitional. In the past—certainly prior to 1 May 1997—I recall that Labour Members were keen to ensure that statistics were bandied around when child poverty was seen as a relative value. Obviously, with many families becoming more affluent, relative values are almost meaningless. If there is an absolute rather than a relative value, I will be only too happy to join the Minister in her crusade to end child poverty.

Dawn Primarolo (Labour, Bristol South)

I will not go down that road, Mr. Gale, because I am sure that you would rule me out of order, except to say that what the hon. Gentleman says is a load of rubbish. He does not want to acknowledge the rising level of incomes in our society and the fairer distribution and share of the growing wealth that has taken place since the Government were first elected.

I have no problem in discussing elsewhere with the hon. Gentleman definitions of poverty. When parents cannot afford to buy their children a new pair of shoes because they do not have enough money, that is a pretty good indication. However, I welcome the hon. Gentleman's unequivocal pledge that he is prepared to join a campaign to eradicate child poverty, and I hope that his colleagues will join him.

Michael Jack (Conservative, Fylde)

Will the Minister give way?

Dawn Primarolo (Labour, Bristol South)

I hope that the right hon. Member for Fylde (Mr. Jack) is about to make the same commitment.

Michael Jack (Conservative, Fylde)

I wanted to pick the hon. Lady up on her point about the distributional effects of the Government's tax policies. As an exercise in the clarity and transparency of the Government's policies and to enable us to understand some of the things to which she has referred, will she commit to answering again the question first tabled in 1981 by the then hon. Member for Blackburn (Mr. Straw), now Secretary of State for Foreign and Commonwealth Affairs, on tax—direct and indirect—so that we might gauge the effect of the measures through the deciles of income that used to be at the centre of that question, or will she explain once and for all why she will not answer it?

Dawn Primarolo (Labour, Bristol South)

As the right hon. Gentleman knows, because this has been debated in the House many times, the distribution of indirect tax is imprecise and difficult to measure. Are we to assume that every household smokes or consumes a certain amount of beer, whether from a small brewery or not?

David Laws (Liberal Democrat, Yeovil)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I will be happy to give way to the hon. Gentleman, but I should like to finish one point before giving way on the next.

In advancing the 10p tax rate, reducing the basic rate of tax and designing our tax measures, whether they be tax credits or changes to the tax system, to ensure that maximum benefit goes to those on the lowest incomes, the Government have substantially increased those incomes. When I have given way to the hon. Gentleman, I will give some examples of how significantly incomes have been increased.

David Laws (Liberal Democrat, Yeovil)

On the non-continuance of the previous series of figures on the tax burden, although I heard the Paymaster General's criticisms of the previous methodology of deriving the tax burden, does she recall using precisely the same figures, to great effect, in opposition?

Dawn Primarolo (Labour, Bristol South)

I admit that I remember being in opposition, but it has no glowing attraction. I much prefer being in government and taking decisions. I will give the hon. Gentleman some figures to consider.

A single person aged 25 or over, working 35 hours a week on the national minimum wage—which was opposed by both the Conservative and Liberal Democrat parties—will be £21.55 a week better off as a result of the working families tax credit. A single-earner family on half male mean earnings, with two children, will be £3,490 better off since 1997.

Lynne Jones (Labour, Birmingham, Selly Oak)

Will the Minister give way?

Dawn Primarolo (Labour, Bristol South)

If my hon. Friend will wait a moment, I will give way to her.

These are hardly the actions of a Government who do not care about those on low incomes. As I have said, we must contrast our record with that of the Conservative party when in government.

I know that I should return to the clause before you reprimand me, Mr. Gale. I will give way to my hon. Friend and then return directly to the clause.

Lynne Jones (Labour, Birmingham, Selly Oak)

The question is whether those who cannot afford to buy shoes for their children, to use the Minister's example, should be paying tax at all.

Dawn Primarolo (Labour, Bristol South)

If my hon. Friend will bear with me, I will come to indexation, the Rooker-Wise amendment and the true cost to families in each tax bracket.

Clause 28 freezes the personal allowances for those under 65. Along with the freeze on the national insurance threshold, that will raise £700 million for the Exchequer next year and £850 million the year after, helping to fund the increase in investment in the national health service. It spreads the burden of contributions wider than simply being placed on earners. As I have said, clause 29 will extend the age-related personal allowances for those aged 65 or over beyond indexation.

Conservative Members oppose the clause. They made great play of ignoring the Rooker-Wise principles. I took the precaution of reading the debate that took place in 1978. It is a very important debate, and I hold both hon. Members who moved the amendment, especially the late Audrey Wise, in great respect as regards their intentions in doing so. In the debate, Audrey Wise made it clear that a Government who were freezing the allowances would have to come to this House to explain why automatic indexation was not taking place. That is exactly what we are doing in relation to this year. We are not talking about indexation having gone for ever, but about what happens as result of this Budget.

As the hon. Member for Yeovil (Mr. Laws) pointed out, Conservative Members showed no hesitation and expressed no worries about the poor when they froze personal allowances in 1993–94, nor when they did it again in 1994–95. They were not freezing allowances, as are this Government, to use the money to spend on investment in public services—quite the reverse. Hon. Members may recall that I reminded the right hon. Member for Charnwood (Mr. Dorrell) that his Government's Budget in 1994 cut £10 billion from public expenditure. The Conservatives were paying the cost of economic failure. The breathtaking argument advanced by the hon. Member for Fareham (Mr. Hoban) was that we should not be raising any more tax because the economy was looking quite good—we should just borrow more if we wanted to invest. That would be a return to exactly the policies that got the last Conservative Government into such a dreadful mess.

Conservative Members said that they were concerned that the increase meant that higher rate taxpayers would pay more.

The rest of the debate is in Hansard.