Finance Bill

Public Bill Committee, 11 June 2002.

Standing Committee F

Finance Bill

Schedule 18 - Relief for community amateur sports clubs

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 69, in page 238, line 37, at end insert

'and may include a club which is incorporated'.

Joe Benton (Labour, Bootle)

With this it will be convenient to take amendment No. 70, in page 239, line 22, at end insert—

'(4) A club does not cease to be open to the whole community under (1) above if it has rules allowing it to expel members for inappropriate or disruptive behaviour.'.

Howard Flight (Conservative, Arundel and South Downs)

Good morning, Mr. Benton. I welcome you back to chairing our deliberations. I must apologise to the Committee because I must go and speak in the financial services debate at 11 o'clock. I hope that we shall have completed schedule 18 by that time, but if not my hon. Friends will take over.

I hope that there is a chance of a stand part debate, because I recollect that when we were debating clause 57 before the holiday we had discussed its principle but had not wound up the subject. Amendments Nos. 69 and 70 are specific and seek to extend eligibility for the new relief to additional types of club. We want to stress the major point that the new relief is unnecessarily complex and restrictive. It would have been better to give qualifying sports clubs the same tax relief measures as those enjoyed by charities. The Law Society says that the relief is welcome, but that it will add to, rather than replace, existing tax reliefs. The relief will therefore add to the complexity of existing reliefs, and that could have been avoided by bringing all sports clubs under a single regime, which is something that we sought to redress with new clause 3.

I shall divert to apologise for having initially omitted to welcome the hon. Member for Wentworth (John Healey) to his new post of Economic Secretary to the Treasury, and I congratulate him on that. We share views about the importance of skills training and have spoken together about that.

The Law Society also comments that it should be made clear that ''clubs'' extends to corporate bodies, provided they have complied with amateur requirements. Although the principles in paragraph 2 are laudable, the question is whether they will impose unforeseen constraints on the clubs concerned. It should be clear, for example, that a club does not cease

to be open to the whole community because it has rules allowing its members to be expelled for inappropriate or disruptive behaviour, so an addition to paragraph 2 should be made.

The reliefs for donors in paragraph 9(3) should extend to include relief for a club from stamp duty on any assets that it acquires. The provisions allowing gifts of assets to charities should also extend to sports clubs. Paragraph 14 contains the definition of an eligible sport, which will be designated by statutory instrument. It might have been easier to include a list of sports in the legislation. Given the adverse tax consequences that follow from a club ceasing either to be registered or to hold property for qualifying purposes, surely a list of eligible sports clubs could be laid out in statute to create certainty on the core list of activities that can be undertaken to give rise to the relevant tax reliefs. The two amendments are designed to address those issues.

One point has come to my attention since our previous discussions. The Treasury proposals last November contained a specific pledge to permit 80 per cent. rates relief to qualifying sports clubs. That seems to have disappeared and the promised relief is less generous than that suggested by the Government during the election campaign. I have received many complaints from sports clubs that the package is not what they had been led to believe. We believe that parity with charity is the correct approach. The costs would not be hugely material but the administration would be much easier.

John Pugh (Liberal Democrat, Southport)

During the recess, I occupied myself usefully with this amendment by consulting the local sports council in Sefton, which is, as you know, Mr. Benton, a reputable and sound body. I gave it the good news about the tax incentives and benefits, but its response was a little muted because the world of large donations and trading incomes of £15,000 plus seems a little foreign to it. Its main interest each year is to get by without being in debt and its main financial preoccupation is meeting the rates bill. The registration scheme poses a dilemma: if it follows the route of charities, mandatory rates relief will be 80 per cent., but if it goes for registration, there will be no such benefit and discretionary rates relief from the local authority could be adversely affected. There was not enormous delight because the benefits were thought to be rather modest.

One matter of concern, which is the thrust of the amendment, is that the Treasury has reserved to itself the right to define what is an eligible sport. There is an uncontentious mechanism to get around that and to get the Treasury off the hook. For all its expertise, the Treasury is not good at defining sports because it is not an area in which it has a substantial body of knowledge. I should have thought that eligible sports could be as well defined by Sport England as by anyone else and certainly better than the Treasury, unless the object of the Treasury in defining eligible sports is to control the rate of tax relief.

Will the Treasury evaluate whether the adjustment is successful in encouraging sports clubs? If there is no evaluation, there is a danger that what the measure

achieves might be cosmetic. I do not think that that is the Treasury's intention and it should explain how it will evaluate the success of the measure.

John Healey (Labour, Wentworth)

It is a privilege and a pleasure to join this Committee, albeit in slightly unusual circumstances, and my hon. Friends on the Front Bench. It is a particular pleasure to join the Committee under your chairmanship, Mr. Benton, and that of your co-Chairman, Mr. Gale. It is clear from the Official Report that your firm and fair chairmanship has helped the Committee to make good progress.

I could not help noticing in the Official Report that the first sitting was peppered with sporting metaphors from jousting to ''Just a Minute'' and from saloon car racing to stunt wrestling. My right hon. Friend the Chief Secretary to the Treasury, whose brief I have inherited but, confusingly for some, not his title--he is still a member of the Committee--was almost prescient in his reference to the World Wrestling Federation because I feel like a tag wrestler being introduced into the contest in the middle of a round. However, I shall do my best to pick up the excellent work that he has done and to play my part on the Treasury's excellent Front-Bench team.

Although we are discussing the narrow amendments Nos. 69 and 70, the hon. Members for Arundel and South Downs (Mr. Flight) and for Southport (Dr. Pugh) introduced points that range much wider. With your indulgence, Mr. Benton, I shall deal with them as well as the amendments.

I was disappointed to hear the hon. Member for Southport dismiss the clause as modest. In many ways, that talks down the value of the measures, which are widely welcomed by sporting federations and, more important, the local community sports clubs that they are designed to benefit. If the hon. Gentleman's experience in his constituency was reflected in his comments, I must tell him that it is not the universal reaction that many of my hon. Friends and I have had from sports clubs in our patch.

Both hon. Gentlemen raised the question of business rate relief. I am aware that sports clubs and some of their organisations are making a case for that, but I point out to Opposition Members that decisions on business rates are not for the Treasury but for the Department in charge of local government policy and finance. The matter cannot be dealt with in the Finance Bill. However, the measures in the Bill represent a generous package of support for local community sports clubs.

Both hon. Gentlemen also posed a question about the Treasury definition of sports.

Howard Flight (Conservative, Arundel and South Downs)

I am aware that the business rates issue must be dealt with under separate legislation, but Sport England's and my understanding is that it will entail relief of only 50 per cent., not 80 per cent., which everyone was led to expect.

John Healey (Labour, Wentworth)

Business rates relief for sports clubs that are not charities is a matter of local discretion. A basic principle of local government introduces a

distinction between charities and non-charitable sports clubs. If I may, I shall deal first with a further point that the hon. Gentleman raised in his brief introductory remarks and then revert to the question of who defines eligible sports and sports clubs.

The hon. Gentleman's point that the measure does not offer full ''parity with charity'' is true. However, the Bill includes a generous package in parallel to what is available for charities. The Charity Commission's decision last November to recognise as charitable those sports clubs that are engaged in the promotion

''of community participation in healthy recreation''

allows many sports clubs to achieve charitable status if they choose. The crucial point is that it is for the clubs to decide whether such a status suits their purposes and membership.

If clubs decide, for whatever reason, that they do not wish to be charities, there is no reason why they should enjoy exactly the same benefits as charities, as they would not have to fulfil exactly the same requirements and responsibilities as charities, which are regulated by the Charity Commission. We are trying to strike a balance between supporting the clubs and respecting and taking into account the interests of registered charities.

Let me turn to the question of the Treasury defining sport. The hon. Member for Southport said that he doubted that the Treasury had the expertise to make such judgments. My hon. Friend the Member for Bradford, South (Mr. Sutcliffe) might disagree with him, but the hon. Member for Southport is right. The Treasury will not take decisions about what should be classified as a sport. Sport England already has a list of recognised activities, and we have decided that it would be most appropriate—initially, at least—to link the definition of eligible sport for the purposes of clause 57 to that list, rather than have Treasury Ministers of whatever description proposing what should constitute an eligible sport. The matter can be dealt with by statutory instrument, which can be readily amended should circumstances require it.

John Pugh (Liberal Democrat, Southport)

Will the hon. Gentleman clarify whether he is suggesting that a sports council list will be accepted wholesale by the Treasury, which will authorise it, or is the Treasury in a position to pick from a menu of sports put forward by the sports council?

John Healey (Labour, Wentworth)

Our intention, and my commitment to the Committee, is that we will use the list of recognised activities produced by the sports council in England, which will be the basis on which we frame statutory instruments that define which sports are eligible.

Roger Casale (Labour, Wimbledon)

I join colleagues in welcoming my hon. Friend to the Front Bench. I wish him well in his new appointment.

I welcome the new measure. Will the Economic Secretary make it clear whether amateur football clubs are likely to be eligible? He will be aware that recently we have seen the disappearance of our community professional sports club to Milton Keynes—our local

Wimbledon football club is to go there. We are going to start a community amateur sports club—a new football club—called Wimbledon association football club. I shall certainly put my hand in my pocket to support that new venture. I hope that my donation and those of other members of the community will qualify for the new relief, which will help us on our way to replay the wonderful story of Wimbledon football club, which is starting again from scratch.

John Healey (Labour, Wentworth)

This is new indeed: Wimbledon loses one football club to Milton Keynes, but gains another. My hon. Friend has always given strong support to constituency activities. I can confirm that football is on the list of recognised activities. Community amateur football clubs will qualify as eligible under the Bill.

I should like to give an indication to the hon. Member for Southport of how we will approach monitoring the impact of the new provisions, and determining in the long term whether they have had the impact that we seek. I draw on his earlier observation to say that the Treasury alone does not have the expertise to make such a judgment; nor would it seek to make one alone. As the Chancellor undertook in the Budget, we will continue to assist with the development of community amateur sport, and will demonstrate and underline our continuing commitment to such clubs. We will do so in close liaison with the Department for Culture, Media and Sport and in dialogue with many other sporting interests. I am meeting my right hon. Friend the Minister for Sport on 3 July to discuss those issues.

I shall turn now to amendments Nos. 69 and 70. As the hon. Member for Arundel and South Downs said, the amendments seek to put beyond doubt a couple of points in legislation. Amendment No. 69 would ensure that incorporated clubs came under the legislation. Nothing in the Bill prescribes the form that a community or amateur sports club must take; nor should it. I therefore give an assurance to the hon. Gentleman and to other Committee members that an incorporated club would be able to register, provided it met the criteria for registering under the schedule.

Amendment No. 70 seeks to ensure that a club would not fail to meet the criterion of being open to the whole community because it had rules that allowed members to be expelled for inappropriate or disruptive behaviour. We do not intend to prescribe in schedule 18 detailed rules for every registered community or amateur sports club. We want to leave general rules relating to the conduct of club activities to good sense and to the wishes of club members; that is part of the clubs' autonomy. The Inland Revenue will take a common-sense view of those rules, and will be concerned only if a rule offends the spirit underpinning the criteria. Clearly, a club must be able to exclude members if the presence of those members is disruptive to the orderly running of the club. I am happy to put on the record an assurance that such a rule will not preclude a club from being registered as a community amateur sports club for the purposes of the provision.

On the basis of those two assurances, I hope that the hon. Member for Arundel and South Downs will withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Economic Secretary for dealing with those two points. His response was entirely satisfactory. Under amendment No. 70, the broad rule would be open membership, but clearly that raises the issue of what the position would be with regard to expelling people who clearly acted improperly. Although the hon. Gentleman's response to incorporation was not crisp, it was satisfactory.

Which amateur clubs will qualify for charitable status, if they wish to apply for it? Our understanding is that the Charity Commission will need to decide on the principle of whether an activity is capable of improving physical health and fitness. It has already made it clear that certain sports, such as angling, ballooning, billiards, crossbow, pistol shooting, flying, gliding, motor sports and parachuting will not meet that principle, and there may be others. Not all amateur sports clubs will have the choice between applying for charitable status and the package under the clause. If there were a choice, there would be more logic in saying that a certain package was less generous and that the other was the full charity package.

Moreover, amateur sports clubs have advanced the sensible argument that, with all the toing and froing, qualifying as a charity is a cumbersome, expensive and complex matter. If it were decided to give charities tax benefits, it should be administratively easier for them to qualify and apply for such benefits. We believe that the measure is unwise. People will misunderstand the situation. There will be a lot of hassle, for example, if certain gifts did not qualify, but would qualify if they were charitable. The cost savings are not worth the candle in terms of the national economy. Hassle will be created by a slightly different and ungenerous rule. The logic of the Economic Secretary's speech was not correct. For starters, many sports clubs will not qualify as charities.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman referred to the limited cost of some of his ideas. Has he noted that, in the Red Book for 2003-04, the total cost of the proposal will be a mere £5 million? The extra costs of his ideas will be small.

Howard Flight (Conservative, Arundel and South Downs)

I thank the hon. Gentleman for that response. If hundreds of millions of pounds were involved, there would be a simple budget controlling argument. However, the amounts involved are not worth the candle. We remain strongly of the view that it is unproductive to have separate rules.

However, with regard to amendments Nos. 69 and 70, we appreciate the Minister's comments, and he has answered our questions satisfactorily for the record. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 41, in page 240, line 28, leave out from beginning to 'and'.

Joe Benton (Labour, Bootle)

With this we may discuss the following amendments: No. 42, in page 241, line 1, leave out from beginning to 'and' in line 2.

No. 43, in page 241, line 24, leave out from beginning to 'and'.

No. 44, in page 242, line 7, leave out 'income and'.

No. 45, in page 242, line 11, leave out from 'is' to 'the' in line 14.

No. 46, in page 242, line 17, leave out 'income and'.

No. 47, in page 242, line 19, leave out 'income and'.

No. 48, in page 242, line 22, leave out 'income and'.

No. 49, in page 242, line 41, leave out 'income and'.

No. 50, in page 242, line 42, leave out 'income and'.

No. 51, in page 243, line 3, leave out 'income and'.

Mark Hoban (Conservative, Fareham)

The hon. Member for Southport was right to describe the relief as modest earlier. That point was amplified by both my hon. Friend the Member for Arundel and South Downs and the hon. Member for Kingston and Surbiton (Mr. Davey). As is pointed out in the Red Book, the relief will cost £5 million next year and £10 million in the fiscal year following that.

I tabled the amendment because the relief is already restricted in so far as the income limits to which tax relief will be granted are set out in the Bill. For example, trading income is limited to £15,000, and property income to £10,000. There is a further restriction based on the proportion of expenditure and income that is applied for qualifying purposes.

Many sports clubs will find the task of trying to identify what income expenditure is to be applied for qualifying purposes onerous. I spoke to a couple of local sports clubs before the recess to identify what levels of expenditure they thought would be applied for qualifying. First, they said that that would depend on how the rules were interpreted, and that they would need more guidance than is given in the schedule. Secondly, by their interpretation, the proportions of qualifying expenditure would be very high. One club suggested that it would be 90 per cent., and another 78 per cent, of its expenditure.

We are imposing a burden on sports clubs that is perhaps not necessary. Most sports clubs earn very little surplus on which they can be taxed anyway. The vast majority of their expenditure is incurred for the purposes of qualifying. To force clubs to jump through further hoops to claim that relief places a disproportionate burden on them, one which runs against the spirit of what the Government are trying to achieve, which is to encourage clubs to grow and develop, and to stress their community aspects. Those who will have the task of leading and developing those clubs—the committee, the treasurers and the administrators—will spend a disproportionate amount of time trying to comply with the schedule.

I ask the Government to think about ways of lifting that burden. That is the spirit in which my amendment was drafted. I should like them to think seriously about whether the restrictions are necessary, or whether the provision places unnecessary regulations on sports clubs, which need all the encouragement that they can get to meet their objectives.

John Healey (Labour, Wentworth)

I assure the hon. Member for Fareham (Mr. Hoban) that we have considered the issues that he raises, but there are problems with his proposals. Amendments Nos. 41 to 51 would break the link between the tax relief that community amateur sports clubs will enjoy on their income and the condition that they should spend that income on their main purpose of providing facilities for, or promoting participation in, an eligible sport. The amendments would provide community amateur sports clubs with tax relief on their income, without ensuring delivery of the intended outcome of providing facilities so that local communities can participate in sport.

Clearly, the amendments would also open up some tax avoidance opportunities. I urge members of the Committee to consider the implications of the proposal. The requirement that the income should, as a condition of the relief given, be applied for the community amateur sports clubs' main purpose of providing sports facilities merely replicates the arrangements for charities, whose income is only exempt if it is applied for charitable purposes. There is no reason why such a condition should not apply to sports clubs, too. I hope that the hon. Gentleman will withdraw the amendments. If he does not, I shall ask my hon. Friends to reject them.

Mark Hoban (Conservative, Fareham)

I am disappointed by the Minister's response. I had hoped for a more substantive reason than that of simply mirroring the rules for charities. The vast majority of the spending of many community amateur sports clubs' is on qualifying purposes. Two clubs in my constituency to which I spoke said that 70 to 90 per cent. of their income is spent on qualifying purposes. Although that sample is small, I believe that it is representative of community amateur sports clubs elsewhere.

The clubs are under pressure from their members to ensure that membership subscriptions and income earned from bars are applied to the clubs' purpose, and to ensure that coaching and facilities allow members to enjoy the sports that they joined a club to participate in.

I really think that the measure places a disproportionate burden on sports clubs. The vast majority of clubs will spend the greater part of their money on qualifying purposes. They are under pressure to ensure that that happens because members are a very demanding group and they will ensure that money is spent properly in the interests of the club rather than on non-qualifying purposes.

I do not intend to press the amendment to a vote, although the Minister's response was disappointing. It will disappoint treasurers and sports clubs throughout the country who want help from the Government rather than a further layer of rules and bureaucracy. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 18 agreed to.

Clause 58 ordered to stand part of the Bill.

Schedule 19 - Capital allowances: cars with low carbon dioxide emissions

Christopher Chope (Conservative, Christchurch)

I beg to move amendment No. 18, in page 246, line 19, at end insert—

'(ia) is a car adapted to run on road fuel gas (with an applicable CO2 emissions figure not exceeding 240 grams per kilometre driven), or.'.

Joe Benton (Labour, Bootle)

With this it will be convenient to take the following amendments: No. 19, in clause 59, page 39, line 31, at end insert

'or

(aa) it is a car adapted to run on road fuel gas (with an applicable CO2 emissions figure not exceeding 240 grams per kilometre driven) or.'.

No. 20, in schedule 20, page 249, line 29, at end insert—

'''natural gas'' shall include ''road fuel gas'';

''road fuel gas'' has the same meaning as in section 168AB of the Income and Corporation Taxes Act 1988.'.

Christopher Chope (Conservative, Christchurch)

The amendments are important because they probe the Government's commitment to liquefied petroleum gas. The Government say in the Bill that there should be enhanced capital allowances for several low-emission vehicles, but not for others. I noticed that a press release issued at the time of the Budget said,

''100 per cent. enhanced capital allowances for low emission cars''.

As with so many things, when one examined the small print, one found that that applied only to cars with low emissions of CO2 but not other pollutants.

The amendments would bring cars that run on LPG within the 100 per cent. first-year allowance. It would not address all cars that run on LPG, but cars that run on LPG and produce relatively low levels of CO2.

At present, it is not possible for an LPG car to meet the 120 g per km test but it is possible for such a car to meet the 240 g per km test, which is why the amendment has been drafted in such a way. There is suspicion that the Government are paying lip service to green technologies. However, when the ordinary man in the street thinks seriously of investing in an LPG-fuelled car or a dual-fuel vehicle, the Government start to go cold on whether they will provide a long-term incentive for such investment in greener technology.

The suspicions are not wild. They are supported by the Government's refusal to confirm that the fuel duty differential between LPG and other fuels—diesel and petrol—will extend beyond 2004. That is a near time horizon. I recently renewed my House of Commons pass and noticed that it now extends to 2006. We are dealing not with the renewal of a pass but with people investing in new models of vehicle. We should encourage vehicles that use both LPG and diesel or petrol and we should encourage people to consider LPG vehicles as a serious option.

Having read the Budget day press release, we read with some amazement the small print of the Bill, which states that LPG vehicles will be excluded from the benefit of 100 per cent. enhanced capital allowances,

notwithstanding the great benefits that accrue to the environment and people's health from LPG compared with diesel or petrol-powered vehicles. Box 7.1 of the Red Book shows the days on which United Kingdom air pollution is moderate or higher. UK air pollution is generated not by CO2 emissions, which impact on climate change, but by other pollutants that largely, especially in urban areas, result from the combustion of road fuels. In paragraph 7.7 on page 127 of the Red Book, the Government state:

''Poor air quality poses risks to human health, quality of life and the natural environment. It affects everyone, particularly children and elderly people . . . In general, air quality in the UK is improving . . . But much . . . remains to be done . . . exposure to air pollution continues to be associated with an unacceptable number of hospital admissions and premature deaths each year.''

All Committee members would agree wholeheartedly with those sentiments. However, now the Government have the chance to give an incentive for people to invest in LPG-powered vehicles that also have low CO2 emissions, and they have missed the opportunity—unless they take that which the amendments present.

I remind the Committee of some of the benefits that flow from LPG compared with diesel and petrol, the significance of which is sometimes ignored. Although LPG vehicles tend to emit less carbon dioxide than do conventionally fuelled vehicles, no LPG vehicle can yet meet the 120 g carbon dioxide test. If that is the sole criterion for what constitutes low-emission vehicles, LPG vehicles will be unable to meet it. However, LPG engines are 50 per cent. quieter than diesel engines and marginally quieter than petrol engines. As we know, noise is a big issue for many of our constituents. LPG emissions of benzene are about one thirteenth those of petrol and half those of diesel. Petrol emits about two and a half times the amount of carbon monoxide emitted by LPG.

The health implications of particulates are the most significant factor. Recent tests have shown that LPG emits 99 to 99.8 per cent. fewer ultra-fine particles than even ultra-low sulphur diesel. For every 1,000 parts that enter the atmosphere as a result of burning ultra-low sulphur diesel, LPG results in only between about two and 10 parts. That is an amazing improvement in terms of reducing particulate emissions, and the Government and the Committee should take note of that. Also, vehicles that run on LPG emit one fifth of the level of sulphur dioxide that is emitted by petrol vehicles, and one ninth of the level that is emitted by diesel vehicles. With regard to oxides of nitrogen, LPG engines offer a 90 per cent. reduction of NOx compared with diesel, and a 40 per cent. reduction compared with petrol.

Therefore, if the Government truly mean to provide 100 per cent. enhanced capital allowances for low-emission cars, there is a case for including all LPG vehicles within that enhanced capital allowance scheme. In that regard, this amendment goes part of the way. It says, ''Let us go along with the overriding objective of reducing carbon dioxide emissions because of the impact of that on global warming, but let us also include LPG vehicles, which are reducing carbon dioxide to a slightly lesser extent, but which are

also producing corresponding and much larger benefits by reducing pollutants of other kinds that impact on the health and environment of our people.''

I hope that the Government will take these amendments seriously, and that the Minister, in his response to the debate, will say something about why the Government are refusing to say anything about making a commitment with regard to extending the fuel duty deferential for LPG beyond 2004—which I hope that he will accept is a short-term horizon.

I hope that the amendments will find favour with the Committee.

John Pugh (Liberal Democrat, Southport)

I hope that you will forgive me, Mr. Benton, if my contribution ranges over several aspects of this schedule—and if it also, perhaps, refers to amendments that are yet to be discussed.

The Minister said that I had been mealy-mouthed in my praise of his recommendations about community sport, and so on. I shall not be mealy-mouthed in this case. I shall not accuse the Minister or the Government of being insincere in their attempts to produce good behaviour by fiscal measures. They want us to use vehicles that produce less pollution, and thereby to create a better environment.

However, we must test what is being presented to us to discover whether it is a real improvement or simply a cosmetic improvement, and to see whether the recommendations, as they are currently framed, offer a sufficiently refined instrument to do the job.

There is a lot of premature optimistic talk about the environment and the absence of pollution. The Automobile Association states that, by the agreement of car makers alone, the Kyoto protocol's demands on motorists will be met in this country, and the Government White Paper of 1998 stated that there would be a 70 per cent. reduction in particulate emissions between 1996 and 2010.

All of that is good news and, in the Government's defence, we must accept that what we have before us is not an isolated recommendation, but part of a package—it does not stand alone, as I am sure that the Minister will say. However, we must ask ourselves whether the instrument is sufficient do the job that it is intended to do.

The Government have every encouragement to do a little more than they are doing at present. The recently published European Transport White Paper encourages Governments to go beyond the minimum goals. It states that the new Community rules

''will help member states create the necessary economic and legal conditions for exceeding objectives.''

In other words, Europe is giving a green light—and a rich menu to choose from. However, the Government appear only to be encouraging purchasers of cars to choose a car that has a low rate of CO2 emission, with the intention of encouraging manufacturers to produce more of them. In one sense, that is a sensible strategy, because the vast majority of people will buy standard petrol cars that have CO2 emissions, and it is far better that they buy cars with low CO2 emissions. However, the legislation does not sufficiently benefit or highlight alternatives, to which the amendment refers. The European Commission set

targets of 2 per cent. for the use of biofuels to be reached more or less now, and 6 per cent. by 2010. It also set a target of 20 per cent. for replacing conventional fuels with substitutes by 2020. The legislation seems a long way from producing that by itself—it is not sufficiently hard-edged. The Government have an opportunity to offer severe fiscal encouragement to alternatives such as biofuels and natural gas, and, in the long term, hydrogen.

The Government say that they are looking ahead, and propose in clause 60 to encourage imaginative developments, but there are things that they could do now which, especially in the case of LPG and biofuels, could be done at little cost. On our way here today, few of us would have passed many LPG or biodiesel vehicles, and I assume that none of us passed a hydrogen-driven vehicle or would have recognised one had we done so. In offering fiscal encouragement, the Treasury is hardly hampering its finances but, in the long term, it could send an enormously important signal as to where the future lies. The Government have missed the opportunity to do so in this legislation, and I should like the Minister to tell us how they might do so.

Rob Marris (Labour, Wolverhampton South West)

I should like to echo the comments of the two previous hon. Members who spoke, and urge the Government to reconsider. I am no expert on this subject and I would like my hon. Friend the Minister to tell us whether bioethanol or biodiesel are encompassed in the schedule, especially under the definition of diesel in paragraph 3(10). We should be encouraging the use of lower-polluting vehicles. At the moment, apart from milk floats, all vehicles pollute. The early returns on company car tax show that the Government have been very successful in encouraging the use of new types of cars. That change of behaviour is driven by—to coin a phrase—the fiscal regime introduced by the Government.

I believe that we could go further, and I urge the Government to consider the amendment moved by the hon. Member for Christchurch (Mr. Chope) and the suggestions made by the hon. Member for Southport about examining biodiesel and bioethanol. Perhaps my hon. Friend the Minister would explain some of the technicalities of the subject. Why do the Government feel that it is not appropriate to take such steps at this stage?

Chris Grayling (Conservative, Epsom and Ewell)

I am delighted to hear a considerable degree of consensus about the issue in the Committee. I commend my hon. Friend the Member for Christchurch for the amendments that he tabled. There is no doubt that LPG is a growing market, and one that is encouraged by the Government. For several years, both Conservative and Labour Governments offered incentives to develop the LPG market. Over the past couple of years, the number of filling stations has risen more than fourfold, from approximately 250 to more than 1,100, and is expanding at a rate of one a week.

There are some contradictions about the nature of the emissions from LPG vehicles, which have lower CO2 and much lower carbon monoxide emissions than petrol vehicles, for example, but which have problems relating to other pollutants that are produced. There are also benefits in relation to diesel vehicles. However, the practical reality is that LPG vehicles can offer a lower-emission alternative. Friends of the Earth recently highlighted the ability of a modern LPG car to meet the arduous standards established in Los Angeles, California—the smog capital of the world for many years—where there are tough restrictions on vehicle usage and emissions. Friends of the Earth believes that a modern LPG car can meet the criteria set in that environment.

Clearly, the Government should encourage the use of LPG vehicles in this country, but the issue goes further than that. We face significant energy problems in the future, and the Government face challenges in relation to future capacity for generating energy. The benefit that LPG offers is that it is, in effect, a by-product; it already comes from the process of extracting and refining existing fossil fuels. Given that this country has a substantial surplus of available LPG, compared with the demand and usage, encouraging the development of LPG when road use is growing can only help to improve the overall environmental picture. LPG already exists, so it must be disposed of or used. Thus making better use of a resource that is already being generated and is already available for use has to make sense, both economically and environmentally.

I hope that the Economic Secretary will reconsider this issue in the light of the comments made by Labour, Conservative and Liberal Democrat Members. My hon. Friend the Member for Christchurch has raised an important point, and the Government would do well to take it into account in this measure before the Bill receives Royal Assent.

John Healey (Labour, Wentworth)

I start by welcoming the general support that the hon. Member for Christchurch has offered for using economic and tax instruments to pursue environmental objectives. He is rightly a very eloquent and strong champion of LPG, but in the context of clause 58 and this group of amendments, he is wrong to argue that we are ignoring the claims made for LPG. We already recognise the benefits that road fuel gas can offer and have introduced a range of other measures that can support such technology.

Those measures include grant-based schemes, such as the PowerShift programme, which offers targeted incentives to assist with the cost of converting vehicles to run on alternative fuels; lower vehicle excise duty for alternative fuel cars; less tax paid by employees on gas-powered company cars; and, from 2003-04, gas fuel provided free by employers will be taxed at a lower rate than for a similarly priced petrol or diesel cars. Finally, the rate of fuel duty on LPG is much less than that for diesel or petrol at 5p a litre, compared with about 45p a litre for the other fuels.

That brings me to the second point on which the hon. Member for Christchurch pressed me: the road fuel gas differential beyond 2004. First, he accused me and other Ministers of refusing to say anything about that matter, but that is not the case. He asked why we should not commit ourselves to continuing the differential beyond 2004. The answer is simple: the environmental case for maintaining that fuel duty differential beyond 2004 for road fuel gases, such as LPG, has not yet been proved, so the Chancellor and the Government will consider it on a Budget-by-Budget basis.

Chris Grayling (Conservative, Epsom and Ewell)

Does the Economic Secretary that accept that uncertainty is perhaps not visible to the public who are continuing to invest in converting their vehicles, so the Government risk leading people up the garden path if they discover that the existing cost-benefits may not be there in the future?

John Healey (Labour, Wentworth)

That may be a pertinent general argument, but it is does not relate to clause 58 and this group of amendments for reasons that I shall explain later.

Michael Jack (Conservative, Fylde)

I welcome the Economic Secretary to his post. Would he be kind enough to tell me on what basis the further assessment of the benefits of LPG will be made? Will that assessment be published?

John Healey (Labour, Wentworth)

The focus of our concern in relation to clause 58 is CO2 emissions. The threshold that we have set is 120g per kilometre. So in the narrow context of that clause, the future relevance of LPG may come into play in relation to those criteria.

Michael Jack (Conservative, Fylde)

Does that mean that the Treasury will discount all the possible health benefits associated with LPG in any further assessment of that fuel?

John Healey (Labour, Wentworth)

Of course it does not. The point is that there is a narrow focus on CO2 emissions.

As the hon. Member for Southport said, this is a modest, focused measure that must be seen as part of a package of environmental measures, using economic and fiscal instruments, which the Government have already introduced. I have described four or five of those, which are chiefly intended to encourage LPG development and use. It is in that wider context that arguments such as those advanced by the right hon. Member for Fylde (Mr. Jack) will be taken into account.

Christopher Chope (Conservative, Christchurch)

The Economic Secretary has made quite a dramatic statement. He has said that the environmental case has not yet been proved for continuing the duty differential between LPG and diesel and petrol beyond 2004. What evidence has he for saying that the environmental case has not been proved? His party is encouraging people to invest in LPG-powered vehicles. Are those people now to take the view that the Government themselves are not convinced of the environmental case for switching to LPG?

John Healey (Labour, Wentworth)

On the contrary. We are talking here about a matter introduced by the hon. Gentleman. We are talking about a time frame—a time limit. Clearly, in a fiscal regime the purpose of a time limit is to concentrate the boost that a measure may give, and increase its impact, in the early days.

I am merely saying that the case for extending the differential beyond 2004 is not yet proved. The decision on whether it has been proved will be considered, and any consequential decisions will be made by the Chancellor and the Government on a Budget-by-Budget basis. I hope that that is clear.

We are now on the territory entered earlier by the hon. Member for Epsom and Ewell (Chris Grayling). The hon. Gentleman was right to say that LPG could offer ''a low-emission alternative''. As he suggested, the schedule focuses on dealing with carbon dioxide emissions. As I have explained, we are encouraging the use of LPG vehicles in other contexts.

My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) began on the same territory, and then moved off it. He urged me to consider the wider application of the measure. As I have said, it is designed to deal with reductions in carbon dioxide emissions. It is part of a wider package of measures, many of which benefit LPG users.

Let me explain a couple of technicalities. My hon. Friend asked whether bio-ethanol was included in the schedule. The answer is yes. First-year allowances will be available if carbon dioxide emissions—here we return to the main focus and reference points—are not more than 120 g per km. That, indeed, applies to other cars.

In pursuing the question of biodiesel, my hon. Friend asked whether there were other provisions encouraging the use of that fuel. The new low rate of duty, 20p below that of petrol and diesel, will do just that.

The hon. Member for Southport made a pertinent point. This was not an isolated measure, he said, but part of a package. He then asked whether that package itself would be sufficient. I suggest that he should regard the work we have done in this Bill, in last year's Bill and previously as policy and legislative work in progress. I refer him to the consultation paper that we issued in the summer of 2001, ''The Green Technology Challenge'', which was designed to encourage debate about further environmental issues that might be tackled through enhanced capital allowances and new technologies that might arguably merit support under such regimes. The hon. Gentleman should view that consultation as a sign that discussion and consideration will continue on a broader front.

John Pugh (Liberal Democrat, Southport)

I can understand what the Economic Secretary is saying. He is suggesting to the Committee that the basic problem is that we are not looking at a narrow enough focus when we consider the legislation. The legislation will give a tax break or benefit to people who choose to use low-emission CO2 cars rather than high-emission ones, but its object is to reduce CO2 emissions. A piece of legislation that encourages people to use low-emission cars but does not give a similar break to liquefied petroleum gas cars or cars

that do not emit CO2 will create the kind of objections that we have brought forward. A simple adjustment to the legislation would provide those benefits for both cars that produce low CO2 emissions and cars that produce no CO2 emissions.

John Healey (Labour, Wentworth)

I urge the hon. Gentleman to bear in mind the aggregate impact of the proposal on the wider package to which he drew our attention. If he will wait, I shall address the amendments after I have dealt with the general points that a number of Members have introduced. I was very struck by his point and will bear in mind his encouragement to us to introduce ''severe fiscal incentives'' for environmental ends.

I now turn to amendments Nos. 18 to 20, which would, as the hon. Member for Christchurch said, extend the special 100 per cent. enhanced first-year allowances to all road fuel gases including liquefied petroleum gas. They would enable LPG-powered cars to qualify, even if their CO2 emissions were up to twice those of other qualifying vehicles. Amendment No. 20 would extend those first-year allowances to LPG refuelling equipment.

The amendments miss the point and purpose of the clause. It may help if I reiterate to the Committee the purpose of the new measures. Clauses 58 and 59 aim to encourage business investment in cars that emit the lowest amounts of carbon dioxide, to expand that market and further to encourage innovation in low CO2 cars. I do not need to tell members of the Committee that CO2 is the key greenhouse gas, and the scheme forms part of a raft of measures to help reduce the UK's emission of that gas to meet our Kyoto and domestic targets. It is not a scheme that aims to support all alternatively powered cars without regard to their CO2 emissions. It therefore focuses deliberately on those cars with the lowest emissions of that gas. Cars that meet the 120g per km limit can qualify for the first-year allowances regardless of how they are powered, and making exceptions for particular fuels runs counter to that purpose. Focusing on a single CO2 figure provides a straightforward and consistent measure for the application of the provision.

Clause 60, to which amendment No. 20 relates, aims to encourage the installation of refuelling equipment for new types of gas fuels, such as natural gas and hydrogen, that will potentially play an important role in future. It targets those new-technology fuels to help increase availability and reduce the barrier to greater take-up and innovation.

There are already 1,000 LPG outlets and the rate of expansion has increased considerably in recent years, with some 350 new refuelling points being installed in the last year alone. Given that growth, I am not convinced that there is a need for further tax incentives.

The Government recognise that road gas fuels such as LPG can deliver the environmental savings that have been ably articulated by a number of hon. Members this morning. That is why there are grants to

help people buy or convert vehicles to run on LPG. That is why employees with gas-powered cars pay less company car tax and, from 2003-04, will pay less tax on free fuel provided by their employers. That is why LPG attracts a much lower rate of fuel duty. In that context, I recommend that hon. Members reject the amendment.

Christopher Chope (Conservative, Christchurch)

The Economic Secretary's response is very polite and measured, but unfortunately I find the content extremely disappointing. He makes the assertion that the amendment would result in vehicles emitting twice as much carbon dioxide as the limit set out in the clause. He makes it seem as though that would be a disastrous state of affairs. Let me remind the Committee that the amendment would confine the 100 per cent. capital allowances to the top tier of vehicles on the PowerShift register. That is the top tier of low-emission vehicles. I do not think that the Economic Secretary has dealt with that problem adequately.

PowerShift register bands reflect the emissions performance overall compared with prevailing European standards, currently known as stage 3 or Euro III. The key regulated pollutant emissions targeted by the Powershift programme are nitrogen oxide and hydrocarbons. To be eligble for PowerShift funding, vehicles must also offer clear reduction—compared with the conventional fuel alternative—in emissions of carbon dioxide responsible for climate change. If such vehicles comply with the top band under the PowerShift register, why are they not eligible for the 100 per cent. capital allowances?

The Economic Secretary said that because there were already 1,000 LPG outlets and there was an increasing use of LPG, he was not convinced that there was any need for extra incentives. At the moment, the proportion of vehicles in the vehicle park that are fuelled by LPG or indeed by fuels other than petrol or diesel is very small indeed. Every extra vehicle that we can get in the vehicle park that is a low-polluting vehicle is of benefit to the environment and the health of the people of this country. The Government have the opportunity to give a joined-up signal in the Bill. In other policies, they have linked the issues of air quality and environmental benefit, but in this case they seem to stick solely to the criterion of whether the vehicles contribute an enormous amount to the reduction in global warming, and have set a limit so low that even an LPG vehicle cannot meet the limit, given present technology.

It appears that the Economic Secretary may be motivated by the protection of the revenue resulting from the clause. If that is so, let us be open about it. Let him say that he does not believe that it is reasonable that the Exchequer should subsidise new technologies to the extent that we encourage. If that is his argument, we can debate it. However, it seems that the Government are duping people into switching to LPG, and after 2004 they will remove the fiscal benefits that come from having a lower rate of duty for an LPG vehicle. The Economic Secretary said that he did not

think that there was any need for extra incentives, but that view is not shared by his own Government's quango, TransportAction, whose website states:

''The research also considered the importance of a number of market factors in influencing decisions to switch to clean fuels . . . The strongest concern was a lack of confidence in the Government maintaining the fuel duty differential''.

I know that the Economic Secretary is new to his portfolio but, although he may have been convinced that there was no need for extra incentives or for maintaining existing incentives beyond 2004, I hope that he reviews his position in light of what TransportAction says. I repeat:

''The strongest concern was a lack of confidence in the Government maintaining the fuel duty differential.''

I am told that a fleet manager or a car purchaser needs a long planning horizon; if an individual is not given an assurance beyond 2004 that LPG will be favoured by a beneficial tax regime from the Government, he may wonder what is the point of investing long term. At the moment, only Vauxhall and Volvo produce dual-fuel vehicles at a significant volume. The Government should encourage other vehicle manufacturers to invest in the technology, but they will not be able to do so if they are not prepared to extend their planning horizons beyond 2004; if vehicle manufacturers are to consider extending manufacturing lines and producing dual-vehicles, they need clearer signals of a longer time frame. I am disappointed that the Economic Secretary has not gone further than his colleague, the new Chief Secretary to the Treasury, went in a debate in the House last October; he also said that he could not say what would happen beyond 2004.

The amendment would restrict the capital allowance to vehicles that are at the top of the PowerShift register in terms of low emissions, so I hope that Committee members will press it to a vote. I hope that the hon. Member for Wolverhampton, South-West, who spoke so eloquently from the Back Benches, will join us by voting in favour of the amendment. He may be outvoted by his colleagues, but if he does rebel he will reflect the balance of debate in the Committee. Although Committee members from both sides—Conservatives, Liberal Democrats and Labour Members on the Back Benches—have spoken with one voice, the Minister has spoken with another. How can the people be sure that their spokesmen will take action against the Government when they are wrong unless those spokesmen join together and vote accordingly? I will be disappointed if the hon. Member for Wolverhampton, South-West does not vote with us.

I hope that the Minister realises that today's debate is another consequence of his Department using misleading language in its press releases. When the Inland Revenue issued its press release on 17 April, it announced the 100 per cent. enhanced capital allowances for low-emission cars. We now find that cars at the top of the PowerShift register will not qualify—we have discovered that only during the debate and as a result of reading the Bill's small print. If the Government had referred to 100 per cent. enhanced capital allowances for some low-emission

cars, it would have been a more accurate press release. I hope that the Economic Secretary will report back to his spin doctors that they have once again been involved in counter-productive spin.

Michael Jack (Conservative, Fylde)

I wish to add to my hon. Friend's comments after reading paragraph 21 of the notes on clause 58 and schedule 19, to which the amendment refers. It says that part of the measure's purpose is

''to encourage a shift towards cleaner cars.''

In his reply, the Minister used the sort of logic that says that, because the clause only defines—in this context—a cleaner car as one with lower carbon dioxide emissions, all arguments that support help for other forms of cleaner cars are off limits. He then told us that he felt that he had done his bit on behalf of the Government to encourage LPG cars because he had put before the Committee a range of other measures. That is a slightly bent piece of logic. It says that we will not have a consistent policy across all areas

''to encourage a shift towards cleaner cars'',

in the words of the Treasury. We will do some things in some areas but not in others. My hon. Friend the Member for Christchurch put his finger on the lack of consistency in encouraging the uptake of cars that use embryonic technologies. In CO2 terms, perhaps the LPG car is marginally behind best practice in diesel or petrol. However, in cost-benefit terms, the LPG car has many benefits, if one believes the science on the relationship between air pollution and health.

The Economic Secretary says that he is happy to sustain only a partial package to support cars that do not cause certain health problems. I hope that his conscience is happy with that, because one advantage of LPG emissions is that, in many cases, they do not present the health risk to the public that are presented by the cars included in the Minister's measure on CO2. At a time when the Government have told us that their priority is the improvement of the nation's health, it seems odd that they are ruling out help to do exactly what they want to encourage—in their own words, a ''shift towards cleaner cars''.

Rob Marris (Labour, Wolverhampton South West)

I would like to say for the benefit of the Committee—certainly for the benefit of the hon. Member for Christchurch—that, despite the hon. Gentleman's eloquence, I am not convinced. I am reassured by the comments of the Economic Secretary, because he has said that the measure is part of an overall package, and I accept that. I am also convinced that the Government will keep the matter under review as time goes by. That is what is necessary to reassure me, and I am reassured.

John Healey (Labour, Wentworth)

In the first place, let me reassure the hon. Member for Christchurch that I am far too junior a Minister to have any spin doctors to tell me what to do. The right hon. Member for Fylde urged consistency across the board. We face different challenges in the environmental field, and different measures are required to deal with them. It is less a lack of consistency and more a question of judgment about

the appropriate economic and fiscal instruments for particular environmental objectives that underpins the clause and my arguments this morning.

I am delighted that my hon. Friend the Member for Wolverhampton, South-West has resisted the sweet encouragement and temptations from Opposition Members. Finally, I say again to the hon. Member for Christchurch that the single focus and purpose of the clause is to tackle greenhouse gases and the global warming problem by reducing CO2 emissions from vehicles on the roads in this country. However, I shall pass on to my right hon. Friend the Chancellor the comments of TransportAction on the fuel differential duty and of the hon. Gentleman as very early representations for the Budget in 2003.

Question put, That the amendment be made:—

The Committee divided: Ayes 6, Noes 15.

Christopher Chope (Conservative, Christchurch)

I beg to move amendment No. 85, in page 248, line 25, at end add—

'7 In section 82 (qualifying hire cars), in subsection (1), in paragraph (b) substitute ''(3) or (4)'' with ''(3), (4) or (4A).''

8 In section 82 after subsection (4) insert ''(4A) The fourth case is where the car concerned falls within subsection (1) of section 45D''.'.

This is a short point. The amendment would extend the 100 per cent. allowance for low-CO2 emission cars to companies that lease cars to members of the public. That would widen the scope of that benefit so that individuals, rather than just corporate owners, could benefit. That could be passed on to private owners via lower leasing costs. I should have thought that that would be consistent with the Government's objective of ensuring that there is a higher take-up of such vehicles on our roads.

John Healey (Labour, Wentworth)

As the hon. Gentleman explained, the amendment would ensure that cars with low carbon dioxide emissions that are for hire to, or for carrying, members of the public are excluded from those special rules that apply to cars that cost more than £12,000. I can confirm that the Bill will achieve that result, and will widen the benefit that the hon. Gentleman is keen on. The effect of the measure will be that all new business cars with low carbon dioxide emissions that are registered or purchased on or after Budget day will be excluded from the special rules that generally apply

to cars costing more than £12,000. That includes low-emission cars for hire to, or for carrying, members of the public.

I hope that the hon. Gentleman will regard his amendment as unnecessary and be prepared to withdraw it.

Christopher Chope (Conservative, Christchurch)

I am grateful to the Minister for that explanation, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 19 agreed to.

Clauses 59 and 60 ordered to stand part of the Bill.

Schedule 20 agreed to.

Clause 61 - Expenditure on green technologies: leasing

Christopher Chope (Conservative, Christchurch)

I beg to move amendment No. 17, in page 40, leave out lines 14 and 15 and insert—

'(5) General exclusion 6 shall not apply to expenditure incurred on or after 17th April 2002.'.

Again, this is a small issue, but it is important nevertheless. Many small and medium-sized enterprises make little or no profit, and so cannot use the capital allowances that are available. Giving those allowances to lessors would make cheaper finance available to small and medium enterprises that do not make big enough profits, as they could then ''sell'' their capital allowances to leasing companies. That would be helpful for small companies seeking such finance. I do not know whether such a provision is also incorporated within the Bill, but if it is not, it should be, which is why I tabled the amendment.

John Healey (Labour, Wentworth)

This amendment would include expenditure on assets for leasing in all the first-year allowances schemes. Therefore, it significantly widens the rules introduced in clause 61, which target the special schemes that encourage investments in ''green'' technologies, to help the environment.

It might be helpful if I explain why we have introduced clause 61. Some Committee members will recall the discussions of the Finance Bill that took place last year. Since then, we have continued to listen to representations, and considered carefully the case for extending the scheme to include assets for leasing. We are now satisfied that extending those special allowances to ''green'' equipment for leasing will ensure the widest assistance to the uptake of those technologies, for increasing environmental gain. That is the key aim of the ''green'' technology allowances.

The change will encourage all businesses to look towards ''green'' alternatives when they make their equipment investment decisions. That choice may be made by the user of the equipment, but it might also be made by the person who will lease, let or hire the equipment.

The amendment misses the point and focus of the clause. If adopted, it would include expenditure on assets for leasing in all the first-year allowance schemes, some of which have different purposes—for example, schemes that encourage investment by specific kinds of businesses, such as SMEs.

I wish to explain why we remain unconvinced that there is a clear case for extending these schemes to include assets for leasing. If a lessor were to receive first-year allowances, he or she might pass much of the benefit to the lessee by reducing the rentals that the lessee must pay to use the asset, but the effect on each payment is likely to be small, as the value of the benefit would be spread over the term of the lease. It has not been convincingly shown that a reduction in rents would have any real impact on investment decisions by the businesses targeted by the schemes. Therefore, the costs would almost entirely be dead weight.

However, the Inland Revenue is continuing to have constructive discussions with representatives of the leasing industry, who have indicated that they generally welcome the Bill's proposals impacting on asset finance. I understand why lessors also want first-year allowances more generally, but at present the case for that has not been proved. I advise the Committee to reject the amendment—but I hope that, having heard my explanation, the hon. Gentleman might agree to withdraw it.

Christopher Chope (Conservative, Christchurch)

I am grateful to the Minister for that explanation. I am pleased that the Inland Revenue is considering further some aspects of the matter, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Peter Luff (Conservative, Mid Worcestershire)

I rise in search of information, and nothing else, because anything that reduces taxation and encourages ''green'' technologies is to be welcomed.

Will the Minister say what are the qualifying energy-saving technologies that the clause deals with? The notes on clauses refer us to a website, but we cannot communicate with websites during Committee proceedings. We are told that, currently, there are investments in eight technology groups that are set out in the energy technology list, which was issued by the Secretary of State for Environment, Transport and the Regions—that takes us back a while. It remarks that, subject to state aids, further technologies will be added in late 2002. This clause is specific about the impact on cars and gas refuelling equipment, which are already dealt with in earlier clauses, but it is vague about what those other energy-saving technologies might be. How comprehensive do the Government intend the assistance to be?

I might need to continue for longer to allow the Minister to get assistance from his officials. I shall sit down and hope that he has the answer in front of him.

John Healey (Labour, Wentworth)

It is always welcome to hear a contribution from the Opposition Whip. I suspect that he is anxious to fill time in the Committee's proceedings for his own purposes--in the same way that I am at present. I shall answer his specific question directly and add a couple of general comments that explain the purpose of the clause.

Further technologies include: heat pumps for space heating; radiant and warm air heaters; solar thermal systems; further refrigeration equipment; and, of course, air compressor drain traps and monitoring equipment.

Peter Luff (Conservative, Mid Worcestershire)

Oh, of course.

John Healey (Labour, Wentworth)

If the hon. Gentleman would like further details on each technology, I should be happy to provide them.

The clause makes a small but significant amendment to the rules that determine the expenditure on plant machinery that may qualify for the first-year allowances. It enables businesses that incur expenditure on qualifying environmentally friendly plant machinery for leasing or hire to claim 100 per cent. enhanced capital allowances on their expenditure. The change applies to investments under new schemes for enhanced capital allowances for low-emission cars and gas refuelling equipment. Furthermore—this is the point that the hon. Gentleman raised—the change will extend enhanced capital allowances to energy-saving technologies under the scheme that we introduced last year to encourage investment.

To give a full picture, existing energy-saving technologies include combined heat and power boilers, variable speed drives, thermal screens for horticulture, lighting, pipe insulation and some refrigeration equipment.

The clause will ensure that such schemes reach the widest number of businesses and encourage the highest uptake of technologies for the widest possible environmental gain. The new treatment will apply to expenditure incurred from Budget day—17 April 2002—on qualifying assets for leasing. I commend the clause to the Committee.

Mark Hoban (Conservative, Fareham)

Can the Minister clarify the concluding sentence in paragraph 6 of the explanatory notes? It says:

''Subject to State aids, further technologies will be added later in 2002.''

Does that imply that the Government must seek clearance from another organisation, such as the European Union, before further technologies can be added? Can the Minister tell us what the sentence means?

John Healey (Labour, Wentworth)

I can, indeed. An established process should be conducted on this area of legislation, and that involves the European Commission. We are currently undertaking the process and we do not anticipate any problems with the proposals in the clause.

Mark Hoban (Conservative, Fareham)

Is the approval that the Minister seeks based on technological aspects? Is the EU checking that the technologies are sufficiently green to be merited and that they conform to the Kyoto protocol and domestic or EU rules on emissions and other environmental aspects? Alternatively, is the Minister seeking approval from the EU on giving state aid to technology? The amounts involved must be fairly minimal, so why do we need approval on the financial aspects? Does the Minister want technological or financial approval?

John Healey (Labour, Wentworth)

The hon. Gentleman may not like the European Commission, but it exists. The United Kingdom Government are signed up to follow the process. In a sense, the hon. Gentleman has answered his own question by referring to state aids. The principal worry about state aids is the distortion of competition. I reassure him that the process is under way. We do not expect that the European Commission will have problems with the proposals in the clause.

Peter Luff (Conservative, Mid Worcestershire)

I am glad that I raised that point. When we ask a question in Committee, we often receive a surprising answer. I represent the Vale of Evesham, which has many horticulturists and growers, and I know that they will be delighted to be the principal beneficiaries under the clause. Will the Minister be kind enough to write to me setting out details of how horticulturists and growers can benefit from the provisions and say whether any of the technologies to be added to the list are likely to benefit that sector?

John Healey (Labour, Wentworth)

The hon. Member for Mid-Worcestershire (Mr. Luff) is much more of an expert on horticulture than I am, given that I represent a former coal- mining community in southYorkshire. I shall certainly make inquiries and write to him on that matter.

I shall try to wrap up the concern felt by the Opposition—understandably from their point of view—about the European Commission and the European Union. In our judgment, the new technologies that we propose to extend under the clause will not give rise to state aid issues. We are not seeking state aid approval from the Commission, but we have undertaken to inform it if we make any subsequent changes to the provisions in last year's Finance Act. We are in the middle of that process, and we do not expect any problems to arise. I trust that my explanation has been sufficient.

Peter Luff (Conservative, Mid Worcestershire)

The horticultural sector knows that several state aids are payable to their competitor countries elsewhere in the European Union, which have escaped proper scrutiny. If any are scrutinised by the European Union, I hope that the Minister will be extremely robust in ensuring that British growers and horticulturists are not denied the advantage already enjoyed by their competitors in other EU countries.

Question put and agreed to.

Clause 61 ordered to stand part of the Bill.

Clause 62 - First-year allowances for expenditure wholly for a ring fence trade

Christopher Chope (Conservative, Christchurch)

I beg to move amendment No. 99, in page 40, line 21, after 'first-year', insert 'and writing-down'.

Joe Benton (Labour, Bootle)

With this it will be convenient to take the following amendments: No. 100, in page 40, line 27, after 'first-year', insert 'and writing-down'.

No. 101, in page 40, line 31, after 'amendments', insert

'relating to first-year allowances'.

No. 102, in page 40, line 32, at end add—

'(4) The amendments relating to writing-down allowances made by that Schedule have effect for chargeable periods beginning on or after 1st January 2003.'.

No. 103, in schedule 21, page 252, line 4, at end insert—

'6A In section 56 subsection 7 shall be replaced with—

''(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period is a percentage of the amount by which AQE exceeds TDR, as shown in the Table—

AMOUNT OF WRITING-DOWN ALLOWANCES

6B In section 56 after subsection (7) add—

''(8) The increased writing-down allowance for ring fence trades will only be available for chargeable periods beginning on or after 1st January 2003.

(9) In this section ''ring fence trade'' has the same meaning as in section 45F.''.'.

No. 104, in schedule 21, page 255, line 30, at end insert—

'14 In section 418, subsection (1) shall be replaced with—

''(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period in respect of qualifying expenditure is a percentage of the amount by which UQE exceeds TDR, as shown in the Table—

AMOUNT OF WRITING-DOWN ALLOWANCES Type of UQEAmount UQE on the acquisition of a mineral asset 10% UQE for use wholly for the purposes of a ring fence trade50% All other UQE 25%''

AMOUNT OF WRITING-DOWN ALLOWANCES

15 In section 418 after subsection (6), add—

''(7) The increased writing-down allowance for ring fence trades will only be available for chargeable periods beginning on or after 1st January 2003.

(8) In this section ''ring fence trade'' has the same meaning as in section 45F.''.'.

Christopher Chope (Conservative, Christchurch)

This group of amendments is important. Committee members may have noticed the press statement that was issued on Thursday, 23 May on the politics section of BBC Ceefax. It stated:

''The United Kingdom oil industry is warning that up to 50,000 jobs could be lost owing to tax changes in the last budget. The changes including a 10 per cent. rise in corporation tax were a shock to the industry. The United Kingdom Offshore Operators Association said the extra costs will cost £8 billion in the next eight years.''

It warned that companies looking to develop new oil fields will bypass the North sea.

Given what the Chancellor said at the time of the Budget, the provisions are designed as a sop to the oil and gas extraction industry to soften the blow of clause 90, which we discussed on the Floor of the House. The clause gives a 100 per cent. first-year allowance for expenditure on plant and machinery, which is not a long-life asset used in a ring-fenced trade. It will help cash flows, but the amendments would give a larger benefit to the industry. They would give increased allowances to expenditure incurred before the introduction of the supplementary 10 per cent. corporation tax charge.

The UK oil industry points out that companies have already incurred much of the capital expenditure that generates income subject to the supplementary charge and that tax relief has already been given on capital allowances claimed to date against income taxed at the old rate of 30 per cent. The amendments would increase the rate of writing-down allowance available on existing capital expenditure to compensate for the higher rate of corporation tax.

Recent investments have been adversely affected by changes announced in the Budget. In recent years, the oil industry has been encouraged to invest. Indeed, not long ago—in the November 2000 pre-Budget report—the Chancellor of the Exchequer said that it had been put to him that North sea oil companies that earn higher profits from higher oil prices should be subject to special taxes, but that he was determined not to make short-term decisions based on short-term factors. He said that the key issue was the level of long-term investment in the North sea and that that would be the approach that would guide Budget decisions in future.

Rob Marris (Labour, Wolverhampton South West)

Very good.

Christopher Chope (Conservative, Christchurch)

As the hon. Gentleman says, that was very good, at the time. Unfortunately, however, it is entirely inconsistent with what is in the Bill, as a result of which some companies have already announced job cuts. BP has announced that it will be cutting 800 jobs from its North sea operations, following closely on the 500 job cuts made a few months ago. It is also in talks to dispose of its Thistle field and is considering whether to decommission its North West Hutton field early in order to save costs. The Government's approach is inconsistent with their energy review in discouraging new gas field investment.

The amendments are designed to mitigate the extremely adverse impact of the regime that the Government are introducing under clause 90 in increasing corporation tax by 10 per cent. I hope that

they will realise that they have made a mistake. One way of pulling back from that position would be to accept the amendments, which, without going into more detail at this stage, I hope the Committee will do.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I welcome you to the Chair, Mr. Benton.

I support the amendments. I congratulate the Financial Secretary on her promotion. Many hon. Members have been aware of her career in the House and wish her well in it. We are especially glad that she now holds that position and is responding on behalf of the Treasury Benches. She is an experienced and distinguished economist who has studied and considered economics and its effect on business in particular. I am sure that she will be prepared to admit to the Committee that the Budget proposals for the North sea oil industry will only reduce investment. That is the crux of the argument that Conservative Members and my hon. Friends the Members for Gordon (Malcolm Bruce) and for West Aberdeenshire and Kincardine (Sir R. Smith) advanced in the debate of the Committee of the whole House. Both sides of the House have tried to advance that key argument and, worryingly, the Government have tried to dismiss it.

The Government have tried to pretend that there will be no huge tax increase, but according to the studies that Professor Kemp has undertaken for the industry, the increase will be equivalent to £8 billion over eight years. Surely there is no way that the Government can pretend that such a tax rise can do anything other than hit investment. I hope that the Financial Secretary will at least be more frank with the Committee than her predecessor on that point. That is why these amendments are important; they would go a small way to relieving the huge tax increase faced by that sector, which is important for north-east Scotland and the rest of the United Kingdom.

The Financial Secretary will want to show that she remains loyal to the Government and to ensure that she continues the arguments that they have used, but she could show some flexibility. She could consider this and subsequent groups of amendments and say that they may represent a way for the Government to make some amends for the huge tax impost. That might be one way of showing that the Government have been listening and appreciate the negative impact of the measure, demonstrated by the job losses that have been announced and the loss of confidence in the industry.

Many of the press comments and some of the statements from the industry show that one of the most damaging impacts of the tax changes is the effect on confidence and on the good faith that the Government had previously built up with the industry. We must remember that the industry has to operate in the face of great instability, especially in relation to the oil price, which has fluctuated massively during the past 20 years. If the Government add extra instability to what is an inherently unstable economic system, they will tie British industry's hands in going about its

business. They would compound the huge mistake that they have made if they fail to adopt some of the amendments in this group.

Amendment No. 99 would make small amends by enabling the writing-down allowances to be doubled in the next year or so. That would not involve huge amounts of money, but it would follow the logic of the clause by attempting to provide extra relief via capital allowances. It would also show that the Government recognise that their tax measures are in some way retrospective. Many of the investments that will be effectively taxed under clauses 90 to 92, which were debated on the Floor of the House, now face much reduced returns.

Although the investment decisions were taken under a different tax regime, those involved now face an extra impost. Introducing the proposed extra writing-down allowance would go some way towards recognising the extra burden imposed on those investments. I hope that the Government will agree to the amendment, which is supported by Labour and Opposition Members.

Michael Jack (Conservative, Fylde)

In following my hon. Friend the Member for Christchurch and the hon. Member for Kingston and Surbiton, I wish to underscore their arguments about the economic impact on North sea oil exploration. In dealing with the fields that are already in production, they have rightly drawn the Committee's attention to the fact that, in response to the request that I made when the issue was debated on the Floor of the House for the Government to justify why they wish to increase tax in this way, other members of the Committee and I received an economic case made out for a brand new oilfield that was immediately profitable at the end of its first year.

That case involved one of those wonderful bits of Treasury and Inland Revenue mathematics that are given to Ministers so that they have an illustration showing that a positive result can be achieved. By the magic of adjusting the cash flow for the field in relation to the tax allowances, bingo, they managed to create a result that suggested that the proposal would be beneficial to the oil industry. It just goes to show that, with the right sleight of hand, people can prove anything they want by means of statistics. If the impact of the measure is concentrated on an existing field, however, those arguments do not hold up. I congratulate the Financial Secretary on her promotion, which is justified, but I now expect her to deploy her expertise in demonstrating that the proposal will have no negative impact on existing fields.

In taxation matters, there is always the question of retrospection. Because the measure will have an impact on existing investment made under a different regime, I think that—as was said earlier—some further relief is justified. In all areas of investment in the oil business there is great sensitivity to changes in the oil price. While the industry has a certain expertise in taking the long-term view, in a mature field or a declining field—indeed, in certain parts of the North sea fields—short-term price changes can significantly affect decisions about whether any further investment

is to be made in a currently active field, or whether it is worth using any of the new technologies to enhance oil extraction from fields that are approaching the end of their life. All that could well happen unless the amendments are accepted.

Ruth Kelly (Labour, Bolton West)

I am delighted to return to the Committee after the short recess, Mr. Benton, particularly now that it is under your able chairmanship. I welcome my hon. Friend the Member for Wentworth to his new position, and look forward to working with him. I am sure that he will make a great contribution to the debate, and to the making and communication of Treasury policies.

It is a pleasure to return to the debate on the North sea oil regime, which featured such enthusiastic and well thought-out contributions from Members on both sides of the Committee of the whole House. The quality of those speeches showed that Members take their commitments to their constituents seriously, and are acting as honourable representatives. At that time, however, the Opposition chose to decouple two parts of an extremely important package that I expect to create a stable, long-term fiscal regime for a significant part of the economy.

Michael Jack (Conservative, Fylde)

Will the Financial Secretary clarify what she means by ''long-term''?

Ruth Kelly (Labour, Bolton West)

The right hon. Gentleman knows very well that, in the pre-Budget report and in past Budgets, the Government set out their intention of creating a long-term stable regime for the North sea which raises a fair share of revenue for the country. The Budget set out the operation of that regime in detail, and companies should now have the confidence to invest while knowing that they are not operating in a system that is clearly unsustainable and unfair to most taxpayers and citizens.

The clause and schedule introduce a new, generous system of 100 per cent. first-year allowances for capital expenditure incurred in the extraction of oil and gas in the United Kingdom and the United Kingdom continental shelf.The hon. Member for Christchurch described the new allowance as a ''sop'', but I completely reject the charge that it is a sop to the industry. The measure is very important because it will add to the industry's cash flow and provide additional incentives for the industry to invest. I do not agree with his analysis, or that expressed by the hon. Member for Kingston and Surbiton, although I welcome the kind remarks in his contribution.

I do not accept to any degree the charge that the investment allowance, which is part of the total package, will impact negatively on investment and jobs, because the package has been designed carefully. The investment allowance means that, even with the supplementary charge, companies investing in new projects will have higher post-tax rates of returns than under the previous rules. As I set out in the House when the clause was last debated, in terms of net present value the benefit of the allowance will

outweigh the additional tax for marginal projects. The effect on marginal projects will turn the effect on investment, and marginal projects will be encouraged by the change. The increased tax is designed to reduce the net present value of the more profitable fields, but such work is likely to go ahead in any event. The overall impact on investment is likely to be positive rather than negative.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Is the Financial Secretary really telling the Committee that she believes that taking £8 billion out of an industry over eight years will not have a negative impact on investment? Is she really asking us to believe that?

Ruth Kelly (Labour, Bolton West)

If the hon. Gentleman studies the speeches that were made in the House, he might convince himself that the measures have been designed so carefully that although they will clearly extract value from existing, more profitable fields, they will also increase the post-tax rate of return for investment in new marginal projects. Although that will have a cash-flow effect on companies, it will lead to greater investment and development. However, I do not want to rehearse arguments in Committee that we have already had in great detail in the House.

Iain Luke (Labour, Dundee East)

Does my hon. Friend the Financial Secretary agree with me, and indeed with the Royal Bank of Scotland, that although the big corporate players may take corporate decisions that shift activity away, recent job losses show that activity is already being shifted away? The job losses were not a direct effect of the Government's proposals, but a function of previous corporate decisions about the market being taken up if there were a move by smaller, leaner companies that could invest profitably.

Ruth Kelly (Labour, Bolton West)

I thank my hon. Friend for his intervention. It is right to point out in Committee that the industry had already forecast before the Budget that there would be an impact on jobs and activity over the coming years. We have to isolate that effect from the Budget measures, which will have a positive impact on both marginal investment decisions and jobs and activity in the future. Those two forces will clearly play out in due course.

I am of course aware of some of the comment on those issues, but I should like to point to Tony Wood, senior economist at the Royal Bank of Scotland, who said:

''We are concerned that negative publicity will impact on investment sentiment and do not see short term any negative impact from the budget.''

There is a risk of the industry exaggerating its concerns through self-interest. We must all be aware that pointing in an exaggerated fashion to potential effects that do not exist will have a self-reinforcing impact on the industry. I warn hon. Members not to get involved in that sort of scaremongering.

Ann McKechin (Labour, Glasgow Maryhill)

May I congratulate the Financial Secretary on her promotion? Does she agree that, had there been such a catastrophic effect on the industry as a result of the decision, we would have seen a marked drop in the

share prices of the companies concerned? In fact, there was no sizeable or noticeable impact whatever in connection with the dividend prices of the major oil companies that operate in the North sea.

Ruth Kelly (Labour, Bolton West)

I thank my hon. Friend for her kind remarks and her informed contribution, which builds on remarks that she made earlier. It is the case that there has not been a significant impact on the share prices of oil companies. We should interpret that in a positive fashion.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Prior to the intervention by the hon. Member for Glasgow, Maryhill (Ann McKechin), the Financial Secretary warned the Committee and the industry that they should not make panicky statements and suggested that people should avoid scaremongering. Does she not realise that the greatest damage has been done by the Government? Having been in consultation with the industry through the pilot project, and having built up a degree of trust, the Government have suddenly changed the tax regime and created a fear that there will be future instability because the industry can no longer trust the Government's word. Surely that is the greatest long-term damage that has been done to the British North sea oil industry.

Ruth Kelly (Labour, Bolton West)

I do not accept the hon. Gentleman's charge in any way whatever. We are committed to working with the oil industry, and to encouraging new investment, new exploration and development in the North sea. The proposals will make new investment more economic for oil companies, while extracting a fairer share of revenue for the taxpayer. The hon. Gentleman accuses us of inconsistency in the matter. I refer him to the statement in the pre-Budget report of 2000 when the Chancellor said:

''While it has been put to me that North sea oil companies, earning higher profits from higher oil prices should be subject to special taxes . . . The key issue is the level of long term investment in the North Sea. And this will be the approach that will guide budget decisions in future.''

In the Budget statement in 2001, he said:

''As we consider the next steps for taxation in the North sea, our approach will be guided not by short-term factors but by the need for a regime that raises a fair share of revenue and promotes long-term investment in the North sea.''—[Official Report, 7 March 2001; Vol. 364, c. 299.]

Those are the guiding principles that the Government have set out, which we have communicated to the oil industry. The industry knew that it was not contributing a fair share of revenue to the taxpayer. It knew that change was inevitable and that the taxpayer deserved a greater contribution from the industry. We have designed the measures to make investment more profitable in future, and to encourage investment and job-creating activity.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Financial Secretary says that the industry knew that there were going to be changes. Is she telling the Committee that the Government actually consulted the industry on such a tax change?

Ruth Kelly (Labour, Bolton West)

I am saying that the Chancellor set out very clearly in his Budget statement the approach that we were going to take to the North sea fiscal regime. What we have done is completely consistent with what was said at the time. Of course, no industry likes paying more tax, and I am not for a minute going to suggest that North sea oil companies are jumping up and down saying ''Thank goodness! The Chancellor has finally decided to force us to contribute more revenue to the Exchequer.'' However, I am saying that what we have done in the Budget is totally consistent with the approach set out in previous years. Any objective assessment of the situation that the oil companies might have chosen to consult would have suggested to them that more tax was going to be raised from the industry. We have designed the tax measures in such a way as to have a positive impact on the economy and the outcome is an important, significant and positive one for jobs and activity.

Michael Jack (Conservative, Fylde)

The Financial Secretary has outlined the care with which the measure was considered. Will she therefore share with the Committee the Treasury's estimate prior to the Budget for North sea investment over the next eight years? Can she also tell us the figure that she is working on post-Budget?

Ruth Kelly (Labour, Bolton West)

As the right hon. Gentleman well knows, we do not give, in aggregate or individual terms, forecasts of that detail. Particularly for North sea oil companies, it is straightforward to draw individual conclusions from aggregate data. For reasons of commercial confidentiality, we cannot share that with the Committee. As he knows, I set out in the House the criteria that were used to consider the matter.

I should turn to the specifics of the amendment, rather than rehearse recent arguments on the Floor of the House. The group of amendments with the chargeable periods commencing on or after 1 January 2003 provides an increased rate of writing-down allowance at 50 per cent., instead of the current 25 per cent. for expenditure already incurred by companies. I urge the Committee to reject the amendments.

I note that the hon. Member for Kingston and Surbiton said that it would not cost the Government much to accept the amendment, but the Revenue estimates that it would cost us up to £1 billion over the next two years, and that it would do nothing to increase investment in the North sea. The money incurred would be a pure deadweight cost and would mean a transfer of a substantial sum of money from the taxpayer to an industry that has already made good returns from the North sea recently and will continue to do so when the Bill's changes are introduced.

To accept the amendment would be neither sensible nor necessary. Our Budget changes have been carefully analysed and we have assessed their effects on all project categories, including future ones. We know of not one single project that would be made uneconomic by the Budget changes.

Michael Jack (Conservative, Fylde)

In giving us a figure for the cost of the amendment, can the Financial Secretary share with us the basis of that calculation? How much investment would the amendment give relief to?

Ruth Kelly (Labour, Bolton West)

I made it clear that the amendment is backward-looking and will do nothing to stimulate new investment, which is why we resist it. We have produced a system with a sensible marginal rate of tax on profits from a natural resource, and which has maximum incentives for investment. It is a principled and sustainable regime that is far more likely than the outgoing one to be durable of cycles.

John Burnett (Liberal Democrat, Torridge and West Devon)

I congratulate the Financial Secretary on her appointment.

I apologise for not being here for much of today's debate. Furthermore, I have not given the provisions detailed study. However, I should like to raise a common-sense point that may have been covered on the Floor of the House or in Committee. Is the new 100 per cent. allowance flexible? We all know that the up-front costs of investment are high, and that profits are slow in coming, so can the Financial Secretary confirm that any unused allowance can be carried forward until the allowance is completely exhausted?

Ruth Kelly (Labour, Bolton West)

I am extremely pleased that I gave way to the hon. Gentleman because he made an interesting and considered point. I am happy to be able to say that the answer is a definitive yes. If the allowance is unused when, for example, a new entry comes into play and it makes losses in the first year, the allowance can be carried forward and the full allowance can be taken up in due course. Taken as a whole, the regime that we have created will encourage investment, activity and job creation. This package is good for the economy. Our regime will be better for the industry and the country, and I therefore encourage the Committee to reject the amendments.

Howard Flight (Conservative, Arundel and South Downs)

May I raise the specific issue of mothballing? My understanding is that mothballing extends the life of a field and is something that everyone wants to see in the national interest, as opposed to shutting down, which means, ''That's it''. I do not understand why the new capital incentives will apply to shutting down but not to mothballing, which, if anything, is entirely the wrong way round. It is rather crackpot not to give mothballing the capital allowance. Why is it there for shutting down?

I apologise for being away. I intended to ask a question rather than make a separate contribution. My specific point needs explanation.

Michael Jack (Conservative, Fylde)

I listened with interest to the Minister's reply to this debate. I would like to pick her up on her retreat into ''commercial and in confidence'' when we questioned the economic arguments underpinning the Treasury's position. Magically, when matters are flowing in the direction of the Treasury and the world outside is saying, ''Thank you very much for this good idea'', estimates of great increases in investment and economic activity are scattered around like confetti.

However, when the going gets tough and people start saying, ''How did you make this calculation and what is the economic impact?'', we find that the shutters come down.

I draw the Minister's attention to a letter sent to her on 15 May by the UK Offshore Operators Association. Interestingly, commenting on a debate on the Floor of the House in which the same argument was used, the Director General, Mr. James May, writes:

''Having consulted my members (who provided this data)''—

the economic information that we discussed a moment ago—

''they are firmly of the view that the data, provided in aggregate, is not of a commercially sensitive nature and they would encourage you to release it at the earliest opportunity. UKOOA Members regularly share and publish this aggregated data, as in our annual Economic Report.''

I did not ask for figures oil company by oil company. I asked for the numbers, which the Treasury must have. If the Minister were truly confident of the impact of the measure, she would have no hesitation in sharing in public the Treasury's analysis. The Treasury must have had a figure for investment to have calculated the cost of the measure. The Minister knows exactly what the numbers are, because otherwise she could not have put to the Committee a moment ago an estimate for the cost of the amendments tabled by my hon. Friend the Member for Christchurch.

If the Minister knows the cost, she knows the amount of investment affected, and, if she is as confident of her position as she says, it is remarkable that she is not prepared to share the numbers with the Committee. In the age of freedom of information that we are rapidly moving towards, it will be interesting to see how she could defend, in terms of the public position, not sharing with the House of Commons the basis of an argument that would enable us to understand more clearly the economic assumptions that have been made. Indeed, the industry invited the Minister to share such information with us. I am interested to know why the Minister is so reluctant.

The Minister will also be aware of a letter that I am sure was circulated to her. Having had an opportunity to assess the current situation, UKOOA members wrote to the Chancellor on 6 June. The Minister said in her opening remarks that the Government want to create a period of long-term fiscal stability. I asked her what she meant by ''long-term''. She replied that the Chancellor said that the Government want the North sea regime to be long-term and stable, but I wanted to know how many years should be read into ''long-term''.

On the subject of the measure to which the amendment relates, UKOOA's letter to the Chancellor says:

''This is a marked feature of the proposals, and a change from historical practice.''

The Government have signalled a significant change by introducing an element of retrospection into the measure, a factor that the Minister did not mention. If I have got that wrong, I shall be the first to apologise. As I have not had the benefit of the briefing that she has received, I may have misunderstood what UKOOA goes on to say.

UKOOA says that without the ''transitional relief'' proposed under the amendments advocated by my hon. Friend the Member for Christchurch, the current proposals

''will have a significant detrimental effect on investments''.

The hon. Member for Glasgow, Maryhill said that the share price of the oil companies did not go down when the measure was announced. She lives in an odd world that does not recognise the international mobility of investment money.

One of the arguments for amendments Nos. 99 to 104 is that they will help to sustain investment in the United Kingdom offshore fields, and not allow it to move to potentially more profitable areas. I am not surprised that the share price did not go down, as people in the markets would have said, ''Fine; some of the investment money that we might have made in the UK offshore fields will go elsewhere.'' In particular, it will go to Scotland and those constituencies on the west coast that are benefiting from some of the oil and gas development there. It will be to the UK offshore fields' detriment that that investment goes elsewhere.

I do not wish to rehearse the arguments that we had on the Floor of the House, but it is evident that there are more profitable areas than the UK continental shelf for investment in oil. [Interruption.] I can hear that the Royal Bank of Scotland is ringing up to agree with my arguments. I am delighted that it pays so much close attention to our debates. The Minister may well be able to sustain her position, but unless she can justify it more specifically, there will be deep suspicion that she is resisting the amendment because the proposal in the Bill represents a smash-and-grab raid by the Chancellor on a source of money that he has decided he wants.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I rise again because I was not happy with the Minister's reply. I have also been informed of a point that has not yet been raised, which is that smaller fields and companies tend to lease, not purchase, their equipment. They have therefore profited from 100 per cent. relief on such leasing, but the clause does nothing to help them offset the new tax. Such smaller companies, which are often the most innovative—and are trying to develop the marginal fields that we have heard so much about in the Government's defence of themselves—will not benefit. They will be hit by the 10 per cent. tax and will have no offsetting allowances.

If the Minister is trying to tell the Committee that the new structure will be beneficial to investors in the long term because the marginal fields will benefit, she shows that she and the Government do not understand how the industry works through leasing for small companies and fields. I hope that the Government will take that on board, and that if the Minister speaks again she will give more assurances to the Committee and the industry that the Government will think again about the measure and will consider the amendments under discussion.

Ruth Kelly (Labour, Bolton West)

I very much enjoyed hon. Members' contributions on the point raised by the hon. Member for Arundel and South Downs. We shall return to that

point under a later amendment, but I will say that the 100 per cent. allowance for decommissioning covers the mothballing of infrastructure at the end of a field's life. We may want to return to that point when we discuss amendment No. 109.

The right hon. Member for Fylde has made several accusations that I do not accept. He talked about the shutters coming down, and the Government's unwillingness to share our economic analysis with hon. Members. I set out in considerable detail our methods of economic analysis, and the economic appraisal assessment that we used in developing these policy ideas, on the Floor of the House—which gave an opportunity for hon. Members on both sides of the House to cross-question and carefully scrutinise them. Indeed, that opportunity was taken up, and I do not intend to rehearse again today the arguments that we went through at that time.

The right hon. Gentleman mentioned the letter from the industry association, which says, ''We have lots of figures, and we do not mind if they are put in the public domain, and the Treasury should do the same.'' The figures that we are talking about are not industry figures; industry figures are incomplete. We are talking about the release of Inland Revenue and DTI information, which is commercially confidential. The industry association does not represent all the companies in the North sea.

However, Committee members are, of course, able to find out the estimated cost of the Budget measures and the forecast tax receipts, which are published in the Budget. Therefore, no one could accuse the Government of having the shutters down, and of not being prepared to share our analysis with hon. Members.

The right hon. Gentleman also talked about what we consider the long term to be. I have set out the criteria on which our assessment of the fiscal regime was made. The right hon. Gentleman accused the Government of imposing an element of retrospection. I do not accept that that is the case. The measures will come into force as they are introduced. Of course, the industry has made plans on the basis of different tax policies, just as ordinary individuals in life make plans on the basis of a particular tax regime. When tax rates and reliefs, and so on, are changed in the Budget and those individuals have to adjust, we do not say that that is retrospective, and nor should we say that the regime that we are introducing in the North sea is retrospective.

Not a single person or company has come to us and said that a single project will be made uneconomic by the changes that we shall introduce. In fact, serious analysis has been published that shows that the impact on investment from these changes will be positive.

Mark Field (Conservative, Cities of London and Westminster)

A distinction should be drawn between individual taxpayers and the oil industry on two grounds; first, the substantial effect that this will have on the oil industry, and secondly, and perhaps more importantly, the fact that the oil industry was—so we are told—kept as an integral part of this entire process, because it was part and parcel of the industry

consultation that allegedly took place prior to this happening. However, as we all know, the oil industry has been surprised by the recommendations.

Therefore, there is a fundamental difference between the adjustment that an individual taxpayer makes and that which is being imposed on the oil industry as a result of these measures.

Ruth Kelly (Labour, Bolton West)

As I explained to the Committee, I do not expect an industry to rejoice when additional tax is imposed on it; it would be extraordinary if it did. However, for reasons that I have explained, I do not think that this sort of change to the fiscal regime cannot have been anticipated.

Mr. Flight rose—

Ruth Kelly (Labour, Bolton West)

I give way, although I wish to make progress.

Howard Flight (Conservative, Arundel and South Downs)

Is it not the case that, when my right hon. Friend the Member for Fylde was a Minister and changes were made to oil taxation, they did not apply to revenue flows from investments that had already been made? These measures are understandably seen as newly retroactive because, due to the huge amount of capital investment in the industry, the precedent with regard to the oil industry has been not to apply them to projects that are already in hand. As the Minister knows after being encouraged by Pilot, the industry feels that it has been cheated by the Government and sucked in to make investments and commit capital. A 33 per cent. increase in taxation has been applied on those committed investments. On past precedent, that is in bad faith.

Ruth Kelly (Labour, Bolton West)

I am grateful that the hon. Gentleman made clear—for the sake of both myself and the Committee—the difference that he understands between retrospection and retroactivity in this case. However, as I have spelled out, and perhaps laboured, the purpose of the tax changes is to encourage new investment and the development of marginal fields. Of course, previously profitable fields, many of which incurred investment at a time when the rates and the amount that was expected to be paid to the Revenue were much higher than today, will have to pay more. That is part of the package's purpose. We are interested in encouraging investment while securing a fair share of revenue for the Treasury.

Mr. Chope rose—

Ruth Kelly (Labour, Bolton West)

Perhaps the hon. Gentleman will let me make progress to deal with the point on leasing raised by the hon. Member for Kingston and Surbiton.

Lessors will not pay the supplementary charges on their profits even if they are leasing assets in the ring-fenced area. Therefore, extending the scheme to lessors who are outside the charge would give relief in circumstances in which there is no reason for that.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am sorry to have sparked an esoteric sub-debate. Can the Minister make it clear whether a lessor leasing for the purposes provided for in the Bill will receive the 100 per cent. allowance so that that tax benefit can be passed in due course to the lessee in whole or in part?

Ruth Kelly (Labour, Bolton West)

I should like to make it clear to the Committee that the normal 25 per cent. allowances available to lessors that already assist lessee companies that are not paying tax will continue under the new regime. Investment in the North sea currently totals more than £3 billion a year. Only a tiny part of that investment is leased assets. We believe that that reflects the specific nature of the oil industry, which is generally quite profitable and may rely on equity finance to fund its investment. Of course, we will monitor closely the operation of the regime to ensure that there is no distortion in the system.

I heard what hon. Members said about this, but we believe that the current operation of the regime and the 25 per cent. allowance is sufficient.

Christopher Chope (Conservative, Christchurch)

The Minister said that the amendment would cost £1 billion a year. Will she tell the Committee the cost to the Exchequer of the present proposals in the clause?

Ruth Kelly (Labour, Bolton West)

The cost of the proposals and forecasts of tax receipts are clearly shown in the Red Book. I have set out the way in which we undertook the assessment in great detail. The pure dead-weight cost of the hon. Gentleman's proposals would be £1 billion, which is why I urge hon. Members to reject the amendment.

Christopher Chope (Conservative, Christchurch)

We have had a very disappointing response from the Minister. Let us deal with costs. She said that the amendment would cost £1 billion and that we know the cost of the clause to the Exchequer, but we do not. We know only what is in the Red Book: the net increase in yield to the Exchequer of the measures that relate to the North sea oil regime.

I am asking a perfectly reasonable question: what will the cost be to the Exchequer of the first-year allowances that are set out in the clause? The Minister is stonewalling and refusing to respond. Much as we congratulate her on her well-deserved elevation and promotion, I must say that, in light of what she has said during this debate, many people in the oil industry will regret the fact that her portfolio will not be transferred to the Economic Secretary, who has just arrived on the Front Bench.

Ruth Kelly (Labour, Bolton West)

For the record, perhaps I may set out the cost of the measure. In 2002-03, it will cost £400 million; in 2003-04, £650 million; and in 2004-05, £500 million. Perhaps that will satisfy the hon. Gentleman that I am taking this issue seriously.

It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

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

Standing Committee F

Finance Bill

Clause 62 - First year allowances for expenditure wholly for a fence trade

Joe Benton (Labour, Bootle)

I remind the Committee that with this we are taking the following amendments: No. 100, in page 40, line 27, after 'first-year', insert 'and writing-down'.

No. 101, in page 40, line 31, after 'amendments', insert 'relating to first-year allowances'.

No. 102, in page 40, line 32, at end add

'(4) The amendments relating to writing-down allowances made by that Schedule have effect for chargeable periods beginning on or after 1st January 2003.'

No. 103, in schedule 21, page 252, line 4, at end insert—

'6A In section 56 subsection 7 shall be replaced with—

''(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period is a percentage of the amount by which AQE exceeds TDR, as shown in the Table—

AMOUNT OF WRITING-DOWN ALLOWANCES Type of AQE AmountAQE incurred on the provision of plant and machinery for use wholly for the purposes of a ring fence trade which is not excluded by section 46 (general exclusions) 50% All other AQE 25%

6B In section 56 after subsection (7) add—

''(8) The increased writing-down allowance for ring fence trades will only be available for chargeable periods beginning on or after 1st January 2003.

(9) In this section ''ring fence trade'' has the same meaning as in section 4SF.''.'

No. 104, in page 255, line 30, at end insert—

'14 In section 418, subsection (1) shall be replaced with—

''(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period in respect of qualifying expenditure is a percentage of the amount by which UQE exceeds TDR, as shown in the Table—

AMOUNT OF WRITING-DOWN ALLOWANCES Type of UQEAmount UQE on the acquisition of a mineral asset10% UQE for use wholly for the purposes of a ring fence trade50% All other AQE25%''

15 In section 418 after subsection (6), add—

''(7) The increased writing-down allowance for ring fence trades will only be available for chargeable periods beginning on or after 1st January 2003.

(8) In this section ''ring fence trade'' has the same meaning as in section 45F.''.'.

Christopher Chope (Conservative, Christchurch)

I think we had more or less concluded the discussion. Just before the break, the Financial Secretary to the Treasury gave us some very interesting figures. I am sure that there will be further comments on the subject, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 111, in page 40, line 32, at end add—

'(4) The Treasury shall report no later than 31st December 2002 on the net monetary effect of this section and sections 90 to 92 of this Act.'.

The amendment would require the Treasury to report the net effect of the tax changes, including the enhanced allowances affecting the oil and gas extraction industry, largely because there appears to be, on the same basic evidence, substantial differences between the numbers reported by the industry on the expected impact and the Government's position. The amendment is in essence partly a probing one to require the Treasury to justify its assumptions and calculations. It is possibly more than a probing amendment in that, if the Government are not willing to see the light at this stage, we feel that the policy needs to be kept under close review and there may be a case for including a report on the impact of the measures.

On Second Reading, the then Chief Secretary to the Treasury argued that the negative effect of the additional 10 per cent. tax on investment would be neutralised by the new 100 per cent. first-year allowances, and the Financial Secretary has continued that argument today. As she will be aware, the assessment of the industry is that new investment of some £10 billion will be lost between now and 2010, including a loss of some 50,000 jobs. It is worth pointing out that, on a rough and ready calculation, the income tax and national insurance lost as a result of job losses is equal to approximately half of the lost additional £7.6 billion of tax revenues.

The other crucial point in terms of the principle and effectiveness, or otherwise, of the capital allowances is that the future of the North sea industry is increasingly in the hands of smaller companies. The North sea is and will become increasingly more immaterial to

major operators such as BP. However, many smaller companies do not have the existing production to benefit from the 100 per cent. capital allowances. In their early years, it is very rare that they are profitable, and as we are aware, financing costs on borrowing to finance new investment are not allowable against the extra 10 per cent. tax.

For example, two start-up companies are involved in redeveloping the Argyll field. Typically, a field has a life of seven years, and is not normally profitable for at least the first three years. That is the crucial territory. Increased capital allowances cannot be effective for new investment if there are no profits to set off against those capital allowances, unless, with a bit of luck, they become profitable well down the line. Bruce Dingle, the chief executive officer of Venture Production, a typical new entrant, has made the point that start-up costs are spectacular where every other late-stage basin such as the North sea receives real incentives to maintain and stimulate investment and production, and not disincentives, which the higher tax rate represents, or non-effective capital incentives, which the 100 per cent. allowance constituted companies have not got the profitability to make use of.

We have already touched on the nature of the Financial Secretary's reply and on the economic data. The point that I stress and that is crucial to the amendment is that the UK Offshore Operators Association has used the same economic information and basis for forecasting investment as the Government. However, the industry trade body and the Government have reached vastly different conclusions about the impact of the extra taxation and capital allowance packages.

Not only did the Chancellor stress on record the importance of not exploiting North sea recovery in its mature stage through a changed and excessive tax regime, but the Secretary of State for Trade and Industry in November 2000, before his movement elsewhere and subsequent resignation, welcomed the £1 billion new investment. He commented that the Government had created a stable tax regime to which the industry was responding well. The Government cannot be surprised that the industry feels that it has been badly betrayed. In November 2000, the Chancellor said:

''It has been put to me that North sea oil companies earning higher profits from higher oil prices should be subject to special taxes, but I can tell the House that I am determined not to make . . . decisions based on short-term factors. The key issue is the level of long-term investment in the North sea. This will be the approach that will guide Budget decisions in future.''—[Official Report, 8 November 2000; Vol. 386, c. 317.]

The Government are apparently attracted by a £10 billion decline in investment and 50,000 job losses. The Chancellor's words meant, as with so many things, the very opposite of what they said.

We are on serious territory. One could understand a Government going for a tax grab if they thought that they could get away it and wanted to be purely opportunistic—that is what they did with pension funds. However, such behaviour will rebound on

them. The £5 billion pension tax grab has wrecked occupational final salary schemes, and, mark my words, this tax grab will severely damage North sea oil investment.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I support the amendment. I am glad that we have the opportunity not only to rehearse arguments heard prior to the intermission, but to develop further ones. I learnt from my hon. Friend the Member for Gordon (Malcolm Bruce) during the intermission that he knows of several companies that are not going ahead with investment. He feels that the level of activity will fall.

This morning, the Government said that they had heard of no examples of people not going ahead with investment. It may be that they have not heard of any because of the fact that investment has not gone ahead. It would be difficult for the Treasury to, shall we say, prove a negative. However, in the United States many small business that would otherwise undertake exploration and consider drilling in marginal fields are not doing so. The word is that Britain no longer has a stable tax regime, or one that enables a profitable return, so investment decisions are not going ahead. Amendment No. 111 would therefore be appropriate. By the end of the year, we would be able see real figures rather than those dreamt up. We are not allowed to see the evidence for the figures.

That takes me back to the point about leasing, which I made in an earlier intervention on the Minister. It has come to my attention that a large section of the industry, which is exploited by small and medium-sized enterprises, depends on the leasing of assets. That does not appear to have been taken into account in the Government's modelling and tax proposals. Some companies use capital leasing, by which they depend on a non-oil company having bought an asset, which they lease from it. Of course, such a non-oil company will not be able to benefit from the allowance that the Government propose in the clause, and will have to pass the extra cost down the line. A small business that is leasing will get no benefit from the allowance because it is leasing an asset from a non-oil company. It will therefore be hit by the charge and there will be no compensation to it.

The Government say that they will promote that important, marginal, growth sector through their structure, but they will cause real damage. They are trying to persuade the Committee that the structure on which they have landed will produce a spurt of investment and increase returns, but the hon. Member for Arundel and South Downs (Mr. Flight) and I have quoted examples that suggest that the opposite will be the case. Although the amendment is in many ways a device to help provoke debate, if they were to accept it, they would call our bluff and that of the industry. We could make an analysis, which would be available to the House of Commons by the end of the year, to drill down to the measure's monetary effects. Some people suspect that the Government will not reach their revenue estimates because they will do too much damage to investment in the oil industry.

Tom Harris (Labour, Glasgow Cathcart)

I rise to make a few brief points. I was near to tears listening to the heart-rending pleas from Opposition Members because I had no idea that multinational oil corporations were in such difficulties. Like me, my hon. Friend the Financial Secretary to the Treasury—I hope that I have got her title correct because she has been promoted—is a former journalist who will have learnt the aphorism by which to identify a news story: when a dog bites a man that is not a story; when a man bites a dog that is a story. When businesses complain about taxes that is not a story; if businesses were to welcome new taxes that would be a story.

The argument presented today by Liberal and Conservative Members is based purely on the premise that multinational corporations will have to pay extra taxes. That is a shame. I wish that we lived in a world in which those companies did not have to pay their fair share, but much of the extra revenue that will come into the Treasury will be used to enhance public services.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

In using an analogy from the newspaper industry, the hon. Gentleman has shown that spinning has gone too far. He should be defending the jobs of Scottish citizens and his constituents.

Tom Harris (Labour, Glasgow Cathcart)

I am more than happy to defend jobs in Scotland and elsewhere in the United Kingdom, which is something that Opposition Members have not done in this debate. The taxation regime for the oil industry in the United Kingdom is benevolent compared with that in other oil-producing countries. I do not believe some of the arguments used by Liberal and Conservative Members. It is right that the oil companies should pay their way. They are not being asked to pay more than is due, but simply a fair amount. I hope that the Government will recommend voting against the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I was not able to interrupt and, with the greatest respect, the hon. Gentleman has missed the point. With a mature field such as the North sea, there is a delicate argument about the right level of tax to generate the greatest revenues and sustain rising investment and jobs. The argument is not ''bleeding hearts for large oil companies''; it is the economic argument that he will hear from not just the industry but outside specialists, indeed the leading specialist in the territory. The Wood McKenzie report, published only last February, contains an analysis of the maturity of the North sea and the fiscal prospects. It concludes that there is no room for additional fiscal rent to be extracted from upstream companies on an expected-monetary-value basis.

Our argument is, ultimately, a pragmatic economic argument. We are saying that the Government's projections and numbers are wrong, both in terms of impact on investment and in terms of revenue potential.

Tom Harris (Labour, Glasgow Cathcart)

Will the hon. Gentleman explain how his party would fill the gap that was created by a refusal to proceed with this tax change?

Howard Flight (Conservative, Arundel and South Downs)

I fear that the hon. Gentleman did not hear what I said. If he does the sums in terms of revenues and lost revenues, he will find that the net tax benefits will be nothing like those forecast by the Government. Moreover, as was pointed out earlier, even the gross figure may not be anywhere near the Government's forecast.

Let me point out, with respect, that we are not the Government. It is the Government's job to decide where they will raise revenue. We are merely saying that, pragmatically, we believe that the proposal is against the national interest. It will not raise revenue. It will reduce North sea production. It will worsen the current account balance. It will lose jobs, and people will have to be supported by welfare payments. We think that the Government's judgment is wrong.

Iain Luke (Labour, Dundee East)

The hon. Member for Kingston and Surbiton (Mr. Davey) mentioned jobs. My constituency on the east coast of Scotland has lost jobs in the past because of investment decisions by big multinational companies in the North sea, which have concentrated their operations in Aberdeen.

We are currently seeing a change in the nature of operations in the North sea. The larger North sea oil companies are moving, as is inevitable. The hon. Gentleman may have read an article published recently about the huge investment BP is making in, for instance, the Caspian sea. I believe that, in many respects, the North sea will go the same way as the gulf of Mexico. A number of big American companies moved from there to other fields.

I think the Government are right to raise taxes, but I also think it right for the Opposition to raise questions. We are talking about an operation that still has a reasonable medium and long-term life. We must protect those jobs. We must also ensure that the revenue we obtain from companies pays for what they obtain from the country. Ultimately, we should establish the right price for a barrel of oil, which is higher than it has been for a long time, and what we should raise in revenue. That will produce the right balance.

Earlier, we talked about decisions that had already been made, involving 50,000 lost jobs. I believe that the decision to cut 500 jobs, at a time when there was a lot of tension in Scotland, was made before the text of the Budget was known. Decisions were made on the restructuring of business of big multinationals from the North sea to other areas. Most of the movement is long term. The chief executive of BP made that point at a meeting of the UK Offshore Operators Association. He did not believe that a 10 per cent. increase in corporation tax would have an immediate effect on investment in North sea oil. The hon. Member for Gordon apparently knows about that. Anyway, the chief executive believed that in the long

term, given the corporate decisions that must be made elsewhere, the big firms would move to more profitable fields. They would not linger. That is the nature of the business: it is a cut-throat business.

Experts in the Scottish press who investigate the Scottish oil industry know that the natural process--it happened in the gulf of Mexico--is that smaller companies move into the gap left by bigger players when they eventually sell their interest.

Howard Flight (Conservative, Arundel and South Downs)

I agree entirely with the hon. Gentleman's diagnosis, but the logic is that new ventures and smaller businesses will be expected to keep the oil industry in the North sea going. I would be interested in his opinion of the package of measures for those companies, which is at the heart of our concern about the combination. The capital allowances will not be an effective incentive for investment because those companies are not profitable enough to use them.

Iain Luke (Labour, Dundee East)

The measures are a first step because production in the North sea is changing. An article in Scotland on Sunday stated:

''Colin Welsh, the European managing director of Simmons & Company, the American energy investment firm, predicted new exploration''—

new investment and new production players would form a group to capitalise on the sale of holdings in the North sea. The package is there, but the trick is to question and probe such packages. The Treasury must ensure that they are effective and, because of the number of jobs left in North sea oil, they must be reviewed regularly.

I sympathise with some of the amendments, but the Government have taken a balanced decision on the revenue that they will extract from the corporation tax increase and the need to run the national budget. Given the number of people who work in the industry and need to use the health service and social services, a balance must be struck. There is still a lot of work in the North sea and I have attended several meetings as a new member of the UK Offshore Operators Association. In Dundee recently, I visited schools engineers clubs where the success of North sea oil was a big issue. Innovation has been essential to capitalise on difficult oil fields that would previously not have been capitalised on.

The Treasury and the Department of Trade and Industry must ensure that the UK Offshore Operators Association and operators in the North sea are kept closely informed so that they know what is going on. The Government's decision marks a definitive moment in the balance of production in the North sea. On balance, I believe that their decision is correct and that the measures will help newer businesses to enter production fields, but we must keep a close eye on that because it is still a vital strategic industry for economic production.

Mark Field (Conservative, Cities of London and Westminster)

I support the comments of my hon. Friend the Member for Arundel and South Downs. I

take on board with interest the robust comments of the hon. Member for Glasgow, Cathcart (Mr. Harris) and the more compliant comments of the hon. Member for Dundee, East (Mr. Luke), who obviously has a lot more experience of the cut-throat nature of the oil industry than some Conservative Members. Those comments were entirely fair.

The substantive issues concerning the clause have been lost in our discussion of the previous group of amendments. Amendment No. 111 covers a narrow point. We want the Treasury to analyse and examine the net monetary effect. We do not know what the effect on the industry as a whole will be and it would be sensible, before taking a path along which it would be difficult to retreat, at least to examine the net monetary effect. The hon. Member for Glasgow, Cathcart may be right and the provision may lead to more money coming into the Treasury's coffers--that is the intention--to fund the national health service and other public services. However, there must be a real risk that it will have the opposite effect and that, in having negative effects not only on multinationals but on small start-up companies in the oil business, many of which will employ significant numbers of people in the UK, they will not result in any great monetary advantage to the Treasury. It seems that the proposal is a sensible compromise, given that there are two distinct schools of thought about the oil industry. Therefore, I hope that the Financial Secretary will give it further thought.

Michael Jack (Conservative, Fylde)

In the intervening period since the previous time we gathered in this Room, I managed to obtain some official Government figures on the size of the investment that underpins our discussions on this part of the Bill. It is a great sadness that the Treasury cannot be as open with public information as the Department of Trade and Industry is. The DTI carries out an annual survey of investment in offshore oil. The survey results for 2001 make very interesting reading, because they show the fragility of the forward investment position in the oil and gas industry. That is why Opposition Members have made the points that they have. For the record, I would like to share the information with the Financial Secretary in the spirit of transparency and openness and perhaps explore with her whether the Treasury's figures match up with those of the DTI. It would be very interesting to know whether, in the world of joined-up government, they have the same view.

For what I might call the firm area of oil and gas exploration—so-called sanctioned fields, which are defined as fields in production or under development— including sanctioned incremental investment, the sums are £2.3 billion for 2002, £1.3 billion for 2003, £800 million for 2004, £600 million for 2005 and £200 million for 2006. The point has been made that, although at present there may be a good level of activity relative to the maturity of our continental shelf fields, it is clear that forward decisions for the years from 2004 onwards are very much in the pending tray.

If we consider the next category, which is probable fields—fields that are likely to move forward during the next four to five years—we find a much thinner picture, in the same way. The figures are £1.8 billion for 2002, £2.5 billion for 2003—an increase, but it is steadily downhill after that—£1.8 billion, £700 million and £400 million. Given the dearth of agreed investment, it would be surprising if the measures that we have been discussing did not substantially affect forward investment prospects.

I would be very interested to hear why the Financial Secretary believes in the robustness of her view against the real-world background in which the actual levels of committed investment rapidly tail off from 2004 onwards and in which the Government's proposals will bite. That is why we in the Opposition are asking for some mitigation.

Howard Flight (Conservative, Arundel and South Downs)

Is not it the case that the DTI-sponsored Palec cogency studies broadly found that 32 jobs are lost for each £1 million decrease in investment? Therefore, central to our argument is the issue not just of investment forecast but of the effect on jobs.

Michael Jack (Conservative, Fylde)

My hon. Friend has been carrying out parallel research, and I am delighted that he has augmented the line that I have been putting forward. I shall not rehearse all the figures, but if one considers parallel aspects of North sea investment that might not necessarily be affected by the measure, one finds a similar lack of absolute forward commitment the further on they go. [Interruption.] The Minister's body language is always instructive—she is shaking her head as if to say, ''Well, you ought to know.'' That is true, but we are talking about the difference between absolute and committed investment and investment which, if the level of activity presently being enjoyed on the continental shelf is to be sustained, will have rapidly to increase above the amount that has already been committed.

That is the point—the rate of return will be the main problem, particularly for those fields that do not have a profitable cash flow at the end of the first year to absorb the full effect of the 100 per cent. write-off. That type of field is likely to be the first to perish in terms of the investment decision-making process. Sadly, the Minister will not discuss how she has reached her conclusions. How are we to know whether her arguments are robust? The figures are telling and they underpin some of the arguments made by my hon. Friends on the Front Bench in support of their amendments.

Mark Hoban (Conservative, Fareham)

I had not intended to speak in the debate on the amendments to the clause on oil taxation, as it is not an area with which I am particularly familiar. However, the cases that we have heard put on the impact of this change in taxation on the oil industry have been polar opposites. The hon. Member for Glasgow, Cathcart suggested in his customary style that the business community is crying wolf over this matter. He was ably supported in that case by the Minister. Conservative Members have

taken an alternative view—that the changes will have a negative impact on the oil industry and could lead to a considerable loss of jobs and investment.

It is important that we continue to monitor the impact on investment and jobs of the changes in oil tax. The amendment tabled by my hon. Friend the Member for Arundel and South Downs, which seek to provide for a report on the impact of this measure on revenues, is important and we should all support it. The oil fields of the North sea are an important asset that should be exploited fully in the country's interests, not purely in the economic interests of the country but in the interest of those who work in the North sea.

I declare an interest, in that my brother-in-law is a deep-sea diver working in the oil sector. I am acutely aware, based on his patterns of employment, of how fragile the investment in oil fields is, as my right hon. Friend the Member for Fylde (Mr. Jack) said. When the economics are good, my brother-in-law's services are in great demand both in the North sea and elsewhere; when the economics are bad, he has—to use a phrase of a former Member of this House—more time to spend with his family.

For my brother-in-law's sake and for the sake of all those who work in the sector, it is important that the Government continue to monitor closely the impact of this legislation. The Government would be failing in their duty to ensure that the oil fields of the North sea are fully exploited if they refuse to support the amendment.

Ruth Kelly (Labour, Bolton West)

The contributions on the clause have been full and well informed, and I found those of my hon. Friends particularly interesting. I enjoyed the remarks of the hon. Member for Arundel and South Downs and the way that they put the clause in the context of the Chancellor's Budget statements, which set out clearly his intention to raise a fair share of revenue for the nation from North sea oil while encouraging long-term investment and not basing any policy on short-term changes. That is exactly what we have tried to do with this package of measures.

The amendment, as I understand it, is designed to require the Treasury to issue a report on the clause's net monetary effect on companies. The clause will have a 100 per cent. positive impact on companies' cash flow, so perhaps the Opposition did not mean precisely what they put down in the amendment. Perhaps they were talking about the impact of the total package on the net monetary value, which we have already debated at length on the Floor of the House.

Howard Flight (Conservative, Arundel and South Downs)

The amendment refers to

''sections 90 to 92 of this Act''

as well as to the clause, so it is clear.

Ruth Kelly (Labour, Bolton West)

I thank the hon. Gentleman for clarifying that point, but we debated the subject at length on the Floor of the House. The package of measures will have a positive net monetary effect for the nation as a whole. That is its intention.

The hon. Gentleman questioned whether the North sea had the capacity to deliver a fairer share of revenue to the Exchequer while maintaining activity and investment incentives. Again, I think that I went through the subject in detail on the Floor of the House. As I said then, following the tax changes made by the Conservative Government in 1993 and the abolition of petroleum revenue tax, the rate of return in the oil industry rose from 10.5 to 34 per cent. last year. By comparison, other non-financial industries made an average rate of return of 11 per cent. last year. Some might try to argue that that difference was due to the high oil price, but that is not the case.

Michael Jack (Conservative, Fylde)

Will the Financial Secretary give way?

Ruth Kelly (Labour, Bolton West)

I will if the right hon. Gentleman lets me make my point. The rate of return for the North sea was higher than that of other industries in each of the past nine years, even in 1998 when the oil price fell sharply.

Michael Jack (Conservative, Fylde)

For the sake of clarity, will the Financial Secretary tell me how the rate of return was calculated and who calculated it?

Ruth Kelly (Labour, Bolton West)

The right hon. Gentleman knows full well that I set out on the Floor of the House the precise assessment criteria and appraisal methods that we used to reach our conclusions on rates of return. I shall not repeat that today. I do not accept the accusation that 50,000 jobs are under threat and that activity will fall as a result of the Budget changes--an accusation that the oil industry is making and that the hon. Member for Arundel and South Downs has repeated today.

I am talking about the impact of the Budget changes on investment activity and jobs, not about whatever else in the external environment may affect the oil industry. I would be completely foolhardy if I were to make an individual forecast of what is likely to happen in relation to that.

Howard Flight (Conservative, Arundel and South Downs)

The rates of return issue is central to the ability to pay tax. While we can debate the historic rate of return, the crucial issue is not the history but the future. The hon. Member for Dundee, East mentioned the change in the North sea from large companies to small ones. Given that change and the increasing marginality of fields to be developed, the relevant issue is what the future rate of return will be to sustain the additional taxation. The Financial Secretary says that it is not her job to calculate that, but in a way that is exactly what the Government must do when considering the pluses and minuses of such tax changes.

Ruth Kelly (Labour, Bolton West)

I agree, but it is not our job to try to predict how individual companies will calculate their post-tax rates of return. In aggregate for marginal fields with the new investment coming on-stream, the post-tax rate of return will increase as a result of the measures. The benefits of the first-year allowance

outweigh the effect of the increased tax take for marginal investment. We should therefore see new developments and projects as a result of the changes.

Of course, more profitable projects will pay more tax. The regime is designed precisely for that to happen. Even after the tax changes, the more profitable projects should still make respectable profits, and we shall have an oil industry regime that compares favourably with any in the rest of the world.

Michael Jack (Conservative, Fylde)

The Minister clearly stated that, in the Treasury's judgment, there is a relationship between the taxable potential of the North sea and the rate of return. Will she say whether the same principle will guide the Government in taxation of other areas of economic activity, so that those with a rate of return in excess of 30 per cent. can prepare for the inevitable—in other words, for more special taxes?

Ruth Kelly (Labour, Bolton West)

The right hon. Gentleman will know that there are many reasons why particular rates of return are made in different industries, and whether they are sustainable over the longer term or temporary. I remember him questioning me on the Floor of the House on fairness. Over a long period, the post-tax rates of return have been significantly higher than for other non-financial industries. Those who argue that the North sea does not have the capacity to pay more tax, given its immense cash flow, are treading on difficult territory. I do not believe that there is no capacity to pay more.

The hon. Member for Arundel and South Downs made interesting points about new entrants to the industry, as did my hon. Friend the Member for Dundee, East. Of course we want to encourage new entrants into the industry to develop new fields. The hon. Gentleman said that tax allowances are not available to companies that do not make taxable profits, but by definition tax allowances are unavailable when there is no taxable capacity. As I said when responding to a previous amendment, allowances are not lost when companies fail to generate profits immediately, but may be carried over from year to year.

The treatment given to companies in the industry is no different from that for new entrants in other types of business. Indeed, there is a very active market in North sea field interests, and new entrants who want to benefit early from the investment allowance can choose to buy into a profitable field, which would give them a stream of income against which they could use the allowance in the first year. It is normal for North sea new entrants to do that, as it is a pragmatic response for those who want to gain those advantages. The problem that hon. Members have identified is more apparent than real, but we shall continue to monitor the situation and consider the impact.

The hon. Member for Kingston and Surbiton asked about not giving 100 per cent. allowances to small companies that lease and pay 40 per cent. tax. The upfront tax benefit will not be passed directly to the lessee, but might be passed indirectly in the form of lower rentals spread over the term of the lease. Extending the first-year allowances to assets for

leasing would lead to more investment, and we have designed our measures to encourage new investment, as the hon. Gentleman knows. We shall continue to monitor the operation of the scheme.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The mechanism by which the Minister suggests that small companies might benefit from allowances would depend on contractual relationships, not Government policy. The companies are concerned because they are being hit by the extra corporation tax—which is Government policy—while getting nothing back from the Government. The mechanism that the Minister describes will give no succour to SMEs in the industry.

Ruth Kelly (Labour, Bolton West)

As I said, we shall continue to monitor the scheme in operation. If the problem turns out to be real, companies will be welcome to talk to us about it. I do not believe that it is a problem, but we shall keep a careful eye on it.

North sea oil and gas are scarce national resources. That is why they have managed, over such a long time, to produce returns that often exceed a normal commercial rate. At times, producers make large profits because of movements in the world oil price. Over the past few years, they have not generated a fair share of revenue for the Exchequer. In this measure, we have combined an increase in the tax take with a very generous first-year allowance, which will continue to stimulate new investment and activity in the sector.

I emphasise again that I am not in the business of forecasting what will happen around the world. However, these particular Budget measures should act as a stimulus to investment and activity in the sector.

The right hon. Member for Fylde points to DTI figures and suggests that the DTI is somehow more open and transparent than the Treasury. Of course, I do not accept that. We work in close co-operation. Work at the DTI informs our assessment at the Treasury; that is why we use those figures as the basis for our analysis and for the estimates that are published in the Red Book. I set out on the Floor of the House the basis for our entire analysis. I do not believe the figures that the oil industry has quoted; the new allowance will provide a generous cash boost for the industry at a time when it is expected to contribute a fairer share of revenue. For those reasons, I suggest to the Committee that it should not accept the amendments.

Howard Flight (Conservative, Arundel and South Downs)

I remind the Committee that the amendment simply calls for a study of the impact of the Government's proposed measures to be made by the end of the year. It does not change the measures. It is strange that the Government should want to resist that, because either they will be proven right or the industry and we shall be proven right. Perhaps 31 December 2002 is a little early, but if I were doing the Minister's job, I would want to know whether I had got policy right and I would accept such an amendment. It is a commonsense proposal.

The Minister rightly referred to oil and gas. The southern basin returns on gas are already negative and there are different calculations for oil as opposed to gas; gas is at a price equivalent to some £10 per barrel. These measures are to apply to both. How anyone at the Treasury can have thought that the measures would stimulate new investment in gas I cannot imagine—they will do the reverse. It is evident from the Red Book that the combined measures are designed to be substantially tax positive, raising £7.6 billion over eight years. The argument that the measures will encourage investment seems to be nonsense.

Our case is that, given the dramatically changing structure of the North sea, the wishful thinking aspect of combining accelerated first-year allowances and higher ongoing tax will not work. I was pleased to hear the Minister say that the Government would look further at the issue. She seemed to have taken the point that that might not be any incentive for new venture operations.

However, we think that any prudent Government—we have such a prudent Chancellor, after all—would double-check whether their theoretical calculations were correct, especially in relation to an industry that makes an important contribution to the current account balance and employs 260,000 people in Scotland. Therefore, I shall press the amendment to a vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 6, Noes 17.

Schedule 21 - First-year allowances for expenditure wholly for a ring fence trade

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 110, in page 251, line 41, leave out '24%' and insert '100%'.

In essence, the amendment would make the 100 per cent. first-year allowance apply to all assets, not only those with an alleged useful life of less than 25 years. Given that the rate of writing-down allowance on long-life assets is 6 per cent., the first-year allowance of 24 per cent. does not seem to be especially generous. Indeed, I should be interested to know how the Government came up with that figure, especially as oil and gas extraction is a long-term project, requiring assets with a useful economic life, which may be 25 years. The logic behind extending the 100 per cent. allowance to all investments is, first, that the proportion of assets in the long-life category is relatively modest, about 10 per cent., so the measure would not have a huge impact on tax revenues.

Secondly, many long-life assets turn out not to be long life, particularly as many of the fields currently being developed may not have a long life. In practice, what falls into such a category may not be used for 25 years. I understand that there was no logic to the Government's having selected 24 per cent. Under the new 40 per cent. tax regime, particularly when long-life assets represent a relatively higher proportion of the total investment, the lower 24 per cent. figure could lead marginally to negative decisions about investment prospects.

It is not a huge issue, but I wonder whether it is worth the candle to make such a theoretical separation. I wonder whether the Government are pinning their hopes on capital allowances keeping investment going and, therefore, whether it would be rather more practical and sensible to give the full 100 per cent. capital allowances to all investments.

Ruth Kelly (Labour, Bolton West)

I thank the hon. Gentleman for the constructive manner in which he spoke. The amendment would indeed give long-life assets with a span of at least 25 years the full 100 per cent. new first-year allowance. Although I understand the hon. Gentleman's argument, he has not made a real case for such a change. We have increased fourfold the allowance for the vast bulk of capital expenditure in the North sea in the first year—from 25 per cent. to 100 per cent. The increase for long-term assets, too, is increased fourfold—from 6 per cent. to 24 per cent. Long-life asset provisions exist to align the rate of depreciation for tax more closely with commercial depreciation. A rate of 24 per cent. is far in excess of normal commercial depreciation, and is therefore extremely generous for assets that have a long life.

The hon. Gentleman pointed out that not many assets in the North sea have a long life, and said that it might not be that expensive to extend the 100 per cent. rate to long-life assets. I agree that not many long-life assets are to be found in the North sea, but such assets

are indeed expensive and extending the rate would have a significant revenue cost to the Exchequer. In other areas, such as for small and medium-sized enterprises, although generous first-year allowances are made, they are not applied to long-life assets, which continue to attract 6 per cent. We see no case for increasing the allowance further. I therefore urge the hon. Gentleman to withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

First, I am interested to note that the logic of choosing 24 per cent. was the simple arithmetic of applying a multiplier of four and not a professional study of its impact on capital allowances. The Minister referred generally to a considerable cost, and I should be interested if she would quantify that figure. My understanding is that with about 10 per cent. of assets generally being long-life assets, the cost would not be hugely material. I have already set out our arguments. Ultimately, it is back to the principal argument—that it is part of a package designed to keep investment as high as possible. For all the reasons that we put forward, we would broadly argue that anything that is doable that is likely to be on the plus side if its revenue cost is not that great would be sensibly done.

The Government still have not made their intentions clear about royalties, despite having loosely promised to do certain things, and I understand that, contrary to my previous understanding, that royalty is relevant to about 20 per cent. of new investment and is particularly relevant to maximising the recovery of an existing field and to the inner drilling of wells. I do not know whether the Minister has anything further to say about when the Government will complete the package.

Overall, we are not debating a huge issue of principle. I hope that the Government will consider it further. Notwithstanding the vote that we just had, if the Government were privately wise enough to do their own investigation of the effects of the package on the industry during the coming nine to 12 months, they could be a little more generous in this territory without a massive tax impact. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 109, in page 252, line 4, at end insert—

'First-year allowances on mothballing costs

6A.—(1) Omit section 161C(2) and insert—

''(2) The decommissioning expenditure is to be treated as first-year qualifying expenditure under section 45F above.''.

(2) Omit section 163(2)(b) and insert—

''(b) on decommissioning plant and machinery which has been brought into use for the purposes of a ring fence trade.''.

(3) In section 163(3), leave out ''The'' and insert ''Where the plant and machinery forms part of an offshore installation or a submarine pipeline, the''

(4) In section 163(5), after ''1998'' insert ''except that an offshore installation partly in relevant waters and partly not shall not be excluded from the definition of offshore installation for these purposes only.''.'.

The amendment touches on a subject raised briefly this morning, when the Financial Secretary gave a response on which I would be grateful for further elucidation. The comments on capital allowances apply equally to the amendment and the cost of mothballing platforms. The decommissioning of infrastructure related to oilfields and the decommissioning of trans-median field installations part of which lie outside UK territorial waters, are currently excluded from the change to grant 100 per cent. first-year allowances. The Financial Secretary commented that her understanding was that mothballing did fall within the allowances. There is also an issue of onshore versus offshore. Surely it is anomalous that such types of expenditure should be excluded from the general change of the capital allowance system. Mothballing extends the life of a field when shutting down would terminate it; logic would suggest that all mothballing should qualify for the capital allowances.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I support the amendment, and I should be interested to hear whether the Financial Secretary will place on the record the view that the hon. Gentleman said she expressed earlier today—that the capital allowances as currently construed do cover all mothballing expenditure. That is not my understanding. It is important that they should, because when the industry is trying to decide whether it can plan for the future and ensure that certain marginal investments might become profitable later on, if it can mothball various plant and machinery installations it can leave those options open and get better value from that investment, and the resources overall. It is important that the tax regime enables companies to retain their existing facilities if they could have a future use. I hope that the new regime that the Financial Secretary proposes will enable mothballing activity to retain the maximum allowances.

Ruth Kelly (Labour, Bolton West)

I am happy to return to the issue of mothballing, and to set clearly on the record when the allowance applies and when it does not. The amendment would provide a 100 per cent. allowance to certain decommissioning expenditure that does not at present qualify for that allowance. The substantial costs of decommissioning offshore oil or gas fields that are incurred under approved abandonment programmes, are already relieved at 100 per cent. I do not believe that there is a case for extending the very generous investment relief that we are introducing in the clause to decommissioning expenditure that is not incurred under a specific approved abandonment programme, or is incurred other than in connection with the closing down of an oil or gas field.

After all, the 100 per cent. allowance that we are talking about is carefully designed to stimulate future investment activity, not its demise. Therefore the rationale for the allowances not applying to mothballing during the development of a field is clear. The oil tax regime already recognises the special case of decommissioning offshore installations through a

100 per cent. allowance. I cannot see a case for further extending that allowance, and on that basis I ask the Committee to reject the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I should like to ask the Financial Secretary for her estimate of the cost difference if the amendment were accepted. Are we talking about material sums because the complexity surrounding the qualification of some forms of mothballing seems to be unsatisfactory? Overall, the point is the same as that raised by the previous amendment. It certainly seems strange that closure qualifies while some forms of mothballing do not.

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman queries the cost of the measure. I can tell the Committee that it would cost tens of millions of pounds each year, which would not encourage new investment, to recognise the issues faced by companies engaged in normal commercial transactions and rationalisations. It would be a significant measure for the Exchequer to consider and would not tie in with our overall policy objectives. For those two reasons, I urge members of the Committee to reject the amendment.

Michael Jack (Conservative, Fylde)

It is on the record that my hon. Friend the Member for Arundel and South Downs asked a perfectly reasonable question. He asked how much it would cost if his proposal were accepted. The Treasury says that it would cost tens of millions of pounds and would not be in line with its policy. We should receive a better and clearer explanation. If the Financial Secretary does not have the figure, will she commit herself to calculating and supplying it in due course? The question was perfectly respectable and we should have an answer.

Ruth Kelly (Labour, Bolton West)

The right hon. Gentleman expects me to make a forecast today on normal commercial transactions undertaken by oil companies. I have given the Committee a reasonable projection that the cost of the measure will run into tens of millions of pounds, and it is impossible to give a more precise figure. I have set out why the proposal does not tie into our policy and, for the last time, I ask the Committee to reject the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I thank my right hon. Friend the Member for Fylde for his intervention. The Financial Secretary is being cavalier, and I shall repeat the commonsense point to which she has not responded. Shutting down a field means that there is no chance of recovery. Mothballing is done deliberately in order to leave scope for further recovery when oil prices rise. There is an obvious inconsistency in shutting-down expenditure qualifying while mothballing expenditure does not. The policy is irrational.

My right hon. Friend did not ask for the exact figure today, which would be unreasonable. There is, however, a difference between £10 million and £90 million. My understanding is that, relative to the total picture, the materiality would not be that great. Rather than suggesting that closing down should not get the allowance and all mothballing should get it, it is easier simply to say that all mothballing should get it.

This is not a huge point, but the Government would be wise to keep their mind open and look at the measure's effect. If the result of not extending the allowance were to be that many marginal fields were closed down rather than mothballed, yet again the Government would have shot themselves through the foot. There is little point in pressing the amendment to a vote, but the Government should take a more in-depth approach to the matter. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 21, as amended, agreed to.

Clause 63 ordered to stand part of the Bill.

Schedule 22 agreed to.

Clause 64 - Postponement of change to mark-to-market in certain cases

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 112, page 41, line 43, leave out '2002' and insert '2003'.

The amendment is probing and asks whether the Government are satisfied from their discussion with the industry that their proposed starting date will work satisfactorily. The clause gives help to insurance companies required to move to a mark-to-market basis in relation to the profits and losses arising on their portfolio investments. For accounting periods ending on or after 31 December 1998, insurance companies have been required to account for the portfolio investments on a mark-to-market basis—that is, investments are recognised in the accounts on their market value, which is duly adjusted at each year end.

To use a mark-to-market basis leads to companies recognising unrealised gains and losses, which are taxable as they arise. Some insurance companies have continued to use the realisation method for tax purposes—that is, they have taxed gains and losses only when they are realised. For companies that organise their accounts based on the calendar year, the first point at which they are required to pay tax on a mark-to-market basis is 1 January 2002.

The industry feels that the arrangements are broadly satisfactory, and does not criticise or challenge them. However, there are outstanding discussions with the Revenue, and some concerns exist that the interaction between clause 83, and schedules 22 and 30, and clause 64 might have a problematic impact on insurance companies in due course. We can pursue that issue further when we come to it. Are the Government happy that everyone is geared up to cope with a starting date at the beginning of this year?

Ruth Kelly (Labour, Bolton West)

I am grateful to the hon. Gentleman for setting out the purpose of the clause. I shall not repeat it because I am sure that the Committee has heard enough. The hon. Gentleman merely queries whether the industry is happy with the dates in the clause.

The clause provides insurance companies with a special rule to allow them to postpone the move to a mark-to-market basis for tax purposes until 2002—a strict application law would make them go back to 1998. To be more precise, the previous basis of tax will still be available for periods of accounts that begin before 1 August 2001, which was the date of the announcement of the changes, and end before 31 July 2002.

The clause has been the subject of detailed consultation with the industry, the Association of British Insurers and others; they have expressed no desire to extend the transitional arrangements. The Bill reflects many of the points that they raised about the draft clauses published on 9 August. I hope that the assurances that I have given will persuade the hon. Gentleman to withdraw his amendment.

Howard Flight (Conservative, Arundel and South Downs)

This was a probing amendment. As I said, my understanding is that the industry is reasonably happy. I also wanted to ensure that the Government were happy, because if a new tax system is being introduced, taxpayers need to be able to deliver. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 64 ordered to stand part of the Bill.

Clauses 65 and 66 ordered to stand part of the Bill.

Clause 101 - References to accounting practice and periods of account

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 179, in page 78, line 45, at end insert 'and'.

Joe Benton (Labour, Bootle)

With this it will be convenient to consider the following amendments: No. 180, in page 79, line 1, leave out from 'companies' to end of line 2.

No. 181, in page 79, line 3, at end insert—

'(c) means generally accepted accounting practice with respect to accounts of non-UK companies that are intended to give a true and fair view, or equivalent, as applied in their country of incorporation.'.

Howard Flight (Conservative, Arundel and South Downs)

The amendments have been tabled because the point has been raised that it does not make much sense to require all companies operating in the UK to use UK generally accepted accounting practice for their accounting. Many branches of such companies will not be UK-incorporated registered businesses and it would make more sense to allow those branches to use the GAAP of their own country rather than forcing them to use the UK GAAP in respect of their branch activities. To do that would create unnecessary administrative burdens for such branches and for companies which are incorporated outside the UK and thus not subject to UK company law but which, for whatever reasons, may be UK tax resident.

It is possible that the profession has misunderstood the requirement in the clause, but I raise the matter to give the Government the opportunity to clarify their intention.

Ruth Kelly (Labour, Bolton West)

There has probably been some misunderstanding. Clause 101 standardises definitions of accounting practice used in existing tax legislation. All accounting references are now to ''generally accepted accounting practice'', and one thing the clause does is to move into a general interpretation section a standard definition of GAAP that already appears in a number of places in tax law.

The part of the definition of GAAP that the Opposition seek to amend says that GAAP means GAAP as it applies to UK companies. However, that is not a new idea—at least 10 different parts of the tax code specify that it is accounting practice as it applies to UK companies that must be followed. The clause brings all those different definitions into one place with one wording.

There is one important place where the fact that it is UK GAAP that must be followed has been made explicit. This is in the general rule governing the computation of profits of a trade in section 42 of the Finance Act 1998, which required taxable profits to be computed using an accounting basis which gave a ''true and fair view''. That wording in section 42 is being replaced with the new definition of GAAP, but the requirement to provide a ''true and fair view'' is maintained because that is required by the definition of GAAP.

The opposition amendments should therefore be resisted on two grounds. First, references in the tax code to accounting practice have made it clear that it is UK accounting practice that is meant. Secondly, in applying the UK tax system, and to be fair to all businesses operating in the UK, there must be consistency. Why should there be a tax advantage or a disadvantage for a company because it follows whatever is a true and fair view in some other state or country? The amendments assume that there will always be a ''true and fair view'' or an equivalent concept in every other country. Of course, we do not insist that overseas companies draw up their accounts using UK GAAP. We require it to be followed only for the purposes of computing tax. It is likely that company law and accounting rules in other territories would show much the same result as if the UK GAAP had been used. On the two grounds that I have set out, I hope that the hon. Gentleman will withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I am glad that the Financial Secretary made it clear that there was no intent to require such non-UK-incorporated companies to use UK GAAP for their accounts. There is clearly an argument about tax fairness in terms of use of UK GAAP for UK tax calculation purposes, but the provision obviously adds to the burdens on businesses that have branches here, because their calculations for UK profits will be different from those for their overall accounts. Therefore, there will be yet more notes in the accounts explaining the differences.

Clearly, in an ideal world, GAAP would be fairly common among at least the developed economies. I wonder whether the Government have considered how much tax materiality there is on the subject. The branch companies are mostly either north American or continental European. If the differences are not that major, is the exactness of the requirement to use UK GAAP for tax purposes worth the bureaucratic hassle?

What discussions have the Government had with the profession? Its representatives have raised the issue broadly with me. The issue is technical, not political, so we would not want to put the amendment to a vote, but I would like a further response from the Financial Secretary on those points.

Ruth Kelly (Labour, Bolton West)

I have two points in response. First, there is nothing new in the provision. It makes a reference that was already in the tax system explicit by putting a definition in one place for ease of reference. Secondly, consistency of tax treatment in the UK is important. Although there may not be great differences between member states in the European Union, such uniformity is important. The last thing that we want to do is to introduce arbitrage when a company decides that it is advantageous for it to use one treatment rather than another. I urge the hon. Gentleman to withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

It is interesting that the Financial Secretary should say that the Government would not want to encourage arbitrage, as there is a massive and dangerous encouragement of arbitrage for self-employed small traders in the Bill, which will cost the Revenue a fortune.

However, I have said that the issue is not major. I hope that the Government will keep it under review, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 101 ordered to stand part of the Bill.

Clause 67 - Expenditure involving crime

Howard Flight (Conservative, Arundel and South Downs)

We have not tabled amendments to the clause, although we have tabled a new clause that has not been selected but to which I shall refer briefly. There are some measures in the clause that it is important at least to mention, so that we hear whether the Government are satisfied that the problems that might be raised would be manageable.

Clause 67 stops UK companies receiving tax relief for payments made overseas that would have constituted a criminal offence if they had been made in the United Kingdom. It will largely affect UK companies operating in overseas territories through branch operations rather than through limited companies, mostly in developing parts of the world. However, it may make it prohibitively expensive for UK companies to operate through branches in areas where bribery is standard practice. That is unlikely to

lead to a significant loss of tax revenue in the UK, because most companies whose overseas operations are profitable will operate in such territories through limited companies in order to protect their overseas revenue from being taxed directly in the UK. In addition, it may affect the UK banking and financial services industry, which tend to use branch operations.

We would be interested to know why UK law only is considered to be the appropriate test, and why not criminal activities under local law. Is there an EU angle, in that UK companies operating through branches will be directly affected but those operating through subsidiaries will not? Is a sort of EU freedom-of-establishment principle involved?

Another and not immediately obvious consequence is that UK companies with controlled foreign companies will have to compute UK-equivalent profits after making an adjustment, which could lead to some overseas companies that were not CFCs becoming CFCs. That would obviously increase the administrative burden. It is probably not a major problem, but have the Government thought about it?

The Chartered Institute of Taxation has expressed support for the fight against criminal bribery, but it raises two particular concerns. It points out that uncertainty could arise if a foreign company had a UK branch that came within the scope of UK corporation tax, but a part of the foreign company unconnected to the UK branch paid a bribe that would be criminal under UK law. If, separately, the UK branch made a payment to the head office of the foreign company to cover central costs incurred by the company that benefited from trade with the UK branch, and as the bribe benefited the whole company's business, it could be shown that the management fee paid by the UK branch included a payment towards the bribe made by the foreign parent. Would the UK branch have to disallow part of that payment towards the central overheads? That would lead to an additional compliance burden, but it also raises questions about the UK's claiming extraterritorial and extranational jurisdiction.

The second and more general point is that there is a risk that the payment would be disallowed in several countries, which could result in the possibility of multiple taxation. That is probably a fairly weak point, but similar points could arise with other costs such as business entertainment. I wonder whether the Government have focused on such issues.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I support clause 67. It is exceedingly welcome and long overdue. I always thought it wrong that the British taxpayer should subsidise what effectively is a criminal activity—the paying of bribes abroad. I know that it is the practice in certain countries, and that it is the only way in which some companies can do business, but I do not see why the British taxpayer should be subsidising it in any shape or form. This is exactly the right measure, and I am glad that the Government are taking it.

John Burnett (Liberal Democrat, Torridge and West Devon)

I agree entirely with my hon. Friend, but I wonder whether the Treasury, in formulating the clause, made a study of any similar laws that prevail in, for example, the United States, continental Europe or Japan. If so, I should be grateful if the Financial Secretary let us know whether the measure is part of a concerted effort by the advanced economic countries to clamp down on bribery and what similar provisions exist in the other countries with which we compete for overseas business.

Ruth Kelly (Labour, Bolton West)

I want to thank the Liberal Democrats for expressing their strong support for the clause. I take the constructive comments made by the hon. Member for Arundel and South Downs in the same spirit. He asked some technical questions about implementing the clause, rather than questioning its validity.

The clause corrects a technical anomaly in the tax rules on bribes and corrupt payments, to make it clear beyond doubt that tax relief is not available for bribes.The existing law denies a business tax deduction on any expenditure that constitutes an offence in the United Kingdom--in other words, if it is a criminal bribe. That virtually covers all the circumstances in which a United Kingdom tax-paying business might pay a bribe.

However, there is one unusual set of circumstances in which it is theoretically possible for a business in the UK tax net to pay a bribe without committing an offence in the UK. That is where a non-UK national in an overseas branch of a UK company pays a bribe and does not report that bribe to the UK head office. No offence is committed in the UK because there is neither a knowing mind in the UK, nor a UK national directly involved in the payment. Such instances will be rare and there is no evidence that there is a problem in practice, so I can tell the hon. Member for Torridge and West Devon (Mr. Burnett) that we are correcting a technical anomaly in tax law. We already have a system in which, by and large, bribes are not tax-deductible in the UK, and we are not making a major change that will impact on UK business.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am interested to hear from the Financial Secretary what the practice is in our main competitor countries.

Ruth Kelly (Labour, Bolton West)

We are moving towards international best practice. I cannot tell the hon. Gentleman exactly what happens in other countries, although I can tell him that our approach is similar to that in the United States and other countries. We have undertaken this change in response to the recommendation from the Organisation for Economic Co-operation and Development in 1996 and the subsequent convention on bribery in 1997.

Michael Jack (Conservative, Fylde)

I am intrigued to know how many of the accounts examined by the Inland Revenue have a neat little insertion that states ''payment of bribe.'' I find it difficult to imagine that anyone involved in shady

practices would make their actions so blindingly obvious that the Government think that there is a loophole to close. Perhaps the Financial Secretary could enlighten us about what triggered the need for such a provision.

Ruth Kelly (Labour, Bolton West)

The right hon. Gentleman makes an interesting point. It is not currently a real problem for the Revenue, which does not collect information on the extent of bribes. We know that such cases are rare because few are reported by local tax inspectors, who are interested in how such payments should be treated for tax purposes. It has not been brought to our attention often, but it is a point of principle that we should not give tax relief for corrupt payments, whether they take place knowingly through headquarters in the UK or not. For those reasons, we want to close the loophole.

Given that we think the problem is relatively minor, we do not think that closing the loophole will have a substantial impact on British companies doing business abroad. On a point of principle, we should not countenance a situation in which British businesses pay bribes in order to win business. That is not the reality, because bribes tend to distort rather than help trade and competition.

Michael Jack (Conservative, Fylde)

I do not dissociate myself from anything that the Minister said, but what about the probing that might occur if a United Kingdom company put a line in its accounts such as ''special commission payment''? Would such an entry be subjected to more detailed analysis by the Inland Revenue to establish more clearly the motive for a payment that caught an inspector's eye?

Ruth Kelly (Labour, Bolton West)

The right hon. Gentleman raises a purely hypothetical and speculative point, which is of no practical relevance. Tax inspectors are trained to know accounts and would of course raise such a payment with the head office, but I would not expect that to be a problem in practice.

The hon. Member for Arundel and South Downs asked whether we should extend the bribery measure to offences committed under the law of other countries as well as our own. There is no European Union angle, as he suggested; we are merely following OECD guidelines in this case. We want the maximum degree of certainty for United Kingdom companies, which the measure will deliver.

The hon. Gentleman also asked whether the disallowance of deduction on a bribe in several countries could amount to multiple taxation. I do not believe that it would, because head office expenses would be allocated between branches in different countries and each country would apply its national law to those expenses. A bribe should not be deductible in any country, and it will not be multiple taxation.

The hon. Gentleman asked whether the clause would apply if a foreign company paid a bribe overseas and attributed part of its bribe to the United Kingdom branch as a management charge. I agree in principle that it would apply, although it would depend on the facts of the case. The part of head office expenses that

would be disallowed should equally be disallowed in the tax computation for the United Kingdom branch of a non-resident company. That is already the case for expenditure on such items as business, entertainment and gifts, and the Inland Revenue is not aware of any significant compliance issue in that regard.

For all those reasons, I ask the Committee to welcome the clause and agree to its implementation.

Howard Flight (Conservative, Arundel and South Downs)

In principle, all hon. Members agree with the clause. In practice, I do not think that the clause will solve the problem 100 per cent., for obvious reasons. In some economies, practices such as bribery remain widespread. I do not know whether it is still the case, but in the past the French equivalent of the Export Credits Guarantee Department was a vehicle for Government bribery for contracts. A rash of scandals broke out in that respect, so I trust that the OECD has tied that matter up.

Another aspect of the territory is shown by the Tate & Lyle case, which we might have discussed under new clause 11, had it been called. That case decided that when political donations were made wholly or exclusively for the purposes of trade, they could be tax-deductible. In the spirit of clause 67, will the Government reconsider that territory? They should make it clear that tax deductibility would be denied to companies or other persons carrying on a trade who make payments to political parties in return for political favours, such as a change in the law, an honour or a Government decision, and that cases such as the Ecclestone, Desmond, Powerjet, Mittal and Hinduja cases will not give rise to tax-deductible expenses.

Ruth Kelly (Labour, Bolton West)

I am sure that all Committee members subscribe to the view that we should have the greatest integrity in our tax affairs. Of course, we continually update our tax policy to reflect those principles and we keep such matters under review. However, the hon. Member for Arundel and South Downs specifically asked about political donations. For the record, the general expenses rule is that only expenses incurred wholly or exclusively for business purposes are deductible when computing business profits. Donations to political parties would not satisfy that test and would not, therefore, qualify for relief. I hope that the whole Committee will support the clause as it stands.

Question put and agreed to.

Clause 67 ordered to stand part of the Bill.

Clause 68 - Qualifying contracts for unallowable purposes

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 114, in page 45, line 41, at end insert—

'(8A) A qualifying contract shall not be regarded as having an unallowable purpose in regard to a company where, on the application of that company, the Board have notified the company that the Board are satisfied that the contract does not have an unallowable purpose.

(8B) Any application under subsection (8) shall be in writing and shall contain particulars of the contract to be entered into by the applicant and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.

(8C) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (8A) above, within 30 days of the notice being complied with.

(8D) If the Board notify the applicant that they are not satisfied as mentioned in subsection (8) or do not notify their decision to the applicant within the time required by subsection (8B), the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (8A), to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (8) as if it were a notification by the Board.

(8E) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decisions of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (8) shall be void.'.

Joe Benton (Labour, Bootle)

With this it will be convenient to take the following amendments: No. 115, in schedule 25, page 303, line 23, at end insert—

'30A In paragraph 13 of Schedule 9, after subparagraph (5) insert—

''(5A) A loan relationship shall not be regarded as having an unallowable purpose in regard to a company where, on the application of that company, the Board have notified the company that the Board are satisfied that the loan relationship does not have an unallowable purpose.

(5B) Any application under subparagraph (5A) above shall be in writing and shall contain particulars of the loan relationship to be entered into by the applicant and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subparagraph, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.

(5C) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subparagraph (5B) above, within 30 days of the notice being complied with.

(5D) If the Board notify the applicant that they are not satisfied as mentioned in subparagraph (5A) above or do not notify their decision to the applicant within the time required by subparagraph (5C) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subparagraph (5B) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subparagraph (5A) above as if it were a notification by the Board.

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

No. 116, in schedule 26, page 344, line 23, at end insert—

'(3A) A derivative contract shall not be regarded as having an unallowable purpose in regard to a company where, on the application of that company, the Board have notified the company that the Board are satisfied that the derivative contract does not have an unallowable purpose.

(3B) Any application under subparagraph (3A) above shall be in writing and shall contain particulars of the contract to be entered into by the applicant and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.

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

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

(3E) If any particulars furnished under this paragraph do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subparagraph (3A) above shall be void.'.

Howard Flight (Conservative, Arundel and South Downs)

The clause inserts an unallowable purpose, anti-avoidance clause in the financial instrument rules and mirrors the existing rule for corporate debt purposes, the paragraph 13 rule. There is a general acceptance that that rule is unclear and untested in the courts. We propose that a statutory clearance procedure should be included in the legislation as an option to give companies certainty when entering into complicated commercial arrangements.

The unallowable purpose rule in the corporate debt legislation has been the subject of widespread criticism. Introducing a mirror image rule in the financial instruments legislation will, potentially, exacerbate rather than ease the situation. The Institute of Directors has made the point that

''This new rule amounts to a general anti-avoidance rule within its limited field. A general anti-avoidance rule ranging over the whole of income tax and corporation tax was carefully considered in 1998. It was decided not to introduce such a rule, for perfectly good reasons. We do not believe that comparable rules should be introduced in limited fields: they generate uncertainty and allow the Revenue to block new tax planning measures retrospectively.''

Ideally, the whole clause should be amended to target the tax avoidance schemes that the Treasury regards as unacceptable. Given that the Treasury does not publish details of such schemes, it is not possible to suggest an amendment that covers that. We therefore suggest that, at the very least, the Treasury should offer advance clearance of the transaction to give certainty to business.

When we suggested that a statutory clearance procedure be included in the substantial shareholdings legislation, the Minister told us that it would be inappropriate for the Inland Revenue to provide a

statutory clearance mechanism due to cost and that businesses would not want it if there was one. That was said to be because the rules on substantial shareholdings had been subject to extensive consultation and we were told that the Inland Revenue guidance notes would clarify any uncertainties.

Throughout the consultation process on substantial shareholdings, there were repeated calls for advance clearance procedures, and the same point applies to this clause. Taking first the cost argument and the suggestion that many clearances are obtained simply because the facility exists rather than because there is serious uncertainty, we do not think that that would be the case with the clearance arrangements that we propose. The amendment asks specifically for confirmation that the contract does not have an unallowable purpose--that is, that it meets the requirements of the legislation.

The clearance procedures contained in section 707 of the Income and Corporation Taxes Act 1988 and section 138 of the Taxation on Chargeable Gains Act 1992, the two most widely used Inland Revenue clearances, give the taxpayer certainty on whether a transaction is being carried out for what the Treasury consider to be bona fide commercial reasons, not whether the transaction meets the requirements of clearly worded and tested legislation. Clearly, there is a difference between a clearance that comments on the motivation for the transaction as a whole and one that gives certainty on the imposition of inherently ambiguous and untested legislation. If existing clearances are obtained unnecessarily, perhaps the Treasury should consider the problems with them, rather than dismissing out of hand the need for new clearance procedures in other parts of the tax law.

The Minister also stated that one of the reasons for excessive costs is that the position might change and the facts might be different when the transaction takes place. However, one of the conditions of the clearance is that the facts are unchanged. If they are not, taxpayers lose their certainty. That is not in the interest of taxpayers, and it is difficult to imagine why a taxpayer who went to the effort of obtaining a clearance would choose to change the facts. If that were a real concern, an additional condition could be included in the clearance procedure that the onus is on the taxpayer to notify the Treasury about any changes in facts or circumstances.

Finally, there is the argument that the legislation has been widely consulted on. I draw the Committee's attention to the response of the Chartered Institute of Taxation, which was submitted to the Inland Revenue last October:

''The total disregard of the unanimous opposition to extension of Sch 9 para 13 FA 1996 is regrettable. It is no doubt correct that most of the objections were based on dissatisfaction with para 13 itself. This is because these objections are well-founded. The provision is so obscurely drafted as to be unpredictable in its application. A retrospective application of the provision back to the beginning of the accounting period containing 26 July 2001 is unreasonable. Some transactions would not have been entered into with such legislation in place, not because they were tax avoidance transactions in any reasonable sense of the word, but

because they might have come within some interpretations of the section because a reduction in tax was a consequence of real business expenditure. At the very least the section should not affect any losses or expenses arising before 26 July 2001. Further we consider that it will be essential for the Inland Revenue to be in a position to offer advance transaction guidance to taxpayers as is proposed in the consultative document.''

That is, manifestly, the purpose of our amendment.

Given the above comments, it is clear that just because there is a consultation process, it neither means that the resulting legislation will be perfect nor that the Treasury will actually listen to all the consultation responses. The Minister said that there were informal methods of obtaining guidance. That is agreed and accepted, but how often a taxpayer would be prepared to bring his tax inspector into discussions when he is considering entering into a complicated commercial arrangement on an informal basis is debatable for obvious reasons. Surely, a statutory clearance procedure would help the Treasury help the Revenue, because it would have the full facts in advance, and it would help businesses and taxpayers by providing certainty.

Ruth Kelly (Labour, Bolton West)

Clause 68 is the first of 18 clauses and six schedules that form a package to modernise the structure of the taxation of corporate debt and derivative contracts, and to protect the Exchequer against avoidance schemes in the period before the structural reforms take effect.

It might help hon. Members if I put the reforms in an overall context before dealing specifically with the clause and the amendment. I gave prior notice to the hon. Member for Arundel and South Downs of my intention to do that. I shall start with a brief account of the background to the reforms as a whole, an outline of what we seek to achieve and an indication of how the clauses fit together.

The existing legislation is as follows: first, the foreign exchange gains and losses—or forex—legislation enacted in the Finance Act 1993, which introduced a statutory regime for taxing companies' foreign exchange gains and losses. Secondly, there is the financial instruments legislation enacted in the Finance Act 1994, which introduced another statutory regime for taxing companies' profits and losses from interest rate and foreign currency swaps, options and futures. Thirdly, the corporate and Government debt—or loan relationships—legislation enacted in the Finance Act 1996, which brought in a new statutory regime for taxing gilts and corporate debt instruments, including ordinary borrowing and lending.

Although all three regimes were thought radical in their time, they have suffered from two main problems: complexity and lack of fairness. The 1993 forex legislation was particularly complex. Companies and tax professionals have long complained about the incomprehensibility of some of its drafting. Few will mourn its passing. The 1994 financial instruments rules were prescriptive, and do not cover all the derivative instruments now available in the markets.

The 1996 loan relationships legislation was drafted in a more user-friendly way, in most cases following companies' accounts. However, it was criticised even before the Act had passed its parliamentary stages

because its detailed rules for determining when bad debt relief is available were unduly harsh. With the passage of time, it has become apparent that those rules can act as a disincentive to lend, especially to smaller companies, or to participate in corporate rescues. All three regimes have proved to be highly susceptible to artificial avoidance arrangements. The Government are determined to remove avoidance opportunities as far as possible, so that all companies pay their fair share of tax and compete on a level playing field.

The Government's objectives in formulating these reforms are those that underlie our strategy for corporate tax reform generally. We aim to create a coherent regime governing the taxation of debt and derivative contracts that is generally as applicable as possible, minimises departures from the profit or loss shown in the accounts, is comprehensive—retaining exclusions only where they can be fully justified—and is based on principles that will provide stability for business in the longer term.

The clauses introduce three structural reforms, all taking place concurrently. First, we are repealing the existing financial instruments regime and replacing it with a new regime that covers a far wider range of derivative contracts, is aligned more closely with accounting practice, and is more user-friendly. Secondly, we are repealing the current regime for foreign exchange gains and losses, and merging the necessary rules into the legislation for loan relationships and derivative contracts. Thirdly, we are changing the loan relationships rules, mainly to make them fairer by allowing bad debt relief in a range of circumstances where relief is not available at present.

Those structural reforms will take effect from a company's first accounting period to start on or after 1 October 2002, giving companies the time they need to plan properly for their implementation. The design of the structural reforms is intended to minimise avoidance opportunities, but in advance of their implementation the Government are not prepared to allow tax avoidance to undermine the corporate tax system. We are, therefore, bolstering the existing regimes with a series of measures intended to stop particular avoidance arrangements. To be effective, those need to operate from the dates they were announced.

The hon. Member for Arundel and South Downs queried why we could not delay their implementation, but if we did that, significant sums would leak from the Exchequer during the interim period. We have published draft clauses to allow companies to implement and take on board the changes from the date on which they were published. The reforms have been the subject of extensive consultation since November 2000. Three consultation documents have been issued--the latest, which contained the draft clauses, in December 2001.

In addition, there have been substantial informal discussions, which have been very constructive and helpful in developing the legislation, among the

Revenue, representative bodies and tax practitioners. Many companies have participated in the consultation process both individually and through the CBI and other representative bodies. I should like to take this opportunity to thank all those who took part in the consultations, which resulted in widespread agreement that the reforms should be implemented.

Before I deal with the amendments tabled by the hon. Member for Arundel and South Downs, I shall turn to the clause itself, which will insert a new anti-avoidance rule into the 1994 financial instruments legislation. It is closely modelled on the unallowable purposes rules that the loan relationships legislation has contained since its enactment in 1996. The clause will allow tax deductions where the main purpose, or one of the main purposes, of a company being party to a financial instrument is not commercial. A purpose related to activities outside the corporation tax net will not be considered as a commercial purpose. The clause is aimed at stopping certain types of artificial tax avoidance. To the extent that tax avoidance is a main motive behind a company becoming party to a financial instrument, it will be denied tax deductions, thereby defeating the avoidance.

As was noted in 1996 when the original loan relationships and allowable purposes rules were introduced, companies that enter into schemes with the primary aim of avoiding tax will inevitably be aware of that fact. The transactions at which the rule is aimed are not those into which companies stumble inadvertently. As a top tax adviser said at the time, ''Companies will know when they are entering serious tax avoidance. Apart from anything else, they are likely to be paying fat fees for clever tax advice and there will commonly be wads of documentation.'' Consequently, provided that companies enter into financial instruments with genuine commercial activities or investments, they should have nothing at all to fear from the unallowable purposes rules, but if they go in for artificial tax-driven arrangements, they may find themselves caught.

Amendments Nos. 114 to 116 seek to introduce clearance procedures for the unallowable purposes rules. There are three amendments because the Bill introduces unallowable purposes rules in three places. Clause 68 will add an unallowable purposes rule to the existing financial instruments rules, which will be replaced by the new derivative contracts rules in clause 82 that include their own unallowable purposes rule.

The abolition of the separate forex rules means that foreign exchange gains and losses will become subject to the existing unallowable purposes rule in the loan relationships rules. As the hon. Member for Arundel and South Downs has explained, the amendments would each provide a clearance procedure so that a company could apply to the Inland Revenue for confirmation, or otherwise, that the relevant unallowable purposes rule would not apply to any transaction for which the company obtained clearance. For reasons that I shall explain--they bear some similarity to the debates that the Committee has already had on other aspects of the Finance Bill--such clearance procedures would be both unnecessary and

undesirable. I therefore have to tell the hon. Gentleman that I shall not recommend that the Committee accept the amendment.

First, the clearance procedure is unnecessary. It is modelled on existing clearance mechanisms, but such statutory clearances are relatively rare in tax law. Where they do exist, it is normally for historical reasons. Tax law contains a large number of anti-avoidance provisions, most of which do not have a statutory clearance procedure because they do not need one. The main exceptions to the rule that anti-avoidance provisions do not contain clearance procedures are the anti-avoidance provisions on transactions in securities contained in section 703 and those on mergers and reconstructions in section 138.

The amendments are based on provisions introduced in 1960 and 1977 respectively, when the idea of anti-avoidance provisions was novel. Section 703 is often said to be the first anti-avoidance provision, and it is understandable that a statutory clearance procedure was thought necessary to allay fears. We have come on a long way since then. Anti-avoidance provisions are now commonplace and well understood, so that more modern provisions do not have clearance procedures. That is true of the unallowable purposes rule for loan relationships, which is commonly known as paragraph 13 and was enacted in 1996. It has existed for six years without a clearance procedure.

Although this provision is said to give rise to some uncertainty, we are not aware of its having constituted a significant barrier to legitimate commercial activity. However, it has been a significant and effective inhibition on tax avoidance. We see no reason why the new provisions should cause the damaging level of uncertainty that the hon. Gentleman foresees.

The second reason for rejecting the amendment is that a statutory clearance procedure would be undesirable in practice, partly because of the resource implications. The number of qualifying contracts and loan relationships for which clearance might be sought is huge. Today's sophisticated financial markets trade many thousands of derivative contracts every day and many thousands of loans are taken out and debt instruments issued every day. That may be contrasted with the situation in which there is already, in practice, a statutory clearance procedure. The Inland Revenue receives a substantial number of applications--around 4,000 a year for company reconstructions--but the number of reconstructions is far fewer than the number of derivatives or loan relationships.

It may be argued that a statutory clearance procedure would not be needed for every derivative transaction or loan relationship. That is so, but nevertheless, clearance procedures add unnecessary administrative and compliance costs. If there is a statutory procedure, applications must be made, if only as an insurance, even when there is no realistic likelihood that the provision could apply. The resources that would be devoted to clearance

applications by companies and their advisers and within the Inland Revenue make that an impractical proposition.

A statutory clearance procedure would also be undesirable if it was abused, as I fear it could be, by the minority of companies that seek to avoid paying a fair share of tax. Artificial, marketed avoidance schemes have been a feature of the financial instruments regime. That is one reason for replacing the existing financial instruments regime with a new derivative contracts regime. The ability to test the limits of acceptability, perhaps by using a series of clearance applications, could facilitate yet more avoidance.

Having said all that, I fully accept that companies and their advisers need to have some idea of what transactions are likely to come within the unallowable purposes rule. Most companies that enter into avoidance schemes will inevitably be aware of that fact. Companies do not stumble inadvertently into the sort of transactions at which the rule is aimed. If they enter into transactions for genuine commercial activities or investments, they should have nothing to fear.

To assist them even further, the Inland Revenue has already published guidance based on its experience of operating paragraph 13, to which the hon. Member for Arundel and South Downs referred, and the existing loan relationships unallowable purposes rule. Companies should be able to take comfort from the fact that, if they stay within that guidance, they will not fall foul of the anti-avoidance test. If they are in any doubt, they can of course approach their tax inspector informally. The hon. Gentleman said that companies may be reluctant to ask their tax inspector whether what they are doing is legitimate, but perhaps he agrees that if there is real tax avoidance, companies will have sought professional advice on how to avoid tax in a particular circumstance. If their activities are genuinely commercial, they have nothing to fear from the provisions and should have no hesitation in discussing what they are doing with their local tax inspector.

For all those reasons, it is both cheaper and more effective to have no formal statutory clearance mechanism. I therefore urge the Committee to reject the amendment.

Mark Field (Conservative, Cities of London and Westminster)

I rise to speak to the clause, because I am sure that we shall not have a stand part debate, and to the amendments.

I give credit to the Government for the significant consultation exercise. I have been in touch with a number of institutions in the City of London and we have tabled few amendments on the provisions because, as was rightly pointed out, there have been at least three stages of consultation during the past 18 months or so. For that, the Government must be congratulated.

Equally, past legislation in this area has not been unimpeachable. We have a moving goal because of fast-moving, globalised finance, and the subject is technical so amendments must be made from time to time. The advice that I have received from several institutions suggests that at this juncture they are at

least comfortable with most of what is proposed in the clause. The proof will be in the pudding. The concerns that have been expressed by my hon. Friend the Member for Arundel and South Downs and others, here and elsewhere, is that the Treasury has a tendency to meddle in so many areas. Although certain aspects of its work will be welcomed, other bits will be seen as tampering for the sake of it.

The City of London is an important financial centre and a centre of invisible earnings for this country. I have a philosophical concern that a feeling exists that taxes must be raised, and that banks and other financial institution must go about their business ensuring that they pay a fair amount of tax; it is somehow seen as illegitimate to avoid tax and utilise the tax system. The idea that financial institutions should be willing to take everything on the chin and not use the system to their benefit is a matter of concern.

The Financial Secretary assured us that it will be up to a financial institution to go to the local tax inspector for advice in advance. However, the area is extremely technical, so I wonder whether in practical terms that will give much comfort to financial institutions, which could find themselves in a difficult position when acting on behalf of clients—they may find that a structure that they have put in place collapses and becomes tax liable. A difficulty that the hon. Lady pointed out was that institutions will receive tax advice from a leading tax QC or law firm, but that tax advisers must give balanced advice. My concern is that, likewise, the local tax office would give an on-balance decision only. When large sums of money are at stake in some of the more complex structures that have been introduced to the financial services sphere, that is not good enough.

Some of the amendments should be welcomed. The City institutions to which I have spoken feel that there has been a significant and acceptable level of consultation. I hope only that we will not have to unpick everything in the next two or three years when some of the implications become apparent.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Financial Secretary for her response, and I echo the point just made that everyone is well aware that there has been extensive consultation. Although, I cannot resist commenting that the number of Government amendments is substantial—clearly, consultation was not completely complete—I welcome the fact that amendments have been tabled late in the day to address some of the problems presented by certain causes.

As my hon. Friend the Member for Cities of London and Westminster (Mr. Field) said, we do not have a great deal to say as we proceed through clause 82. I simply make the point that the issue of informal versus formal statutory clearance needs in-depth consideration. I have known circumstances where there has been a problem with informal clearance and it has never been given because inspectors of taxes feel

that they are out of their depth or they do not want to give an opinion. However, as far as possible we wish to retain the sharpest of clarity in our tax law.

I question whether the informal clearance mechanism will actually work. In the co-operative spirit of the Revenue, it is potentially better than statutory clearance in that it is more flexible. However, it will need to be kept under review and if, in such complex anti-avoidance areas, informal clearance were found not to be satisfactory, any Government would need to consider formal statutory clearance arrangements.

Clearance is the main issue in the clauses and although the amendments are tabled to clause 68, they relate to several other clauses in this group. We will not press the matter to a vote, but our view is that an open mind must be kept as to whether the informal clearance arrangements are delivering what is needed economically. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 68 ordered to stand part of the Bill.

Clause 69 - Forward premiums and discounts under currency contracts

Howard Flight (Conservative, Arundel and South Downs)

There has been some criticism levelled at the way that the revised clauses were introduced with immediate effect from 26 July 2001, which was the date on which the original draft clauses were published. The measure could be retrospective legislation in that it applies to contracts that were taken out before the publication of the draft legislation, whereas the Chartered Institute of Taxation has suggested that the provision ought to apply to contracts taken out after 26 July 2001. Are we right that that is what the clause means? If so, it is clearly a bad precedent to introduce retrospective tax legislation.

Ruth Kelly (Labour, Bolton West)

Clause 69 is an anti-avoidance rule that amends a special computational rule in the financial instruments legislation to ensure that it works as originally intended. It deals with the recognition of forward premiums and discounts, which are amounts equivalent to payments and receipts which accounting convention requires to be recognised in some circumstances.

The hon. Member for Arundel and South Downs is concerned about whether the rule is in any sense retrospective. I do not believe that it is. The new rule applies only to forward premiums and discounts—which should be recognised under UK GAAP—attributable to the period from 26 July 2001, the date on which the rule was announced and the clause first published.

I reiterate to the hon. Gentleman and to the Committee that such anti-avoidance measures are designed to catch sophisticated, carefully designed processes designed purely to avoid tax that is owed to

the state. I do not for a moment share the philosophical doubts of the hon. Member for Cities of London and Westminster about the legitimacy of raising a fair share of taxation from particular individuals or companies. I take the principled view, which I think is shared on the Labour Benches, that we should create a level playing field where everyone pays a fair share of tax. That is what the clause is designed to do.

Howard Flight (Conservative, Arundel and South Downs)

I wish just to make the point that I was expressing the concerns of the Chartered Institute of Taxation. I am not sure that the Minister answered them, in that there is a difference between the measure being effective from the date of the draft legislation, which is perfectly fair and understandable, and its affecting contracts prior to that. I am well aware that the clause rightly deals with a narrow territory, but I should like clarity on that point.

Ruth Kelly (Labour, Bolton West)

I have made the position clear. We seek to avoid deliberate tax evasion. In one sense, it is updating an existing measure providing that tax should not be avoided. Companies should have no difficulty in interpreting what is and what is not tax avoidance. We do not want to miss the opportunity of avoiding leakage to the Exchequer, which the clause seeks to stop.

Howard Flight (Conservative, Arundel and South Downs)

I am slightly concerned by what the Minister said. No one likes tax avoidance, and it is fine that people should pay their fair dues and so on. However, the law is the law and, as I have pointed out on many occasions, there is great strength in the Anglo-Saxon heritage in the UK and the USA compared with continental Europe, where there is a lack of clarity about the difference between avoidance and evasion. Such a lack of clarity leads to tax evasion and to a corrupt society. That is the reason for the massive evasion of tax on interest by German savers—[Interruption.]

Joe Benton (Labour, Bootle)

Order. I ask hon. Members to keep the noise levels down.

Howard Flight (Conservative, Arundel and South Downs)

Thank you, Mr. Benton.

Tax evasion became socially acceptable because of a lack of clarity about the difference between evasion and avoidance. Laws are passed by Parliament, courts interpret those laws and, by and large, people will take measures if they legally can to reduce their tax liabilities. It is a question of what is within the law and what is without it. The tidying up of laws that permitted avoidance—it may have been perfectly correct; in essence, it was commenting on the fact that the original law may not have been clear enough—is time-consuming and complex, but it needs to be done if we are to keep our principle. However, it is not correct to say, ''Oh, because we are blocking up a tax avoidance scheme, we do not mind its being retrospective.'' That is not in the tradition of British tax law. If that principle were to be followed, one would find that it led the country down some fairly undesirable byways.

I still ask my question on that narrow point. It is totally fair and reasonable to announce something on a particular date and say, ''From now onwards, the law is clear.'' However, it is relevant whether it applies retrospectively to contracts taken out before that date.

Rob Marris (Labour, Wolverhampton South West)

If I understand him correctly, I have some sympathy with what the hon. Member for Arundel and South Downs says. I wonder whether the Minister would clarify part of new section 168A to the Finance Act 1994, inserted by clause 68.

Subsection (3), at the top of page 46, allows an apportionment procedure for qualifying contracts for the purposes of dealing with the date of 26 July 2001. I cannot see that sort of apportionment for before and after that date in clause 69. I may not have read it correctly, or the contracts may be so complex that I do not understand them. Will the Minister explain why such apportionment is provided under clause 68 but not clause 69, which appears to give the retrospection about which I am uneasy?

Ruth Kelly (Labour, Bolton West)

It may help the Committee if I explain what the clause is intended to achieve. The clause is an anti-avoidance rule that deals with the recognition of forward premiums and discounts, which are amounts equivalent to payments and receipts that accounting convention requires be recognised in some circumstances. At the moment, avoidance schemes are set up that attempt to establish a mismatch between the amount of such premiums or discounts shown in accounts on one hand and the amount recognised for tax purposes on the other. That strikes me as a clear case of deliberate tax avoidance.

The amended rule aligns the recognition for tax of a forward premium or discount, as recognised under United Kingdom GAAP. It is a sensible measure that does not go against the tax tradition in this country, as the hon. Member for Arundel and South Downs implies that it will. Anti-avoidance rules always apply to existing contracts; it is not retrospective but prospective, and applies from the date from which the draft clause is published. In 1996, the Conservative party introduced just such an anti-avoidance measure when it was in government. I hesitate to look at the right hon. Member for Fylde because he may have been the Minister who sat where I am sitting now and proposed such a provision. We are merely following precedent. I rest my case.

Howard Flight (Conservative, Arundel and South Downs)

The Chartered Institute of Taxation has commented that during the consultation process the changes proposed did not solve the problem of divergence between amounts recognised for tax and those recognised in the company's profit and loss account. The institute suggested that rewriting the operative provisions would solve the problem satisfactorily. Why did the Government not decide to rewrite the provisions entirely?

Ruth Kelly (Labour, Bolton West)

We have consulted extensively on the clauses that we have been discussing, which have not on the whole been criticised but generally welcomed by those in the industry who deal with complex financial

instruments, derivatives and loan relationships. They mark an advance on the previous legislation. The structural reforms make avoidance far less likely in future, in addition to the specific anti-avoidance measures.

Of course, such measures introduce an additional element of complexity; that is to be expected, but a balance must be drawn between protecting the interests of the Exchequer and the ease with which the measures can be carried out.

The hon. Gentleman suggests that we should have rewritten the rules. In fact, we have done so, and if he reads schedule 26 he will see a case in point.

Question put and agreed to.

Clause 69 ordered to stand part of the Bill.

Clauses 70 to 78 ordered to stand part of the Bill.

Schedule 23 - Exchange gains and losses from loan relationships etc

Schedule 25 - Loan relationships