Finance Bill

Public Bill Committee, 13 June 2002.

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38)

Joe Benton (Labour, Bootle)

Good morning, ladies and gentlemen. I am pleased to see that you have made rapid progress during my absence.Schedule 26 Derivative contracts

Schedule 26 - Derivative contracts

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 119, in page 324, line 31, at end insert—

'(3) Nothing in this Schedule shall cause or require the recognition of income chargeable to tax by reason of any transactions involving futures or options by the trustees of an authorised unit trust or by an open-ended investment company, and ''company'' and ''derivative contract'' shall be interpreted accordingly.'.

I warmly welcome you back to the Chair, Mr. Gale.

Amendment No. 119 is essentially a probing amendment. It seeks to ensure that the tax treatment of dealings in derivatives by open-ended collective investment schemes is clear so as not to both discourage their usage and incur unnecessary accounting problems. The current position for unit trusts and pension funds contrasts sharply with the unclear tax treatment of derivatives for investment trusts. Consequently, derivative activity in closed-ended funds is mostly conducted by funds based outside the UK. In principle the repeal of the relevant sections will not have an adverse tax effect on existing unit trust and pension schemes, which is the first logical point for repealing them.

The key point is the risk that, at the end of the year, accountants will want to see an audit trail of decision making behind every derivative transaction. That is not currently required because open-ended schemes rely on section 468AA of the Taxes Act 1988, which provides a blanket exemption from tax issues. Not only would the necessary audit trail be administratively burdensome but it could deter open-ended funds from using derivatives, which is not the intent behind the schedule.

A further complication is that open-ended vehicles are bought daily by investors, and the price of those vehicles also changes on a daily basis. It would be extremely complicated if, at the end of an annual audit, the auditor were to decide that the tax treatment was not as originally envisaged by the fund manager or trustee. That would mean that the prices at which many transactions had taken place were wrong, and

correcting that would be a nightmare. I hope that the Government have a ready answer to deal with that important practical point.

Dawn Primarolo (Labour, Bristol South)

Good morning, Mr. Gale. It is nice to see you back in the Chair. We worked hard in your absence so that you would be pleased on your return by the progress that we had made, and we will continue to make progress under your guidance.

The hon. Member for Arundel and South Downs (Mr. Flight) raises an important point. This area is hugely complex and there is a long history of attempts to ensure that the tax rules in it are correct. At every opportunity the previous Government and our Government tried to ensure that the rules taxed appropriately without adding constraints or creating uncertainty for that highly complex market. I appreciate the point behind the hon. Gentleman's amendment about the tax position of authorised unit trusts and open-ended investment companies.

I appreciate also that over the past few weeks companies have been in doubt about whether the clause offered the certainty that they previously thought it did. As the hon. Gentleman pointed out, that has happened because certain sections of tax law, which appeared to give certainty, were repealed and their absence appears to give less certainty.

I am sure that the Committee will be mightily relieved to hear that the hon. Gentleman and I do not intend to have a technical debate on the clause. I am particularly reluctant to have such a debate because I know that the hon. Gentleman is something of an expert in the area and has written a book about it, which is out of print.

Chris Grayling (Conservative, Epsom and Ewell)

The Paymaster General has been trying to find a copy.

Dawn Primarolo (Labour, Bristol South)

Indeed. At one stage, I thought that it might be wise to track down a copy.

I fully appreciate that the funds need the certainty that capital profits will not be taxed. I also understand the concern that the removal of the protection that the funds enjoyed under section 468AA should not allow the Revenue to tax funds by using the argument of trading. We accept that. Since the amendment was tabled, we have had the opportunity for further discussions with the industry, and I shall explain their conclusions.

I shall first state why we believe that concerns are unfounded. The new rules will give authorised funds greater certainty than they currently enjoy about the treatment of profits from a wider range of derivative contracts . As well as applying to futures and options, the new exemption extends to contracts for differences such as swaps. Relief from taxation on capital profits is therefore being extended. The rules are explicit that where a fund accounts for profit as capital under its accounting laws it cannot be taxed. The amendment is not necessary because that position is clear.

Where income is available to distribution to unit and shareholder trusts, the situation becomes more complicated, because that carries a tax credit. The

amendment would create a mismatch, and an opportunity for avoidance—I accept that that is not the hon. Gentleman's intention—and therefore a loss to the Exchequer. It would not be correct for investors to be able to gain a tax credit when no tax had been paid on the fund.

The Inland Revenue met the relevant representative bodies to discuss the matter. It agreed, after it explained to the companies how the system would operate, that it is crucial that the guidance, which deals specifically with some of the issues that the hon. Gentleman raised, is clear. With all the changes to the clauses, the Revenue, with the companies and representative organisations, is focusing on the guidance to ensure that it is very clear. The Revenue officials and I are grateful for the helpful suggestions that have been made. We are more than happy to take them into account to ensure that the position as the Revenue understands it, which is that there is greater certainty, is clear with respect to the tax rules. As I understand it, the interests concerned with that proposition are now satisfied.

It is always important when dealing with complex matters to ensure that the consultation on changing the rules is correctly conducted and that people are able to comment fully on all the procedures. Originally, the unit trust industry decided that it wanted to stay under the old rules rather than be included in the new arrangements. We were perfectly happy to accommodate it. Late in 2001 it decided that it would be better to be included in the new rules, which are an improvement, so we have not been able to spend quite as much time as we might have done consulting other interested parties.

I believe, however, that the consultation has now reached a successful conclusion. I hope that that is the information that has reached the hon. Gentleman. I am happy to put on record an acknowledgement of the issues that were raised. We believe that they have been dealt with by guidance that makes the matter absolutely clear, and on that basis I hope that the hon. Gentleman will be prepared to withdraw his amendment.

In conclusion, because of the complexity of the issue, it is important that the Government continue to draft guidance, discuss how the rules operate and keep an open mind about any fine-tuning that may be needed in future. I hope that none will be necessary, because the Revenue officials, to whom I would like to pay tribute—even though it is perhaps unusual to do so—have undertaken a splendid and detailed consultation, which I believe has been recognised and appreciated by everyone involved in the markets. As I said, I hope that the hon. Gentleman feels happy—at this stage, at least—and will agree to withdraw his amendment. If not, we would reluctantly have to oppose it, and that would be a bad start to the morning.

Howard Flight (Conservative, Arundel and South Downs)

May I echo the Minister's comments about the Inland Revenue? Despite the complexity of the issue, an amazing effort has been made to sort out

highly complex tax matters. I am pleased to hear the Minister's assurances that this latent issue has been addressed and, therefore, beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 174, in page 332, line 27, leave out from 'which' to 'or' in line 28 and insert ', if the future were to run to delivery, would fall to be delivered at the date and price agreed when the contract is made,'.

No. 175, in page 332, line 33, leave out paragraph (a) and insert—

'(a) where the contract for differences relates to fluctuations in the value or price of property described in the contract, the property so described, or'.

No. 176, in page 333, line 18, leave out 'referred to' and insert 'described'.

No. 177, in page 333, line 23, at end insert—

'( ) a future;

( ) an option;'.

No. 178, in page 334, line 4, leave out from 'terms' to 'not' in line 8 and insert

'provide—

(a) that, after setting off their obligations to each other under the contract, a cash payment is to be made by one party to the other in respect of the excess, if any, or

(b) that each party is liable to make to the other party a cash payment in respect of all that party's obligations to the other under the contract,

and do'.

No. 121, in page 337, line 13, leave out second 'or' and insert—

'(aa) so much of any exchange gain or loss arising to a company as results from any translation from one currency to another pursuant to section 93A(4) of the Finance Act 1993 (c.34) of the profit or loss of part of the company's business and falls within sub-paragraph (5A), or'.

No. 122, in page 337, line 18, at beginning insert 'For the purposes of sub-paragraph (3)(a),'.

No. 123, in page 337, line 29, at end insert—

'(5A) For the purposes of sub-paragraph (3)(aa), an exchange gain or loss falls within this sub-paragraph to the extent that, in accordance with generally accepted accounting practice, an amount representing the whole or part of it is carried to or sustained by a reserve maintained by the company.'.

No. 124, in page 341, line 28, at end insert—

'(3) Sub-paragraph (4) has effect where, in the case of a derivative contract of a company,—

(a) the company uses, as respects the contract, a basis of accounting other than an authorised mark to market basis of accounting for an accounting period (the ''preceding period''), but

(b) by virtue of sub-paragraph (2), the company must for the succeeding accounting period (the ''first mark to market period'') use, as respects the contract, an authorised mark to market basis of accounting as its authorised accounting method for the purposes of this Schedule.

(4) Where this sub-paragraph has effect in relation to a derivative contract of a company, the company shall be deemed—

(a) to have disposed of the contract immediately before the end of the preceding period for a consideration of an amount equal to the fair value of the contract at that time, and

(b) to have reacquired it for the same consideration immediately after the beginning of the first mark to market period.'.

No. 125, in page 344, line 40, at end insert—

'(3) No debit may be brought into account by virtue of this paragraph if it is taken into account in arriving at the amount of expenditure in relation to which a debit may be given by Schedule 29 to the Finance Act 2002.'.

jf1ÝNo. 126, in page 345, line 17, at end insert—

'(4A) In this paragraph ''option'' has the same meaning as in paragraph 12, apart from sub-paragraph (10).'.

No. 120, in page 360, line 42, leave out sub-paragraph (3) and insert—

'(3) Where—

(a) a company ceases to be party to a derivative contract in an accounting period (the ''cessation period''),

(b) profits or losses arise to the company from the derivative contract or a related transaction in the cessation period, and

(c) the credits or debits brought into account for the purposes of this Schedule for the cessation period do not include credits or debits which represent the whole of those profits or losses, credits or debits in respect of so much of those profits or losses as are not represented by credits or debits brought into account for the cessation period shall continue to be brought into account under this Schedule over one or more subsequent accounting periods (''post-cessation periods'') as in the case of a derivative contract to which the company is party in those periods and sub-paragraphs (3A) and (3B) shall apply.

(3A) In any case falling within sub-paragraph (3), any question—

(a) whether, in a post-cessation period, the company is, or is to any extent, party to the contract for the purposes of a trade carried on by it, or

(b) whether, in a post-cessation period, the contract is to any extent referable to a particular business, or a particular class, category or description of business, carried on by the company, shall be determined by reference to the circumstances immediately before the company ceased to be party to the contract instead of the circumstances in the post-cessation period.

(3B) In any case falling within sub-paragraph (3), any question—

(a) whether the contract has to any extent a particular purpose in a post-cessation period, or

(b) whether there is a connection between the company and any other person for a post-cessation period,

shall be determined by reference to the circumstances in the cessation period instead of the circumstances in the post-cessation period.'.—[Dawn Primarolo.]

Schedule 26, as amended, agreed to.

Schedules 27 and 28 agreed to.

Clause 102 - Discounted securities etc

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 167, in page 80, line 15, at end insert

'or for the transfer of the whole or part of a business or interest in a business carried on by him or by him and others in partnership;'.

Clause 102 makes two changes to the rules for relevant discounted securities—that is, securities held by persons not within the charge to corporation tax and issued at a discount compared with the eventual amount payable on redemption.

The first change relates to an earn-out right in the form of a qualifying corporate bond when a double charge to both income tax and capital gains tax could arise. Modifications in the Bill, which is deemed always

to have had effect, includes the value of the earn-out right in the issue price of the security, which should eliminate the risk of double charge.

The second change is a restriction on any loss on the transfer to a commercial person of a relevant discounted security by a person who acquired it on its issue, paid more than its market value at the time of issue and is connected with the issuer. There is a similar effect when the issuer is a closed company and, although the person in question may not be connected with the closed company, he and any other persons who issue securities of the same sort taken together control the company. The new rule applies from 26 March 2002 when the change was announced and restricts the loss in such cases. There is no motive test.

The Law Society is the main professional body to comment on the clause and is essentially the author of the amendment. Its purpose is to ensure that the clause applies when business assets as well as shares or debentures are exchanged for earn-out rights.

John Burnett (Liberal Democrat, Torridge and West Devon)

I endorse the point made by the hon. Member for Arundel and South Downs. It is important, especially for small businesses, which often sell assets rather than the shares of the company for tax as well as other reasons. It is also important to retain a flexible economy and to allow people to organise their own affairs satisfactorily. These assets probably provide their only pension, and when selling a business or smoothly passing over a business, often assets rather than shares are sold. I hope that the Government will help the small business sector by accepting the amendment.

Dawn Primarolo (Labour, Bristol South)

The circumstance of double taxation raised by the hon. Members for Torridge and West Devon (Mr. Burnett) and for Arundel and South Downs is not a problem that the Revenue has seen, and as far as we know it has not arisen. However, the amendment seeks to prevent a double charge to income tax and capital gains tax and, although we do not believe that that would arise, the amendment would make the matter clear. I am therefore persuaded by the hon. Gentlemen that it would be wise to accept it, and I recommend it to my colleagues accordingly.

Howard Flight (Conservative, Arundel and South Downs)

What can I say? Thank you, Minister. The issue is obviously not an awe-shaking one, but I have often banged on about the fact that clarity in our tax law is a great virtue to be preserved, and the amendment provides clarity.

Mr. Burnett rose—

Joe Benton (Labour, Bootle)

I am sorry, but the hon. Member for Arundel and South Downs has resumed his seat.

John Burnett (Liberal Democrat, Torridge and West Devon)

On a point of order, Mr. Gale. May I record my gratitude? Double taxation is indeed unfair, and we are very grateful to the Paymaster General, especially at such an early hour.

The Chairman: That is not strictly a point of order for the Chair, but it is now on the record.

Amendment agreed to.

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

Clause 102, as amended, ordered to stand part of the Bill.

Clauses 103, 105 and 83 ordered to stand part of the Bill.

Schedule 29 - Gains and losses of a company from intangible fixed assets

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 182, in page 373, line 33, at end insert

'except for those assets that are subject to Part 4, paragraph 26 (Realisation of a pre-commencement asset).'.

Joe Benton (Labour, Bootle)

With this it will be convenient to take amendment No. 183, in page 383, line 11, at end insert—

'Realisation of a pre-commencement asset

26.—(1)This paragraph applies where there is a realisation of a ''pre-commencement asset'' that is an intangible fixed asset—

(a) that was held by the company, or in the same worldwide group, before commencement, as defined by Part 14 of this Schedule, and

(b) on which no deduction has been claimed under Part 2 of this Schedule.

(2) The company can elect to tax the realisation of the pre-commencement asset under the ''existing law'', as defined by Part 14 of this Schedule.

(3) The election must be made in writing to the Board of the Inland Revenue within two years of the end of the accounting period during which the realisation takes place.

(4) In particular, the making of the election will allow the company to roll over the proceeds on realisation of the pre-commencement asset under the replacement of business assets rules in section 152 of the Taxation of Chargeable Gains Act 1992.

(5) Where the creation of an intangible fixed asset straddles the commencement date the election may be made only in respect of the pre-commencement portion. The proceeds on realisation should be apportioned between pre and post commencement on a just and reasonable basis.'.

Howard Flight (Conservative, Arundel and South Downs)

The amendments are designed to allow companies that held intangible assets before 1 April 2002, on which no deduction has been claimed under the new legislation, to roll over the proceeds on disposal under the old rules—that is, against land and buildings—rather than being able to roll over proceeds against only the acquisition of new intangible fixed assets. In essence, if that were not the case, there would be an element of retrospection in the operation of the schedule. We hope that the Government will take note, and that they will be able to address the issue satisfactorily if they do not accept the amendments.

John Healey (Labour, Wentworth)

Thank you, Mr. Gale, and good morning. As I said to your co-Chairman on Tuesday, it is a great privilege to join the Committee, and I very much look forward to serving on it under your chairmanship.

The schedule would enact a major reform of the corporation tax treatment of intangible assets. The reform modernises the corporate tax base, providing relief for the cost of acquiring intangible assets when none had previously been available. Before I turn to the amendments, let me introduce clause 83, and schedules 29 and 30, and explain the background to this important new element of the legislation. It introduces a comprehensive regime that will provide consistent treatment of companies' expenditure and receipts in respect of intangible assets.

The new regime replaces an outdated and, in places, incoherent accretion of rules based on judicial decisions and occasional legislation, which had grown up piecemeal over nearly 150 years. It marks a further step in the Government's programme of corporate tax reform, which is designed to ensure that the tax system reflects the realities of today's business and competes with the best in the world. A modern system for taxing intangible assets will encourage companies to take advantage of new opportunities in the knowledge-based economy and will contribute to the Government's goal of increasing national productivity.

The proposals have been the subject of extensive consultation. The Government have issued six consultation documents since March 1998. The Inland Revenue has established a consultative group drawing on all representative employer organisations, and draft clauses were published with the pre-Budget report by my right hon. Friend the Chancellor of the Exchequer in November 2001. To that degree, therefore, business and tax practitioners and specialists have been closely involved in the development of the new regime, both individually and through their representative bodies. I pay tribute to all those who made a contribution. The Bill has been very much improved by that process, and the reform has been widely welcomed. The proposals have been developed considerably, particularly through the inclusion of roll-over relief and grandfather clauses.

The new regime provides for companies to obtain tax relief for the cost of intangible assets, including goodwill, brand names, trade marks and other intellectual property; in most cases, it will be based on the amortisation reflected in the accounts. The use of accounting write-downs to determine the tax relief breaks new ground, providing greater flexibility and bringing tax and commercial profits closer together.

The coverage of the new regime is also broadly aligned with the accountancy definition contained in financial reporting standard 10. That will ensure that relief under the new rules is available for the full range of intangible assets, with very few exceptions. It will enable the new regime to keep pace with commercial developments, without the need continually to add to the legislation to provide relief for new forms of intangibles as they develop in an increasingly fast-moving business world.

Mr. Michael Jack (Fylde): Just for clarification—not necessarily now, but before the end of our debate—will the Minister say what he meant by those delphic words ''with a few exceptions''? I am interested to know what has been left out.

John Healey (Labour, Wentworth)

What the right hon. Gentleman called my delphic words were ''very few exceptions''. I shall be happy to clarify that at the appropriate point.

Moving from a system of rigid tax rules set out in legislation to one that follows accounting practices will mean that, from the outset, the new provisions, which I hope will be welcomed by all hon. Members, will give us the flexibility for future developments.

Michael Jack (Conservative, Fylde)

The Minister mentioned accounting practices. I wonder whether he will say a few words about the international dimension. It is clear, post-Enron, that there are significant differences in accounting standards and accounting definitions between, for instance, the United Kingdom and the United States, which may cause problems for multinational and international companies. I wonder whether such conflicts will be resolvable under the proposals.

John Healey (Labour, Wentworth)

I do not see that such conflicts are likely. We will be dealing in later amendments with a divergence in practice between the USA and the UK. However, the measures draw directly on established accounting rules and practices, so they give us a consistent code under which to operate the tax relief system. We therefore have some certainty that they will operate securely and give us the assurance that we need as we move away from the previous approach, under which tax rules were specified in legislation.

Under the new regime, disposals of intangible assets will be taxed on an income basis. To ensure that companies have an incentive to reinvest, however, a roll-over relief will apply where disposal proceeds are reinvested in new intangible assets. As I explained, that feature is a direct result of consultations during our preparation of the provision.

Intangible assets that companies held on 1 April this year—the date on which the new provisions came into effect—will generally be taxed under current law. That treatment responds to concerns expressed during the consultation by business and experts, who felt that existing capital gains assets should remain subject to the capital gains rules and should be grandfathered on any future sale. Disposals of such assets will, however, qualify for roll-over relief under the new rules for intangibles, rather than under the capital gains roll-over relief.

John Burnett (Liberal Democrat, Torridge and West Devon)

One point that the Law Society made was that non-trading losses on intangible fixed assets to be carried forward to the next accounting period should be added to the list of carry-forward provisions. Is the Minister saying that the tax treatment of such assets should fall under the capital gains tax regime, not the proposed regime?

John Healey: If I may, I shall return to that at the appropriate point in my remarks.

Schedule 29 sets out the detail of the provisions, and schedule 30 sets out the consequential amendments that are needed to other taxation legislation. Government amendments Nos. 212 to 214 are not substantive; they simply correct minor drafting errors that we have picked up over the past few days. They therefore form a proper part of schedule 30.

The legislation has been drafted in the new style that we adopted for the tax law rewrite project. The consultation draft that the Inland Revenue published at the time of the 2001 pre-Budget report was widely welcomed for its clarity and, by tax legislation standards, for its relatively plain English. That certainly helped the recent consultation process.

The reform in clause 83 and the accompanying schedules marks an important step on the road to a modern and competitive UK corporate tax system. As the hon. Member for Arundel and South Downs explained, the amendments would make capital gains roll-over relief available to companies that dispose of their pre-commencement intangible assets—those that pre-date 1 April—as an alternative to the roll-over relief provided by the new intangibles regime. That gives companies the scope to reinvest gains in a wider range of assets—tangibles and intangibles—and, in some cases, to defer tax on such gains for longer.

By way of background, I should explain that the roll-over relief provisions and the rules for dealing with companies' existing assets were the product of the extensive consultation process. The rules were designed to respond to the issues that business raised with us. They have, therefore, been widely welcomed. In particular, the facility to roll-over gains that are taxed as income under the new rules against the acquisition of further intangibles is unprecedented and generous.

The transitional arrangements, too, are already generous to companies. Companies are able to benefit from capital gains loss relief, indexation and 1982 values on the disposal of their existing assets at the same time as enjoying the new relief against current income on the assets that they buy.

John Burnett (Liberal Democrat, Torridge and West Devon)

To put it simply, the regime is predicating a system whereby the gain is brought in to tax but is also shielded and can be used for roll-over within the capital gains tax regime.

Mark Field (Conservative, Cities of London and Westminster)

On intangibles?

John Burnett (Liberal Democrat, Torridge and West Devon)

Yes, on intangibles.

John Healey (Labour, Wentworth)

I shall come to that point. I shall pull together my responses to the remarks that have been made at the end of my comments.

The transitional arrangements are generous. A range of benefits is available to companies that, at the same time, enjoy the new relief against the current income of the assets that they buy. Roll-over relief has been expanded as a result of the consultation within the new framework, to cover capital gains on all pre-commencement intangibles, not just the limited

categories that currently qualify for capital gains roll-over relief. While companies can no longer defer the gains on those disposals when they buy assets within the capital gains rules, they can now do so by reinvesting in not only the limited categories of intangible assets that currently qualify for capital gains roll-over relief but all intangibles within schedule 29.

John Burnett (Liberal Democrat, Torridge and West Devon)

Are the Government considering enlarging the scope of roll-over relief so that all assets normally available for reinvestment will be considered?

John Healey (Labour, Wentworth)

The simple answer is that we shall keep the matter, as we generally do, under careful and constant review.

It is not correct to say that we are limiting the range of reliefs available when pre-commencement assets are sold, nor that the proposals are in this respect unfair to companies, nor that they do not adequately take into account their expectations with regard to existing assets. The hon. Member for Arundel and South Downs suggested that there was an element of retrospection in the provision. I do not accept that argument, and would point out that the consultation on the changes began in March 1998, so the proposals have been in the pipeline and in the public domain, and have been the subject of detailed discussion with many of the representative bodies and interests in the field, for a considerable time.

As stated in the background information, the estimated cost of the provisions to the Exchequer is some £200 million, rising in due course to £350 million. I submit that schedule 29 and the clause that it supports represent—by anyone's standards—a generous set of proposals that has been developed in the light of extensive consultation. Finding the right balance between the benefits to be enjoyed by companies from the new relief and their expectations with regard to future disposals of their existing assets has been an important element in the consultation.

The proposals represent a balanced package at an affordable, but not insignificant, cost to the Exchequer. The package is both competitive and fair, because it provides relief for all expenditure on intangibles; fair taxation of sale profits; and roll-over relief to ensure that companies have an incentive to reinvest in further intangible assets.

The amendment proposed by the hon. Member for Arundel and South Downs would make the package even more generous. It would allow a choice of capital gains or intangibles roll-over relief, and would add to the Exchequer cost and alter the balance of the package. To that extent, the amendment goes too far and cannot be right at the moment.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am grateful to the Economic Secretary, whom I must congratulate on his appointment. Has the Treasury done an exercise as to the cost if the amendment were made?

John Healey: I am grateful for the hon. Gentleman's congratulations. The direct answer is yes, and the cost would be about £50 million. The provisions, which are already generous, cost the Exchequer about £200 million a year, and the amendment would add significantly to that. For the other reasons that I have explained, we cannot support the amendment.

I shall pick up on several of the points put to me by hon. Members during this short debate. The hon. Member for Torridge and West Devon raised a question from the Law Society on what is essentially a minor drafting point. We do not think that it is material. It cropped up in our consideration when preparing the Bill, and the Inland Revenue will monitor matters in case our judgment proves incorrect.

The right hon. Member for Fylde (Mr. Jack) picked me up on my reference to ''very few exceptions'', a phrase that I included because there are indeed very few. He asked for examples. One may be life assurance assets, which are subject to the special insurance tax regime. Research development gives rise to special reliefs, and so falls into a different part of the regime.

I was asked how many businesses might benefit, given the nature and scope of the new regime. The number will build in time under the new rules, but our best estimate is that about 30,000 companies will benefit that would not have done under the previous regime.

On the basis of my remarks, I encourage the hon. Member for Arundel and South Downs to withdraw the amendment. If he is not prepared to do so, I must ask my hon. Friends to reject it.

Howard Flight (Conservative, Arundel and South Downs)

If I did not make it clear up front, I should say that the reforms in the clause are welcome. A lot of work has gone into them. My understanding of the net cost of honouring the existing position is that it is not as great as £50 million. I have been advised that it is more like £20 million.

Is there any prospect of the deal and approach that the Government have taken being unfairly skewed? Without the amendment, a measure that cost £200 million is a big plus to businesses, but some people will obviously have intangibles from before 1 April 2002 and, in running their businesses, will expect the tax rules to be as they were. It is conceivable that sheltering them on disposal by other intangibles, for whatever reason, may not fit their businesses especially well.

Given the extensive consultation, what response to the issue have the Government encountered? Is the general view that there has not been much skewing and that the deal is acceptable, or have some argued that it is unfair to certain types of business to change the regime in midstream? It is important to know that because rough justice is not necessarily the answer to this sort of problem.

John Healey (Labour, Wentworth)

Terms such as ''changing the regime midstream'' and ''rough justice'' are inappropriate, given that we have issued six consultation documents on the matter since 1998. As with other detailed points

of the proposals, individuals and representative organisations have raised questions and made criticisms, but the total package has been widely welcomed as a reform that goes in the right direction and breaks precedent in a way that is modern and helpful to businesses and their professional advisers. The hon. Gentleman would be hard-pushed to find a representative body or individual that would not want that package to be introduced.

Mark Field (Conservative, Cities of London and Westminster)

I accept that the Institute of Directors and others have welcomed the proposals, that the measure is not new—it has been around for the past four years—and that there was substantial consultation on it. However, I have a philosophical concern that may not affect the schedule or the amendments but may have a longer-term effect.

Until 1997, the income and capital taxes regimes were on one stream, but the new Treasury team introduced a change in philosophy. Capital gains tax, especially for small entrepreneurs, is now at a far lower level. I wonder whether provisions that ensure that intangible fixed assets are put on an income rather than capital basis may mean higher rates of taxation for companies on those assets. I suspect that that is not the Government's intention at this juncture, and we have not received representations on it. However, on the basis that rates of income and capital gains taxes have diverged and that there has been an increase in Treasury meddling, which we may see more of in the future, Opposition Front-Benchers may return to the area of intangible fixed assets when we debate future finance Bills. As the Minister said, it is an important area, and goodwill on this matter is important to large and small companies in a globalised and high-information world.

Mark Hoban (Conservative, Fareham)

I want to raise a couple of points about the impact of changes in markets on the tax cost of the measures. Over recent years, telecom and information technology companies have incurred huge losses as a consequence of the write-down in value of assets because the consideration that businesses paid for those companies some years ago is no longer held to be a fair reflection of their market value. What is the implication of future write-downs on the tax cost set out in the Red Book? If a company such as Vodafone wrote off £0.8 billion of the value of assets acquired from Mannesmann, the transaction would not be covered by the schedule, but if future transactions of a similar magnitude incurred a similar write-down, that might give rise to some variations in the revenue.

In its representation, the Institute of Directors welcomed the new regime in general but went on to say:

''the great extent of legislation suggests that the plot, of simply following the accounts, has been somewhat lost.''

The Bill and the explanatory notes are somewhat longer than FRS 10, on which the measure is meant to be based.

John Healey (Labour, Wentworth)

The hon. Member for Fareham (Mr. Hoban) raises an important point, of which we are all conscious in the light of our experiences of such large

corporate problems. The massive goodwill write-offs that have followed some major takeovers have generally involved the acquisition of shares in the target company, rather than direct purchase of the assets. For clarification, the new relief would not apply in such cases. We are keen to encourage reinvestment in assets and the relief will be available only for new acquisitions, not for write-downs of assets that companies have previously acquired.

Mark Hoban (Conservative, Fareham)

I am grateful for the Minister's important clarification of the matter. I suspect that in transactions there will be some tension between vendors and purchasers: vendors will be interested in the substantial shareholdings rules and the benefits that they bring; and purchasers will increasingly want to use asset-based transactions to crystallise the goodwill in the transaction and benefit from the tax relief that that brings when the goodwill asset is amortised over however many years. They will also want to catch any major write-downs that may occur in the future if they believe that the value of the business that they have acquired has diminished.

John Healey (Labour, Wentworth)

I suspect that we shall return in fuller detail to that issue when we discuss a later amendment.

I welcome and accept the general support offered by the hon. Member for Cities of London and Westminster (Mr. Field) for the reform proposals in the Bill. Perhaps he will allow me to take his specific points as fair warning—if we are fortunate enough to serve on a future Finance Bill together.

Howard Flight (Conservative, Arundel and South Downs)

Although the area is very technical, the debate has usefully aired it. I repeat that, overall, the measures are welcome. I remain uncomfortable that some businesses may suffer as a result of what is intended to be, and is accepted as, a positive measure. Our amendment will not be accepted and is not sufficiently material to put to a vote, but I hope that the Government will examine the matter further to find out whether there might be any significant wobbly areas. Nobody would want changes to our tax system to have a material and effectively retrospective impact on previous decisions. That point is different from the one that I made yesterday about retrospective measures. If a business has done a major deal based on current tax rules, there is an expectation in our traditions that it will get grandfathered. That principle should therefore be followed as far as possible. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Joe Benton (Labour, Bootle)

I have deliberately permitted a fairly wide-ranging debate on the amendments because the issues are complex and interrelated. Also, the Committee did not have a clause stand part debate on clause 83, so it seemed right for the Minister to have the opportunity to range slightly wider in putting his case than the amendments would otherwise have allowed. That being so, I shall tell the Committee now that, although I am prepared to allow a more wide-ranging debate where matters are interrelated, I shall take that into account when considering whether to allow a stand part debate.

Mr. Flight: I beg to move amendment No. 184, in page 405, line 44, at end insert—

'71A (1) This paragraph makes provision for the application of this Schedule where a controlling interest is acquired in a company (the first company) by another company (the second company), such that the first company becomes a member of a group of companies of which the second company—

(a) was already a member; or

(b) is or becomes the principal company.

(2) Immediately before the time when the second company acquires a controlling interest in the first company, where the first company owns intangible fixed assets, the first company shall immediately before that time be deemed to have disposed of those intangible fixed assets for a sum equal to such amount as shall result in neither a gain nor loss for capital gains tax purposes nor a credit or debit for the purposes of this Schedule as the case may be.

(3) Immediately after the time when the second company acquires a controlling interest in the first company, such part of the expenditure (the apportioned expenditure) by the second company on the acquisition of a controlling interest in the first company shall be treated as expenditure on acquiring the intangible fixed assets of the first company, as shall be just and reasonable. The tax written down value of the intangible fixed assets of the first company shall be deemed to be equal to the expenditure so apportioned.

(4) The third person is a company or other person from whom the second company acquired the controlling interest in the first company. Where this paragraph applies—

(a) the third person shall be deemed to have disposed of an intangible fixed asset for a sum equal to the expenditure deemed to have been incurred by the second company pursuant to sub-paragraph (3) above;

(b) the disposal by the third person of the intangible fixed asset pursuant to this sub-paragraph shall be deemed to be a separate asset from the shares in the first company; and

(c) any chargeable gain that accrues to the third person as a result of the disposal of the shares in the first company shall be treated for all the purposes of the Tax Acts as reduced by an amount equal to the expenditure deemed to have been incurred by the second company pursuant to sub-paragraph (3) above (and an allowable loss will be deemed to be increased by a like amount, as the case may be).

(5) The intangible fixed asset deemed to have been disposed of by the third person for the purposes of sub-paragraph (4) above shall be treated as having been created or acquired (as the case may be) at the time that the intangible fixed asset owned by the first company was acquired or created by the first company.

(6) In sub-paragraph (2), (3) and (5) above, references to the first company shall include references to one or more companies that were not in the same group as the second company before its acquisition of a controlling interest in the first company but as a result of that acquisition are in the same group as the second company after the acquisition.

(7) For the purposes of this paragraph, the second company acquires a controlling interest in the first company if the two companies are not in the same group and there is an acquisition by the second company of shares in the first company such that those two companies are in the same group immediately after the acquisition.

(8) This paragraph shall apply only if an election in writing is made jointly by the second company and the third person, such election to be made within the period commencing with the acquisition of the controlling interest in the first company and ending two years later.'.

The amendment picks up the issue that my hon. Friend the Member for Fareham has already raised. It is aimed at resolving the anomaly where the acquisition of assets results in a materially better tax result for the acquirer than if they had acquired the shares of the company carrying on the trade. Under the current provisions, where a company acquires a business from another person, the goodwill becomes

purchased goodwill, as defined under generally accepted UK accounting practice, and hence may be tax depreciated, but if a company acquires the shares of a company carrying on a trade, as the Minister commented, the goodwill may not be amortised.

Clause 44 contains measures that operate in the entirely opposite direction, which make it much more attractive for vendors to dispose of shares than to dispose of assets. My hon. Friend the Member for Fareham referred to tension, but I see potentially more than that. The proposals may encourage complex schemes for deals that would put money into clever corporate financiers' pockets, and we do not want to create such complexity. I was unhappy to hear the Minister say earlier that the measure was intended to apply only to assets, not to shares. I take that to be the Government's position, and if their position is unchangeable, measures that are otherwise positive may bring with them many problems.

John Healey (Labour, Wentworth)

As the hon. Member for Fareham mentioned during our discussion on the previous set of amendments and as the hon. Member for Arundel and South Downs explained, there is a perceived tension in the Bill between the intangible assets reform and provisions in clause 43 on the exemption for substantial shareholdings. The amendment addresses that perceived tension with a provision that appears to be based on section 338 of the United States internal revenue code. This is not a new issue. We raised it during the consultation process, we considered it carefully when drafting the Bill and we shall keep the matter under review, as I explained to the right hon. Member for Fylde.

Both the intangibles and the substantial shareholdings reforms were developed following extensive consultation with business. In each case, the final outcome has been welcomed by business. Both reforms address what are, by anyone's standards, long-standing problems in the corporate tax system, which needed to be overhauled. At the asset tier, the new intangibles regime modernises the corporation tax base and removes the distortion against acquiring intangible assets. At the shareholder tier, the substantial shareholdings exemption removes a major obstacle to commercial restructuring.

We have included in schedule 29 a measure that will extend the intangibles roll-over relief to cases where a company reinvests by acquiring a controlling interest in another company and that newly acquired company has intangible assets within the regime. I hope that the Committee appreciates that this innovative rule will provide for a greater degree of neutrality between acquisitions in share and asset form, and that it will afford greater flexibility to companies as the number of assets within the new regime increases.

All in all, the reforms provide a sensible framework at shareholder and asset tiers that will enhance the competitiveness and flexibility of the UK corporate tax system. However, we understand the points that have been made about it. As I said earlier, we shall keep the matter under review. As we monitor the

impact of the new regime in its first few years of operation, we shall consider the case for a further measure along the lines of the United States section 338 model should the evidence warrant it. However, I warn those hon. Members who may wish to press the point now or on Report that a range of factors will need to be taken into account.

The potential cost would need to be considered carefully. An elective provision of this sort, which would generally be used by companies only when there was an overall tax benefit to them, would be likely to carry a significant Exchequer cost. The amendment would increase that cost, as it appears to bring existing intangible assets within the new regime while they remain in the hands of the company that held them prior to commencement. Under the schedule, those assets are outside the regime until they actually change hands.

It is by no means clear that the proposed new paragraph would work satisfactorily in practice. I shall not go into the technical detail here; it will be more appropriate to do it in consultation with experts. However, it is a technically complex area and legislation along such lines would need to be developed in consultation with business to ensure that it achieved the objectives that we might wish for potential provisions of that nature. The amendment would also allow intangible assets to be treated as bought and sold under the election, but no other assets. It is hard to see why that should be so. The US equivalent rule applies to all assets, not only intangibles.

I assure Opposition Members that we will continue to keep the matter under review. We shall assess the impact of the reforms introduced in the Bill, and we shall consult business on future reforms to corporation tax. I would therefore encourage the hon. Member for Arundel and South Downs to withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I am glad to hear the Minister saying that the Government accept the tension, and that they are willing to keep the matter under review and consider following the US section 338 model. As the new economy sector recovers over the next few years, intangibles will be more important than ever. I am sure that the Revenue will keep a beady eye out for new schemes that try to marry the two conflicts—of buyers wanting to buy assets and sellers wanting to sell shares. The problem may be solved; otherwise, it may be an indication that it is time to make a change. 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. 197, in page 433, line 18, leave out from 'acquisition' to end of line 19.

The amendment is about the rules for bringing Lloyd's syndicate capacity within the new intangible property regime. Paragraph 128 of the schedule applies the new intangible property regime to existing syndicate capacity at Lloyd's—that is, the right that a corporate member of Lloyd's has to underwrite in syndicate. Syndicate capacity is already dealt with under an income regime for corporation tax purposes.

It therefore makes sense immediately to bring existing capacity into the new rules. Lloyd's made representations to that effect during the consultation and is satisfied with what has been agreed.

The amendment concerns paragraph 128(4), on which the Treasury's explanatory note states:

''Paragraph 128(4) ensures that reinvestment relief under Part 7 is not prohibited on the realisation of existing capacity by virtue of the requirement in paragraph 38(1)(a) that the asset may have been a 'chargeable intangible asset' throughout the period it is held.''

That is covered by the decision, which is to be supported, to bring existing capacity within the new rules. A corporate member of Lloyd's who acquired a syndicate capacity in 1998 and realised in 2003 would be able to qualify for full reinvestment, provided they met the reinvestment requirements.

The wording of paragraph 128(4) seems not to achieve the result stated in the Treasury's note. It states:

''For the purposes of Part 7 (roll-over relief on realisation and reinvestment) the asset shall be treated as if it had been a chargeable asset from the time of its acquisition or, if later, the beginning of the first accounting period to which this Schedule applies in relation to it.''

That would surely mean that the capacity would be treated as having been acquired in 1998, when it was acquired, or if it were acquired later it would be considered to have been acquired on 1 January 2002. A significant period of ownership would therefore not qualify for reinvestment relief. That seems to be the opposite of the Government's intention, and if that is so it surely needs correcting, which is what the amendment is designed to do.

The wording of paragraph 128(4) continues to baffle the tax lawyers advising Lloyd's, who remain convinced that it states the opposite of what is both intended and in the Treasury notes. I hope that the Economic Secretary can place something on the record to make the wording mean what the Government intend it to mean.

John Healey (Labour, Wentworth)

As the hon. Gentleman has explained, the amendment's purpose is to ensure that roll-over relief is not restricted in the case of an intangible asset that is a syndicate capacity at Lloyd's. He is right to say that the provision in question is intended to ensure that there is no such restriction. Even I can see that the wording of the paragraph may not be as clear as it ideally might be. Leaving aside interesting syntactical arguments over the precise meaning of the words in paragraph 128(4), although Lloyd's regards it as baffling there is only one way in which it could be interpreted. The provision will ensure that relief is not restricted, which is precisely the result that the hon. Gentleman is seeking.

On that basis, the amendment is not needed. The hon. Gentleman asked me to confirm that on the record, and I am happy to do so. I assure the Committee that the provision can, and will, be construed to ensure that there is no restriction on roll-over relief in those circumstances. I have listened carefully to what the hon. Gentleman has said and I have to concede that there is some merit in the amendment, which some would regard as belt and

braces. Nevertheless, I should like to give the matter further thought, not least because a similar issue arises in relation to paragraph 127(3).

If necessary, the Government will table amendments to both provisions on Report. With that assurance and the confirmation that I placed on the record, I ask the hon. Gentleman to withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Economic Secretary for his helpful comments. I look forward to the matter being sorted out one way or t'other. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 212, in page 438, line 19, leave out 'group relief' and insert 'relief against total profits'.—[John Healey.]

Joe Benton (Labour, Bootle)

With this it will be convenient to take Government amendments Nos. 213 and 214.

Howard Flight (Conservative, Arundel and South Downs)

I am now in a state of disorganisation and not certain whether the amendment to which you have just referred, Mr. Gale, is that which I wish to talk about. I stood up originally to raise something under a stand part debate on schedule 29. Which amendment are we referring to?

Joe Benton (Labour, Bootle)

We are discussing Government amendment No. 212, with which we are taking amendments Nos. 213 and 214.

Howard Flight (Conservative, Arundel and South Downs)

I do not wish to oppose those amendments, but I should like the opportunity to raise another issue under schedule 29.

Amendment agreed to.

Amendment made: No. 213, in page 439, line 3, at end insert—

'existing asset paragraph 118(3)'.—[John Healey.]

Question proposed, That this schedule, as amended, be the Twenty-ninth schedule to the Bill.

Howard Flight (Conservative, Arundel and South Downs)

I thank you, Mr. Gale, and I apologise.

Although I have not tabled an amendment on the issue, I want to mention the insurance industry's position. We have already dealt with the position of Lloyd's, and I want to deal with the major reform introduced by clause 83 and schedule 29, which provides tax relief for purchasing goodwill and other intangible assets. The insurance industry's concern is that, although insurance companies writing life assurance business are within the regime in which they purchase royalties and computer software, they are not benefiting and will not benefit from the goodwill reform. Paragraph 78(1) excludes intangible fixed assets held for the purpose of life insurance business. The reason why that is the case is a fundamental question. Surely, if a life insurance company purchases goodwill, it should be treated as any other company.

I suspect that the Government's argument for exclusion will be that the special method of taxation for life insurance companies, known as the IE system—income minus expenditure—is primarily a charge on policyholders' investments, and that goodwill relief is a matter for shareholders. It may be accepted that the new regime needs to be adapted so that it applies appropriately to the IE system, but surely goodwill held by shareholders outside the insurance companies' long-term business fund should in principle be entitled to the relief available to most other corporate taxpayers.

The Government's decision not to allow relief for goodwill purchased by insurers writing life assurance business, and held outside the long-term business fund, contrasts with their acceptance of the principle elsewhere in the Bill of the exemption from tax of capital gains on substantial shareholdings. Elsewhere, shares held by a life insurance company outside the long-term business fund qualify for relief, just as the shares of any other company would.

What is the logic on which the particularly narrow category of outside assets of the insurance industry has been excluded? Do the Government have the matter under consideration, and are they likely to include it, according to the logic of what they have done in other parts of the Bill?

John Burnett (Liberal Democrat, Torridge and West Devon)

I should like to raise a small point of clarification with the Economic Secretary. Paragraph 56 is headed:

''Roll-over relief on reinvestment: application to group member''.

The Law Society has brought to my attention the fact that it is not clear from paragraph 56(2)(b) whether the disposing company still needs to be a member of the group when the expenditure on other assets is incurred. It should not be necessary for the disposing company to remain a member of the group and I look forward to hearing the Government's view on that from the Economic Secretary. If there is doubt, I hope that an appropriate amendment can be tabled on Report so that the model contained in section 175(2A) of the Taxation of Chargeable Gains Act 1992 can be followed in such circumstances. It is not wise to have the inflexibility that could be construed as being part of this provision and I hope that the Economic Secretary will give us his interpretation of the provision, and tell us whether he believes that the more benign construction is more appropriate and, if there is any doubt, that an amendment will be tabled on Report.

Chris Grayling (Conservative, Epsom and Ewell)

I want to make a brief probing point and I apologise to the Economic Secretary if he covered it in his earlier comments when I had to slip down the Corridor to a Select Committee.

The Economic Secretary will be aware that in the telecommunications and media sectors there have recently been some substantial write-downs of intangible assets following, for example, the Vodafone acquisition of Mannesmann. What would be the tax implications for substantial write-downs and future potential write-downs of 3G licences?

John Healey: Perhaps I may take those points in reverse order and deal first with that raised by the hon. Gentleman. I understand the tension between Select and Standing Committees, having experienced that myself. I refer him to the Official Report because substantial write-downs were dealt with earlier in our discussion. If he feels that I did not respond adequately to his hon. Friend the Member for Fareham, I encourage him to tackle me again.

The hon. Member for Torridge and West Devon asked about group roll-over provisions. My advice is that the rules already have the effect that he wants, so it is unnecessary for the measure to be amended.

On the specific concerns raised by the hon. Member for Arundel and South Downs about the life assurance industry, he will not be surprised to know that the Association of British Insurers has already raised the matter with the Revenue. I shall try to give an explanation of the provisions as they stand and then some encouragement and an assurance that significant consideration is being given to such matters.

The hon. Gentleman asks why a life company does not receive any relief for write-down of its goodwill under the schedule. There are two reasons. The way in which we tax life assurance companies on the income accruing for policyholders means that it would not be appropriate to allow write-down of goodwill against policyholders' income. Goodwill relates entirely to the shareholders. The ABI accepts that as a reasonable argument and I believe that the hon. Gentleman acknowledged it. As a rule, goodwill is only ever acquired by a life company for payment if there is what the schedule calls a tax-neutral transfer. That means that goodwill would never become an asset subject to the schedule.

However, the ABI believes that there may be cases in which goodwill is purchased from unconnected parties and is not held in the life company's long-term business fund, which is the point that the hon. Gentleman made. The ABI argues, as he did, that in such a case relief should be given. I am not persuaded that the case for giving relief in such circumstances is strong enough. It is certainly not right for relief of that type of goodwill to be set against policyholders' income, and the existing capital gains reliefs, like indexation and roll-over, remain available for it.

Let me also say that rules for life assurance taxation will not be static during the next few years. In the Budget, my right hon. Friend the Chancellor announced that consultation on reforms to corporation tax would start later this summer. Clearly, such reforms will include life assurance company taxation. Changes are also likely because of developments elsewhere, such as the Financial Services Authority's review of regulatory reporting requirements, which are used for tax purposes.

The hon. Gentleman asked for confirmation that the matters that he raised are under consideration. I hope that my explanation suggests that that is the case. I assure him that the treatment of goodwill will be kept fully in mind when considering any possible future changes.

Finally, as this is a clause stand part debate, I conclude by saying that I welcome the broad support of the Committee for the new provision, which puts in place a comprehensive regime that will provide consistent treatment of a company's expenditure and receipts in respect of intangible assets. The new regime replaces what I described previously as an outdated, incoherent accretion of rules based on previous judicial decisions and occasional legislation stretching back for more than 150 years. It is a significant further step in the Government's programme of corporate tax reform. The measure has been subject to extensive consultation, which has produced a better set of provisions. The end result is that the reform has been widely welcomed outside the House, and I hope that it will also be supported by the Committee.

Howard Flight (Conservative, Arundel and South Downs)

I agree with the Economic Secretary that the reforms are broadly welcomed and again express appreciation for all the work that the Inland Revenue has done in addressing difficult issues.

On the specific insurance point that I raised, I was pleased to hear the Economic Secretary's comments. Materiality is the crucial issue. If the Government were to perceive a material aspect, they would probably see the justice of the argument. However, overall, the measures are very welcome.

John Burnett (Liberal Democrat, Torridge and West Devon)

The provisions are welcome, and I am grateful for the Economic Secretary's assurance on degrouping. So that it is absolutely clear for the record, is it the Government's view and intention that it should not be necessary for the disposing company to remain a member of the group when the expenditure on other assets is incurred? That is my understanding of what the Economic Secretary said.

John Healey (Labour, Wentworth)

That is correct.

Question put and agreed to.

Schedule 29, as amended, agreed to.

Schedule 30 - Gains and losses of a company from intangible fixed assets: consequential amendments

Clause 104 - Valuation of trading stock on transfer of trade

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 185, in page 81, line 29, after 'assets', insert 'to a connected person'.

The amendment has been suggested to us by the Institute of Chartered Accountants because it feels that introducing a fiscal requirement to account for stock and work in progress on a just and reasonable basis would impose quite unrealistic obligations on parties who were actually at arm's length.

John Healey: Before discussing the amendment itself, let me explain the background to Clause 104. The clause is designed to modernise the rules governing the valuation of trading stock on the transfer of a trade. It removes existing anomalies and puts the treatment of trading stock in these circumstances on a basis that is comparable with other tax rules, including the new code for intangible asset that we have just been debating.

Under current law, trading stock that is transferred when a new owner takes over is generally—and in the circumstances that the clause is directed towards, always—brought into account in the amount of the consideration agreed between the parties. That is out of line with the capital allowances and capital gains rules. In both cases, asset values are determined by apportioning the total consideration paid for the trade on a just and reasonable basis.

That approach is not quite the same as that proposed under schedule 29 for transfers of intangible assets, but it is essentially compatible with it. Schedule 29 is founded on a just and reasonable apportionment of the consideration passing on the transfer of a business. However, it goes a step further in requiring where possible that an apportionment made in a company's accounts is to be regarded as ''just and reasonable''.

The rule for trading stock, on the other hand, is not compatible with what is proposed for intangibles or with the current rules for capital allowances and capital gains. The incompatibility of the current rules can give rise to anomalies, with businesses in some cases being taxed on amounts in excess of the total consideration paid for the trade. That is manifestly unfair. In other cases, businesses obtain more tax relief than the total amount that they have paid. That is also wrong. The new rule should put an end to these anomalies. The arrival of the new intangibles regime has made change in this area more urgent, but it is a change that is desirable in its own right. We are therefore applying that change for income tax as well as corporation tax, and regardless of whether the assets of the trade transferred include intangibles.

The purpose of the amendment is to restrict the ''just and reasonable'' rule to cases where the parties to the transfer of a business are connected persons. The Committee will not be surprised, in light of what I have said about the reasons for introducing the clause, that I cannot accept the amendment, which is both misconceived in concept and drafted in such a way that it would not achieve the purpose that the hon. Member for Arundel and South Downs is anxious to secure.

The amendment is misconceived because it would leave in place incompatible tax rules and perpetuate the anomalies to which I have referred. The existing capital allowance and capital gains rules do not limit ''just and reasonable apportionment'' to cases where the parties are connected, and I see no reason why the proposed rule for stock should do so. Those businesses that ended up being taxed on more than their total sale proceeds would not thank the hon. Gentleman.

It is hard to see why this change should impose any unreasonable obligation on taxpayers. On the contrary, it will provide for consistent treatment of the various assets bought and sold on the transfer of a trade. It will therefore make the system easier to operate and fairer. The existing capital gains and capital allowances rules, with which the clause would align the treatment of stock, have not, as far as I am aware, imposed unreasonable burdens on business. These rules have not been a prominent subject in the Budget representations made by business or specialist tax practitioners.

I do not, therefore, accept the principle behind the amendment, that the allocation of the overall sale proceeds on the transfer of a business should be capable of being overridden for tax only when the parties are connected with one another. In any event, the amendment would not have its intended effect. It would not provide for the value of trading stock to be determined on the basis of a just and reasonable apportionment in cases where a business is transferred between connected persons. That is because the transfer of trading stock in these circumstances is already subject to a different rule. In these circumstances, the value of the trading stock is the value that would have been placed on it if the stock had been transferred between independent parties acting at arm's length.

I refer the hon. Gentleman to section 100(1)(a) of the Income and Corporation Taxes Act 1988. The clause, with or without the amendment, has no impact on that special rule. The amendment, by confining the impact of the clause to situations where it has no effect, is equivalent to removing the clause from the Bill. Therefore I cannot support it, and if the hon. Gentleman decides to press it to a vote I shall ask the Committee to reject it.

Mark Hoban (Conservative, Fareham)

May I just establish the issue of the valuation of stock? I have practised as a chartered accountant and worked on transactions in which the apportionment of considerations is important. Ordinarily, I would expect that stock to transfer at a value determined in line with United Kingdom GAAP. Is the expectation in the clause that the value under UK GAAP does not necessarily equal a just and reasonable apportionment of consideration?

If we are talking about a divergence in valuation, the amendment tabled by my hon. Friend the Member for Arundel and South Downs is important because it seems unnecessary to add an additional layer of complexity to a transaction over and above that which normally arises through the valuation of stock in determination of consideration, goodwill or other aspects of a transaction. There is a perfectly reasonable valuation technique available in UK GAAP and it would be odd to introduce another one when we are referring to the just and reasonable apportionment of consideration.

John Healey: As I explained earlier, I do not accept that the provision introduces additional complexity. There is a much stronger argument that the better alignment and greater coherence in the proposal will make things easier for business, not more complicated.

The short answer to the hon. Gentleman's question about the valuation of stock being the same as under the GAAP provisions is that it nearly always is.

Howard Flight (Conservative, Arundel and South Downs)

The Minister's latter comment is the crucial point. Perhaps I should have made it clear that this is a probing amendment. As it was suggested by the Institute of Chartered Accountants I thought that the Government would want to take it seriously. The chartered accountants' underlying point, on which my hon. Friend the Member for Fareham commented, is that ''just and reasonable'' needs to mean GAAP accounting treatment for arm's length parties; and if, while understanding the consistency arguments, the Government were thinking of some other accounting basis it would not be reasonable.

To judge by what the Minister said, the problem has probably been solved, but I trust that the Government will consult the Institute of Chartered Accountants to ensure that everyone is happy about it. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 104 ordered to stand part of the Bill.

Clause 84 ordered to stand part of the Bill.

Schedule 31 - Gains of insurance company from venture capital investment partnership

Schedule 32 - Lloyd's underwriters

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 105, in page 453, line 3, after 'effect', insert

'in the corresponding underwriting year'.

The Chairman: With this we may discuss the following amendments: Government amendment No. 205.

No. 106, in page 453, line 16, at end insert

'and for the purposes of section 172 above shall be treated as a payment made at the time the contract takes effect.'.

No. 107, in page 454, line 5, after 'effect', insert 'in the accounting period'.

Government amendment No. 206.

No. 108, in page 454, line 22, after 'contract', insert

'at the time the contract takes effect'.

Howard Flight (Conservative, Arundel and South Downs)

Schedule 32 deals with the tax treatment of what tax legislation terms ''quota share contracts'' at Lloyd's, a term that is already defined in the Finance Acts of 1993 and 1994. I understand that these provisions do not affect all the commercial quota share reinsurance contracts that Lloyd's members may enter into, but only specific forms of reinsurance contract under the rules and practices of Lloyd's, such as exeat policies and some estate protection plans.

The first part of the schedule—paragraphs 1 to 5—amends the 1993 Act provisions for individual members of Lloyd's. The second part deals with corporate members as per the 1994 Act, but the two are broadly parallel. As I understand it, the purpose of the schedule in each case is to remedy deficiencies in the original legislation that could have led to Lloyd's members getting too little or too much tax relief when they took out such a policy.

For example, if a Lloyd's member pays a cash call into a syndicate to meet losses, that injection of funds can be expected to reduce the price that he would later have to pay to take out a personal reinsurance policy. However, the cash call is not itself a deductible expense, and if the syndicate's taxable result is not declared before the policy takes effect, the member will get no relief for the amount paid in by way of the cash call.

Conversely, existing legislation could in certain circumstances give too much relief. That could happen, for example, if the syndicate has already declared a loss for tax purposes before the quota share contract takes effect, but has not called the loss from its members. In that case, the Lloyd's member might effectively get relief twice for the same economic loss.

I shall first address amendments Nos. 105 and 107, which go together, and then amendments Nos. 106 and 108. The first two concern the proposed restriction of relief as it applies to contingent contracts. Amendment No. 105 deals with individuals, and amendment No. 107 with corporates.

I shall focus on amendment No. 105. There exist within Lloyd's a number of estate protection plans that are within the scope of clause 85 and schedule 32. These are personal reinsurance polices that are contingent on the death of the underwriting member. As a matter of legal construction, the same issue arises in the provisions dealing with corporate members of Lloyd's, although I am not aware that it is a practical concern, at least at present. The purpose of the amendment is to clarify the operation of the provisions.

Let us take the case of individual members. Paragraph 2 of the schedule provides that the premium under such a policy is wholly tax-deductible if the contract does not come into effect. If the contract comes into effect the deductible amount is restricted by any transferred losses that are declared before that date. The practice at Lloyd's is that members who take out estate protection plans usually pay a premium in the December of one year to cover themselves for events in the following calendar year. For example, the premium paid in December 2002 will purchase cover for calendar year 2003. That gives rise to the practical issue that the premium is tax deductible as an expense in the income tax year 2002-03. Paragraph 2 of schedule 32 might be read as requiring members to wait until December 2003 before they can know by how much the premium is tax deductible for that year. Members cannot know before then whether they will die in circumstances such that the tax deduction will be restricted under the proposed new section.

I am sure that the Government do not intend that members of Lloyds should be unable to make their tax returns for an income tax year until after the following 31 December. The amendment deals with that uncertainty in a practical way by requiring the member to look only at events that occur up the end of the corresponding underwriting year. The parallel amendment for corporate members requires the corporate member similarly to look only at events that occur up to the end of the year. I hoped that the Minister would confirm that that was the intention, although it is not specifically stated. Alternatively, she may acknowledge the problem and say that the Revenue will accept provisional figures, which is not as good as tidying up the matter but would partly deal with it.

Ruth Kelly (Labour, Bolton West)

I thank the hon. Gentleman for that lucid and helpful exposition. I do not intend to detain the Committee with an exposition of the clause itself. The case for it has been well made by the hon. Gentleman. It corrects defects in the legislation dealing with quota share contracts taken out by Lloyd's members. The hon. Gentleman also made the case for conditional contracts and raised issues that I found persuasive. I do not know whether he wants to hear the good news first or the bad news. The good news is that we accept the case that he makes: the bad news is that we do not accept the precise wording of his amendments, as he may have deduced.

The amendments seek to fix the time by which a deduction may be made for premiums paid by Lloyd's members in respect of quota share contracts. Time here, of course, means the relevant years of assessment for individuals or accounting periods for corporate bodies. Amendments Nos. 105 and 107 cover the case of a conditional contract where the condition is never met and as a consequence, the contract, in the wording of the proposed legislation, never ''took effect''. In that type of case, the legislation as drafted allows a deduction equal to the amount of the premium. Where the condition is not satisfied, existing law would

already allow a deduction for the premium in the year of assessment or accounting period in which it is paid. The provisions of schedule 32 do not alter that.

It is, of course, not possible to know for certain until the period covered by the contract has actually ended whether the contract will take effect. For that reason, the actual amount deductible cannot be determined until that time. However, existing law and practice allow an estimate to be made and a deduction claimed at the time that the premium is paid. When the actual amount allowable is finally determined an adjustment may be made if necessary.

Amendments Nos. 106 and 108 deal with different circumstances: payments of cash by a member to a syndicate to meet expected losses before those losses have been formally declared. The aim of the provisions of schedule 32 is to ensure that relief is available where appropriate for those cash calls. As these amendments rightly identify, while the Bill ensures that relief is available where the necessary conditions are met, it is silent about when the relief is due. We agree that the omission needs to be rectified and we are grateful to hon. Members for drawing it to our attention. However, the wording of the amendment could give rise to ambiguity and so we have tabled our own amendments. I therefore urge the Committee to reject the amendment, which I know the hon. Member for Arundel and South Down tabled in good faith. Perhaps he will withdraw it and accept instead the Government amendments.

Howard Flight (Conservative, Arundel and South Downs)

I spoke at some length on amendments Nos. 105 and 107, but not on amendments Nos. 106 and 108 because Government amendments Nos. 205 and 206 address the same issues. The issue is providing a timing rule to specify when further relief may be given if a cash call is later deemed to be an amount payable under a share quota contract that was previously lacking. It was not clear from the Financial Secretary's response whether Government amendments Nos. 205 and 206, which I have not seen, will cover the issues raised by amendments Nos. 105 and 107.

Ruth Kelly (Labour, Bolton West)

The advice that I received is that Government amendments Nos. 205 and 206 will not cover the issues raised by amendments Nos. 105 and 107, but the existing law covers the points that the hon. Gentleman has made. The substance of our amendments will clarify the wording that he proposes and express it in a more structured way. The precise issues about which he is concerned are not matters of substance, and we now have a framework that does the job that he has requested.

Howard Flight (Conservative, Arundel and South Downs)

I am sorry to be a slight bore, but I am jolly happy about what the Financial Secretary has said in relation to amendments Nos. 106 and 108. However, she said that the legislation is intended to provide what amendments Nos. 105 and 107 seek to achieve. There is an issue, and it would be useful to make it clear on the record that that is what it is all about.

Ruth Kelly: To reassure the Committee and repeat what I said earlier, amendments Nos. 105 and 107 cover conditional contracts in which the condition is not met and as a consequence the contract, in the wording of the proposed legislation, ''does not take effect''. In such a case, the legislation allows a deduction equal to the amount of the premium. Where the condition is not satisfied, the existing law would already allow a deduction for the premium in the year of assessment or accounting period in which it is paid, and the provisions in schedule 32 would not alter that.

Existing law and practice allow an estimate to be made and a deduction to be claimed at the time the premium is paid, which is the particular point to which the hon. Gentleman referred. If he were to refer to section 172 of the Finance Act 1993, he would see the legislation set out there. I hope that I have reassured the Committee that the legislation will do precisely what we have clarified as its intention.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Financial Secretary kindly for her explicit comments. Her comments and Government amendments Nos. 205 and 206 have addressed the issues that we raised with amendments Nos. 106 and 108, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 205, in page 453, leave out lines 15 and 16 and insert—

'(a) for the purposes of subsection (1)(c)(i) and (3A) above, as an amount payable under the contract, and

(b) for the purposes of section 172, as a payment made at the time the contract takes effect.'

No. 206, in page 454, line 22, leave out from 'treated' to end of line 23 and insert—

', for the purposes of subsections (1)(b)(i) and (3A) above, as an amount payable under the contract at that time.''.'.—[Ruth Kelly.]

Schedule 32, as amended, agreed to.

Clause 86 - Life policies etc: chargeable events

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 187, in page 60, line 35, at end insert—

'(1A) Section 539 (introductory) is amended as follows.

(1B) In subsection (1) (scope of Chapter II of Part XIII of the Taxes Act 1988) after ''policies of life insurance, contracts for life annuities and capital redemption policies'', insert ''but any gain falling to be treated as taxable income by virtue of this Chapter shall be disregarded from total income in applying section 257(5) (reduction in personal allowance for elderly taxpayers by reference to total income).''.'.

The amendment is designed to address a problem that I raised on the Floor of the House in relation to the allowances of individuals, particularly retired people, and the operation of the law on insurance policies.

When a United Kingdom insurance policy is issued, the saver gets a credit equal to the basic rate of tax. Only higher-rate taxpayers have to pay tax, and then at a rate equal to the excess of the higher over the basic rate of tax. As the Minister is aware and has confirmed,

the gain arising on the policy is included in individuals' total income for the tax year for the purposes of allowances, even though they may have no tax to pay when the policy matures. That can have the effect in the year in question of removing completely age-related personal allowances, which are becoming of greater relevance to those who are in retirement in the latter part of their lives. That seems very unfair, as it simply penalises the older saver.

The amendment is designed to separate the two: it would keep the provisions that impose a tax charge on life assurance gains, but ignores the deemed income in determining whether there should be a clawback of the elderly person's higher allowances. There will still be the tax liability as it stands, if any, on the insurance policy, but people will not be punished further for having virtuously saved for their old age.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I support the amendment, because I have had reason to write to the Paymaster General on two separate occasions, urging the Government to go down the very route that the hon. Member for Arundel and South Downs has so ably put forward.

It is important that all Committee members realise what is at stake here. Many pensioners on very modest incomes have chosen to save for their retirement using the devices mentioned in the clause, through insurance policies and so on. It just so happens that when their bonds or policies come to be cashed in, although they

have fairly modest incomes the rest of the time, the gain added to their income in that year takes them well above the age allowances and can result in them paying significant amounts of income tax for that year. Those pensioners are often on modest incomes and have scrimped and saved to buy those policies.

Michael Jack (Conservative, Fylde)

Is the hon. Gentleman talking about a qualifying or a non-qualifying policy?

Howard Flight (Conservative, Arundel and South Downs)

Qualifying.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful for the intervention by the hon. Member for Arundel and South Downs clarifying the position. I thought that I was talking about qualifying policies. The right hon. Member for Fylde has great technical knowledge, and he may wish to intervene further if he thinks that they are non-qualifying. I had understood that they were qualifying because that would be in the general framework of the law in this area.

The political point that I want to make, which the Government should take on board, concerns the group of people we are talking about. They are not extremely wealthy pensioners who would suddenly receive an extra relief if the amendment were passed; they are people who are often on very modest incomes. Although hundreds of thousands of people may not be affected by that unfairness, a number of people are.

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

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

Gale, Mr. Roger (

Chairman

Brennan, Kevin

Burnett, Mr.

Casale, Roger

Cruddas, Jon

Cunningham, Mr. Jim

Davey, Mr. Edward

Field, Mr. Mark

Flight, Mr.

Grayling, Chris

Harris, Mr. Tom

Healey, John

Hendrick, Mr.

Hoban, Mr.

Jack, Mr.

Kelly, Ruth

Luff, Mr.

Luke, Mr.

McKechin, Ann

Marris, Rob

Primarolo, Dawn

Pugh, Dr.

Ryan, Joan

Smith, Angela

Sutcliffe, Mr.

Wright, David

Standing Committee F

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, - 131 and 134 and schedules 1, 5 and 38) - Clause 86 - Life policies etc: chargeable events

Edward Davey (Liberal Democrat, Kingston and Surbiton)

As our erstwhile football-supporting colleagues return to their places having seen Italy qualify by the skin of their teeth, much to our joint chagrin, I can return to the matter in hand. I had risen to support the amendment tabled by the hon. Member for Arundel and South Downs (Mr. Flight) because it is important. It would deal with a real unfairness that hits many pensioners on modest incomes when they cash in a life assurance policy, life annuity or capital redemption policy, because the value they realise is added to their income for that year, which often takes them above the age allowances, so they sometimes pay a significant amount of income tax when, in normal years, they have a very modest income. The amendment would tackle that genuine unfairness so that pensioner savers would not suffer that tax hit.

My guess is that the Government will not accept the amendment, but I hope that the Financial Secretary, when she responds to this useful debate, will not dismiss it out of hand. The Government would be wise to realise that the hon. Gentleman has flagged up a serious matter for many pensioners and I hope that the Financial Secretary will assure the Committee that she will discuss the amendment with her Treasury colleagues and consider whether they might take such action in future, either by accepting the amendment or by introducing top-slicing relief so that pensioners will no longer be hit by that tax.

Ruth Kelly (Labour, Bolton West)

I welcome you, Mr. Benton, back to the Chair.

It is incumbent on those Opposition Members who support the amendment to explain why life assurance policies should be treated differently from other forms of savings policy. They seem to misunderstand the purpose of the age-related allowance, which is to give extra help to those aged 65 and over who must rely on

relatively modest incomes. That is why it is given in full only to those whose income does not exceed a certain limit. A life assurance policy is income and it is right to take that into account. A pensioner pays no more income tax than a younger person with the same income and the same family circumstances. Most life assurance is taken out as a form of saving and there is no good reason to treat it differently from income from other savings products. The amendment would give a unique tax privilege to income from life assurance.

Life assurance is a very flexible savings vehicle and it is possible to take income of up to 5 per cent. with no tax until the end of the policy. Life assurance products can also be structured to produce a regular stream of income through arrangements grouping together a number of different policies. Age-related allowances exist to help people on relatively modest means. If the amendment were accepted, it would allow all such income to be received without its affecting age-related personal allowances. For example, it would allow someone over the age of 65 with a pension income of less than £20,870—a significant amount of money—to receive investment income from insurance without losing any of the allowances they would lose if their money had been directly invested in a bank account. For that reason it would give a tax advantage to part of the population aged over 65 who are relatively well off compared with their peers.

I shall not detain the Committee with a long discussion of our record on pensioner poverty, which speaks for itself. We are determined to tackle pensioner poverty. The amendment before us would privilege one section of the elderly without helping us target pensioner poverty.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Does the Financial Secretary agree that many forms of income from savings have tax exemptions, in addition to the age-related allowances? For example, there are individual savings accounts, which do not suffer tax. We are talking about one particular form of saving, which compared to savings that can be put easily into an ISA, does not gain those benefits. The logic of the current tax position is against her.

Ruth Kelly (Labour, Bolton West)

Certain savings vehicles are taxed in very different ways. As the hon. Gentleman knows from our earlier debate, there is a difference between qualifying and non-qualifying life policies. If we compared the annual income paid from a life assurance product to an individual with income from savings invested in a bank or building society account, we would not choose to tax privilege the life assurance product versus savings in other forms. That would not be a very effective use of resources, nor would it add significantly to the pursuit of reducing pensioner poverty.

Rob Marris (Labour, Wolverhampton South West)

Perhaps the Minister could remind us of something. My understanding is that until 1984 there was 15 per cent. tax relief on premiums for life assurance policies. Policies that are more than 18 years old would have had tax relief when the premiums were paid.

Ruth Kelly (Labour, Bolton West)

My hon. Friend speaks from a position of great knowledge, and for the sake of the Committee he has made an extremely valuable point. I thank him for it.

The hon. Member for Kingston and Surbiton (Mr. Davey) suggested another potential way of tackling the problem, which is to apply top-slicing relief to the calculation of age-related allowances. The purpose of top-slicing relief is to reduce the possibility of taxpayers who would normally pay tax only at the basic rate paying tax at a higher rate solely because of a one-off gain from a policy that has accrued over many years.

Of course, we have received representations on this issue in the past, not least from the hon. Gentleman, but they do not match the amendment before us. I would like to clarify that. It is not clear to me that applying top-slicing relief to the calculation of age-related allowances would in every respect alleviate pensioner poverty as the hon. Gentleman maintains. It would be incredibly complicated to calculate. One would have to average the gain over the period of the policy, and work out the impact of any age-related allowances in previous years. In many cases, there would be no difference to the amount of tax paid, but it is perfectly possible that individuals would end up paying more tax because they would lose more than one year's age-related allowance during the life of the policy. I do not think that that is a simple solution to the matter, and for those reasons I urge the Committee to reject the amendment.

Howard Flight (Conservative, Arundel and South Downs)

The Minister asked why, and my reply is as follows. As she knows, the data show that, typically, the more sophisticated and better-off do not save with such life policies. They have learned to save through personal equity plans, ISAs and other ways, and they would not qualify for the age allowance because their incomes are often too high. The typical case study of people with policies that are caught in this case concerns people of quite modest means who may have been oversold a policy in the past. Some of them have a non-qualifying policy, which is different, but the same point obtains. They have worked in a fairly modest way in other parts of the world and have saved a bit in a non-qualifying policy as an alternative to a pension, because they are not eligible for a pension. Their basic income in retirement is very modest, which is why they would otherwise qualify for the age allowance. They have saved in a life policy, which may have gone up by X or Y, depending on the fortunes of the stock markets. For better or worse, they view whatever gain they have been fortunate enough to make not as income but as capital gain.

I am surprised that the Financial Secretary has not received letters from constituents who have discovered that, because of their little nest egg, which, with a bit of luck, has made a bit—unfortunately, it appears that the reverse will be the case for the next few years—they have lost their age allowance. Their incomes are typically only £10,000 or £11,000, and they feel huge resentment. They believe that they are being unfairly

screwed and, from their perspective, I can understand that.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman seems to suggest, in essence, that the taxpayer should bail out people who have been mis-sold policies. Is that what his amendment is designed to do, or have I misunderstood him?

Howard Flight (Conservative, Arundel and South Downs)

That is an unjust comment, because those people may have saved through life assurance for perfectly good reasons. The wealthier members of society who are not eligible for age allowances have probably saved in more sophisticated ways that may have been more tax efficient. It is a different form of saving.

Just as an observation, the people who have the sort of life policies to which I refer will have been modest savers. If they were in the expatriate category, life policies were probably a good way to save. They did not want to risk direct exposure to equities that might go up or down and wanted to pay only a modest amount each month. Similarly, those in the UK who saved that way in the past were often saving amounts each month that were so small that putting them into unit trusts, given front-end charges, would not have made sense.

I am saying not that the policies were mis-sold but that this is a historic, old-fashioned way of saving that probably suited the person's cash flow. The crucial point is that we are talking not about the better-off members of society but about people whose regular, basic incomes in retirement in old age are very modest. From their perspective—Governments should consider tax from the perspective of citizens, particularly those who are less sophisticated—it is extremely unjust that they should lose their age allowance in the year that their insurance policy delivers a gain.

Rob Marris (Labour, Wolverhampton South West)

I do not want to labour the point, but is the hon. Gentleman suggesting that people—for example, those who live overseas—who use these saving instruments could have chosen pensions policies instead? As I understand it, life policies mature when the person is of pensionable age; we would not be discussing them otherwise. Therefore, those people who took financial advice appear to have been mis-advised, and they should seek redress elsewhere.

I am grateful that the hon. Gentleman now accepts that Governments should look after pensioners with modest incomes, because the previous Conservative Government never did that. That is what the pension credit is about.

Howard Flight (Conservative, Arundel and South Downs)

First, the hon. Gentleman will be aware that I fought for many years for groups who work overseas, but the Treasury, under the present Government and the previous Conservative Government, resisted. There is absolutely no tax logic in not allowing people who work overseas to belong to a UK pension scheme. The answer to his first question is that they cannot save though a pension scheme because there are no schemes that are appropriate for expatriates. Typically, they saved for their old age through life policies. Again, such savings

may be out of date, but if one went back a hundred years they would find that the situation was the same then. I am trying to remember the hon. Gentleman's second point.

Ruth Kelly (Labour, Bolton West)

The pension credit.

Howard Flight (Conservative, Arundel and South Downs)

Yes, the pension credit. The hon. Gentleman's logic seems extraordinary: he says that those who have made an effort to save, which is what the Government want because they want to shift the balance from 40:60 to 60:40, should be punished, and that those who have not saved should be given taxpayers' money through a generous pension. He raises the basic issue related to pensions and the minimum income guarantee, which is that if there is a much more generous state earnings-related pension at the expense of other taxpayers, it makes little sense for people to save for their old age at all.

We are talking about people who have, in one way or another, saved for their old age. Typically, the lump of saved capital is small—perhaps £20,000—but when that is finally cashed in to spend in retirement, people will find that, oops, they have lost their old-age allowance. I suggest that the cost of the amendment would not be great and that, from a social justice point of view, the academic approach of saying that savings will be regarded as income for the purposes of general taxation and that they relate directly to someone's personal allowance in old age is an example of bureaucratic, middle-class establishment thinking. Ordinary people do not see it that way, but in the way in which I have described.

There is an academic argument for the Government's case, which is why it has remained for so long. However, where it bites the category of people to which it applies, morally there is a case for people paying tax on what gain there is but not allowing that to affect tax allowances in old age.

Rob Marris (Labour, Wolverhampton South West)

I am sure that Committee members are as anxious as I not to open up the debate to discuss the Government's pensions policy—I am sure that you would not allow it, Mr. Benton. However, the purpose of the amendment is to add to the tax advantages already enjoyed by those on modest incomes who will gain considerably under the pension credit. The Government are already assisting those people, and rightly so.

Ruth Kelly (Labour, Bolton West)

I thank my hon. Friend for that helpful contribution.

The hon. Member for Arundel and South Downs suggests that his proposal would be of no significant cost to the Exchequer, and that the Government are being prejudiced against holders of life insurance policies by not accepting his amendment. I hotly dispute that. His amendment would cost about £5 million every year. If his intention is to target pensioner poverty, there are more appropriate and focused methods of achieving it.

I accept in good faith, however, the hon. Gentleman's comment that we should make the navigation of the tax system as simple and easy as possible for people so that they understand what tax

rates and systems apply to them, and that we should make it easy for them to save and protect themselves for the future. That is precisely what we are doing by commissioning the reviews—of savings policies by Sandler in the Treasury, and of taxation policies by the Inland Revenue.

I ask the Committee not to accept the hon. Gentleman's amendment, which would not make a substantial difference to the real issues to be addressed.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Financial Secretary for her comments. I remain of the view—as, I believe, does the hon. Member for Kingston and Surbiton—that the Government continue to consider the perspective of the individuals involved through rosy spectacles. The cost of £5 million is not considerable, and I am grateful to the hon. Lady for quoting it.

Kevin Brennan (Labour, Cardiff West)

Does the hon. Gentleman understand that the Government's response must not only consider the £5 million that his amendment would cost, but all the other spending commitments that he has suggested during the Bill's consideration? The other day, he referred to £1 billion in extra subsidy for the oil industry. He cannot announce £5 million here and £2 million there on different occasions; when all his spending commitments are totted up, the Tories will have promised to spend a considerable amount.

Howard Flight (Conservative, Arundel and South Downs)

The hon. Gentleman is indulging in age-old political games. On oil revenues, he missed our point that the net revenue gained from the tax would be exceedingly modest as a result of losing £10 billion of investment and 50,000 jobs. If he thinks that the Government will get £1 billion a year out of the tax, he has got another thought coming. As I have gone through the Bill, I have been fairly careful in keeping a little tot-up of what hon. Members might come back and say, and the total is not that significant. It is perfectly valid to say that if the cost were £100 million it would be a significant amount, but £5 million is not significant.

On the minimum income guarantee and pension credit, it is strange to argue that it is better for the Government to pay out with one hand with MIG while taking back with the other hand. With respect, that sounds like buying votes, which is of course what lies behind much of the thinking on tax credits. The issue concerns what people who are not well off perceive to be fair. They have accumulated modest sums for their old age by saving through insurance, which they know will be taxed through income tax. They do not know, however, that they will experience the knock-on effect of losing their age allowance, which is extremely unjust. Given that the cost of correcting that would be modest, the Government should get on and do it. We therefore want to put the amendment to a vote.

Question put, That the amendment be made:—

Clause 93 - Deduction of tax:

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 188 in page 70, line 9, leave out '1st October 2002' and insert

'the day on which this Act is passed.'.

Joe Benton (Labour, Bootle)

With this we may discuss the following amendments: No. 189 in clause 94, page 70, line 35, leave out '1st October 2002' and insert

'the day on which this Act is passed.'.

No. 191, in clause 95, page 72, line 11, leave out '1st October 2002' and insert

'the day on which this Act is passed.'.

Howard Flight (Conservative, Arundel and South Downs)

These are simple probing amendments to ask why, in the three respective cases, the exemption is timed to apply from 1 October 2002 rather than applying more speedily. The amendments would give effect to clause 93 from the date of Royal Assent. We are asking whether there is a technical reason for the date being 1 October.

Ruth Kelly (Labour, Bolton West)

It may help the Committee if I set the amendments in context. Over recent years, the Government have taken steps to reduce the regulatory burdens associated with deducting tax at source when making certain payments. In 2000, we abolished withholding tax against national bonds, and last year we effectively lifted the withholding tax rules for interest and other payments passing between companies within the United Kingdom.

Clause 93 will build on those earlier reforms to provide further deregulatory benefits. It will remove the obligation for companies to withhold tax on payments of interest royalties, annuities and other annual payments made to specified tax-exempt bodies. That change will help companies by increasing the range of payments that they can make without deducting tax at source. It will benefit tax-exempt bodies such as charities, local authorities and pension funds because they will no longer have to make claims to recover the tax suffered.

The measure will align the obligation to record tax for local authorities with that of companies, which will simplify the administration of local authority debt and is something for which local authorities have asked. It will also update the withholding tax rules covering

payments to partnerships. That will ensure that tax is not withheld from payments to a partnership, the entire membership of which would each be entitled individually to receive gross payments.

Amendment No. 188 seeks to bring forward the start date for the new rules from 1 October 2002 to the date on which the Bill is passed. The other two amendments seek to achieve a similar result with two other clauses that impact on the rules for deduction of tax. The rules set down in clauses 93, 94 and 95 will generally be welcomed by the firms concerned, many of which would like to see them implemented as quickly as possible. Many firms will already have systems in place that would allow for early implementation, as the hon. Gentleman suggests. Some firms, however, will need a little longer to establish their systems under the changed rules. They will have to establish procedures to enable them to decide whether or how much tax should be withheld from the various payments that they make. Some preparation time is required, and to reduce complexity it seems sensible to have the same start date for all three measures.

There is clearly no magic significance about the October start date, and we could have chosen another date. October 2002 strikes a reasonable balance, however, providing adequate preparation time without unreasonably delaying the introduction of deregulatory reform. It also has the advantage of being the beginning of one of the calendar quarters by reference to which firms make returns on the tax that they have deducted at source. If we were to bring the start date forward to Royal Assent, as the hon. Gentleman suggests, firms would have to operate two different systems and sets of rules within the same quarterly return period.

For those reasons, the hon. Gentleman's proposal would not be universally welcomed, and I suggest that we stick with the start date set out in the clause.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister for her explanation, which is perfectly reasonable. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 93 ordered to stand part of the Bill.

Clause 94 ordered to stand part of the Bill.

Clause 95 - Cross-border royalties

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 55, in page 70, line 40, leave out 'of a royalty'.

Joe Benton (Labour, Bootle)

With this we may discuss the following amendments: No. 56, in page 70, line 41, after 'section 349(1)', insert 'or (2)'.

No. 57, in page 71, line 4, after 'section 349(1)', insert 'or (2)'.

No. 58, in page 71, line 17, leave out from 'made;' to end of line 24.

No. 59, in page 71, line 42, after 'section 349(1)' insert 'or (2)'.

No. 60, in page 72, line 2, after 'section 349(1)', insert

'or, as the case may be, section 349(2)'.

Howard Flight (Conservative, Arundel and South Downs)

The amendments are designed to extend the new arrangements under which companies will pay royalties to overseas recipients without either the deduction of tax at source or the prior approval of the Inland Revenue for the payment of interest. Under current legislation, a UK company paying interest or royalties to an overseas recipient has to withhold 20 per cent. tax, or 22 per cent. in the case of royalties, and account for that amount to the Inland Revenue. If a double tax treaty between the UK and the recipient's state provides for a reduced or nil-rate withholding tax, the recipient may make a claim for repayment of all or part of the amount deducted. With advance permission from the Inland Revenue, the payer may apply the reduced or nil-rate on making the payment, avoiding the need for the hassle of a repayment claim.

As regards royalties, the clause is extremely welcome, and is part of the simplification arrangements to which the Minister just referred. The Bill introduces the new regime for royalties, under which—subject to various conditions—the payer can apply the treaty rate without any advance permission, provided that there is a reasonable belief that the recipient is entitled to the benefit of the treaty. That, however, still leaves companies with the administrative burden and potential cash-flow cost of applying the existing system to the payment of interest, and to certain other annual payments from which tax has to be deducted.

The solution that the amendments propose is to extend the new system, which includes extensive safeguards for the Inland Revenue, to all such payments. That would complement the provisions introduced in last year's Finance Act to remove the obligation on companies to deduct tax from payment of interests and royalties, and certain other payments to recipients within the charge to UK corporation tax.

Ruth Kelly (Labour, Bolton West)

The amendment is designed to extend the scope of the new scheme for cross-border royalties introduced by the clause so that it would also apply to cross-border payments of interest, annuities and other annual payments. At present, a company making a cross-border payment of interest or royalties must deduct tax at source at 20 per cent. unless it has received approval from the Inland Revenue not to deduct, or to deduct at a reduced rate. Approval is given after the recipient has made a claim that has been endorsed by the recipient's tax authority. Those procedures enable checks to be made that relief is due under the relevant treaty.

Under the scheme proposed in the clause, which I am pleased to see that the hon. Gentleman has welcomed, a company will be able to make a cross-border payment without deducting tax at source, and without receiving prior approval from the Inland Revenue. The paying company will have that option, if it has a reasonable belief that the recipient qualifies for relief under a treaty.

We have been convinced of the value of such a scheme in the case of royalties, especially at a time when we are introducing important new rules for the taxation of intangible assets. Such a scheme will help UK businesses to gain access to the foreign-owned intellectual property that they need. In the case of cross-border payments of interest, however, different considerations are involved. There is considerable scope to use cross-border interest payments to reduce the UK tax liability for the payer. That can happen when a foreign-based business puts an excessive amount of debt into its UK operations. The imaginative use of debt by some multinational groups means that the Revenue have to apply considerable resources to that area in order to protect the Exchequer. Every year, substantial amounts of interest are denied the benefit of treaty relief as a result of such efforts.

The risk of a substantial loss of tax is much greater with interest than it is with royalties. We have not been persuaded that it would be appropriate to extend the new scheme to interest. The introduction of the scheme in clause 95 will have a cost. That will arise when payments are made without deduction at source, or at a reduced rate when treaty relief is not due, in cases where that is not picked up during the Revenue's examination, but would have been if it had been necessary to apply for prior Revenue approval. To have audit arrangements under the new scheme that will be as effective as those under the existing system would require every possible case under which payments are made to be checked, which would negate the whole value of the scheme.

The Revenue estimate that the cost of the new scheme would be negligible where royalties are concerned. The value of cross-border interest, however, is over 20 times the value of cross-border royalties, and the risk to the Exchequer is greater with interest than with royalties. The Revenue estimate that the cost of extending the new scheme to interest would be about £5 million a year. I will let the Committee draw its own conclusion as to whether £5 million is relevant. Special arrangements currently apply to some cross-border interest payments. When loans are arranged by syndicates of recognised banks, for example, a paying company may apply for provisional treaty relief in advance of a full claim's being approved. That speeds up procedures in cases where the risk to the Exchequer is perceived to be low.

I am grateful that the hon. Gentleman recognises the value of the clause, but I urge him to withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I would be interested to know the cost of the clause in relation to royalties.

Ruth Kelly (Labour, Bolton West)

Negligible.

Howard Flight (Conservative, Arundel and South Downs)

I simply make the point that an element of trust is involved, as I said when referring to royalties. As I understand the Financial Secretary's point about qualifying interest, because the figure is much larger the Revenue would incur substantial costs in checking the bona fides of qualification. That may seem a valid argument, but I repeat that I thought she was going to say £50 million, not £5 million. There is

an argument for consistency in making the changes to include both. I suspect that the Government may consider that eventually and we may find ourselves debating the matter next year. However, it is not a major point and in bona fide situations individual companies can make satisfactory arrangements. It is not an issue of principle that we want to press to a vote, but I hope that when the royalty system is up and running we shall round it off with interest next year. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Michael Jack (Conservative, Fylde)

I should be grateful if the Financial Secretary would clarify a technical point that has caught my eye. New subsection (1)(b) states that where

''the company reasonably believes that, at the time the payment is made, the payee is entitled to relief in respect of the payment'',

the company may, if it thinks fit, calculate the sum to be deducted from the payment under section 349(1) by reference to the rate of income tax appropriate to the payee pursuant to the arrangements. Can the Financial Secretary describe the mechanisms through which the person paying the royalty must go to establish beyond reasonable doubt that the person receiving it is entitled to the relief? It is not clear whether such relief by the receiver of the royalty is a moveable feast and, therefore, in practical terms, whether a United Kingdom company might believe at one moment that it was all right and, at the next, find itself in hot water. In the real world, how does the establishment of reasonableness on the part of the payer work?

Ruth Kelly (Labour, Bolton West)

It will be relatively easy for a company to know whether it has a reasonable belief or not as to whether the payer and payee are associated companies and know each other well, or whether they are not. For example, when a payment is made between associated companies, the payer is in a good position to know whether the recipient is the beneficial owner and meets the conditions to receive relief from UK tax under a double tax treaty. When the companies are not known to each other, the payer may want to obtain documentary evidence, if that is possible, to show that the recipient is eligible. Such a statement might contain confirmation that the recipient is beneficially entitled to the royalties, is resident in a particular country, and meets the conditions for relief from UK tax on royalties under the relevant double tax treaty.

If a genuine mistake is made, it can be corrected later and the Revenue would then require the payee to pay the tax that should have been deducted, plus interest. However, it would be very unlikely that a penalty would be incurred in such circumstances. In practice, the issue is not significant, but the right hon. Gentleman raised an interesting point.

Question put and agreed to.

Clause 95 ordered to stand part of the Bill.

Clause 96 - Gifts of real property to charity

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 90, in page 72, line 17, leave out 'and'.

Joe Benton (Labour, Bootle)

With this it will be convenient to take the following amendments: No. 208, in page 72, line 18, leave out 'land' and insert 'property'.

No. 91, in page 72, line 18, at end insert

'; and

(f) a qualifying work of art'.

No. 209, in page 72, line 23, at end insert—

'(9AA) In this section a ''qualifying interest in property'' means—

(a) a qualifying interest in land, or

(b) tangible moveable property.'.

No. 92, in page 72, line 32, at end insert—

'(9D) In this section ''qualifying work of art'' shall mean any object or group of objects designated by the Secretary of State, either specifically or as a class, and the provisions of section 31(1)(a), (aa), and (e) of the Inheritance Tax Act 1984 shall apply for the purposes of determining the category or class of object to be so specified as they apply for the purposes of that Act.'.

No. 210, in page 72, line 36, leave out 'real' and insert 'other'.

No. 207, in page 74, line 8, leave out 'land' and insert 'property'.

Howard Flight (Conservative, Arundel and South Downs)

The Conservative party greatly welcomed the introduction of tax relief on gifts of listed securities. I believe that the measure was based on the success of the experience in the United States, and we argued that if Britain was following that, there was a powerful logic for including property and art treasures. Therefore, we are pleased that the Government have now added property. If they do not accept our arguments for including art treasures this year, we look forward to a clause in next year's Finance Bill that adds art treasures and unlisted securities.

Amendment No. 91 would allow a gift of a qualifying work of art by adding a new category to the existing list of qualifying assets in section 587B, in which land is now included under clause 96. Amendment No. 92 would give effect to that by defining a qualifying work of art by reference to existing criteria that apply to certain designated works of art and that are applied for the purposes of exemption from inheritance tax. The intention is not to limit the relief to the same items but to introduce a process whereby the Secretary of State for Culture, Media and Sport could designate individual works of art, or works of art as a class, qualifying works of art.

Art galleries and charitable organisations have widely welcomed the amendment. Alex Beard, a director of the Tate, has said that it would

''encourage lifetime donations of works of art to galleries and to national collections.''

I shall say more on that in a moment. James Evelyn of the Charities Tax Reform Group has rightly pointed out that other assets that do not fit into the broad categories of listed securities, property and works of art would also be incredibly valuable if they were

gifted under the scheme to charities; for example, computers, motor vehicles, intellectual property and, as mentioned earlier, unlisted securities.

Under existing rules, the owner of a valuable work of art who wishes to donate the asset to a charity cannot benefit from gift aid unless the asset is sold and the cash donated to a charity. That expensive and inefficient approach results in works of art not ending up in a national collection. The existence of a relief from inheritance tax through the assets in lieu of tax scheme creates a perverse incentive to retain works of art until death. In practice, few major works of art are donated during the owner's lifetime.

Extending tax relief to such gifts in kind would constitute a major step forward in helping public museums and galleries to expand their holdings. It would provide an additional impetus to encourage donations of valuable assets to other charities. In a rather circular business, at present deals are done over inheritance tax on works of art. There is a scramble to collect the money to purchase the work and keep it in the country. In one way or another, Government agencies put up most of the money. In the round, extending the measure to works of art would actually be modest in cost terms, because it would provide a simple, reasonably attractive mechanism for gifting works of art.

I anticipate that the Government do not want to do that yet, and that their principal objection to it will be based on the costs and risks to the Exchequer. They will argue that no ready market exists for many works of art, as it does for quoted shares or, less arguably, for land, and that both the donor and those receiving donations have an incentive to maximise the value and increase the tax relief available. The amendment addresses that objection. It would not extend relief to all works of art because that could give rise to difficulties of definition. It would adopt the provisions of the Inheritance Tax Act 1984, which allows the Treasury to designate the works of art that benefit. That allows negotiation of agreement in relation to works of art of national importance and provides reasonable protection to the Treasury against abuse. Parallel arrangements work extremely satisfactorily in the United States; there, equivalent relief for tax purposes relies on the evaluations by an expert panel of gifts of works of art.

The anticipated objections are therefore dealt with by case-study experience in the United States and by the amendment's provisions. We should like to know the Government's reasons for adding land but not biting the bullet and adding works of art. The Government may not accept our argument this year, but we think that it will be on the agenda next year.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I rise not only to support the hon. Gentleman's amendments, but to speak to the amendments in my name and that of my hon. Friend the Member for Torridge and West Devon (Mr. Burnett). Our amendments, Nos. 207 to 210, are somewhat broader than the amendments of the hon. Member for Arundel and South Downs, which focus primarily on works of art. Ours were suggested

by the Charity Tax Reform Group and would go further by granting relief to donations to charities for a range of chattels.

The amendments follow the same lines as the Government's moves in this and previous Finance Bills. The Government are to be congratulated on expanding tax relief for charitable donations and, as the hon. Member for Arundel and South Downs said, on what they are trying to do in the Bill. In reforming the tax system for charities, they want to focus on income by achieving greater levels of new giving. To a certain extent, they have been successful in doing that in the new tax relief for donations of securities, which is presumably why they are taking it a step further today. However, I should like them to pursue the total logic of their policy by including all the chattels that could be tax relievable under to the amendments.

Given that the amendments are along the same lines as Government thinking, why would the Government not accept the amendments? The hon. Member for Arundel and South Downs suggested that cost might be the answer. However, whether the cost were £5 million or greater, I do not think that that is at the back of the Government's mind because they have shown themselves to be extremely generous, over many Finance Bills, in encouraging new giving to charities—I make no bones about that. Compared with the Government's previous generosity, the extra provisions in the amendments are small. The Government must explain why they will not go the whole hog and give relief to the many variants of donations to charities.

In trying to answer that question, I wondered whether the Government were worried about administrative costs. Perhaps there are difficulties in making valuations of all the different assets that could be donated to charities. The hon. Gentleman talked about computers and vehicles. We could mention furniture, antiques, or a range of different items that could be gifted to charities, and tax relief could be granted on them. Perhaps the Government are concerned that lots of official time would be tied up in working out the value of those items to determine what the tax relief should be. I should be surprised if that argument would withstand much scrutiny, because in many other areas of tax administration, tax officials produce such evaluations, and they do so according to guidelines and standards. Therefore, I cannot see why that should be an overriding objection. Perhaps it would take a bit of extra work to find out how new evaluation techniques could be applied in this area, but I suggest that the work would be worth while.

There are added advantages of extending tax relief for such donations. Many assets that I mentioned—computers, scientific equipment, motor vehicles and so on—could be of great value to charities if they were donated, and if the number of donations increased. The route currently open to people—realising the asset, getting the cash and donating it on—would not be as valuable as giving the gift in kind. If one went down the route of realising the assets, capital gains tax might be payable, the administrative costs and hassle involved would be a significant barrier and the value of

the cash might mean less to the charity in terms of benefits than the asset itself. The second-hand value of the asset might be more beneficial to the charity.

I urge the Government to consider carefully the development of this interesting series of tax reliefs for charitable donations. They have heritage importance, as the hon. Member for Arundel and South Downs pointed out, in respect of works of art. There are many other gifts in kind, such as antiques, which would have heritage value for the nation. Moreover, by encouraging donations and the reuse of assets, there is an environmental benefit: the assets are not thrown away; they are given to voluntary bodies and charities that can make good use of them for the wider community. Thus an environmental benefit underlies the proposals.

If the Minister does not accept the amendments, which I somehow doubt he will, it would be nice if he could assure the Committee that the Government will think carefully about the amendments tabled by the hon. Member for Arundel and South Downs and by my hon. Friends, and see whether in future Finance Bills, they might seek to widen this generous tax relief a little further.

John Healey (Labour, Wentworth)

It is interesting that both the hon. Member for Arundel and South Downs and the hon. Member for Kingston and Surbiton drew on the United States model to support the proposals made by their two groups of amendments. In a sense, the first point made by the hon. Member for Arundel and South Downs was correct. We did learn from the US experience in framing some of our new charity taxation legislation, but we adapted and applied it to particular British circumstances, which in some respects are different. His group of amendments would take us a step closer towards the US system. The second group of amendments spoken to by the hon. Member for Kingston and Surbiton would take us still closer towards it.

I particularly welcome the strong recognition that the hon. Member for Kingston and Surbiton gave to the changes in the support that we have given to charities since 1997. He asked about the cost of the amendments. We have an estimated cost, which is fairly provisional, of £5 million. [Laughter.] Particularly with works of art, it would only need one very large donation under that regime significantly to increase the estimate. Cost is categorically not the reason why I recommend to my hon. Friends that they do not support the amendment, as our track record over the past few years in providing generous provision to boost charities suggests.

I shall briefly explain the purpose of the clause and deal with the problems with the amendment. Clause 96 will extend the relief, which we introduced in the Finance Act 2000, for gifts to charity of listed shares, land or buildings. From April 2002, individuals and companies giving a freehold or leasehold property to charity will be able to claim relief on its market value in computing their income or profits for tax purposes.

The extension of the relief has been welcomed by charities.

Amendments Nos. 90 to 92 seek to extend the relief for gifts of listed shares and real property to ''qualifying works of art'', and amendments Nos. 207 to 210 seek to extend the relief to all moveable property. The existing types of asset that come within the relief are relatively easily valued for claiming the relief in the first place and are readily realisable, which means that a charity has an option to hold or sell a gift to draw its benefit. Extending the relief to all moveable property could lead to charities receiving assets that have no investment value or are not readily convertible into money. The difficulties in valuing such a wide range of assets would add significant complexity to the working of the relief for both donors and the Inland Revenue. The hon. Gentleman significantly down played the potential problem of complexity in his remarks.

Michael Jack (Conservative, Fylde)

Where does the Economic Secretary's logic, which I hope I have followed correctly, lead for somebody who set up a charity to collect individual items, which they might have been offered under the amendment? Effectively, they could not accept such items because of the line that he is taking. He puts the complexity of the use of an asset to a charity as a reason for not accepting the amendment. If, for example, somebody had a prize collection of motor-cars in a motor museum and had set up a charity for the purpose of collecting a particular mark of car, why should they not have the benefit of the provision if they were offered such a car?

John Healey (Labour, Wentworth)

Quite simply, the provision that we are trying to make here is to give a boost to charities right across the field, irrespective of the particular activities that they undertake. The example that the right hon. Gentleman suggests is, if not singular, relatively uncommon. Most charities are not geared up specifically to collect items, and the problems caused by the impact of the amendments should not be underestimated.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

There is another check on the types of donations that would be likely to flow if the Economic Secretary were minded to accept the amendment, which is that a charity has to want to receive them. Unless he is suggesting that a charity might receive a whole series of gifts for which it has no use but which need storage space, incur collection costs and so on, he is implying that the proposal would help an individual corporation to reduce its tax liability although the mechanism would not be in the charity's interest. I do not understand the Government's reasoning. The necessary check is in the clause.

John Healey (Labour, Wentworth)

I am completely unconvinced by the hon. Gentleman's argument. It does not take much to imagine charities being badgered by all sorts of people to accept all sorts of gifts under the amendments he tabled. That is likely to be a source of aggravation and unnecessary activity and I am not convinced that the amendments would have the beneficial impact that he wants to achieve.

Rob Marris (Labour, Wolverhampton South West)

I have in mind several charities that do excellent work collecting old computers and so on which are often donated by companies. It would be a nightmare to make valuations of old computers.

Howard Flight (Conservative, Arundel and South Downs)

Zero.

Rob Marris (Labour, Wolverhampton South West)

It might be zero or £5 million, but it would be a nightmare to make those valuations.

John Healey (Labour, Wentworth)

I agree with my hon. Friend who anticipated the second part of my reply to the hon. Member for Kingston and Surbiton. His amendments would impose complex activities on the charity and also the complication of having to obtain valuations of a wide range of gifts to draw down the relief.

Mark Hoban (Conservative, Fareham)

I just wonder how the Economic Secretary's argument about the difficulty of valuation, the problem for donors and the Inland Revenue, and the huge complexity that might arise from the treatment of moveable assets relates back to other clauses in the Bill. Clause 54 refers to gifts of medical supplies and equipment. Surely the valuation issue he raises applies equally to that clause, which the Government put in the Bill.

John Healey (Labour, Wentworth)

The hon. Gentleman cites an example of goods that are tightly defined and relatively easily valued and realised, unlike those that might be covered by the amendments tabled by the hon. Member for Kingston and Surbiton.

Mark Hoban (Conservative, Fareham)

I am afraid that the Economic Secretary's argument was not very good. One of the assets to which the Charities' Tax Reform Group refers as potentially falling within the scope of the amendments tabled by the hon. Member for Kingston and Surbiton is scientific equipment, which is very close to medical equipment and must be relatively easy to value. His argument is not as robust as he makes out.

John Healey (Labour, Wentworth)

It strikes me that the hon. Gentleman is making my argument for me in that medical goods have a market value that is readily identifiable. They are a defined set of goods and relatively easy to manage compared with the scope of the goods suggested by the hon. Member for Kingston and Surbiton.

The value and benefit of wanting to extend the existing provisions to land and property is that valuation is relatively easily undertaken and if a charity does not wish to accept a gift and use it for its own purposes, it is relatively easy for it to realise its value and to gain the benefit of the donation.

Howard Flight (Conservative, Arundel and South Downs)

In my reference to other potential assets, I sought deliberately to restrict them to items that were reasonably valuable. The valuation point is understood, for better or worse, but a second point arises. Charities want a category of assets wider than quoted shares, land and works of art for which valuation is not a major issue to qualify and I shall be interested to hear the argument concerning those categories for which valuation is not a great problem.

John Healey (Labour, Wentworth)

In respect of our previous discussion, qualifying works of art is a category for which there may be other problems, but not specific valuation problems. The hon. Gentleman will appreciate that I

am trying to deal with all the amendments grouped together. I shall return to his points.

The clause will extend the relief for shares under Budget 2000 to real property. The purpose is to incentivise new sources of giving to charity. Amendments Nos. 207 to 210 would extend relief to everything from rare works of art to second-hand clothes and household goods. We are not convinced that a further incentive is needed at either end of that range. There is certainly no evidence that the second-hand clothes and goods markets need stimulation in relation to charities. At the other end of the range, there are sufficient incentives in the inheritance and capital gains tax regimes to encourage gifts of works of art and to protect that heritage. As the hon. Gentleman knows, there are extremely generous reliefs from inheritance tax and capital gains tax for such gifts, including for private treaty sales of pre-eminent works of art and other heritage assets to museums and galleries. There is no capital gains tax or inheritance tax on a gift to a qualifying museum or gallery.

Michael Jack (Conservative, Fylde)

Can the Economic Secretary confirm that in the operation of, for example, the inheritance tax there are no significant valuation problems?

John Healey (Labour, Wentworth)

If the right hon. Gentleman will forgive me, I will make some progress. There is a particular difficulty with the valuation of works of art, but it is not the general one that we are discussing.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Would it not be possible to deal with the problems that the Economic Secretary suggests are contained in the amendments by introducing a value below which tax relief would not be possible? That would move us away from the idea that people could seek tax relief on second-hand clothes and books. Surely, it would be simple to introduce such a figure. We could then be clear that assets only above a certain amount would be deemed to qualify. The Minister is right: along any high street in Britain, one can see that people readily donate their second-hand clothes and books. Charities that advocate the measure, however, do not have such assets in mind.

John Healey (Labour, Wentworth)

Charities may not have those assets in mind, but the provisions in the hon. Gentleman's amendment cover exactly those assets. That is the problem with the amendments that I am trying to address.

Howard Flight (Conservative, Arundel and South Downs)

I apologise for further interrupting the Economic Secretary before he leaves this territory. The point about tax benefits that relate to works of art is that they do not operate in favour of art galleries. Generous inheritance tax benefits exist for people who keep works of art in their homes, but the cri de coeur of art galleries, which I sought earlier to articulate, is to put works of art in the same category as property and quoted shares. That should stimulate a much bigger flow out of private control into art galleries to the greater benefit of the public at large.

John Healey (Labour, Wentworth)

Essentially, our concern to secure works of art for the United Kingdom collections and public is dealt with through private treaty arrangements that, in our experience, work perfectly effectively. Such arrangements are used to secure

works of art that are heritage assets to museums and galleries. There is no capital gains or inheritance tax liability on a private treaty sale, and the terms of the deal include what is called the douceur, so that some of the tax break goes to the vendor. Furthermore, living artists who donate their works to a museum, gallery or any other charity can get income tax relief for the gift through the relief for gifts of trading stock.

The right hon. Member for Fylde (Mr. Jack) asked about gifts and private treaty sales. In private treaty sales, valuation questions generally do not arise, because the value is agreed between the two parties. It is a differently structured process of valuation than would be the case if the scope of the provision were widened by both sets of amendments.

Therefore, it is difficult to see how an income tax relief for gifts of works of art, on top of the existing tax breaks, would have a significant effect in increasing gifts of such assets. The hon. Member for Arundel and South Downs made it clear that he is concerned about works of art not ending up in the national collection. I share the sentiment, but the operation of his amendments may actually work counter to what he is trying to achieve. In some cases, his proposal may work against the interests of the UK's heritage.

The taxpayer's favoured charity would be under the usual obligation to maximise the benefit of the gift in the furtherance of its charitable objectives, so it might have no option but to arrange for the work of art to be auctioned. If a foreign museum bought it, the work would be lost to the UK. By comparison, an aim of the inheritance and capital gains tax reliefs for gifts and private treaty sales to qualifying UK institutions—not just museums and galleries but university libraries, heritage bodies and others—is to keep assets in the UK for the benefit of the public.

The hon. Gentleman rightly anticipated my response to his amendments, although he was not entirely right in anticipating my arguments and concerns. If he returns to the matter in future years, as he promised, perhaps he might examine my comments to determine whether there are good grounds for his concerns.

The generous reliefs that are already in place provide adequate incentive for donors to give assets of a kind that charities can retain or easily liquidate. The reliefs are simple, straightforward and well defined. Therefore, I encourage the hon. Members for Kingston and Surbiton and for Arundel and South Downs to withdraw their amendments. If they are not prepared to do so, I ask my hon. Friends to reject the amendments.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Economic Secretary for his full, well-considered comments and responses. However, our amendments have been discussed and drafted with the help of representatives of the country's main art galleries. Their view is that, although it sounds great, they do not get much from private treaty sales. They believe that the incentive of the gift scheme has the potential to result in many more works of art for the national collection.

If such measures did not apply only to art galleries and the like, but across the board of charities, which I think would be only fair, I accept that it could result in charities having a large number of works of art to sell, which would then give the galleries a problem in raising the money to purchase them. I think that that is a fair issue of which to take account.

However, notwithstanding the wider practical issues that were touched upon, I do not think that the valuation of major works of art is a major issue. It is already dealt with in different ways. There is an issue of principle, which is where we started. In general, for better or worse, wealth is held predominantly in securities, land and works of art, and if one is going to permit that principle, as in the United States, the arguments for excluding art are somewhat—I will not say contrived—very particular to the territory of works of art. I remain of the view that next year we are likely to be focusing on an extension to works of art when the particular issues to which the Economic Secretary has referred have been thought through. I think that it is quite difficult logically not to go down the US road more fully than we have embarked upon at present.

There is not much point in voting on the issue. The Government have made their stance very clear, and there are some practical issues to address. In begging leave to withdraw, I would make the point that there is a logical inconsistency where we now are, which will need to be addressed. It is better to do that one stage at a time each year, than not to go forward at all. I beg to ask leave to withdraw the amendment.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I wish to seek leave to withdraw the amendment.

Joe Benton (Labour, Bootle)

Order. The hon. Gentleman does not need to withdraw it as it has not been moved.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Should the Committee agree to the hon. Gentleman's request to withdraw his amendments, I would not seek to move the amendment on the amendment paper in my name and those of my hon. Friends. I think that the Government are making progress, which should be recognised. As the debate has developed, the case made on the Opposition Benches has been strong, and follows the strong logic of the Government's own position. Although we are not going to vote on the amendments, I would urge the Government to reflect on the debate, and I hope that next year we might have total agreement in the Committee on further, more progressive amendments.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 98, in page 72, line 23, leave out 'where' and insert 'whether or not'.

John Burnett (Liberal Democrat, Torridge and West Devon)

On a point of order, Mr. Gale. Are we going to have a stand part debate on clause 96?

Joe Benton (Labour, Bootle)

I will assess that when the time comes, but the time has not yet come.

John Burnett (Liberal Democrat, Torridge and West Devon)

I beg your pardon.

Howard Flight (Conservative, Arundel and South Downs)

Amendment No. 98 is designed to extend the relief to land held outside the UK. We cannot see any reason why UK charities should not be able to benefit from non-UK land. It is certainly the sort of matter that is likely to run contrary to European Union principles in the near future. To give a different tax treatment to an asset in one EU state from another may be a problem. Aside from that, what is the logic of excluding non-UK land? The Government seem not to have worried about certain other aspects of their tax legislation dealing with UK assets. We do not envisage any particular valuation problem, because land is an asset that many charities sell if they are given it. What is the difference between land in Kent and land in Calais?

John Healey (Labour, Wentworth)

I am sure that you would not wish me to be drawn into speculation about the development of the European Union, Mr. Gale. I was interested to hear the case that the hon. Gentleman was looking to put for the amendment, the essence of which seems to be, ''This is a logical extension, so why not?'' The principal reason why not is that extending the relief to property situated anywhere in the world would make it complicated to administer and virtually impossible to police.

Limiting relief to properties in the UK means that a UK charity accepting a gift, which needs a certificate of acceptance, can readily access a property to ensure that it is suitable for its purposes. The certificate is an important protection for charities to prevent unwanted properties from being gifted to them. The Inland Revenue can also, in most cases, easily confirm a donor's interest in a property and agree a valuation for the purposes of the donor's relief.

It is not hard to foresee the problems that would be caused by properties that could be anywhere in the world. If the relief were extended to include non-UK properties, charities would be faced with taking decisions on whether to accept a property with little or no first-hand knowledge of its utility. The Inland Revenue would find it difficult to confirm whether a donor's interest in a property under foreign law met the requirements for the relief, and it could be extremely difficult to agree a value for a property. The relief, as it stands, is relatively simple for donors, charities and the Inland Revenue. Amendment No. 98 would only complicate that, and I urge the Committee to reject it if it is pressed to a vote.

Michael Jack (Conservative, Fylde)

I want to probe the Economic Secretary about his remarks. To some extent I can understand his line of argument, but in a world of double tax treaties the internationalisation of tax and other matters that we have discussed, such as valuations, are part and parcel of the issue. If, for example, a children's charity were offered a holiday home in sunnier climes that would enhance its ability to give a good quality holiday to UK children, then, by virtue of the restriction, which the amendment seeks to address, it would be unable to take control to show that that particular property was of worth to it. That would inhibit its ability to be of service to UK children.

The Economic Secretary may have reservations about the amendment moved by my hon. Friend the

Member for Arundel and South Downs. Nevertheless, if a charity were offered a property or land abroad and said, ''Yes, we think that it would be a useful adjunct to what we are doing,'' and could demonstrate that that relationship clearly fulfilled the point, which my hon. Friend made, that the property or land was not being deposited on it as an ineffective asset, surely in an increasingly mobile world there is a good case to be made for a procedure to allow such a donation to take place. It would not be beyond the wit of man to sanction such useful donations on an exceptional basis.

John Healey (Labour, Wentworth)

I can see the very attractive picture that the right hon. Gentleman paints of a large property in sunny climes. In practice, we are concerned with producing legislation with a general application, not with framing it for the sort of exception that he posits. The aim is to create a legislative framework that will bring the biggest benefit and boost to income for charities, to increase donations, and to do so in a way that is as simple to administer as possible for charities, donors and the Inland Revenue. We are engaged in creating legislation for the general, not the exceptional, case.

Rob Marris (Labour, Wolverhampton South West)

I take the point that the right hon. Member for Fylde made about a home for a charity in sunnier climes. However, that could cause a nightmare in other circumstances. Many of my constituents have land in India and I anticipate that they might wish, from honourable and generous motives, to give six acres in the Punjab to a charity, perhaps to a religious one, on which tax relief could be claimed. I am sure that the right hon. Gentleman knows how valuable land is in the Punjab, but it may not be so valuable in UK terms, and it could be awkward in terms of the charity's honour to refuse such a donation. That situation can arise now, but it could be greatly exacerbated were tax relief available.

Michael Jack (Conservative, Fylde)

The hon. Gentleman makes a powerful point and I am grateful for his constructive observations. He has highlighted the reason why I suggested to the Economic Secretary that there could be a mechanism—if not now, in future—for dealing with exceptional circumstances. I take the point of the hon. Member for Wolverhampton, South-West (Rob Marris) that to decline a gift could cause tremendous problems, but on the other hand, there may be examples—I thought only of the children's home—of ways in which a beneficial donation of an asset could help a UK-based charity or charities. My suggestion is that the proposal, instead of being ruled out, should be examined and if necessary a mechanism could be derived for exceptional circumstances to avoid some of the problems that we have identified. There are plenty of examples in UK legislation—for example, child support legislation—of exceptional circumstances being catered for by the departure mechanism, which takes into account things that do not neatly fit into an agreed national formula.

Howard Flight (Conservative, Arundel and South Downs)

Although I accept some of the Economic Secretary's points, I believe that the issue has been greatly overstated. I should think that a Sikh temple in England would be extremely pleased to be given 10 acres of land in the Punjab, which is worth

about three times more per acre than land here—it would be a valuable asset. The task of disposing of it is not difficult, so what is the problem with something that sounds as exotic as that?

The issues of valuation and the claiming of rights would not cause great problems either, because until a charity has certified that a donation has value it might not get tax relief. I feel that bigger problems are being created than those that exist. I see a different argument for ring-fencing UK taxation, with which, from many other perspectives, I agree. There is an issue in terms of the EU because, through the measure, the Government will attach different tax rights to UK land from those attached to the land of other EU countries. It may well be illegal to do that.

We will not press the amendment. The Government can think about it until next year. However, there will not be great problems if they show the will to take the view that a land gift should be viewed on an international basis. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

John Healey (Labour, Wentworth)

I beg to move amendment No. 198, in page 72, line 23, at end insert—

'This subsection is subject to subsections (9AA) to (9B) below.

(9AA) Where a person makes a disposal to a charity of—

(a) the whole of his beneficial interest in such freehold or leasehold interest in land as is described in subsection (9A)(a) or (b) above, and

(b) any easement, servitude, right or privilege so far as benefiting that land,

the disposal falling within paragraph (b) above is to be regarded for the purposes of this section as a disposal by the person of the whole of his beneficial interest in a qualifying interest in land.

(9AB) Where a person, who has a freehold or leasehold interest in land in the United Kingdom, grants a lease for a term of years absolute (or, in the case of land in Scotland, grants a lease) to a charity of the whole or part of that land, the grant of that lease is to be regarded for the purposes of this section as a disposal by the person of the whole of the beneficial interest in the leasehold interest so granted.'.

Joe Benton (Labour, Bootle)

With this it will be convenient to take Government amendments Nos. 199 to 204.

John Healey (Labour, Wentworth)

These amendments clarify the position of easements that are included as part of a gift of land and ensure that the provision correctly reflects the position in Scottish law.

Amendment No. 198 makes it clear that when a person makes a disposal to a charity of freehold or leasehold property, including any easement benefiting that land such as a right of access, that easement is included in the definition of the disposal of the whole of a beneficial interest in a qualifying interest in land. It also tidies up the drafting by inserting what was subsection (2) of proposed new section 587C of the Taxes Act 1988 into section 587B as new subsection (9AB). Amendment No. 202 consequently removes subsection (2) of proposed new section 587C. I am delighted that the hon. Member for Mid-Worcestershire (Mr. Luff) is with me on those points.

Amendments Nos. 199, 200 and 201 make some small changes to proposed new subsection (9C), which deals with the application of the provision to Scotland. They provide specific Scottish translations of the English and Welsh terminology concerning Scottish tenancies and clarify the position of Scottish missives of let.

Amendments Nos. 203 and 204 deal with the transitional provisions covering the position prior to the changes to Scottish land law to be introduced by the Abolition of Feudal Tenure etc. (Scotland) Act 2000. The existing subsection (7) is deleted because Scottish Ministers will not be able to effect the end of feudal tenure before Royal Assent of the Finance Bill. There is also a minor amendment to the wording in subsection (9) more closely to reflect the wording used in the Abolition of Feudal Tenure etc. (Scotland) Act 2000.

The amendments simply clarify some points in the clause and I ask the Committee to support them.

Amendment agreed to.

Amendments made: No. 199, in page 72, line 29, leave out 'and'.

No. 200 in page 72, line 31, leave out

'the interest of a tenant'

and insert

'a tenant's right over or interest'.

No. 201, in page 72, line 32, at end insert

', and

(c) references to an agreement for a lease do not include references to missives of let that constitute an actual lease.''.'.—[John Healey.]

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 81, in page 72, line 37, at end insert—

'(4A) Section 25 of the Finance Act 1990 and section 339 of the Taxes Act 1988 are amended as follows.

'(4B) At the end of subsection (2)(f) of section 25 of the Finance Act 1990 insert '', but this paragraph shall not apply where, had such property been transferred to the charity by way of gift, relief would have been allowed under section 587B of the Taxes Act 1988.''

(4C) At the end of subsection (3E) of section 339 of the Taxes Act 1988 insert '', but this subsection shall not apply where, had such property been transferred to the charity by way of gift, relief would have been allowed under section 587B of the Taxes Act 1988.''.'.

There is a problem with the clause, in that quoted shares or land that a donor wishes to give to a charity may be standing at a capital gains tax loss, particularly in the case of shares since the measures were introduced. If the donor makes a gift of the shares or land, thereby obtaining income tax relief under section 587B of the Taxes Act 1988, the shares or land will be transferred at a zero gain, zero loss consideration under that Act and the loss will not be available.

If the donor were to sell the shares or land to the charity and then gift the cash proceeds of the sale to the same charity, he would remain entitled to the capital gains tax loss on the sale but would be denied the income tax relief for the cash gift because of the anti-avoidance rules in section 252F of the Finance Act 1990 for individuals and the relevant section for companies, which deny gift aid relief unless the cash

gift is not conditional or associated with or part of an arrangement involving the acquisition of property by the charity otherwise than by way of gift from the donor to a person connected with him.

The purpose of the amendment is to address that situation and to clarify that it applies to shares as well as to land.

John Healey (Labour, Wentworth)

The provisions in section 25 of the Finance Act 1990 and section 339 of the Taxes Act 1988 are concerned solely with gifts of money. Effectively, the restriction that the amendment seeks to modify is intended to prevent the relief being used to make non-monetary gifts under gift aid. The amendment seeks to disapply the restriction in cases in which the property could have been gifted under section 587B of the 1988 Act, which gives relief to donors on the market value of gifts of listed shares—as the hon. Gentleman pointed out—and, with the extension introduced in the clause, land and buildings.

Relief is given under gift aid on readily identifiable cash sums. Relief under section 587B is given on the market value of the gift of the qualifying investment. Our aim with reliefs for charitable giving is to give sufficient incentive to donors to maximise the benefits that flow to charities. Removing the restriction in the gift aid provisions would open up opportunities to manipulate the relief so that the benefits of the relief flowed to the donor rather than, as intended, the charity.

I am aware that one of the representative bodies suggested that section 25 prevents a donor from selling a property to a charity and then donating the proceeds under gift aid. For the sake of clarity, I confirm that that is not a problem, provided the sale is at arm's length and there is no prior condition or arrangement to the effect that the donor will give all or part of the proceeds of the sale to the charity. The restriction is not intended to prevent innocent transactions but manipulation of the reliefs.

It is right that gift aid should continue to apply to unconditional gifts of money and not be opened up to conditional payments that are not pure gifts. Therefore, I hope that the hon. Gentleman will withdraw the amendment. If he will not, I ask the Committee to reject it.

Howard Flight (Conservative, Arundel and South Downs)

May I seek further elucidation? I believe that the Economic Secretary understands my basic point. Because of the way that the process works, one would not be able to use a loss if it was gifted; selling the asset and then giving the charity cash to buy it—going around the houses—is designed to obviate that. However, the Economic Secretary made it clear that that route would not work because, under the present arrangements, the transaction would not be deemed to be at arm's length. What other mechanism can the Minister suggest to address the problem? There will be a lack of incentive for people to gift assets that happen to have capital losses attaching to them, as opposed to assets that happen to have capital gains attaching to them. I cannot believe that that is the overall intent of the gift aid package. If the Government do not want to address the problem in the way that the amendment

proposes, do not they see a need to address it in some other way?

John Healey (Labour, Wentworth)

I am not as convinced as the hon. Gentleman seems to be about the nature or extent of the problem that he identifies, but I shall consider the matter further and give him my thoughts in writing.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Economic Secretary for his reasonable response. As the matter will be given further consideration, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 202, in page 73, line 1, leave out subsection (2).

No. 203, in page 74, line 14, leave out from beginning to second 'subsection' in line 16.

No. 204, in page 74, line 22, leave out 'coming into force' and insert 'purposes'.—[John Healey.]

Joe Benton (Labour, Bootle)

I have listened to what the hon. Member for Torridge and West Devon said about the clause stand part debate. Significant parts of the clause have already been thoroughly debated. However, other issues in what is a fairly lengthy clause have not been debated. I am therefore prepared to permit a stand part debate on the basis that we do not go over ground that has already been covered.

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

John Burnett (Liberal Democrat, Torridge and West Devon)

I am extremely grateful to you, Mr. Gale. Two problems have been raised with me and with other Committee members by the Law Society. I do not believe that they have been debated before. They relate to technical problems with the provisions. The danger of recapture of tax relief will be a considerable disincentive for those making gifts of real property to a charity and will defeat the purposes of clause 96. I refer particularly to subsequent innocent, bona fide transactions that could lead to a claim for repayment of tax relief.

The first point relates to clause 96(5), which contains supplementary provisions for gifts of real property. Proposed new section 587C(9) defines a disqualifying event and, accordingly, a clawback of relief given under section 587B, where the person who made the disposal, or any person connected with him,

''becomes entitled to an interest or right in relation to all or part of the land to which the disposal relates . . . otherwise than for full consideration in money or money's worth.''

That is an extremely wide provision. It could catch a number of sets of circumstances in which the spirit of the rules is not breached. For example, if a person grants a lease to a charity and obtains tax relief, it would appear that that tax relief will be withdrawn if the person subsequently makes a gift of the freehold reversion to a relative. Given that example, the charity will still retain the benefit of the property given to it.

My second point concerns a gift that is given to a charity on condition, for example, that the property be used for charitable purposes, which is an eminently sensible provision. If, later, the condition is no longer satisfied, arguably a disqualifying event arises. That could occur many years later and it would not seem

appropriate to recapture the tax relief if the arrangements were genuinely undertaken.

The first problem could be overcome if subsection (9)(a) were limited to the donor or a connected person becoming entitled to the interest acquired by the charity or an interest derived from that interest. The second set of circumstances that I have posited would appear to require a specific saving provision in the legislation.

I hope that the Minister will give some thought to those points. Those of us who advise donors to charity, or who have considered making gifts to charity, will not want to have the original tax relief recaptured or to receive demands for repayment if, in future, a bona fide incident occurs that could give rise to a charge to tax.

John Healey (Labour, Wentworth)

I welcome the fact that the hon. Gentleman has raised the Law Society's technical concerns about the provision. We always take seriously the points that it makes on legislation. The difficulties that the hon. Gentleman has mentioned are to do with clawback provisions. The recapture provisions are clear. Donors would go into any transaction with their eyes open. The provision is there to prevent avoidance. The clawback is time-limited to six years. The donor has the option to delay innocent transactions. In addition, a subjective decision of what was innocent would be difficult to make.

John Burnett (Liberal Democrat, Torridge and West Devon)

But of course, the donor will not have control over that six-year period.

John Healey (Labour, Wentworth)

The donor may not have control, but the clawback period lasts for six years.

John Burnett (Liberal Democrat, Torridge and West Devon)

I appreciate that, but the problem arises when the donor has divested himself of the property and the charity or whoever has the property might subsequently make arrangements with the property that defeat the tax relief provisions.

John Healey (Labour, Wentworth)

I fail to see the cause of the concern that the hon. Gentleman expresses so strongly. The provision is there to prevent avoidance. It is a proper and major consideration for the Government. I cannot understand the hon. Gentleman's argument and I, therefore, find it difficult to accept.

John Burnett (Liberal Democrat, Torridge and West Devon)

I appreciate that it is important to prevent avoidance. The Economic Secretary stated that the clawback provision lasts for only six years. It is possible that a condition on use may be innocently broken within that six-year period, and in such circumstances a clawback could technically happen. Would the Revenue consider mitigation in such a case?

John Healey (Labour, Wentworth)

Considering the hour, Mr. Gale, and the doggedness within which the hon. Gentleman is pursuing the point, I shall give the matter further consideration and look at the technical concerns raised by the Law Society. If he will allow me, I shall write to him.

Howard Flight (Conservative, Arundel and South Downs)

I shall be brief. The comments of the hon. Member for Torridge and West Devon lead me to consider the public policy review of charity law that will be reporting in the autumn. It may, for example, propose that certain bodies could lose charitable status more easily than at present, and that they will be required to meet criteria to maintain their charitable status that do not exist at present. The thought occurs to me that someone could give to a charity in good faith, but that the charity could lose its charitable status shortly afterwards because it did not meet the new criteria anticipated by charity lawyers. Would the donor lose the property and then lose his tax relief because the charity had ceased to qualify, or is the requirement merely that the charity should be a charitable body at the time of giving?

John Healey (Labour, Wentworth)

The body needs to be a charity at the point of donation. I hope that answers directly the hon. Gentleman's question. The review that he mentioned underlines the importance that the Government attach to charitable giving. It would be wrong of me to pre-empt any judgments or recommendations that the report might make.

The clause is a further manifestation of how important charities are to the Government. It is a further step in our efforts to boost the incomes of charities and the level of giving to aid their purposes. It adds substantially to already substantial incentives for giving to charity that we have put in place. I commend the clause to the Committee.

Question put and agreed to.

Clause 96, as amended, ordered to stand part of the Bill.

Clause 97 - Gift aid: election to be treated as if

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 193, in page 74, leave out lines 27 to 32 and insert—

'(2) Any such election must be made by notice in writing to an officer of the Inland Revenue on or before the 31st January next following the end of the year of assessment to which the claim made by the donor relates.'.

Joe Benton (Labour, Bootle)

With this we may take the following amendments: No. 192, in page 74, line 27, at end add

'or in any of the next succeeding six years of assessment.'.

No. 194, in page 74, line 34, leave out 'previous year' and insert

'year to which the election relates'.

No. 195, in page 74, line 39, leave out 'previous year of assessment' and insert

'year of assessment to which the election relates'.

Howard Flight (Conservative, Arundel and South Downs)

The amendments are designed to extend the one-year roll-back for gift aid to a six-year roll-forward. That would give the gift aid system greater flexibility and encourage people to contribute more to charity. A change would also be made to give taxpayers more time to make a claim. They presently have until the end of the January following the end-of-year assessment to which the claim relates.

John Healey (Labour, Wentworth)

As the hon. Gentleman says, the amendments seek to extend the period available for donors to elect to have their donations made under gift aid. The clause allows donors to elect to have the donation treated as if made in the previous tax year. Higher-rate taxpayers can therefore claim their portion of the tax relief earlier. The amendments would allow the donation to be deemed to have been made in a later year, and any relief to be given against the tax liability of that later year.

In discussions on clause 86, the hon. Gentleman urged us to consider possible legislation from the point of view of the ordinary citizen. The operation of the relief would add considerable complexity for donors in identifying gift aid donations on which relief had not already been claimed, and in establishing when it would be most appropriate to claim unused relief.

In addition, the clause is intended to act as a prompt and incentive to higher-rate taxpayers to give to charity by making the relief available immediately. A reminder that they can do so will appear in the self-assessment returns from next year. By changing the deadline from the day of filing to a general one of 31 January, the amendment would reduce the incentive for immediate giving.

To allow a six-year carry-forward in the way proposed would add to the complications that I have suggested for donors and the Revenue, without necessarily increasing the sums given to charity. On that basis, I encourage the hon. Gentleman to withdraw the amendment, or my hon. Friends to reject it if he presses it.

Howard Flight (Conservative, Arundel and South Downs)

The underlying point is simple. Let us take land. Many people may be rich in assets, especially land, but not in income. The one-year roll-back will give two years' income tax relief, but that is it. Therefore, if such people want to give a substantial asset well beyond their income, they will give a bit this year, a bit more next year, a bit more the year after and so on, so that they get their bite of relief every year in future. Would it not be better if they gave the lot now, so that charities gained, and then apportioned the income tax relief that they could not use this year and last year in future? The charity is the beneficiary, as it would be given the land earlier than it would otherwise. I cannot see that the amendment is especially complex, tax-wise.

The same principle applies to shares, although it is more likely to arise with land because so often owners of land may be asset rich but not especially income wealthy. People can give a bit at a time over several years, but the party that suffers from that is the charity recipient. I urge the Government to think a little more on the point.

John Healey (Labour, Wentworth)

I remind the hon. Gentleman that gift aid involves no gifts of land. It relates only to money. That type of debate may be more appropriate on new clause 12.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Economic Secretary; it has been a tiring week. The issue in relation to cash is probably less fundamental. I take it, therefore, that the Government's argument is that two years is a sufficient

period over which to spread it. 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. 196, in page 74, line 45, leave out '6th April 2003' and insert—

'the day on which this Act is passed.'.

Somewhat oddly, the gift aid tax roll-back provisions only apply from April 2003. We are suggesting that they should apply as soon as possible in order to get people to contribute to charity. Is there a good reason for postponing the start date by a year? What is the Government's rationale for not making the provisions applicable in the current tax year?

John Healey (Labour, Wentworth)

The hon. Gentleman is right—it is an attractive idea to introduce such an incentive for charitable giving earlier. However, it would not be possible in practical terms and that is why the measure starts next year. The claim for higher rate tax relief and in most cases the election to have the donation treated as being made in the previous year will be made through the self-assessment return. That means that the self-assessment form and accompanying guidance will need to be amended to take account of the measure. Since most self-assessment forms for 2001–02 have now been issued to taxpayers it is not a practical option to amend the return form and guidance for that year. I therefore encourage the hon. Gentleman, having made a powerful point, to withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

That is a practical explanation that I have understood. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Joe Benton (Labour, Bootle)

With this it will be convenient to take the following:

New clause 12—Gift-aid: carry-forward of excess allowances—

'.—(1) Section 25 of the Finance Act 1990 shall be amended as follows with effect from the year 2002–03.

(2) After subsection (6) of that section insert—

''(6A) For the purposes of the Income Tax Acts and the Taxation of Chargeable Claims Act 1992, if the basic rate limit for the year of assessment referred to in subsection (6) above, as increased by subsection (6)(a)(ii) above, exceeds the income and the capital gains of the donor which are chargeable at the starting rate, lower rate or basic rate for that year of assessment, the excess, in so far as it arises from the operation of subsection (6)(a)(ii), shall be carried forward to the next following year of assessment and the basic rate limit of that year shall be increased by the amount of the excess so carried forward, and if the basic rate limit of the next following year, as so increased, exceeds the income and capital gains of the donor which are chargeable at the starting rate, lower rate or basic rate for that year of assessment, the excess so arising for that year shall be carried forward and so on, until no excess remains.

(6B) In a case where an excess is carried forward under subsections (6A) above, the reference to profits or gains chargeable to income tax or capital gains tax in subsection (2)(i)(i) above shall include a reference to profits or gains chargeable to income tax and capital gains tax for any year of assessment to which such an excess is so carried forward.''

(3) Section 587B of the Taxes Act 1988 shall be amended as follows with effect from the year 2002–03.

(4) After subsection (2) of that section insert—

''(2A) In the case of a disposal by an individual, if the relief that may be claimed for the year of assessment referred to in subsection (2)(a)(i) above exceeds the total income of the individual for that year of assessment, the excess after making a claim for that year of assessment and the individual may make a claim for relief under this section for the amount of the excess in the next following year, and if the relief that may be claimed in the next following year, after making such a claim, exceeds the total income of the individual for that year of assessment, the excess shall be carried forward to the next following year and so on until no excess remains.

(2B) In the case of a disposal by an individual, if the relief that may be claimed for a given year of assessment under subsection (2) or (2A) above exceeds the total income of the individual for that year of assessment, the individual may make a claim for that year of assessment to treat the excess as increasing the annual exempt amount for that year for the purposes of charging capital gains tax under section 3(2) of the Taxation of Chargeable Gains Act 1992. To the extent of that relief is so given as a result of such a claim, the amount of any excess which may be carried forward to the next following year under subsection (2A) shall be reduced.''.'.

New clause 14—Gift Aid and non-taxpayers—

'—(1) Section 25 of the Finance Act 1990 (donations to charity by individuals) shall be amended in accordance with subsection (2) below.

(2) In subsection (8),

(a) after ''year of assessment'' there shall be inserted ''by more than £520''; and

(b) at the end there shall be added ''over £520''.

(3) This section shall be deemed to have effect for the year 2002–03 and subsequent years of assessment.'.

Several hon. Members rose—

Joe Benton (Labour, Bootle)

New clause 12, which is in the name of the official Opposition, was the first one that I mentioned. I think that, as a courtesy, I must call the Opposition Front Bench spokesman first.

Howard Flight (Conservative, Arundel and South Downs)

The new clauses are designed to address some of the tax points to which I mis-referred a few minutes ago. The difficulty encountered in practice is that the income and gains, in the case of gift aid, may be insufficient for relief to be given for the donation that the donor would like to make. The donor may view the proposed gift as coming out of his capital resources. As such, it will often be the case that his income, or income and capital gains in the case of gift aid, for the year of the gift is much smaller than the value of the gift that he or she would like to make. That may put off or at least delay the proposed gift or result in it being split into tranches or scaled down.

Sometimes, on a company flotation, the major shareholder realises very large capital gains. Such a donor would be more prepared to make gifts of shares in a quoted company to a charity if he were able to obtain relief against the capital gains on the shares he sells along the lines of the income tax relief in section 587B. He will typically have a relatively small income and substantial capital in the year of flotation. I made the same point in relation to the ownership of land.

First, any relief not absorbed against the donor's total income and gains in the year of gift should be carried forward to the following year and treated as though it arose on a gift made in that year and so on,

until the relief is exhausted. Secondly, the donor should be allowed to make an election that any relief under section 587B not absorbed against the donor's total income in a given year should be allowed against his capital gain for that year.

Roger Casale (Labour, Wimbledon)

I welcome clause 97, which will improve the operation of gift aid. I welcomed the introduction of gift aid by the Government two years ago, and I welcome their willingness continually to review its operation. The idea of gift aid is to boost donations to charities, which we want to be as generous as possible. We should also remember that giving to charity is an act of citizenship and a way for many people to participate in their community. At the same time as trying to increase the total amount of donations to charity, we should also ensure that the incentives that we provide through the operation of the tax system do not put off certain groups of people.

I act as patron to several local charities, including London and South East Direct Aid to Kosovo. Three years ago, I helped to set up the charity, which has as its patrons hon. Members on both sides of the House. It has been involved in helping to rebuild schools in Kosovo following the conflict there. We launched the charity in collaboration with the Newsquest local and regional newspaper group, which made the charity its chosen charity for six months. We received many small donations from Newsquest readers and, once that campaign came to an end, we continued to raise money through schools and churches. We raised more than £100,000 for schools in Kosovo, much of it in the form of small donations, but many of them would not qualify for tax relief through gift aid under current law.

As I aim to show, the situation can create difficulties not only for charities but for donors. There are at least two reasons why gifts to charities, such as London and South East Direct Aid to Kosovo, may not qualify for gift aid. First and most obvious, the donor who wishes to give a small amount to a charity may not be a taxpayer. Secondly, the donor may have been a taxpayer but ceased to pay tax in a later year, perhaps as a result of unemployment or retirement, or because of a fall in interest rates, if the donor's only income is from savings or investments. In those circumstances, the donor would no longer be eligible for gift aid relief. If anyone listening to our debate doubts whether such generosity exists on the part of citizens whose incomes are so low that they do not pay tax, they would do well to remember the parable of the widow's mite. However, we should also be aware of the need to avoid a tax liability arising as a result of the generosity of the widow in making her mite available to charity.

The Committee will be aware that charities have an obligation under current law to remind donors to amend previous declarations if they are subsequently not liable for tax. The failure to notify such a change in status could lead to a tax liability on the part of the donor, who would, by default, have allowed the charity to claim tax relief against a tax bill that he no longer had. In the case of the widow's mite, a

liability would arise if the widow had previously been a taxpayer and made a declaration.

I raised the issue of non-taxpayers when the gift aid scheme was introduced. The scheme was, however, so important and has proved so successful at increasing donations to charity, that I was anxious for it to get off the ground, and I obviously wanted to do nothing to hold it up. The point, however, is to improve the operation of the scheme. When it was debated in the Committee that considered the 2000 Finance Bill, I referred to a concern which the low incomes tax reform group had raised with me and several other Committee members. I cannot quote directly from the record, but I hope that I make a better job of paraphrasing myself than others do. I said that someone who stopped paying tax, but forgot to withdraw any gift aid declarations would be liable for tax on their gifts. How likely is it that even someone who is warned at the time—I mentioned the obligation on charities in that regard—will remember to withdraw a declaration several years after they made it, unless they are specifically reminded to do so? These days, we are very much encouraged to pay our mite, or perhaps more, by standing order, and the habit of paying money to charities in that way can go on for some time. How is a person to be reminded to change their declaration if their circumstances change?

The need for individuals to remember to amend gift aid declarations could be onerous, and there is a danger that it will lead to a tax liability in subsequent years. However, it could also be onerous and expensive for charities. Mr. Beighton acts as the treasurer for London and South East Direct Aid to Kosovo, and he is very much involved in his local church group. He writes every year to thank donors for their generosity and to remind them to inform him of any change in their liabilities. He wrote to me before this debate, saying that he had got a letter this year from a lady in her late 80s who was in a nursing home and who said that she had not paid tax last year. He could, therefore, adjust the church's claim, but unfortunately, as a result, the lady, who wanted to avoid any tax liability, cancelled her standing order and no longer donates money to help the church. There are, therefore, costs involved, and it takes time to remind people who donate to charities of their obligations. Such things can act as a disincentive and lead to the cessation of regular donations.

As is often the case with those who so generously give their time to charities, Mr. Beighton is involved with about 30 other charities in one way or another, although not specifically as their treasurer. He is not aware, however, that any of them write to donors to remind them of the need to review their liability to pay tax and to review subsequently their gift aid declarations if they have ceased to be liable for tax in that way.

The question, then, is what can we do about this? Clause 97 will not touch on the issue of non-taxpayers; nor will new clause 12 or new clause 14. I do not wish to push the point or, at this stage in the proceedings, resolve the issue, but this seems to be the right time to ask the question. The only fair solution would be to allow non-taxpayers to qualify for gift aid on their

gifts just as taxpayers do. There is an important point to be made about broadening the range of people who are eligible for incentives to give money, recognising that many people who make small donations may not be liable to tax.

The principle involved is no different from that behind tax credits, which the Government pay to taxpayers and non-taxpayers alike. If there is a fear of abuse, perhaps such donations should be subject to a maximum of £520 a year, or £10 a week. If Ministers continue to rule that out, should there not be a duty on charities to write to donors every so often, reminding them of their tax position? Most charities are in fairly regular contact with their warm donors—those who give regularly—so they could do so without that constituting too severe an imposition on them.

I hope that the Minister can confirm that those issues will be subject to continuous review. The gift aid scheme is excellent. I am delighted that the Government have introduced it and that it is working so well. It is encouraging more people to give to charity and is helping charities such as London and South East Direct Aid to Kosovo to get money. I have put on record our thanks to Newsquest for its help. We so often hear adverse commentary about the press, but this is an example of its doing very well. I say that in good faith; it was an intelligent way to support an important initiative. I ask the Government to keep the situation under review and would like to request an opportunity to meet Ministers and their officials to examine the issue of those people who give to charity but do not pay tax, in order to ensure that they receive a similar level of incentive—and that the charities that they support receive a similar level of reward—to those people who do pay tax. We want to encourage the widow's mite, but we do not want the widow's mite to generate a liability to pay tax in years to come.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I enjoyed the speech of the hon. Member for Wimbledon (Roger Casale). I recall the debate to which he referred in which he made a powerful case on a similar issue. My hon. Friends and I joined with him on that occasion. He was right to set out the position with respect to the widow's mite: gift aid does not apply to non-taxpayers and the state operates the rather worrying scheme that might catch a citizen who signs a gift aid declaration thinking that he is a taxpayer and that the charity should be able to reclaim the tax on his donation, but subsequently discovers that he is a non-taxpayer that year. That person, by definition on a very low income, would suffer a tax liability for having made a charitable donation. The hon. Gentleman's description of the problem was right, and the Government need to address it.

I disagreed with the hon. Gentleman, however, on one point of detail: new clause 14 goes a long way towards dealing with the problem that he spent several minutes describing. It is specifically targeted at dealing with that problem and drafted with the help of the Low Incomes Tax Reform Group. During a previous debate, Ministers suggested that the Inland Revenue would do its best, by making its literature clear and advising charities, to ensure that there would be few or

no cases of people inadvertently signing gift aid declarations. However, I am told that subsequent experience has shown that the complexity of gift aid is a real problem, not least in the pilot for tax help for older people that the Low Incomes Tax Reform Group has run with the encouragement of Treasury Ministers and the Inland Revenue.

The group told me that at least one client was told to sign the certificate on the ground that she and the charity would save tax, but that she had been a 10 per cent. taxpayer and should not have signed the form. The extension of the Government's policy to the 10 per cent. rate band will make the problem even worse. The problem is real, as are the concerns expressed by hon. Members.

Our concern is not only that an individual on a modest income might face an unexpected tax liability but that the measure will discourage the widow's mite. There will be press stories and anecdotes about people being punished for making donations, which will reduce the amount of giving. Of course, such a result would be exactly the reverse of the thrust of Government policy and would represent a serious error.

Those involved in the matter might be of the sort who would be scared of the Inland Revenue. Of course, all Committee members know how friendly and helpful the employees of that august body are. However, people such as elderly female pensioners may never have had to deal with the Inland Revenue, because their employers or spouses had dealt with it. Now that their spouses are deceased, they are suddenly faced with declaration and self-assessment forms and a letter in the post that tells them that they have made a mistake. One can imagine the anxiety that that would cause, over tiny amounts of money, to people who are simply trying to give money to charity. One begins to see the absurdity of the system that the Government have created, albeit with the best of intentions.

Treasury Ministers say that they are worried that the proposals will set a precedent and that the Treasury will effectively be giving tax subsidies to the donations, because no tax is being paid. In fact, the Treasury does just that in other areas of the tax system. With stakeholder pensions, the pension scheme member contributes a net amount and the Revenue tops it up by the basic rate of tax to the level of the earnings threshold, which is currently £3,600, whether or not the member is a basic rate taxpayer. That is one example of a tax subsidy that is analogous to the present proposals. The tax credit systems are also effectively tax subsidies to non-taxpayers or to people regardless of their tax position. In this Bill, the research and development tax credit is giving subsidy over and above the tax paid, because it is at 150 per cent. In other words, the Government have not identified a real problem, and if they continue to argue their case they should do so more convincingly.

New clause 14 would not get rid of the overall problem because it deliberately limits the amount that

can be given to £520 a year, which is £10 a week. That is probably as much as many such people are likely to give. It is difficult to imagine a case in which a non-taxpayer, about whom we are all concerned, would give more than that. The £520 limit will deal with the issue of fraud. Inland Revenue officials are worried that if they allow charities to get tax back from donations from non-taxpayers, there might be a risk of fraud. The new clause deliberately sets a limit that deals with that rather dubious argument.

It is time for the Government to address the issue. The poorest in our society should be allowed to give without the threat of harassment from the Inland Revenue. I hope that the Economic Secretary takes that simple point on board.

Michael Jack (Conservative, Fylde)

I just want to explore with the Economic Secretary why, if I understand the clause correctly, basic rate taxpayers do not figure in the ability to carry back unutilised tax payments in relation to the gift aid scheme. What happens when, for the sake of this discussion, a basic rate taxpayer in financial year 1 achieves an income that would take them into higher rate tax part of the way through financial year 2? They would not necessarily have received a self-assessment form for that year because, for the previous tax year, they would have been deemed to be, and in fact were, a basic rate taxpayer, and they would get their self-assessment form in financial year 3. If they have a cyclical pattern of income—very low one minute, very high the next—they might, if they had become an extremely generous taxpayer, have missed out on potential benefits under clause 97. I should be grateful if the Economic Secretary would tell me what happens to people who realise by financial year 3 that they are higher rate taxpayers and wish to make a substantial donation to use up the previous year's tax potential. Given that they would not have made an election, where would they stand?

Clause 97(1) states that those who will be affected by that

''may elect to be treated for the purposes of that section as if the gift were a qualifying donation made . . . in the previous year of assessment.''

A basic rate taxpayer pays tax and does not have to fill in a self-assessment form, but is still assessed to have a liability for tax. If it so happened that the person concerned had come into money in financial year 2 and, for whatever reason, wanted to make a substantial charitable donation, are they expressly forbidden, although they did not fill in a self-assessment tax form but are assessed to have a liability for tax, from utilising the facility in the clause? I should be grateful for the Economic Secretary's guidance on that, because some people have erratic earnings to which the examples that I have put before the Committee may well apply.

Mark Hoban (Conservative, Fareham)

If I may, Mr. Gale, I shall go back to the subject of my hon. Friend's amendment. With the use of numbers I shall illustrate the impact that the amendment would have. If one were a taxpayer with a taxable income, which was not complicated by other factors, of £100,000, one would pay £38,388 tax in, for example, 2003. If one were to receive a gift making one's income £200,000, one's tax bill based on the

same income would go up to £44,000 because of the taxes that were withheld at the rate of 22 per cent. on the value of the gift of £200,000. Therefore, a taxpayer motivated by generosity who makes a substantial gift out of some assets that he has—someone who is asset rich and income poor, or relatively so—would actually lose out by about £9,500 as a consequence of his generosity.

People may be willing to give away their assets to the benefit of charities. I think that the prospect of becoming poorer as a consequence, by virtue of the way in which the tax system operates, would act as a disincentive. If such a person had an income of £300,000 rather than £100,000, he would make a tax saving of £36,000 under the current rules. If one is income rich and asset rich, a significant tax saving can be made by making a gift of £200,000 using gift aid. If one is income poor and asset rich, one would make a loss of about £9,500. My hon. Friend's amendment would give those people who are asset rich and income poor the opportunity to spread forward the value of their gift. Lo and behold, if one does that over two years and one's taxable income remains £100,000, the tax saving over three years amounts to £36,000, simply by the way in which the numbers work out. My hon. Friend's amendment would give—

Joe Benton (Labour, Bootle)

Order. For the record, the hon. Gentleman has referred to an amendment three times. I assume that he is referring to the new clause.

Mark Hoban (Conservative, Fareham)

Of course, it is new clause 12. That new clause would provide the opportunity for income poor, asset rich taxpayers to benefit from the same provision that the Finance Acts currently offer to income rich, asset rich taxpayers. On the grounds of equity, it might be appropriate to give taxpayers the benefits of the new clause. Moreover, it would stimulate giving from those people who benefit from safe flotations and the profits that can be made from the sale of shares. There would be an incentive for them to give more money to charity. The new clause is a sensible measure aimed at encouraging the civic mindedness to which the hon. Member for Wimbledon referred. We all want to see that in this country.

Howard Flight (Conservative, Arundel and South Downs)

I wish briefly to pick up the point about the returns having to be done for gift aid, and the risk of people not paying tax. I would question the notion of millions and millions of bits of paper being filled out, particularly in relation to cash gifts. Personally, I find it maddening when one is given something and then keeps receiving bits of paper to return.

When we were discussing the matter two years' ago, there was a fairly sensible suggestion, which applied to cash gifts, that a rough and ready analysis could be done of the national proportion of tax paid, and a block tax credit could be given based on that proportion. Supposing that the average rate of tax paid on gifts to charity were 26 per cent., a central grossing up could be carried out, which would get rid of the need for all those pieces of paper. Anyway, I am sure that the poor Inland Revenue cannot check 15 million pieces of paper and pursue the discipline.

John Healey (Labour, Wentworth)

I had not expected such a rich debate, but I certainly welcome it because it draws attention to

the importance of the provision. In general terms, I am glad to say, there was support throughout the Committee for the principle if not the detail of the approach, and I welcome and pay tribute to that.

I shall take the points that have been made in order, and then deal with new clauses 12 and 14. My hon. Friend the Member for Wimbledon, who is a veteran of Finance Bills, brought his experience to bear. I welcome his support for our proposed development of gift aid. He spoke in parables and in practical terms about the experience and importance of charitable giving, not just because it benefits charities but because it is an important act of citizenship. That was a telling point. He asked me to confirm that the matters he raised would be subject to continuous review; I can do so. He also asked whether he could discuss the issue further with officials from the Treasury and the Revenue, and I confirm that I would be delighted to ensure that that happens. I shall ask the appropriate officials to contact him to proceed with those discussions.

The hon. Member for Kingston and Surbiton raised several points, which I shall deal with and then return to his general proposition. First, he said that 10 per cent. of taxpayers do not qualify for gift aid. They do qualify, on the condition that the donor pays enough tax to cover the tax reclaimed by the charity. It does not matter what rate the tax is paid at. Despite his general warm words and support for gift aid, the hon. Gentleman took the scheme to task for its alleged complexity. The Inland Revenue is doing a great deal to help charities understand the tax system and the benefits that it can bring to their income streams. The Giving Campaign is heavily funded and strongly supported by the Government; it runs a series of well-received workshops. The Inland Revenue also works with charities to ensure that they properly understand the range of reliefs that may be available to them and potential donors. I have material from the Giving Campaign, which I would be delighted to give the hon. Gentleman after the Committee.

The hon. Gentleman was also concerned about recovery from poor widows. In practice, where the Inland Revenue finds that a non-taxpayer's donation has been included in a gift aid claim from a charity, it invites the charity to make good the shortfall rather than pursuing the individual taxpayer. The hon. Gentleman cited the opinions of the low income tax group. We will continue to look at the evidence that it produces, to keep the impact of our measures under scrutiny and to keep our provisions under constant review.

The questions asked by the right hon. Member for Fylde covered two areas: concern for taxpayers who may one year be basic taxpayers but subsequently become higher rate taxpayers and, as an extension of that, taxpayers whose earnings are somewhat erratic year on year. I reassure him that the carry-back provision that we are discussing is available to all taxpayers; the self-assessment return is simply a convenient mechanism for claiming it. The Government and the Inland Revenue will make

available alternative routes to those who do not receive self-assessment returns.

The hon. Member for Fareham (Mr. Hoban) spoke in support of new clause 12, so perhaps he will allow me to deal with that. As the hon. Member for Arundel and South Downs explained, new clause 12 seeks to allow individuals to obtain higher rate relief on gift aid payments and relief on gifts of shares or real property to charity in later tax years if they cannot get the maximum relief in the year in which they make their payments or gift. Such a provision could lead to complications for donors. The hon. Gentleman may be a sophisticated tax player himself, but we should bear in mind the words of my hon. Friend the Member for Wimbledon when he urged us not to put people off making donations. New clause 12 would introduce complications in establishing tax liability from year to year, as additional relief for new donations augmented unused relief from earlier years. As a result of those complications, we may fall into the trap that my hon. Friend warned us against. It would be an unnecessary burden for the large numbers of gift aid donors who are not liable at higher rates. They would have to calculate the amount of unused relief every year, even though they might never be in a position to make the higher rate tax-paying band and use the accumulated relief that they were gathering. They would almost certainly have to make annual tax returns to the Inland Revenue, whereas at the moment they do not have to do so.

The present reliefs for gifts to charity are generous, as one or two Members acknowledged. Individuals can eliminate their entire higher rate liability through cash donations under gift aid or their entire income tax liability for the year with a gift of shares or real property. There is no evidence that the lack of a carry-forward facility, of the type put forward in new clause 12, is inhibiting the success of gift aid. In fact, the amount of tax repaid to charities by the Inland Revenue under gift aid is increasing year on year.

New clause 12 would also allow unused relief for gifts of shares or real property to be set against capital gains tax liability for the year. Such gifts have already enjoyed full relief from capital gains tax on the gift itself. We see no reason to allow further relief against capital gains liability on unconnected disposals.

On new clause 14, under the current gift aid provisions donations are treated as having been made after the deduction of income tax at basic rate. The charity is exempt from tax on that income and is therefore entitled to claim the basic rate tax from the Inland Revenue. If the donor has not paid sufficient income or capital gains tax to cover the amount of basic rate tax that the charity has reclaimed, the donor is liable to be assessed on the shortfall, although I explained how the Inland Revenue deals in practice with the problem of the poor widow, which the hon. Member for Kingston and Surbiton mentioned earlier. The changes proposed by the clause would allow only that shortfall to be assessed where it amounted to more than £520 in any year of assessment. That would mean that someone who had paid no tax in a year

could make donations of over £1,800 per year under gift aid. The charity would still be able to reclaim the equivalent of basic rate tax on the grossed up value of the donations. However, we must consider a consequence of that. The amounts that the charity reclaimed would not be tax repaid, but would in effect be a grant from the Exchequer, although the hon. Member for Kingston and Surbiton tried to refer to them as a tax subsidy.

Gift aid is only one of the ways in which the Government support the charity sector. Another important form of support is targeted grants or subsidies for particular sectors. Changing gift aid to a grant scheme would lose its focus and mean that Government would have to revisit other spending priorities within the sector. There is no good reason to extend gift aid further through the new clause.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Could the Minister undertake to do some work in his Department on the administrative costs to the Inland Revenue that would result from the auditing of charities under the provisions? If the cost is significant, might not turning gift aid into a partial grant scheme actually save the Government money?

John Healey (Labour, Wentworth)

The Government and the Revenue in particular work constantly on such costs. That work is going on. As I said, present reliefs in the system provide significant incentives for giving to charity. We are not persuaded that the potential additional incentive of a carry-forward facility is needed, or that the extension of gift aid to allow non-taxpayers to make donations is required. On that basis, I invite the Committee to reject both new clauses if they are not withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I was not convinced by the Minister's response to new clause 12. Adding land has become more relevant. Where gift aid is in equated shares, it would be veritably straightforward to work out how much to give year by year in order to obtain the full income tax deductions. Land and property can be broken down into different parcels, but it is much more legally complex to do so. Clearly, people are not going to give in any one year more than they will receive from income tax offset. Not allowing a carry forward—always less generous than a carry back—will inhibit people who are asset rich but not so rich in income from giving more valuable blocks at one time.

I encountered a specific case of someone who wanted to donate to the London Business School the premises where a venture capital laboratory operated. Both needed the incentive to give property and the carry forward because of the size and value of the gift. If the Government do not address the point in some other way, they will not meet their own objectives. At the end of the day, if nothing is done, people who are asset rich but not so rich in income will not give as much as they would if, as in the States, they could use in one way or the other a full income tax offset.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I was pleased with much of the Minister's reply, particularly the fact that he is open to considering the matter again in future. When he does examine it in more detail, he may well find that the amount of money given by non-taxpayers will be small. Despite the issue of this turning into a partial

tax subsidy, the amounts are absolutely tiny. If the Government were really worried, they could try to limit the provisions either as I propose in new clause 14 or in a slightly lesser way. That might prevent the danger of an explosion in Exchequer costs.

I am grateful for the Minister's response. I hope that the work will be carried out so that we can deal with a future Finance Bill in a way that meets all the

Treasury's concerns while also meeting those of many hon. Members on both sides of the Committee.

Question put and agreed to.

Clause 97 ordered to stand part of the Bill.

Further consideration adjourned.—[Angela Smith.]

Adjourned accordingly at fourteen minutes past Five o'clock till Tuesday 18 June at half-past Ten o'clock.