Orders of the Day — Finance Bill — [1st Allotted Day]

House of Commons, 3 July 2002.

New Clause 20 — Stamp duty and stamp duty reserve tax: power to extend exceptions relating to recognised exchanges

Ruth Kelly (Labour, Bolton West)

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

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following: Government amendments Nos. 19 to 24.

Government new schedule 1—Stamp duty: contracts chargeable as conveyances: supplementary provisions.

Ruth Kelly (Labour, Bolton West)

New clause 20, amendments Nos. 19 to 24 and new schedule 1 all extend existing stamp duty exemptions and reliefs. New clause 20 extends the exemption from stamp duty and stamp duty reserve tax for recognised intermediaries and for stock lending while the amendments and the new schedule ensure that subsale relief applies to contracts brought into charge under clause 114.

At present, the stamp duty and stamp duty reserve tax exemptions for intermediaries and for repurchases and stock lending are available only to European Economic Area exchanges that run regulated markets listed under the investment services directive. That requirement excludes exchanges such as OFEX, which specialises in smaller companies but is not listed under the investment services directive. None the less, OFEX is regulated as a service company by the Financial Services Authority under the Financial Services and Markets Act 2000, and it is a prescribed market under the provisions to discourage market abuse contained in that Act.

The purpose of the stamp duty and stamp duty reserve tax exemptions is to encourage liquidity in well-regulated markets. We have therefore decided to extend the scope of the exemption to exchanges that are prescribed by the Treasury under the provisions to discourage market abuse in the Act. The extension of the exemptions in new clause 20 will help smaller companies that are seeking to raise capital, and investors in such companies. I am sure that the measure will be welcomed by Conservative Members, and I commend the new clause to the House.

New schedule 1 and amendments Nos. 19 to 24 relate to clause 114 and respond to representations made to us about subsale relief. They meet the commitment I made during the Standing Committee debate to table measures to ensure that subsale relief continues to apply to contracts brought into charge under clause 114. The new schedule provides that subsales will continue to receive the benefit of relief where stamp duty has been paid on a contract under the clause and there is either a subsequent subsale or a subsequent conveyance. In those circumstances, stamp duty will be payable only if the subsequent subsale or conveyance is for a higher amount. The end result will be to ensure that the total amount of stamp duty paid for a deal that involves one or more subsales is equivalent to the duty that is payable under the current rules for subsale relief.

As I said in Committee, we did not intend that clause 114 should take away the benefits associated with subsale relief, and the new schedule and consequential amendments that we have tabled put that beyond doubt. There is no similar requirement to amend the clause to ensure that subsale relief continues to apply where no payment has been made on a contract under clause 114. We are content that subsection (2) already provides relief in the situation in which a property is conveyed directly to a sub-purchaser, as we regard that as a conveyance or transfer that is made in conformity with the original contract.

I should mention that the Inland Revenue will shortly publish guidance setting out how both clause 114 and the new schedule will be administered in practice. In many instances, it will be possible to make an application to the Stamp Office to extend the statutory 90-day period. That will apply both to an initial contract and to any subsequent subsales. In that way, stamp duty can be paid in due course on the conveyance in line with the commercial reality of the transaction.

The new schedule addresses the representations that called for subsale relief to continue to be available to contracts brought into charge by clause 114. I therefore commend it and the consequential amendments, Nos. 19 to 24, to the House.

Howard Flight (Conservative, Arundel and South Downs)

We are pleased to welcome the Government's new clause, new schedule and amendments. Both of the territories with which they deal were raised by the Opposition in Committee, as the Minister will recollect. It was unreasonable that market makers on OFEX, which is of growing value to the British economy, did not have the same stamp duty exemption as other exchanges. We are pleased to see that the Government have introduced a belt and braces to ensure that subsale relief will continue, and that it will still apply to the sale of interests in land, which was the specific issue that we raised. We are pleased to see both provisions clearly dealt with in the Bill.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I welcome the new clause and the related new schedule and amendments. I had discussions with OFEX prior to the Standing Committee—OFEX clearly did its job well by speaking to all the parties and the Government. It had a very strong case that there should be equal treatment of exchanges in terms of the granting of stamp duty exemptions. I am delighted that the Government have listened and acted so promptly.

Question put and agreed to.

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

New Clause 21 — Films: restriction of relief to films genuinely intended for theatrical release

Dawn Primarolo (Labour, Bristol South)

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

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following: Government new clause 22—Films: restriction of relief for successive acquisitions of the same film.

Government amendment No. 13.

Dawn Primarolo (Labour, Bristol South)

The amendments respond to a detailed Standing Committee debate on clause 99 and representations made by the British film industry. I promised in Committee that I would reconsider two issues: relief for high-value television drama, and the possibility of introducing transitional relief where filming has already commenced. I explained to the Committee the difficulties of finding a secure means of providing for those two principles while returning the film relief to its original intention.

The new clauses and the amendment make changes to the proposals for film relief. On high-value television drama, as I said in Committee, it was not clear to us from the evidence presented by the industry that television production companies were subject to the same structural problems and risks as those faced by British film makers. We have subsequently received further evidence from the industry, which indicates that, although television production companies often incur some risk of budget shortfall, such risks are generally not comparable to those taken by British film makers.

Making films for the cinema remains a very high-risk venture. The typical British film is still made by a small, one-off production company. The producer has to stitch together a complex web of funding and the company is at considerable risk of not getting the film screened and recovering its costs. Some 60 per cent. of British feature films completed in 2000 have yet to achieve theatrical release.

In contrast, high-value TV drama—drama costing more than £1 million an hour to make—is usually made by major broadcasters and production companies or combinations thereof. We accept that those companies often fund individual productions with some degree of deficit. In other words, they take some risk in making sufficient overseas sales to cover their budget and make profits. However, they are guaranteed television broadcasting and can usually spread the risk over a wider slate of other productions and commercial interests. Classically, such producers have more than one film in production and make their profit from a range of products.

In considering the further evidence, therefore, the Government do not accept that the industry has made a case for suggesting that television drama of any value should benefit from the special incentives intended to counter the very particular problems of making films for the cinema, so we do not intend to make any changes to the Bill in respect of high-value drama.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

Does the Paymaster General accept that that decision could not have come at a worse time for the independent television sector? Commercial revenue is down by 25 per cent. in the wake of problems in the media and advertising, so is this not the worse possible time to edge television production out of support under section 48 of the Finance (No. 2) Act 1997?

Dawn Primarolo (Labour, Bristol South)

Television drama was never intended to be covered by the relief, which was specifically provided for the British film industry, in which there is very high risk. It was intended neither for television drama nor game shows, soaps or any of the other productions in respect of which claims were made. The cost to the Exchequer of the use that was made of the relief, even though everybody in the industry knew that such use was not intended, rose hugely last year and this year. In 2001, the cost was £180 million, and it is estimated to rise to £290 million in this financial year. The cost rose very steeply, very quickly for two reasons. First, there was a time-lag between production completion and claiming the relief and, secondly, there was a piling in of those who wanted to make use of it. Although I accept the hon. Gentleman's point about the difficulties faced by some in the industry, the Government had to make a judgment on whether they should allow a relief that was not intended for TV drama to be used for that purpose and on whether that was a good use of taxpayers' money. For the reasons that I gave on Second Reading and in Committee, we do not accept that that massively growing cost represents a sensible use of taxpayers' money. However, we accept the need to secure the film relief for its intended beneficiaries—British films—and we are trying to achieve that.

I turn to the transitional relief. We were not prepared to cross the boundary to say that the relief is now for films and for high-value drama. If that issue needs to be addressed, there is another place to do that—it is not the purpose of the relief. The Government announced the returning of the relief to its original intended use with effect from 17 April, Budget day. Some companies were in production and therefore faced quite serious financial hardship whereby they had committed to sell the product for a price that assumed a tax relief that was no longer there. Whether they should have done that is another matter. The question then arose, and was discussed in Committee, as to whether the Government had an obligation to say that they had noted the situation and that transitional protection would be given. As I explained in Committee, the problem is that the normal way of trying to determine whether transitional relief is applied is the existence of a contract. No contracts were in place. The whole point of the misuse of the relief—if I may put it that way—was that the contract was always drawn up at the end of the process. The producers took the risk in between times because they wanted to maximise the amount of relief that was ultimately available.

The Government accept that there is an obligation to try to deal with the issue of transitional relief. In Committee, I promised to look again at the practical difficulties of devising a relief that could be targeted to those instances for which we have sympathy. I am pleased to report to the House that, following further constructive discussions with the industry, we have found a way of protecting the position of the vast majority of the projects concerned. New clause 21—which, by virtue of amendment No. 13, will replace clause 99—will protect the position of drama series costing more than £500,000 an hour to make, provided that shooting on the production began by 30 June 2002.

Mark Field (Conservative, Cities of London and Westminster)

The Paymaster General says that the vast majority of projects will be saved by new clause 21. Can she quantify the precise proportion of projects that will be thus saved, given the representations that she has received and the statistical analysis on which she is no doubt relying in making that statement?

Dawn Primarolo (Labour, Bristol South)

Yes, approximately 50 production companies would have experienced severe difficulties. We settled on £500,000 as the break point because I was keen to ensure that the game shows, soaps and other productions that were clearly not even drama did not fall within the scope of the transitional relief. Perhaps hon. Members believe that I have been rather stubborn, but including a transitional relief to protect soaps, however enjoyable they may be, was not the intention.

I understand that we are considering approximately 80 per cent. of the productions of the 50 companies. The problem when we devised the relief was that the costs became astronomical if the transitional relief was extended further down, in a way in which the House did not want. That was also clear in Committee.

The monetary limit excludes continuous productions that are below budget, for example, soaps. We have used the principal photography device to try to identify the contractual start of the drama. It would risk abuse to base the relief entirely on contractual arrangements. It would also be too complicated to operate.

The proposed transitional relief is sensible and a fair solution to a complex matter. It will be simple to administer and will provide certainty. It will not allow further abuse; that is important. It will cost £50 million in 2003–04. Hon. Members must understand the scale of misuse that was beginning to build up. I stress that the relief is transitional and that the commitment will therefore not be continuing.

New clause 21 clarifies whose intention is relevant for determining whether a film is intended for theatrical release. Clause 99 provided that the relevant intention was that of the film maker, as defined in the Films Act 1985 and copyright law. On reflection, that provision would restrict relief beyond our intention. We were therefore happy to adopt the industry's suggestion and change it.

I mentioned new clause 22, which is an anti-avoidance provision, in Committee. Film makers generally have access to relief under section 48 of the Finance (No. 2) Act 1997 via sale and lease-back arrangements with film partnerships. The partnership claims relief on an amount that is equivalent to the total production expenditure on the film and passes part of it on to the film maker. There is nothing wrong with that and the new clause will not affect it.

Let me simplify complex arrangements for hon. Members. The abuse that the new clause tries to prevent consists of the film partnership subsequently selling the film to another partnership for no commercial purpose, solely so that the second partnership can claim relief on the total production expenditure. The chain is far more complicated than that, and means that the first partnership is able to avoid tax liability on disposal. Through a long chain, the ownership of the film is passed on to prevent the application of the final tax liability on disposal. In theory, the chain could go on for ever.

We spotted that possibility early, and realised that such schemes were beginning to be marketed. We have taken the opportunity of today's debate to introduce an anti-avoidance mechanism.

The Government remain committed to supporting the British film industry, recognising the real challenges that British producers face, and the high risks that they take in producing British films. We are also, however, sending a clear, firm message to the industry—it is regrettable that it has to be done through legislation—which is that, when we intend a relief to be used for films, we shall make sure that that is precisely how it is used in the industry.

I hope that the House is satisfied with my explanation of why we are unable to make any concessions or arrangements in relation to high-value television dramas. I also hope that hon. Members will accept that we have made a fair and proportionate response on the question of transitional relief, and that they will agree with the Government that this relief should be returned to the use for which it was originally intended.

John Bercow (Conservative, Buckingham)

I would like briefly to comment on what the Paymaster General has helpfully told us this afternoon. Just before I do, however, and with your indulgence, Mr. Deputy Speaker, I would like to congratulate you—four days in advance of the event—not only on my own behalf but, I hope, on behalf of the House, on the forthcoming 25th anniversary of your election as the Member of Parliament for Saffron Walden, following your four years' service in another constituency. You have given great service to the House and to your constituents, and I am cheekily taking this opportunity to congratulate you before anybody else does so. Moving on—

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. I am extremely grateful to the hon. Gentleman for that completely unexpected intervention. I therefore feel that I can be cheeky enough to congratulate him on his engagement.

John Bercow (Conservative, Buckingham)

Well, this is as good as it gets. All good things come to an end, and I fear that I must enjoy this while it lasts.

Dawn Primarolo (Labour, Bristol South)

If I am allowed to be cheeky just for a moment, Mr. Deputy Speaker, may I say that you must have entered the House at a very young age? May I say, too, how much we value your attention? I also congratulate the hon. Member for Buckingham (Mr. Bercow) on the recent announcement of his engagement. What a lucky man he is! I congratulate him on behalf of all my colleagues, and we look forward to the wedding celebrations—

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. I thank the right hon. Lady, but I think that we had better get back to business.

John Bercow (Conservative, Buckingham)

We had certainly better do that, Mr. Deputy Speaker. I thank you for your kindness, and I warmly thank the Paymaster General for what she has just said.

Mr. Deputy Speaker, I am about to astonish you, the Paymaster General and all right hon. and hon. Members present in the Chamber by making the shortest speech that I have ever made since 1 May 1997, when I was elected. The new clauses give a partial transitional relief to certain TV productions that meet cinematic standards. As the right hon. Lady acknowledged, we raised these issues in Committee, and my hon. Friends tabled two amendments that offered some protection, although it is only fair for me to say that, in financial terms, our proposals were more generous.

Nevertheless, it is encouraging that the Paymaster General has listened. She was slightly stung—perhaps legitimately so—towards the end of our deliberations in Committee, when her word appeared to be questioned. In fact, on one occasion, I think that I appeared to question the reliability of her word. Certainly, in this case, she has come up with the goods. She said that she would look at the matter, and she has done so. We understand the rationale behind the Government's position, and some relief is certainly much to be preferred to none. On that, I will rest my case.

Chris Smith (Labour, Islington South and Finsbury)

In contributing to this brief debate on new clause 21 and other new clauses and amendments, I should perhaps remind the House of the interests that I have recorded in the Register of Members' Interests.

When the Chancellor introduced the relief for investment in the production of films in the UK, in his first Budget five years ago, it was widely and warmly welcomed by the film community. I very much hope that the decisions that the Government have taken over recent months will not endanger the warmth of that reception. In one important respect, the Government have moved to acknowledge some of the difficulties that the decisions announced in the Budget were likely to cause. New clause 21 contains a scheme for transitional relief, which I welcome.

I know that particularly in the independent film and television programme-making sector in the UK, there is a feeling that the Government have recognised the problems of natural justice that arose where commitments had already been entered into, but the relief was on the point of immediate withdrawal. The Government have now tackled that. Yes, they have circumscribed the transitional arrangements, but they have done so in a reasonably fair way, and there will be a welcome across the industry and across the House for the transitional measures included in new clause 21.

However, I am deeply disappointed that the Government did not move on the other issue which they committed themselves to consider—the withdrawal of relief for high value mini-television series, especially those made with inward investment money in the UK. Those are usually major undertakings costing many millions of pounds to make. They have all the features of a movie-making exercise—the amount of money, the scale of the operation, the kind of skills required and the type of film used to make the movie. All are akin to the making of a film for theatrical distribution, rather than to the making of a run-of-the-mill television series.

With those high-value television series, there are major employment and skill benefits for us here in the UK. In the past year, for example, £173 million-worth of inward investment came into the UK to assist the making of such major television series. A large segment of that was the HBO series "Band of Brothers", but there were other major series as well. The employment consequences of that inward investment were substantial, as were the opportunities that were given to people in the UK to learn the process of making film and television programmes, to develop their skills, and to find employment not just directly on the movie sets, but in all the ancillary occupations around the making of television programmes and movies. I fear that as a result of the decisions that the Government have taken, we will lose such opportunities in the future.

When the Government made their announcements in the Budget, they rightly drew attention to the fact that the original intention of the relief was to provide support for the British film industry, and not the British television industry. They stated in their Budget press release that they were trying to

"refocus the reliefs on the original intention of stimulating the production of films in the UK and to promote growth, employment, investment and opportunities in the British film industry".

I would argue that the making of major television series of high value—very often well over £1 million per hour in terms of the cost of making the programme—do precisely that. They are films in all but name.

Undoubtedly, there have been abuses of the system, as the Paymaster General rightly said, in that soaps, game shows and even the weather forecast have been eligible for tax relief. It was not the intention of the original relief to assist such programmes, and it is right that the Government have taken action to restrict relief so as to prevent such abuse. However, I fear that, in seeking to catch the abuses of the system, they are eliminating genuine, major investment in British employment in the making of major series.

My right hon. Friend said that the makers of television mini-series are not subject to the same risk as film makers. Yes, that is true in the majority of cases. Most major mini-series, especially those reliant on inward investment, are made by substantial companies, which usually have some guaranteed outlet for distribution before they start to make the series. If that were the only test to be used, the conclusion that the Government have reached would be the right one. However, that is not the only test to be applied.

I put three arguments to the Government. First, they are in danger of losing substantial amounts of valuable inward investment as a result of this decision. Secondly, the makers of mini-series may not be faced with the same risks as the movie maker, but they have the same temptation to make their mini-series elsewhere around the world where they can get tax relief, be it Canada, Ireland, Australia or anywhere else. That temptation is still there. The removal of the relief in the United Kingdom makes other environments more attractive to the makers of mini-series.

Thirdly, the making of these mini-series has helped to sustain the infrastructure of the film industry, especially in the past year and a half when times have been difficult for parts of the industry. By damaging the television mini-series potential in the UK, the Government are in danger of damaging the film infrastructure. I urge them to reconsider that point.

I realise that, for the time being, the Government's mind is made up. I would warmly welcome a proposal from the Paymaster General that she will come to tomorrow's proceedings in the House with a draft amendment to put this matter right, but I suspect that she will not do that. I am sad about that, but I hope that she will commit herself to reconsidering this question over the next year or so to see how in broad terms the new restricted relief is working in practice, and whether damage to inward investment is occurring as I fear it might. If that is what the analysis shows, she should introduce measures, perhaps in next year's Finance Bill, to put right the damage caused.

I hope that a review of what is happening on this relief will be put in place. I shall listen with great interest to hear whether my right hon. Friend is able to assist in this matter.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I fear that I am about to strike a discordant note in the debate, but before I do, may I join in the congratulations to the hon. Member for Buckingham (Mr. Bercow)? We will be looking at the Conservatives' policy on the married couples allowance to see whether there are any changes in the future. [Interruption.] The Paymaster General has just mentioned the child tax credit as well. Perhaps there are other announcements that I have not yet heard.

On new clause 21, it is always nice when Ministers tell us that they have listened and introduced changes in consultation with the industry. However, bearing in mind the general interests of the taxpayer, I am concerned when the Minister says that the industry is very happy with this measure. I have great respect for the right hon. Member for Islington, South and Finsbury (Mr. Smith), who made a powerful and informed speech. However, many industries and individuals across the country would like a bit of tax relief, given half the chance. Is this tax relief necessary and are the provisions sensible? Let me deal with the details before discussing the principles.

New clause 21 contains an attempt to prevent tax avoidance. As the Minister said, when the relief was originally introduced, it was not intended that it could be abused in the way that it has been. My concern is whether new clause 21 will be sufficient. I predict that we will be back here, perhaps not next year but the year after, discussing other anti-avoidance measures to stop the abuse of this tax relief. That is what happens when reliefs are provided in this way.

Proposed subsection (2)(c) provides that

"a significant proportion of the earnings from the film should be obtained by such exhibition."

Making a judgment will be extremely difficult. When one is making a film and looking at a business case, presumably one looks at the future revenue projections, such as sales of videos, DVDs, television rights, and so on. The business case might not be disclosed to the tax authorities if the film makers wanted to ensure that they obtained the tax relief. There will still be many ways in which to get round these provisions.

I do not know whether this is the first time in tax legislation that the words "quiz show" have appeared. The new clause refers to a range of different types of programmes; it has to be extremely specific to ensure that abuse does not take place. I am worried that the tax commissioners will determine whether something is a film or a quiz show. Will there be case law on that? I can see the policing costs mushrooming in the future. So although the Government are quite right to want to tighten up the provisions, I am worried that they have not gone far enough.

When the Paymaster General was discussing new clause 22 she said, almost as an aside, that although the new clause restricts relief, providing transitional relief in the process, the costs in the coming year will be about £50 million. That is an awful lot of money. The right hon. Lady says that it will not reoccur because it is transitional, but let us imagine what £50 million could have done for an endowment for a higher education institution, providing training and education for the skills that people need in the industry.

We will still be spending significant sums on giving the industry tax relief. The question that the House should really address is whether those sums, directed in a different way, would help the wider industry, the individuals who work in it, and UK plc overall. Should we be giving tax relief to those who are effectively the companies' shareholders, although they may be few in number, rather than investing in the skills and talents of British people who would work in the United Kingdom and abroad? I fear that we may be choosing the wrong method to support the industry by investing in shareholders rather than the skills and talents of British people.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

Does the hon. Gentleman accept the point made by the right hon. Member for Islington, South and Finsbury (Mr. Smith), that the reality of the industry is that there is strong tax competition and there simply will not be a film industry in the UK unless we offer tax relief to support it?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

My concern with that argument is that the logic of it is that the UK Government should respond to every tax relief given by every other country and should engage in a competition of tax reliefs across the world. We live in a global economy and globalisation affects many industries, not just the film industry. If this is the first example of the Government and the country giving in to such pressures, it is a severe mistake. Rather than getting into that battle, we should invest in our people; that is the best way to secure our future.

As the Paymaster General said, one of the reasons why the Government gave the relief was because they believed that the risks faced by the particular type of companies involved were significant and that there were higher risks than in other industries. That creates a disturbing principle. Will the Government give a series of reliefs to industries involved in high risk? Should we have a tax relief for impresarios who take on the risk of a theatre production? Should we have tax reliefs for the risks involved in developing a new record, and for all high-risk industries?

Should we have tax relief for North sea oil companies, who are clearly engaged in risky ventures and do not appear to be enjoying the generosity of the Government tonight? If we are going to give tax relief because an industry happens to be particularly risky—in this case, the film industry—how far do we extend that principle? It is a worrying principle.

Chris Smith (Labour, Islington South and Finsbury)

The hon. Gentleman dismisses the point about global competition far too lightly. This industry is far more mobile than virtually any other industry across the world. The industry is ready to move a major investment in production from one tax environment to another, depending on the relative attractions of those tax environments; much more so than virtually any other industrial activity.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The right hon. Gentleman accentuates my concern. Will we have a new principle, concerning mobility of capital? There are many other industries that, arguably, are even more mobile than the film industry; for example the IT sector—later we will discuss IR35—in which we have seen the mobility of capital and labour. If we decide our tax policy simply and purely on that basis, we will be handing tax relief after tax relief to industry after industry. We have to be exceedingly careful.

The Government were ill-advised to go down this route in the first place. We will be coming back and passing further anti-avoidance legislation for this relief year after year until a future Government have the courage to say that enough is enough. If we are going to promote the industry, we should do so by investing in the training and education of the people who work in it, and not a few shareholders who may not be United Kingdom citizens.

Mark Field (Conservative, Cities of London and Westminster)

I agree in part with some of the well-made points of the hon. Member for Kingston and Surbiton (Mr. Davey), particularly in relation to the worry that we may come back in years to come to try to correct other sorts of tax avoidance. Of course, that is the very nature of the tax advice given in all industries.

I represent the constituency in which the home of the British film industry—Soho—is located. Unlike the right hon. Member for Islington, South and Finsbury (Mr. Smith), I have no other declarations to make. I must confess that the Government have got things just about right. Because such relief was widely regarded as open to abuse, the film business's great worry was that it would be scrapped entirely, in the way that the hon. Member for Kingston and Surbiton suggests it should be in future years.

Iain Luke (Labour, Dundee East)

The hon. Gentleman mentions, as he did in Committee, that the film industry is located in Soho, but does he not accept that many small production companies in Scotland and elsewhere benefit from this relief, given the efforts of the Scottish Executive—and, indeed, of the Welsh Assembly—to encourage filming and film production as a means of stimulating the economy in areas outwith London?

Mark Field (Conservative, Cities of London and Westminster)

I was not trying to claim exclusivity for my constituency, and as we speak, new film businesses are doubtless springing up in every last suburb of Dundee.

As I said, the Government have more or less got the matter right, and the film industry's great worry was that, if widespread abuse were perceived, the relief would be scrapped entirely. I am glad that the Government took on board several of the issues concerning transitional relief that Opposition Members raised in Committee, and I am encouraged by the Paymaster General's comment that roughly 80 per cent. of film projects will be saved under her proposals. I take on board the comments of the right hon. Member for Islington, South and Finsbury, who knows a great deal about this subject. It is clear that the matter will have to be re-examined, and if evidence were to come to light that we were losing significant business, the Government would doubtless want to do so during the course of a future Finance Bill. The original intention was to ring-fence tax benefits for the film industry, and although one might argue that the film industry is part of a global communications world that includes television and the like, that intention has clearly been open to abuse.

I hope that the Paymaster General is comfortable with the amendments. We will have to see how things pan out in future, and I shall continue to look towards the interests of a film industry that, hopefully, will remain strong in the years to come.

Chris Grayling (Conservative, Epsom and Ewell)

I begin by thanking the Paymaster General, and congratulating her on listening to the discussions in Committee, and to the other representations that she received. Through these measures, the Government have addressed the transitional issues in an admirable way, and I am grateful to her for that. I am also particularly grateful for the reference in new clause 21 to documentary programmes in which the dramatic content is substantial. There is an increasingly grey area in production, in terms of programmes with a substantial mix of documentary and drama, so that measure is especially welcome.

However, I retain two anxieties about the provisions in the clause, which were reflected in the comments of the right hon. Member for Islington, South and Finsbury (Mr. Smith). The Paymaster General said that the relief is used by large companies to gain financial benefit, but I remind her of what I said in Committee. It is not simply the majors that invest in and produce such programmes; we also have a thriving independent sector. Television mini-series, major television dramas and cinematic films are often made by the same companies. My anxiety is that we may lose some of the higher-quality international productions. More to the point, we could put our own industry at a disadvantage in competing in substantial markets—in which it is much easier to get major productions off the ground, as in the United States—and in those that offer tax incentives to their own industries.

I accept the Paymaster General's decision, but I ask the Treasury to keep the matter under review, and to be receptive to representations from the industry, in case there is a significant adverse effect on the production of major dramas in the United Kingdom. Should that happen, I hope that she will remain sufficiently open-minded to revisit the issue.

I would be grateful if the Minister would also give a commitment to keep the issue of different distribution channels under review. I mentioned the issue in Committee, because it is far from clear that cinema will continue to be the sole driving outlet for independent producers. I gave the Minister examples of the development of online technology, which may lead to theatrical productions being produced not for the cinema but for an environment in which the same risks are taken—perhaps pay per view or as part of a subscription service, but not the conventional linear television channels that we have known for many years.

I hope that the Minister will keep under consideration the changing nature of outlets and seek to be sure that the restriction of the relief to productions destined for a theatrical release is not stifling creativity in the independent sector. That sector is seeking new outlets and opportunities to develop its talents.

I am grateful to the Minister for what she has done, but I hope that she will keep those two points in mind.

Dawn Primarolo (Labour, Bristol South)

A great misunderstanding has arisen about what we are discussing today. We are discussing a relief that was introduced following the Middleton report on film finance in 1996, which focused especially on the long-standing structural problems of the British film industry. The main relief sought to redress market failure and respond to the fact that British film-makers are denied access to the market and can make films only at considerable risk. That is because of the structure of the industry and, in particular, the distribution of films.

The main relief, which we are attempting to return to its original intention, is intended to stimulate the production of low-budget British films for distribution in the cinema. If the House wishes to have a discussion on whether to have a tax relief for high-value drama on television, that should be a separate discussion. The issue before us is the relief and whether it should be returned to its original intention, as the Government have sought to achieve.

The UK is not unique in using the tax system to overcome those specific problems. Many other countries do the same, including Australia, Canada and Ireland. Increasingly, eastern Europe is introducing similar reliefs for the same reasons.

We do not need to have a long debate about the value of encouraging the British film industry and, especially, the production of low-budget films. The relief was never intended to help to subsidise American companies' inward investment in making dramas for television. The hon. Member for Kingston and Surbiton (Mr. Davey) thought that the £50 million cost of the transition to 2003–04 was enough. However, if the Government had decided to allow relief to the production of high-value television drama, which is what attracts the inward investment, and had put a figure of £1 million per hour on that, the cost to the Exchequer would have been £100 million-plus a year. That investment by the Exchequer for £150 million of inward investment from film production and financing companies would not be a good deal for the taxpayer.

We have to consider whether the United Kingdom has the skills and critical mass to attract the production of those films—we do—and whether we have a structure that helps. We are talking about films costing £15 million. That is what we call a low-budget film. We are trying to encourage those films and help the industry to blossom and grow.

Chris Smith (Labour, Islington South and Finsbury)

Will my right hon. Friend also take into account the economic impact on the Exchequer and our whole economy of the 60,000 working weeks of employment that such investment would generate?

Dawn Primarolo (Labour, Bristol South)

I considered the employment question very carefully, and I have to tell my right hon. Friend that, regrettably, although the relief is claimed on the full production expenditure of those dramas, sometimes as little as 20 per cent. of the expenditure occurs in the United Kingdom. When we look at the industry's structure, we see that people are employed in many different parts of the industry and that they move around. The industry is not wholly dependent on such inward investment.

I also have to tell my right hon. Friend that I have considered the inward investment issues very carefully. I have not ignored them, but the difficulty is that we have to consider whether any contribution would be made to the industry's development if a British company made a television drama costing £800,000 and did not receive the relief, but a high-value drama did—or, vice versa, whether a wholly British company should not receive the relief and, for example, American finance company should.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I congratulate the Paymaster General on not listening to those voices and on saving the taxpayer £100 million. Although the relief will be restricted under the Bill, what will the ongoing cost be to the taxpayer?

Dawn Primarolo (Labour, Bristol South)

I had that figure to hand a moment ago because I thought the hon. Gentleman might ask me about it, but I have put it down. I believe that the ongoing cost of the relief is about £70 million, but I will certainly check that figure, and I will write to the hon. Gentleman if it is incorrect.

This is not a "push me, pull you", "congratulate you on listening, congratulate you on not listening" game. As a Treasury Minister, I have sought to consider the arguments put before us on the relief's importance to the industry, on the impact on low-budget films in particular and on the industry's structure and employment. I have considered whether it was fair to allow the relief to be used in a way that was never intended, whether it represented a good investment for the taxpayer and whether the Government were behaving fairly in relation to taxpayers' legitimate expectations.

The Government's underlying view, which is not shared by the hon. Member for Kingston and Surbiton, is that we are committed to the British film industry, and we intend to continue to be committed to it. However, we will not allow parts of the industry that do not require the relief to get it, thus bringing into disrepute a relief that was intended for small producers, as I have said.

My right hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) and the hon. Members for Epsom and Ewell (Chris Grayling) and for Kingston and Surbiton asked whether the Government would continue to review this issue. First, there is no question but that the Government will keep a very close eye on how this relief is used, the costs, and whether it is stretched beyond what is intended. In response to the hon. Member for Kingston and Surbiton, I am as confident as I can be that the Government have made the necessary corrections, but there are some very clever tax planners, who work very long hours for very high fees, and I am not in a position to say that they will never find a way around this provision. That is a fact of life, and that is true of any relief.

I will confirm, however, that this relief expires in 2005. Clearly, the Government and the House will need to take a view at that stage about whether it is the best way to continue to give encouragement and support to the British film industry. I will also bear in mind the comments of the hon. Member for Epsom and Ewell with regard to the different distribution channels, online developments and so on. To return to my point about £1 million per hour allowing access to relief, when I examined which categories of companies might gain as a result, I saw—looking at the development and movement of the industry—that they were not start-up companies or those to which the hon. Gentleman referred. Those companies are at the other end of the chain, where the low-budget British films are made. We must strike a balance in relation to whom we support in the industry.

I assure the House that I will consider this issue very carefully, now, throughout the rest of the year, and, if I am still the Minister responsible, when it is up for review in 2005—I would have considered it very closely by then. I assure the House that whoever has responsibility for this relief would have done so, and that those issues that hon. Members have raised will be considered in the round. However, I cannot give any hope at this stage—it would mislead the House were I to do so—that we will change our minds on the question of high-value television drama. I do not have a closed mind on the matter, but I have not been convinced, and there is no substantive evidence to justify providing that relief. I could not therefore recommend it to the House.

Question put and agreed to.

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

New Clause 22 — Films: restriction of relief for successive acquisitions of the same film

Clause 99 — Films: restriction of relief to films genuinely intended for theatrical release

New Clause 1 — Supplementary charge in respect of ring fence trades: financing costs

Howard Flight (Conservative, Arundel and South Downs)

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

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following: New clause 2—Termination of supplementary charge—

'. After section 501B of the Taxes Act 1988 insert—

"501BA Termination of supplementary charge

The provisions of section 501A shall cease to have effect for accounting periods beginning on or after 31st March 2005.".'.

New clause 3—Supplementary charge: termination—

'. Section 92 above shall have effect for a terminal straddling period beginning before 31st March 2005 and ending after that date.'.

New clause 4—Ring fence trades: capital allowance supplement—

'. After section 501AA of the Taxes Act 1988 insert—

"501AB Ring fence trades: capital allowance supplement

(1) A company's adjusted ring fence profits for an accounting period shall be subject to a deduction for the capital allowance supplement.

(2) For the purposes of subsection (1) above the capital allowance supplement is the amount A + B where A and B are as calculated below—

(a) A = 10% x C, where C is the written down value at the end of the immediately preceding accounting period of the separate plant and machinery pool of expenditure required pursuant to section 162 of the Capital Allowances Act 2001; and

(b) B = 10% x D, where D is the written down value at the end of the immediately preceding accounting period of expenditure qualifying for allowances under Part 5 of the Capital Allowances Act 2001.

(3) For the purposes of computing the capital allowances supplement only, any expenditure incurred on or after 1st January 2003 qualifying for capital allowances under the provisions of Part 2 or Part 5 of the Capital Allowances Act 2001 shall be ignored.

(4) For the avoidance of doubt, the capital allowances supplement for an accounting period shall not reduce the amount of unrelieved qualifying expenditure carried forward into the following accounting period for the purposes of any provision in the Capital Allowances Act 2001.

(5) Where an accounting period is less than twelve months the capital allowances supplement shall be restricted to the amount given by the following formula—

(A + B) x E/365

where E is the number of days in the accounting period.

(6) The provisions of this section shall have effect for the company's first accounting period ending on or after 1st January 2003.".'.

Amendment No. 42, in clause 63, page 41, leave out lines 13 to 27.

Amendment No. 43, in clause 91, page 64, leave out from beginning of line 34 to end of line 33 on page 68.

Amendment No. 44, in schedule 21, page 252, leave out from beginning of line 5 to end of line 30 on page 257.

Howard Flight (Conservative, Arundel and South Downs)

I add my congratulations on your coming silver celebration, Mr. Deputy Speaker, although I seem to remember that you were first elected to the House nearly 32 years ago.

These four new clauses, and the Scottish nationalist amendments, are self-evidently about what we view as the Government's unwise and excessive taxation of the North sea industry. The Scottish nationalist amendments simply propose to reverse both the taxation and the new capital allowances. Our new clauses, which are supported by the Liberal Democrats and the Scottish nationalists, seek to alleviate the effect of those measures.

Somewhat typically, when the Chancellor of the Exchequer responded to my hon. Friend the Member for Epsom and Ewell (Chris Grayling) on 20 June, he candidly displayed an arrogant and unwise attitude to this issue. He commented that he hoped that Members would not fall for the industry's propaganda and he argued that the 100 per cent. investment allowance would

"make it more profitable to develop new oil fields".

That is absolutely not the case for the new operators that have no profits. He also argued that the British tax regime would be

"more favourable than that of other countries."—[Official Report, 20 June 2002; Vol. 387, c. 400.]

As I will show later, that is also not the case.

I respect the noble efforts of the Paymaster General to put the Government's economic case, but the essence of our case is that these taxes will cause serious damage to North sea oil recovery in the coming years. As everyone knows, the North sea field is at a very mature phase, and most subsequent recovery will depend on smaller, newer companies. Many of them will not have the profits to qualify for the 100 per cent. allowance.

Have the Government even considered the fact that the projected average fall in North sea oil production is 1.5 billion barrels a day, which is the equivalent of a cost of £12 billion to the current account deficit, which is already at the highest real figure on record? According to the Government's own assessment, it is calculated that the measures will lose 50,000 jobs by 2010 and £10 billion- worth of capital investment. If we add up the loss of income tax and national insurance revenues and the potential welfare costs, it is unlikely that the Government will see more than half the tax take projected for the measures.

The Government were extremely unwise to act in bad faith in relation to the substantial £4 billion—a figure much higher than in previous years—of new investment that resulted from the PILOT collaboration. The former Secretary of State for Trade and Industry—yet again, the right hon. Member for Tyneside, North (Mr. Byers)—assured investors of the future stability of the tax regime that prevailed. However, investors have been zapped with an extra 30 per cent. of taxation without even being able to benefit from the capital allowances on the new investment that they have made.

The Government try to argue that they have warned the industry since 1997 that they were going to raise taxation, so I place the Chancellor of the Exchequer's remarks on the record again. He said:

"It has been put to me that the North sea oil companies earning higher profits from higher oil prices should be subject to special taxes, but I can tell the House that I am determined not to make short-term decisions based on short-term factors. The key issue is the level of long-term investment in the North sea. This will be the approach that guides tax decisions in future."—[Official Report, 8 November 2000; Vol. 356, c. 317.]

We would argue that the Chancellor has stood his promise on its head and introduced tax measures that will clearly reduce investment in the North sea.

The Government have based their arguments for extra tax on the excessive returns that have been made, and they have quoted the return of 34 per cent. achieved in 2000 at the top of the cycle. The industry has responded by quoting returns on investment since 1996, and those figures are most relevant for the future. They show a return of only 7.2 per cent., reducing to 5.9 per cent. after tax. In the whole decade of the 1990s, the average return was 14 per cent. before the new tax was introduced.

I turn to the fundamental reason why it is economically unwise to increase North sea taxation at this point in the oil price cycle given that the North sea field is in its mature phase. Taxation of oil and gas provinces needs to reflect the relevant basin's geological realities as well as their maturity. The average UK continental shelf discoveries now contain only 25 million to 30 million barrels of oil equivalent. By comparison, the figure is 100 million barrels in Norway, 150 million in the gulf of Mexico and 350 million in Angola. The UK continental shelf is virtually the most expensive province in the world in which to engage in activity. Development costs average $4 a barrel; operating costs add another $4 a barrel; and exploration and appraisal costs add a further $4 a barrel.

According to the recent Wood Mackenzie study, of 59 recent developments, only one province—the east coast of Canada—is more expensive than the UK continental shelf. The study ranked the UK continental shelf as 31st out of 51 countries in terms of exploration attractiveness and concluded categorically that there was no room to extract additional fiscal rent from the UK continental shelf.

Those findings reflect the fact that the North sea field has entered its most difficult phase as it declines and enters maturity. Average discovery sites are likely to be much smaller than in the past, and discoveries will be more difficult to make and more expensive to develop. In short, North sea activity is far riskier than it has been and the fiscal regime needs to reflect that fact and compensate for the high costs and geological realities. It should not add extra penalties in the way that it is now doing.

The Government will argue that some UK continental shelf fields have been very profitable in the past and have been highly taxed. However, in reality, it was only the hope of discovering such profitable fields that provided the incentive to future activity and to overcoming technical barriers. Indeed, there has been far greater extraction from the North sea than was previously predicted. There is little hope of discovering such profitable fields in the future if success is to be excessively penalised on the rare occasions that a profitable field is discovered.

Some have argued that our fiscal regime is generous. However, the facts, when properly analysed, do not support that view. Allowance must be made for geological realities and, even before the Budget, taxes imposed on the UK continental shelf ranged from 30 to 69 per cent. depending on a field's age and profitability. Those taxes have now gone up to between 40 and 74 per cent. They are high tax rates for a province that has high costs, poor prospects and small fields.

The Government have relied on analysis that assumes much larger fields than are found in the North sea and lower development costs. If allowances are made for the differences, the British tax regime is considerably less attractive than appears on a shallow analysis. Other basins in other countries are more attractive. For example—comparing like with like—the top rate of tax in the gulf of Mexico is 44 per cent., in Norway 78 per cent. and in Angola 68 per cent. Those are some of the UK continental shelf's main competitors, so the Chancellor's comment that the UK has one of the most attractive tax regimes does not stand up.

Chris Grayling (Conservative, Epsom and Ewell)

Does my hon. Friend agree that one of the most fascinating elements of the Chancellor's reply to my question of 20 June was that, although he said that he was creating a wonderfully attractive environment in the North sea, he admitted that he was taking £500 million out of the industry? It beggars belief that any Chancellor of the Exchequer could believe that one could take £500 million out of an industry and benefit it.

Howard Flight (Conservative, Arundel and South Downs)

I thank my hon. Friend for making that point clear. However, the Chancellor was wrong even on this issue. The leading expert, Professor Kemp, has estimated an additional tax bill of £7.6 billion for the industry as a whole up to 2010. That is considerably more than the £500 million per annum quoted. I repeat that although the tax revenues are greater than the Government are letting on, the tax losses will be significant as a result.

New clause 1 would allow the financing costs incurred for the purpose of the ring-fenced trade to be deducted to reduce the profits on which the supplementary charge is levied. Hon. Members will know that the supplementary charge of 10 per cent. on the profits of UK companies arising from oil and gas extractions is levied without deducting the costs of financing the trade. In addition to being charged on profits that do not reflect the commercial reality of the businesses, because companies have to finance the investment in the expensive plant and machinery required for oil and gas extraction, the supplementary charge denies a deduction for financing costs. That will make the UK much less attractive, especially to overseas investors and smaller investors who are crucial to further exploitation of the North sea.

For overseas-based businesses, the interaction of UK and overseas tax on profits will be such that the United States of America and France in particular will allow only their residents to credit the foreign tax paid if financing costs have been deducted when calculating taxable profits. In other words, the effect of the financing costs not being tax deductible and the newly defined additional taxation not being a straightforward corporation tax will be the loss of double taxation treaty benefits.

No doubt the Government will respond by saying, "Hard luck", because they think that the interest deductions from which the industry has benefited have been too great. No doubt they also believe that although the costs will not qualify for double taxation, they might qualify as an expense. Those are not the fundamental issues at stake on the double taxation arrangements, however. The Revenue has received no response from the IRS to its inquiry about the new charge. However, the tax counsel to Mobil Oil advised definitively that the result will be unfavourable and the new cost will not be allowed.

Malcolm Bruce (Liberal Democrat, Gordon)

The hon. Gentleman makes an important point. Does he find it extraordinary that the Government are so willing to acknowledge the problem that they have written to the IRS, the tax authority in the United States, asking it to consider reviewing its tax policies as a result of changes to UK tax? Do they really think that that is likely? How would the Inland Revenue respond to America trying to change our taxes?

Howard Flight (Conservative, Arundel and South Downs)

I thank the hon. Gentleman for his common-sense comment. It underlines the fact that the costs will not be allowable under double taxation treaties and, according to all the tax advice that I have received, I am afraid that the Government and the Revenue will get a response from the IRS to that end.

New clauses 2 and 3 address a separate territory. They would bring the supplementary charge to an end by 31 March 2005 and negate it if the price of oil falls significantly in the meantime. That is designed to give the industry an idea of how long the windfall tax will apply and could help to encourage investment today in fields that are expected to be profitable in a few years' time.

The interaction between accounting requirements and tax arrangements is an important consideration. The key result would be that the 2002 earnings of oil companies will not be hit as dramatically. I am sure the Government would not welcome further downward spirals in share prices if pension schemes are unable to pay the pensions to which they are committed when the measure makes its way through to oil prices. The Government's response is likely to be that they want a stable regime, but it is self-evidently a disaster to have the stable regime that this Finance Bill institutes if it is no good for the industry, the country or our external overseas accounting position.

New clause 4 would allow accelerated capital allowances on new assets used in a ring-fenced trade. As we debated in Standing Committee, we want to take a cash flow advantage approach, which does not reduce the total tax payable over the life of the project or improve accounting profits. The new clause would allow an extra 10 per cent. deduction over and above normal capital allowances in 2003. It would apply only to assets acquired before 1 January 2003 on which normal non-accelerated allowances were claimed.

We want to reduce some of the bad faith evidenced in the PILOT encouragements. The Government have been stonewalling by denying that there is bad faith. For the past 20 years, transitional arrangements have been available when significant changes have been made to the tax regime. If the Government argue that there is the odd historic case of a retroactive tax, measures have been designed to offset those. The key problem for the oil extraction industry is that it perceives two major risks: first, the operating risk of the oil price; and, secondly, the operating risk of a Government who have a regime that lacks fiscal integrity in terms of what the future will hold. If the risks increase, the returns have to increase to justify the same investment by having a higher risk:reward ratio.

I pay tribute to the efforts of the hon. Member for Waveney (Mr. Blizzard) for his attempts to get the Government to see sense. I am aware that Scottish MPs have been involved in significant lobbying behind the scenes, but they have been feeble in not defending their homeland in public. The industry employs 6 per cent. of the labour force in Scotland.

Alex Salmond (Scottish National Party, Banff and Buchan)

The hon. Gentleman puts at risk his cross-party support. I take it that when he says "feeble" he is referring to Scottish Labour MPs.

Howard Flight (Conservative, Arundel and South Downs)

Indeed I was. I thought I made that clear. However, I am sure that anyone who appreciates what is at risk would have wanted more Scottish Labour MPs to join the Scottish nationalist MPs, the Liberal MPs and Conservative MPs in speaking out against the wanton damage that will be caused, and the wanton reduction of the prospects for recovery in the North sea. No doubt they would also have wanted them to speak out against measures that will reduce investments substantially, destroy jobs and boost an already vulnerable current account deficit to the extent of £12 billion per annum.

Bob Blizzard (Labour, Waveney)

As I said on Second Reading, I very much welcome efforts to raise more money for the NHS, but I am concerned about the Bill's effect on future investment in the United Kingdom oil and gas industry. That is important not only to local economies in many parts of the country, such as my own, but to the country generally, because investment in the industry has amounted to about 16 per cent. of total industrial investment over many years, which means that it has generated a lot of employment.

Having listened to debates on this subject throughout the Bill's proceedings, I still find it hard to see how a big increase in tax cannot have some effect on that investment, whether it be a reduction in the cash flow from the existing fields which is available for reinvestment or an impact on the psychology of investors who have just taken a hit, perhaps shaking confidence in investment.

Behind the measure lies the argument that the oil and gas companies make big profits. They certainly do in bumper years such as 2001, when we had high oil prices, but they do not make big profits all the time, as we can see by looking at returns over the full cycle or over the full lifetime of individual projects. The return on capital employed over those periods is not greatly different from that in other industries.

The hon. Member for Arundel and South Downs (Mr. Flight) quoted a figure of 14 per cent. over time, before corporation tax is taken into account. That compares with returns of between 11 and 13 per cent. for other companies in non-financial sectors over, say, a decade. That has to be the case, or everybody investing in stocks and shares would just plunge all their money into oil and gas. It would be the only game in town and those companies would constantly be at the top of the stock market. No one would need to engage a financial adviser.

Oil exploration and production is a risky business, and companies find many expensive dry wells or uneconomic fields in an area before they discover the successful ones that make money. Fiscal stability is therefore an important factor when companies are making plans, and it has been seen as one of this country's great strengths. As we know, the industry is arguing that that fiscal stability is now at an end, so it has to factor a fiscal risk into its calculations for future investment, which adds to the overall risk.

The Treasury argues that fiscal stability has now been achieved and that the review started in 1997 and halted in 1998 has now concluded. The essence of its case is the argument that although it is unquestionably taking more money out of existing developments, the fiscal position for new developments is improved by the combination of 100 per cent. first-year capital allowances and the supplementary charge. The industry's figures, which I have seen and which have, I know, been presented to the Treasury, also show that to be the case, on paper. The argument is about whether the reality is more complicated.

The industry's figures also show, however, what happens if fiscal risk is factored in and corporation tax of 40 or 50 per cent. applies. In that analysis, the fields do not work at all. The Treasury says that it would never set the tax at 50 per cent. because that would kill everything off, but at 40 per cent, the fields still work.

Notwithstanding that argument, we have to consider now the key question of how we can maximise investment in what will clearly be a new regime of a 10 per cent. supplementary charge and 100 per cent. capital allowances. The key issue, which is the subject of one of the amendments, is financing costs. We know that, over the years, companies have normally been allowed to offset them against corporation tax, but it is proposed to change that so that they will not be creditable against the supplementary charge. That is absolutely relevant to new development, and we have to be extremely careful that it does not act as a disincentive that will undermine the incentive given by the Treasury in the 100 per cent. capital allowances.

I have been asking why the measure is necessary. The answer given in the Committee of the whole House was that it is important if the supplementary charge is to work; otherwise there would be scope for companies to manipulate their financing costs so that they could offset more than is justified against the new charge. The industry maintains that that is not possible under the existing regulations and the close scrutiny by the Revenue.

Will the Financial Secretary tell us exactly what loopholes the measure is designed to plug, and will she deposit that information in the Library? I realise that it is not normally the business of the Treasury to broadcast the existence of loopholes, but if the Government are introducing measures to plug loopholes, it would be helpful to know what they are. We would then be able to see clearly whether there is a need for a measure preventing financing costs from being offset against the supplementary charge.

I fear that if we have got this wrong, it will create unnecessary problems, even within the new regime, for certain types of company whose continued investment in the North sea is desperately needed. The first type is smaller companies, for which financing costs assume a greater proportion of their costs. They have a vital part to play in the development of the North sea. The experience in other mature provinces around the world is that smaller independent companies—the experts who get stuck in—are the appropriate ones to go after smaller reserves and make money by extracting them. We want to ensure that those small companies, which the Government accept have a part to play in future, are not put off by the measure.

That is particularly the case with new entrants. We have managed to attract 23 new entrants to the North sea since 1997. We know that they will not get the real benefit of the 100 per cent. capital allowances because they have no profit in the first year against which to offset them. I know that they can roll them over, but they would then have, for example, 25 per cent. allowances for four years, which is what they already have. Financing costs are an important consideration if we are to encourage new entrants.

Another reason for considering the measure carefully concerns the origin of much of the investment—parent companies or venture capitalists in the USA. There are issues of double taxation which are not yet clear. I know that the Government have written to the IRS in the hope of clearing up the matter through double taxation treaty agreements. I fear, however, that until that agreement is confirmed by the IRS, investors will not go ahead in case they are caught by the measure. Furthermore, I am told that if the financing costs are not creditable but companies take them as an expense, the measure will still make a difference of about 6.5 per cent., which might make the difference between investing here or in another country.

I ask Ministers to try to find an alternative way of protecting the supplementary charge—the Treasury introduced it, so it will want to protect it—that does not have the negative effects on smaller companies and new entrants that I have described. In addition, it would be helpful if the measure and the reasons why it is needed were set out clearly for us to see.

At the core of the issue are the integrated companies that have both upstream and downstream activities, and the fear that money might be moved between the two spheres of activity. However, new entrants, smaller companies and independents are not downstream companies; they are only upstream companies. If we carry on as we are, those companies will be hit by a measure that is presumably not designed to hit them, so we must make sure that it does not. Those who have been bitten by the supplementary charge might—rightly or wrongly; it depends on what view one takes of the argument about fiscal stability—be shy of further investment, but we cannot afford to deter new and smaller companies.

Royalty is part of the package, and it is important that we proceed quickly with the consultation that will lead to its abolition. Everyone seems to agree that it need not take long as it is a technical consultation, not a full public consultation. I worry that the longer we leave the position on royalty unattended, the longer we will hold back the investment we need, even under the new regime. It will therefore be helpful if the Minister says something about royalty tonight and confirms that once the consultation is over, the Chancellor can abolish royalty without further legislation, and can fix whatever operative date he wants—even today, if he were so minded.

Malcolm Bruce (Liberal Democrat, Gordon)

I am pleased to follow the hon. Member for Waveney (Mr. Blizzard), who made a characteristically well-argued and consistent contribution. He spoke about real issues that are clearly affecting the industry. Although the Government have to some extent acknowledged those issues, they have not yet answered them. All of the participants in the debate would like to know how the Government can acknowledge the problems, but leave them unaddressed.

The impact of the changes is real and perceptible, not theoretical. As I said in the Committee of the whole House, I have been indirectly or closely involved with the industry for more than 30 years. Thirty years ago, oil and gas was a boom industry—a crazy industry. Everyone was scrambling to get the stuff out and money was almost no object. There was an OPEC-induced oil crisis and the Government were interested only in getting the oil out and resolving the balance of payments position; they would worry about the regime later.

Now, the position is completely different. The North sea is, in the precise term used by the industry, a mature province, which means that marginal rates of return are being squeezed and the risks are higher in a high-cost area. The Government appear to have picked precisely that moment to create a new pressure on an industry which already has enough pressures on it simply because of where it operates. I urge the Government not to discount the actual and the psychological effects of the change.

The industry believed that it had established a relationship with the Government that was based on a recognition that it should be treated as an industry, not merely a source of revenue, and provided with a regime that created a climate conducive to long-term investment. The least it should have been able to expect is not that there would never be any tax changes, but that changes would not be introduced without proper consultation, transitional arrangements, and a willingness to hear the industry's explanations of how Government proposals might adversely affect investment. In reality, however, the industry has had to make that case after the Government have made their decision. In the past five years, the industry has invested £23 billion on the presumption that either the existing regime would continue, or any change would, first, be negotiated, and, secondly, allow for transition. Companies that have made investments on the basis of the pre-Budget regime are understandably extremely miffed that they have been treated in such a fashion.

Companies that made calculations based on assumptions about the oil price that were not borne out have also been hit. The Government can say, perfectly reasonably, that the risk in the industry is that the oil price fluctuates; the industry has to calculate that fluctuation and build it into its risk assessments. However, I should have thought the Government understood that an industry that has to deal with an extremely volatile fluctuating commodity price could do without a similarly volatile fluctuating fiscal regime. The combination of those two factors substantially increases risk.

The Government seriously underestimate the damage that is being done to this country's reputation for promoting inward investment and industry. The new tax regime wholly contradicts the very rhetoric that the Chancellor placed at the heart of his Budget. He expressed his desire to create a stable, predictable corporation tax regime for business in general in the United Kingdom, so as to make the UK an investor-friendly, business-friendly economy. If that is what he wants for every other sector of the economy, why has the oil industry been singled out as not entitled to benefit? We can legitimately seek an answer to that question.

The new clauses deal with the specific concerns that have been identified by the industry as "addressable". The industry wants the Government to rethink its approach to those matters. The hon. Member for Waveney stated well the Government's argument that they cannot allow financing costs to be offset against the windfall 10 per cent. The implication of that argument is that they do not trust the industry. They will allow the industry to fiddle the other 30 per cent., but not the 10 per cent. margin. However, as the hon. Gentleman said, the Inland Revenue is perfectly well aware of the regulations, so it would be interesting to hear precisely how much abuse the Government think is going on. Much more to the point, many of the smaller companies, by definition, finance their projects by going to the market to secure finance. They have real, not theoretical, financing costs which they assumed they would be allowed to offset in a proper way that, in the case of American and French companies, conformed to double taxation agreements.

In the previous debate, the Government acknowledged that problem and said that they have taken up the matter with the American tax authority, the IRS. As I said in my intervention on the hon. Member for Arundel and South Downs (Mr. Flight), if the Government admit that the problem is severe enough for them to ask the American IRS to consider changing the regime, are they prepared to revisit the issue if the IRS declines to do so? Alternatively—or additionally—are the Government prepared at least to engage, or to allow the Inland Revenue to engage, in negotiations with individual companies that can demonstrate that the offset is crucial to the viability of their project and that the project will not happen without it? That would reassure us—and the Department of Trade and Industry—that the Government genuinely want to ensure that they do not seriously reduce the amount of investment that would otherwise take place.

I suspect that here we have a point of argument between Ministers, the industry and the Opposition. We genuinely believe that some investment—possibly a significant amount—is at risk and may not happen. The Government do not appear to accept that argument. At the heart of our concern is our genuine belief that investment will be prejudiced, further jobs will be lost, and some oil and gas that would have been recovered will not be recovered, at least in the short run, and possibly not at all. I therefore ask Ministers whether they are prepared to consider case-by-case representations rather than merely shut the door.

Ministers have stressed that there is a package. Part of it is the capital uplift, which is a contribution for some companies, but not all, and does not quite offset the windfall. The other part is the abolition of royalties. I am told that £2 billion of investment is proposed in respect of fields that are paying royalties, but are clearly on hold. No company is going to commit itself to investing in a royalty-paying field until it knows whether, when and how the royalties will be abolished, so the £2 billion of investment is on hold until the consultation paper is published, all the consultation is concluded and the Chancellor makes his decision. I hope that Ministers will understand that speed is of the essence if that £2 billion is not to be lost or its investment is not to be unduly delayed.

The proposal for a three-year limit has genuine merit. First, it would close off what Professor Kemp has identified as the very high potential return to Government and cost to the industry in the later years, which are difficult to predict at this stage. As a number of industry representatives have said, such provision would enable them to say that the regime will either end or be continued, but only following further debate and consultation. There is genuine merit in the proposal, especially if the new arrangement is a windfall tax that is being imposed because of the high oil price. What the Government have said about that is contradictory. Is this a windfall tax or a permanent increase that makes the tax regime less attractive at a time when the industry is having more difficulty squeezing out marginal oil at higher costs and greater risk? Now does not seem the right moment to make a permanent change of that sort.

Chris Grayling (Conservative, Epsom and Ewell)

Like me, the hon. Gentleman will have seen the many references made by commentators in recent weeks to the potential problems that the Chancellor still faces in raising revenue for the latter years of this Parliament. Clearly, any fall in growth rates will also have implications for the Chancellor. Does he share my opinion that it is extremely unlikely that the tax is a windfall tax, as we cannot be sure that the Chancellor will be able to afford to give the money back?

Malcolm Bruce (Liberal Democrat, Gordon)

That is a fair point, but Chancellors always have to consider the dynamic of their tax changes. I have drawn the following analogy before. When the previous Government's plans to introduce VAT on fuel were frustrated by the will of the House, they decided that they would further tax whisky, perhaps as a slightly spiteful revenge. As a result, demand for whisky fell so much that the following year, their net revenue from the spirits industry was reduced. The hon. Gentleman puts his finger on an important point: if the Government try to squeeze more taxes out of an industry that is marginal and mature when the economy is struggling, their actions will become almost counter-productive. They will depress the industry, the investment and the profits that they are trying to tax, and finish up promoting reduced revenue. That is a genuine issue that the Treasury will, of course, find impossible to quantify until after the event. Surely, it must bear that in mind.

It is certainly not possible to look at the North sea and say that the industry is booming and therefore deserves to have some money clawed back from its windfall profits. I understand that 11 rigs are currently stacked in the Moray firth. It is forecast that by the autumn, that number will have risen to 18. Nobody is suggesting that that is a direct result of the tax changes, but it is nevertheless an indication of reducing activity, and the tax change that we are considering will not stimulate new activity.

It is interesting to note two points made in the briefing circulated by BP. First, although the 100 per cent. capital uplift effectively reduces the tax burden in the first year, the whole package increases the tax take and reduces the return over the lifetime of the field. The Government know perfectly well that any analyst will consider the life of an investment and not only its first year. Although a contribution is made to that overall calculation, the net effect is negative.

BP, which is the biggest operator and UK company, is also saying that the North sea taxation regime now needs to be changed further. The industry is therefore saying not only that it needs concessions on the financing costs and the immediate abolition of royalties, but that further tax inducements may be necessary to ensure that it maintains its long-term commitment. It is often said, and it bears repeating, that the oil industry is a worldwide industry and that the North sea and the UK continental shelf are by no means the most attractive prospect for it. All the major companies operate worldwide and it is not that difficult for them to switch their investment to more attractive areas.

This debate started on the day of the Budget announcement, was conducted in Committee on the Floor of the House and has returned several weeks later, but a number of concerns remain on which the Government have acknowledged that there is a problem, but they are not prepared to address it. I ask Ministers to acknowledge the concerns that are being expressed by the industry, Opposition Members and, indeed, some Labour Members on the basis of a genuine commitment to ensuring that the North sea continues to be a major source of investment, employment and technical innovation. We are concerned that the Government, through the Budget, are encouraging the industry to take much of that activity outside the United Kingdom, which will damage employment, investment and technical innovation in the UK economy. I cannot believe that that was the Government's intention, but I urge them to recognise that it may be the consequence of what they are doing.

Frank Doran (Labour, Aberdeen Central)

I must confess to being one of those feeble Scottish Members of Parliament who have been doing all their lobbying behind the scenes. The comment that was made from the Opposition Front Bench either shows just how long it is since the hon. Member for Arundel and South Downs (Mr. Flight) was in government or, as I cannot recall exactly when he came into the House, demonstrates that he has not experienced government at all. Full-frontal attack is not always the best way of dealing with issues. The ability to sit down and talk directly to Ministers is more important, and I am very pleased about the access that Ministers at every level have provided for Scottish Members who are interested in discussing the issue. [Interruption.] The hon. Member for Gordon (Malcolm Bruce) comments from a sedentary position, but I can excuse him, as he has never experienced government and is never likely to do so, so such a way of operating will be completely alien to him.

The presentations from those on both Opposition Front Benches reveal one of the difficulties about this debate. On one side, it is clear—I am very clear about this—that the complaints made by the oil industry are wholly expected. I have listened carefully to the arguments and have engaged in debate with those involved, who are doing what is appropriate for them to do. However, the doom and gloom scenario does not reflect the debate in the industry, which is not unified on the issue. Certain companies, including one of the major ones, have been pressing the case very hard directly and through the United Kingdom Offshore Operators Association, but there is a much livelier debate below the surface.

The discussion is about the balance in the budgetary measures that affect the North sea. It is often conveniently ignored in public statements that the measure is not only about extra tax, although that is important, but about the balancing measure of the tax reliefs that have been provided. Yes, there are concerns about how those provisions will operate in practice, but the bulk of the industry is sitting down to see how particular companies will be affected by the new taxes. It is important to get that on record. The oil industry has a diversity of views on this as on every subject, but the only views that we are hearing at the moment are those of the Private Frazers—the doom and gloom merchants.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

Does the hon. Gentleman recognise that some of the people expressing doom and gloom might be those who saw the royalties relief that was promised by the Chancellor as an important part of the upside? Even now, as we reach the final stages of the Finance Bill, the consultation paper on the abolition of royalties has yet to be published. Does the hon. Gentleman think that if the Chancellor is serious about that commitment, he should ensure that the paper is published?

Frank Doran (Labour, Aberdeen Central)

I shall make my own contribution to that debate shortly. The hon. Gentleman makes an important point, but I may express it slightly differently.

In their new clauses, the Conservatives are trimming around the edges somewhat in that there is no direct attack on the 10 per cent. increase. The SNP amendments would simply wipe everything out to return to the status quo.

The allegation that I have heard most frequently in every debate on this matter concerns the stability of the tax regime, and Conservative Members mentioned it again today. In fact, the hon. Member for Arundel and South Downs went a lot further in his comments. He said, to quote him verbatim, "The UK tax regime lacks fiscal integrity as a result of this Budget measure." That is an extreme statement, and I find it difficult to see how he has reached that judgment.

Howard Flight (Conservative, Arundel and South Downs)

rose—

Frank Doran (Labour, Aberdeen Central)

The hon. Gentleman is anxious to leap to his feet. Before he does so, it is important to say that although we need to have a debate, it must be conducted in a measured way, and his comment was a long way from reality.

Howard Flight (Conservative, Arundel and South Downs)

With respect, I think that I made the point straightforwardly. In the past, Governments have always observed the principle that if the tax regime is changed, it does not affect existing arrangements. Even in the one or two instances where that was not so, compensation was made in other ways. That is not the case as regards this provision, which is why I, and many in the industry, believe that it does not have tax integrity. Moreover, it follows the Secretary of State for Trade and Industry having encouraged substantially higher levels of investment through the PILOT scheme and having implied that the existing tax regime was going to continue. It is a pity if the hon. Gentleman—

Michael Lord (Deputy Speaker, Central Suffolk and North Ipswich)

Order. The hon. Gentleman's intervention is starting to become a speech.

Frank Doran (Labour, Aberdeen Central)

I agree with you, Mr. Deputy Speaker. Methinks the hon. Gentleman protests overmuch. I shall remind him of some history. He may not have been around at the time of the 1993 Budget, when the Conservative Government did exactly what he is accusing this Government of doing. They introduced tactics of which the industry—at least, the bulk of the industry—had no advance warning. One company—I think that it was Texaco—signed a deal on the day before the Budget. On the following day, as a result of the Chancellor's statement, that deal lost it several million pounds. The company did not anticipate what was going to be in the Budget, and there was no consultation. That is exactly what the hon. Member for Arundel and South Downs is accusing the Government of, yet nobody compensated Texaco.

Chris Grayling (Conservative, Epsom and Ewell)

I, too, had not entered the House in 1993. Did the hon. Gentleman oppose the changes in the 1993 Budget, and, if so, how can he support those in this Budget?

Frank Doran (Labour, Aberdeen Central)

Unfortunately, due to a little disagreement with the electorate, I was not here in 1993 either. However, I was acting as a consultant to one or two of the people involved and contributed to the discussions.

On stability, it is difficult to know what the oil industry wants. I understand why PILOT has been mentioned, but PILOT has a completely different focus. The Chancellor's words were clear. In 1998, when he dropped the review of the oil tax regime, he made it clear to the industry that the decision to do so was a decision for the duration of the Parliament. He made it equally clear in this year's Budget that he was giving us a tax regime for the oil industry for this Parliament. I know of no other area of the economy with that level of stability—a guarantee that that is it for the entire Parliament.

There are three high watermarks in the history of oil taxation. In 1975, the then Labour Government established the modern petroleum tax regime with the introduction of royalties, petroleum revenue tax, and so on. That, with some changes around the edges, remained the position until 1993. This year, a further substantial change is being introduced. That is a considerable degree of stability for any industry, and it should be noted and recorded.

Alex Salmond (Scottish National Party, Banff and Buchan)

The hon. Gentleman is being somewhat disingenuous. He may recall that in a Scottish Grand Committee last year, the hon. Member for Aberdeen, South (Miss Begg) said:

"The oil industry in the North sea is doing so well because this Government have provided a stable fiscal regime. When they came to power, my right hon. Friend the Chancellor considered the fiscal regime and took advice from the industry, and those of us in the north-east who advocated leaving well alone."—[Official Report, Scottish Grand Committee, 28 March 2001; c. 26.]

Did the hon. Gentleman agree with his hon. Friend, or has he since changed his mind?

Frank Doran (Labour, Aberdeen Central)

I am not sure what the hon. Gentleman's question is. He is right that in 1997 and 1998 I lobbied the Chancellor—not publicly, but privately—to leave well alone. As the hon. Gentleman well knows, at that time, the industry was experiencing a sustained period of low oil prices. This year, the Chancellor is reacting to a sustained period of nearly three years of high oil prices.

Alex Salmond (Scottish National Party, Banff and Buchan)

indicated dissent

Frank Doran (Labour, Aberdeen Central)

The hon. Gentleman took part in the debate and he knows exactly what I said. He is twisting words; he is very good at that. At that time, in 1997 and 1998, leaving well alone was the approach that both he and I took.

I have already spoken for longer than I intended, but I want to make a couple more points. Despite the support that I have given to the Chancellor's measures, two issues need to be addressed. The first of those—royalties—was mentioned by the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith). It is important to get an early decision from the Treasury on royalties, and I know that the intention is to publish a consultation paper. From the industry's point of view, and from my perspective as a Member of Parliament with an interest in the industry and a constituency that houses part of the capital of the industry—the city of Aberdeen—an early decision on royalties would be extremely welcome. There is a genuine fear in the industry that the Chancellor intends to delay the introduction of any reliefs until the next financial year. I would be disappointed by that. The oil industry sees the royalties relief as part of the package, and would appreciate it if it were part of the package for this year, starting on 17 April when the new supplementary tax was introduced.

The second point concerns financing costs, the most important aspect of which is to deal with the uncertainty that has arisen. My hon. Friend the Member for Waveney (Mr. Blizzard) has already made the position fairly clear. I do not go the whole way with him, but the industry needs to know as soon as possible exactly what the position is.

With those two qualifications, this is an important measure. The industry will learn to live with the new arrangements. When they are properly examined, the tax allowances provided in the Budget will be welcomed and will take the industry forward into the new era. That is inevitable. It is a maturing province, which remains the most important part of our economy—not only in the north-east of Scotland, but in the whole of the UK. Last year, a little under £4 billion was invested, and the hon. Member for Gordon mentioned the five-year figure of £23 billion. That is a massive amount of investment in one part of our economy, and it should be supported.

Alex Salmond (Scottish National Party, Banff and Buchan)

I did not quote the hon. Member for Aberdeen, South (Miss Begg) to play with words or twist phrases. The quote was from the proceedings of the Scottish Grand Committee in March 2001. It matched the general understanding that the idea of an unannounced tax change, made without consulting the industry, had been seen off. The oil industry was not labouring under an illusion; it had not simply forgotten about the change. The belief that no such change would be made was widely shared throughout the industry and among Members of Parliament, including the hon. Member for Aberdeen, South.

The hon. Lady went on to claim the credit for, as she put it,

"those of us from the north-east",

who persuaded the Government to "leave well alone". I doubt whether she would have been foolish enough to say that unless it was a general perception among Labour Members of Parliament from the north-east of Scotland.

I well remember the Scottish Grand Committee last year. The debate was optimistic. Perhaps the hon. Member for Aberdeen, Central (Mr. Doran) also remembers it. I could quote other passages from it. However, the theme that the industry would advance from a base of stability because the Chancellor had abandoned the idea of a sharp change in the tax regime was shared by all Committee members.

The industry did not sleepwalk into a tax change. The shock of it is therefore all the greater. I do not oppose changes to the fiscal regime. The Government are entitled, in the public interest, to change a fiscal regime if they choose. However, there are two absolute requirements for such a change to be in the public interest. The first is consultation. That is especially true of the industry, with which a framework of consultation has been established. In all conscience, one cannot establish a PILOT initiative based on consultation to extract more, necessary investment in the industry, yet proceed with an unexpected tax change without consulting the institution that was set up to deal with such matters.

I am open to contradiction from the Financial Secretary, but I believe that not only was the tax change not discussed with the industry through PILOT, but that there was no prior discussion with the Minister for Energy or the Secretary of State for Scotland. I believe that they found out about the tax change only a short time before the rest of us—probably on the morning of the Budget. If the Financial Secretary does not agree, perhaps she can tell us when Treasury Ministers consulted the Secretary of State for Scotland—who had a huge interest in the matter because of the employment implications of the change—and the Minister for Energy and Construction—who is responsible for general oil policy—about the tax change. I believe that they were not in a position to anticipate events. I base that strong belief on watching their reaction at the time. [Interruption.] The hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) agrees with that. He was also present and he, too, saw their reactions.

The second requirement is minimising the impact on jobs and investment. It is in the public interest to minimise the effect on jobs. Minimising the impact on investment is in the long-term interests of the Treasury, let alone the rest of us. It is vital that the North sea oil show is kept on the road through investment. With the right approach to fiscal policy and the industry, we are only halfway through the North sea oil and gas story. It is reasonable to assume that there is as much to be extracted in future as in the past 30 years. Deciding that now is the time for a short-term, smash-and-grab raid to maximise revenue in the next few years is a fundamental error, not only for the public interest but for the Treasury and economic interest.

In previous debates in the Chamber and in Committee, the Financial Secretary outlined the model that she had followed, probably without sharing it with her colleagues in the Department of Trade and Industry. The model was based on the change being good for the industry. Indeed, she claimed that it would be a boost for the industry. However, on the previous day, in the Scottish Grand Committee, the Secretary of State for Scotland said that the Government were trying to minimise the impact on jobs. If the Treasury had shared the wonderful news of a boost for the industry, why was the Secretary of State trying to minimise its impact? The Secretary of State for Scotland was simply acknowledging the reality that the overall impact of a tax change that means, in five or six years, taking £1 billion out of the industry, will be negative, regardless of the skill with which the effects are distributed.

We are simply debating the extent of the negative impact. Will it mean the loss of 50,000 jobs, as the United Kingdom Offshore Operators Association suggested, or less, as other sources have predicted? The Government have criticised the industry for the estimate of 50,000 jobs. It will be jeopardised in the longer term by a decline in investment. Surely the Government's argument that a £1 billion tax raid is a boost to jobs and investment is far more fantastic than the argument about the extent of the negative impact. The Financial Secretary owes us a reasonable explanation of the exact basis for the Treasury's belief that the Government can take so much out of the industry yet have a positive impact on jobs and investment. That is daft, without credibility and ignores the substantial anxieties of hon. Members who represent those who work in the industry about the impact of the tax change.

Earlier, I said that there were arguments for the Government changing oil taxation, but with consultation. Key issues must be tackled. The hon. Member for Waveney (Mr. Blizzard) raised one: the well-rehearsed question of financing charges and the way in which a new entrant, who will not qualify for the full capital allowance relief, can be protected. How will such a company be protected so that it can exploit opportunities? Bringing in new, smaller operators to exploit and increase the overall extraction from the North sea is meant to be Government policy. That matter has not been properly tackled.

I was pleased to read in today's edition of The Press & Journal that the hon. Member for Aberdeen, Central acknowledges exploration drilling as a serious concern. That has been a theme of every speech that I have made about the matter in the past few weeks. Any reasonable Government would be worried about the downturn in drilling activity in the North sea in the past few years. In 1996 there were 112 exploration and appraisal wells; last year the figure was 51.

Exploration is largely financed from cash flow. It is therefore difficult to conceive that the measure will do anything other than further depress an already declining statistic. Now would be the moment to introduce a further uplift for exploration and probably appraisal drilling. There are mechanisms and means to do that. I suggested such a method in an amendment. However, for technical reasons, the proposal might be considered a subsidy, and the amendment was not selected. However, providing an uplift can and should be done. If exploration drilling continues to decline at the same rate, we will mortgage the future of a possible further 50 years of substantial oil and gas activity to gain an extra few billion pounds to add to the £160 billion—more than £30,000 for every man, woman and child in Scotland—that successive Chancellors have already extracted from the North sea.

It would be common sense for the Financial Secretary to answer the points about financing charges and the impact of the tax change on exploration drilling. She should also answer the genuine worries about the provision, which has not been thought through, has caught the industry by surprise, is likely to have a huge impact on jobs and investment, and will mortgage the future of an enormous industry that is responsible for a huge amount of overall capital investment in the United Kingdom. It will sacrifice jobs in Scotland and elsewhere for short-term gain by the Chancellor of the Exchequer.

The hon. Member for Aberdeen, Central talked about the past and about Budgets in which there had been unexpected tax rises. Hon. Members—not he or I, because we were not here—can go right back to the early 1980s, when one of the first actions of the Thatcher Government was to increase oil taxation. Given that the previous Secretary of State for Energy had been Anthony Wedgwood Benn, it was interesting that the Thatcher Government wanted to levy taxes at a higher rate than Tony Benn had done.

The accusation that was always levelled at people who had doubts about the approach to the industry was not just about individual tax rises, because they could sometimes be justified, given the shape of the industry, the price of oil and the windfall profits being made. It involved the underlying assumption—in relation to many of the moves and manoeuvres taking place—by the Treasury and the then Department of Energy that North sea oil and gas was a short-term story and that it would be there for 10, 15 or 20 years, then it would all be over bar the shouting. Many of the tax changes of that period and later were predicated on that short-term assumption.

Many people in the industry believed—as did the hon. Member for Aberdeen, South and I—that over the last few years there had been a realisation, through the PILOT initiative and other schemes, that this was a long-term game, worth playing over the long term because there was huge potential for maximising jobs and investment over the next few generations. More than anything else, this foolish tax change has damaged the credibility of the notion that, at last, some long-term thinking and planning was going into the industry, to maximise the benefits over a long period of time.

This is not a matter of passing an amendment or getting a tax measure into a Finance Bill, although I know that the Minister will be focusing on that at the moment. This is much more than that. It is about the future of the whole industry and about the jobs of many of our constituents.

Iain Luke (Labour, Dundee East)

I rise, as I did in Committee, to make a contribution to this debate. I say to the hon. Member for Arundel and South Downs (Mr. Flight) that I am one of those Scotsmen who is happy to stand up and defend the implementation of the 10 per cent. supplement proposed in the Budget. I take my daily dose of Irn Bru, so I might not be as soft as some of the more feeble Scots in the House.

Contrary to what has been trailed through the press by some of the major companies, I do not believe that the current changes have had any effect on jobs in the North sea oil industry to date; nor, perhaps, will they in the near future.

Chris Grayling (Conservative, Epsom and Ewell)

Surely the hon. Gentleman does not believe that the kind of business changes that would inevitably lead to job cuts would have taken place in the eight weeks since the Budget. The impact of these measures will be long term, and they will result in fewer jobs and a lack of investment in the years ahead, not just in the short term.

Iain Luke (Labour, Dundee East)

I am happy to come back to the hon. Gentleman on that, because that was exactly the point I was making. People in the press and in multinational companies are already talking about job losses. Indeed, an hon. Member remarked in Committee that he had heard from another hon. Member that there had already been job losses because of these changes. I accept the point made by the hon. Member for Epsom and Ewell (Chris Grayling), but I do not believe that that is the case or that it will be the case in the short and medium term.

As many hon. Members have already said, we need to ensure that the future of the oil industry is safeguarded. We have to do that against the changing scenario in the North sea, in which different types of company are becoming involved in exploration and in the production of oil. The hon. Gentleman makes a worthwhile point, along the lines of other points that I shall make in my speech.

I do not believe—as was suggested by the hon. Member for Arundel and South Downs—that we are attacking the integrity of the tax regime. This is the first major change in tax to be introduced in this area in the last five years. Although it has been talked about as a short-term smash and grab, I believe that the Government's proposals will create a pool of revenue that hon. Members across the House have argued should have been put in place a long time ago. There has been constant talk of a windfall tax, to make sure that the massive profits made over many years were taken into account and used for the benefit of the taxpayer.

Howard Flight (Conservative, Arundel and South Downs)

The hon. Member for Aberdeen, Central (Mr. Doran) referred to the last major change, introduced in 1993, when the Minister responsible was, I think, my right hon. Friend the Member for Fylde (Mr. Jack), who served on our Committee. This can be checked with my right hon. Friend directly, but I believe that those changes, though significant, did not have a retroactive impact on the new fields that had previously been invested in; they were changes for the future. There was, therefore, a major difference between what happened in 1993 and the changes that are now being proposed.

Iain Luke (Labour, Dundee East)

I take the hon. Gentleman's point. He has made many illuminating points during this debate. I was trying to suggest that this measure does not represent an attack on the integrity of the tax regime. If the change in 1993 was the last major change to the North sea oil tax regime, one tax change nine years later is not a big change. We are setting up a scenario which we hope the companies and organisations involved in the North sea will be able to live with and adapt to in the future.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

The hon. Gentleman has to accept that a dangerous signal is being sent—not just to the oil and gas industries, but to others such as the biotechnology industry—about the integrity of the tax system. The oil and gas industries feel that they were lured, through the operation of the PILOT scheme, into making major investments last year, and that they are now being hit by a tax that they cannot escape. They feel trapped by it, because they were lured into making investments in the first place. Had they steered clear of the United Kingdom, they would not have been hit by these taxes.

Iain Luke (Labour, Dundee East)

Many large multinational oil companies have already taken the decision to move out of the North sea. That is part of a corporate plan, given the maturity of the oilfields there. The issue is how we encourage the smaller companies to break in and take on the mantle of the large multinationals. Given that those smaller companies are not arguing against the changes in the supplementary charges—or at least, not shouting as loudly about them as others—I believe that they will see the opportunities available.

There have been recent examples of small companies taking on that mantle, and making finds left in parcels of the North sea left by the multinationals, such as the Buzzard field. The large reserve of oil discovered there—1.1 billion barrels has been proposed—was obviously one that the multinationals had walked away from, leaving the smaller companies to carry out the exploration and make the connection with those reserves.

Changes in the companies working in North sea oil involve the bigger companies—because of their corporate nature—planning to move their corporate investment to other, more profitable, less difficult, lower-cost investment options, because of the nature of oil production. The hon. Member for Gordon (Malcolm Bruce) said that it was not difficult for those companies to do so. My response is that it is inevitable that they will do so, given the maturity of the field and their own corporate plans.

We need to ensure that we create the conditions to encourage newer, leaner companies that are more innovative, enterprising and cost-effective, and more willing to take risks, to take up these opportunities and to become more fully involved in this area. There is a history of 20 or so newer, smaller companies becoming involved in the North sea, making finds and carrying on the tradition of employment and production that the big companies started.

That activity has been mirrored in other fields. There has been evidence of that kind of change in the gulf of Mexico, and there are indications that the trend will continue. Last week, a bumper find was announced in the Buzzard field. That had recently been abandoned by one of the bigger multinationals, which moved on to more profitable fields, given the higher costs that such companies carry, and was explored by a smaller company. The potential of 1.1 billion barrels of good oil over the next 10 to 15 years was an opportunity spurned by bigger companies taking easier options elsewhere.

The hon. Member for Banff and Buchan (Mr. Salmond) mentioned that we are only halfway through the life of North sea oil. I believe that there will be more finds like the one that I described. A common theme of hon. Members' contributions is the need for the Government to ensure that all the areas that need to be investigated are investigated, in view of the number of jobs and livelihoods that depend on the industry. Much useful information has been provided by UKOOA—the United Kingdom Offshore Operators Association—including a recent update on employment. Because of history and the traditional view of Dundee's role in the economy, my area spurned many chances to be involved early on in North sea oil, but many people in Dundee are nevertheless involved in servicing the rigs and in innovative engineering to provide access to the difficult fields.

We must allow smaller companies to become involved. Like many hon. Members, I have had discussions with the industry. The big fear is that companies that hope to become more involved in exploration will not be able to do so because of the costs. In a recent article in Scotland on Sunday, the American head of a European investment company was quoted as saying that there was great potential for smaller companies to become involved in the North sea. The problem was the financing cost. Like many other hon. Members, I believe that the Government should consider offsetting the financing costs against the supplementary increases, to provide more impetus for companies to become involved. That possibility was raised in the newspaper article, which was supplied to my hon. Friend the Economic Secretary at the time.

The Government must provide incentives to ensure that the interests of North sea oil and employment there are maintained, and that investment and production are stimulated. Although I believe that the Chancellor is justified in his revenue-raising initiatives, he should not jeopardise the good work undertaken—I have been involved in several discussions through the all-party oil and gas group—by the Department of Trade and Industry and its work with the industry. The PILOT programme was a means of encouraging future exploration, and I hope that that work is not wasted.

I congratulate my hon. Friend the Member for Waveney (Mr. Blizzard) who, is in his role in the all-party group, has been discussing with the Minister the future role of the group, and asking questions about the tax issue. I hope that we can get together to make sure that the work of PILOT is progressed. At the next meeting of the group, we will consider the way ahead for PILOT. That is a discussion topic that deserves to be taken further.

Hon. Members in all parts of the House have urged the Government to confirm that they are taking seriously the need to nurture the industry by ensuring that the issue of the abolition of royalties is moved up the agenda. I hope that they will soon announce the date on which deliberations will begin and when the abolition of royalties will come about. That would send a clear signal that the Government want to engage with the industry on a joint agenda.

The situation in the North sea is changing, and the Government should be monitoring it. There is a movement away from the larger multinationals being involved—they are being replaced by smaller, more investment-oriented companies. As someone who comes from a city that used to be known as Juteopolis—in other words, a one-industry city—I and the other citizens of Dundee know the problems and the despair that ensue when an industry disappears. It is inevitable that North sea oil will eventually be exhausted. We must encourage smaller companies that want to make the investment to start planning the future for energy and energy renewals in the UK.

In Committee, the Government gave a commitment to listen, to take comments on board and to respond positively. I look forward to the Minister's reply. I hope that the Government will make it a top priority in our economic agenda to prolong the life of the North sea industry and the livelihoods connected with it.

Mark Hoban (Conservative, Fareham)

Even those of us who have not had a long association with the oil industry, unlike many hon. Members who have spoken today, have learned a great deal from the discussions about taxation of North sea oil during the progress of the Bill. The matter has dominated discussions both on the Floor of the House and in Committee, on which I had the good fortune to serve.

Two key facts emerged from the discussions of oil taxation. The first was the high preponderance of international companies that are based in the North sea—two thirds of the companies operating on the UK continental shelf are foreign-owned. The second was the great flexibility and mobility of assets in the North sea. The UK continental shelf is perceived as having a highly liquid market for its assets. As a consequence, foreign companies investing in that market can adopt a portfolio approach to the way in which they manage assets across the world, and move in and out of oil-producing areas, depending on the costs that they would incur by doing business in those areas. Clearly, tax costs must be taken into account in that equation.

It is interesting to compare the present debate with the one that we had on the previous new clause, where we were rightly concerned about subsidising an industry that was footloose in the way in which it moved its operations around the world. In this case, we are discussing a change in the taxation regime which acts as an incentive for companies to leave this country and conduct their operations elsewhere. That is a quite different situation from the one that we discussed a little earlier.

Given the extent to which many independent companies are dependent upon debt finance to exploit oil reserves, my concern is that the way in which the supplementary charge is structured—excluding debt finance from costs that are allowable to offset the liability—means that we are penalising companies that invest in the market. New clause 1, which gives the opportunity to offset those debt finance costs against the revenues that companies earn and which are covered by the supplementary charge, is a valuable amendment to the Bill.

Coupled with that, companies paying the supplementary charge will have difficulty in getting credit for the additional supplementary charge in tax computations submitted in the United States or France. Ensuring that interest is deductible from the computation of the supplementary charge will make the process of deducting the tax in the companies' home country's tax computations much easier.

It is disappointing for the industry that the Government did not seek advice from the Internal Revenue Service much earlier in the process. Before they introduced a charge in the UK, they should have thought in much greater depth about the international impact of that charge, and obtained clearance from the US.

An interesting aspect of the rationale for the supplementary charge was identified by the hon. Member for Aberdeen, Central (Mr. Doran), when he mentioned that a few years ago it was inappropriate to introduce a windfall tax because oil prices were low, but now that they are high, it is okay to do that. That is a convenient justification. It reinforces the argument for a sunset clause on the supplementary charge that is the subject of other new clauses.

The new clauses would limit the timing of the operation of the supplementary charge, and would bring it to an end when oil prices are low, and when the good times that North sea oil companies are apparently enjoying at the moment have come to an end. We could then consider afresh the impact of the supplementary charge. In the meantime, we could see whether the United Kingdom Offshore Operators Association was right when it said that this tax will have a negative impact on jobs, or whether the more optimistic forecasts by the Government and the hon. Member for Dundee, East (Mr. Luke) are correct and that, miraculously, a tax that takes £0.5 billion out of our economy every year will be neutral and will create jobs.

The new clauses address some of the issues at the heart of the supplementary charge. The Government would do well to listen to the concerns that we have raised, reflect on them and consider whether the new clauses are the right measures for us to take to ensure the future vitality of the North sea oil industry.

Chris Grayling (Conservative, Epsom and Ewell)

I support these amendments and new clauses with slight misgivings, because although they will take the sting out of a thoroughly unwelcome measure, I still believe that this new taxation is ill-thought-out, and I would much rather that it was not in the Bill.

My biggest concern about and lack of understanding of what the Government are trying to do involve the impact that this tax will have on the manufacturing sector. This industry employs 300,000 people across the United Kingdom, and it represents 6 per cent. of Scotland's work force alone. The new tax is being introduced at a time when manufacturing in Scotland is at an historically low level, and when manufacturing across the UK has been through a number of years of extremely difficult business circumstances. The industry has suffered from the adverse value of the pound and a deluge of regulation and ill-thought-out measures from central Government, and it operates in a world in which it is increasingly easy for manufacturing companies to relocate to other parts of the globe where the cost bases are fundamentally different from those in the UK.

Malcolm Bruce (Liberal Democrat, Gordon)

What the hon. Gentleman is saying is obviously true, but it is even easier than he suggested, because many of these companies have already relocated to other parts of the globe. It does not take much to switch the investment. It does not require a major switch of funds. It is merely a matter of redeploying their existing assets.

Chris Grayling (Conservative, Epsom and Ewell)

The hon. Gentleman is right.

Iain Luke (Labour, Dundee East)

Not only is it easy to redeploy assets, but many of the companies in the North sea oil industry took corporate decisions well before the Budget to shift to much more profitable fields where the higher costs are covered by the larger profits that they will make out of fields that are easier to access.

Chris Grayling (Conservative, Epsom and Ewell)

The point that I was making about manufacturing is that, as well as the oil operators, there is in the UK a substantial industrial sector that provides the industry with components, support and other services and products. Inevitably, the consequence of levying a charge on the industry of hundreds of millions, if not billions, of pounds, thus reducing its margins and making business ventures less viable and less economic for companies to pursue, is that they will seek ways to cut their costs. One way to do that is to source the components that they use from other parts of the world where the cost bases are lower. That will have an adverse effect on employment and manufacturing businesses across the UK.

Hon. Members should not take my word for it. The chief executive of the Aberdeen and Grampian chamber of commerce said:

"There is no doubt that there will be a knock on effect on jobs. These changes will not just affect the oil majors but the countless small businesses operating in the supply chain."

This is not merely about the major companies operating in the North sea: it is also about the huge industrial sector that supports them. As a result of the combination of this and other Budget measures, such as the increase in employers' national insurance contributions, there is no realistic way in which this levy of a huge amount of money on the industry can avoid having a serious effect on jobs in Scotland.

The Government's approach in levying this new tax is ill-thought-out. I fear that the consequences will be far greater than they pretend. I listened to Labour Members who defended the tax, and realised that they do not understand the consequences of what is happening. It is simple maths. They cannot levy hundreds of millions of pounds on an industry, reduce its margins, as will happen as a result of this tax, and expect that not to have an effect on investment and jobs. That is basic business arithmetic. Our manufacturing sectors have suffered badly in the past few years, and many companies are under pressure, so this is precisely the wrong moment to take such an adverse tax step.

Sadly, I am certain that the Government will not change their approach, but I hope that at the very least they will take note of these new clauses and amendments, which would take the sting out of this measure. They would put a time limit on the effects of the taxation, so investment decisions over the long term could be taken in the context of a point of termination. I urge the Minister, for the sake of manufacturing industry in different areas of the country, not just in Scotland, to accept the new clauses and take the sting out of what is otherwise a thoroughly unwelcome measure.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

I welcome a chance to take part in the debate. These new clauses have allowed us to return to this subject on Report. It was discussed in Committee on the Floor of the House and in the Standing Committee, and this is a welcome opportunity to see how the debate has moved on. The vocal support of Labour Members at the start of the Budget debates seems to have melted away on Report. We have heard far more thoughtful contributions, and even those who support the Government's general approach seem ready to recognise that some of these amendments make serious points and raise serious issues.

The hon. Member for Epsom and Ewell (Chris Grayling) made a valid point about the importance of the supply chain to the North sea oil industry—the manufacturing that is supported by it and the onshore jobs not just in Scotland but throughout the United Kingdom. Some companies are finding life difficult. They do not necessarily want to be named, but some companies in my constituency are already concerned. When orders are cancelled, the cash flow of manufacturing companies is hit.

The Treasury needs to understand more about the structure of the industry. When major companies are hit by indecision and uncertainty about whether royalties will be abolished, investment decisions are put on hold. For those companies, that is a nuisance, an irritation, a frustration and a worry, and it affects their bottom line, but they survive because their cash flow can take such a hit. Down below them in the supply chain are many companies whose everyday cash flow is crucial. They cannot switch off the business for a few months while the Government sort out the tax regime and the major investors decide whether to invest. The Government must consider the knock-on effect on the many small businesses that supply the industry. There has been much more outsourcing of functions. Investment houses are much more involved, and the supply chain is much more dependent on a continued flow of business.

Many hon. Members have referred to the fact that this measure has been a surprise and a shock to the industry. The Treasury still seem to be under the illusion that that is a fiction or an elaborate hoax, and that it was not a shock or a surprise because the industry saw it coming and understood what was happening. I assure the Treasury that there could not be that many well-paid actors giving such a consistent message from many levels of management and from many different businesses in the industry. Many people have worked closely with PILOT, with Logic and with the taskforce. There is genuine shock and surprise, and it would be helpful if the Treasury recognised that. Whether it intended to surprise the industry, or whether it thought that it had surprised the industry, the reality is that it has surprised it.

There must now be some damage limitation, and some undoing of that damage. That is what these new clauses would do. New clauses 2 and 3 on termination and new clause 4 on transition would relieve the shock and the sense of betrayal. They would also deal with the fiscal instability by getting the message across that if companies made the investment last year because of what they got out of PILOT, this year they can get some of the relief on that investment against the new tax. Similarly, a three-year period gives a chance for further consultation with the industry, a chance to address these concerns and not to have hit the immediate Red Book figures. My hon. Friend the Member for Gordon (Malcolm Bruce) made a very valid comparison with whisky, in that overtaxing can kill the goose that lays the golden egg.

Given the surprise felt by the industry, we need an explanation from the Treasury on when it chooses to consult and when it does not. When debating the timing of the Finance Bill and the business motion relating to it, the Leader of the House said:

"I think that two full days in total to consider the remaining stages is perfectly adequate provision. It is adequate partly because this Finance Bill has already been through more consultation with industry, outside bodies and financial services than any previous one. Many of the clauses were seen in draft form by the industry, which may partly explain why the Opposition ran out of things to say in Committee."—[Official Report, 24 June 2002; Vol. 387, c. 710.]

The oil and gas clauses were not seen by the industry before the Finance Bill was published. It might be helpful if the Financial Secretary would outline the Treasury's thinking in consulting some sectors and industries prior to the Budget to allow them to understand the measures. Why were there no draft clauses on which the oil and gas industry could consult? Will she put in the Library what percentage of the Finance Bill honoured what the Leader of the House told us only the Monday before last?

When it comes to sending strange signals and conflicting messages, the industry is entitled to argue that PILOT psychologically sent a message that this was its way of engaging with Government and that it was engaging with the whole of Government, not just a part. The Government pride themselves on encouraging joined-up government, but the signals from PILOT were about the need to obtain investment and deal with fallow fields. There was a response, and the PILOT objectives were being met, so the shock felt is quite understandable. That is reinforced by what the Secretary of State for Scotland said in Scottish questions on 11 June in answer to a question from the hon. Member for Banff and Buchan (Mr. Salmond):

"As part of that review, the Treasury was represented on the oil and gas industry taskforce and on Pilot, which I chaired for about two years, by no less a figure than Sir Steve Robson. At that time, very few Treasury officials were ranked higher than him. It was the discussions within Pilot that led us to reach a decision on the North sea fiscal regime that is designed to help companies which are investing in the North sea."—[Official Report, 11 June 2002; Vol. 386, c. 707.]

If the Secretary of State for Scotland was under the impression that PILOT and the Treasury were closely linked and that there was a link between what PILOT was up to and the fiscal regime, it is little wonder that the industry thought that messages were coming from that engagement.

Previous speakers have alluded to what was said last year about the tax regime and the messages sent out in the north-east of Scotland. The Press & Journal—the voice of the north—serves the north-east of Scotland. It serves Aberdeen, the capital of the oil industry for Europe. The paper wrote in its editorial about the Prime Minister's visit to Aberdeen in May 2001, in the run-up to the election. It said that the Prime Minister made it clear in his speech in Aberdeen, South that there were

"no plans for a windfall tax on the oil companies, and accepted the offshore industry's need for a stable tax regime.

He said:

"We have been strongly supportive of the oil industry and oil production and I'm well aware of the fact it is of crucial importance to Aberdeen."

The Press & Journal said in its editorial:

"His insistence that there will be no windfall tax on North Sea oil operators is a major relief not just to the multinationals, but to all whose prosperity and services depend on a healthy oil trade."

If, just before the general election, the Prime Minister promises that there will be no windfall tax, and then within the year the Chancellor introduces a new tax regime that is even worse than a windfall tax because it is for ever, regardless of the price of oil, what kind of industrial policy are the Government pursuing? What is their long-term fiscal strategy for encouraging inward investment and a thriving investment potential for this economy?

It was the Government's declared aim to lay to rest the fears that a new Labour Government would damage industry, but if every sector suddenly finds that the rug is pulled out from under it, and that promises are made just before elections and reneged on within the year, that does not create an investment climate that is conducive to long-term fiscal stability.

Alex Salmond (Scottish National Party, Banff and Buchan)

Let us dwell on that point for a moment. If we assume that the Prime Minister was telling the truth before the election last year, that would destroy the Treasury argument that this was part of a continuous process from 1997, culminating in this tax change. Or we could conclude that the Prime Minister was not telling the truth, but even Treasury Ministers would not want to go down that road, would they?

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

It would be extremely helpful if the Treasury could clarify the Secretary of State's view of PILOT and the Prime Minister's comments in the run-up to the election. Or was the right hon. Gentleman's speech simply a message designed to be heard in the north of Scotland where votes were important so that Labour Members could be re-elected in marginal seats? That is not the way to deliver a stable, long-term economic environment, but it is a dangerous way to mislead people. Once people feel misled, the damage must be undone, which is, I hope, what the Treasury is looking to do. However, its response so far to the debate seems to be to put pressure on the industry. The Treasury seems to be saying that if the industry complains, it will drag its heels on the other half of the package.

If this proposal was thought out on day one and abolishing royalties comprised part of the package, why on earth has the consultation not started? Why on earth is there no consultation paper on the abolition of royalties? It was something that the Chancellor promised, to dress up the presentation of the Budget, yet we still hear nothing about it.

The most frightening thing about the Treasury's lack of understanding is how it thinks that someone can make investment decisions about a field that is subject to royalty tax when he does not know what is happening to royalties. It beggars belief that the Treasury believes that it can sit on this measure without it doing any damage. Every day is a delay when a decision needs to be made. The longer the wait, the worse the situation becomes as people find other places to make their financial investments.

Amendments Nos. 42, 43 and 44, tabled by the hon. Member for Banff and Buchan, provide a chance to undo the damage completely. It would be impressive if, when those votes take place tomorrow, the House could reject this part of the Finance Bill. We could go back to square one, have a proper consultation with the industry, with proper draft clauses, as the Leader of the House thought that the Government were doing with other sectors of industry. In that way, we could have a long-term, stable, clearly thought-out policy for the future of oil and gas.

This does not matter so much at the very top. The middle and senior managers whose job it is to manage an asset in the North sea are the ones who have been betrayed. They have been telling their bosses in France or America that they are a good bet, they have a good climate, a taskforce and PILOT. They have been saying that they have engaged with each other, that a logical way of working has been established, that they have tried to get the industry to work together, that they have learned a lot of lessons and that much good has come out of 1997. As the hon. Member for Banff and Buchan said, only a year ago many of us were praising the Government for what they had done. The middle and senior managers feel betrayed because their bosses in France, America or elsewhere in the UK are saying, "You got the money out of us under false pretences. You said that there was no fiscal risk and that the bet was long term. We backed your judgment and you have let us down because you have not delivered." That delivery is the Government's failure—it has sent the wrong signals. In fact, those people probably regret ever becoming involved in PILOT and changing the culture of the industry. It would have been better if they had remained isolated and carried on as before because they would not have exposed themselves.

It will be a sad outcome if the Treasury does not find a way of engaging in the debate on financing costs, royalties and long-term stability. PILOT requires the commitment of individuals and industry money to make it work. It is quite difficult to motivate people after such a bad hit. Anything the Financial Secretary can do to smooth the waters and rebuild confidence will be most welcome, but she must realise that there has been a genuine shock. The new clauses provide a chance for the Government to show that they are listening and willing to address that shock. They provide an opportunity for the Government to address the point about financing costs, which has been raised on both sides of the House.

The Treasury must look at the smaller companies who look to lease assets to exploit smaller fields and ensure that the tax system is not a straight hit on those companies, with no compensation to encourage them to maintain their projects. We have real potential in terms of the technology of floating production, which is an exportable technology. If we can develop that expertise, nurture it and maintain it, we can take it elsewhere.

There has been talk about major companies walking away. However, the crucial thing about major companies being here as long as possible is that they often own the central asset to which many small fields are tied back, and the tax regime and Government stability must maintain those central core assets if we are to maximise the exploitation of the North sea. I urge the House to back the amendments and new clauses tabled in the names of Conservative and Liberal Democrat Members, which address what is a tax too far.

Ruth Kelly (Labour, Bolton West)

This has been an interesting debate. The hon. Member for Arundel and South Downs (Mr. Flight) has accused the Government of unwise and unnecessary taxation. He attacked the good faith of my right hon. Friend the Chancellor, when he warned the Opposition not to fall for the propaganda of the oil industry. However, it seems to me that the hon. Gentleman, who speaks for the Opposition, has fallen hook, line and sinker for that propaganda. In the process, he has accused the Government of undermining the integrity of the tax system.

Last year—even after investing £4 billion—oil companies generated net cash flow of £10 billion from the North sea, after all the taxes that they paid. I do not accept the argument that an additional annual tax burden of, say, £600 million must reduce investment in the UK because there are no longer sufficient funds to maintain it.

The hon. Member for Banff and Buchan (Mr. Salmond) accused the Government of a short-term smash and grab raid. I tell him, as I tell other hon. Members, that the Government have consistently made it clear that the North sea tax regime needs to strike the right balance between securing a fair share of profits for the nation and encouraging investment.

North sea oil and gas is a limited national resource. Oil companies produce oil and gas under Government licence, and the returns generated from that often exceed a normal commercial rate of return. Furthermore, at times, producers make large profits simply due to movements in the world oil price. But the key point is that underlying rates of return are high, even when adjusted for short-term oil price movements. Every single major oil-producing country has a special tax regime to reflect the economics of the oil industry and to ensure that their country shares in the benefits.

Alex Salmond (Scottish National Party, Banff and Buchan)

When the Prime Minister told people in the north-east of Scotland immediately before the last election last year not to expect any windfall tax, was he unaware of the arguments that the Economic Secretary has just outlined or was he purely misleading people for electoral purposes?

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman's proposal would result in a windfall tax on oil companies; a time-limited specific additional tax on oil companies. It is the Government who are committed to a long-term stable regime for the oil industry that is based on securing a fair share of the industry's resources for the UK citizen while making sure that there is a favourable climate for investment.

Several hon. Members, including the hon. Member for Banff and Buchan, have difficulty in understanding the relatively simple concept that we can design a tax measure so as to promote future investment, while securing more revenue from the oil industry.

Alex Salmond (Scottish National Party, Banff and Buchan)

rose—

Ruth Kelly (Labour, Bolton West)

If the hon. Gentleman will allow me to continue, I will explain how it works. There are two elements. The first is the investment allowance. That means that even with the supplementary charge, companies investing in new products will have higher post-tax rates of return than under previous rules. Secondly, in net present value terms, the benefit of the 100 per cent. allowance outweighs the additional tax for marginal projects. It is the effect on marginal projects that determines the effect on investment. Marginal projects will be encouraged by this change; the increased tax reduces the net present value of more profitable fields, as it is designed to do. But these are likely to go ahead in any event, so the combined package increases the incentive for oil companies to invest in marginal fields.

Alex Salmond (Scottish National Party, Banff and Buchan)

We need a bit of humility from the hon. Lady; some of us were working in the industry on these matters even before she was a Minister. Can we get back to the Prime Minister and the explicit undertaking that he gave to people in the north-east of Scotland that no such change was envisaged? Was he, at that stage, aware of the arguments that the Financial Secretary is making just now, or was he merely misleading people last year for electoral purposes? Can we have an answer this time, instead of a lecture?

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman accuses the Government of imposing a windfall tax on the oil companies. We are determined not to do that; that is why we have carefully designed a package that promotes investment while securing a fair share of resources for the country's citizens. The package is designed to promote a long-term stable fiscal regime for oil companies to operate in. I shall return to the perceptions of the oil companies in due course. I have spelled out in considerable detail to the House the investment criteria and the criteria that we took into consideration when designing these tax measures.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

Will the Financial Secretary explain why the Treasury chose not to consult on draft clauses and engage with the industry on them—as it has done, according to the Leader of the House, for other businesses—and instead chose to surprise the industry?

Ruth Kelly (Labour, Bolton West)

I will come on to deal with the element of fiscal risk, the perceptions in the oil industry and why we did not consider PILOT to be an appropriate forum to discuss those issues before the new regime was introduced.

I was on the point of explaining the analysis behind our tax changes. A full analysis has been made of the impact on investment, and I have spelled it out in great detail to this House, including the criteria behind the analysis. The analysis has been open thereafter to public scrutiny and scrutiny by oil companies. I will not run through all the criteria used for the analysis again today.

We looked, for example, at 108 new fields that were potentially commencing development over the next five years. We applied all the investment criteria that companies used to establish whether projects will proceed. We used the long-term oil and gas prices typically used by the industry when calculating those rates of return. The conclusion of all of our work—particularly that on new fields and incremental investment—was that, on average, the impact on marginal investment projects was positive.

The oil industry broadly accepts that analysis. The industry differs over specifics, but broadly accepts that if we have a 100 per cent. capital allowance—which makes new investment in marginal fields more profitable—and combine that with a supplementary charge, there can be a positive impact on investment. The industry differs on the impact on fiscal risk and the stability of the long-term regime. We have heard interesting and thoughtful points made by hon. Members on that precise subject.

I disagree fundamentally with the projections that the oil industry is now claiming to attach to the impact of our regime change. The hon. Member for Arundel and South Downs quoted industry figures for the fall in production, a forecast of 1.5 million barrels a day by 2010. He quoted figures on investment and jobs. The problem is that the industry was forecasting those figures before the tax changes. It is very difficult to say that the impact on jobs and investment is as a result of the tax changes when those forecasts were produced, apparently, before the industry had any idea of what those tax changes were to be.

Chris Grayling (Conservative, Epsom and Ewell)

In April, Lord Browne said of the changes in the Budget:

"Taken together those steps are likely to reduce investment and to hasten the decline of production."

Is the Financial Secretary suggesting that Lord Browne, whom I believe to be a man of integrity, is not giving an accurate picture of the truth?

Ruth Kelly (Labour, Bolton West)

I was saying that the oil industry was forecasting an impact on jobs and investment before the results of the tax changes had even been announced. It is completely inappropriate to tie that analysis to subsequent tax changes.

Malcolm Bruce (Liberal Democrat, Gordon)

If the industry is predicting a reduction in jobs, production and investment, why do the Government believe that increasing the tax burden on it will halt or reverse that process?

Ruth Kelly (Labour, Bolton West)

I have just been through the analysis supporting our conclusion that, taken as a whole, the tax package will promote marginal investment in new fields. In fact, the industry is blaming decline—which was forecast—on tax changes that were designed to help investments with less attractive returns. That analysis is completely disingenuous, and I am surprised at those hon. Members who have fallen for it.

I do not accept that the North sea regime is uncompetitive; on the contrary, tax rates for new fields remain lower than for all other major oil and gas producers. Combined with generous allowances, the low rate means that the United Kingdom will remain an attractive place to invest. All companies have their own hurdle rates of return and other criteria for investment. If they were prepared to invest here before the tax changes, there is no logical reason why they should not be prepared to do so now. In general, the tax changes should not reduce any returns below companies' own thresholds for investment; indeed, as I have explained, in some cases the changes may raise returns from marginal projects, so that they will be above the required thresholds in future.

I am aware of the arguments, put forward after the Budget announcements, concerning the tax changes' impact on the fiscal regime. I am also aware of the argument—made by, among others, the hon. Members for Arundel and South Downs, and for Gordon (Malcolm Bruce), and my hon. Friends the Members for Aberdeen, Central (Mr. Doran) and for Waveney (Mr. Blizzard)—concerning the impact of any tax change on the perception of fiscal risk in the United Kingdom. I intend to deal with that specific issue in as much detail as I can. The industry is claiming that the fiscal risk has somehow increased since the Budget changes, and that although the changes would in principle lead to greater investment and more jobs, changing the perception of fiscal risk could impact on jobs and investment. Indeed, the industry is putting great stress on a predicted hypothetical 20 per cent. supplementary charge for future projects.

Labour Members have discussed such issues with me, and they are fully aware that that is the industry's projection, and that it is using those figures to back its analysis of the impact on investment and jobs. However, the regime that we have introduced is a regime for the long term, combining a 10 per cent. supplementary charge with 100 per cent. relief for capital expenditure. That is the regime that we are debating today—not some hypothetical future regime. In fact, as far as is practical, fiscal risk has now been eliminated. Before the Budget, a substantial element of fiscal risk was clearly attached to North sea investment. The Government reviewed the position in 1997–98, and when the review ended, we gave no commitment to maintaining an unchanged North sea regime. Indeed, as the 2001 Budget Red Book states, the Chancellor made it clear that he was considering "the next steps" on North sea taxation. We have made the changes required—

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

Will the hon. Lady give way?

Ruth Kelly (Labour, Bolton West)

If the hon. Gentleman will allow me, I want to make a little progress. We have made the changes required to put the regime on a sustainable, long-term footing. It now provides a fair share of profits for the nation, and helps to encourage long-term investment. We introduced these changes only after careful analysis, and we are being absolutely clear in our commitments. Before this year's Budget, we gave no indication that we considered the North sea fiscal regime sustainable in the long term. We are now putting it on the record that, with the Budget changes, we have a stable regime into the next Parliament. We cannot be any clearer than that.

Chris Grayling (Conservative, Epsom and Ewell)

The industry has not got the message. Lord Browne also said the following about those changes:

"Their direct impact will be compounded by the fact that a change made in this way reduces confidence in the stability of the regime going forward and imposes an added element of risk on all future decisions."

Ruth Kelly (Labour, Bolton West)

I have set out what the oil industry is claiming, and our response to it. This is a long-term fiscal regime that is stable into the next Parliament—we cannot be clearer about that. As far as we are concerned, fiscal risk has reduced. Of course, it is up to individual companies to argue and decide, and to set their own fiscal risk criteria. We could never challenge an individual company's subjective assessment of fiscal risk, but if it is irrational and inappropriate, other companies will come in and make profits where profitable opportunities exist.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

Will the hon. Lady help to restore fiscal stability by explaining why the Government chose not to consult on the draft clauses before the Budget, and why the sector was not given the same opportunity to consult as other sectors? There must be some explanation as to why the proposal was sprung on people. Will she also recognise that, whether or not it was rational, the people involved were genuinely surprised?

Ruth Kelly (Labour, Bolton West)

We have already debated these matters at length. It was clear that, in the late 1990s—when the matter was first put out for consultation—two different regimes might apply, and we consulted on that basis. It became increasingly obvious that one of the policies was inappropriate, because of the time that had elapsed. The hon. Gentleman might agree that it is slightly odd to consult on the basis of one possible remaining regime. We have designed a regime that clearly takes into account investment needs, jobs and growth in the North sea, Scotland and the rest of the United Kingdom. Moreover, we have planned for the future with a long-term, stable fiscal regime. We cannot be any clearer about our intentions.

Alex Salmond (Scottish National Party, Banff and Buchan)

On the question of people being taken by surprise and the careful analysis of the impact on jobs, did the Treasury consult the Minister for Energy and the Secretary of State for Scotland on this matter before the Budget, or on the morning of the Budget?

Ruth Kelly (Labour, Bolton West)

Of course, Ministers and officials from different Departments have regular conversations about the oil industry, but I hope that the hon. Gentleman will agree that tax matters and tax changes are a matter for the Chancellor. The real issue that has rightly been raised today by my hon. Friends is the question of why we did not consult within the framework of PILOT, an organisation that was set up to encourage investment in the North sea. The Government accept that PILOT has a very valuable role to play in discussing issues of concern to the industry, but it—

Alex Salmond (Scottish National Party, Banff and Buchan)

Will the hon. Lady give way?

Ruth Kelly (Labour, Bolton West)

I have given way to the hon. Gentleman many times, and I must make progress. I will doubtless give way to him later on in my speech.

PILOT is not, and never has been, the appropriate forum for discussing tax; indeed, the position has been clearly set out. I think that it was the hon. Member for Arundel and South Downs who mentioned Steve Robson, who was present at the very first meeting of the oil and gas industry taskforce, which became PILOT in due course. At that meeting, Steve Robson made it clear that taxation was a Budget issue, and was not for consideration by the taskforce. PILOT, and the taskforce, always operated within that framework. PILOT's terms of reference refer explicitly to working within the parameters set by Government policy. Of course, PILOT sometimes deals with administration and the efficient operation of the tax system, but it was explicitly made clear that it was not for PILOT to consider the quantum of taxation of the oil industry.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

The chair of PILOT for two years is now Secretary of Scotland, and she made it clear at Scottish questions that it was from PILOT that the tax regime was developed.

Ruth Kelly (Labour, Bolton West)

PILOT has always been concerned with legitimate questions of tax administration and implementation, but it was made clear in its terms of reference and set out at its first meeting that it was not the forum for discussing the quantum of taxation, which was an issue for the Chancellor that should be taken forward with the industry in the normal way.

I wish now to deal with some specific concerns that have been raised in this debate. In particular, many hon. Members raised the issue of financing costs. New clause 1 would allow financing costs to be taken into account in the calculation of the profits base for the supplementary charge. The new clause says that the costs would be allowed to the extent that the existing provisions referred to—section 494—permit them to be allowed. That is on the false assumption that that resolves the problem of manipulation of borrowings to minimise the effect of the charge. It does not.

My hon. Friend the Member for Waveney asked whether I would be able to put on record the precise arrangements that companies use to take advantage of the ring fence and the current disallowing of finance costs, and why we could not also apply that to the supplementary charge. I shall do my best to make the position clear, although I shall of course be willing to follow up later if he feels that I have not made the position sufficiently explicit tonight.

Section 494 restricts interest deductions against profits arising inside the ring fence to the extent that the money borrowed has been used to meet expenditure incurred by the company in carrying on its trade of producing oil or gas in the North sea. So the borrowing cannot be for downstream operations or some activity overseas. That is of course wholly sensible.

Essentially, what section 494 does is to set an upper limit on borrowing inside the ring fence based on the amount of spending in the North sea. What it does not do is to prevent the company from choosing to borrow for North sea purposes rather than other purposes. What it does not do—and neither do any of the transfer pricing rules that apply to finance costs—is to prevent a company from borrowing heavily, or even exclusively, to fund its ring fence activities, leaving other activities of the company, or the group of which it is a member, to be financed in other ways.

It is accepted that some groups, which are profitable in the North sea and unprofitable outside, will have already borrowed up to the limit allowed by the present rules. However, others will not have exercised that capacity and would be able to increase their borrowing further. With a higher rate of tax inside the North sea ring fence than outside, there will be a considerable additional incentive for companies to arrange their borrowing in that way. However, it is not just the potential for further shifting of borrowing that is of concern: it is also the current uneven distribution of debt within companies and groups.

It is clear that if new clause 1 were to be accepted the yield from the supplementary charge would be significantly eroded and the North Sea regime would fail to give a fair return to the nation from profits derived from a national resource.

Malcolm Bruce (Liberal Democrat, Gordon)

The Minister is giving a fair explanation of why the Government would apply that regime to companies that have a wide range of interests nationally and internationally, upstream and downstream. It does not however answer the issue for those companies that do not have any of those offsets and that are investing by means of finance for marginal projects in the North sea. Those companies have no downstream and no offset, and they cannot even benefit from the full capital outlet. Cannot the Minister accept the case for varying the provisions in the Bill for those companies?

Ruth Kelly (Labour, Bolton West)

I accept that finance costs are a cause of concern, especially to smaller companies. However, it is not possible to distinguish, company by company, those companies for which it is a real concern and those that might use the additional latitude to rearrange their borrowings. What is clear is that the solution cannot be just to allow all finance costs in computing the new supplementary charge. Any alternative approach would need to ensure that the overall yield from the North sea—both ring-fence corporation tax and the supplementary charge—is maintained.

There are alternatives to allowing finance costs to be set completely against the supplementary charge that the Government are willing to discuss with oil companies. For example, we could try a system of apportioning finance costs so that those used for North sea purposes would be allowable against the extra charge. However, we must have a fair system that does not penalise those companies with least scope to manipulate their borrowings and does not lead to a reduction in the overall yield. We have already contacted oil companies with certain proposals that they may wish to discuss with us. I hope that that gives some comfort to my hon. Friends and other hon. Members that we take the issues very seriously.

New clauses 2 and 3 would bring the supplementary charge to an end after just three years. That is totally unacceptable. I shall not rerun the argument that that would be a windfall tax on oil companies, not the long-term fiscal regime that the oil industry needs.

Alex Salmond (Scottish National Party, Banff and Buchan)

rose—

Ruth Kelly (Labour, Bolton West)

I will not give way to the hon. Gentleman, because I must make some progress.

I cannot accept new clause 4 because it would do nothing to increase investment in the North sea, but would simply hand money back to companies that have made very good returns from the sector in recent years and, as I said in Committee, will continue to do so when the changes in the Bill are enacted. It seems to have been forgotten that this tax is not like petroleum revenue tax. It is not a tax on individual fields. It is a tax that applies to company profits in the North sea—profits that have been shown to have far exceeded those of other industries since petroleum revenue tax was abolished for future fields in 1993, even with the effect of oil prices stripped out.

Several hon. Members have questioned our relationship with the US tax authorities and whether the supplementary charge will be allowable under double taxation treaties. The Inland Revenue has written to the Internal Revenue Service in the US to ask for its view on whether the supplementary charge will be creditable. That is, of course, an issue for the US. It was the industry which asked us to do that, and it was then up to the Revenue to contact the IRS and deal with the issue in the usual way.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

Does that mean that until the industry raised the issue as a concern the Inland Revenue was not aware of it? Does the Inland Revenue think that it is a genuine concern or did it miss it completely?

Ruth Kelly (Labour, Bolton West)

It clearly is of concern to certain companies and it needs to be sorted out one way or the other. It is not clear, however, that companies will be significantly disadvantaged if the supplementary charge were not to be completely allowable under the double taxation treaties. I urge those companies for which that is a real issue to approach the Government and the Inland Revenue and set out their concerns. We will then liaise with those companies and address their concerns. If the hon. Gentleman has evidence that the issue is of real concern, I will also of course be willing to listen to him.

Several other hon. Members raised the question of royalties. Many views have already been expressed to the Government about the abolition of royalties and several dates have been suggested. I expect the Department of Trade and Industry to issue a consultation document in the near future. I can certainly confirm that it remains our intention to abolish royalties subject to that consultation.

The Government have considered the returns on capital employed in the North sea. We have found that, since the tax changes made by the Conservative Government in 1993, the rate of return has risen from 10.5 per cent. to 34 per cent. last year. In comparison, the rate of return for other non-financial industries was, on average, 11 per cent. last year, and the difference was not caused by temporarily high oil prices. In fact, the rate of return in the North sea was higher than that for other industries in every one of the past nine years—even in 1998, when the oil price fell sharply.

It is only right that we take a fair share of revenue from the North sea for the United Kingdom taxpayer. Our reforms promote investment, jobs and development in the North sea. They are right; they are for the long term. I urge hon. Members to reject the Opposition's new clause and to support the Government.

Howard Flight (Conservative, Arundel and South Downs)

I will be brief.

The economic life of the North sea in the 1990s was enormously better than expected, which has been largely reflected in a sensible tax regime since 1993. The Government clearly have a windfall strategy: oil prices have gone up, so it is appropriate to charge more tax. Indeed, the Financial Secretary said so. I warn her that, with the economic outlook facing the world today, and as the European Bank for Reconstruction and Development is funding the installation of a new pipeline from Russia, it is highly questionable whether higher prices will be sustained.

The Opposition have won the argument overwhelmingly. This tax grab will put at risk the maximum future exploitation of the North sea. I commend the Financial Secretary on doing her best to defend the indefensible. I am slightly saddened that someone as bright as she is has swallowed the spin that the Treasury has fed her. We have already made the point that the 34 per cent. return figure is nonsense. It represents the top return for 2001, compared with the 14 per cent. average. Indeed, the figure is only 7 per cent. for investments since 1996.

The Financial Secretary will come to eat her words. The leading oil industry economist, Wood Mackenzie, has made it absolutely clear that the Government's case is rubbish and that the industry cannot sustain any further marginal taxation without a major loss of investment and employment. The Government will regret what they are doing. They have misled the industry by their lack of consultation, but they then try to tell the industry, "Trust us. This is another long-term regime." Pull the other one, mate. When confidence has been broken, people do not give their trust. Britain will suffer; the current account will suffer; jobs will suffer; and investment will suffer. This additional taxation is very unwise.

New Clause 5 — Contingent liabilities under the Private Finance Initiative

Howard Flight (Conservative, Arundel and South Downs)

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

This is an important new clause because it addresses growing concerns expressed by the various authorities and professional bodies involved, by the City of London, and by citizens up and down the land. It calls for amendment to the Finance Act 1988 requiring a statement of the aggregate of all contingent potential liabilities as well as actual liabilities relating to private finance initiative and public-private partnership deals.

A variety of issues are raised by the new clause. The Opposition continue to support the broad principles of PFI under which the private sector is brought in to do things, and often to do them better than the public sector. Under that initiative efficiencies can be achieved in funding and trade union Spanish practices can be addressed. It operates according to the principle of transferring operational risk. We have greater concerns about PPP, when that risk is often not transferred. When such arrangements are made, under PPP and under PFI, it is axiomatic that financial matters should be transparent. Because of the Government's unique position in terms of being able to issue letters of comfort and guarantees that can be rolled over, the accounting standards should be more demanding, if anything, than those in the private sector.

This Government—I do not include those Members with whom we have been debating this Finance Bill—have crafted a web of deceit and an Enron-style system in which there is a lack of accounting and a lack of disclosure. There has been a desperate determination to move investment in the public sector off balance sheet, and, as far as possible, to do so without describing it fully or accurately in the Red Book.

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Gentleman give way?

Howard Flight (Conservative, Arundel and South Downs)

I shall do so in due course.

The Government have been incurring contingent liabilities in relation to PPP deals, and, to some extent, PFI deals, which are recorded nowhere in the Red Book. The total extent of those liabilities is unknowable, but I have identified £25 billion alone relating to transport. That comprises a £2.67 billion guarantee for London and Continental; the Government undertaking through the Strategic Rail Authority to repay the £9 billion of commercial borrowings by Network Rail within three years if those are not refinanced; and the Government's letters of comfort in respect of 95 per cent. of the borrowings of the tube PPP contractors—their total borrowings over the first two phases are expected to be £15 billion. Sizeable potential contingent liabilities also relate to defence PFI deals, and there may be contingent liabilities in relation to other PFI deals.

With regard to those contingent liabilities, the Government have interpreted the Accounting Standards Board's FRS12 directive and structured vehicles in a way designed to avoid disclosure. The principle of FRS12 is that, unless a contingent liability is remote, it should be disclosed, except when it is immaterial. In assessing remoteness—the key issue—the potential ability to roll over liabilities must not be taken into account until after a roll-over has been implemented. On 11 April, I asked the then Chief Secretary to the Treasury whether the Government guarantee via the Strategic Rail Authority of Network Rail's £9 billion commercial borrowings would be treated as a public sector liability. He responded that, although that would not really be the case, the contingent liability would not score as, given the unlikely event of alternative private sector refinancing not being obtained, it was unlikely to be called.

If that is the case, which is questionable, it is because the Strategic Rail Authority's liabilities can be rolled over for a further three years to enable commercial refinancing. Indeed, they can be rolled over for ever. A brilliant little wheeze has been invented giving a guarantee against which the private sector happily lends, and each time the end of the three-year period comes near the liabilities can be rolled over again. That is very clever and fits a narrow definition of the remoteness rules, but does not fit the roll-over rules. Given the Government's power on this matter, common sense suggests that materiality should be a major factor in determining their policy on the disclosure of contingent liabilities. 8.30 pm

Chris Grayling (Conservative, Epsom and Ewell)

My hon. Friend may not be aware that, yesterday evening, the chief executive of Network Rail confirmed at a meeting of the all-party railways group that Network Rail will be treated, for accounting purposes, as a subsidiary of the Strategic Rail Authority. However, the debts and liabilities built up by Network Rail will not manifest themselves in the Government's accounts.

Howard Flight (Conservative, Arundel and South Downs)

I thank my hon. Friend for those comments. I shall come to that issue and to the tortuous structure that has been crafted by some of the best legal brains in the City of London to achieve that end.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Further to that point, is the hon. Gentleman aware that the second footnote of the minutes that the Secretary of State for Transport issued on 20 June says:

"Direct rights would be exercised under a 'Put option' whereby, in certain specific circumstances, commercial lenders can require the SRA to purchase all amounts due to them from Network Rail Group"?

Does the hon. Gentleman agree that that suggests that, far from the debts being able to be rolled over, the Government and the Government agency—namely the SRA—could be forced by the lenders to repay them? Therefore, those debts should be on the Government's balance sheet.

Howard Flight (Conservative, Arundel and South Downs)

Indeed, I accept that point, but another issue is relevant. The Government could be forced to repay the debts but, because the money is lent by the private sector against the undertaking from the SRA, the Government have relied on the remoteness argument that it is unlikely they would ever be called upon to disclose them. At best, that is a questionable interpretation of FRS12. At worst, it is downright deceitful hiding of the true position of the public finances.

A different accounting issue relates to PFI. Note F, which was crafted by the Treasury PFI taskforce, lays down that liability for PFI projects should be based on the risk attached to them. For example, a £100 million hospital could be ignored and disclosure could be made in relation to the basic ownership element that is deemed at 10 per cent. The Accounting Standards Board had initially advised that a much clearer and more transparent practice would have been to look at who was liable for the debt. In the case of such a £100 million hospital project, the risk is placed off balance sheet because the Government argue that 90 per cent. does not count and that the private sector is responsible for 55 per cent. of the remaining 10 per cent. However, in reality, the Government are liable for 94.5 per cent. of the entire hospital. As the senior partner of one of our leading accounting firms commented:

"The Government is effectively fiddling the figures by using a mechanism to disguise its liabilities and that a major danger of disguising the figures is that projects may not be scrutinised effectively."

The Government have also insisted on public sector capital projects being financed off balance sheet by PFI and PPP deals. The total package is, "Make them happen. Get them done by PFI and PPP, and get them off balance sheet". The projects are not then on balance sheet for the purposes of the EU rules in relation to membership of the euro, and public finances appear to be very much better than they are in reality.

So here we have the second scam that has already been exposed. To get the deals through the best value comparator process, there has been what can only be described as a rigged approach. Many crucial details are hidden from public view by the blanket ban on disclosure under commercial confidentiality requirements, and the public sector comparator, which is supposed to show a fair measure of whether privately financed schemes offer better value than conventional public funding, contains many rigged elements. Jeremy Colman, the auditor- general at the National Audit Office, recently described some of the comparators as "utter rubbish". Public service managers are engaging in the sham because they have to show that their PFI plans are cost-effective to get the investment.

Aspects of the rigging that have been exposed include what is widely known as risk costing, under which private operators are allowed to claim a special 12.5 per cent. of costs risk element. That constitutes a key component of the fair value-for-money calculation and knocks down the calculation for the PFI deal. It compares with an average cost overrun on, for example, hospital-building projects of 7 per cent. So even if we accept the principle, the cost is too high.

The British Medical Journal recently published a paper showing how risk costing has been used to distort results to a major extent and to swing projects that qualify marginally which would not have otherwise done so. There is a point of principle to consider. Even if the risk was assessed realistically, the entire exercise is questionable. Would the Government allow a major public service to collapse, as illustrated by Railtrack or the Channel Tunnel Group?

In addition, the Association of Chartered Certified Accountants explains that the Government allow public bodies to reclaim VAT on privately funded projects but not on publicly backed schemes, thereby favouring private finance by 17.5 per cent. National health service trusts have to pay the Treasury a 60 per cent. capital charge on buildings they own, but private builders have no such obligations. The Government also give local authorities an annual grant of 11.5 per cent. of the value of PFI schemes they commission, but that is not the case for publicly funded projects. Although subcontracted private sector projects and managements may be much better than public schemes, in many cases the best value justifying comparators are being rigged when they should be dealt with on a transparent and straightforward basis.

The Office for National Statistics recently confirmed that the Government managed to craft in Network Rail a legal entity with debts that will not be included in public sector borrowing requirements, unlike Consignia. That is at odds with it being billed as a renationalisation and also constitutes a legal model vehicle that could accommodate even more public sector off balance sheet borrowing. Very bright lawyers crafted that. When I approached their firm for information, I was told that they could not assist because it would be a conflict of interest and they were working for the Government to design such a scheme. That is an answer to a maiden's prayer if one wants to keep public-private partnership liabilities off balance sheet.

The Red Book includes PFI payment liabilities for 25 years, through to 2027–28. I wonder whether hon. Members have looked at those because they already amount to £98 billion. That contrasts with the initial capital value of the projects of £20 billion at the time of the deal and reflects a total of about 450 PFI deals. Another 300 PFI deals are in the pipeline and expected to sign up in the next two years. Their current capital value is assessed at £25 billion. Presumably, that will add another £100 billion over 25 years of PFI liabilities. Those are recorded in the Red Book and are material to the public sector accounts.

I participated in the Standing Committee on the Government Resources and Accounts Bill. The Conservative Opposition expressed grave doubts because they felt that it increased the scope of the Treasury to cook the books. We thought that it allowed the Treasury to incur expenditure in respect of the formation of Partnerships UK and to provide it with financial assistance, including, again, substantial Government guarantees on the discharge of financial obligations. So we have yet another conduit through which contingent liabilities can be built up but not recorded.

One of the inimitable results of this complex and devious structure, designed to keep PFI and PPP liabilities off balance sheet, has been horrific mounting legal and other transactional costs.

Rob Marris (Labour, Wolverhampton South West)

I understand that PFI started in 1994 under a Conservative Government. Is the hon. Gentleman saying that in the unlikely event that the Conservatives were ever in government again they would abandon PFI, or would they continue the scheme and show everything on the balance sheet? Is he also saying that when the Conservatives were in government, they showed all these costs on the Government's balance sheet and in the Red Book?

Howard Flight (Conservative, Arundel and South Downs)

With respect, I would have expected a better question from such a pleasant Member of Parliament. The hon. Gentleman will be aware that the PFI deals done before 1997 were few and, in the main, very straightforward, concerning the building of bridges or roads. We poor, feeble creatures did not get up to all the sophisticated trickery indulged in by his colleagues. He asked a question about principle, but I have already given him the answer: if things are properly done and transparently accounted, there is a great deal of scope for subcontracting to the private sector. There is a question as to whether one can do that safely for 30 years, but we support the principle of PFI; indeed we gave birth to it, and it is utterly usable. Unlike the present Government, this party does not stand for non-transparent and deliberately misleading accounting. If we were in power, we would get the thing cleaned up pretty quickly.

I return to the mounting legal costs. As hon. Members will know, in 1998 the upgrading of the west coast main line was priced at £2.1 billion. The cost of the scaled-down version has gone up to £13 billion this year, over twice the cost of the equivalent French new TGV investment, and much of it arises from the huge legal and transactional processing costs, reflecting the complexity of the legal structure.

The first major project being promoted by Partnerships UK is Project Aquatrine, a PFI deal to modernise the drains at the Ministry of Defence. How pathetic that the Government could not come up with something more worth doing. That deal is worth between £300 million and £400 million, and £37 million has already been spent, mostly on legal fees, without a single drain having been cleaned or improved.

When we introduced PFI, we employed it for much simpler projects such as building bridges and roads. However, PFI and PPP have been the magic solution for this Government, enabling them to keep major public sector investment costs and commitments off balance sheet. The complex structures involved avoid both the Eurostat requirements on what should be included as a public sector liability and British law and conventions on local authority liabilities, which are also to be viewed as central Government liabilities.

The Office for National Statistics is also ducking responsibility for what is happening, although it makes noises of displeasure. However, it comments that, on the question of whether a cost should be included in Government accounts, it takes the advice of others who are specialists. The Treasury ducks the issue by saying that the classification is up to the ONS. The Paymaster General will know that the hon. Member for Dumbarton (Mr. McFall), the Labour Chairman of the Treasury Committee, has advised, thank goodness, that he intends that the Committee should examine these Enron-style Government accounting practices.

At the crudest level, if the initial capital element of PFI debt alone were brought back on balance sheet it would add £35 billion to the public sector borrowing requirement—excuse my using the old-fashioned term, but it is clear. A further £30 billion would probably be added over the next two years as PFI projects in the pipeline were signed up.

Transparent treatment of PPP and PFI contingent liabilities would have serious repercussions for an application to join the euro. That is one of the main issues driving the web of deceit hiding the commitments, or at least the lack of transparency about them. The treatment of contingent liabilities is absolutely central to the new Network Rail legal structure. In principle, Network Rail is a legal structure whose borrowings are not part of Government debt. They could be rolled over and over, increasing private sector borrowing against a Government guarantee renewed every three years via the Strategic Rail Authority. That would be a nonsensical example of hiding behind the remoteness element of the FRS12 principle relating to disclosure.

It is ironic that in the wake of the private sector accounting problems in the United States the British Government are applying to contingent liabilities certain accounting practices that would be questionable in the private sector. They are certainly not practising the degree of transparency appropriate to the public sector. What is needed is full and clear disclosure of contingent liabilities and where they truly fall, accounting practices for PFI and PPP deals that make that clear, and a speedy end to the practices that have developed—practices that, if the Government are not careful, will run PFI and PPP amok and cast into ill repute principles that are workable and good for making projects happen.

We want clarity and transparency. At the very least, we want all contingent liabilities listed in the Red Book. To be candid, saying that a £9 billion contingent liability does not matter because we have a clever little deal that makes it remote is a disgrace.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I welcome the new clause and congratulate the hon. Member for Arundel and South Downs (Mr. Flight) on his ingenuity in enabling us to debate the issue—it is not before time.

I agree with the point implicit in the hon. Gentleman's argument. There is not necessarily a problem with off balance accounting or with having contingent liabilities. What is key is that they are transparent and reported properly, and that if off balance accounting is the chosen method, it is chosen for the right reasons and makes economic sense.

Those are not theoretical issues. Off balance accounting is more expensive. The Government guaranteed a bond to finance the channel tunnel rail link rather than use gilt financing, and it ended up costing the taxpayer more. The National Audit Office said that that decision cost the taxpayer an extra £80 million, for no benefit other than to keep the transaction off balance. Going off balance has to be justified because it carries a higher cost.

There is concern that the desire to drive projects off balance has become the sole reason for projects. In other words, decision making in Whitehall is being distorted. If the Minister doubts that, my first exhibit is a letter to my hon. Friend the Member for Truro and St. Austell (Matthew Taylor) from the Under-Secretary of State at the former Department for Transport, Local Government and the Regions. Dated 8 January 2002, the letter, which relates to the debate on what was then called Renewco, states:

"It was clearly understood by both sides that for RenewCo to deliver its objectives and be established successfully it could not be classified as part of either the Government's or Railtrack's balance sheet."

In other words, the negotiations surrounding Renewco were driven by the need to take the vehicle off balance. The driving force was not that that was the best way to run the railways but the desire to move the structure off balance. That is the wrong way to decide how to structure an industry as important as the railways. Policy cannot be driven by accounting definitions.

The Government have sometimes tried in their various discussions on Network Rail and the PFI in general to justify why they are taking things off balance. As far as I have been able to tell, however, the main justification boiled down to a rather obscure economic notion, which I never came across in my studies at university—reputational externalities. These are rather bizarre things and we have again had to go to the National Audit Office to find out what they amount to. The NAO takes the view that the Treasury considers that increasing public borrowing has an external cost in terms of the Government's reputation for prudence and that reputational externality is a calculation to reflect that assumed cost.

That is a bizarrely theoretical reason for promoting off balance accounting. It seems to involve the assumption that the private sector and financial markets are daft and will not notice it. I suggest that when a ratings agency considers Network Rail, it will take those factors into account. Indeed, if the Government continue to follow such a practice, they might be punished when the credit and ratings agencies consider their debt in the next few years. The reputational externalities will seem theoretical nonsense. They are a very thin reed to be used to justify taking so much borrowing off balance. My concern is why the Government are doing that, as they seem to have no clear and good economic rationale.

Rob Marris (Labour, Wolverhampton South West)

May I address the hon. Gentleman in terms of reputational long shots and ask whether, if the Liberal Democrats were ever to form a national Government, they would support PFIs?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

We support PFIs. I do not think that there is anything wrong in such methods of financing projects. However, we are debating not whether we support PFIs, but how capital assets that are bought through PFI deals and the contingent liabilities that could fall to the taxpayer are accounted for. That is the problem.

I am grateful to the hon. Gentleman for his intervention, because it takes me to my next point: we could accept off balance accounting if we knew what was happening, but I am afraid that the efforts that my hon. Friends and I have had to make to uncover the process on which the Government are embarking have been so detailed and have required so many letters and parliamentary questions that they do not suggest much transparency.

One must ask what the tests are for moving something off balance. As far as I can see, the Government have been using the commercial, private sector test: statement of standard accounting practice 21, which is about whether a deal is a financial lease or an operating lease. If it is a financial lease, it is deemed another form of borrowing and therefore has to go on to the balance sheet, but if it is deemed an operating lease, it can go off balance.

That creates a few problems. In preparing my speech, I visited the Accounting Standards Board website and looked at statement of standard accounting practice 21. Interestingly, we are told that that practice is currently under review because it is felt that it is not precise enough and that in its own terms, there is some uncertainty about its effects. It is also suggested that transactions that are carried out by private sector firms, but are effectively the same as those in question, are being accounted for in different ways. The private sector admits that there is a problem, as does the Accounting Standards Board, but the Government do not seem worried. That should be a particular cause for concern, given the huge amounts involved.

Although statement of standard accounting practice 21 is not specific in its definition of operating and financial leases, I have spoken to practising accountants to find out what the basic practice is and what they do to make the decision. I am told that although it is not written down, in practice they say that if 90 per cent. of the capital value of an asset is recouped by the lessor out of the capital element of the lease payments over the lifetime of a contract, it is normally deemed to be a financing lease and should therefore count as borrowing. In January, my hon. Friend the Member for Truro and St. Austell asked the then Secretary of State about what proportion of PFI contracts would have been affected by the rule that is used by the private sector. He received the following reply:

"No such estimate has been made. The existing PFI contracts in the Departments are for the provision of a service in return for a unitary payment, the payment of which is dependent on satisfactory performance. The unitary payment is not broken down into constituent parts."—[Official Report, 18 January 2002; Vol. 378, c. 514W.]

That suggests that the Government are not operating the test under statement of standard accounting practice 21, because they do not know which elements of the unitary payment are capital and which are not. Although the Government have been telling us that they have been doing what the private sector do, in practice they have not. That should give us real cause for concern.

Howard Flight (Conservative, Arundel and South Downs)

The hon. Gentleman did a better job than I did of explaining the PFI in relation to standard 21. Standard 21 deals with PFI and what is used to hide liabilities in that context, but contingent liabilities are covered by a separate rule, FRS12, which is the doctrine of remoteness. Under that rule, roll-over cannot be used as a justification for believing that a liability may be remote.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful to the hon. Gentleman. He anticipates me, as I was about to come to that point, specifically to pick up his example of Network Rail, where the remoteness test is the fig leaf that the Government are hiding behind.

The Secretary of State for Transport did not dwell on the matter in his statement of 27 June. He referred Members who asked him about contingent liabilities to the minute that he had just published, suggesting that we went to the Library, put towels round our heads, and studied it. I have not put a towel round my head, but I have indeed studied it. Interestingly, it reveals that in making their decision the Government seem to have leaned heavily on the advice of the Office for National Statistics. Paragraph 19 of the minute, which deals with non-statutory contingent liabilities, refers to the confirmation by the Office for National Statistics that

"Network Rail would not be classified as a public sector organisation and its expenditure and liabilities would not score against public sector expenditure and net debt."

So the Government are relying on the ONS.

On 28 June, the day after the statement and the publication of the minute, the Comptroller and Auditor General, the main watchdog that the House relies on, published a press release entitled "Comptroller and Auditor General's view on the appropriate accounting treatment for Network Rail". Hon. Members should look at it, because it suggests that he is in complete disagreement with the Office for National Statistics. I quote:

"Sir John Bourn, the Comptroller and Auditor General, has concluded that Network Rail should be accounted for as a subsidiary of the Strategic Rail Authority"—

the point made by the hon. Member for Epsom and Ewell (Chris Grayling)—

"and should be consolidated in the SRA's accounts. He makes this judgement in his capacity as statutory auditor of the SRA.

Sir John's view is that the Government's interest in Network Rail is akin to an equity shareholder's interest. The Government is effectively providing security for the providers of debt finance to Network Rail and is acting as a lender of last resort in the event of financial difficulties. Therefore the Government is the party bearing the risk that would normally be borne by equity capital."

That is pretty clear. It goes on:

"Financial reporting standards look at the substance of transactions as well as legal form and on that basis Sir John has advised that the assets and liabilities of Network Rail should be accounted for on the balance sheet of the SRA."

Sir John is therefore saying that, in substance, there is a liability to the public sector. The Government may use rules that the Office for National Statistics dreamed up for them, but they refuse to accept the point on substance, about which, as Sir John points out, we should be worried.

Michael Jack (Conservative, Fylde)

The hon. Gentleman is speaking with great clarity. Does he agree that our focus on rules may not enable us to examine reality? When Railtrack experienced problems, the Government believed that they were the only body that could sort out the liabilities that are associated with the railway system. If Network Rail ran into unforeseen problems and was in commercial difficulties, who would be there to pick up the pieces? The Government of the day.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The right hon. Gentleman is right, and reaches the core of the debate. The political point is that hon. Members cannot be clear that the Government's finances are being soundly run. We are elected to make those judgments and ensure that the taxpayer is not being saddled with debts that will result in higher taxes or cuts in public expenditure down the line. That lies behind this welcome and important debate.

I was discussing the difference between the focus of the Comptroller and Auditor General on substance and that of the ONS on rules. A report in The Times on 29 June states:

"The Times has learnt that the Statistics Commission, the watchdog appointed by the Chancellor to police the national accounts, is to investigate the ONS's view and may seek to overturn it."

I have no confirmation of that quote; I am sure that The Times had its information on good authority.

The Government appear to be structuring Network Rail on guidance that the ONS has accepted. However, the ONS watchdog is examining the information and is worried about it. The National Audit Office has made a public statement to express its concern. Hon. Members should take serious note of that, and the Government should provide a proper, full debate in their time so that we can ensure that we know what is going on.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman has been generous in giving way. His comments suggest a difference of opinion between various watchdog bodies. Against that background, how could the new clause be implemented, when such a range of opinion exists about the way in which figures can be drawn up?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am not sure whether I understand the hon. Gentleman. The new clause would help matters because it would flush out the issue so that it was in the public domain. That needs to be done. The issue needs greater public debate by Select Committees, including the Public Accounts Committee. If we are to put the future of rail, not simply an individual PFI, into the financial structure, we need greater clarity and transparency. I welcome the new clause because it would help to achieve that.

Mark Hoban (Conservative, Fareham)

The new clause appears to change the rules of accounting for Government liabilities to bring them in line with generally accepted UK accounting practice. I believe that the Comptroller and Auditor General is relying on that practice to state that Network Rail is Government controlled and the liabilities should therefore be on the Government's balance sheet.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman is right. I believe that when the Statistics Commission examines the actions of the ONS, it will agree with him and the NAO. That is why the new clause is so welcome.

Let us consider the debate between the various bodies. The Government have been trying to say, "Well, the ONS has told us that that's okay." Yet the ONS is acting simply in an advisory capacity; it is not making decisions for the Government. It is up to the Government to decide, the ONS to advise and the NAO to audit the decisions. The Government cannot try to escape responsibility by relying on the words of others. The spirit of the Government's rules, to which they presumably try to keep when making such important decisions, is being broken.

Two key documents cover this matter. One is "Government Accounting", and chapter 26 is the relevant section, for those hon. Members who want to wade through that heavy document. Technical note 1 deals with accounting for PFI transactions. In the case of Network Rail, as was the case for London Underground, the whole framework seems to rest on the edifice of letters of comfort. What does chapter 26.3.1 of "Government Accounting" have to say about letters of comfort? It says:

"Departments should approach any request for a letter of comfort . . . with a strong predisposition to reject it."

If that is the basis for the Government's rules, under which they are setting up the new structure for the rail industry, we should be really worried. The Government's own rules say that they should not do this. The paragraph goes on:

"Proposals to issue a letter of comfort should therefore be exceptional".

They should not be the basis for the whole railway industry. The Government seem, effectively, to be breaking their own rules. They know exactly what they are doing, and they are trying to hide this.

My hon. Friend the Member for Truro and St. Austell anticipated the Government's thinking on this. In November last year, he asked a parliamentary question of the then Under-Secretary at the then Department for Transport, Local Government and the Regions. My hon. Friend asked:

"what representations he has received from potential financiers of the successor body to Railtrack for non-legally binding assurances from the Government on their support for Railtrack's successor body".

The answer was:

"The Government are not anticipating having to provide any non-legally binding assurances on their support. If contingent liabilities are required to be entered into, they will be notified to Parliament as part of the standard procedure."—[Official Report, 23 November 2001; Vol. 375, c. 497W.]

In other words, in November, the Government were not intending to go down that route, because they knew that it should be used only in exceptional circumstances. Unfortunately, they have been forced back because of their failure to structure the organisation properly.

Is it any wonder that people are concerned about this matter? The process is neither transparent nor clear. The Government are not keeping to their own rules and guidance, and Parliament's main watchdog is not happy. The Government must think again, and promote a much wider debate on this issue. If they do not, their whole financial framework for the public finances will be undermined. They must tell us why they favour these off balance sheet approaches.

Howard Flight (Conservative, Arundel and South Downs)

"Off balance sheet" can mean two different things, but, at least, if these matters are not part of the national balance sheet, the notes to the balance sheet should clearly record everything that is in place. That is what transparency is about.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman is right, and if the Government do not do what he is asking, and do not respond to this kind of debate more fully, the Treasury will be acting as the Andersen to the Department for Transport's Enron.

Mark Field (Conservative, Cities of London and Westminster)

With great respect to the hon. Members who spoke earlier, this is the most important debate on Report. I appreciate that we need to move on, so I shall make just a few comments. I entirely agreed with the contribution of my hon. Friend the Member for Arundel and South Downs (Mr. Flight). I share his grave concerns about the Government's off balance sheet approach, and about the way in which, as a result, headline public expenditure is reduced for the purposes of the public accounts.

I might be able to pre-empt the hon. Member for Wolverhampton, South-West (Rob Marris) by saying that, while I shall not pledge to scrap PFI—in the highly unlikely event that I ever hold office in this place—I have always had grave reservations on the subject, going back to the early 1990s, when I practised as a lawyer in the City of London. The whole PFI project—now superseded by PPP and enhanced, specifically in the last five years, by a considerable number of projects that are now in train and will be for some years to come—was made highly attractive to public sector investors, the construction industry, and the vast number of advisers in the City of London, many of whom I represented, in a pastoral way, at least. Often there has been little evidence of a substantial risk being transferred. That is one of the concerns mentioned by both the previous contributors to the debate. The real test, and the cost to the taxpayer in the longer term, may become apparent only in the second decade of this century, as the projects come to an end.

My great fear is that we will find that many of the PFI projects have not been well structured and are not good value to the taxpayer. That may become evident, as I said, only in the second decade of the century, which may unfortunately also be a time when, for whatever reason, we are going through a recession. If, in those circumstances, we suddenly have significant expenditure from the public purse, it would be a nightmare.

I entirely agree with my hon. Friend the Member for Arundel and South Downs that we need greater transparency. I also agree with the hon. Member for Kingston and Surbiton (Mr. Davey) that we must ensure that substance, rather than legal form, is the test of any transaction.

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Gentleman give way?

Mark Field (Conservative, Cities of London and Westminster)

I hope that the hon. Gentleman will forgive me; I know that others want to speak. I hoped that I had pre-empted at least one of his questions.

I hope that the Minister will make a statement in relation to the new clause. It is unlikely that the clause will win through today, but it is at the core of the grave concerns that have been expressed about the manner in which the Government seek to present their finances. If Government finances and finances generally are to be trusted, it is crucial that they are accompanied by increasing transparency, security and trust. It is clear from the events of recent months around the world that we need a greater degree of trust. It is incumbent on the Government to ensure that the finances and accounts that they present to the country warrant full trust.

Mark Hoban (Conservative, Fareham)

We are fortunate to have the example of Network Rail to illustrate the arguments in favour of the new clause moved by my hon. Friend the Member for Arundel and South Downs (Mr. Flight). As someone who has practised as an accountant in the past, it is clear to me that the Government are exploiting the difference between accounting standards to create a transaction and a structure that get them off the hook in terms of accounting for the liabilities of Network Rail as a debt on their balance sheet.

As the hon. Member for Kingston and Surbiton (Mr. Davey) observed, the Comptroller and Auditor General recognised that Network Rail was a subsidiary of the Strategic Rail Authority and should therefore be included on the SRA's balance sheet, and on the Government's balance sheet as a public body that should be counted as such. Of course, the Comptroller and Auditor General is not the first to identify that. There was an article in the Financial Times on 20 June, I believe, which reported that the SRA's own auditors, PricewaterhouseCoopers—the firm for which I used to work—had also identified that the debt should be on the SRA's balance sheet and therefore be counted as part of public sector borrowing, and that the Department for Transport had confirmed that.

Transactions are being deliberately structured to ensure that they are not counted as part of the public borrowing, by ensuring that the Office for National Statistics uses the European standards of accounts 1995. The art form of structuring transactions to meet the form of regulation, rather than ensuring the substance of the transaction that is being accounted, underpins the problems that we have witnessed in the US with Enron. We have seen a rules-driven approach trying to ensure that liabilities are kept off the balance sheet.

It is important for the Government to recognise that if we require, rightly, the accounts of private companies to present a true and fair view of their assets and liabilities, it is right that the Government's accounts show the very same thing. They should recognise that the definitions used in UK general accounting practices should be used to determine their own liabilities. It is the view of both the CAG and PricewaterhouseCoopers that the SRA has dominant control or influence over Network Rail. In its report, the ONS tried to justify this accounting treatment. The SRA is a strategic partner and funder of Network Rail, and its influence is clear. Cleverly structuring transactions so that the majority of board members are from the private sector is not the right way to go about accounting for a £9 billion liability.

We need to accept and recognise the reality of this transaction, which is that the SRA controls Network Rail through its funding and its role as a strategic partner. That is how the transaction is structured at the moment. However, we should also recognise, as the Government did last year, that if things go wrong they will pick up the bill. The Government will act as the lender of last resort, so it is clear that there is a real liability to the taxpayer. That may be seen to be contingent now, but it could well be actual, and the public accounts should recognise that fact.

This debate is well timed. The example of Network Rail is highly appropriate. The transaction has been structured in such a way as to focus on its form and to get the liability off the public sector balance sheet. That is not the way in which accounting should be done for these transactions. We should ensure that our public accounts are honest, transparent and open.

Ruth Kelly (Labour, Bolton West)

It was interesting to listen to this debate, especially to the impassioned defence of the new clause by the hon. Member for Arundel and South Downs (Mr. Flight). I was slightly surprised by the colourful and, dare I say it, slightly intemperate language that he used to describe Government accounting. I am sure that many hon. Members agree with me that the accounting issues that Enron and WorldCom have exposed in the United States are extremely serious and should be dealt with across the globe as well as in the US. They could have serious consequences for investor confidence and for ordinary people working in and around those companies. I do not think that such language is appropriate to describe genuine differences in the United Kingdom in the accounting treatment of various liabilities, some of which have to do with the PFI, but many of which have absolutely nothing to do with it or with the words of the new clause.

Howard Flight (Conservative, Arundel and South Downs)

I hope that the Minister heard what my hon. Friend the Member for Fareham (Mr. Hoban) said. He is a qualified accountant, and he made the point that the approach that is being followed, which is to exploit the rules rather than the substance, is precisely what Enron off balance sheet accounting was about.

Ruth Kelly (Labour, Bolton West)

That is absolutely not the case. I found much of this debate confused. When the hon. Gentleman considers the arguments as I respond to the debate, perhaps he will withdraw this completely unnecessary and muddled new clause.

The new clause would require the Government to follow generally accepted accounting practice in preparing the Red Book in addition to the code of fiscal stability. It would also require us to publish an aggregate figure for liabilities under the PFI. I intend to deal with each of those points in turn.

First, I should like to point out to hon. Members, especially Opposition Members, that the Government already follow GAAP. Spending data in the Red Book, including commitments under the PFI, come from Departments' accounts. We are one of the few Governments in the world to require by law Departments' accounts to follow GAAP.

I am also surprised that the hon. Gentleman has suddenly decided to retreat from the Bill that was introduced with bipartisan agreement—now the Government Resources and Accounts Act 2000—which was part of a process that started in 1994 and was described by the then Chancellor and the Conservative Government as the most important financial reform since Gladstone. I am delighted to see that the hon. Member for Kingston and Surbiton (Mr. Davey) accepts that fact.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

May I say how much I agree with that statement? It was an extremely important reform. However, as the hon. Member for Arundel and South Downs (Mr. Flight) said, in Committee we debated the way in which the Government treat contingent liabilities. Neither Conservative nor Liberal Democrat Members were happy about the way in which contingent liabilities were being treated under resource accounting and budgeting. This is not a new point, therefore—we have been arguing this for some time.

Ruth Kelly (Labour, Bolton West)

I accept the point made in good faith by the hon. Gentleman, and will deal with the treatment of contingent liabilities under PFI projects in due course.

The Government Resources and Accounts Act 2000 was passed as a result of the transformation of public accounts under resource accounting and budgeting. Section 5(3)(b) provides that a Department's accounts must

"conform to generally accepted accounting practice subject to such adaptations as are necessary in the context of departmental accounts".

The adaptations are necessary because GAAP, desired in the main for the private sector, does not have to deal with issues such as military assets or nuclear decommissioning liabilities that we have to deal with in the public sector.

We have an independent statutory advisory board—the financial reporting advisory board—to advise us on the application of GAAP to the public sector. It was this Government who put that independent advisory board on a statutory basis, and we have never rejected its advice in the five years of its existence. We have a system for public sector financial reporting that is among the most advanced and transparent in the world. I believe that this part of the new clause is therefore superfluous, but it is also confused.

There is a wealth of data in the Red Book not covered by GAAP, because GAAP cannot say anything about unemployment assumptions, for example, or oil revenues. Instead, under the very Finance Act that the new clause seeks to amend, we subject changes to these assumptions to the audit by the independent National Audit Office. In practice, the new clause would require these numbers to conform to GAAP, which is silent on these issues.

The second part of the new clause would require the Government to publish an aggregate figure for all financial liabilities actual and contingent under the PFI. Again, I believe that that is misleading. First, the Opposition should look at table C19 of the latest Red Book, in which the Government published their estimated payments under the PFI going up to 2028, consistent with the audited data in Departments' accounts.

Howard Flight (Conservative, Arundel and South Downs)

I readily acknowledge that the totals add up to £98 billion, as I mentioned.

Ruth Kelly (Labour, Bolton West)

The new clause wants a figure for possible liabilities, but PFI rarely gives rise to contingent liabilities. PFI deals are contracts for the provision of a service. We pay only for the services received. In the event of a default, the financiers are required to look for alternative service providers. If that fails, which would be very rare, termination proceedings would begin. That is the course of normal business—it does not give rise to a contingent liability in any proper sense of the term.

In a small number of specific cases involving public-private partnerships, we have provided for some sort of public formal guarantee to the financiers. One example is London Underground, where a letter of comfort sets out different sets of circumstances whereby the Government would underwrite some of the financiers' commitments. That letter was of course put before Parliament, as we are required to do and as happens in the normal course of events. The Government report to Parliament all such letters of comfort and all contingent liabilities that arise which account for more than £100,000.

Michael Jack (Conservative, Fylde)

If a PFI hospital deal ran into trouble and there was a gap between the originator of the project and the successor body taking over that required some degree of financing, would that not be a liability? If so, how do the Government account for it?

Ruth Kelly (Labour, Bolton West)

If a genuine contingent liability exists, the Government publish that contingent liability as part of the supplementary statement to the Consolidated Fund accounts. Details by Department are available in the notes to Departments' audited accounts, which, again, are laid before the House. It is hard to see how the system could be any more transparent than it is at the moment.

Howard Flight (Conservative, Arundel and South Downs)

How on earth could the Minister say to me earlier that a £9 billion guarantee on Network Rail would not need to be disclosed as a contingent liability?

Ruth Kelly (Labour, Bolton West)

I will come to the treatment of Network Rail in a moment, but I should point out that Network Rail does not actually count as a PFI and, strictly speaking, is not within the terms of the debate. However, I shall be happy to deal with it in a moment.

Opposition Members have charged us with using the PFI and the PPP as a ruse to keep numbers off the balance sheet so that they do not show up in the Government's accounts. That is utterly untrue and complete nonsense. Balance sheet treatment in this country has to be confirmed by independent audit. Recent PFIs and PPPs—including the London Underground, prisons and the second Severn river crossing—are all on the balance sheet; the trend increasingly is to put them on the balance sheet. The issue of whether or not there is a transfer of risk is decided independently. We take independent advice from our advisory body, which we put on a statutory basis. We could not have a more transparent system.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

Are the devolved Administrations free to enter into their own contingent liabilities, or must they seek Treasury approval?

Ruth Kelly (Labour, Bolton West)

I will have to check that point and write to the hon. Gentleman. If contingent liabilities arise in UK Departments, they have to be reported to Parliament, as is clear in the treatment of those liabilities in Departments' accounts.

Rob Marris (Labour, Wolverhampton South West)

I confess that I used to be a solicitor before entering this House, and not an accountant—[Hon. Members: "Oh!"] I am quite proud of that, although others may not be. There are differences of opinion, so could my hon. Friend explain what the Government understand by the term "contingent liability"? I confess that I do not exactly understand it. I thought I did before the debate began, but I am not sure now whether it has to do with the probability of a risk occurring, a possibility or a tiny possibility. Could my hon. Friend elucidate?

Ruth Kelly (Labour, Bolton West)

The word "contingent" has different meanings in different contexts and contingent liability for a PFI is slightly different from contingent liabilities arising in other contexts. We have consistent treatment, in which if a liability is possible or likely, it is reported to Parliament. If a liability is remote, it is treated differently, as the hon. Member for Arundel and South Downs has said.

The important thing is that we have a statutory independent financial reporting advisory board, and a framework within which the decisions are taken. In considering the case of Network Rail, we have an independent statistical body—the Office for National Statistics—which applies internationally recognised national accounting standards that are used to compare economies internationally.

Clearly, in the treatment of complex statistical issues other bodies and individuals will take different views in certain circumstances. That is precisely what has happened in the case of Network Rail. The National Audit Office made a different judgment about how liabilities arising should be treated. Do hon. Members really want me to say that we should go against the recommendation of the Office for National Statistics and use a system for Network Rail that does not apply internationally recognised accounting standards, and which treats the matter in a different way?

To reassure the House that we take this issue seriously, we have set up an independent statistics commission that examines our treatment of accounting and whether we treat these issues in an unbiased, objective and professional way. In due course, it will reach a conclusion on whether the treatment of Network Rail is the appropriate one. I suggest that we wait for the commission's review before jumping to a premature conclusion that is based on what Opposition Members have said today.

This country has one of the most transparent accounting frameworks in the world. Under this Government, we have taken an enormous step forward in the treatment of accounting. We have introduced resource accounting legislation and put the financial reporting advisory board, which advises us, on a statutory basis. As I said, we have also set up a statistics commission, which can take an independent view of our accounting and of our statistical processes and treatment. Hon. Members should give the Government some credit for taking this process forward. They should acknowledge the reforms introduced by this Government to ensure that our public sector financial statements are among the most sophisticated and transparent in the world. Those statements fully accord with generally accepted accounting practice and with some of the highest standards in the private or public sector anywhere in the world. On that basis, Opposition Members should withdraw the new clause.

Howard Flight (Conservative, Arundel and South Downs)

I was surprised at the Financial Secretary's sticking to the official line. The City of London and the markets are focusing on the growing totals of contingent liabilities and private finance initiative contracted payments. In particular, they are asking about defence—an area on which there is no information at all. It is well known that the Treasury went to great trouble to establish the Network Rail structure in such a way that the view could be expressed that borrowings would not count as a public sector liability.

The new clause is self-evidently a probing one; it is about substance and getting the substance right, rather than using rules for convenience. The Financial Secretary did not discuss the other side of the coin—the manifest rigging of the public sector comparator to justify PFI deals in the first place. On putting together the different pieces of the jigsaw, virtually all public sector capital investment is off balance sheet via PFIs or public-private partnerships. The precise substance of the Government's liability in relation to PPP and PFI deals is simply not known.

We want a transparent, whiter-than-white system that is more demanding than that applying to the private sector, which it manifestly is not. It is extremely difficult to get information, as the hon. Member for Kingston and Surbiton (Mr. Davey) has discovered. The Government will pay the price if they do not clean up this area quickly.

New Clause 6 — Statement of liability to income tax

John Bercow (Conservative, Buckingham)

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

Michael Martin (Speaker, Glasgow Springburn)

With this it will be convenient to discuss new clause 18—Timing of announcement of all income tax allowances—

'In section 257C(3) of the Taxes Act 1988, at the end—

"The order shall be made by 31st December following the preceding September referred to in subsection (1).".'.

John Bercow (Conservative, Buckingham)

I have a sense that the patience of the House might soon be exhausted if hon. Members are inclined to dilate excessively on the remaining new clauses for our consideration. I am conscious of the patience threshold of Members, as you will testify, Mr. Speaker, and I shall therefore keep my remarks genuinely brief. Labour Members should savour that consciousness while it lasts, as it may not be reproduced very soon.

Dawn Primarolo (Labour, Bristol South)

May I say how much engagement suits the hon. Gentleman? His new-found brevity is no doubt a product of his haste to spend his time—as we would all like to do occasionally—with loved ones and family.

John Bercow (Conservative, Buckingham)

As the Paymaster General can easily discern, I am thirsting for the company of my beloved, who said to me, although she is a keen supporter of mine, "Why, dear, do you always think it necessary to avoid using one word when a hundred would do?" She might not admit it, but that is what she said.

The subject matter in question is the statement of liability to income tax. The thrust of the new clause, which is tabled in the names of the shadow Chancellor, my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard), other of my hon. Friends and I, is to make explicit what people pay, the effect of their contributions, and how resources are divided between the areas of Government responsibility. Specifically, people pay their taxes and, in return, they want decent health care, a quality transport system, adequate education, the best possible protection against crime, a guarantee of financial security and proper but minimum interference in the affairs of industry and commerce. If they live in rural areas, they are concerned about the rural environment. In addition, the Department for Culture, Media and Sport is mentioned in subsection (2)(h) of the new clause. It has responsibilities and money goes to it. Therefore, we need to know what we receive in return.

The thrust of the new clause is an attempt to move towards more open government, requiring transparency about where Government money is spent and an easy-to-follow format for the lay person. It is not, however, a move towards hypothecation of tax. The Government publish all the information in other formats, but the new clause would merely make it easier for individuals to understand Government spending.

As hon. Members can testify from their experience, a number of councils provide similar information on the council tax bills sent to each household. Conservative Members do not understand why the Government cannot operate on a similar principle in relation to the payment proceeds and purposes of income tax. It should not be costly to follow the spirit and content of the new clause, because the same calculations could apply to each taxpayer. A uniform system could operate, and it would not create a great administrative burden. It should be relatively straightforward to make computer-produced statements, about which we know the Government are very keen.

The new clause takes the form of a probing amendment. It does not make an explicit commitment on the part of the Opposition, but it would require the Revenue to produce a statement of an individual's income tax liability and the proportion of that liability that would be spent in each Department. It is a straightforward and eminently reasonable proposal.

I feel almost 100 per cent. confident that the Paymaster General, if she is in one of her more eminently reasonable moods, will eschew the opportunity of a long reply and make it clear that no Labour Member has any intention of objecting to the new clause. With the hoped for—although not guaranteed—support of the Liberal Democrats, I trust that we can be unanimous on the subject and dance round the mulberry bush together in support of new clause 6.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The reputation of the hon. Member for Buckingham (Mr. Bercow) for speaking without hesitation, repetition or deviation once drove me to suggest that he was a suitable candidate for "Just a Minute". That point may not apply today, because he has been brief and witty.

I assure him that the Liberal Democrats support the new clause. We have advocated such a proposal, under what we describe as our citizens' tax contract, since 1993. Therefore, it would be odd if we did not support the new clause. However, I have one or two concerns about its detail. Perhaps I did not hear the hon. Gentleman clearly, but he did not appear to explain why the Ministry of Defence was not covered by subsection (2).

Rob Marris (Labour, Wolverhampton South West)

And the Foreign Office.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Foreign Office, and one or two other relevant agencies. I do not want to provoke the hon. Member for Buckingham, because I want to move on.

John Bercow (Conservative, Buckingham)

rose—

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The hon. Gentleman has been provoked.

John Bercow (Conservative, Buckingham)

I am easily provoked, as you will be aware, Mr. Speaker. I was being selective and illustrative about the new clause rather than pedantic and exhaustive. As a person of generous spirit, I always thought that the hon. Gentleman preferred the former combination to the latter. I hope that he will not now disabuse me.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

Although it is tempting to indulge in a little banter with the hon. Gentleman, I am sure that hon. Members would prefer me to discuss new clause 18.

The new clause is similar to a new clause that I tabled to the Finance Bill 2000. I will not rehearse the speech that I gave then, but hon. Members who are interested can read it at columns 268–69 of Hansard for 18 July 2000. It is also on our website.

The new clauses have the same purpose: to avoid unnecessary bureaucracy, expense and anxiety among vulnerable people. Let me explain. Relatively recently the Government changed the way in which they send out pay-as-you-earn notices of coding. I raised that in 2000 because of the Government's practice of announcing personal allowances for the following year for most employees in the pre-Budget report, but their failure to announce the allowances for pensioners. That caused confusion among pensioners who received a notice of coding in the spring and another one after the Budget. They wondered what was going on because the coding had changed following the Budget, and between April and May they effectively gave a tax-free loan to the Government because their tax position had been based on non-indexed allowances.

We argued that the Government should amend the Taxes Act 1988. They did not accept that, but changed the practice by administrative decision, which was welcome. They were clearly moved by the strength of the argument, especially the case put forward by the Low Incomes Tax Reform Group, and this is my first opportunity to salute them for that. However, in making the change and announcing the age-related allowances in the pre-Budget report, the Government did not announce the allowances for the following year for blind people. Although pensioners escaped the double tax code notification and related problems, blind people did not. So the Government need to go a little further.

The problem also suggests that, rather than making the change by administrative decision, it might be better to put it beyond doubt by including it in law. That would allow us to avoid the problems that arise for blind or elderly people if someone in a Department is forgetful and they receive two coding notices. That situation is confusing and people end up giving an interest-free loan to the Government. It is a small but important point because some of our vulnerable citizens experience unnecessary anxiety. I hope that if the Government do not accept the new clause, they will make that administrative decision now and table an amendment to that effect to next year's Finance Bill.

Dawn Primarolo (Labour, Bristol South)

New clauses 6 and 18 are aimed at giving greater information and clarity to the taxpayer. I regret that I cannot accept either new clause, but I will outline some of the problems that arise and the issues that need to be settled.

New clause 6 attempts to provide every taxpayer with a statement to show how their income tax liability is allocated in spending terms. Telling taxpayers how their taxes are spent is something that the Government take seriously. We are doing that in a number of ways, but always want to improve on such practices. I want to explain why new clause 6 does not provide the best method. I listened very carefully to the points made by the hon. Member for Buckingham (Mr. Bercow), and I shall continue to reflect on them, but I shall briefly put to him the major difficulties with the new clause.

First, the new clause runs counter to the principle underlying the Consolidated Fund because it asks us to track £1 of tax from a taxpayer into the Consolidated Fund and then back out to a particular Department. I accept the principle being put forward by the hon. Gentleman about giving indications of how taxpayers' money is spent, and we do our best to do that, but this route would be bureaucratic and difficult.

In addition, the apportionment calculation in the new clause simply will not work. I appreciate the point that is being made, but by multiplying an individual's income tax liability by the percentage of the total UK tax take that the income represents, the apportionment proposed in subsection (2)(d) can never add up to 100 per cent. of the individual's income tax liability. Other hon. Members pointed out that the list of Departments is not exhaustive and perhaps that is where the 100 per cent. is made up. However, that runs counter to the point that the hon. Member for Buckingham was trying to make about people understanding where their money goes.

There is a second problem with the new clause. Many of those who are not in self-assessment, such as employees taxed under PAYE, currently have no reason to provide the Inland Revenue with details of investment income taxed at source, unless they are liable to be taxed at the higher rate or are due a repayment. To provide such taxpayers with a statement of their total liability to income tax, the Inland Revenue would be required to obtain details of the total tax paid by each individual, and that would effectively bring millions of taxpayers into self-assessment, not for the purposes of collecting tax, but merely to provide them with a statement of their share of income tax liability, notionally apportioned. I do not think that the hon. Gentleman wanted to achieve that.

To be fair to the hon. Gentleman, what he is asking in his new clause is that the total tax paid by an individual over a tax year should be calculated, but that information, which would have to be accurate, is not held in one source. The new clause would require a statement to be issued annually to every one of the 26 million income tax payers, showing their total tax liability for the year, including PAYE. That would be a huge task, and it is a costly way of trying to achieve the hon. Gentleman's aim.

In speaking to the new clause, the hon. Gentleman was good enough to say that it was a probing amendment, and that he wanted to push the Government and, presumably, to hear me say that we will continue to look for ways to improve our method of accounting to the taxpayer for the spending of tax moneys. Although the hon. Gentleman will want to return to the matter, I hope that he accepts that the intention is shared across the House but this particular method is not the best way of fulfilling it. I should be grateful if he would allow me to consider the matter for a little longer.

John Bercow (Conservative, Buckingham)

The right hon. Lady's tones are mellifluous and her forensic parliamentary skill was on display for all to see, but I suggest that the speech that she has just delivered represents the triumph, the ultimate victory, of the Treasury anorak. If ever there were a case of a Minister being guided by those whom we cannot name, but whom we can see if we look fairly carefully, to such an extent as to offer the House an extraordinarily over-zealous interpretation of what a rather humble hon. Member had in mind, this was such a case. The Minister knows that I am a very straightforward sort of bloke. I do not go in for the high-powered stuff—

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

Order. That is rather long for an intervention.

John Bercow (Conservative, Buckingham)

With the greatest respect, Madam Deputy Speaker, I was not under the impression that I was making an intervention. I thought that the Minister had finished her speech.

Dawn Primarolo (Labour, Bristol South)

indicated dissent

John Bercow (Conservative, Buckingham)

I beg your pardon, Madam Deputy Speaker, and I beg the Minister's pardon. In that case, let me simply say that the Minister is guilty of over-literal interpretation. What my hon. Friends, the taxpayer and I want to know is how money is divided between different areas of responsibility. I rest my case.

Dawn Primarolo (Labour, Bristol South)

I hope that I did not unintentionally contribute to the hon. Gentleman's misunderstanding. I was giving way to him before responding to new clause 18.

Perhaps it is a mistake for a Minister to do this, but I was trying to give a considered response detailing why a particular mechanism would not work. I sometimes feel that I cannot win: if I brush an amendment aside without explanation, I have not dealt with it properly, and if I make an honest attempt to explain the real difficulties, I am accused of being an anorak. Oh well, never mind.

Around the time of the pre-Budget report and the Budget, the Government provide summary leaflets that provide a breakdown of the total revenue raised and the expenditure divided by Government Departments, as well as a breakdown of the sources of tax income. I thought—perhaps mistakenly—that that information was available to every taxpayer. It is certainly on the internet. I assumed that new clause 6 was designed to tease out whether that provision could be refined to an individual basis, so I was trying to explain some of the hurdles to the hon. Gentleman. I understand his impatience. I am sure that I would feel the same way if I were in opposition and he were the Minister making this speech.

New clause 18, to which the hon. Member for Kingston and Surbiton (Mr. Davey) spoke, deals with the timing of the announcements on income tax allowances. I regard it as a reasonable proposal, but for the reasons that I shall outline, I am not prepared to adopt it as an amendment to the Bill.

Indexation orders specify the level of allowances that should apply if they were to increase in line with inflation, but Parliament may determine otherwise. The orders do not set the level of the allowance or the rate bands. In effect, they provide formal confirmation of what the amount would be if indexation were to apply, which means that they are made even if statutory indexation is to be overridden—as it was during discussions on the Budget. For example, in clause 29 we set the level of the personal allowances for those aged 65 to 74 at £6,610 for 2003–04, which on current forecasts is £390 over indexation. We debated in Committee why it was necessary to do that. In any event, we published the indexed allowances in the pre-Budget report, in table 2 of the tax ready reckoner. The actual figures have not been pre-announced, but the information is available on the Treasury website. As part of our obligation under legislation, we also covered most of the allowances in the Treasury order that was made on the day of the pre-Budget report's publication. In the past two years, we have announced the level of pensioner allowances in the pre-Budget report. For 2003–04, we have already set the policy on the pensioner allowance and we should be able to confirm the figures once we know the value of the retail price index.

However, the crux of the matter—I will be perfectly straightforward with the hon. Member for Kingston and Surbiton in putting the Government's view—is that it is wrong to commit Governments for ever to announcing all allowances in the pre-Budget report. Chancellors must retain flexibility in the timing of decisions, so that they can mesh with the timetable of other policies or take account of the overall fiscal position on the basis of the latest available economic data. Current legislation ensures that indexation orders can be made at any time up to the start of the next year, once the retail prices index is known. In our view, it is better to make the order giving the theoretical indexation figure when the announcement is made on the actual level of allowances. That allows people to compare the two, which follows on from the principle to which the hon. Member for Buckingham referred in relation to information.

The Government have developed a policy of pre-announcement, in the context of the Chancellor taking the decision, of other strategies in the Budget or pre-Budget report. However, although we follow that practice at this time, we do not wish to formalise it as a permanent arrangement. I point out to the hon. Member for Kingston and Surbiton—this point lay behind many of his comments, and especially his reference to the Low Incomes Tax Reform Group—that the Government continue to take a very active interest in listening not only to him and other hon. Members, but to lobby groups, about how we can make contact with the tax system less frequent, especially for the vulnerable sections of our community, and how such contact can be made far less arduous than people sometimes find it when it does occur. I hope that he will accept that, although the Government may act on the principle at this time, we are not prepared to concede its formalisation into the Budget.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

rose—

Dawn Primarolo (Labour, Bristol South)

That was my last point, but I am happy to give way before I sit down.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I am grateful to the Paymaster General for showing her usual generosity.

The Paymaster General's words are very welcome and I understand her argument, but will she reassure me on the point that I made about blind people's allowances? The Government have moved by administrative decision to the pre-announcement of personal income tax allowances and age-related allowances, but will she give me some reassurance that she and her Department intend to do the same thing for the blind people's allowance?

Dawn Primarolo (Labour, Bristol South)

I hope that the hon. Gentleman will forgive me if I assure him only that I will go away and consider the position of the allowances to which he refers. I do not think that I can give him the commitment that he seeks, and it would be unfair of me to do so without having properly considered the matter, but I will certainly take it away and consider it very carefully.

John Bercow (Conservative, Buckingham)

I apologise profusely once again to you, Madam Deputy Speaker, and to the Paymaster General, because I genuinely misheard her in thinking that she had finished her speech.

The hon. Member for Kingston and Surbiton (Mr. Davey) can certainly fight his corner, and that he has eloquently done. Of course, I am saddened and mildly surprised that the Paymaster General did not respond to my exhortations. I had hoped that my hon. Friends and I would persuade her of the merits of new clause 6, and I am a sadder man for having been unable to do so. Nevertheless, I am genuinely encouraged by the Minister's willingness to consider the issues and by her comments about the Government's commitment to tax transparency and therefore, presumably, to the intelligibility principle. 10.15 pm

Perhaps I can conclude by asking the very busy, very senior, very distinguished, very important, very influential Minister, who has many commitments and a very full diary, whether, in one of her lighter and lazier moments, she would do me the signal honour in my parliamentary career of studying my Taxation (Right to Know) Bill, which I introduced as a ten-minute Bill on 6 June 2000. In that Bill, and in my speech commending it, I suggested several ways in which we could make the tax system more transparent to the people who have to foot the bills. In line with the principles of new clause 6, I particularly ask the Minister to consider the combined impact of direct and indirect taxes on people in various income deciles. The Minister is now extremely experienced in the Treasury, and she will be aware—although it may not suit her book to cite the fact—that for 15 successive years between 1981 and 1996, Conservative Governments published their assessments of the impact of direct and indirect taxes on the various income deciles.

The Minister, despite her professed and genuine loyalty to her boss, the Chancellor of the Exchequer, will know that he has been excoriated on several occasions by the Select Committee on the Treasury for his lack of transparency. I hope that she will not find it too painful if, in support of the principles of new clause 6, I remind her that in March 2000 her right hon. Friend was chastised by the Committee for his consistent failure to publish such an assessment. If the eloquently and sincerely expressed commitment to glasnost in matters of taxation that we have received from the Government tonight is to be taken at face value, it can only be a short time before the Chancellor admits that he was wrong, prays in aid the advice of his Paymaster General, and publishes the statement that is long awaited and much overdue.

I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 7 — Taxation of community amateur sports clubs

Howard Flight (Conservative, Arundel and South Downs)

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

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

With this it will be convenient to discuss the following amendments: No. 5, in schedule 18, page 242, leave out from beginning of line 24 to the end of line 37 on page 243 and insert—

'4 Section 505 of the Taxes Act 1988 (charities: general) applies to registered clubs and qualifying purposes as it does to charities and charitable purposes.

5 Section 25(10) of the Finance Act 1990 (c. 29) (gift aid) applies to a registered club in respect of any gift received by it as it applies to a charity in receipt of any qualifying donation.'.

No. 6, in page 243, leave out from beginning of line 42 to end of line 5 on page 245.

No. 7, in page 245, leave out lines 7 to 31 and insert—

'9 In respect of all gifts and transfers to a registered club, which for the purposes of this Schedule include membership fees, the donor may make such claims and elections as would be available under any enactment if that registered club were a charity.'.

Howard Flight (Conservative, Arundel and South Downs)

For some time there has been cross-party support for the view that qualifying amateur sports clubs should either be able to qualify as charities or to have a tax relief parallel to charities. What has happened is a dog's breakfast in that last November, the Charity Commission decided that some amateur sports clubs could qualify on the basis of contribution to health and fitness, but others could not. Consequently, angling, crossbow, flying, motor sports, pistol shooting and various others do not qualify. The Government had made certain promises, going back to the last election, on tax reliefs for qualifying amateur sports clubs, not expecting them to qualify as charities, and those are introduced by the Bill. However, they are slightly less generous than those which would obtain if an amateur sports club became a charity.

The duties of charitable status are not hugely onerous, but they entail work, and some smaller clubs that would qualify as charities may not want to make the effort to become a charity. In essence, the new clause states that it is ridiculous to have two sets of slightly different rules when the amounts of money are not material, and suggests that it would be more sensible for qualifying amateur sports clubs to enjoy the same tax reliefs as charities.

Under the Revenue rules in the Bill, gifting is permitted only from individuals, not companies. There will be misunderstandings about that and rows about claims. There are differences in the rules for trading income and stamp duty. Above all, there could be a difference in rates. Before the election, the Government suggested that they expected to put in place measures that would give 80 per cent. relief. They cannot be part of the Bill because they are not financial, but the figure was miraculously reduced to 50 per cent. That is important for many amateur sports clubs.

The cost of the relevant provisions is £5 million—not a huge sum. The modest, small new clause would tidy up the Bill. Amendments Nos. 5, 6 and 7 would allow membership fees to qualify for gift aid on an equal basis with charities. Is there a material difference between membership of a qualifying, virtuous sports club, which makes people healthy and saves the national health service money and membership of Save the Whale? We believe that it would be sensible for all membership fees to qualify.

We raised the issue in Committee and discussed various aspects of it. However, the fundamental point was not tackled. We hope that the Government have had second thoughts. Instead of making everything even more complex, let us have a clean, simple arrangement.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I support the new clause. The relevant issues were debated in Committee, when my hon. Friend the Member for Southport (Dr. Pugh) put our position on the record. The matter was discussed in two sittings and I therefore do not wish to detain the House at length. The Government have offered sports clubs a choice between the route set out in the Charity Commissioners' recent ruling and the provision in the Bill. That is a welcome improvement, but as the hon. Member for Arundel and South Downs suggested, it creates some untidiness and means that the decision is difficult.

People who do not have much expertise in the matter because their core aim is to run a sports club, with all the attendant benefits for communities throughout the country, are being asked to make difficult decisions. Should they decide to become a charity, with the various duties, responsibilities and possible change in the club's ethos that that entails and get the available reliefs? Or should they go down the route that the Government propose, and obtain slightly different reliefs? It is a complicated decision. It is therefore not sensible simply to say that it is wonderful that sports clubs have a choice. It would be better to align the choices so that they are identical for tax purposes.

The new clause is sensible and I believe that the Government would agree with its spirit. Perhaps they wish that they had thought of it. The Economic Secretary is unlikely to accept the new clause, but I hope that he will show that the Treasury is open minded and that we can look forward in due course to changes that the Government have drafted.

John Greenway (Conservative, Ryedale)

It is often the way in the House that, if there is something that an hon. Member has wanted to talk about for a long time, they only get the opportunity to do so very late at night, when they have no wish to detain the House unnecessarily. I do, however, want to speak to the new clause and the associated amendments.

There are 110,000 community and amateur sports clubs in this country. They are run by volunteers, and they provide the biggest resource to grass-roots sport participation in the entire United Kingdom. As my hon. Friend the Member for Arundel and South Downs (Mr. Flight) said, in last year's Budget, the Chancellor of the Exchequer proposed the introduction of a tax package, and Ministers in both the Treasury and the Department for Culture, Media and Sport heightened expectations that that package would include mandatory rate relief.

That perception was encouraged at the general election. I well recall, two days before polling day, an argumentative joint interview with the hon. Member for Vauxhall (Kate Hoey)—then the Minister for Sport—not about whether the Government wanted to provide mandatory rate relief but about how that should be done. The sense that mandatory rate relief was the Government's plan was, therefore, certainly heightened at the election.

When the Government were about to publish their White Paper on this tax package, however, the Charity Commissioners produced a rabbit out of the hat by suggesting that they were prepared to amend their definition of "social purposes" so as to include many of these sports clubs. Ministers have been very enthusiastic that charitable status would deliver mandatory rate relief—as, indeed, it would. We find, however, that the mandatory rate relief proposal has been dropped from the Treasury's own tax package. Yet, on the very day that the White Paper was published—30 November—the Treasury issued a press release that stated that its tax package would include 80 per cent. mandatory rate relief. I take that as an indication that this idea was dropped at the last minute, because there was an alternative route.

My hon. Friend the Member for Arundel and South Downs and the hon. Member for Kingston and Surbiton (Mr. Davey) have made the point that this is not a popular choice for those who run the many amateur sports clubs to have to make. They are volunteers, this is a complex matter, and they cannot understand why Ministers are saying, "Yes, we think you should have mandatory rate relief, but you can only have it by going down the charitable route. You can't have it through our tax package." That shows a very strange sense of priorities.

For that reason, my hon. Friend the Member for Arundel and South Downs felt it sensible to raise this issue in Committee and on the Floor of the House. Where is the logic in saying, "You can have mandatory rate relief by one route, but not by the other"? That is subject, of course, to the caveat that the purposes of the club must be clearly defined, and relief restricted to genuine community and amateur sports clubs.

Earlier today, here at the Palace of Westminster, the Central Council of Physical Recreation launched its latest initiative on the value to health of sports participation. Those colleagues who attended the launch were told that the Government spend £1,100 per capita on health, but only £1.34 on sport, and any sensible interpretation of a written answer that I received from the Secretary of State for Culture, Media and Sport last week would be that half that £1.34 is spent on administration and regional bodies.

Nobody in the House can be proud of this situation. It is time to begin to redress the balance of priorities. At the most recent Department for Culture, Media and Sport Question Time, the Minister for Sport said that the Government were looking to see how they could extend their relief to provide this rate relief, but I would say to the House that it really is time to give these community and amateur sports clubs the support that they deserve. I urge hon. Members on both sides of the House to do what their constituents, and the sports clubs in their constituencies, want, which is to vote for this measure.

John Healey (Labour, Wentworth)

I welcome the cross-party support expressed by the hon. Members for Arundel and South Downs (Mr. Flight) and for Kingston and Surbiton (Mr. Davey) for the general increase in support for community and amateur sports clubs.

The provisions that the Government, together with the Charity Commission, have put in place offer the scope for local sports clubs to become charities if they choose and if they are eligible, and they offer significant support for clubs that are not able or not willing to become a charity. What the hon. Member for Arundel and South Downs proposes does not tidy up the provisions that the Government propose; it does not reduce the complexity; and it does not reduce the inequity that the hon. Gentleman thinks he sees in what we are proposing. I shall explain why in a moment.

The hon. Member for Ryedale (Mr. Greenway) said that he had wanted to speak about these matters for a long time. Indeed, he has a long-standing interest in local sports and is heavily involved in his local area. I know of his activities and I know the area well, and the hon. Gentleman spoke knowledgeably on the subject.

On business rate relief, that was not part of the tax package that was the subject of the consultation that led to the provisions in the Bill. Discretionary rate relief, as the hon. Gentleman rightly points out, is a matter for local authorities. The Office of the Deputy Prime Minister has issued a consultation paper on revising the guidance on rate relief for charities and other non-profit-making bodies. The aim is to provide a more consistent basis for and approach to decision making in local authorities on these matters. The issue that the hon. Gentleman raises is a matter for the Office of the Deputy Prime Minister, not for a Finance Bill. The measures contained in the Bill and in the tax package are generous by any measure and they are widely welcomed.

New clause 7, as the hon. Member for Arundel and South Downs briefly explained, seeks to extend all the exemptions that charities enjoy on their income to clubs which have as their object the promotion within the community of amateur sport, physical education or the provision of sports facilities. The Opposition claim that the new clause would give sports clubs parity with charity, which clubs have sought, as least as regards the exemptions on their income.

Clubs can already achieve parity by becoming charities, following the Charity Commission's decision to relax its approach, announced alongside the pre-Budget report in November last year. If a sports club wants to be treated as a charity, it can now be treated as a charity, and it should become a charity.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister for allowing me to intervene. My understanding, as I mentioned, is that the Charity Commission has made it clear that not all amateur sports clubs can become charities. They must be able to meet the Charity Commissioners' designation of health and fitness. I read out an illustrative list showing that there are various kinds of amateur sports clubs that would qualify for the measures in the Bill, but cannot become charities.

John Healey (Labour, Wentworth)

The hon. Gentleman is perfectly right. The broadening of the definition of charitable purposes that the Charity Commission confirmed in November last year included two activities that it will now recognise as charitable: first,

"the promotion of community participation in healthy recreation by the provision of facilities for the playing of particular sports"

and secondly,

"the advancement of the physical education of young people not undergoing formal education".

That leaves certain sports which Sport England would recognise as a sport, such as angling, pool, billiards and snooker, outside the definition. Hence, we are bringing in tax provisions in the Bill so that clubs that cannot qualify as a charity may nevertheless benefit to a significant extent from the support that we want to put in place to back their activities.

Amendment No. 5 would give sports clubs access to all the reliefs that charities enjoy on various sources of income, including the right to reclaim tax on payments made under gift aid. Amendment No. 6 would remove the restriction of reliefs where a sports club spends its funds on non-qualifying purposes—that is, not in providing facilities for or promoting participation in an eligible sport.

Amendment No. 7 would give donors to sports clubs access to all the incentives that donors to charities enjoy. It would also allow members of sports clubs to use gift aid for their membership fees. That is not charity parity, but charity plus, and it is not justified.

It would be misconceived to allow any organisation not prepared to meet the requirements or the responsibilities of becoming a charity to enjoy the full range of exemptions available to charities. It is not our intention to put community and amateur sports clubs in a better position than charities or other businesses.

Furthermore, including membership subscriptions in the gift aid scheme would not be appropriate. Gift aid is intended to increase the value of gifts to charity by allowing taxpayers to add to their donation the basic rate of tax that they have paid. It is not meant to subsidise the payments that people make to purchase their use of leisure and sporting facilities.

The principal purpose of the provision in the Bill is to support local sports clubs, which pay an important role in all our communities. Every Member could cite a number of local clubs in their constituency that could benefit from this support. They play such an important role that we want to support them. In my own area, next door to where we live in Rawmarsh, is the Upper Haugh cricket club and the St. Joseph's junior football club. Those clubs allow people to participate in sport, and are run by people who give up their time willingly and voluntarily, and have often done so for many years. This is the first time that the Government are putting in place through the tax system support and recognition for their contribution to their communities.

Our proposals, as set out in clause 57 and schedule 18, provide alternative support for clubs that cannot or do not want to become registered charities. We received more than 2,500 responses to the consultation. The sector told us that it wanted a scheme with less regulatory requirements than the Charity Commission that was administered by the Inland Revenue. That is what they have got. If clubs meet the criteria in schedule 18, they will be able to enjoy most of the reliefs and exemptions usually associated with charitable status, including many reliefs for donors. The package is targeted in particular at helping the smallest sports clubs without triggering the level of regulation required of charities.

I shall show the strength of support for this provision. After the proposals were first set out in the pre-Budget report in November last year, Elsa Davies, director of the National Playing Fields Association, said in December:

"We have criticised the Government in the past for its record on supporting sport . . . and we had begun to believe that this change was unattainable, but the Charity Commissioners and the Treasury have provided a magnificent Christmas present for sport."

In response to the Budget on 17 April, the chairman of the Central Council of Physical Recreation said:

"This is a great day for British sport. We are delighted that Government is listening to the views of sport, and is recognising its contribution to society through the tax system."

The new clause would introduce a more complicated regime, not a tidier one. It would require the Secretary of State to decide what activities should qualify for this relief, and to set up additional procedures for approving individual clubs. It would require clubs to apply to the Inland Revenue for exemptions.

Our proposals would define qualifying sports by reference to the list of recognised activities maintained by the Sports Council, to which I have already referred. It seems to us to be best placed to make such decisions. That would allow clubs to register with the Inland Revenue, which would be responsible for administering the exemptions.

These provisions have been the subject of wide consultation and the object of equally wide welcome. I hope that I have explained to the House why the Government's proposals, not those in the new clause or the amendments, should be the basis for the Bill's support for community sports clubs. On that basis, I encourage the hon. Member for Arundel and South Downs to withdraw the new clause. If he will not, I urge my right hon. and hon. Friends to vote it down.

Howard Flight (Conservative, Arundel and South Downs)

Half a pint is better than no pint, but our new clause and amendments are clear. They simply ask why on earth we should have slightly different rules under this mechanism. Instead, we should have a system under which amateur sports clubs get the same tax breaks either under the Bill or as charities. There will be confusion as a result of the difference, and I am afraid that there is some disappointment.

Our lawyers advise us that there is nothing more in what we propose, although I have specifically raised the issue of membership. Our proposals seem to us by far the better solution. The Treasury is proving that it can do it as it wishes, as it is already doing, but that is simply to avoid what is called the golf club problem. We think that what we propose is right, and we are not satisfied with the Government's measures—welcome though they are as half a pint. Sports clubs could easily have been treated the same as charities.

New Clause 8 — IR35

John Bercow (Conservative, Buckingham)

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

In common with all the new clauses that my hon. Friends and I have tabled, new clause 8 is so manifestly reasonable that only an extraordinarily unreasonable Government could resist it. That is the yardstick by which the Paymaster General will be judged when she replies. As she and the House know, IR35 provisions apply to individuals who are employed by their own service company, but whom the Government consider as employees of the business to which they are contracted. They are taxed as if they were employees, hence they cannot benefit from the ability to defer tax liabilities via dividends, and so on. That is to say, they cannot enjoy the normal benefits of incorporated businesses.

My hon. Friends and I believe that the costs of vocational training should be deductible for an IR35 individual—if I may so describe him or her—who is both employee and employer, in the same way that those costs would be deductible for any other employer.

In order to anticipate the charge that will be lobbed at us, I say in advance that the Conservatives are not advocating tax avoidance. It is merely a case of bringing employees and employers subject to IR35 provisions into line with other employees and employers. Since the Paymaster General has said that IR35 individuals can get all the tax benefits of being employed—that was what she said in Committee—we think that it is reasonable for them to get relief for eligible and relevant training costs.

The idea contained in the new clause would be valid even if it were merely the product of a back of a cigarette packet calculation by my hon. Friend the Member for Arundel and South Downs (Mr. Flight), because any such calculations that he makes are invariably cogent. However, the new clause has the added benefit of being derived from the grass roots. It is the result of representations and the consequence of us going around the country and hearing what people who are faced with Government imposts say about the inequity of the treatment that they currently suffer.

It is a modest request, made with my characteristic modesty and self-effacement. I am sucking up to the Minister in the hope that, at almost 11 pm, she will give an even more favourable reply than she was otherwise disposed to do. Exceeding even my own now established reputation for brevity, I commend the new clause to the House.

John Burnett (Liberal Democrat, Torridge and West Devon)

The changes to bring IR35 into being, and bring the self-employed—in this case, invariably computer specialists—into the employees' national insurance contributions network, were unfair for numerous reasons. First, those people got no enhanced benefits. Secondly, the companies deemed to employ them, which were often large multinational companies, did not have to pay employers' NICs. Thirdly, the nature of the change was deeply prejudicial.

The businesses in question are knowledge businesses. Their principal or main assets are the individuals who work so hard for them. The individuals do not have a choice about how they trade—that is dictated by their employers. We have always called for a wholesale review of the IR35 system. It is unsatisfactory, partial and prejudicial. Nevertheless, we agree that in the meantime the costs of vocational training should be deductible and we support the new clause.

Chris Grayling (Conservative, Epsom and Ewell)

I shall follow the example set by my hon. Friend the Member for Buckingham (Mr. Bercow) and be brief. The Minister needs to understand that the status of someone who is encompassed by IR35 is very different from that of the conventional employee. Employers do not provide the infrastructure of support to them that employees normally enjoy, including training. Such individuals have a very different status in the organisations. Leaving aside the short-lived—or at least time-limited—nature of their contracts, they do not receive training and other support. The new clause is an admirable proposal that would certainly make the life of many IR35 people much easier and I hope that the Minister will accept it.

Dawn Primarolo (Labour, Bristol South)

I shall not accept new clause 8 and I am sorry to disappoint the hon. Member for Buckingham again. I intend to put forcefully the Government's arguments on the issue. The hon. Members for Buckingham, for Torridge and West Devon (Mr. Burnett) and for Epsom and Ewell (Chris Grayling) are labouring under a misconception. The new clause would not bring IR35 employees in line with others in the tax system. Indeed, it would do the reverse. It would give them an advantageous position that no one else in the tax system possesses.

I need to remind the House what the legislation on service companies was intended to do. It is called IR35 because it appeared in Inland Revenue press release 35. In the tax system, individuals are dealt with according to whether they are self-employed or employees, and the reliefs given are within the tax system. I shall leave partnerships aside.

What happened was that a large number of people who use a service company structure sought to give themselves the benefits of the reliefs that employees gain and those that the companies would receive. They then undertook contracts within a company as allegedly self-employed subcontractors, but the control of the hours worked, the tasks of the job and the work undertaken were completely identical in every other sense to those of the people whom they worked alongside, who were employees of the company.

A huge amount of tax was lost through national insurance and income tax because those individuals did not pay the correct amount, even though case law determined that they were employees. The Government introduced legislation that said that, where the service company sought to disguise the fact that there was only one person in the company and that person was really employed in another company and he or she worked alongside an employee and, by every test, was an employee, that person therefore had to be designated as an employee of that service company. Our legislation was indeed repeatedly challenged in the courts, and the Government's position was repeatedly supported by the courts as following case law. That is the purpose of the IR35 legislation.

Where someone is in a service company and he or she is not caught by the provisions that say, "You are working alongside someone else and your job is exactly the same, so you are not self-employed because your job is controlled. You are an employee. You pay through PAYE", that person is genuinely self-employed and genuinely working through a service company, and the Government's legislation does not impinge on him or her.

I shall remind hon. Members how training is treated under the tax system. The employer receives the tax relief to pay for the training of their employees. The new clause would allow the service company, as the employer, to gain access to the tax relief and then give it 5 per cent. on top for no earthly reason whatever. It would allow the company to claim the employee's tax relief and the employer's tax relief for the same person. That is simply not fair. It is not fair on the other taxpayers, and there is no justification for special treatment in that way.

I would go further. I am interested to hear the hon. Member for Buckingham say that he has been heavily lobbied on this issue, because the organisation that represents service companies—the Professional Contractors Group, the lobby and professional group which has worked with the Government for the past few years—has been totally silent on this issue. In fact, it has been totally silent on every issue over the last 12 months. Its website no longer carries the frequent information and demands that it used to have. When the Government introduced the legislation, we said, "This is what we believe to be the case; we are standing by this legislation. However, we will work with you. If you can clearly demonstrate to us that we have made an error in how we treat you in relation to either your training costs or the 5 per cent. that we already allow—which nobody else gets, and which can be paid on training costs or on administration costs—talk to us about it." There has been no discussion; there has been radio silence.

I understand and applaud the hon. Gentleman's declaration that he merely wants to ensure that those in service companies are not disadvantaged because of the IR35 legislation and do not receive unequal or different treatment from everybody else in the tax system. That is what the status quo provides. Under his new clause, those who seek extra reliefs with no justification to reduce their tax liability would have an unfair position with regard to all other taxpayers. I would therefore ask him to withdraw it.

The Government continue to be prepared to discuss these issues if evidence of a problem can be supplied to us. If the hon. Gentleman prefers to press the new clause to a vote, however, I shall have to advise my hon. Friends to oppose it in the name of fairness and justice to the 26 million taxpayers who work in the tax system and get a fair deal from it as it is. They would rightly be outraged if a small proportion of taxpayers were to receive a greater advantage than them.

Howard Flight (Conservative, Arundel and South Downs)

I have received complaints, inevitably, from those in the software industry that, because they have fallen within the IR35 legislation and they face considerable training costs to keep their skills up-to-date, they are tax-disadvantaged. The new clause does not seek a tax privilege for those people. As the Paymaster General has said that the Government are entirely open to addressing any problems, however, I should like to pursue, outside the Chamber, what problems might exist and whether they need to be addressed, or whether the body of people who have approached me have misunderstood their position under IR35.

The basic principle of the new clause is that people should not be disadvantaged with regard to skill training—everybody wants to ensure that the country is more skilled and that productivity rises—just because they fall under IR35. On the basis that the issue will be investigated further, given what the Paymaster General has said, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 10 — Attribution of gains to members of non-resident companies

Howard Flight (Conservative, Arundel and South Downs)

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

I regret that, at this late hour, I raise for the third year running what I believe to be a continuing injustice in the tax system. However, I accept that this injustice occurs in very limited circumstances.

Section 13 of the Taxation of Chargeable Gains Act 1992 prevents UK residents avoiding tax on capital gains by arranging for gains to arise in closely controlled offshore companies, namely companies owned by a few individuals. Section 13 counters any abuse by taxing UK residents on their corresponding share of such gains. It is widely drawn and contains only limited exemptions, principally for gains made by overseas trading companies.

A particular difficulty arises when commercial activities do not amount to trading, and a later new clause will explore the trading versus investment issue and the outdated approach that is sometimes used. The result of the difficulty is that a UK family-controlled business can find that it is taxed on gains made in overseas subsidiaries whether or not those gains can be remitted back to the UK and to the family who make up the controlling body. In some cases, the gains may not even represent real profits, but only exchange rate fluctuations.

The particular problem is for property investment businesses. Section 13 places a considerable compliance burden on such companies and can result in anomalous tax charges, putting privately owned British groups at a considerable disadvantage compared with public companies and non-British businesses.

The new clause seeks to address the issue by extending the gains that will not be subject to the section 13 charge to gains arising to groups of companies that invest in property on a commercial basis. It would do that by using an existing definition in subsection (2) of section 13A of the Taxes Act 1988 to distinguish trading and property investment companies from pure investment activities. That would ensure that ordinary equity and similar investments could not be packaged into UK companies to avoid capital gains tax.

The Grosvenor Group of companies feels with some justice that it is being persecuted under the law as it stands. In one case, it owns indirectly 25 per cent. of an EU-resident property investment company and the remaining shares are controlled by EU residents. The European group's strategy is to create a property fund and it will sell 49 per cent. of the shares to a new company established to hold a group of companies that own established retail investment properties in Europe. The price to incoming new investors is determined and the company uses the cash to reduce external debt and finance new property investments.

The company is not controlled by Grosvenor, although Grosvenor can have a place on the board. It is difficult to argue against such a compelling commercial strategy simply on the ground of a domestic UK tax difficulty. Even if Grosvenor objected to the transaction, it would not have any power to prevent it.

Grosvenor has incomplete information from the company in question and has difficulty complying with the reporting requirements for the European company's investments, and little UK tax is payable as a result of the historic structure of the European company. The equivalent UK section 13 base case cost is negligible because the underlying company is to be sold or financed by loans rather than share capital. Therefore, Grosvenor picks up a large UK capital gains tax bill of £10 million and corporation tax at 30 per cent. works out on a euro basis at £10.7 million.

From the point of view of Grosvenor, the UK holding company, the gain is unrealised because the European company is not making any distribution to shareholders and the cash realised simply pays down debts. The £10 million tax is payable, but no cash flows through to pay it. If Grosvenor sells its interest in the European company to release funds to pay it, there is no credit for the section 13 tax to be set against the tax on the gains of the sale of the European company, which is a double taxation situation.

The problem has been recognised in negotiations to date, but it is a low priority. Aside from general policy objections, the Government might be concerned that the arrangements in the new clause could allow UK residents to shelter gains on UK investment properties by holding them in non-UK resident companies. If so, we could exclude the holding of land in the UK from the qualifying activities.

The bottom line is that the law as it stands can create a double capital gains taxation charge. If the Government do not like our proposal for addressing it, will they produce one of their own?

John Burnett (Liberal Democrat, Torridge and West Devon)

Do I understand the hon. Gentleman correctly? Is he saying that private companies are merely seeking the same tax treatment as public companies?

Howard Flight (Conservative, Arundel and South Downs)

In essence that is the case, but the arrangement is sparked by the problem that arises when a private group is controlled by a family trust.

Rob Marris (Labour, Wolverhampton South West)

I think that I understand the hon. Gentleman's argument, but it sounds as though he wants to change the law to give a tax break to property speculators who engaged in a tax avoidance vehicle that failed to deliver.

Howard Flight (Conservative, Arundel and South Downs)

With respect, I expected better from the hon. Gentleman, who is a lawyer. That is not the case in the slightest. A UK company that owns minority investments in, for example, European property companies gets a look-through tax treatment and does not suffer double taxation. If the holding is controlled not by individual shareholders but by a trust, it gets exposed to double taxation. I cannot think that the hon. Gentleman, as a man of principle, would want our tax law to impose double taxation on normal commercial investment activities. I would be pleased to take him through the details at another time, but the new clause is not about speculation and tax sheltering. It is merely designed to achieve fair taxation in line with publicly owned companies that have shareholders.

Rob Marris (Labour, Wolverhampton South West)

I am grateful to the hon. Gentleman for his offer of an explanation at a later date, which I may take him up on. Most, if not all, hon. Members would not be in favour of double taxation, but can he explain why a trust exists rather than a regular company in the example that he gave? Is not the trust a tax avoidance measure?

Howard Flight (Conservative, Arundel and South Downs)

No. The hon. Gentleman associates trusts, for some good reasons, with tax avoidance schemes, but many companies—especially family companies—prefer the old-fashioned bona fide use of a trust, and the new clause is aimed at them. The legislation was designed to abolish a tax avoidance scheme, which I named the Belgian wheeze. Inadvertently, however, it catches one or two bona fide situations. Some relief has been afforded, but we leave open an unfair double taxation charge.

John Burnett (Liberal Democrat, Torridge and West Devon)

I assure hon. Members that trusts do not exist solely for the purpose of tax avoidance; in fact, many are set up for the sensible family reasons that have been given.

Rob Marris (Labour, Wolverhampton South West)

I was not trying to suggest that every trust is set up as a tax avoidance vehicle. I was referring specifically to the Grosvenor trust, which, from what was being said, sounded like such a vehicle.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am not aware of the intricacies of the Grosvenor trust or trusts. All I can tell the hon. Gentleman is that in my time as a practitioner I have set up a great many trusts, invariably for bona fide family reasons such as ensuring succession in a business and, often, the prudent running of a business.

In Committee, we referred to "investment bad, trading good", and I note that the matter will come up later. Investment companies are very important. They employ many individuals, and they facilitate jobs, trading and industry. In an intervention on the hon. Member for Arundel and South Downs (Mr. Flight), I asked why the Bill should prejudice private companies. If the Paymaster General has an explanation for that, I look forward to hearing it.

Dawn Primarolo (Labour, Bristol South)

I shall deal first with the last point, which is the claim that the Bill discriminates unfairly against private companies compared with public companies in otherwise identical circumstances. It counters the avoidance of UK tax by UK residents who invest through closely controlled companies. Any closely controlled public company will fall within the scope of the Bill, and a private company that is not closely controlled will fall outside it. The Bill draws no distinction between companies according to whether they are public or private; it is the fact that the company is closely controlled that is crucial.

The rest of the debate is in Hansard.