Finance Bill

Public Bill Committee, 15 May 2003.

Morning

(Except clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and schedules 5, 6, 19 and 25, and any new clauses and schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.)

Nicholas Winterton (Conservative, Macclesfield)

I welcome right hon. and hon. Members to the first sitting of the Finance Bill 2003. I am a tough Chairman and this will be an ordered, constructive and positive Committee. I hope that ways will be found to discuss all the important parts of the Bill, which is important not only to the House but to many people outside.

I want to make some domestic announcements. Copies of the money and Ways and Means resolutions are available in the Room and Members are encouraged to obtain copies and to study them.

There are some red boxes in the Room, perhaps in anticipation of those who aspire to high office. There is one for every Committee member, and no doubt they will wish to collect them in due course.

I want to say with every emphasis that I can muster that mobile telephones may be useful electronic devices, but I do not like their sound in this Standing Committee, so I hope that they will all be switched off.

I also want to announce, well in advance, a matter that is always stated by the Chairman—it is not my intention, or that of other Chairmen of this Committee, to call starred amendments.

I hope that I have made myself clear and that this will be a good Committee. We have a programme motion, whether we like it or not, and I hope that important matters can be debated properly in this Committee, despite those restrictions.

David Wilshire (Conservative, Spelthorne)

On a point of order, Sir Nicholas. I noted the words ''a tough Chairman'', so it is sensible to inquire whether gentlemen may remove their jackets. I would not wish to offend you on day one.

While raising that point of order, could I, through you, Sir Nicholas, inquire of the Paymaster General whether the significance of the red boxes is that they are Labour boxes, or is she celebrating Bristol City football club and its tragic loss to Cardiff this week?

Nicholas Winterton (Conservative, Macclesfield)

I cannot speculate on the latter point, but I have no doubt that the Minister will have some feelings about one of her local football clubs.

On the matter relating to the boxes behind me, I am pleased that we are proceeding with a certain amount of humour. I can only advise the hon. Gentleman that red boxes are slightly cheaper than green boxes, and Parliament is conscious of the cost to the public purse.

I am grateful to the hon. Member for Newcastle-under-Lyme (Paul Farrelly) for putting on his jacket. If Members feel uncomfortable as we move to a hotter period of the year and if jackets are hung tidily on the rear of chairs, I am happy for them to be removed at the discretion of Members.

Dawn Primarolo (Labour, Bristol South)

I beg to move,

That—

(1) during proceedings on the Finance Bill the Standing Committee do meet when the House is sitting on Tuesdays and Thursdays at 8.55 am and 2.30 pm, except on Tuesday 3rd June when it shall meet at 10.30 am and at 4.30 pm;

(2) the proceedings shall be taken in the order shown in the first column of the following Table, and shall (so far as not previously concluded) be brought to a conclusion at the times specified in the second column of the Table:—

TABLE

Proceedings

Time for conclusion of proceedings

Clauses 2, 3, 6 to 8, 10 to 13 and 15 to 19, Schedule 1, Clauses 20, 21 and 23, Schedule 2, Clauses 24 to 41, 147 and 149 to 151, Schedule 26, Clauses 152 to 154, Schedule 27, Clauses 155 and 163 to 166, Schedule 30, Clause 167, Schedule 31, Clause 168, Schedule 32, Clause 169, Schedule 33, Clause 170, Schedule 34, Clauses 171 and 172, Schedule 35, Clause 173, Schedules 21 and 22

5.00 pm on Thursday 22nd May

Clauses 43 to 49, Schedule 3, Clause 50, Schedule 4, Clauses 51 to 55 and 58 to 62, Schedule 7, Clauses 63 to 68, Schedule 8, Clauses 69 and 70, Schedule 9, Clauses 71 to 78, Schedule 10, Clause 79, Schedule 11, Clauses 80 to 91, Schedule 12, Clauses 92 and 93, Schedule 13, Clauses 94 to 99, Schedule 14, Clauses 100 to 104, Schedule 15, Clause 105, Schedule 16, Clauses 106 to 115, Schedule 17, Clauses 116 to 123, Schedule 18, Clause 125, Schedule 20, Clauses 126 to 129, 136, 137 and 140, Schedule 23, Clauses 141 and 142, Schedule 24, Clauses 143 to 146

11.25 am on Tuesday 10th June

Clauses 156 to 158, Schedule 28, Clauses 159 to 162, Schedule 29, Clauses 174 and 175, Schedule 36, Clauses 176 and 177, Schedule 37, Clauses 178 to 180, Schedule 38, Clause 181, Schedule 39, Clauses 182, 183 and 200, Clauses 185 to 192, Schedule 40, Clause 193, Schedule 41, Clauses 194 to 197, Schedule 42, Clauses 198, 199 and 201 to 213, Schedule 43, Clause 214, new Clauses, new Schedules, any remaining proceedings on the Bill.

5.00 pm on Thursday 12th June

Good morning, Sir Nicholas. On behalf of the Committee, may I welcome you and Mr. McWilliam, your co-Chair, to the proceedings of the Finance Bill? I am sure that I speak for the whole Committee in saying that we welcome your expertise and know that you will keep us on the straight and narrow while not allowing us, however much we may be tempted, to stray on to matters that are not strictly relevant. I know that you will have a light but firm touch—I hope that that is not a contradiction in terms—so long as the Committee conforms to the required conduct.

The Economic Secretary and I will be doing our best to assist the Committee in the progress of business.

I welcome the hon. Member for Arundel and South Downs (Mr. Flight) to the Committee, as shadow Chief Secretary to the Treasury and as the leader of Her Majesty's Opposition in this Committee. He has participated in three previous Finance Bills. He has

always conducted business in a good-humoured but none the less incisive way while leading the Opposition team. His wealth of knowledge and experience, along with that of his hon. Friends, bodes well for the Committee and the debate.

I welcome the right hon. Member for Fylde (Mr. Jack), who is an experienced member of the Committee having been Financial Secretary to the Treasury under the previous Government. He has served on all the Finance Bills since 1997. He, too, brings great knowledge and understanding to our proceedings. I know that he will participate fully by challenging Ministers in his distinct and effective way.

I welcome the hon. Members for Eddisbury (Mr. O'Brien) and for Hertford and Stortford (Mr. Prisk). This is their first Finance Bill as Opposition spokespersons, and I hope that they enjoy their new posts and find the Finance Bill challenging, edifying and enjoyable.

I welcome the many talented and able Government Members to the Committee. I am reasonably confident that they will provide the Government with appropriate support.

I welcome for the first time to the Finance Bill the hon. Member for Yeovil (Mr. Laws), who is leading for the Liberal Democrats. The hon. Member for Torridge and West Devon (Mr. Burnett), who is a veteran of previous Finance Bills, will also bring his great knowledge to our proceedings.

I welcome Hansard, the Officers of the House, the Clerk and the police, who will do everything in their power to ensure that we make progress in an orderly fashion and that our proceedings are properly recorded.

The Finance Bill in Committee is an enjoyable experience, but perhaps that is something that Members will want to reflect on at the end of the process. Notwithstanding the fact that there will need to be detailed and sometimes controversial debates, the hallmark of these Committees has always been that they have been conducted in a proper and, where appropriate, good-humoured but none the less meticulous fashion.

The motion sets out the clauses and schedules to be considered in the Standing Committee. Clauses will be taken together with their related schedules to facilitate debate. The programming of the Committee provides certainty about the time at which clauses will be taken, to help all those involved in the process to prepare for debates and to support our wish for the Finance Bill to be considered properly. For example, hon. Members will see that the clauses on modernised tax, stamp duty and land tax have been specifically scheduled for the week following the Whitsun recess. The date on which the Committee will report its business to the House is given in the motion. The Government will make no attempt to curtail discussion on clauses. I should say at the outset that the Programming Sub-Committee will be able to reconsider the number of sittings timetabled, should it decide that that is necessary.

My hon. Friend the Economic Secretary and I look forward to the coming weeks and to being able to

respond in detail to the very detailed questions that hon. Members will, quite rightly, want to put to us on the contents of this year's Finance Bill.

Howard Flight (Conservative, Arundel and South Downs)

Sir Nicholas, may I warmly welcome you to the Chair this morning and, in their absence, Mr. McWilliam and Mr. Gale? We all know of your expertise and are glad to hear of the discipline with which you will guide us. It is particularly splendid that we have a Chairman of such gentlemanly and courtly conduct. Thank you very much for chairing us.

I thank the Paymaster General for her kind remarks. I fear that the drafting of this year's Bill might defeat any incisiveness that I have left, but her comments are greatly appreciated and I return them. I think that this is her ninth Finance Bill, which must be one reason for the mastery with which she has grasped tax law and the operation of the Inland Revenue. As I have commented before, I was first a member of a Government tax consultative committee in the early 1980s, and I have been involved, off and on, with a number of Financial Secretaries and Paymaster Generals. I certainly feel that this Paymaster General has the best grasp of tax law of any whom I have encountered in 20 years. Dare I say that the wicked thought crossed my mind that there would be a highly remunerated job for her as a tax adviser in the City of London?

The Opposition are also pleased to debate the Bill with the Economic Secretary. I believe that the Chief Secretary to the Treasury will be participating as well as all the Committee members. I am honoured to be joined by a first-rate Opposition Front-Bench team, which includes my hon. Friend the Member for Eddisbury, the shadow Paymaster General, and my hon. Friend the Member for Hertford and Stortford, the shadow Financial Secretary. As the Paymaster General commented, we have the services of the right hon. Member for Fylde, who has enormous expertise that he gained in government and from a pure intellectual fascination with the challenges of tax law. We also have an outstanding team in my hon. Friends the Members for Tatton (Mr. Osborne), for Huntingdon (Mr. Djanogly) and for Billericay (Mr. Baron), who bring with them enormous legal and financial expertise.

I add my welcome to the Liberal Democrat Front-Bench team and recognise the expertise that the hon. Members for Yeovil and for Torridge and West Devon bring to the Committee. Dare I say that, given their views on such important matters as tax, they should be part of the Conservative team? I also welcome the Whips. It is a tireless and thankless task that they do, which is carried out by extremely decent chaps—[Interruption.] Oh, we have a lady Whip as well—they are decent chaps and chapesses. I welcome the Clerk, the police and the officers. I thank the Clerk for the help that he provides the Opposition with the tabling of amendments.

I have already made it clear that the Opposition oppose the timetable, particularly the knives within it. We feel strongly that 14 sittings are not sufficient, and the knives could cause a lot of problems. During the past three years we have shown that we can behave in

a thoroughly responsible manner when dealing with the Finance Bill in Committee, and we have not wasted time. We feel that it is unfortunate that the Government have chosen to over-organise matters this year. It has attracted some criticism from professionals outside the House.

The Bill is complex. It contains 180 pages of new drafting relating to stamp duty and the new laws for employee share schemes. The stamp duty arrangements in particular—the new short lease arrangements—could add dramatically to the costs of small businesses. As I said on the Floor of the House, the rewriting of tax law relating to enterprise and options has been incomprehensibly drafted, and it runs the risk of leaving many share schemes in a considerable mess if there is inadequate scrutiny. The real risk is that poor drafting will pass into law if there is not the opportunity for further consideration in the other place.

Dare I quote some of the comments of outside professionals? The Law Society has commented that a significant proportion of the Bill

''consists of complex legislation which had not been previously published. This might not have been a concern, had agreed policy intentions been translated into clearly worded drafting. Regrettably, this appears not to be the case in a number of areas. These failings are compounded by the extremely limited time available for consideration both by professionals and by Parliament and the poor quality of many of the Explanatory Notes.''

The Institute of Chartered Accountants has similarly commented that it is

''concerned at the length and complexity of this Finance Bill. Many of the clauses were not made available for earlier consultation''.

Particularly in the area of VAT clauses and the stamp duty land tax, it is concerned about the conflict with EC law and human rights legislation.

The Chartered Institute of Taxation has made similar comments. It feels that

''much of the legislation has not been the subject of consultation, eg the legislation on employee shares . . . This is very much to be regretted, and is against the Code of Conduct on Consultation. Whilst we can understand that consultation is not easy where anti-avoidance measures are concerned''—

as the Paymaster General said—some 75 pages of complex legislation are likely to receive inadequate scrutiny.

Therefore, we are opposed to the timetabling motion and will be obliged to vote against it. That is a great pity. Notwithstanding that, I am sure that the Committee's proceedings will, as ever, be conducted in good humour. Opposition Members will do our best to ensure that, in the limited and inadequate time available, scrutiny of the Bill is as good as possible.

David Wilshire (Conservative, Spelthorne)

I want to make one or two comments for the avoidance of doubt. I suspect that there will be occasions when we disagree on certain matters, probably about programming. So that we do not have an unnecessary debate, may I make it clear that the official Opposition opposed this motion from the beginning? Indeed, in the Programming Sub-

Committee there were votes against it. Therefore, we do not need to have that argument.

When such important legislation is guillotined, there is a danger that spending time on matters that the Government believe to be less important is considered to be wasting time. I believe that it is the duty of Her Majesty's Opposition to deal with everything that matters to somebody. Just because a few clauses are less important to the Government, it does not mean that someone out there in the British economy is not deeply affected. Therefore, I hope that we will not get locked into arguments such as ''You shouldn't be using time on that, because this is far more important''. We will not be apologetic about addressing matters that do not bother the Government but which concern people outside the House.

Similarly, there is a real risk—this is not an attempt to filibuster—that certain matters will remain unconsidered. The Paymaster General said in her opening remarks that there is no attempt to curtail debate. I am afraid that there is, because this is a programme motion, and programme motions curtail debate. She said that the number of sittings is a matter for discussion, but ultimately it is not, because the House has fixed an out date. Although it may be possible for the usual channels to juggle things within that, there is a fixed out date, and we would have to go back to the House, not the Programming Sub-Committee, to change that.

Therefore, although I welcome the Paymaster General's conciliatory approach when she says that she does not wish to curtail debate and has an open mind on the number of sittings, which sounds good, it is not accurate. There is a programme motion; we oppose that programme motion. There is some flexibility, but not much. As the other place does not consider the Bill, there is a real danger on this occasion that matters will pass into law that have not been scrutinised. I am not sure why I am trying to save the Government from falling flat on their face, but there is a real risk that, if some of this stuff is not considered properly, they will drop the most almighty clanger and do serious damage to the British economy.

That is the general sense in which I approach the motion. There is just one matter that may be of interest to my colleagues and perhaps—dare I say it—to Labour Members. The Programming Sub-Committee, in its wisdom, stated that on the day after the Whitsun recess the Committee will meet at half-past 10 in the morning. I put it on record again that I, on behalf of my hon. Friends, am very willing to do some negotiating, so that if the majority of members of the Committee are keen not to be here at half-past 10 on that morning, provided that we can find an alternative time, the door is wide open on the Conservative side to reach an arrangement that enables people to enjoy a slightly longer holiday.

Several hon. Members rose—

Nicholas Winterton (Conservative, Macclesfield)

Order. May I help the Committee? We have about 10 minutes left for this debate. I hope that those whom I call will bear that in mind, so that all those who wish to participate can do so.

David Laws (Liberal Democrat, Yeovil)

Thank you, Sir Nicholas. I am sure that that is good guidance for all our proceedings. I wish to begin by welcoming you to the Chair and by joining the Paymaster General and the shadow Chief Secretary in saying that we are confident that you will be extremely effective and robust, as you always are.

I thank the Paymaster General for her welcome to the Committee and appreciate the large amount of experience that she brings to the job. We hope that the shadow Chief Secretary's suggestion that she might at some stage be poached for some highly paid job will not turn out to be the case. I also welcome the Economic Secretary who has already engaged in robust debate, not least with me, on various subjects. We look forward to his contributions as well as those of all the Government Members who are, no doubt, looking forward with enthusiasm to participating in our proceedings during the next few weeks.

I also thank the Conservative shadow Chief Secretary for his comments. He underlined the fact that there is some common ground between my party and his on some aspects of tax, and we certainly have three economic liberals among the Liberal Democrats on the Committee. Unfortunately, I cannot take up his generous offer to join the Conservative party. I am far too ambitious for that, as are my hon. Friends the Members for North Norfolk (Norman Lamb) and for Torridge and West Devon, who are limbering up even as I speak to join the detailed debates that we will have in the next few weeks.

I also pay tribute to some of the other members of the Committee, including the right hon. Member for Fylde, who will help to enlighten us and bring to the Committee a depth of experience from his time at the Treasury. On your earlier comments, Sir Nicholas, about red boxes, I note that some Conservative Members—for example, the hon. Member for Tatton—have betrayed their intentions for the future in seizing control of the red boxes at this very early stage.

I also welcome the hon. Member for East Carmarthen and Dinefwr (Adam Price), who will draw to our attention the interests of Scotland when they come up in our proceedings. [Laughter.] And Wales—I have betrayed the fact that geography was not one of my strong points at school. Fortunately, I shall not have to deal with that subject on this Committee.

I wish briefly to thank the tax advisory groups who do much to bring those of us who do not have the experience of other Members up to the required standard on aspects of the Finance Bill—if not geography—to enable us to participate more meaningfully in the proceedings. The representations of the tax law committee of the Law Society, the taxation faculty at the Institute of Indirect Taxation and the Chartered Institute of Taxation were immensely useful, not least to those of us in the Opposition.

I hope that we will be able to use the proceedings to focus on the substantive issues that are still to be debated while, as the Conservative Whip, the hon.

Member for Spelthorne (Mr. Wilshire), mentioned, not ignoring matters that are of interest to different groups in the economy. I shall now take your guidance, Sir Nicholas, on the time available and conclude my comments.

Michael Jack (Conservative, Fylde)

Sir Nicholas, it is a great pleasure to serve under your chairmanship. You follow in the proud tradition of north-west Members who have chaired this Committee, and the same thing could be said of the hon. Member for Crewe and Nantwich (Mrs. Dunwoody), who was equally robust in her chairmanship of the Committee some years ago. I am also delighted to note that more than 20 per cent. of members of the Committee come from seats in the north-west of England. I have no doubt that that will bring a resolute and down-to-earth approach to our proceedings.

I thank hon. Members for their generous comments about what they hope will be my contribution. The Paymaster General has shown a very good grasp of tax matters over the years. She served an honourable apprenticeship on the Opposition side of the Committee and has distinguished herself in her two Treasury posts. Like me, she will realise that at the heart of one's contribution is the quality of the briefing and information that one gets, either from experts or, in her case, from Treasury and Inland Revenue officials. I am but the humble creature of the advice that I receive, but I will do my best to put it to good effect.

I hope that in trying to scrutinise that which we are able to scrutinise Ministers will try to explain why they want to do what they want to do, what its economic effects will be, and, importantly, whether the Inland Revenue will have the resources to cope with the implementation of the measures. Only this morning, I awoke to the news that yet another problem has beset the Inland Revenue over matters connected with pension contributions and national insurance. Now is not the time to debate those issues, but they underscore the fact that for the Revenue implementation requires resources and knowledge.

I, too, am disappointed that the programme motion includes knives that bite. The one thing that has always typified the Finance Bill has been the agreement across both sides of the Committee that it will be considered in a timely fashion. Perhaps part of the reason why we have such a motion before us is that, for as yet no publicly-given reason, the Budget was something like a month late. I welcome the Paymaster General's observation about the possibility of flexibility on the number of sittings that we may have, but, as my hon. Friend the Member for Spelthorne told us, there is ultimately an inescapable barrier.

May I conclude by congratulating my hon. Friends the Members for Arundel and South Downs and for Eddisbury on their excellent performances on the Floor of the House on the Bill? I am overwhelmed by the number of files that my hon. Friend the Member for Eddisbury has already accumulated. On that basis, I am sure that we will have an extremely well informed debate on the clauses that we have time to consider in detail.

Mark Prisk (Conservative, Hertford and Stortford)

May I say how delighted I am to serve under your chairmanship, Sir Nicholas? I am aware of the short time available to me. As this is my first Finance Bill, the prospect of 447 pages, 214 clauses and 43 schedules seems remarkable and daunting. In facing the challenge, I draw some comfort and inspiration from the painting behind you, Sir Nicholas. It is entitled ''Alfred inciting the Saxons to prevent the landing of the Danes.''

George Osborne (Conservative, Tatton)

So, my hon. Friend is Alfred.

Mark Prisk (Conservative, Hertford and Stortford)

I sincerely hope so.

May I draw the Committee's attention to the impact that the programme will have on the stamp duty land tax? The tax is new and therefore needs particular consideration and scrutiny. There are 82 clauses and 17 schedules related to it. As such, the programme motion compounds a particular problem regarding the tax. Many outside experts believe that the proposal as it is currently drafted is incomplete. For example, sale and leasebacks, which are a very complicated aspect, have been left to secondary legislation.

I am principally concerned not just because we need time to consider the unintended consequences, but because there are many outside experts in taxation, law and property who want to contribute to the process. The programme motion is too short and inconsiderate. It will not allow us to examine the tax, never mind the Bill, in the thorough and professional manner that people outside the House would expect.

Nicholas Winterton (Conservative, Macclesfield)

So far so good. A very pleasant atmosphere prevails. I trust that that will continue.

Question put:—

The Committee divided: Ayes 18, Noes 10.

Clause 2 - Rate of duty on beer

John Healey (Labour, Wentworth)

I look forward to serving on the Committee under your chairmanship, Sir Nicholas. You said that you were determined that it will be an ordered, structured and positive Committee and that every effort will be made to ensure that important matters are properly debated. My right hon. Friend the Paymaster General and I share your determination.

The right hon. Member for Fylde noted the number of Committee members from the north-west. As I look down the list, it strikes me that almost one in five of us are from Yorkshire, which will ensure a tough, gritty approach. It is probably appropriate that the first clause that we are to discuss concerns beer duty.

The clause increases the rate of excise duty charged on beer by 2.8 per cent., in line with general inflation. Excise duty and value added tax on alcohol provide a crucial £12.5 billion to invest in essential public services such as schools, hospitals and transport and in tackling crime. Beer accounts for more than 40 per cent. of alcohol duty receipts. This inflation-only increase in duty and VAT, which is equivalent to around a penny a pint, is necessary to maintain an important source of revenue. I remind the Committee that that modest increase, which is a freeze in real terms, comes after actual freezes in beer duty in three of the previous four Budgets. Since coming to power in 1997, this Government, unlike the last, have made no real terms increases in beer duty.

Some hon. Members may say that any increases in duty rates, even an inflation-only increase, will fuel the smuggling of beer and wine, the duty on which is increased in line with inflation in clause 3. The Government are absolutely committed to tough action to protect the industry against the effects of illegal smuggling and, as we announced in the pre-Budget report, Customs and Excise have continued to have a significant impact on cross-channel smuggling. The modest duty increases take place against a background, in 2002, of a 22 per cent. reduction in revenue evaded through beer smuggling and a halving in revenue evaded through smuggling of wine and spirits for the second year in succession.

I am aware of the pressures on brewers and the pub industry. They play an important part in our economy, our heritage and, for some of us, our leisure time. This modest inflation-only increase in beer duty recognises their concerns but, at the same time, maintains an important stream of revenue that is necessary to maintain our commitment to improving public services.

Stephen O'Brien (Conservative, Eddisbury)

I, too, welcome you to the Chair, Sir Nicholas, and your colleagues, Mr. McWilliam and Mr. Gale. As one of the proliferation of Members from the north-west, and not least as a Cheshire Member, I find it a particular privilege to serve under your chairmanship.

I thank the Economic Secretary for his contribution in the Committee of the whole House, although we were disappointed that he was not minded to accept any of our amendments. The issues raised were given a fair time for debate, but deep regret was felt on the Opposition Benches, and by many professional advisers and those who take an interest in the City, that the operation of a knife at the end of the first day meant that we were not able to debate the important area of stamp duty. That was a serious omission, and stamp tax was a real victim of the draconian timetabling procedure under which we have to suffer. Having put those comments on the record, I take this opportunity—as it has not been mentioned so far—to wish the Financial Secretary to the Treasury well. I know that she is quite rightly on maternity leave, and we all hope that it proceeds satisfactorily so that she will be able to add to her happy, and already somewhat numerous, family.

Clause 2, as the Economic Secretary has said, provides for an increase in the rates of excise duty charged on beer in line with inflation at 2.8 per cent., which came into effect from midnight on 30 April, on the assumptions that the Committee feels minded to support that proposal and that it will receive the backing and support of the House in due course. Although that is a very important duty, it would be right, in taking account of the proper admonitions that you hope we will be mindful of and abide by, Sir Nicholas, to note that the arguments that we raised in some detail in relation to tobacco products, and the other issues that came up during the new clause debate on the Floor of the House, apply equally to smuggling and cross-border issues relating to beer.

I do not think that it would be proper use of the Committee's time to delve into those issues one more

time. We have gauged the Government's reaction to what I hope were seen to be considered and responsible proposals, which were an attempt to tackle a genuine issue that affects users, not least, and corner shop owners and others, whether we are talking about tobacco or beer or other drink. Finding where elasticity in approach should fall is an increasing problem.

We all wish to curb smuggling. There is of course the phenomenon of cross-border shopping. The reality of that activity for personal consumption has been recognised, and that has to be considered part of the principle of freedom to shop. The House has seen personal allowances for such shopping raised, but there is concern that the duties that continue to be applied to such products are not bringing about the Government's desired objective by curbing smuggling to the necessary degree.

I shall not seek to spend particular time on that issue, given that we have debated tobacco, especially the proposal for a comparative control group that could test how the Government's strategy is working in relation to smuggling, how we can link it to pricing and differentials to tackle smuggling, and how it connects to the attack on corner shops that the increase in cross-border shopping represents.

I seek the Government's assurance that they will give detailed consideration to the impact of inflationary duty increases on smuggling and cross-border shopping. We are concerned that much information behind the advice given to Treasury Ministers is not being made broadly available, and not to those of us who have to scrutinise the Government's policy. There is a genuine need to protect the revenue raised from those products. I look to the Minister for those assurances so that we may have a detailed commitment to a programme of report on the elasticity of prices, duty and differentials between marketplaces. That would be particularly helpful.

It would also be helpful to ensure that the Government's assessment includes a proper analysis of the effect of duty increases on consumption, particularly in relation to tobacco. Let us not forget alcohol, too, which, while a pleasure in moderation, can result in a serious and damaging condition for some people. The health issue must genuinely be borne in mind with beer, as with tobacco products, about which there has been much fuller discussion.

I would be grateful if the Economic Secretary would share with us any detailed analysis that has been done or ensure that such analysis will be done. I would like to know about any commitment to a continuing programme that supports the fairness of the decision to increase duty on beer and wine, the effect on consumption—taking into account commercial and health issues—and, above all, where the elasticity factors range for each product in respect of smuggling and cross-border shopping.

John Baron (Conservative, Billericay)

Welcome to the Chair, Sir Nicholas. I shall keep my comments brief, as I appreciate that time is short.

In spite of all the Economic Secretary's comments about being fair to the domestic brewing industry and the consumer, I put it to him that beer duty is much higher on this side of the English channel than it is on the continent. That is unfair and wrong for several reasons. There is a great deal of talk about how Customs and Excise is coping and doing a great job on smuggling, but the increase in the price differential between this country and the continent encourages smuggling. Unless we can really get to grips with smuggling, as was pointed out on the Floor of the House yesterday in respect of tobacco smuggling, the increasing price differential will significantly harm our domestic industry.

The higher duty is also unfair on the 15 million beer drinkers in this country. I must declare an interest because I am one of them, in moderation. I ask the Economic Secretary what justification he has for the ever-increasing price differential on beer between this country and the continent. Will the Treasury put in place some long-term strategy or policy on taxation? At present, we seem to live hand to mouth, from year to year, never quite knowing where we are with taxation on alcohol. It would help the Committee, and the country as a whole, if we had some better indication of what might come in the years ahead. It would certainly help our domestic brewing industry to make investment plans for the future.

Jonathan Djanogly (Conservative, Huntingdon)

It is important to say something about real ale. The industry is not happy with the proposed rise and has hit out against the penny increase. Mike Benner, head of campaigns and communications for the big consumer group, the Campaign for Real Ale, stated:

''We understand that the Government needs to raise extra cash in this Budget, but increasing beer duty is a flawed strategy. As people only have so much cash to spend in pubs and bars, increasing duty reduces average consumption which in turn reduces revenues from beer duty. This increase is a blow for consumers after freezes in the last two budgets indicated a more sensible approach from the Government.''

That ties in with what my hon. Friend the Member for Billericay said. It is all very well to crack down on smuggling—indeed, we must do so—but at the same time we must put the price of beer in this country in the context of the price in the rest of Europe. Most people do not have to indulge in smuggling. They can legally go to the continent and purchase alcohol at a rate that is vastly reduced in comparison with rates in this country. That is why I fully support the proposal of my hon. Friend the Member for Eddisbury, who said that it would be helpful if the Government were to provide comparative figures for other European countries so that we could see what we were talking about.

Yesterday, on the Floor of the House, we discussed the duty on Scotch whisky. As part of that debate, comparisons were made with the duty on beer and wine. I remember the Economic Secretary saying that he was happy that the duty had been kept constant for a number of years and that it would have been bad for

whisky if there had been increases over those same years. However, he did not go on to give a rationale for the Government's strategy of freezing duty on whisky, other than to imply that that had been done on a year-by-year assessment basis.

Comments made yesterday are relevant to the debate. It would help the industry if some sort of strategy were put in place, so that it could be debated as an issue and put in an overall context. Has the Government's policy over recent years been to equalise the duty on whisky vis-à-vis the duty on beer and wine? The Economic Secretary never addressed that in the debate yesterday, so it would be helpful if he addressed it today.

Michael Jack (Conservative, Fylde)

I want to follow the line of my hon. Friend the Member for Huntingdon and take the Economic Secretary through one or two arguments on which I would be grateful for his comments. Every time the Government of the day return to the hackneyed old favourite of raising money by revalorisation—on this occasion, of the duty on beer—we hit a problem. I had not realised that one of the effects on the product itself was a potential downgrading of some of our better known beers. I declare an interest. I am principally a wine drinker, but occasionally I like to go into The Taps in Lytham, which is an excellent community pub, and enjoy a pint of Boddingtons beer. I had thought that it was a good north-west brew of traditional style, but I discovered recently that instead of containing good English-grown hops, the beer is being reformulated to contain hop oil. Those who like their beer brewed the traditional way will reflect on the fact that a range of hops and the contribution that whole hops make to the flavour of beer will be denied them. What many traditional beer drinkers would think of as an inferior product will be the one that is available.

Brewing and the retailing of beer are under considerable pressure on the margin and returns that they give, so manufacturers reformulate the product to try to sustain their financial returns against a background of rising prices. That background is occasioned by the clause. I am concerned because there are potential knock-on effects on agriculture. If brewers adjust the formulation, in the light of the rising price of the product, the net result will be that hops grown in the United Kingdom will suffer. The Government have made great play of their policies on the importance of rural Britain and sustainability. The inch-by-inch increase of the price of beer occasioned by the clause acts against the Government's professed interest in sustaining rural Britain and its communities.

That brings us back to where we started: namely, in the pub. The Countryside Agency's recent report on rural Britain places strong emphasis on the important role that the pub plays as the centre of rural communities. However, the inexorable rise in the price of beer has its effect on depressing the viability of not just rural pubs, but pubs in general. There is a circularity to the argument. The more the Government carry on increasing the price of beer, the more they affect not only the returns to the landlord, but also the quality of the product.

The Economic Secretary did not comment on another aspect. The increase in the price of beer is not the same as the increase in the price of duty. Retailers of beer will take a retail margin on the extra tax, so the percentage increase that he mentioned will be multiplied by the retail margin, especially in the case of supermarkets, off-licences and other purveyors of alcoholic drinks. That raises the question of how much analysis the Treasury has undertaken of the knock-on effect of what seems on the face of it a modest proposal. Can the Economic Secretary enlighten the Committee on what will happen?

Beer is deemed a natural beverage. Many would ascribe to it health-giving properties. I contrast that with many of the comments made on, for example, drinks available to children—fizzy pop, to give the generic term—which are high in sugar content. They can bring all kinds of problems, such as the onset of type 2 diabetes, which results in a cost to the national health service. However, such drinks have so far remained untouched by the Government in terms of taxation. It proves an interesting contrast that a natural beverage, beer, is continually under price pressure from the Government while other beverages that may have health disadvantages remain untouched.

Rob Marris (Wolverhampton, South-West) rose—

Nicholas Winterton (Conservative, Macclesfield)

I call the hon. Member for Wolverhampton, South-West (Rob Marris), who, I believe, represents the home of Wolverhampton and Dudley breweries.

Rob Marris (Labour, Wolverhampton South West)

You almost took the words out of my mouth, Sir Nicholas, and may I say what a remarkable pleasure it is to serve under your chairmanship? I should declare an interest that is not registrable: Banks's, the Wolverhampton and Dudley breweries, which is headquartered in my constituency, is the landlord of my constituency office—at an open-market rent, I hasten to add. It makes the excellent Banks's mild bitter as well as Banks's bitter, as I am sure that all hon. Members know. It used to be available in the Strangers Bar.

Banks's is the largest independent brewer in the United Kingdom and is responsible for some 1,600 public houses. It is a major brewer, and I can briefly tell my hon. Friend the Minister that I have quite close contact with Banks's, not only because my office is its tenant, but because it is literally a stone's throw from the brewery that is its headquarters. I saw Ralph Findlay, the chief executive, fairly recently—before the Budget—and discussed many things with him, including the Licensing Bill. I cannot recall that I have had any representation from Banks's brewery—the largest independent brewery in the UK—on the rise in the rate of excise on beer proposed in the Budget.

John Healey (Labour, Wentworth)

I welcome the strong support that a number of Members have given for particular local brewers and breweries in their constituencies. It reinforces the quality of insight brought to proceedings in this House and in Committee when we can make such direct links between our experience of local interests and more general national policy

issues. I particularly welcome the comments of my hon. Friend the Member for Wolverhampton, South-West.

I have to say to the right hon. Member for Fylde that although I drink Boddingtons, I do not submit it to the chemical analysis to which his comments treated us. I found them especially interesting.

Michael Jack (Conservative, Fylde)

The ale in The Taps pub that I mentioned is brewed with hops. I should be delighted to share a pint of that fine brew with the Economic Secretary.

John Healey (Labour, Wentworth)

I look forward to that opportunity, although a visit to Fylde is not in my diary at present.

The right hon. Gentleman tried to take the Government to task for adding duty pressures to the state of the brewing and pub industries. I remind him that he served in the Administrations between 1979 and 1997, which raised beer duties by more than the rate of inflation in nine out of those 18 years. In introducing the clause, I acknowledged the pressure on the brewing industry and pubs. That is one reason why we have introduced the small breweries relief scheme, which I know that he recognises as being particularly valuable to small brewers. For three of the past four years, we froze beer duty. This year, we propose an inflation-only freeze on beer duty—in other words, a real terms freeze.

The hon. Member for Billericay cited alcohol duty as an unfairness in the UK tax system. I do not know whether the hon. Member for Spelthorne pricked up his ears at that, because the hon. Member for Billericay may be emerging as a European tax harmoniser. Reducing alcohol duty to the French level would be prohibitively expensive because it would cost more than £5 billion in lost excise and VAT, which would be broadly equivalent to a 1.5 per cent. increase in VAT across the board or a 2 per cent. rise in the basic rate of income tax.

It is important not to examine excise duty and taxation in isolation. A large proportion of cross-border shopping for alcohol by British people is done in Belgium, the Netherlands and France, and it is true that those countries generally have lower rates of alcohol excise duty than Britain does. Each of those countries, however, has a higher rate of VAT and a higher rate of corporation tax than Britain has. The Organisation for Economic Co-operation and Development has shown that the UK is still a relatively lightly taxed economy. We have one of the lowest total tax burdens in the EU, and it is far lower than the EU average.

John Baron (Conservative, Billericay)

Although I accept the Minister's point about the possible loss of revenue if taxes were harmonised across the continent, tobacco smuggling has cost the Treasury £15 billion since 1997. Beer smuggling and alcohol smuggling have also cost sizeable sums of money. To argue that we cannot reduce taxes because we would lose revenue is to examine the problem the wrong way. We should concentrate on stopping smuggling, which would be a revenue earner for the Treasury. That would allow us to reduce taxes on alcohol. The tax on alcohol in Britain is much higher than it is on the continent, which is grossly unfair.

John Healey (Labour, Wentworth)

The hon. Gentleman jumped in prematurely and repeated his earlier remarks. He said that we should get to grips with smuggling. In the last year—I also said this earlier—Customs and Excise has managed to cut the beer duty lost to cross-channel smuggling by more than one fifth and has reduced the loss of duty on wine by a half.

The hon. Member for Eddisbury also discussed curbing smuggling, which we are doing. I shall address the two points on which he specifically sought reassurance. We are monitoring the impact of smuggling on industry, the market, consumers and Government revenues. In the Committee of the whole House, we discussed the need for better data and better analysis to inform better policy debates and better policy decisions, and I shall repeat my remarks in Committee. We are currently completing work on improving the model that we use to analyse demand and elasticity in the alcohol market. In particular, we are improving it to take account of the distinction between on-trade and off-trade beer. With the completion of the single market, we will have better data to analyse and track cross-border shopping.

David Laws (Liberal Democrat, Yeovil)

When the model that the Economic Secretary said the Treasury is refining is completed, will he contemplate making it available to the outside world and the private sector?

John Healey (Labour, Wentworth)

The hon. Gentleman may have missed my detailed explanation yesterday when I said that interaction and data on demand, elasticity and the new factors will be set out in a Government economic service working paper. We aim to publish that shortly, and I am confident that it will help to inform our future debates.

Stephen O'Brien (Conservative, Eddisbury)

I have noted what the Economic Secretary said and will pick up any points when we come to the next clause, because the same will apply.

May I take the hon. Gentleman back to a comment that he prayed in aid about the relative position of tax in other countries? I am sure that he will recall that at paragraph C60 on page 261 of the Red Book chart C3 shows the tax-GDP ratio. For the record and given that the Economic Secretary referred to it, it is proper to draw the Committee's attention to that chart. Committee members can refresh their memories by obtaining a copy from the Vote Office. The Government's own document shows that the percentage of tax is projected to escalate phenomenally to 38.5 per cent. during the period to 2008–09 from the current position which they claim is around 36 per cent. The trend is looking very unfavourable.

John Healey (Labour, Wentworth)

I made the point clearly that the figures from the independent Organisation for Economic Co-operation and Development show that Britain's economy is one of the most lightly taxed in the European Community. As I draw my comments to a conclusion, I trust that that answers the points that have been put to me and I hope that the Committee will approve clause 2.

Question put and agreed to.

Clause 2 ordered to stand part of the Bill.

Clause 3 - Rates of duty on wine and made-wine

John Healey (Labour, Wentworth)

We now turn to the rate of excise duty to be charged on wine and still-made wine. Clause 3 proposes an increase in the rate in line with general inflation of 2.8 per cent. Wine accounted for around 27 per cent. of total alcohol duty receipts, including VAT, of some £7.3 billion in 2002–03. As with beer duty in clause 2, it is an inflation-only increase in duty and VAT and equivalent to around 4p on a bottle of standard table wine. As with clause 2, it is necessary to maintain an important source of revenue to fund essential public services and Government spending. I should remind the Committee again that this modest increase—it is a freeze in real terms—comes after a period of actual freezes in wine duty in three of the previous four Budgets. Since coming to office in 1997, the Government, unlike the previous Conservative Government, have made no real-terms increases in wine duty.

The UK wine market continues to flourish, and sales of UK duty-paid wine are still increasing. They have increased by 56 per cent. during the past 10 years and remain buoyant with an increase of 8 per cent. during the year to December 2002. The wine share of the UK alcoholic drinks market increased from 21 per cent. in 1993–94 to 29 per cent. in 2001–02. We can look to the wine sector to help to maintain revenue without damaging its prosperity.

The arguments about smuggling and cross-border shopping are essentially the same as those made by the hon. Member for Eddisbury at the end of his remarks on clause 2. As I have made clear, the Government are committed to preserving people's rights to shop freely in the single market, but we are also absolutely committed to clamping down on smuggling. I am sensitive to the concerns of wine importers and native wine producers, but the modest increase—as I said, it is a real-terms freeze in wine duty—recognises those concerns while maintaining an important source of revenue to the Exchequer to help it maintain its public spending commitments.

Stephen O'Brien (Conservative, Eddisbury)

In relation to clause 3 and the increase in the excise duty charges on still wine and still made-wine, much the same arguments apply as were made on the previous clause. Recognising the precious time of the Committee, I wish to pick up on only a few of the Economic Secretary's remarks on the previous clause that apply equally to this one, rather than going through the same arguments.

The Economic Secretary helpfully said that the Treasury is compiling studies and analysis and completing a model on elasticity. He noted that it would take account of factors such as industry, market and revenues. I hope that it will also consider consumption, given the effects on elasticity of smuggling and cross-border shopping. From an industrial point of view, there are the questions of capacity and growth of the market, and of the effect

on consumption overall, but for certain products important health issues cannot be overlooked. All those factors go hand in hand, and our objective as policy makers or scrutineers must be to do our best to represent all our constituents and their interests. We sometimes have to consider competing factors to ensure that the best possible framework for a proper balance can be struck through the laws and secondary legislation that we consider and pass or do not pass.

I am glad that the hon. Member for Yeovil supports the call for publication of the model—that is right. I noted the Economic Secretary's response that the intention is to publish it, and we look forward to that. He used the expression ''shortly''. We would like the same sort of guidance that we were able to obtain some time back on whether the Chancellor's pronouncements on his five economic tests for the euro would be in the first half of this Parliament. We are now almost at that point.

Nicholas Winterton (Conservative, Macclesfield)

Order. No, I will not have that. Can we please attend to the matter before us relating to excise duty on wine?

Stephen O'Brien (Conservative, Eddisbury)

As I am sure you noticed, Sir Nicholas, my comments were by way of example and parallel. Therefore, as the parallel and precedent have been noted, I am sure that the Economic Secretary will want to define what he means by ''shortly''. I hope that it is no later than the summer recess.

John Healey (Labour, Wentworth)

Shortly means shortly.

Stephen O'Brien (Conservative, Eddisbury)

That was not the reassurance for which I was looking. Having put the question on the record, our expectation will be that the model will be published before the summer recess. Anything beyond that would stretch the meaning of the word shortly, however often it is repeated. On the basis of such assurances, we will not press the issue further.

David Wilshire (Conservative, Spelthorne)

I hasten to say that I have not been put up to this, and I have not even consulted my colleagues on the Front Bench so they will be worried about what I am about to say. I want to make a plea from the heart, and on a serious point. Over a number of years, I have done my level best to produce English wine. It is not a declarable interest because no one in their right mind would ever buy it from me. No money is involved, but it has given me an insight into the English wine industry. Its small-scale production means that its overheads and its ability to compete in the marketplace are seriously undermined.

I appreciate the difficulty of discriminating between one sort of alcoholic grape juice and another; I am well aware of that. However, if the Government, or any other Government, were looking for a means of import substitution to help the balance of payments, any way that could be found to assist and encourage the production of English wine would make a great deal of difference.

Ian Lucas (Labour, Wrexham)

Does the wine to which the hon. Gentleman refers include Welsh wine?

David Wilshire (Conservative, Spelthorne)

I am proud to be an Englishman. The Welsh can make their own case. I doubt that the Scots would want to—it is a bit too chilly up there. I am aware of Welsh wine. It is, of course, nothing like as

good as English wine, but I will make a plea for that as well, if it will help. The point is a serious one. Anything that any Government can do to encourage small-scale production, through any financial relief or benefit, would be valuable for eccentrics such as myself in England, and it would be quite useful in a very small way for the British economy.

Michael Jack (Conservative, Fylde)

The Minister might say a word or two about the current structure of the rates of duty per hectolitre, because I thought the tax was on alcohol. Why is it that the rate for wine or made-wine up to a strength of 15 per cent. is £158.69 but the addition of a dash of carbon dioxide, whether added naturally or by the process of fermentation, raises the duty rate to £220.54? It seems quite an expensive tax for a whiff of carbon dioxide, unless it is an anti-greenhouse gas measure, but I do not understand why there is such a large differential if we are taxing alcohol.

John Healey (Labour, Wentworth)

We have made rapid progress. I welcome the information that the hon. Member for Spelthorne is a small wine producer in his own right. We have considered the suggestion that has been put to us of some sort of reduced rates for small wineries, similar to the scheme that we introduced for small breweries nine months ago.

The European directive does not allow for us to set reduced rates for small wineries. In considering whether the UK should press for such an alteration in EU law, it is important to appreciate that despite the hon. Gentleman's best efforts, less than 1 per cent. of the wine consumed in the UK is produced in the UK. By comparison, 90 per cent. of the beer drunk in the UK is produced and manufactured here. Even were we able to amend EU law to consider such a measure, it would remain the case, under other European and world trade agreements, that we could not apply such a scheme to UK wine producers only. It is likely that much of the wine that might qualify under such a scheme would come from overseas. Our own small wineries would receive comparatively little benefit from such a move.

The right hon. Member for Fylde asked why there was an increase on still wine in line with inflation, but a freeze on sparkling wine.

Michael Jack (Conservative, Fylde)

The question was not about the differential rate of increase, but the different rates of duty. If we are taxing alcohol, what is the explanation for having such a big difference between still and sparkling wine, when carbon dioxide is the only difference?

John Healey (Labour, Wentworth)

For duty purposes, we treat sparkling wine such as champagne as more comparable to other alcoholic drinks than to still wine. There is, therefore, a different duty band, and the rates in the Bill to which the right hon. Gentleman points are different.

I believe that I have given all the reassurances that I can to the hon. Member for Eddisbury. He has raised again points that he has raised in previous debates. I have explained that ''shortly'' means shortly.

Question put and agreed to.

Clause 3 ordered to stand part of the Bill.

Clause 6 - General betting duty and pool betting duty: relief for losses

John Healey (Labour, Wentworth)

We turn now to general betting duty and pool betting duty. For about a year and a half now, we have had in place a reformed taxation system based on a new gross profits tax on betting. When we introduced those reforms, they were a radical and bold response to a difficult and rapidly changing competitive environment for our betting industry. They represented a fundamental shift in the approach to taxation in that sector.

We have now completed a review of the reforms and I am happy to be able report that bookmakers, racing representatives, academics and industry observers widely hold them to have been a significant success. John Brown, chairman of William Hill, speaking at the British Horseracing Board annual general meeting last year, said that the implementation of the gross profits tax was

''truly momentous. The significance of which cannot be over estimated. The new tax changes everything—the basis is now fairer, it is set at a sensible rate, and thus enables the bookmaker to stand the tax, without deductions from the punter. It represents forward thinking of the best possible sort''.

I am quoting because I would hesitate to make this claim myself. Mr. Brown continued:

''GPT will prove to be the single most important and influential development in betting and racing in 30 years.''

I shall not embarrass my hon. Friends by citing other commentators who have made similar remarks—

Rob Marris (Labour, Wolverhampton South West)

Go on.

John Healey (Labour, Wentworth)

Since my hon. Friend presses me, an article published last year in The Economic Journal concluded:

''The switch to a gross profits tax is likely to lead to lower prices and enhanced consumer welfare . . . Further, the switch will . . . enhance the ability of UK betting firms to compete in an increasingly competitive environment.''

Research has indeed confirmed that the gross profits tax is more efficient, fairer and more sustainable than the former regime.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

Does the Economic Secretary have any quotations or positive assessments made by the betting industry since the Budget or the publication of the Finance Bill that he can share with the Committee?

John Healey (Labour, Wentworth)

I am grateful to the hon. Gentleman. As it happens, I published a report yesterday containing the results of the review, so I can bring him and the Committee bang up to date by summarising one or two of its main findings.

The report shows that since the reform, betting shops have experienced an increase in turnover of 82 per cent., almost half of which is attributable to the gross profits tax. It shows that 2,000 jobs have been created in the industry in the UK, and that internet and niche gambling sectors have had a significant

boost—the previous duty on stakes was a greater burden to such small operators because their margins were tighter, so that is a significant gain from the new system. The report also shows that the benefit of betting offshore or illegally, which was a serious problem for the industry, has been removed and that the level of illegal bookmaking has been significantly reduced. Finally, it shows that international business appears to be drawn to the UK. Although it is still too early to quantify, at least one large chain has reported a 10 per cent. increase in overseas sales since the introduction of the gross profits tax.

None the less, because the review threw up some questions from the industry for the Government, we are taking the opportunity it provides to make some further improvements to the new regime. We are doing that through this clause and the related clauses 7 and 8. At present, if a bookmaker makes a loss over an accounting period, although no duty is payable because no profit is made, that loss cannot be carried forward to the next accounting period to be offset against future profits. During the review, some smaller bookmakers and spread betting firms argued that, when they made a loss over an accounting period, the lack of a carry-forward facility meant that over a year they paid a higher effective rate of duty than 15 per cent. on their gross profits over the year as a whole. Having considered the merits of the bookmakers' argument, the Government have decided to refine the betting provisions to allow them to carry forward losses between accounting periods. For consistency, the arrangements also apply to pool betting operators.

I hope that the Committee will realise that the clause demonstrates the Government's commitment to consult, to listen to the industry, to respond when there is good evidence and a good case is put to them, and to refine the regime accordingly. On that basis, I commend the clause to the Committee.

Stephen O'Brien (Conservative, Eddisbury)

I recognise that it must have been in order, because otherwise you would have brought it to the Economic Secretary's attention, Sir Nicholas, but clearly his introduction was to the whole group of clauses rather than specifically to clause 6.

It was quite interesting that the Economic Secretary said that he was hesitating. I have never before noticed him hesitate to heap praise on himself and the Government. When he was called for an encore, he seemed to have one well prepared—a well rehearsed pat on his own back. Perhaps he is concerned with a new game of who can pass the bucket fastest, but that for him to decide.

The Economic Secretary is right to say that we are dealing with a rapidly changing industry. Whenever there is change, it is appropriate to consider during the fundamental redrawing the settlement between activities that are taking place and the proper approach to the element that will eventually benefit the public purse through revenue raising. I do not take issue with the approach on gross profits tax.

Although I do not want to stand in the way of progress and development in the industry, we should not lose sight of the effect that the tax regime and the way in which the industry is developing are having.

This is yet another example of arguments about services, opportunities and entertainments in localities and communities. We are deeply concerned on behalf of our constituents about community post offices and pharmacies, given the rate of closures and threatened closures; so it is with the pleasure of many of our constituents who like to have a bet and take part in gaming in other ways.

Although it would be wholly inappropriate to say that the matter should be the subject of a regulatory impact assessment, it is right to seek an assurance from the Economic Secretary that, when considering such matters, the Government genuinely acknowledge at all times the effect on communities and opportunities for people, as opposed to simply industrial, commercial and taxation issues, which may become clinical unless there is determination to hold on to the community aspect. The businesses in question are meant to serve and to entertain their customers, who are using their hard-earned, post-tax money.

On clause 6—perhaps this is unsurprising but it should be recorded none the less—it is nice to see the Government trying to get the law right at the second time of asking. The clause allows for losses that occur when winnings paid out by bookmakers exceed lost bets to be carried forward to offset gross profits in the following accounting period; that applies to both stake and pool betting and is in line with the general hopes and expectations of the interested parties. The clause will, of course, take effect from 1 September. It would be helpful if the Minister were to ensure through his reply that there is an absolute understanding about the following accounting period—it is obvious, but it would be helpful to have a clarification on the record.

One significant issue is not transparent: what is the position on carrying back losses? If there is relief for losses where winnings paid out by bookmakers exceed lost bets, what is the position on carrying back losses to prior accounting periods? Does the clause provide for that? It would be helpful to hear the Minister's observations. If the issue has not been considered or covered, it clearly should be and he should examine it. He may well have been advised that other accounting provisions cover it according to the entity, individual or business affected.

We considered many of the issues relating to the general application of GPT when we had our extremely important, although sadly unconsensual, debate on bingo in the Committee of the whole House. That debate has continued to resonate loudly within communities interested in bingo, and many of the issues relating to bookmakers have similar community bases. We should ensure that everything is done to facilitate the more modern approach that is appropriate under GPT, given how the whole business is developing. I look forward to the Minister's responses to those questions.

David Laws (Liberal Democrat, Yeovil)

We, too, broadly welcome the thrust of the Government's reforms in relation to GPT. I should like briefly to press the Minister on one issue, which, as the hon. Member for Eddisbury mentioned, came out of the debate on bingo. Without going off the topic—the right hon. Member for Fylde mentioned this earlier—I should like to discuss the consistency of

Government taxation across certain areas. When we discussed bingo, we were disappointed that the Economic Secretary was unwilling to be open about the Treasury's approach to the taxation of different forms of gambling. Can he reassure us that the Treasury seeks neutrality between different forms of gaming, betting and gambling?

Most economists assume that Treasury policy is based on neutrality. In other words, one assumes that the Treasury is aiming to get to a point at which there is no incentive—this touches on clause 7, but I do not want to anticipate that argument—to choose one form of betting or gaming over another given how the different forms are taxed. Earlier, the Economic Secretary seemed to indicate that there was no Government policy to align and neutralise the taxation of different forms of gambling, which was surprising and disappointing. Referring two days ago to the implications of offshore activity and the potential evasion of tax, he sensibly said that that was an area in which an argument could be made for not having a neutral tax structure. However, when pressed, he was not willing to indicate that there was a more general Government commitment to tax neutrality in respect of betting and gaming.

Can the Economic Secretary tell us more about the Government's intentions regarding tax neutrality between different forms of betting and gaming? Is it the Government's broad approach to seek to achieve neutrality? Finally, is he willing to publish an assessment of the tax burden on different forms of betting and gaming so that we can assess whether neutrality has been achieved?

John Healey (Labour, Wentworth)

The hon. Member for Yeovil raises the same points that he raised earlier. I entirely respect your judgments and decisions, Sir Nicholas, but his comments go much wider than the clause with which we are dealing.

When the hon. Gentleman put those points to me earlier, it was not that I was unwilling to explain the Government's position on tax neutrality but that my approach was different from his. I explained that the Government's approach to the reform of gambling and gaming taxation was a consistent one, not an equalising one. The reason for that is simple. We are dealing with an outdated, over-complex and over-burdensome taxation system for gambling and gaming. We have applied consistent principles to the reforms that we propose and those that we have already put in place: they are to remove some of the costs and complexity of compliance, to improve the prospects for growth in those industries and to produce a better deal for those who participate—the punters or players.

However, although the principles and approach are the same, the circumstances of the different gambling and gaming industries are different. When we were considering reform of the betting system—some of my hon. Friends are more expert on this than I am—we were faced with a UK industry that was increasingly moving offshore and on to the internet. We were faced with totally different circumstances when dealing with

the reform of bingo, on which the hon. Gentleman pressed me earlier.

To avoid doubt and at the risk of repeating myself, the approach that we take to reform and the principles underlying it are consistent, but it is not the Government's policy purpose to have an equalised approach across the gaming regimes.

David Laws (Liberal Democrat, Yeovil)

Will the Economic Secretary give way?

John Healey (Labour, Wentworth)

No, I have dealt with the point. Let me turn to the question of the hon. Member for Eddisbury about how carry-forward losses would work. It might help if I first give an example and then deal with the carry-back question. If in a four-month period a bookmaker made a loss of £5,000 in one month and a profit of £10,000 in each of three months, he would pay tax of £4,500, or 18 per cent. of gross profits, if he could not carry forward the loss, rather than £3,750, or 15 per cent. of gross profits.

The following accounting period is the one after the loss-making accounting period, so there is no carry-back provision in the clause. It is small bookmakers and financial spread betters who are at greatest risk from losses during accounting periods and who are most likely to benefit from the clause.

Stephen O'Brien (Conservative, Eddisbury)

The Economic Secretary will realise that I raised the point not as a criticism, but as a matter for clarification. Professionals who advise various clients, large and small, raised it. The question has drawn an answer on the record, and I dare say that he is aware that it may be something on which many professionals rely when clarifying the position.

John Healey (Labour, Wentworth)

I hope that the hon. Gentleman does not feel that I was trying to be anything other than helpful by giving him the clarification that he wants. It may be that professional advisers have put those questions to him. As I understand it, they were not raised by the industry during the work that we have done in framing the reform. Were we to look at a carry-back provision, it would add some complexity of compliance to the system, which would have to borne in mind.

I welcome the hon. Gentleman's recognition of the success of the reforms to betting taxation that we have made. He is right to say that customers have to be central to that process. Through those reforms we have given customers and punters what he might call a fair deal. On that basis, I hope that the Committee will approve the clause.

Question put and agreed to.

Clause 6 ordered to stand part of the Bill.

Clause 7 - General betting duty: betting exchanges

George Howarth (Labour, Knowsley North and Sefton East)

I beg to move amendment No. 126, in

clause 7, page 5, line 4, after 'one person' insert '(''the bettor'')'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 127, in

clause 7, page 5, line 4, after 'another person', insert '(''the bet-taker'')'.

Amendment No. 128, in

clause 7, page 5, line 5, after 'third person', insert '(''the operator'')'.

[R] Relevant registered interest declared.

Amendment No. 129, in

clause 7, page 5, line 8, leave out subsections (2) to (4) and insert—

'(2) For the purposes of sections 2 to 5B as modified by subsection (5)—

(a) the bet shall be treated as if it were made by the bettor with the operator and not with the bet-taker, and

(b) the operator shall be treated as a bookmaker in respect of the bet.

(3) But subsection (2) does not apply to a bet if—

(a) the bet-taker holds a bookmaker's permit, and

(b) the bet would not be an on-course bet if the operator were making the bet with the bet-taker as principal.

(4) Section 2 (Bookmakers: general bets) is modified as follows—

(a) in subsection (3) for ''15 per cent of the amount of his net stake receipts for that period.' substitute 'the aggregate for that period of the amounts of duty charged in respect of each individual bet-taker using facilities provided by him.''.

(b) after subsection (3) insert—

(4) For the purposes of subsection (3), the amount of duty in respect of each individual bet-taker in an accounting period shall be 15 per cent of the bet-taker's net stake receipts for that period.

(5) Where there is any doubt as to which of two persons is the bettor and which the bet-taker for the purposes of subsection (1)(a), whichever of the two was the first to use the facilities of the operator to offer the bet shall be treated as the bet-taker.'.

Amendment No. 130, in

clause 7, page 5, leave out line 26.

George Howarth (Labour, Knowsley North and Sefton East)

Let me take this opportunity to welcome you to the Chair, Sir Nicholas. I know from long experience of dealing with you that you are always fair and, as you rightly point out, firm. I will seek constantly to bring out your fair side rather than the firm.

I begin by drawing the Committee's attention to the fact that I have a relevant registered interest in these matters. I am a remunerated adviser to William Hill and I do not want there to be any doubt about that relationship. I also have considerable constituency interest in that Bet Direct, which is one of the biggest telephone betting services, is based in Kirby in my constituency, and Ladbrokes has a call centre in the Aintree part of my constituency. Both of those concerns are responsible for a number of my constituent's jobs and are a significant part of the local economy. I am also very proud to have Aintree race course in my constituency. Since the arrangements in the clause have an impact on racing, that is important. Finally, I am pleased to draw attention to another interest: I am a part-owner, together with several hon. Friends, of a two-year-old bay filly known as Theatre Bell. I am not sure whether that is an interest, because so far all it has done has cost me money, but we live in hope.

Amendments Nos. 126, 127 and 128 are essentially definitional. They describe the relationship between

the various parts of betting exchanges. The crucial one is amendment No. 129, which proposes an alternative tax regime to that which the Treasury has proposed. I am grateful to my hon. Friend the Economic Secretary; we have discussed the matter previously and he wrote to me earlier this week. He said that he was hoping to create a level playing field through the arrangements, which is a perfectly proper way for the Treasury to proceed. I will comment on whether or not it is a level playing field shortly.

However, I should point out that my hon. Friend the Minister for Sport repeatedly makes the claim, which I think is justified, that we in this country have an industry of which we can be proud. Its integrity is not open to question, which is not true of other betting industries internationally. He has made a convincing case that the betting industry is part of a wider entertainment industry and an important part of the economy. My right hon. Friend the Chancellor recognised that when he introduced gross profits tax, which has been widely welcomed. As my hon. Friend the Economic Secretary pointed out, it has been a huge success in allowing the industry to grow and take its place as a worldwide centre of excellence for those who wish to bet. It has had the effect of bringing some offshore interests back onshore, thereby ensuring that they are properly regulated.

I am grateful and indebted to the Association of British Bookmakers for its assistance in preparing the amendments. I should draw attention to a letter that I have received. It was sent to me only yesterday, and I do not know whether other hon. Members have had copies of it.

Adam Price indicated assent.

George Howarth (Labour, Knowsley North and Sefton East)

The hon. Member for East Carmarthen and Dinefwr indicates that he has done so. The letter is from the British Horseracing Board and is signed by its secretary-general, Mr. Tristram Ricketts, who is well known to many Committee members. The fourth paragraph of page 1 says:

''While betting exchanges are, in principle, a consumer-friendly addition to the traditional betting scene, it is important that they operate on a level playing field with other betting facilities to minimise the scope for market distortions and maximise the opportunity for fair and open competition. BHB is aware of, and supports, the view of the betting industry generally that such a level playing field is currently compromised by the present taxation arrangements for betting exchanges.''

The penultimate paragraph says:

''BHB shares the disappointment and concern of bookmakers that the Government did not respond positively to these proposals and proposes instead to change the basis of the taxation of betting exchanges in a manner which does not fulfil the key objective of creating a level fiscal playing field. Such a level playing field is a prerequisite of fair competition, the absence of which is proving deeply damaging to the revenues of the Racing Industry, with the implications that may have for employment and investment, as well as to bookmakers. We therefore wish you every success in at least securing a commitment from Government to reconsider the matter as a matter of urgency before further damage is done.''

It might be for the convenience of the Committee if I run through the implications of all that.

I know that betting exchanges are a relatively new concept to some members of the Committee, who perhaps take a less close interest in such matters. They act as intermediaries between the layers of bets and

punters. The majority of their customers do not hold bookmakers' permits, and a significant number are located outside the UK. There is nothing objectionable about betting exchanges, as Tristram Ricketts makes clear. They provide another opportunity for punters to bet in an entirely different way and employ modern technology to facilitate that. However, the problem is that the proposals as set out in the Bill do not, as my hon. Friend the Economic Secretary said in his letter to me, create a level playing field.

The Budget proposals in the Bill require exchanges to pay 15 per cent. gross profits tax only on commission income. That means that those who use the exchanges to lay bets and who do not hold bookmakers' permits will not pay tax, but only a small commission on winnings. Let me illustrate that. A £1,000 losing bet with a bookmaker generates £150 in duty, while the layer on the exchange pays nothing. In terms of any gross win generated by the betting exchanges, the Treasury will be totally dependent on the commission level of the exchange. As a result, the same £1,000 losing bet made through an exchange would generate a maximum of £7.50—or less if the commission rate is less than 5 per cent. In fact, the average commission rate is thought to be about 3 per cent.

That does not represent a level playing field for either the bookmaker or the Treasury. The current proposal, based on betting exchange commission, is flawed, as it gives an unfair advantage to layers on betting exchanges, some of whom may not even reside in this country. It must be appreciated that betting exchanges compete directly with licensed bookmakers. There are not many opportunities to place bets. One can go through a betting exchange or a bookmaker. Some of us might have a friendly wager that has nothing to do with the Chancellor or anybody else, but that is becoming less and less usual.

The betting exchanges regularly advertise in the Racing Post, advising punters to ''join the revolution''. Matching £4 billion worth of bets annually is significant business, and as they claim to have 500,000 matched bets a day, it really is big business. On current proposals, that would produce about £9 million in duty. It is estimated that, if the same volume of business passed through a traditional bookmaker, the duty generated would be about £35 million, so the proposals would involve a significant loss to the Exchequer.

The main marketing approach of betting exchanges is that they offer the punter better value. That is true, but they can do so only because they are not paying their fair share of the costs. The amendment would not penalise betting exchanges, but ensure that the layers operate under the same tax regime as UK bookmakers, with whom betting exchanges clearly compete.

I shall not say a great deal more—

Michael Jack (Conservative, Fylde)

I have been following the hon. Gentleman's argument closely. I am not an expert in this area, so can he tell me whether, in the traditional sense of placing a bet, one can place bets through the

internet offshore of the United Kingdom, where the tax regime is more beneficial, notwithstanding the change in tax arrangements on betting? That would seemingly put offshore betting on a par with the exchanges that the hon. Gentleman mentions in the amendments.

George Howarth (Labour, Knowsley North and Sefton East)

That possibility clearly exists, and the right hon. Gentleman is right to point to it. I have no doubt that, if this provision goes unchecked, that will happen. It is not simply a matter of competition. I referred in my opening remarks to the integrity of the industry. The reason why there is so much integrity and trust in the industry is that it is well regulated. If the developments that the right hon. Gentleman describes take place, people will not know how the people they are betting with are operating or what their level of integrity is.

Betting exchanges are not unique to the United Kingdom: because of its nature, the technology becomes worldwide very quickly. We are all aware of that from other contexts. I understand that Australia and Hong Kong are talking about banning betting exchanges altogether, and there have certainly been complaints from the French racing authorities about their activities in France. I am not proposing anything as draconian as banning them because, in the right context, they provide an alternative opportunity for punters and I would not want that to be taken away. The UK betting industry is fully prepared to compete with betting exchanges, provided the competition is fair. My amendments would create a level playing field in contrast with the arrangements in the Bill, which will not.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

From his expert knowledge and for my understanding, will the hon. Gentleman elaborate briefly on the implications for horse racing in this country of an expansion in betting exchanges' market share vis-à-vis the licensed bookmaking trade?

George Howarth (Labour, Knowsley North and Sefton East)

At the moment, British horse racing benefits through the levy, all of which is collected from bookmakers. There is a debate about whether that should be a statutory levy and the Government are thinking about replacing the levy with a more commercial arrangement. That may or may not happen. The basic principle is that the British Horseracing Board owns fixture lists, although the Office of Fair Trading is inquiring into the ownership of those lists. At the moment, the British Horseracing Board benefits from being able to sell the fixture lists and the money that they receive from bookmakers through that arrangement helps to support racing in this country. Betting exchanges are not involved in that and because they do not participate in the levy, racing does not benefit from it in any way.

I am conscious that I have spoken at some length and I do not want to test the patience of you, Sir Nicholas, or the Committee any further. I shall listen carefully to the response of my hon. Friend the Economic Secretary because the matter is important for the betting industry and for racing.

Stephen O'Brien (Conservative, Eddisbury)

I have read the amendments and received representations from the Association of British Bookmakers Ltd., which the hon. Gentleman so ably explained. I have considered them carefully and one issue that he is relying on is open to question. He will detect from the tone of my comments that we are not minded to support him today. However, he has raised some valid issues, which, in the circumstances of this rapidly changing market, must be addressed. It is simply not good enough to ignore them.

The hon. Gentleman based much of his argument on the issue of a level playing field and I understand where he is coming from and why. In terms of a level playing field, one tends to think of rights and responsibilities but also of unfair competition. It is on that latter limb of the level playing field argument that he must be basing his case.

There is a challenge to that because we are discussing a market of choice for customers and, as with all marketplaces, whether the product is available and affordable. With betting, affordability is an interesting notion for the normal marketplace test, but it is entertainment, so we can put to one side the issue of whether it goes beyond entertainment to compulsion. However, that is not what is behind the hon. Gentleman's amendments and, because it is that type of marketplace, we as a Parliament and a legislature must be very cautious when considering passing laws, as suggested in the amendments, that would defy the way in which the market is moving. However, the hon. Gentleman has raised valid concerns. If he is, through the amendments, providing a serious and well-thought-through marker of what needs to be addressed, that is fair and helpful to the Committee, to the House and to those beyond. I in no way criticise that, but I am not in a position to offer the official Opposition's support for the amendments today.

I take seriously the concerns that the hon. Gentleman raised in regard to the British Horseracing Board. I am a little more familiar with that, although I do not partake in the ownership of a leg or even a forelock. I have had representations on such matters on various occasions, not least because I have a constituent who has been a member of that board and who has ensured that I am aware of its views.

We have to recognise—as did the hon. Gentleman—that betting exchanges are a very successful new phenomenon. Although it is absolutely right for the margin earned by an exchange to be taxable, we have to be extraordinarily careful in addressing the issue of how to make that equivalent to what happens with other forms of betting and gaming under the GPT regime. The real complaint from the Association of British Bookmakers is, as I understand it, that there is a chance that it will be forced to compete against what is in effect an unregulated sector of the market.

There is always a problem with the word ''regulation''. My party and I abhor red tape. We abhor bureaucracy and the overwhelming culture among legislators and the civil service—with the greatest of respect to them—that they all the time

must find something to do, rather than something to undo. We should all always assume that regulation is the worst of all options. However, in this case, I think that it is proper to look at the complex issues that arise, although perhaps not at law. We are dealing with a type of business that is not only cross-border but even ethereal, or ether-driven. That challenges our normal notions of jurisdiction.

I am conscious that one could go down a long cul-de-sac on that point—it would certainly be a cul-de-sac where my personal knowledge of the conflicts of laws and rudimentary legal education are concerned—but there is a major issue here. This is the sort of real-life example that can impact on what are often academic and learned issues, upon which it would be wholly presumptuous of me to give an opinion.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

I am listening with great interest to the points that the hon. Gentleman is making, although they seem somewhat inconsistent with the arguments on tax neutrality that we will soon be hearing. I hope that his comments have nothing to do with the fact that one of the main owners of a successful betting exchange in the UK is a major funder of the Tory party.

Stephen O'Brien (Conservative, Eddisbury)

As I have said, this is not my area of expertise but I am glad to note that we are developing policies in this field—not least on the clause—that are gaining such widespread support that some people feel compelled to ensure that we have the best possible opportunity to prevail at the next general election.

George Osborne (Conservative, Tatton)

I should correct the hon. Member for East Carmarthen and Dinefwr. The declared donor to whom he referred is an owner of a spread betting company. That is different from a betting exchange. The clause refers explicitly to betting exchanges, not to spread betting firms.

Stephen O'Brien (Conservative, Eddisbury)

I am very grateful to my hon. Friend and neighbouring Member of Parliament up in Cheshire. I am glad to see that, as always, Cheshire contains a multiplicity of expertise on which I can draw. While recognising that helpful distinction, I accept the serious underlying point made by the hon. Member for East Carmarthen and Dinefwr.

As we examine this difficult area, I want to make sure that the counter-intuitivity of the matter is understood. On tax neutrality and the level playing field, the challenge is to capture betting exchanges, which exist in a different marketplace and have almost ethereal geographic locations. I do not underestimate the challenge to the Treasury in raising revenue. We should not always seek to step in rather than stepping aside to let markets find their own levels. Because I veer more towards the latter approach than the former, as a matter of principle I would prefer to hesitate rather than rush into such a rapidly developing area.

The amendment moved by the hon. Member for Knowsley, North and Sefton, East (Mr. Howarth) is underpinned by an important point. Unlicensed bookmakers should be tackled through regulation to protect the consumer. It is appropriate to examine the

issue if we have consumer protection in mind. It is neither appropriate nor right to tax the exchange as though it generates the income from the bet because all the exchange actually earns is a margin. When people bandy the numbers from exchanges around the City, they are often discussing very small margins because where volume is all, turnover can be wholly disproportionate to the true element of a business. Although those points are arguable; they provide an analysis of what is taking place.

On that basis, we cannot support the amendment. We urge the Minister to examine the question of unlicensed bookmakers and the appropriateness of improved regulation to address some of the points behind the hon. Gentleman's concerns.

David Laws (Liberal Democrat, Yeovil)

I warmly congratulate the hon. Member for Knowsley, North and Sefton, East on raising the issue. He obviously shares some of my concerns, which I expressed when we debated the previous clause, about neutrality between different forms of betting and gaming duty. At the beginning of his contribution, I thought that I heard him say that he had secured an undertaking from the Economic Secretary that there should be a level playing field.

George Howarth (Labour, Knowsley North and Sefton East)

My hon. Friend the Economic Secretary is more than able to explain himself. I referred to a recent letter from him in which he used the phrase ''level playing field''.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the hon. Gentleman for that clarification, which moves us forward. I also congratulate him on making more progress with the Economic Secretary in his letter than I have managed to make in a number of exchanges in Committee. Given that the Economic Secretary has given an undertaking to the hon. Gentleman that he is in favour of a level playing field, perhaps he can explain how it would differ from the concept of tax neutrality, which I was talking about earlier. Is a level playing field the same as tax neutrality? He has said to me on a couple of occasions that he is not in favour of tax neutrality, but he has given an undertaking to the hon. Gentleman that he is in favour of a level playing field. It would be useful to know the difference between the two.

My suspicion, which has only been underpinned and confirmed by the Economic Secretary's reticence in debating the issue, is that although the Government have tried to move policy in the right direction, they will not ensure consistency between the different areas of taxation and that they hope to keep that aspect of policy making in the dark. He smiles, but he has been less than forthcoming in his answers. Indeed, he refused to give way to clarify various points on the last clause. If he is committed to a level playing field, can he tell us what it is, and will he have the courage and the openness to engage in debate and to publish his assessment of tax neutrality or a level playing field in the different areas of betting and gaming? If he has decided that in some areas the level playing field requires the taxation of particular products to be unequal, because he is trying to deal with issues such as offshore gambling and the potential for evasion of tax revenues if they are set at the same level, can he acknowledge that explicitly?

If we do not press the Treasury to be open about the assumptions that it is making and whether there is actually tax neutrality, the danger is that we may end up—as we have done, for example, on alcohol—with taxation that is not consistent or coherent across a range of products. I hope that the Economic Secretary can deal with those concerns when he sums up. If he cannot address the points that I have put to him, I hope that he will be more open and helpful to his hon. Friend.

Rob Marris (Labour, Wolverhampton South West)

Clause 7 and amendment No. 129 both appear to me, and I am not well versed in such matters, to deal with the relatively new phenomenon of betting exchanges, and closing tax loopholes—perfectly legitimate loopholes, I hasten to add—in the way betting exchanges operate that give them an undue tax advantage, as my hon. Friend the Member for Knowsley, North and Sefton, East argued. If that is the case, I seek the Economic Secretary's reassurance because Europe's only all-weather floodlit racecourse, Dunstall Park, is in my constituency and on-course betting takes place there. I have a constituency interest in making sure that undue tax advantage is not conferred on betting exchanges.

George Osborne (Conservative, Tatton)

As this is the first time that I have spoken in the Committee, I begin by paying tribute to you, Sir Nicholas. You are my constituency neighbour—Cheshire is well represented in the Committee—and you have been a good colleague to me and, I venture to say, a friend. Now that I have done my sucking up, I could sit down, having achieved a principal objective.

I intend to speak against the amendment moved by the hon. Member for Knowsley, North and Sefton, East. I have come to regard him as a friend, too, in the two years that I have been here. We served together on the Public Accounts Committee and enjoyed a very good day together at the Grand National in his constituency, so it pains me to speak against him.

I declare an interest of sorts. It is not a pecuniary interest, but members of my extended family—my uncle, for example—run casinos, gaming businesses and so on. Not for the first time, I am going to disappoint my family and speak against what is in their interests, by speaking for the betting exchanges. They are an enormously innovative and positive force in the gaming industry. The hon. Gentleman gave us some idea of the scale of what goes on. Betfair, the largest company, handles about 500,000 bets a day, and processes about £4 billion worth of transactions, but it is not a bookmaker in the traditional sense; it is a market. It links together those who want to place bets and those who want to lay bets. It is different in concept from a traditional bookmaker of the kind that one might find on the rails at Aintree or anywhere else.

The effect of amendment No. 129, which is the meat of the group, would be to create what is known in the business as an aggregated profitable layers tax. That was actively considered by the Treasury and Customs and Excise as part of the consultation.

George Howarth (Labour, Knowsley North and Sefton East)

I am grateful to the hon. Gentleman for his warm remarks about me. He makes a distinction between betting exchanges linking punter to punter and regular bookmakers. Is he aware that some of the rails bookies are linked by computer to betting exchanges and are using that facility to hedge their bets? It is quite possible that punters, because they do not know with whom they are dealing, are betting with bookmakers who are not regulated for that kind of trade.

George Osborne (Conservative, Tatton)

The hon. Gentleman makes an important point, which is at the heart of the argument. I will come to that because there are serious problems with the solution that he proposes. As he suggested, his amendment would tax betting exchanges as if every single layer on the exchange was acting as a bookmaker. I have doubts about his amendment.

As the Department for Culture, Media and Sport recognised in its position paper on regulation for betting exchanges, it is not reasonable to treat most betting exchange users any differently from other gamblers. The fact that some gamblers like to bet on an outcome that does not happen, as well as an outcome that does happen, does not make them bookmakers. Indeed, spread betting firms of the kind that we were talking about earlier have offered that for many years. Traditional bookmakers have begun to do it more recently. Betting exchanges and spread betting companies have done an enormous amount to gee up—to use a pun—the traditional bookmaking industry and have been a force for good in the gaming industry in getting people to improve their act.

George Howarth (Labour, Knowsley North and Sefton East)

Does the hon. Gentleman accept that, although bookmakers are regulated and spread betting organisations are regulated by the stock exchange, betting exchanges are effectively unregulated?

George Osborne (Conservative, Tatton)

The companies are regulated in the sense that they will be registered for tax and have to deal with the Treasury. It is worth pointing out that the clause will considerably increase the tax that they pay. That is something for which the companies have volunteered, in that they have supported the Government's proposal. Under the current arrangements, they pay about 5 or 6 per cent. of the commissions that they collect in tax. Under the Government's proposal, which has been accepted by the betting exchange industry, the companies will pay 15 per cent. of the commissions that they levy. That is quite a substantial increase.

I have other problems with the amendment. The liability is exorbitant. It is estimated that around 40 per cent. of Betfair's commission revenue would be swallowed up by betting duty. That 40 per cent. compares with 6 per cent. under the current arrangements and 15 per cent. under the arrangements proposed by the Government. Some of Betfair's smaller competitors, which are trying to enter the market, would have up to 80 per cent. of their revenue swallowed up in tax. That would obviously be an extremely exorbitant tax liability.

Another criticism is that things would be horrendously volatile. Liability would swing hugely—far more so even than under the current arrangements. Indeed, one of the central arguments deployed by the Government in introducing the legislation is that the existing arrangements are volatile. The volatility is referred to in the explanatory notes. The hon. Gentleman's measure would make things even more volatile. The measure is anti-competitive because new entrants to the market and those trying to charge lower commission rates would suffer enormously.

The proposal is also open to manipulation. It would be extremely easy for users to manipulate their liabilities up and down. A clever, or professional, layer could quite easily get round the provision by manipulating the way in which they laid their bets.

All those factors would mean that exchanges would have to pass on all or some of the charge to users to remain in business and that would be unfair on punters. It would in fact tax punters for using Betfair. For example, Sir Nicholas, if you were to put a bet on at William Hill that Manchester United might not win the premiership—

Rob Marris (Labour, Wolverhampton South West)

How about a bet on the Conservative party not winning the next election?

George Osborne (Conservative, Tatton)

So that I am entirely neutral and gather support across the Committee, let us say if you were to put a bet on at William Hill that the Liberal Democrats would not win the next election, Sir Nicholas, you would not pay the same tax as you would if you placed the same bet at Betfair. Under the arrangements proposed by the hon. Member for Knowsley, North and Sefton, East, you would be treated as a bookmaker in laying a negative bet. That would be unfair and would undermine the major attraction of the betting exchanges, which is that one can trade in and out of positions. Both Customs and Excise and the Department for Culture, Media and Sport say that they want to encourage new, innovative and consumer-friendly products: betting exchanges are exactly that. As the hon. Member for Knowsley, North and Sefton, East said, the Bill would drive more rather than fewer punters to offshore alternatives. I mentioned manipulation. It would be easy to manipulate one's liability to zero if one set up two accounts and deliberately lost one's bets in each account.

Betting exchanges are new and innovative. In recent years Governments of both political colours have tried to catch up with changes in the betting industry, a point made persuasively by my hon. Friend the Member for Eddisbury. It would be a mistake to try to tax and regulate that innovation out of the market. As we found with traditional bookmakers, it would simply drive them offshore to places such as Gibraltar. Betting exchanges have been good, but supporting the Government's proposal will considerably increase the tax that they will pay. Exchanges create a true level playing field, where all betting operators are taxed and regulated in the same way as are all punters, wherever they place their bets.

Michael Jack (Conservative, Fylde)

When I first looked at this matter, it seemed that one area of betting was getting away with it and another was not. However, on examining the substantive clause to which the amendment refers, I find that that is not the case. A change is proposed to impose higher taxation on the exchanges than at present. I want to follow up, with a question to the Economic Secretary, a point that the hon. Member for Yeovil made about tax equivalence.

The question whether exchanges are being fairly or unfairly treated turns on the nature of what is available to be taxed. With taxation, one must crystallise out a certain amount of money at a certain time and then, if one decides that it is legitimate to tax it, determine the rate of taxation. In the case of the onshore betting arrangements in the United Kingdom, it is determined that the point of taxation is the crystallisation out of the gross profit of the enterprise. In the case of the exchange, what crystallises out is an amount of money known as the commission income. Does the Economic Secretary believe that the commission income is the same as the gross profit, or are they different? He could argue that the gross profit is influenced in the case of onshore betting by the nature of the book that is determined. In other words, one can decide what one's gross profit is by manipulating the odds at which one accepts bets. That determines the amount of money that falls to be taxed.

In the case of the exchange, if I have understood that operation correctly, the commission income comes simply as a result of the amount of business transacted through the exchange. In other words, the way in which it works is hardly influenced by the providers of the exchange.

Stephen O'Brien (Conservative, Eddisbury)

My right hon. Friend makes an extremely interesting analysis of the position. It is fair to say that, in relation to the betting exchange, the income is an introductory commission from putting two parties together, but, above all, it is volume driven, whereas the other one naturally has to be price driven, or the book would simply not perform.

Michael Jack (Conservative, Fylde)

My hon. Friend crystallises my argument into an elegant sentence. If the descriptions of sums of money to which taxation rates are applied differ, conventional betting may blow the whistle and call foul, but we are not comparing like with like. If the Economic Secretary sustains that argument, high as is my regard for the hon. Member for Knowsley, North and Sefton, East, the Government are right to do what they can to have an equivalence of taxation, but it may be impossible to have exactly the same tax regime, because we are not taxing apples and apples.

John Healey (Labour, Wentworth)

I welcome the fact that my hon. Friend the Member for Knowsley, North and Sefton, East tabled the amendments to enable us to have such a well-informed and genuine debate. For the benefit of the Committee, it may help if I explain that betting exchanges facilitate betting between private individuals. Such companies provide a web-based service where two customers can come together and take bets against each other. One set of customers, known as the layers, offers odds; the other set, known as the backers, takes the odds and puts down a stake.

The general practice is for the exchange to make its money by charging commission on the winnings.

At present, as the hon. Member for Tatton said, the exchanges pay duty based on the aggregated gross profits of the layers. The amendments would prevent our achieving the purpose of the clause, which will move betting exchanges on to a level playing field with bookmakers, who are, in my hon. Friend's words, competing directly.

To answer the questions of the hon. Member for Yeovil and the right hon. Member for Fylde, from June, betting exchanges will pay 15 per cent. tax on the total commission that they receive, assuming that the amendments are not agreed to. There will be a fairer and simpler relationship between tax and profit. As the hon. Member for Tatton pointed out, the measure has been welcomed by the betting exchanges.

We considered several options for changing our approach to the taxation of betting exchanges, including basing the assessment on the winnings achieved by one set of the customers—that is, the layers—which is what the amendments of my hon. Friend the Member for Knowsley, North and Sefton, East seek to do. However, we came to the view that such a system would increase rather than decrease the problems highlighted by our review of the reforms that we made earlier. In particular, under the business model that is used by exchange operators, duty liability would be highly volatile and there would be a significant and perhaps increased risk that liability could exceed the revenue generated.

I understand why mainstream bookmakers wanted us to adopt a different approach to taxing exchanges, but we have tried to achieve a fair outcome that levels the playing field for those who are in direct competition. We believe that that is achieved by focusing on the gross profits of betting exchanges—their commission—and the gross profits generated by those using facilities by way of business, which are already catered for under existing provisions.

Therefore, just like bookies, betting exchanges will now pay tax of 15 per cent. on their gross profits.

The amendment would keep exchanges in the current situation, in which their tax liability is determined by the gross profits of those who lay bets. My hon. Friend made a particular point of that, so perhaps I should emphasise that the vast majority of exchange customers are recreational users, according to the industry's data. We do not want to tax those private individuals. Indeed, the betting tax reforms that we have put in place move the duty charge away from customers and on to businesses. If we were to tax all layers, we would have to deal with minute tax returns from thousands of individuals.

I welcomed my hon. Friend's concern about the possibility of a significant loss for the Exchequer. The industry's data suggest that the additional revenue that would be raised would be minimal—some £5 million—even if we were to tax all winning laying customers on betting exchanges.

My hon. Friend and the hon. Member for Eddisbury asked about regulation. Although I am fortunate as Economic Secretary to have the best brief in Government among junior Ministers, my responsibilities do not actually range as far as the social regulation of exchanges. Of course, all UK exchanges hold UK bookmaking permits, and my hon. Friends in the Department for Culture, Media and Sport are well aware of concerns about regulation.

George Howarth (Labour, Knowsley North and Sefton East)

My hon. Friend the Economic Secretary said a few moments ago that the information that had been made available to him showed that the vast majority of transactions were, in effect, punter to punter. He did not use that phrase, but that was the import of what he said. Would that equally be true of the amount of money involved in each transaction?

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

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

Standing Committee B

(Except clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and schedules 5, 6, 19 and 25, and any new clauses and schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.) - Clause 7 - General betting duty: betting exchanges

John McWilliam (Labour, Blaydon)

I remind the Committee that with this we are discussing the following:

Amendment No. 127, in

clause 7, page 5, line 4, after 'another person', insert '(''the bet-taker'')'.

Amendment No. 128, in

clause 7, page 5, line 5, after 'third person', insert '(''the operator'')'.

[R] Relevant registered interest declared.

Amendment No. 129, in

clause 7, page 5, line 8, leave out subsections (2) to (4) and insert—

'(2) For the purposes of sections 2 to 5B as modified by subsection (5)—

(a) the bet shall be treated as if it were made by the bettor with the operator and not with the bet-taker, and

(b) the operator shall be treated as a bookmaker in respect of the bet.

(3) But subsection (2) does not apply to a bet if—

(a) the bet-taker holds a bookmaker's permit, and

(b) the bet would not be an on-course bet if the operator were making the bet with the bet-taker as principal.

(4) Section 2 (Bookmakers: general bets) is modified as follows—

(a) in subsection (3) for ''15 per cent of the amount of his net stake receipts for that period.' substitute 'the aggregate for that period of the amounts of duty charged in respect of each individual bet-taker using facilities provided by him.''.

(b) after subsection (3) insert—

(4) For the purposes of subsection (3), the amount of duty in respect of each individual bet-taker in an accounting period shall be 15 per cent of the bet-taker's net stake receipts for that period.

(5) Where there is any doubt as to which of two persons is the bettor and which the bet-taker for the purposes of subsection (1)(a), whichever of the two was the first to use the facilities of the operator to offer the bet shall be treated as the bet-taker.'.

Amendment No. 130, in

clause 7, page 5, leave out line 26.

To save the hon. Member for Spelthorne (Mr. Wilshire) some embarrassment, hon. Gentlemen may remove their jackets.

David Wilshire (Conservative, Spelthorne)

On a point of order, Mr. McWilliam. I was told this morning by the lead Chairman that we had his permission to remove our jackets. However, if his strictures are not carried forward to you, I grovel unreservedly.

John McWilliam (Labour, Blaydon)

The hon. Member does not have to grovel. The standing order applies to each sitting individually.

John Healey (Labour, Wentworth)

May I welcome you to the Chair, Mr. McWilliam, for this afternoon's sitting? I have no doubt that you will be no less fair and no less firm than Sir Nicholas made it clear he intended to be this morning. I look forward to serving under your chairmanship alongside your co-Chairmen.

With my last breath before sitting down, I was on the last line of my response to my hon. Friend the Member for Knowsley, North and Sefton, East (Mr. Howarth) when I took an intervention from him. He asked whether the majority of betting exchange customers are recreational users and whether the majority of exchange business is recreational. The figures that we have come from commercial companies, so the precise details are confidential. However, I can confirm that the vast majority of betting exchange customers are recreational users, and they account for the vast majority of betting exchange business. I hope that that is helpful.

My hon. Friend's amendments Nos. 126 to 130 would change fundamentally the reform proposed in the Bill, and the exchanges would retain their current volatility. Therefore, I hope that my hon. Friend will consider withdrawing his amendment.

George Howarth (Labour, Knowsley North and Sefton East)

I welcome you to the Chair, Mr. McWilliam. I know that you have many years' experience of chairing these Committees and that will stand us in good stead.

I shall be brief because we have had a good, detailed and wide-ranging discussion that covered a topic that would not otherwise have been debated.

I notice that the hon. Member for East Carmarthen and Dinefwr (Adam Price) has not made it back to the Committee, but he intervened on me to ask about the relationship between betting exchanges and racing. I understand that it was presumed that the levy for the current year would be around £92 million, but the latest estimate has declined to £75 million, so there is a discrepancy as a direct result of people transferring business to betting exchanges. Racing will suffer proportionately because most of that money, if not all, is used to support racing. I wanted to put the record straight.

Turning to the substantial matter, the key issue between my hon. Friend the Economic Secretary and I is the market. We have different views on who participates in betting exchanges and what is happening—where the money is coming from and where it is going.

I think that my hon. Friend used the term ''leisure participants''. He certainly referred to people becoming involved in betting exchanges in pursuit of a leisure activity. Another way of putting that is punter

to punter. The problem with that analysis is that it is difficult to know whether that is so, because in reality it is stranger to stranger. The person laying the bet is unknown to the person taking the bet, and there is some doubt about what is going on.

My hon. Friend justifiably pointed out that, because of the Chancellor's changes, many bookmakers who had located themselves offshore had come back onshore. He said that that was welcome, as indeed it is. The danger now is that foreign layers could use—I suspect that they are using—the betting exchanges because they have an unfair advantage over UK bookmakers. If that assumption is correct, in the longer term one of two things will happen—or both. Either regulated UK bookmaking business will decline or there will be more and more offshore activity, the very thing that the Chancellor tried to avoid.

Since our sitting this morning I have been informed, although I have not spoken to it directly, that the Tote is concerned about the provision and supports the arguments that I put this morning. Therefore, the argument is finding wider favour, certainly among the bookmaking community.

My hon. Friend asked me to consider seeking to withdraw the amendment. As he is aware, I have always been prepared to do that. However, because there is a disagreement between us about exactly who is involved, I ask him to meet our leading bookmakers before the Bill completes all its stages, to see whether their version of what is going on can be squared with his. If he undertakes to do that, I should be more than happy to seek to withdraw the amendment.

John Healey indicated assent.

George Howarth (Labour, Knowsley North and Sefton East)

I see by the nod of his head that my hon. Friend signifies his agreement to do that. With those assurances, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

John Healey (Labour, Wentworth)

I beg to move amendment No. 102, in

clause 7, page 5, line 28, after first 'in', insert 'paragraph (a) of'.

As my hon. Friend the Member for Knowsley, North and Sefton, East said, we had a full and wide-ranging debate on his set of amendments.

The context of amendment No. 102 is clearly our recent evaluation of the gross profits and tax on betting and the submissions that we have received from the industry as part of that evaluation. The amendment is to the part of the clause that puts in place the change in the way in which betting exchanges are taxed.

It became clear from studying the changes that the law requires further clarification. The clause was intended to remove betting exchanges from the provisions of the existing law relating to bet brokers, and to change the basis on which their liability is calculated to a general betting duty. That required, among other things, an amendment to section 5C(1)(a) of the Betting and Gaming Duties Act 1981, but the clause could be interpreted as requiring an amendment

also to section 5C(1)(b), which is not the intention of the reform. Amendment No. 102 was prompted by questions from the trade, which pointed out that the clause could be interpreted as needing an additional and unnecessary amendment to the law.

More broadly, I understand why mainstream bookmakers wanted us to adopt a different system, but, despite a tripling of the tax rate for betting exchanges—taken as a percentage of commission, exchanges have had a tax rate of around 5 per cent. during the 12 months of the new regime—the change has been welcomed by exchange operators. Mark Davies of Betfair, one of the market leaders, has said that his company

''have consistently argued that a gross profits tax should be charged on the basis of a company's gross profits, and Betfair makes its money by charging its customers a commission that is stated up-front.''

With those remarks, I hope that the amendment will be welcomed on both sides of the Committee. I commend it to Members.

Stephen O'Brien (Conservative, Eddisbury)

May I welcome you to the Chair, Mr. McWilliam, in your role as co-Chairman of the Committee? First, I seek your guidance. As we have had a wide-ranging debate on the amendments, and knowing that Chairmen generally consider whether that can eliminate a stand part debate, can I ask whether you are thinking about doing that? If so, may I just introduce one idea now on which I had hoped the Government might table an amendment?

John McWilliam (Labour, Blaydon)

It is extremely difficult for me to take that view because I was in the middle of taking advice. However, it seems to me that the amendments pretty well cover the clause anyway, and my instinct is to do just that. I suggest to the hon. Gentleman that if he wants to go wide, and treat this as a clause stand part debate, that is probably in the interests of the Committee as a whole.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful, Mr. McWilliam. That entirely accords with the determination that I had hoped you would make.

My party supports the Government amendment and raises no objections to it. It is clearly a sensible tidying-up. My point, which is brief, relates more to a stand part debate because it is on something that we hoped would be included in a Government amendment, but does not appear. I do not find it clear from the drafting of the Bill what the consequences will be if a provider provides both a betting exchange and premises. I understand that in the case of premises exclusively, the service involved is better understood; but it would be helpful if the Minister could clarify what happens if there is joint provision. Why have the Government not thought fit to introduce a further amendment on that?

That aside, we are happy with the current Government amendment.

John Healey (Labour, Wentworth)

Perhaps the hon. Gentleman will allow me to write to him on that narrow point.

John McWilliam (Labour, Blaydon)

I call Mr. Jack.

Mr. Michael Jack (Fylde) rose—

John McWilliam (Labour, Blaydon)

Order. The Chair may have seemed a little prescient there, but I was worried about the right hon. Gentleman getting back in time.

Michael Jack (Conservative, Fylde)

I welcome you to the Chair, Mr. McWilliam. Thank you very much for your kind consideration.

I may have missed something, but perhaps the Economic Secretary could explain to me, before he closes his notes on it, precisely how the amendment works. Unless something is missing, or it leads to some greater mystery, I cannot see, having examined line 28, how the amendment fits into it. Can he explain how it will work and rather more precisely what it means? If after the word ''in'' we inserted ''paragraph (a) of'', which is on the amendment paper, we would then have the words

''of the course of a business''.

I do not understand that.

John Healey (Labour, Wentworth)

My belief is that the amendment works perfectly adequately, but I shall have a look at it. If I change my view on that—

John McWilliam (Labour, Blaydon)

Order. I think that we are getting our ''in''s mixed up—or perhaps we visited some at lunch time, I have no idea. Perhaps the right hon. Gentleman should read from the first ''in''. I can understand it, and I am not that clever.

Michael Jack (Conservative, Fylde)

I think that I have got the wrong ''in'', Mr. McWilliam. Let us say that I shall be out, and thank you very much.

Amendment agreed to.

Clause 7, as amended, ordered to stand part of the Bill.

Clause 8 - General betting duty: restriction of exemption for on-course bets

John Healey (Labour, Wentworth)

On-course betting was taken out of the scope of general betting duty in 1987. The intention was to promote a healthy betting market at race courses and greyhound tracks, which is an important factor in generating the starting prices for horse races and greyhound races. The starting prices are used to determine the odds in high street bookmakers up and down the country.

That concession was welcome, well-judged and well-targeted. In recent years, however, the on-course exemption has increasingly been used at other sporting venues where betting is not the main source of attraction and where no comparable starting price mechanism is at work. Members of the Committee will probably be aware that bookmakers are based in stalls within most football grounds, golf tournaments and cricket grounds, and it does not make sense for them to benefit from the same on-course exemption.

We signalled our intention to review the scope of the on-course exemption when we introduced the gross profits tax in 2001 and we have consulted extensively

since then. We have received no responses to the consultation supporting the continuation of current arrangements. By restricting the on-course exemption to bets made on horse racing and greyhound racing, we are restoring and strengthening the rationale behind the original concession. We are satisfied that the measure will have little adverse impact on the ability of bookmakers at other sporting venues to continue to flourish and I stress that it will have no impact on punters, who will continue to be able to enjoy tax-free betting at those venues.

John Baron (Conservative, Billericay)

I, too, welcome you to the Chair, Mr. McWilliam. Although I accept the Economic Secretary's remarks, the choice of sports to benefit from the exemption is unfair. The clause amends the definition of an ''on-course bet''. As I understand it, from 1 September 2003 the on-course exemption to betting duty will apply only to bets made at horse and dog race meetings.

Because of the actions of both Labour and Conservative Governments over the years, Britain has been a world leader in the global betting market and the online betting revolution. I pay tribute to the Government for abolishing the betting tax in October 2001. Going back even further, the Economic Secretary rightly pointed out that in 1987 on-course betting was taken out of the scope of general betting duty. As he said, the intention was to promote a healthy on-course betting market for horse and greyhound racing, which importantly supports the industry's starting price mechanism.

The Committee has heard that the provisions have been increasingly used at other venues, such as football grounds, rugby grounds, golf courses and so forth. At this point, I should declare a partial interest: like many others, one of my great pleasures is watching rugby, particularly England at Twickenham, and having the occasional beer as well. Although I do not partake, I have friends who like to bet on the outcome of the match. It appears that the Government are not prepared to accept that on-course bookmakers at events, such as rugby matches and games of football, should be treated in the same way as those at horse races or greyhound meetings.

I accept that the starting price mechanism is crucial in horse racing, but starting prices also apply to football matches and rugby matches. The nature of betting has moved on because one can bet in a variety of ways on not only the outcome but the spread of points. It seems unjust that those going to rugby matches, for example, should be discriminated against and, at the end of the day, poor tax law results in costs being passed on to consumers.

I would also ask the Economic Secretary one other question. What assessment has he made of the impact that the clause will have on the odds offered by the bookmakers? I should be interested to hear whether any analysis of that has been carried out by the Treasury.

Michael Jack (Conservative, Fylde)

I add to what my hon. Friend has just said one further question. Why would the measure apply at a grand prix horse meeting but not at a grand prix motor race? There are examples of on-course

betting arrangements at the latter, and I am struggling to understand why animals should benefit, while human activity is discriminated against.

Rob Marris (Labour, Wolverhampton South West)

I welcome you to the Chair this afternoon, Mr. McWilliam. Another jewel in the crown of my constituency is Molineux football ground, home to Wolverhampton Wanderers football club which, as I am sure many hon. Members will know, had a wonderful result last night at Reading and is going into the play-offs for the premier league. If the team should not get promoted, I am concerned what the financial impact of this change might be on Wolverhampton Wanderers football club.

John McWilliam (Labour, Blaydon)

Order. If the hon. Gentleman is suggesting that the Finance Bill should contain legislation that would require that result, I have to tell him that I would have to be impartial.

Rob Marris (Labour, Wolverhampton South West)

I would welcome any amendment to that effect, Mr. McWilliam. If Wolverhampton Wanderers was not to be promoted, it would stay in the English league division one, in which there are significant financial difficulties due to the ITV Digital fiasco. I wonder if the Minister would tell me what effect the clause would have on the finances of football clubs that may be leasing out betting space to a private company for at-stadium betting, whether on the result of the match taking place at that stadium, other football matches or other sporting events. Has the Treasury made an assessment of the financial impact?

Stephen O'Brien (Conservative, Eddisbury)

I have listened carefully to the Minister and the contributions of my hon. Friends, as well as to the hon. Member for Wolverhampton, South-West (Rob Marris), and it seems to me that while I accept the Minister's logic, questions have to be raised—of course, it would be very helpful to have the answers too. I am very interested to hear the answer to the question put by my right hon. Friend the Member for Fylde (Mr. Jack) about motor racing. Oulton Park circuit is in my constituency and it is having to go through some major restructuring, so obviously the financial implications are important.

Most of us will have some form of constituency interest which might experience a potential differential or even competitive effect in relation to the future financial backing that can be found to underpin various sporting venues. It did strike me that one of the most difficult ones to square—it may seem somewhat humorous—was a donkey derby because that really is entirely animal-based. Is a donkey a horse for the purposes of the clause? I do not know whether the Economic Secretary has paragraphs of advice helpfully provided by his officials, but I dare say that the world has always wished to know the answer to that. Is he able to provide it this afternoon? That would be a world first. I say that in the presence of my right hon. Friend, who represents Fylde, which is close to one of the most famous donkey derbies on the Blackpool beach. We need to know the answer, but on the basis that we will get satisfactory answers, we will be happy to support the Government on the clause.

John Healey (Labour, Wentworth)

I shall respond to the points raised by the right hon. Member and other hon. Members. The rationale for returning the concession to its original purpose is twofold. First, at venues such as rugby grounds and motor racing circuits, betting is not a major part of the attraction in the way that it is in horse racing or greyhound racing. More importantly, as I explained in my opening remarks, at greyhound tracks and horse racing circuits, on-course betting is a crucial component in establishing, altering and determining the starting prices for those races. That simply is not comparable with the sort of prices that someone would get on the result at a football or rugby match, or any other sort of sporting fixture where the prices are determined by off-course bookmakers.

A couple of hon. Members were concerned about the impact of the change. As a result of the consultation and the accompanying discussions and evidence, we are satisfied that there will be little adverse impact on the ability of bookmakers to conduct their business activities at sporting venues that will no longer be covered by the concession. There was absolutely no indication from the bookmakers during the consultation period that they would withdraw from those venues as a result. We, therefore, confidently believe that there will be very little or nil adverse impact on the venues at which the bookmakers choose to continue to operate. As far as we can estimate, the impact of the reform on the odds that may be offered will also be negligible.

Tony Cunningham (Labour, Workington)

From what I can gather, the Economic Secretary is talking about horse racing and greyhound racing. I just wondered whether hound trailing, which is popular in my constituency and other parts of Cumbria and which has on-course betting that determines the price, is also covered by the amendment.

John Healey (Labour, Wentworth)

I have to concede that I am not familiar with that sport. We do not have it in Rotherham. If I may, I will check the point and get back to my hon. Friend.

Stephen O'Brien (Conservative, Eddisbury)

Will the Economic Secretary ensure that the letter is sent to all members of the Committee? As a Cumbrian by background, I am familiar with the sport. It was a good example and I am grateful to the hon. Member for Workington (Tony Cunningham) for raising it.

John Healey (Labour, Wentworth)

I should be delighted to do that. I am not promising or making any commitment, but if I can shed any light on the philosophical question posed by the hon. Gentleman about when a horse is a horse and not a donkey, I will do so as well.

John McWilliam (Labour, Blaydon)

Order. That is more a zoological question than a philosophical one.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.

Clause 10 - Amusement machines not operated by coins or tokens

John Healey (Labour, Wentworth)

The Government's White Paper ''A Safe Bet for Success'' proposed a relaxation of the current restrictions on the use of certain payment methods for playing machines. By the summer of this year it is expected that players will be able to play jackpot machines using smartcards and notes. Other machines will benefit from the changes early next year. The clause ensures that any dutiable amusement or gaming machine remains liable to that duty even when it accepts payment through methods other than coins or tokens. There is a possibility that machine operators may take advantage of the current legislative definitions of payment methods, such as coins or tokens, to argue that machines accepting payment other than in coins or tokens are not subject to duty. The clause ensures that that loophole is closed. It is an administrative change only. It does not place any burdens on business or consumers. I commend it to the Committee.

Stephen O'Brien (Conservative, Eddisbury)

Given the guidance, I just want to raise a small point. In the interest of time, it will not necessarily mean that the Economic Secretary has to open the whole issue up to drill down to the fine detail. I just want to establish why there is a different structure for the definition of 50p machines, compared with 2p, 5p and 10p machines. It is no more than that. Otherwise, we are happy to support the Government.

John Healey (Labour, Wentworth)

I have not given that detail of this provision as much scrutiny as the hon. Gentleman. I am prepared to answer the question whenever I can. The reason, I understand, is that rates of amusement machine licence duty are set in those bands.

Question put and agreed to.

Clause 10 ordered to stand part of the Bill.

Clause 11 - Amusement machines: use of currencies other than sterling

Stephen O'Brien (Conservative, Eddisbury)

We note that under new section 26A(3) references to sterling will include references to the equivalent amount in other currencies on Royal Assent, and that the date when the licence is granted rather than when the application is received is the applicable date. It would be helpful if the Minister could clarify the difference between the date when the licence was granted and the date when the application was received. If it is a matter of writing a letter, that will be more than satisfactory.

Jonathan Djanogly (Conservative, Huntingdon)

I also have a small point. In relation to currencies other than sterling, new section 26A(2) says that the exchange rate

''shall be determined by reference to the London closing exchange rate for the previous day.''

Can the Minister advise us whether that is defined elsewhere in the 1981 Act? If it is not, whatever it is that constitutes the exchange rate should be defined.

John Healey (Labour, Wentworth)

Like clause 10, the clause flows from our proposed relaxation of the use of certain payment methods for play machines, following the recommendations in the White Paper, ''A Safe Bet for Success''. Therefore, in future, as well as using sterling coins and tokens, it will be possible to use bank notes, so it may be possible to use foreign currencies for play machines in the UK. The clause ensures that any dutiable amusement or gaming machine remains liable to that duty, even when it accepts payments in foreign currencies. That closes a possible loophole in the current legislation.

The hon. Member for Eddisbury (Mr. O'Brien) asked about the date on which the provision comes into effect. The date will be when the application is received. I hope that that clarification is helpful.

Like clause 10, the clause makes an administrative change only and does not place any burdens on business or consumers.

The definition is as the hon. Member for Huntingdon (Mr. Djanogly) read out. The rate is the closing price on the London market on the day prior to the day when the application is received. I hope that that helps him.

Jonathan Djanogly (Conservative, Huntingdon)

What London market is referred to? Is it the London inter-bank rates or Barclays bank's rates?

John Healey (Labour, Wentworth)

That is an interesting, and slightly esoteric, point, but I understand why the hon. Gentleman makes it, because we want to be as precise as we can. As I said earlier, these are essentially technical and administrative changes, which we are putting in place in anticipation of deregulation, so that amusement machines can operate more effectively in future.

I shall write to the hon. Gentleman to answer his detailed points. I shall type the letter to make it extremely clear and very readable, and I hope that that will satisfy him.

Question put and agreed to.

Clause 11 ordered to stand part of the Bill.

Clauses 12 to 15 ordered to stand part of the Bill.

Clause 16 - Duty at higher rate: exception for tractive units

Stephen O'Brien (Conservative, Eddisbury)

We have moved from betting and gaming to vehicle excise duty. We have passed through clause 15 on Northern Ireland and reached clause 16. The clause provides that an articulated lorry is not chargeable at the higher tax rate if used with fewer axles than when licensed. Provided that actual weight, rather than plated weight or design weight, is used to determine the tax rate, the vehicle will not fall into a higher tax band than when licensed. That will take effect from 9 April.

I am sure that the Economic Secretary will be as aware of that matter as I am. He will not be surprised that I have been made aware of it by the Freight Transport Association, not least because it has been

instrumental—and successful—in making representations on the matter. I generally support the clause, but there is useful background material, and I shall place just some of that history on the record.

I am grateful to the Freight Transport Association for having ensured that the provision is well understood. That is important because, as a constituency Member, I have had many cases on it. I dare say that that is the case with Members across the Room, and I see one of my neighbouring Members of Parliament from across the border in Wales in his place, the hon. Member for Wrexham (Ian Lucas). He is aware that there are many trunk roads in our part of the world, but not that many motorways. Since the introduction of the 44-tonne limit, an increase under European law, the question of axle weight has become key.

Axle weight is causing concern because, clearly, lorries can now be larger. Many of our roads were built after houses were already there, which had been built when the road was a track. There is much grave danger. People have recognised the importance of axle weight as they have come to understand the cost to the Exchequer and to local councils and highways authorities. These heavy lorries are, unquestionably, the greatest determinant of road maintenance costs. With the company for which I used to work, I used to be the leading supplier of aggregates in the FTSE 100, so that situation was very advantageous to us; but it is very poor in terms of the competitive economy of the nation.

The change that the clause contains will protect operators from prosecution if they opt for the flexibility provided by the seven bands of vehicle excise duty introduced in the 2001 Budget. There is a slight history to that, which is building up. I agree with the Freight Transport Association that the change is sensible and will prevent articulated vehicle operators from being prosecuted because of the previous somewhat ambiguous legislation. That is not intended as a criticism; this is a sensible tidying-up. It will also avoid extra administration for the Vehicle Inspectorate and the Driver and Vehicle Licensing Agency. Those costs could be quite significant, and the clause will assist to temper the administrative burdens that there would be on the public purse if operators were required to up-plate and down-plate vehicles according to their circumstances.

It would be gilding the lily to go through the history from 2001—those who wish to know more can always look it up—but the new vehicle excise system introduced that year gave operators of articulated vehicles the choice of seven taxation bands. The main thing to recognise is that as a result of the sensible and determined representations of the FTA, among others, the Treasury has included in the clause an addition that is helpful in relation to the Vehicle Excise and Registration Act 1994. It confirms the flexibility for articulated vehicles to operate at maximum weights with trailers that have fewer axles without attracting a higher rate of duty.

I hope that all that is not as clear as mud. It is enormously important to recognise changes in road usage, even if they may be somewhat unwelcome. It is a fact that weights have been allowed to increase, thereby putting trunk roads under much more pressure. The more we can do to reduce the administrative costs of up-plating and down-plating for such vehicles, the better for all of us.

John Healey (Labour, Wentworth)

I welcome the hon. Gentleman's welcome for the clause. He recognises the work of the FTA , which I am happy to confirm was helpful and influential.

The clause is intended to clarify the system of vehicle excise duty for lorries that we introduced in December 2001, which greatly simplified the structure of taxation for lorries by replacing more than 100 separate tax rates with seven tax bands that reflected the road wear and environmental impact of different types of lorries. In particular, it was intended to allow greater flexibility to operate a lorry at a variety of weight and axle configurations without the need to re-plate or re-licence it. That significantly reduced red tape for the industry and was greatly welcomed at the time.

The flexibility in the new structure for VED for goods vehicles relied on section 15 of the 1994 Act, which states that a vehicle becomes liable to VED at a higher rate when it is used in such a way as to render it liable to tax at a higher rate. Thus, a vehicle could be used at any weight or axle combination that rendered it liable to taxation at the same or a lower rate.

However, we became aware of a potential conflict between that interpretation and clause 60A of the Act, which states that the rate of tax at which a licence is issued is determined by the plated weight of the vehicle; in other words, the maximum weight at which a vehicle is permitted to operate. It became clear that there was a risk that operators who took advantage of the greater flexibility that we intended might leave themselves open to challenge and prosecution.

The aim of the clause is to resolve that conflict and make it clear that once a vehicle is licensed and on the road, it is the actual weight, not the theoretical maximum weight, of the vehicle that determines the tax liability, in line with the policy that we announced in 2001.

Rob Marris (Labour, Wolverhampton South West)

I am grateful for the change, as someone who used to drive such vehicles. Can my hon. Friend tell me whether it will be easier or harder for the police to enforce the law when they stop a vehicle, in terms of having to weigh it rather than refer to its plated weight?

John Healey (Labour, Wentworth)

We have not yet encountered significant enforcement problems in the operation of the new regime, and I do not anticipate that the clause will change that. Clearly, I must stop pausing for breath before I say my final sentence. On that basis, I hope that the Committee will support the clause.

Question put and agreed to.

Clause 16 ordered to stand part of the Bill.

Clause 17 - Requirement of evidence or security

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 84, in

clause 17, page 15, line 28, leave out subsections (4) and (5).

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Amendment: No. 1, in

clause 17, page 15, line 42, at end insert—

'(6) If the Commissioners enforce their security to secure payment of any VAT that is due from a person other than the taxable person, the taxable person may recover the amount of that VAT from that other person.'.

Amendment No. 85,

in clause 17, page 16, line 6, leave out subsection (7).

Stephen O'Brien (Conservative, Eddisbury)

Having moved so rapidly, we come now to VAT. I think it is only fair to say that that subject will need to be considered in a little more detail, because there are a number of points to be made.

I shall be economical in introducing the amendments, and it may be helpful if I deal with amendment No. 1 first, and then amendments Nos. 84 and 85. The clause is intended to enable Customs and Excise to require the deposit of a security from a business involved in the VAT supply chain, the operation of which places the revenue at risk. That provision is intended to come into effect on 10 April, and it also includes a provision for Customs and Excise to accept evidence, other than that contained in documents, to support a claim to deduct input tax. It is that second evidentiary point to which amendments Nos. 84 and 85 are addressed.

Amendment No. 1 would add a further provision. The clause raises issues of concern as to the general balance—this is an important constitutional issue, and one of general rights—between achieving the aim of protecting Customs and the revenue it is able to raise, and preserving the rights of individual taxpayers. It goes further than the existing provisions, in that it extends to supplies to the taxable person and supplies by other persons. The key point is that the clause places no limitations on Customs and Excise, as the security provisions can be invoked whenever it thinks it necessary for the protection of revenue.

The provisions could be onerous, particularly for newly formed businesses. It has been noticeable throughout the consideration of clauses by the whole House during the past few days that that sector of our economy has exercised hon. Members from all parties. It is an important point, and the hon. Member for Sheffield, Heeley (Ms Munn) made a very clear speech about small businesses in her constituency. The provision is particularly onerous for newly formed business. That is why we have tabled the amendments, which I hope the Economic Secretary will find appropriate and proportionate, and will accept as the solution to the problem.

There should be a right of recovery from third parties if VAT on supplies by them is collected through enforcement of the security. That logic

reflects what I believe was in the minds of the draftsmen. I do not think that we are asking for something beyond what they have contemplated, but it is not in the Bill. Very revealingly and helpfully, in that it discloses the mind of the Government and those who have sought to put their instructions into words, there is such a reference is in paragraph 1 of the explanatory notes on the clause:

''This clause extends the powers that Customs and Excise currently have to require the provision of security where it is considered that a business is associated with other businesses whose pattern of trading poses a real threat to the proper collection of VAT.''

The reference to associated businesses in the explanatory notes should be reflected in the clause. That does not seem to be asking too much or doing anything other than making the clause clear.

Amendment No. 1 would also ensure that there are limitations to the circumstances in which the provisions can be applied. It is not as though I am raising this point for the sake of it. I have received representations on the matter from the most respected institutions. Those bodies take a deep interest in such affairs, and have a wide collective client base, which is aware of what the measure means on the ground. The Institute of Chartered Accountants in England and Wales, the Chartered Institute of Taxation and the Institute of Indirect Taxation have all written in stronger terms than I have used to the Economic Secretary and in the amendments. Some of those bodies would have had the clause struck from the Bill on the basis that it represents a serious potential problem.

For the sake of the Committee's efficiency, I shall refrain from reading out the Law Society's long brief, which I commend to those who are concerned about the matter. As Members of Parliament, we are all concerned to protect the interests of our constituents as citizens and taxpayers, which is part of our duty in examining all provisions in legislation proposed by Governments of all colours. It is also obviously our duty to examine the Government's proposals in order to protect the revenue that they can raise.

Subsection (2) broadens the powers of Customs of Excise to require the production of documents ''or other information'', which may give rise to unreasonable, irrelevant or inappropriate requests for information that have no direct bearing on the transaction with which the inquiry is concerned.

Amendment No. 1 addresses the important point about an appropriate, proportionate and fair settlement. Above all, we should seek to enshrine in statute a sense of justice on which taxpayers, citizens and constituents can properly rely without concern and doubt that there may be a clause that enables Customs and Excise to act inappropriately—I am not suggesting that it will. The taxpayer should not be subject to the enormous concern, worry and expense of having to prove their position in the civil courts at a cost risk. Putting a benchmark in statute would set the standard that we expect, which is why amendment No. 1 seeks to address that point.

If, much against my hope and expectations, the Government are not minded to accept the amendment,

given that the group of amendments clearly and sensibly relates to one clause, I shall seek recognition that amendment No. 1 deals with a slightly separate point from amendments Nos. 84 and 85. Under your guidance, Mr. McWilliam, I may want to vote separately on amendment No. 1 and to take amendments Nos. 84 and 85 together.

The next problem with the clause is the requirement for evidence and security. The issues on subsections (2) and (3) are not very different from those in the existing provisions. I want to make it clear that the clause has been genuinely thought through and filleted to establish where the problem lies. I do not seek to amend subsections (2) and (3), which are part of the intended tightening up by Her Majesty's Customs and Excise of input VAT refunds to traders who do not hold VAT invoices. That is made clear in the consultation paper ''VAT Strategy: Input tax deduction without a valid VAT invoice'', which was published in April 2003. Customs and Excise intends to be tougher on computers and associated equipment, telephones and associated equipment, alcohol and road fuel rather than on other goods and services, which is not objectionable.

Subsections (4), (5), (6) and (7) are an entirely different matter and give rise to real concerns. In addition to the concerns that we have outlined, which we have sought to address through amendment No. 1, there are the problems addressed by amendments Nos. 84 and 85.

Ever since VAT was introduced, Her Majesty's Customs and Excise has had the right to demand security from a supplier for his future output VAT liabilities—he has a limited right of appeal against that—or in case input of VAT refunds are incorrectly made to him. The security is normally a cash deposit or bank guarantee.

I sought with sleepless effort to distil the serious issue contained in the pages of representations that I have received, but I thought it might be easier for hon. Members to follow my argument if I referred to parties A, B and C. For those who like drawing diagrams, this may be the moment. The new provisions state that if A makes supplies to B and B makes supplies to C, B can be required to give security not only for any VAT that becomes due from him to Customs and Excise, but for any VAT that becomes due from A or C. There is no restriction to goods or services of any particular sort. Customs and Excise must show under subsection (7) that there has been or is likely to be some evasion or attempted evasion of VAT in relation to some goods or services supplied to or by B. That might have been at any time in the past, it might have been trivial and it might not have been by B. Enforcement of the security is not restricted to VAT on supplies when there has been or is likely to be evasion.

That is extraordinarily widely drafted and could impose a crippling—I am not using the word lightly—obligation on small businesses for VAT liabilities that are essentially not their own. The provisions should be deleted. Under existing legislation, Customs and Excise can demand security from A or C for their

own output VAT liabilities. If A or C find it difficult to come up with that security, B can help them out if he believes that it is in his commercial interest to do so. That is why our amendments Nos. 84 and 85 would omit subsections (4), (5) and (7).

I have done my best to explain the issue clearly in a complex but important area involving taxpayers' rights versus the state's interests. We could be discussing a more fundamental interface of the interests and duties that we, as Members of Parliament, must tackle.

Rob Marris (Labour, Wolverhampton South West)

Does the hon. Gentleman share my surprise that in new section 77A there is a knowledge test, but clause 17(7) to which amendment No. 85 refers contains no such knowledge test for person B?

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the hon. Gentleman. He has put his finger on a fundamental issue, not least because knowledge of evasion or attempted evasion is fundamental to whether a citizen is likely to attract a penalty and difficulty. The hon. Gentleman's helpful and pithy contribution demonstrated the problem better than I could, having compared the different parts of the clause, taking it as a whole and examining the intended mischief that the Government seek to address. It is not a matter of dispute in the Committee that the Government must tackle tax evasion wherever and whenever it arises. We would support clauses that were designed and targeted to achieve that.

The clause is extraordinarily widely drafted. There is disparity in the application of a knowledge test, and there could be a significant financial penalty and a major impact on a person's reputation, even though he has not taken the action or had the knowledge that is causing the problem. Therefore, the Government must reconsider the matter. I recognise that a great deal of work goes into these Bills and that there must be pride of authorship—I do not accuse the Minister of that.

I hope that the Government will accept the amendments, because the provision could create a mischief that can easily be spotted now that it is on the record, given what I have said. I hope that we will not find this debate quoted in courts around the land when it comes to costs assessments and whether it was right for Customs and Excise to be able to recover costs when it had to take somebody through the courts who had not done anything wrong and may not have had knowledge of the mischief that it was trying to prevent. Those are the issues at stake.

John McWilliam (Labour, Blaydon)

It may be for the convenience of the Committee if I explain exactly where we are now. At the moment the only question before the Committee is amendment No. 84. If the hon. Member for Eddisbury wants to put amendments Nos. 1 and 85 separately to a vote, I shall invite him to move them formally at the appropriate time. However, if the amendments essentially eat the clause, and they do, it is my view that we are having a clause stand part debate at the same time.

David Laws (Liberal Democrat, Yeovil)

Welcome to the Committee, Mr. McWilliam, and I welcome your guidance on the debate. It is extremely useful and will

allow us to deal with many issues at the same time and more crisply than would otherwise be possible.

We support the argument developed very effectively by the hon. Member for Eddisbury and the amendments. Clause 17 and the related clause 18 seem to have been two of the most controversial in the Bill and are probably two of the more controversial clauses that we shall debate. The hon. Gentleman was correct to say that there has been widespread criticism of them—I shall try to focus on clause 17, as that is the one before us—which has ranged across the principal bodies with expertise in tax matters, including the Law Society, the Institute of Indirect Taxation, the Institute of Chartered Accountants and the Chartered Institute of Taxation. All those bodies have been extremely critical of the way in which clauses 17 and 18 have been drafted and all have made points that appear to underpin the hon. Gentleman's arguments.

The background is well understood by all members of the Committee, who understand that the Government are concerned about the loss of large amounts of indirect tax revenue—possibly billions of pounds a year—and are responding by closing some loopholes used to evade tax that could be used to cut tax burdens on business or to invest in public services. Therefore, this is clearly an important issue.

We also understand why the Treasury wants to draw the clauses as widely as it has, as such a body would always do. It enables it to catch many types of offences without having to come back in one Finance Bill after another to introduce increasingly tough measures, as has happened in some areas of tax evasion. This time, the Treasury seems to seek to catch a whole area of evasion in one go, but in doing so, it is asking us to trust it to administer that in a way that is safe and reliable for the interests of taxpayers. I hope that the Economic Secretary will not mind my saying that businesses across the country and Members on this side are concerned about giving the Treasury powers to the extent that it seems to seek in this and other clauses—the power to make judgments itself on whether businesses have acted reasonably in particular cases.

I draw the Economic Secretary's attention to much of the evidence provided and many of the points made by the leading tax advisory groups, and to the issues that the hon. Member for Eddisbury picked out so well in his discussion of the amendments. The Institute of Chartered Accountants has distributed an analysis on clause 17 to us all. It has drawn serious concerns to public attention. The first is the potential for some of the measures to apply to businesses that are innocent as well as to those that are clearly guilty and need to be dealt with. The second is that, as the hon. Gentleman said, there do not appear to be adequate safeguards for many of the businesses that could fall into that category. Many would undoubtedly be smaller businesses, those just getting off the ground, perhaps with shaky finances, or those in a fragile position that could fall victim to some of the measures proposed in the clause. In less favourable circumstances than the economic growth of the past 10 years, a large number of businesses could be in such a position.

As the hon. Gentleman pointed out, another serious concern in relation to his helpful notion of the four entities, A, B, C and D, is that the Treasury is essentially asking to be able to police the entire supply chain, rather than holding businesses accountable only for the immediate transactions with which they are involved. If taken to its logical conclusion and not implemented in a sensitive way, that could in practice require some legitimate businesses to cease trading. The Institute of Chartered Accountants sums that up well when it says:

''The legislation should be properly targeted and not drafted so widely that it applies to innocent taxpayers. It is not acceptable for a wide class of taxpayers to be taxed under the law, only to be untaxed by internal safeguards within Customs which have no legal effect. Limited experience of similar, but more restricted, laws in other countries indicates that tax administrations tend to pursue the legitimate businesses in the supply chain, since these are the ones who remain after the fraud has taken place.''

That is a well-put case and concern.

Not only the Instituted of Chartered Accountants, but the Institute of Indirect Taxation and the Chartered Institute of Taxation have expressed concerns on whether clause 17 is consistent with the sixth VAT directive or the Human Rights Act 1998. The Chartered Institute of Taxation has said:

''The provisions will inevitably lead to situations whereby the VAT due from a taxpayer falls to be discharged by another person. This appears to be contrary to the express provisions of article 21(1)(a) of the Sixth VAT Directive.''

As that concern has been fairly widely expressed, I hope that the Economic Secretary will return to it.

We entirely understand why the Economic Secretary is trying to frame the clauses as widely as possible. We understand the good intentions in the Treasury over trying to ensure that only businesses that have been complicit in VAT fraud should be held to account. However, we do not feel that the safeguards here are sufficient to give businesses comfort that they will not fall into a situation in which the concerns that have been expressed, and to which I have referred, will come about.

Perhaps I could list some of the detailed concerns, which the hon. Member for Eddisbury has already brought to our attention. Those concerns are set out by the Institute of Chartered Taxation in its paper about clause 17, and are precisely the points the hon. Gentleman raised. First, it finds it unacceptable in principle that one business could under clause 17, and clause 18 to some extent, be held liable for the actions of another in a circumstance where it cannot be proven that it is acting in collusion. We require some assurances from the Economic Secretary if we are to contemplate supporting the clause.

The second salient concern is that the clause appears to apply whether business is required to provide the security, or was aware of the existence of the other potentially fraudulent business. The provision is likely to bear down hardest, as the hon. Member for Eddisbury mentioned, on smaller businesses, which in many cases will be able to provide a security from their own resources. There are some very serious concerns, and we are worried that the Treasury, in trying legitimately to close a loophole that means the loss of an enormous amount

of tax revenue, is going over the top. We urge the Economic Secretary to balance the desire to ensure that we do not lose excessive amounts of revenue to tax evasion with the requirement that tax law should deal fairly with all entities and should not bring in a significant area of injustice for some businesses in order to police those who are acting in a responsible way outside the law.

Jonathan Djanogly (Conservative, Huntingdon)

My hon. Friend the Member for Eddisbury said at the outset that there was a series of complicated issues, but he explained the position extremely well and made it sound relatively straightforward. At base, it is a question of rights. There is always a balance of rights to be considered between authorities and individual taxpayers, and my hon. Friend made an excellent case in saying that, in this situation, the balance is much too onerous on the taxpayer.

The provisions go well beyond the concept of giving people security for their own liabilities. We are talking about one person being made to suffer because of the wrongs of another, whether or not the first person has done anything wrong, and in some cases, whether or not he knows what went wrong with the other person. That seems onerous in the extreme.

Michael Jack (Conservative, Fylde)

Thank you for calling me, Mr. Hendrick, and I welcome to the Chair.[Mr. John McWilliam in the Chair]

Jonathan Djanogly (Conservative, Huntingdon)

My right hon. Friend mentioned traders having knowledge. I think that under the provisions of the clause—the Economic Secretary may wish to clarify this—that knowledge would not necessarily be required at all.

Michael Jack (Conservative, Fylde)

I take my hon. Friend's point. One of the points made by the Institute of Indirect Taxation, to which the hon. Member for Yeovil (Mr. Laws) referred, is that it is not necessarily a question of whether a company might be illegally conducting its activities; there may be a judgment as to its commercial solvency.

I should be grateful if the Economic Secretary would comment on what is almost insider dealing. Customs and Excise has privileged access to a company and its books and could form a view from that standpoint. Quite clearly, somebody trading with that company might not be in that position. I would be interested to know whether, in the operation of the clause and the formation of views by Customs and Excise, there is an absolute guarantee that it will not also be fed information about companies from other sources such as, principally, the Inland Revenue and members of the security forces. Where are the Chinese walls for protection? People could go on fishing expeditions to find out bits of information to make demands on legitimate traders for deposits against the anticipation that something in company A is going to happen, visiting all that, unknowingly, on company B simply because Customs and Excise has access to a vast amount of potentially privileged information.

Stephen O'Brien (Conservative, Eddisbury)

Without having to cite cases, which I could not do from memory, I am sure that my right hon. Friend is as aware as I am that the courts have

found that it is the right legal precedent to consider what Parliament intended when there is an accusation that Customs and Excise or the Inland Revenue, or any other public authority, has gone on what has been termed a fishing expedition—something that we would all find abhorrent in terms of the balance of rights between taxpayers or other citizens and public authorities. Hence the importance of the debate that we are having—our words, sentences and beliefs—and the Government's intent in relation to the legislation. As a statutory reference, that would be regarded as admissible and appropriate for a court to consider. My right hon. Friend's point was right.

Michael Jack (Conservative, Fylde)

I am grateful to my hon. Friend for further amplifying some of the real world dangers of the powers, because all the representations that we have received address the balance between the way in which the powers will be used and the nature of the problem that they are meant to solve. When the Economic Secretary replies, he will be able to explain to us in some detail how the provision will operate in the real world and what checks and balances will be put in place to deal with the concerns that are reflected in my hon. Friend's amendments.

John Healey (Labour, Wentworth)

The debate has been a useful one. The hon. Member for Eddisbury kicked it off in precisely the right way by recognising the importance of protecting the revenue due to the public purse and by saying that a provision such as we are examining in clause 17 requires the detailed scrutiny of the Committee.

I shall try to deal with the points that have been made and explain my objections to the amendments, and the purpose and importance of clause 17. [Interruption.]

John McWilliam (Labour, Blaydon)

Order. Before the hon. Gentleman gets too deeply into his remarks, can I say that I find it unacceptable that a Minister cannot get to a place because the way is blocked? I have the power to remove any civil servant from this platform and I shall not hesitate to do so if anyone has any difficulty getting past again.

John Healey (Labour, Wentworth)

Thank you, Mr. McWilliam.

The Government have made an unprecedented commitment to reducing the revenue losses that have historically affected the VAT system, in particular to tackling the serious problem of missing trader fraud. Missing trader fraud exploits the basic rules that allow VAT-free transactions between businesses in different European Union member states. The fraud, which has been a feature of criminal operations throughout the EU, relies on a fraudulent business buying in a large consignment of high-value, low-volume goods, such as mobile phones or computer chips, VAT-free from another member state, selling them on at a VAT-inclusive price and then disappearing without paying the VAT to the tax administration. In answer to the right hon. Member for Fylde, that is the real-world problem that we face.

The fraud relies heavily on the ability of fraudulent businesses to undertake trade in goods with other apparently legitimate businesses. There is no getting away from the fact that this type of business activity

results in massive amounts of VAT going unpaid. We believe that it is supported by businesses that perhaps turn a blind eye or, at the very least, are not sufficiently circumspect about their trading connections.

For several years, the VAT system in this country has been under a concerted and extremely costly attack from organised criminal groups concentrating such operations in the UK. This is deliberate tax avoidance—it is not a marginal activity that is part of a more legitimate business activity. Customs has succeeded in stopping the previously rapid growth in the scale of the fraud, but our latest estimates still put the cost to the public purse at some £1.7 billion to £2.7 billion a year. That is the real-world dimension of the problem.

Let me give members of the Committee some examples to illustrate the type and scale of the operations that are perpetrated as part of missing trader fraud. Last November, the director of an Irish-based company was arrested in a joint operation between British Customs and the Irish authorities for missing trader fraud involving a staggering £160 million of stolen VAT. In February, two men were sentenced to a total of 16 years and three months imprisonment for a £38 million series of VAT fraud involving the importation and onward sale of mobile telephones. That fraud involved a network of companies based in Spain, the Irish Republic and Staffordshire in the UK. One of the men was sentenced to nine years in prison, the longest sentence ever given in a case involving VAT fraud.

Paul Farrelly (Labour, Newcastle-under-Lyme)

I understand that some of that activity was centred on Stoke-on-Trent, which borders my constituency of Newcastle-under-Lyme. I particularly welcomed the Chancellor's commitment to regionalism in the Budget statement. Have my hon. Friend the Minister and my right hon. Friend the Paymaster General considered relocating Customs and Excise to Stoke-on-Trent, so that we could benefit from a Government Department and cut down on VAT fraud?

John Healey (Labour, Wentworth)

Both the Inland Revenue and Customs and Excise have a strong staff presence throughout the United Kingdom and that is part and parcel of their effectiveness.

In addition to the sentence handed down being the longest ever for VAT fraud, a solicitor was sentenced to five years for laundering £8 million of the proceeds of that fraud. The money was used for the usual purposes and activities: expensive cars, properties, yachts and so on.

We have had some significant successes in arresting the growth of and clamping down on missing trader fraud, but we must do more to reverse the enormous cost to the Exchequer.

Michael Jack (Conservative, Fylde)

I am most grateful for the Minister's real-world examples. Given the prosecution's success, which he has just described, can he explain to the Committee what were the missing elements that the clause now provides to enable further stemming of the loss of VAT?

John Healey (Labour, Wentworth)

If the hon. Gentleman will forgive me, I do not want to go any further into the details of those cases, but I will answer the general point in a moment.

We must do more to deal with the massive criminal, organised, international VAT fraud. In addition to the extra resources that we announced in the pre-Budget report, we said that we would consider what further legislative steps could be taken to tackle the problem. The Bill takes two such steps and the provisions in clause 17 are part of that. They attack that fraud at its financial heart by targeting the supply chains for the missing trader frauds.

The clause ensures that if, despite warnings, a business is repeatedly engaged in transactions with other businesses whose pattern of trading suggests a high risk of revenue losses, Customs and Excise will be able to require security to be deposited on the transactions.

Rob Marris (Labour, Wolverhampton South West)

Perhaps my hon. Friend could tell me where the phrase ''despite warnings'' appears in the Bill.

John Healey (Labour, Wentworth)

The hon. Member for Eddisbury pointed out the significance of our proceedings this afternoon. I am in the process of explaining precisely how we will put into operation the legal provisions proposed in clause 17 and I hope and trust that my hon. Friend will take what he needs by way of reassurance from what I am in the process of saying.

The clause revises and extends Customs and Excise's existing and well-established powers to require security payments. As at present, it will apply those powers in a way that is proportionate to the value of the tax at stake and targeted at the areas of greatest risk. I understand the concerns that businesses and advisers have made known to all members of the Committee. I understand the concern voiced by hon. Members in this debate that the powers are significant, but we are dealing with serious fraud organised on an almost unprecedented scale. The powers are necessary to attack the unprecedented loss of revenue to the public purse.

Michael Jack (Conservative, Fylde)

Does the Minister agree that the tenor of the representations that we have received is not antagonistic to the objective that he has just described but reflects the concern that legitimate traders would find themselves caught up in disproportionate processes in a business environment in which they would not have the knowledge to be able to protect their own activities? I hope that he understands the point that I am making. Our main concern relates to the legitimate trader rather than the illegitimate trader.

John Healey (Labour, Wentworth)

I well understand those concerns. The provision and the way in which we intend, through Customs and Excise, to put it into practice are intended to protect, wherever possible, legitimate traders. We are talking about traders who are part of a supply chain that is systematically defrauding the public purse of millions of pounds of revenue each year.

Jonathan Djanogly (Conservative, Huntingdon)

I want to back up the point made by my right hon. Friend the Member for Fylde. We remain concerned about the innumerable, more legitimate traders than about the handful of fraudsters. The Minister gave one or two examples of fraud where the existing law was successful in bringing prosecutions. He has not yet given us proper examples to show the need for these powers, which everyone, including himself, is beginning to agree will prejudice legitimate traders.

John Healey (Labour, Wentworth)

I shall give way again.

Howard Flight (Conservative, Arundel and South Downs)

No one could be keener on recovering wasted expenditure than I, but surely the hon. Member for Wolverhampton, South-West made the crucial point in terms of the law: there needs to be knowledge and warning if a democratic system is to accept the sort of powers being proposed here.

John Healey (Labour, Wentworth)

If the hon. Gentlemen will forgive me, I shall come later to precisely these points: knowledge for the trader of doubts and concerns before action is taken, warning before action is taken and redress, if action is taken by Customs to require this extended security provision. Hon. Members will have to judge whether we got the balance right.

We are putting in place not only powers for extended security but powers giving the tribunals extended scope to challenge the decision and actions of Customs in relation to the clause. Customs will always review any decision that may be challenged. A trader then has the right to take the decision to tribunal. That tribunal will have full appellate jurisdiction. Therefore, it will not only be able to decide whether the decision to require the security is reasonable but will have additional powers to decide to require less security or remove the security altogether. It is therefore not the case, as the hon. Member for Eddisbury asserted, that there are no limitations on Customs and Excise's powers in invoking the provisions. Those powers will be invoked only when a warning has been given. The trader will always be given a warning before the powers requiring security are used.

In addition, VAT-registered businesses that are known to have dealt with high-risk businesses in the past will be contacted by Customs and given advice on the steps that they should take to avoid dealing with such types of business in the future. Only if they continue to do so will Customs invoke the power to require security payments. In answer to the hon. Member for Yeovil, it cannot therefore be the case that action will be taken against a firm that is not aware of the problem with the companies and supply chain with which it is involved.

There are safeguards in the provision. I believe that they are sufficient, and if a business takes reasonable steps to establish the legitimacy of the business with which it is trading, the legislation should not affect it. As with clause 18, this should help to protect the competitiveness of such a business in relation to others in its industry that are cutting corners, colluding with fraudsters and not paying and operating in the way in which they should.

John Burnett (Liberal Democrat, Torridge and West Devon)

Who will act for Customs in the tribunal process? Will it be its own internal lawyers?

John Healey (Labour, Wentworth)

I propose to go through a number of detailed points that hon. Members have raised. I shall deal with that one in the course of my remarks.

Amendments Nos. 84 and 85 would remove our proposed new power to require the security. To that extent, they would render the clause toothless. They would allow unscrupulous individuals and businesses to continue to work together to evade tax by playing the system. Amendment No. 1 would introduce a provision for the business on which the security was enforced to recover the amount involved from the business that was first liable to pay the VAT.

I can tell the hon. Member for Eddisbury that there is already recourse for the recovery of debts through the civil litigation process. The person on whom the security is enforced should seek to prove a debt against the other business and gain redress through the courts in the normal way. In addition, there is no legal vires in EU law to introduce a measure such as that which he seeks. To do that in the UK would therefore be illegal. I shall urge my hon. Friends to vote against amendments Nos. 84, 85 and 1 if they are pressed.

On the point raised by the hon. Member for Huntingdon on compliance with human rights legislation, that statement is on the frontispiece of the Bill and we have taken a judgment that this clause is compliant. It may help him if I go a little further. The use of the measure will be compatible with human rights legislation if it occurs in appropriate cases, in a proportionate manner and with the safeguard of an appeal, at which the commissioners will have to establish on the balance of probabilities that there has been fraud evasion.

Stephen O'Brien (Conservative, Eddisbury)

On the point that the Economic Secretary is seeking to address, it would be helpful to cite what the Chartered Institute of Taxation has said:

''It is difficult to reconcile the new VATA 1994 Schedule 11 paragraph 4(2) with the requirements of article 21(1) of the Sixth VAT Directive, which deals with the persons liable to pay VAT.''

If I may crave your indulgence to quote a little further on this complicated matter, Mr. McWilliam, the institute says that

''under the internal system, the person liable to pay VAT is 'the taxable person carrying out the taxable supply of goods or services'. In the absence of a specific derogation, a requirement to secure the tax due from another person—which may result in payment of that tax—sits uneasily with the clear terms of article 21(1)(a).''

The institute goes on to cite the case of Balocchi v. Ministero delle Finanze dello Stato. Hon. Members may read that reference in the record in the usual way.

This is a serious matter, and while no issue has really been taken with the endorsement on the frontispiece of the Bill, many professionals have raised the issue on numerous occasions. It seems that there is a challenge to the Government's judgment.

John Healey (Labour, Wentworth)

We always take the views and representations of such bodies seriously, but our judgment is compliant with the legislation, as is confirmed in the frontispiece to the Bill.

Michael Jack (Conservative, Fylde)

Can the Minister satisfy the Committee that the legislation is compatible with the sixth VAT directive?

John Healey (Labour, Wentworth)

The right hon. Gentleman and the hon. Member for Eddisbury posed the question whether the clause is ultra vires in relation to the sixth directive as well as in relation to the Human Rights Act 1998. The vires is in article 22.8 of the EC sixth directive, which means that it is entirely in order and that we obviously have the vires to take the provision.

The hon. Member for Eddisbury tried to make the case for restricting the companies within the supply chain to which those extended security powers could be applied and suggested that the restriction should be on the basis of an association established by Customs and Excise between the companies. I must to say that to attempt to define something as precise as an association would give rise to an argument about degrees of association, which would make the measure ineffective. For the purposes of the measure, the relevant relationship between traders is their position in the same supply chain.

The hon. Member for Eddisbury asked who will represent Customs at a tribunal. It would either be its solicitor's office or, in important cases, Customs might instruct counsel.

Stephen O'Brien (Conservative, Eddisbury)

The Minister has tried to address whether Customs and Excise must establish the associated chain of relationships between companies. When we are considering the clause, it is wholly legitimate to quote paragraph 1 of the explanatory note, which I sought to do, and to which he did not give a specific response. It is therefore incumbent on me to repeat the quotation in the hope that I can get an answer:

''This clause extends the powers that Customs and Excise currently have to require the provision of security where it is considered''.

''Where it is considered'' is in the passive voice: it is not considered by them; it is considered by the authorities. The statement of condition and circumstances is passive, which means that somebody has to make the judgment. Who will make the decision? I assume that it must be those who seek some form of payment or redress from those companies rather than those within the association. The quote continues:

''where it is considered that a business is associated with other businesses whose pattern of trading poses a real threat to the proper collection of VAT.''

We all agree with the final sentiment. However, the issue is that in order to restrict appropriately, the necessary association must be established.

John Healey (Labour, Wentworth)

I have explained how missing trader fraud by which the Exchequer is systematically defrauded out of massive sums of money operates, and that it is rooted in supply chain relationships and trading relationships. The place in the supply chain is the relevant factor. I remind the hon. Gentleman that no company will have the power raised against it without a warning from Customs and without the power and provision to challenge the power in the

courts. Customs will make a judgment, but it can be challenged through the tribunal.

John Burnett (Liberal Democrat, Torridge and West Devon)

Given the draconian nature of the provisions, what will be the burden of proof at the hearings? Will it be civil or criminal? If criminal, will the new Customs prosecution service now under the aegis of the Attorney-General be involved?

John Healey (Labour, Wentworth)

It will be civil.

The clause will allow us to disrupt the supply chains that underpin missing trader fraud. It will give us the powers that we lack to make further progress in stamping it out. Despite the best efforts of Customs, which has managed to control the expansion of missing trader fraud, we now need such powers, just as we needed them at the time of the pre-Budget report. Further action will increase the exposure of the main players and dramatically alter the risk-reward ratio for them. The clause is important and necessary. It is part of the fight against missing trader fraud and part of protecting huge amounts of money that are due to the public purse. On that basis, I urge the Committee to reject the amendments and support the clause as it stands.

Stephen O'Brien (Conservative, Eddisbury)

I shall be completely frank and say that I am genuinely disappointed. I thought that the Government would at least take the opportunity to acknowledge that the arguments made in support of the amendments are genuine and have widespread support. I thought that I had made my opening remarks in a reasonable manner. I am aware that there is pride of authorship and so on in these situations, but I was not out to fight some war of pride about who had it right the first time.

These very serious issues affect the rights of individual citizens and the settlement between them and the public authorities. At the very least, I had hoped that the Economic Secretary might have said, “We do not like your amendments, but you have raised important points. Therefore, we will go away and draft our own amendments.” That might have tempted me to withdraw the amendments. Instead, as we discovered on the Floor of the House, the Government wrap all their arguments in either anti-avoidance speak or the need to address significant tax evasion.

Let us not play games. We all want to avoid stepping into the trap of thinking that we have to present arguments that could prevent the Treasury, Inland Revenue or Customs and Excise from collecting due and proper taxes. We are all responsible for maintaining the settlement between taxpayers and the public authorities, but it may be used as a cloak to stifle legitimate concerns about striking the wrong balance.

The amendments were modestly drafted, given that some representations that we received asked to have the entire clause deleted. They said that the measure was draconian. That word was used by the hon. Member for Torridge and West Devon (Mr. Burnett), who also asked who the prosecuting authority would

be in a criminal as opposed to a civil action. The Economic Secretary sought to defend his position on that matter, because the Attorney-General has had to take the prosecution processes of Customs and Excise under his wing, given the very serious concerns about and abysmal track record of the prosecuting authorities in Customs and Excise, about which the Economic Secretary and I have recently debated on the Floor of the House.

At present, Customs and Excise is not covered in glory over its ability to make judgments about the rights of the citizen and its powers­and that is in an area in which its powers have been properly and more fully qualified. The very guidance that the Government issued has been reissued. We have seen the way that Customs and Excise used its powers to deal with various imports coming into the country in recent months and years.

I would like to have confidence that we are dealing with a public authority in which we can place considerable trust, but it is not actually appropriate that we as legislators, whether in Opposition or in Government, should place such trust in it in any event. Our duty is to stand up for the citizen and for our constituents in order to ensure that they have proper protection. Unless such checks and balances are in place, the state is almighty and is always open to abuse.

David Laws (Liberal Democrat, Yeovil)

I agree with the case that the hon. Gentleman is developing. Does he agree that the minimum that would have been helpful from the Minister would have been an agreement to incorporate in the Bill some of the safeguards on which he touched in his comments? Then it would be clear what they were, and we could debate them, rather than have to rely upon the good faith of Customs and Excise.

Stephen O'Brien (Conservative, Eddisbury)

The hon. Gentleman puts it succinctly, appropriately and accurately. I am grateful for the support and consensus. I realise that, ultimately, if the Government wish to whip their vote, we are outnumbered. However, it is our duty to challenge attempts to pass other than proper and good law. I sense­perhaps I am overoptimistic­that some of my arguments have struck a chord with Labour Members. I do not say that they agree with me entirely, but they recognise that the issues are genuine and that it would be appropriate for the Minister to acknowledge that there was a chance to look at a review.

In the absence of an offer from the Government to table their own amendments on Report, we must press the matter to a vote for no reason other than to stress the importance of recognising that the Government's case has not been made. We must register our disapproval on behalf of all citizens and taxpayers whom we represent, as well as the professional bodies who have made such thorough representations to us.

Michael Jack (Conservative, Fylde)

Does my hon. Friend agree that the Minister could have taken a lot of the steam out of the situation if he had volunteered to produce a note of explanation or to circulate to the Committee

the Customs practice note that will no doubt accompany the operation of the clause, to assuage our concerns about how it will operate in the real world?

Stephen O'Brien (Conservative, Eddisbury)

That would have been very beneficial and, for the Government, an advantageous thing to have done towards persuading us of their argument. Its absence has not been helpful. We are considering the potential legal cost and hassle that individuals will face when they have to defend themselves in the civil courts because things have got out of control due to the fact that they are in a chain­whether or not Customs and Excise, in the absence of an appropriate measure in the Bill, has to make any effort to discover whether they are in association.

Above all, particularly for small companies, it is a matter of reputation. Once company directors or sole traders become engaged in such matters­which are often widely known­their reputation is under threat. That can kill a small company before it has had any chance of redress and that is why it appears disproportionate. The Government are seeking to reverse the natural burden of proof that should exist when we, as democratic representatives, favour freedom under the rule of law. We are dealing with a proposed law in which that freedom is presumed not to exist unless proven. Although that might sound extreme, it looks as though the challenge is to the citizen, rather than to the authority, to make his case. It is incumbent upon us to register our great distaste and disapproval. I hope that the Government will understand that, having read what will now be recorded in the Official Report, not least because under the rules of statutory interpretation, the point that I made in an intervention on my right hon. Friend is correct. Because of the nature of the issues that we have raised, today's proceedings will be relevant and capable of acceptance and statutory interpretation.

Rob Marris (Labour, Wolverhampton South West)

I must say that I accept the assurances of the Minister that warnings will be given. Does the hon. Gentleman not accept those assurances?

Stephen O'Brien (Conservative, Eddisbury)

I do not take issue with the personal integrity of the Economic Secretary­of course I do not. Furthermore, it would have been helpful, as my right hon. Friend the Member for Fylde said, to have had a copy, at least in draft, of the intended guidelines. Clearly, the provision will not be included in the Bill according to the Economic Secretary's current thinking, so one would hope that the guidelines would include that. At the very least, we would be left to make a judgment on what is likely to be the behaviour of those practising under those guidelines, as opposed to those who simply have an obligation to do so under statute.

I also argued that we should make sure that the right of recovery from the party that had failed to pay back in the associated chain should be enshrined in the statute. Although the redress is there through the civil court, if it was a statutory expectation it would give rise to a presumption that there was that right of recovery, which would get the whole civil case­if it came to that­off to a more favourable start. That may save costs.

John Healey (Labour, Wentworth)

It may be helpful if I make it clear to the hon. Gentleman and his right hon. Friend the

Member for Fylde that the statement of practice is included in the public notice issued by Customs and has been available since Budget day. It is public notice 700/52 and I will leave a copy of it in the Library to help Committee members.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Economic Secretary. It would be completely futile to pretend that I had taken that document on board, but it would have been helpful in anticipating the arguments that were adduced today to have had a copy of it on the Table in the Committee Room. It is clearly relevant to our considerations today, and we are being asked to place trust in the operation of that guidance, which was published on Budget day. As the Economic Secretary will be aware, however much this is an important argument, all of us have been under a tremendous work load in order to try and master all that we have to deal with during the coming days and weeks. I am grateful to the Economic Secretary for pointing the document out. I will certainly study it, but in the absence of knowledge of it, I shall continue to press my amendments to a vote.

Question put, That the amendment be made:­

The Committee divided: Ayes 9, Noes 16.

Clause 18 - Joint and several liability of traders in supply chain where tax unpaid

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 86, in

clause 18, page 16, line 36, after 'payable', insert 'by the supplier'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Amendment No. 87, in

clause 18, page 16, line 37, leave out from first 'supply' to 'would' in line 38.

Amendment No. 121, in

clause 18, page 17, line 14, after 'if' insert 'he knew'.

Amendment No. 122, in

clause 18, page 17, line 17, leave out 'on the open market' and insert

'(taking account of the circumstances of the market in which such prior supply took place as were known to him).'.

Amendment No. 88, in

clause 18, page 17, line 24, at end insert—

'(8A) Where any VAT becomes payable and is paid by a taxable person pursuant to this section he shall be entitled—

(a) to recover that amount from the supplier, and

(b) for that purpose to require the Commissioners to give him a certificate specifying that amount,

and any such certificate shall be conclusive evidence of the facts stated in it.'.

Amendment No. 2, in

clause 18, page 17, line 31, at end insert—

'(11) A person served with a notice under this section may recover any amount that he pays to the Commissioners pursuant to the notice from the person who, apart from this section, would be liable for the VAT specified in the notice.'.

Stephen O'Brien (Conservative, Eddisbury)

Clause 18 has been rightly observed to be strongly linked to clause 17, so some of the issues pertaining to clause 18 have already been debated.

There remain some issues in my opinion and that of my right hon. and hon. Friends, which is why we have tabled the amendments. Recognising your earlier guidance about the way in which the amendments will be taken, Mr. McWilliam, I flag up at this point that amendment No. 2 will not be pressed. It has been replaced by the improvements in amendments Nos. 86, 87 and 88, which we tabled later than amendment No. 2, our original amendment.

It will be helpful to examine the amendments together and I suspect that that will necessarily involve something of a stand part debate, with your guidance Mr. McWilliam.

John McWilliam (Labour, Blaydon)

Order. The hon. Gentleman is right. Again, the amendments eat the clause and in such circumstances we shall have the stand part debate along with the amendments.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful for that confirmation. It will make it more efficient for us to be able to go through the clause.

The clause makes certain businesses in a supply chain jointly and severally liable for tax that has not been paid by a missing trader. That was effective from 10 April this year. The measure is restricted to telephones, telephone parts and accessories and computer equipment, including parts, accessories and software.

There is an increased risk of doing business that involves trading in specified goods, so any business unwittingly caught in a supply chain involving a missing trader fraud will need specialist advice.

It may help the Committee if I read from a letter dated 15 April this year, which was helpfully sent, as a constituency matter, by Sir Nicholas Winterton to me and my colleagues in the shadow Treasury team. The letter is from a Dr. Dwek, who is a constituent of my hon. Friend the Member for Tatton (Mr. Osborne). Fortunately, I spotted that as my hon. Friend came into the Room, so I have been able to give the proper courtesies, but I thought initially that I was raising the case on behalf of Sir Nicholas. In his letter to the Chancellor of the Exchequer Dr. Dwek says:

''Dear Chancellor,

In your recent Budget Statement you referred to the changes in the VAT regulations for the mobile phone and computer industry, in order to avoid VAT fraud, and this is much welcomed by the trade.''

That is why the letter is important: it sets the clause in context. He goes on:

''I know this has been a serious problem and this is now being addressed through consultation documents, some of which appear to be entirely reasonable, and other suggestions could seriously undermine the trade, which is a valuable export earner.''

That is the nub of the issue.

''Surely the simplest solution would be that, instead of paying the VAT over to the supplier, it is paid directly to the Treasury by TT—

telephonic transfer—

''or BACS, and on receipt of the funds by the Treasury a receipt could be issued which could then be passed on to the supplier. In this way there could be no VAT fraud and the Treasury would collect its share of VAT at the point of sale. Simple, but quite effective.

Since my business is involved in the trade of mobile phones, we shall of course be making a full submission . . .

However, there is one item of the draft new legislation, which does not make sense, that is: Customs will presume that a taxable person—

Dr. Dwek emphasises the following—

''had reasonable grounds to suspect'' that VAT had not, or would not be paid, on goods supplied to it in two circumstances;

1. The purchase price of the mobile telephones was lower than the price, ''the lowest price that might reasonably be expected to be payable for them on the open market''. (Section 77A(6)(a) of the draft legislation)

2. The purchase price of the mobile telephones was, ''less than the price payable on any previous supply of those goods.'' (Section 77A(6)(a) of the draft legislation).

The purchase price of mobile telephones fluctuates''—

that is a fairly obvious point—

''according to market conditions and because of the uncertainty created now by the new measures, there are so many mobile phones on the market that the price has dropped considerably, thus any trader now operating could fall foul of these two items, and this cannot be right.

Finally, the measures introduced contain so much lack of definitions, and have created so much uncertainty that the trade has come to a virtual standstill.''

Mr. Joe C. Dwek CBE, who has made many public-spirited contributions as well as obviously being a successful businessman, has put his personal reputation on the line in suggesting that these measures have already

''created so much uncertainty that the trade has come to a virtual standstill.''

Michael Jack (Conservative, Fylde)

Is my hon. Friend also aware that Joe Dwek was a former chairman of the Confederation of British Industry in the north-west?

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to my right hon. Friend, who is able, with his considerable experience, to clarify that for me. As a former elected member of the CBI's south-east regional council, I know that there is proper respect for the CBI's representation of business. The Government have placed an enormous value on the views and advice of the CBI. Dr. Dwek concludes:

''In the interim, therefore, there ought to be more clarification.''

Rob Marris (Labour, Wolverhampton South West)

Since the letter was written on 15 April, has Dr. Dwek made the full submission to which he refers? If so, will the hon. Gentleman refer to the full submission?

Stephen O'Brien (Conservative, Eddisbury)

I am conscious of the fact that I have taken a liberty in reading so much of the letter in Committee. I do not plan to go into the submission at great length. I am also conscious that Dr. Dwek's Member of Parliament is in Committee and may be able to assist—I do not want to steal all the thunder from my hon. Friend the Member for Tatton, who has the most thunderous voice in Committee.

John McWilliam (Labour, Blaydon)

Order. My co-Chair, the hon. Member for Macclesfield (Sir Nicholas Winterton), has done nothing more than pass on a letter from someone who is not his constituent, so he has no interest in the matter.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful that that is on the record.

George Osborne (Conservative, Tatton)

May I make it clear that Dr. Dwek has written to all members of the

Committee? The information is available for anyone to use in the debate.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful because one often receives letters and does not know to whom they have gone.

It is clear from the example that up to now a supplier has been liable only to Customs and Excise for output VAT on goods that they have supplied. There have been a few limited exceptions, such as reverse charge VAT on the buyer in the case of a service brought in from abroad, but the ultimate principle remains the same.

It is back to the drawing board with parties A, B, C, D and E. I have tried to distil the raft of representations that we have received from the Chartered Institute of Taxation, the Institute of Indirect Taxation, the Institute of Chartered Accountants in England and Wales, the Law Society, Dr. Dwek, PricewaterhouseCoopers and others. This is the best distillation that I can come up with and I hope that it helps the Committee. Under the new provision, if A makes supplies to B, who makes supplies to C, who makes supplies to D, who makes supplies to E, C can be made liable not only for their own output VAT on those goods and services, but for that of A, B, D or E if A, B, D, or E fail to pay. C must have known or have had reasonable grounds to suspect that the person in question would not pay their proper VAT, which relates to the Value Added Tax Act 1994 new section 77A(2). ''Reasonable grounds to suspect'' is an objective test—new section 77A(6) and (8) also relates to the issue.

The Customs and Excise paper ''VAT Strategy: Joint and several liability—Consultation on reasonable checks'' dated April 2003 proposes the publication of a statement of practice on the checks that Customs expects C to take. The new liability is currently limited to supplies of telephones, computers and associated equipment, but the Treasury has the power, which is contained in new section 77A(9), to add other types of supply ad lib. C is given no express right to claim a refund from A, B, D or E, which appears to be permissible under article 21.3 of the sixth directive, but it must be questionable whether the article permits such a wide provision.

It would be a good idea if the Chancellor of the Exchequer had to state on the front of the Finance Bill that the provisions are compatible with all EU directives, just as he has to state that they are compatible with the Human Rights Act 1998. In VAT matters, we would all find that particularly helpful for future reference. I hope that the Economic Secretary and those who have a supporting role will take that on board.

I shall carry on with the diagrammatic example, which seems to have emptied the Government Benches. C has a right of appeal to the VAT tribunal, under subsection (2), but only on the question of whether he has on the facts a liability under the new section. The tribunal has no discretion to let him off. HM Customs and Excise says that that provision is necessary to deal with missing trader

frauds and that it will apply the provisions reasonably. However, that is not written into the legislation. I suspect that there are strong echoes from the debate that we have just had on clause 17. The provision goes over the top again, and will expose many small businesses that do keen deals with other businesses to great worries and liabilities.

One answer would be to leave the clause out altogether. However, I suggest an amendment that restricts C's liability to B's unpaid VAT, and also gives C an express right, for what it is worth, to reclaim from B any money that C has to pay under the provisions. Amendments Nos. 86, 87, 88 address that point and the right of recovery. I hope that that is clear to members of the Committee.

There are other issues that need to be considered carefully. It is very much the opinion of the Law Society—the chairman of the VAT and duty sub-committee of the Law Society, Mr. Gary Richards helpfully submitted the information—that the words ''if he knew'' should be inserted in new section 77A(6). That is what we propose in amendment No. 121. There again we have an echo of the point raised by the hon. Member for Wolverhampton, South-West, which was particularly perceptive. I was somewhat disappointed that he concluded that he ought to vote against the amendments. As he is not in his place, I will have to let that rest.

Amendment No. 121 invokes that essential element of knowledge that harks back to all the arguments that we have adduced about the rights, checks and balances that should be taken into account in a proper settlement between individuals and the state. Amendment No. 122 relates to the end of paragraph (a). It would

''leave out 'on the open market' and insert '(taking account of the circumstances of the market in which such prior supply took place as were known to him).'''

It is patently along the same lines. The purpose is to restrict the application of the clause to cases of actual knowledge. In the last discussion, it was disappointing that that point was not taken sufficiently seriously.

The Law Society states that, in its current form, the clause applies to a person who knew, or had reasonable grounds to suspect, that VAT on transactions already entered into, or that may subsequently occur, will not be paid. However, there is a presumption, albeit rebuttable, that that person has reasonable grounds for suspecting that the VAT will not be paid if the goods offered to him have been offered for a price less than that paid on any previous supply of those goods. If A sells goods for £1,000 to B, who sells them for £1,050 to C, who sells them for £900 to D, D is presumed to have reasonable grounds for assuming that VAT will not be paid. There may be many reasons why C is prepared to sell the goods to D that are not tax-evasion driven. More importantly, commercial confidentiality makes it very unlikely that D will be able to find out the terms of the bargain between A and B and between B and C. I am happy to adopt the recommendation of the Law Society that

''clause 77A(6)(b) could only operate where, in this example, D has knowledge of the prices previously paid in the supply chain.''

Without having to recite at length the welter of representations that I and other hon. Members have received on the matter from the reputable organisations that I listed earlier, I hope that it is as clear as it can be that we have yet another example of the measure being rough, to say the least, and probably unfair. We need seriously to reconsider the balance of rights and duties between the citizen taxpayer and the public authority. I hope that on this clause the Government may be prepared to take the track that I advocated in the response to clause 17 and forlornly expected the Minister to adopt. Given the nature of the arguments advanced in that debate, we want to draw attention to the importance of our arguments by dividing the Committee on the amendments. However, I hope the Minister will show that that will not be necessary.

David Laws (Liberal Democrat, Yeovil)

The hon. Member for Eddisbury has made his point extremely effectively on behalf of Opposition Members, as he did on clause 17. Because the clause is drafted very widely, many of the issues are relevant to the previous debate. I do not want to squeeze every bit of juice from the letter from the constituent of the hon. Member for Tatton, but Dr. Dwek summed up the situation that applies to clause 18 perfectly when he said that the law as proposed is too penal, subjective and uncertain.

I have four, rather than the usual three, questions for the Economic Secretary to follow up the points made by the hon. Member for Eddisbury. First, does the Economic Secretary really believe that it is necessary to pursue what is essentially an open-ended chain in the way proposed? Does he think it can be done in a way that will be consistent and fair for all the businesses that may be caught in this potential trap? Did his advisers in the Treasury propose any alternative that may have been considered in respect of similar problems in the past that could have the same effect in safeguarding revenues without the draconian consequences in the clause?

Secondly, can the hon. Gentleman clarify whether clause 18 will also relate to the issues of bad debts and fraud? Thirdly, the Economic Secretary will be conscious that many of the tax practitioners who have opposed, or expressed concerns about, clause 18 feel that the issue of prior warning to third parties is even weaker in clause 18 than it is in clause 17.

Michael Jack (Conservative, Fylde)

Does the hon. Gentleman agree with me that one of the principal weaknesses of the approach is its dependence on interpretation and anticipation of conditions in a fast-moving marketplace?

David Laws (Liberal Democrat, Yeovil)

The hon. Gentleman is entirely right; it is a fast-moving marketplace and I will come to that matter in a moment. In addition, if the Government wish to introduce measures on such an issue, they should have the courage to introduce some clarity and put them in the Bill rather than rely on the confidence to exercise discretion.

My fourth question is about safeguards in respect of the assessment that will have to be made about whether there are reasonable grounds to suspect a

particular entity, based on the price that was paid in the open market. There might be circumstances in which it would be reasonable to be suspicious of a transaction that occurred at a price that was very much below the market price.

Some of those who have made representations on clause 18 have pointed out, quite sensibly, that there are particular products, such as those that clause 18 affects, for which there can be a sudden step effect. For example, a new product that came on to the mobile phone market could cause the price of an existing product that was considered to be inferior to move down very sharply. Therefore, the way in which the Government has drafted the clause and introduced the proposals connected with clause 18 could be open to confusion and controversy with respect to items that undergo sharp movements in price.

George Osborne (Conservative, Tatton)

It will not surprise the Committee that I, too, am concerned about the effects that the measures in the clause will have on a perfectly legitimate business—the mobile phone business—and could bring to an end a vital trade and a huge export earner for the UK mobile phone industry. I am grateful to Dr. Joe Dwek CBE, who has brought his expertise to bear on the issue, and who wrote to all members of the Committee, including the hon. Member for Wolverhampton, South-West, who has now discovered the letter among his pile of correspondence.

According to the proposed legislation, as my hon. Friend the Member for Eddisbury ably demonstrated to the Committee, Customs will presume that a taxable person has ''reasonable grounds to suspect'' that VAT had not or would not be paid on goods supplied. Subsection 77A(6) sets out those reasonable grounds, the first of which is that if the purchase price of a mobile phone was lower than

''the lowest price that might reasonably be expected to be payable for them on the open market''

and the second of which is if the purchase price of a mobile telephone

''was less than the price payable on any previous supply of those goods.''

That is what the Government seek to enact in law.

The objection to those provisions centres on the presumption of ''reasonable grounds to suspect'', because the presumption presumes—if I may put it that way—that a taxable person is aware of facts that a taxable person could never know in a commercial environment, or reasonably be expected to find out. The price paid for products in a free market is often a commercial secret, but the clause presumes that a person might know what that price might be.

We might take as an example the presumption of suspicion where the price of the mobile phones was

''the lowest price that might reasonably be expected to be payable for them on the open market.''

Those of us who are familiar with the mobile phone industry—I suspect that we are all customers of the mobile phone industry—will know that it is very difficult to establish the lowest price payable for any one consignment of mobile phones. The price of

mobile phones, like that of shares, fluctuates on day to day, in accordance with market conditions, and the price depends on the amount of stock—

John McWilliam (Labour, Blaydon)

Order. I can tell the hon. Member for Tatton that the standing order that says that tedious repetition is not to be allowed does not necessarily apply to one hon. Member. If another hon. Member is repeating arguments that have already been made, they can also fall foul of it. The hon. Gentleman should consider this as a yellow card.

George Osborne (Conservative, Tatton)

I hope that if I accumulate enough yellow cards, I will be suspended. I live in hope.

The serious point is that if a single mobile phone manufacturer dumps a large number of mobile phone handsets on to the market on a particular day, the price can vary by as much as £10 per handset. Mobile phones are also subject to the whims of fashion. I have a 17-year-old brother, and every time I go to my parents' house for lunch or dinner he has a new mobile phone. It irritates me and my other brothers—and my parents even more—that he has a new mobile phone every time we see him, but such phones are subject to fashion.

It is simply not possible for the industry to ascertain the open-market value of a mobile phone. It would be fine if Customs were saying that the price had to be so low that it was obviously suspicious. If it were the equivalent of someone saying, ''You can have a Rolls-Royce for £5,000'', anyone would know that something dodgy was going on. If that is the spirit of the Bill, it should be explicit in the wording, but it is not.

There is also the operational presumption that VAT has not been paid, because the telephones were purchased at a price below that paid by any previous purchaser in the supply chain. Again, that presumes a knowledge that is not available in the commercial market. How is someone supposed to know how much the person who supplied them with a consignment of mobile phones paid for it, or how much the person who supplied that person paid for it? That is unknowable in a free market. The industry could therefore fall victim to the clause through no fault of its own.

Finally, there appears to be an incongruity between the Bill and the Customs and Excise consultation document. The Minister will be aware that paragraph 13 of that document states that Customs will deem that a business knew or had reasonable grounds to suspect that VAT on a supply had not or would not be paid if

''it has made a gain or benefit from the suppliers' failure to account for the VAT''.

The concept of gain by the taxable person is not contained in the Bill.

Rob Marris (Labour, Wolverhampton South West)

On a point of order, Mr. McWilliam. Is it in order for the hon. Gentleman to read from a letter without saying that he is doing so, as the hon. Gentleman just did with Dr. Dwek's letter?

John McWilliam (Labour, Blaydon)

It is not in order for hon. Members to read at all, unless they say they are going to quote something specific.

George Osborne (Conservative, Tatton)

I was not reading. The hon. Gentleman will not find a reference to my 17-year-old brother in the letter to which I referred.

Rob Marris rose—

John McWilliam (Labour, Blaydon)

Order. I have explained the situation.

George Osborne (Conservative, Tatton)

I am using hand-written notes. They are not a verbatim account.

There is a serious point. There appears to be an incongruity between the Customs consultation document and the Bill, and I would be grateful if the Minister could address it. The industry has serious concerns about the effects of the clause, and it is right that we bring them to the Committee's attention and ask the Minister to respond.

Michael Jack (Conservative, Fylde)

I shall move away from the rather difficult issue of mobile phones in the time that remains before the Division. The Institute of Indirect Taxation has raised further questions about the practicalities of the clause, and I would be grateful if the Minister could respond.

Paragraph 14 of the institute's submission to the Committee suggests that many people in the supply chain could be held liable for missing unpaid tax. Given the operation of joint and several liability, the institute postulates that everyone in the supply chain could be held liable for the total amount of the missing tax, even though only one person in the supply chain was causing the problem. I would be grateful if the Minister could enlighten us as to how the clause will work in reality.

The institute notes that there are other issues. Paragraph 18 of its submission states that Customs is consulting on what tests it might be reasonable to expect a trader to carry out as part of the operation of the clause. Will the Minister enlighten us on that? We can then try to deal with the concerns of individuals who feel that they may unwittingly be caught up in a supply chain in which VAT will ultimately go unpaid.

Those two important practical questions illustrate once again that some of the major concerns that have been raised about the clause—particularly through the amendments—reflect how these wide-ranging, widely drafted powers will be used in practice.

John McWilliam (Labour, Blaydon)

Order. I think that it would be wrong to call the Minister to speak at this stage because there will shortly be two Divisions in the Chamber. They must be called by 5.6 pm, so I shall suspend the Committee until 5.35 pm.

Sitting suspended.

On Resuming—

David Wilshire (Conservative, Spelthorne)

On a point of order, Mr. McWilliam. When my hon. Friends and I were preparing for the Committee, my hon. Friend the Member for Eddisbury made me aware that he had a major speaking engagement tonight in Cambridge. I took it on myself to say that I could see no reason why we would be here after 5 o'clock, so he did not withdraw

from his engagement. I make no criticism of the Government for that; I did not ask for an undertaking that we would finish by 5 o'clock.

Conscious of the fact that he had moved the amendment, my hon. Friend wished to be here as a matter of courtesy to the Committee. I took it on myself to persuade him to go. If anyone in this Room considers that there is a degree of discourtesy to the Committee, the blame is entirely mine, not my hon. Friend's. I hope that the Committee will accept that.

Dawn Primarolo (Labour, Bristol South)

Further to that point of order, Mr. McWilliam, may I say to the hon. Members for Spelthorne (Mr. Wilshire) and for Eddisbury that I am sure that all Committee members appreciate that these things sometimes occur? The Committee will take no umbrage and understands the pressures on Members' time. I am happy to put on the record our complete understanding and agreement that he is unable to be here at this stage. We shall miss him, but we shall soldier on.

The rest of the debate is in Hansard.