Finance Bill

House of Commons, 1 July 2003.

New Clause 6 — Intangible Fixed Assets: Tax Avoidance Arrangements and Related Parties

Dawn Primarolo (Labour, Bristol South)

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

Last year, after extensive consultation, the Government introduced new tax rules for companies' good will and intangible assets, such as patents, brand names and copyrights, which are vital for a modern, knowledge-based economy. The new rules, which are in schedule 29 of the Finance Act 2002, broadly allow companies to claim tax relief for those assets as they write them down in their accounts. Companies may alternatively elect to treat them as though they were written down at 4 per cent. per annum. The rules are meant to apply only to assets created by or acquired from an unrelated party after 31 March 2002.

There is clear evidence of marketing tax avoidance schemes that are intended to bring assets that already existed on 31 March 2002 into the new regime to claim relief under the alternative 4 per cent. option. We estimate that there are approximately £400 billion to £600 billion of potentially eligible assets. If only a small fraction were brought into the new tax regime, the cost would be enormous, apart from the fact that that was not the intention. The cost would continue for the next 25 years.

The avoidance schemes rely first on the fact that the anti-avoidance rule does not currently apply to the 4 per cent. relief. They then try to exploit a mismatch in the definitions of "related persons" in the intangibles rules and of a group for capital gains purposes. To put it simply, they try to transfer assets in a group for capital gains purposes so that no capital gains tax arises, while arranging matters so that the transfer is between unrelated persons for intangible assets purposes. Thus, the asset is treated as acquired from an unrelated person and can be brought within the new regime.

The new clause would block such schemes by widening the scope of the anti-avoidance rules in schedule 29 of the 2002 Act and by tightening the definition of "related persons". It is a modest and proportionate response to an attempt to exploit a new relief. I underline our determination to act against tax avoidance speedily and firmly.

I commend the new clause to hon. Members and I am happy to respond to any questions.

Stephen O'Brien (Conservative, Eddisbury)

The Paymaster General told us in a written statement on 20 June after the Committee had concluded its proceedings on 17 June that such a new clause would be tabled. It prompts us to ask why the Treasury and the Inland Revenue were unable to formulate it before the Finance Bill was considered or during the Committee's proceedings. That would have been more appropriate than taking up time now.

It is clear that the changes will have an immediate effect and the new clause therefore smacks of panic by the Treasury and the Government. It is part of a transparent and notable theme that will become apparent in our proceedings today, in that it reflects a panic in the Treasury, which has splurged and wasted so much money that it now has to gather much, make every part of the tax system sweat and, above all, change the balance between the rights of the citizen taxpayer and those of the Government. I do not wish to explore that more general theme now because there will opportunities to do that later.

The background note to the new clause is useful and I daresay that it would not have attracted controversy if it had been tabled when we considered the Bill in Committee. Paragraph 22 of the background notes states:

"There is now clear evidence",

to which the Paymaster General referred,

"that companies are seeking to overcome the restrictions in Schedule 29, by exploiting a perceived mismatch between the definition of related persons in the intangibles rules and the definition of a group for capital gains purposes as well as the fact that the anti-avoidance rules in paragraph 111 of Schedule 29 do not extend to cover the optional 4 per cent. scheme."

The new clause therefore tries to remove the mismatch. It has been decided that the provision will not be retrospective—a major issue with which we had frequently to contend in Committee. We may dispute the Government's ability to deploy money or doubt whether they deserve to receive so much taxpayers' money, given the way in which it is deployed—let alone wasted—on behalf of taxpayers.

None the less, because the proposal is not retrospective and because the changes seem to be in line with the consultation—had it been considered in a timely manner in Committee, it might have attracted our broad non-objection—we may on this occasion have to accept that the Government are entitled to introduce it, notwithstanding those reservations.

John Redwood (Conservative, Wokingham)

I have declared my interest in the register. I am rather perplexed by this proposal. I can quite understand why the Government need more and more money—as my hon. Friend the Member for Eddisbury (Mr. O'Brien) rightly said, they are wasting so much of it—but I am not sure that this is the final answer. The Government are legislating at the last minute in a panic, and my hon. Friend is right to ask why a whole year has elapsed since the previous legislation, why nothing was forthcoming if the matter was this urgent, and why nothing was forthcoming when the original Bill was considered in Committee. Why is this proposal being introduced from 20 June, as if huge gaps appeared in the revenue from that date onwards but no such problem had existed previously?

If the Paymaster General is right in saying that she is going to lose revenue unless she makes this particular change, is she not running the risk—if the change is adopted—of losing revenue in other ways following the bolting of this particular stable door? For example, might not many more exchanges of brand assets and other intangibles take place between groups of companies? I believe that it is becoming quite fashionable for certain large companies owning lots of brands to concentrate on their top six or 12 and to sell their other brands. Those other brands may be very advantageous or interesting to competitors or other companies in related fields, which, by dint of acquisition from an external group, could then trigger the advantages of the Finance Act 2002.

Is the Paymaster General worried that this change might simply shift the method of making sensible tax-planning arrangements from transfers of brands and intangibles between companies in the same group, to transactions between different groups of companies? Has she considered that if the closure of this loophole leads to the tax-planning advantages becoming much greater for one system than for the other, the legislation itself might trigger changes in corporate structure? Might it not be better for shareholder value for the boards of companies owning a substantial number of brands to de-merge different companies within the group, and then to transfer brands and assets of an intangible nature afterwards, so that they can get round this particular closing of the loophole?

I fear that the Paymaster General has not come up with the final answer, and that what she is really seeking to do is to repeal schedule 29, but has yet to realise that the insatiable demand for revenue requires that the Government take such action. As a result, she has brought a half-baked half-measure to the House today, and I doubt whether it will be found sufficient. I ask her to address my worry that closing one door simply opens up others that industry and commerce will take advantage of, because of the obvious tax-planning advantages in so doing.

Dawn Primarolo (Labour, Bristol South)

I should point out to the right hon. Member for Wokingham (Mr. Redwood) that this regime was introduced last year with the support of his party, following extensive consultation with business. The facility that it provides within the tax system—a facility that did not exist under his Government or in the first years of this Government—has been widely welcomed.

The right hon. Gentleman asked me the $64,000 question: will tax planners continue to try to tax plan? Well, I expect that they will. As a Minister, the issue for me is this. I have seen marketed specific suggestions and arrangements that would lead to a loss of revenue to the taxpayer, collected on the Government's behalf, in respect of what was introduced last year as essentially a relieving measure. I should point out to the right hon. Gentleman that the proposals are specific and targeted and will deal with those avoidance measures.

John Redwood (Conservative, Wokingham)

I realise that the regime was introduced last year with our agreement; indeed, I welcomed it at the time and thought it an excellent idea. My understanding was that the whole idea was to charge less tax on companies and therefore, from the Treasury's point of view, to lose revenue. My worry this afternoon is that the Government seem to be trying to reverse that. They appear to regret the fact that they lost revenue through a measure that I thought was introduced as a tax relief. My suspicion is that what they are really seeking to do in due course is to scrap the whole thing, which I would regret deeply.

Dawn Primarolo (Labour, Bristol South)

I can assure the right hon. Gentleman that that is not the case. If he looks at the legislation he will discover the specific intended use of the 4 per cent. annual deduction, which, as I explained in my opening remarks, is being abused. We are therefore seeking to prevent that by introducing anti-avoidance measures.

John Bercow (Conservative, Buckingham)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

If I may, I shall first answer the questions from the hon. Member for Eddisbury (Mr. O'Brien). Perhaps I did not hear him correctly, but my understanding from what he said is that the Opposition will not be dividing the House on this issue.

Stephen O'Brien (Conservative, Eddisbury)

indicated assent.

Dawn Primarolo (Labour, Bristol South)

I thank the hon. Gentleman. His first question was why the proposal has been introduced now and not in the original Bill. Regrettably, I was not able to table the new clause in time: the Revenue has only recently received the relevant information, which requires us to act immediately. As he knows—we have discussed this issue before—it was the practice of the previous Government and of other Governments that anti-avoidance legislation becomes effective from the date of its announcement, and that is the practice of this Government.

I know that the hon. Gentleman shares my view about the importance of the issue of retrospection. Whatever the view of schemes introduced before 20 June, there is no retrospection in this proposal. It deals immediately with what we understand to be the perceived problem with the arrangements, in terms of exploiting an aspect of this legislation. This House never intended that the arrangements be used in this way, and I am grateful to him for his support on this issue.

John Bercow (Conservative, Buckingham)

I am very grateful to the Paymaster General for giving way. She is bringing a certain world-weary cynicism to today's exchanges, and I can tell that she is very taxed by, and disappointed by, the incidents of abuse that she believes she has identified. However, for the edification of the House and in order to satisfy the legitimate curiosity of my constituents in Market Hill, Buckingham, this weekend, would she care to identify three examples of especially grave abuse that the new clause is designed to tackle?

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. I should point out to the hon. Gentleman that there was probably a shorter way of putting that point.

Dawn Primarolo (Labour, Bristol South)

I can do better than that—I can explain to the hon. Gentleman, so that he can explain to his constituents, why the new provisions are needed and the otherwise potential loss to the Treasury, to which I referred in my opening remarks. He will surely agree with me that it is better to prevent loss of revenue through speedy action than to sustain such loss in the first place. The provisions are needed because of the way in which the aims of two parts of the legislation seek to be achieved. The provision on the related party is clear and effective where it applies. It gives certainty to the meaning of the law—a meaning that all of us understood, and therefore agreed with, in passing this legislation last year.

However, there are a variety of possible schemes, as I said. I am sure that the hon. Member for Buckingham (Mr. Bercow) is not suggesting that I wait until they are in action. They are designed to refresh old assets, as they are politely called in the trade. The purpose of the legislation was to operate forwards from last year, not backwards from the date of the legislation. Some fresh old assets—if such a term could be used—will not need to use the related-party mismatch. To deal with those, and also to close the door on schemes that have yet to be designed—that is, to anticipate subsequent exploitation—we also need the general cover provided by the wider anti-avoidance rule.

The House is rightly sensitive about the use of wider anti-avoidance rules, and it expects Ministers to be sensitive about that as well, but the rules are needed in this case. By virtue of its less mechanistic approach of testing the main object of the scheme, the provision can apply in a wider range of circumstances. In simple cases, it is easier to test for the group relationship than to examine the various possible objectives of transactions.

From that, I am sure that it is immediately obvious to the hon. Member for Buckingham how much mischief could be made with regard to those two rules, and that he will be able to think up many examples for himself. I commend the new clause to the House.

Question put and agreed to.

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

New Clause 7 — Inheritance Tax: Gifts with Reservation

Dawn Primarolo (Labour, Bristol South)

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

This new clause introduces the changes announced on 20 June to the inheritance tax rules on lifetime gifts. The changes come in response to a recent Court of Appeal decision in the Eversden case. Everyone who has commented on the case has noted the wide-ranging tax-avoidance opportunities that it opens up. Almost all have gone on to say that they were too good to last and were bound to be tackled by early countervailing legislation. I agree with that assessment, and the Government have introduced this clause to achieve it.

I shall set out the relevant factors briefly. The Court of Appeal confirmed that married wealth owners could make what are called gifts with reservations. They are permanently free of the normal tax consequences, so long as the gifts are made to a trust and the trust initially provides an interest in possession to the donor's spouse. That means that married couples could remove assets from their inheritance estates, effectively without limit, by making lifetime gifts into the trust in the way that I have described, without losing any effective ownership. They could do so by using schemes where the interest for the donor's spouse is quite blatantly inserted purely to get the desired tax effect and is predestined to disappear after the shortest decent interval once it has served its purpose.

The schemes were of wide appeal, at least among the minority of people wealthy enough to have prospects of paying inheritance tax. The only essential requirement was that the donor should be married and have the prospect of wealth at death of more than £250,000.

John Redwood (Conservative, Wokingham)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I just want to introduce the new clause, after which the right hon. Gentleman will of course want to speak. I shall be happy to respond to his points.

I remind the House that we are talking about the inheritance tax rules that were introduced in 1986, under the previous Conservative Government, and about the ways that people try to get around them.

The schemes could be used for all sorts of assets at all levels of wealth. They could allow married couples to remove the family home from inheritance charge on death, yet to continue to live in it during their lifetimes. That aspect has received much attention in the press, and among some of those who market these schemes.

However, the schemes could be used equally well to shelter all sorts of other assets, including—notably—financial assets wrapped up in the form of an insurance bond. As for the amounts involved, the sums become a little more complicated if the couple's total wealth is significantly more than £1 million or so. Although executing one of these schemes at that level would not necessarily remove a couple from inheritance tax forever, it would remain a very attractive proposition.

The Government are not stopping, as some have suggested, an innocent piece of self-help for couples with modest homes who might be taken into inheritance tax by inflation in property prices. Even if that were true, tolerating tax avoidance would not be a sensible way to deal with the issue of house prices. In reality, however, the potential avoidance goes much wider, as I said. It goes all the way up the scale of wealth, undermining all the revenue from those who pay inheritance tax and account for the lion's share of the total yield. That is not fair to the wider body of taxpayers, nor to the balance of prospective inheritance tax payers, who cannot afford this sort of avoidance, or who do not engage in it.

Following on from the Court of Appeal ruling, it is essential that we stop now any possible future loss to the Exchequer. That is what the clause seeks to achieve, operational from 20 June.

Howard Flight (Conservative, Arundel and South Downs)

As happened with new clause 6, the Government are introducing this significant piece of legislation on Report. No doubt they will give the excuse that they wanted to hear the ruling in the Eversden case, but I submit that, had they wished to make changes as radical as the ones that they propose, they could easily have addressed the matter in the body of the Bill.

The use of defeasible life interest trusts in relation to homes has not been a matter of tax avoidance, as the Paymaster General suggested. It has failed her own test, which she set out in Committee, regarding the difference between accepted tax planning and tax avoidance. It has been widely known about, and the law has provided for inheritance tax gifts with reservations to be made.

Therefore, the new clause introduces what is, essentially, a new tax. The Paymaster General may be concerned that what has been used purely to protect the family could be used in other areas, but so far the scheme has been used solely in respect of family homes. Indeed, her own comments highlighted the problems described to me by constituents.

As we warned in the debate on last year's Finance Bill, the problem is based in particular in the rise in home values in the south of England. The Government have done and said nothing to deal with the knock-on problems that that creates for inheritance tax. I suggest that it is very much part of British culture for people to want to be able to hand on to their children the house that they own, or the value that they have built up in it. In the south of England in particular, there are a growing number of reasonably ordinary properties whose value is in excess of the inheritance tax threshold. The number has been estimated at between 1.5 million and 2 million properties. To date, the specific defeasible life interest trust has been used by people to gift their home to their children while retaining a right for the surviving spouse to live there until death. That is hardly a wicked thing to do; most families presented with the problem would want to do that.

John Bercow (Conservative, Buckingham)

Given the need to make this debate on new clause 7 intelligible to the wider public, does my hon. Friend agree that the Paymaster General has a basic responsibility to tell us in broad terms the sort of revenue to the Exchequer that the new clause would deliver?

Howard Flight (Conservative, Arundel and South Downs)

Yes, but she advised the press that the measure was designed to protect a significant part of the £2.4 billion per annum inheritance tax revenue. I suspect that it will do no such thing. One of our concerns, of which the Paymaster General will be aware, is that a likely reaction to not being able to achieve what most people want—what more and more couples who manage to stay together and bring up their children want—is a boost to the equity release market, in which older people can sell all or part of their homes and retain the right to stay in them, thus releasing the cash value from their homes and then donating the cash released to their children.

There are inherent dangers in such schemes, which the Government are unwilling to regulate. With so many people's pensions wrecked by the actions of the Government, many people are looking to those schemes for a source of income in old age.

John Redwood (Conservative, Wokingham)

I detected a moral judgment in the Paymaster General's statement. How does my hon. Friend think the morality of such schemes compares with the morality of using offshore trusts in the creative and perfectly legal way that a number of former and present Government Ministers have done? As one who thinks that to be perfectly reasonable, I ask my hon. Friend how he feels the relative moral charge sheet rests from the Government's point of view.

Howard Flight (Conservative, Arundel and South Downs)

My right hon. Friend has made his point. The middle England vote that the Labour party has been keen to retain is largely made up of citizens who believe that it is natural to want to hand on their house or its value to their children. That is much more straightforward than some of the fancy antics that certain past Labour Ministers got up to.

New clause 7 will turn out to have unintended consequences, and the Bill is full of many such examples. I referred earlier to the fact that it is extremely unlikely to achieve the bolstering of inheritance tax revenues that the Paymaster General is expecting.

The Paymaster General's letter refers to the fact that the Government are pursuing an application for leave to appeal to the Lords on the question of how gifts already made should be taxed. In other words, the Government are hoping to introduce retrospection; there would be no point in pursuing such an appeal were that not so. Specifically, the Government are seeking to get a ruling that the gifts of family homes made by older people who have entered into defeasible trusts will be brought back within the inheritance tax net.

Such an initiative will be seen by ordinary middle-class voters as a means of picking on them as they carry out a straightforward action in the interests of their children, which they feel entitled to do. I have to suggest to the Government that it is reasonably unlikely that they will win, but there seems to be an element of spite in seeking to introduce a retrospective element to this new tax.

We are not going to burn up yet more time that we do not have on a vote that we know we cannot win, but we leave the Government to reap their own bitter harvest of the growing hostility of home owners in middle England, arising from a measure that will be seen as spiteful and which will not be effective in raising inheritance tax revenue. It is understood that there is a case for preventing the use of such trusts in wider financial affairs, but the Government's approach to the fundamental wish of people to hand on their family home goes against the family and against British instincts.

David Laws (Liberal Democrat, Yeovil)

My hon. Friend the Member for Torridge and West Devon (Mr. Burnett) anticipated this debate in Committee on 17 June when he asked the Paymaster General whether she would introduce proposals at any stage on inheritance tax, to which she replied:

"I will certainly keep him informed of developments in due course."

On 20 June, we had the announcement of this change. I commend my hon. Friend on his precipitation and wisdom in raising the issue, and for anticipating the thrust of the new clause when he said during the same exchange that inheritance tax

"is a tax levied on those who do not have sufficient money or assets to avoid it legitimately."—[Official Report, Standing Committee B, 17 June 2003; c. 613.]

That is a growing perception of people in and beyond the tax world: that, increasingly, people who have large estates and can afford good tax accountants can get round paying inheritance tax altogether, whereas a much wider group of people are being absorbed into the inheritance tax net, not least as a result of the increase in property prices in the past few years.

We welcome the fact that the Government are addressing some of those loopholes in the new clause, as those steps ensure that inheritance tax does not simply become a tax that falls on those who are not wealthy enough to afford good tax advice, but ensure that the purpose of inheritance tax is maintained and that the tax that we anticipate collecting is collected as far as possible.

The hon. Member for Arundel and South Downs (Mr. Flight) raised a number of legitimate issues in relation to inheritance tax, but did not state whether the Conservative party's former desire to abolish it altogether still holds. He raised a number of issues that flow from the avoidance of inheritance tax, and not least from the increase in property prices in the last few years.

Before the 1997 election the debate—in my case, it was not conducted from within this House—was about a proposal by the then Prime Minister to abolish inheritance tax. At that time, the then Chancellor of the Exchequer was keen to emphasise that inheritance tax and capital gains tax were minority taxes paid by a small proportion of the population. I suspect that we were talking about tens of thousands of people in 1997. The criticism from the Labour party at the time was that the abolition of such taxes would simply benefit a small number of people.

I suspect that the Paymaster General is aware that concern about inheritance tax is now rising among a much broader proportion of the population and it may be that, in future, she will wish to address that concern in an amendment, a new clause or in a future Finance Bill. Property prices over the past few years have increased to such an extent that people who could by no means be considered wealthy have been caught in the inheritance tax net.

John Burnett (Liberal Democrat, Torridge and West Devon)

Does my hon. Friend agree that with the dive in the value of people's pensions, their principal private residence is often the only thing they have left—especially if they are self-employed— to keep them going in old age?

David Laws (Liberal Democrat, Yeovil)

My hon. Friend is right to identify the fact that many elderly people's primary assets are the properties in which they live. Other financial assets, including shares, may have depreciated in value as a consequence of recent changes.

The new clause is welcome, but in future it would be sensible for the Paymaster General to consider the wider issues of inheritance tax, particularly the number of people who will be pulled over the threshold in the next few years. For the reasons provided by the hon. Member for Arundel and South Downs, she should also consider reviewing that tax policy, particularly in respect of the potential to shift tax avoidance from one vehicle—we hope that that loophole has been closed by the Government—into others such as equity release schemes in which people can, through perfectly legitimate and legal tax-planning devices, seek to undermine the intention behind Government tax policy and tax legislation.

Other issues that should be considered as part of any review of inheritance tax include not only the implications of rising property prices and avoidance techniques such as equity release schemes, but the wider issue of whether it is sensible to levy inheritance tax on estates as currently operated. In future, the Government should consider levying inheritance tax differently on recipients of the assets rather than on the estate itself. That might encourage people to spread wealth and provide incentives for people who may not be paying the upper rate of 40 per cent. that is applied to inheritance tax. If the Paymaster General cannot respond categorically to all those points, I hope that she will at least remember the fact that it may be worth reviewing this form of tax in the future.

John Redwood (Conservative, Wokingham)

I am glad that the hon. Member for Yeovil (Mr. Laws) reminded the House of the excellent Conservative policy of getting rid of inheritance tax, and I trust that when we reach manifesto time, it will be one of the strong runners.

David Laws (Liberal Democrat, Yeovil)

I accept that the right hon. Gentleman is not currently a member of the Conservative shadow Cabinet, but he will receive all the briefing papers on Conservative tax policy. Will he tell us whether it remains Conservative tax policy to abolish inheritance tax?

John Redwood (Conservative, Wokingham)

The position is well known in the House—although I fear that we might be deviating a little from the new clause, Mr. Deputy Speaker. The Conservative party will come forward with tax proposals nearer the time of the election, when it is clearer how much money the Government are wasting and how much necessary expenditure a future Conservative Government will need to incur. Many demands will be made to the shadow Cabinet of the day to offer all sorts of tax relief and tax reductions after the present Government's tax binge, which we are debating this afternoon. The Government are finding more and more ways of taking money off people, so that they can waste it on schemes such as "Notwork Rail"—with a £15 billion loss so far, and much more to come as the dreadful nationalisation policies get under way.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. May I remind the right hon. Gentleman not to broaden the debate too far?

John Redwood (Conservative, Wokingham)

You are right, Mr. Deputy Speaker. I am naughty and sorry, so let me return to the point at issue—inheritance tax. Conservative Members approach the subject from the proposition that as a wealth tax it is not a very desirable tax. It does not seem pleasant to tax people even in death who have been taxed quite enough during their lifetime while they were earning and saving the money in the first place.

John Burnett (Liberal Democrat, Torridge and West Devon)

It is a lifetime tax as well.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. I must tell the hon. Gentleman that he should know the procedures of the House by now, and that if he wishes to intervene, he must do so with the permission of the right hon. Gentleman who has the Floor.

John Redwood (Conservative, Wokingham)

I am grateful once again for your wise guidance, Mr. Deputy Speaker.

I wish to take up with the Paymaster General her extraordinary statement that inheritance tax is moral and fair, so that anyone who tries to pass on their primary residence to their children is somehow guilty of an immoral act against the state that should be stopped by the imposition of the tax. People work extremely hard over many years in this country to buy their primary residence. They take great pride in their ownership of it and they want to be able to pass it on to their child or children in death. I see nothing wrong in that: it is an excellent expectation and an important part of the property-owning democracy from which we all benefit. I therefore take exception to the idea that it is somehow against the rules or unsporting. The Paymaster General has not understood how far house prices have risen and how even modest dwellings throughout the south and in parts of the north and midlands are now well above the tax threshold for inheritance tax.

George Howarth (Labour, Knowsley North and Sefton East)

I am listening carefully in an attempt to understand the logic of the right hon. Gentleman's argument. To follow it a little further, if someone dies with a property in negative equity—in other words, the amount still owed on it is greater than its value—does the right hon. Gentleman believe that the child who inherits the property should be charged with making up the difference between what is owed and what the property is worth?

John Redwood (Conservative, Wokingham)

No, I do not. I do not think that children should have the sins of their parents visited on them, and it would be a foolish bank or building society that allowed circumstances to develop in that way without having any other security or guarantee. I strongly urge banks and building societies to lend only a reasonable proportion of a property to protect themselves in the likely event of the Government creating a boom-and-bust in housing to go along with their boom-and-bust in telecommunications, manufacturing and pensions, which we have seen to our cost in recent years. My worry about the measures before us is just that—that the Government are now targeting the housing market with a view to getting prices down, but that they may be too successful and produce exactly the sort of problems to which the hon. Gentleman referred. That will not be to his political advantage. On the specific matter that he raised, children should not have to make good those payments unless they were party to the transaction and offered guarantees or pledges of their own free will when the agreement was originally designed.

I urge the House to get the Paymaster General to think again about this matter. She is being mean-minded and I do not believe that the schemes that we are talking about are immoral or unreasonable. They meet a perfectly sensible need in the marketplace for people to plan their tax affairs and pass on some of the assets that they have worked hard to accumulate over the years. To answer my own intervention on my hon. Friend the Member for Arundel and South Downs (Mr. Flight), I should have thought that those schemes are less immoral, in the Government's own terms, than some elaborate offshore schemes. I take no exception to offshore schemes, which can be sensible and are usually perfectly legal, but it is odd that a Government who set such store by stopping any tax loopholes, as they call it, but who allow in their ranks Ministers who freely use offshore schemes, should then say that much poorer people struggling to buy a semi-detached house in an expensive part of the country are not allowed to use a perfectly reasonable scheme to pass that on.

I hope that the Paymaster General has realised how high house prices have risen in Bristol recently, because many of her constituents will be affected. I can assure her that in Wokingham, where people are not rich but work hard and have to pay a lot of money to live because of the cost of housing and the cost of living, many of my constituents will be caught by inheritance tax, yet no one could say that they were rich in the way that some of the Paymaster General's right hon. and hon. Friends in the Government are rich. I hope that the right hon. Lady will withdraw this petty and mean-minded new clause.

Jonathan Djanogly (Conservative, Huntingdon)

I support the views of my right hon. Friend. The Paymaster General gave an accurate but complicated explanation of a position that affects many thousands of people in this country and relates to the income and estates of many.

I should like to describe the position in plain English. Grandma gifts her house to her son, who decides to live with granny and look after her. As a result, grandma has not made the gift for tax purposes, it stays in her estate, and everyone except the taxman is the worse for it. That seems utterly ridiculous. To avoid the tax, the family has to split into two homes, breaking up the family unit into two houses. Granny will probably be looked after by social services, the cost of which will be more than the tax paid out in the first place. If granny happens to live in the south of England, she is taxed for being a southerner. House prices are more expensive in the south, so the tax will be greater.

Indeed, at a time when we need to share our houses more and should be keeping family units together by encouraging people to stay with their families even if only because—there are lots of other good reasons too—we are short of houses, particularly in the south, we are in fact encouraging the break-up of families for no good reason. This tax, particularly as it affects homes, is unfair and senseless and should be abolished instead of being patched up by this lousy new clause.

John Bercow (Conservative, Buckingham)

My hon. Friend the Member for Huntingdon (Mr. Djanogly) movingly describes the plight of over-taxed granny under the Labour Government, and he is entirely correct. I do not myself have a granny, but I feel sure that if I did, she would strongly oppose new clause 7 and would have good reasons to justify her position.

I was rather taken aback both by the fact of the introduction of the new clause and the manner in which the Paymaster General sought to commend it to the House. It seemed obvious that there was considerable irritation in the Inland Revenue and in Her Majesty's Treasury about the alleged sauce—I use that word advisedly—of taxpayers who had sought to avoid or minimise a burden by a contrivance that was perfectly legitimate under the law. In other words, Ministers are upset because they have not been able to plan, with Kantian perfect information, for every scenario. There are eventualities in which citizens are able either entirely to avoid a burden or to keep it to a much lower level than the Government would favour.

I say three cheers to that, and I confess that one reason—probably the principal reason—why I oppose new clause 7 is that I oppose the whole monstrous apparatus of inheritance tax. I do not seek to argue my case according to the intricacies of the tax or the arguments about revenue raised or forgone. My view is that it is fundamentally immoral and unethical.

My only criticism of my right hon. Friend the Member for Wokingham (Mr. Redwood)—I scarcely volunteer criticism of him on any occasion—is that he was guilty of a certain understatement of his case. If he had said what he said a little more forcefully—perhaps with a degree of crudity that was lacking from his presentation—his stance on this important matter would be all the clearer.

I am glad that the hon. Member for Yeovil (Mr. Laws) urged something of a wider review and debate. He was justified in doing so. He challenged my party—without giving any particular idea of the stance of the Liberal Democrats—to say where we stood overall on inheritance tax. I am against it, and I want to scrap it.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. I understand the temptation felt by the hon. Member for Buckingham (Mr. Bercow), but the hon. Member for Yeovil (Mr. Laws) began to lead us astray on this matter, and I must remind the House that we are dealing not with inheritance tax as a whole but with new clause 7.

John Bercow (Conservative, Buckingham)

You know, Mr. Deputy Speaker, that I never knowingly behave badly. My poor conduct is always entirely inadvertent, and there is nothing better than to be brought to book by your kindly but authoritative ministrations. That is what has happened to me, and I make no protest about it.

On behalf of my constituents, many of whom have already raised their anxieties about new clause 7—others can be confidently expected to do so on Saturday in Market Hill—I inveigh in the strongest possible terms against new clause 7. If people are using the device of gifts without reservation to circumvent the frankly sinister and oppressive designs of this tax-raising, pocket-plundering, petty-minded, socialistic-oriented Government, I say three cheers to them. Unite, and fight new clause 7.

John Baron (Conservative, Billericay)

I wish to raise a couple of points with the Paymaster General. The ramifications of any new clause—indeed any legislation—need to be properly thought through. What thought has been given to the effect that new clause 7 will have on the equity release market? There is little doubt in my mind—my hon. Friend the Member for Arundel and South Downs (Mr. Flight) briefly touched on the point—that it will lead to a dramatic increase in equity release mortgages, schemes and loans.

We all know that the industry got off to a bad start not so long ago, with many sharks operating in the market. Has any consideration been given to whether the market should be regulated to ensure, at the least, that fair play is done and seen to be done? The schemes will be considered by many vulnerable people in the autumn of their years who are thinking about how best to release equity from what, given that the equity markets have not done so well recently, is probably their main investment. What are the Government going to do to ensure that their nudging forward of the equity release market—the interest in the market will be quite significantly increased in some instances—will not mean that vulnerable people will be taken advantage of, particularly given that many of them may live on their own and need good advice? The industry needs to be properly run and regulated, and I ask the Paymaster General to tell us her thoughts about that. What action do the Government intend to take to ensure that there is fair play in the market?

Secondly, I want to discuss the idea that it is somehow perfectly immoral to avoid this tax. None of us wants to see legitimate tax avoided, but I think that the Paymaster General has completely underestimated the extent to which house prices have increased. My hon. Friend the Member for Arundel and South Downs mentioned that between 1.5 million and 2 million houses fall into the inheritance tax bracket. Statistics and studies exist that suggest that the figure is greater than that. No one really knows. It is completely wrong, however, to suggest that when people who have paid tax throughout their lives and simply want to hand on their assets to their children, it would be somehow immoral not to tax them. The Government need to re-examine their thinking. The new clause would tighten matters even further. It is, in effect, a new tax, whatever the Paymaster General may say.

John Bercow (Conservative, Buckingham)

My hon. Friend is aiding our deliberations. In referring, as the Paymaster General did, to people who are rich enough to pay inheritance tax, was she including in her categorisation every member of the Cabinet and most members of the Government?

John Baron (Conservative, Billericay)

I completely agree with that. The Paymaster General would also include in that threshold a large swathe of teachers, nurses and all those who work in public service, particularly in the south of England. I should appreciate her deliberations on whether that is right.

My hon. Friend the Member for Huntingdon (Mr. Djanogly) made the excellent point that not enough thought has been given to the effect that the new clause may have on the break-up of families and homes. The Government are in complete crisis with regard to the care home sector, in which something like 45,000 to 50,000 beds have been lost because of the bureaucracy and regulation that they have introduced. This measure will not help that situation. No one knows the exact figures or the extent, but it could lead to a premature break-up of a home simply because the arrangement will no longer be available whereby a parent—an elderly person, perhaps—could live within the home that had been gifted. That may make the premature selling of the house to realise assets a reality. I hope that the Government have given that some thought, and I look forward to hearing from the Paymaster General.

Dawn Primarolo (Labour, Bristol South)

The new clause applies to an avoidance scheme used by married couples. It has nothing to do with grannies, grandsons or children; it specifically deals with the exploitation of the inheritance tax rules, especially by married couples.

Jonathan Djanogly (Conservative, Huntingdon)

Will the right hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

If the hon. Gentleman will wait, I shall be happy to give way in a moment, but we need to set out a few facts clearly.

We are not discussing whether the Conservative Opposition are in favour of inheritance tax, although I should be delighted to have such a debate. Despite the fact that inheritance tax was introduced by their Government—

Jonathan Djanogly (Conservative, Huntingdon)

Will the right hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

No. I will give way to the hon. Gentleman in a moment, but I want to make a few points so that we can be clear about what we are discussing, rather than what Opposition Members think—

Jonathan Djanogly (Conservative, Huntingdon)

On a point of order, Mr. Deputy Speaker. It is right to point out that the provision may relate to grannies and that husbands and wives—

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. I must tell the hon. Gentleman reprovingly that he has been a Member of this place long enough to know the difference between a point of debate and a point of order. That was not a point of order.

May I remind the Minister that I had already suggested that discussion of inheritance tax in principle is outwith the scope of the new clause?

Dawn Primarolo (Labour, Bristol South)

I agree, Mr. Deputy Speaker: whether individual hon. Members like or dislike inheritance tax is not the subject of the debate. The subject of the debate is whether tax rules that were introduced in 1986 and have been variously amended should fairly apply to all taxpayers. Some taxpayers comply with their tax obligations, so the Government have responsibilities when others find ways around their compliance obligations.

The point is whether the Government of the day should be required to ensure fairness between taxpayers. I understand the issue in terms of fairness. Tax rules should apply fairly to taxpayers who are subject to them and it is the Government's duty to ensure that that happens.

Howard Flight (Conservative, Arundel and South Downs)

rose—

Dawn Primarolo (Labour, Bristol South)

I shall give way to the hon. Gentleman, but then I shall deal with house prices, equity release schemes and some of the other points that have been made.

Howard Flight (Conservative, Arundel and South Downs)

Will the Minister confirm that, putting it in simple language, the provision is about, for example, a couple who, hoping that they will both live for another seven years, give their house worth £400,000 to their children, but set up a trust so that whoever outlives the other is still able to live in the house until they die? I think that describes the main circumstances, and no one would regard that as either cheating the system or avoidance.

Dawn Primarolo (Labour, Bristol South)

There are many sections in the inheritance tax rules; one is called "Gifts with Reservations". The Court of Appeal decision in the Eversden case paved the way for artificial schemes that enable married couples to put their assets beyond inheritance tax estates while retaining the enjoyment of them for their lifetime. We want to correct that. As I said, the new clause is specifically about that issue. Opposition Members are getting too worked up. Although I understand the views of Opposition Members about other aspects of inheritance tax, we are discussing only whether a set of rules should apply to all equally.

David Laws (Liberal Democrat, Yeovil)

rose—

Dawn Primarolo (Labour, Bristol South)

I want make a point about property prices and the inheritance tax threshold. If that does not answer the hon. Gentleman's point, I shall be more than happy to give way to him—as always.

The inheritance tax threshold is still about twice the average UK house price. Only about 5 per cent. of estates will pay inheritance tax this year. However, let us look at the question the other way round: how much has the inheritance tax threshold moved since its introduction in 1986, and what has happened to house prices in that period?

The latest statistics, for quarter one, show that house prices have risen since 1986 at much the same rate as the threshold—about 250 per cent. The UK average house price is about £140,000. Even in London and the south-east, prices are still below the threshold. The figure for Greater London is £215,000 and for the south-east, excluding London, it is £190,000. The rules are consistent with the movement of the threshold since its introduction in 1986 and its reflection in house prices. The question of property prices is not directly relevant to the new clause; the point at stake is that the movement of the threshold is keeping pace with prices.

David Laws (Liberal Democrat, Yeovil)

The Paymaster General said that she estimates that about 5 per cent. of estates are above the threshold and will be caught by inheritance tax. Will she tell us how that has changed over the last 10 years? What is the size of the increase?

Dawn Primarolo (Labour, Bristol South)

I have seen the figure, but I apologise to the hon. Gentleman for being unable to give it to him immediately. I shall be happy to send him the figures. By estates, I mean the number liable to pay inheritance tax, which may not necessarily be on property. Significant numbers of people pay inheritance tax that is not on property. Currently, about 29,000 estates are in the category; movement is more or less static, although I cannot remember the exact figure.

John Bercow (Conservative, Buckingham)

The Government tend to increase thresholds in line with inflation, whereas the overall rise in property prices over a period is appreciably greater than that. I hope that the Paymaster General will reflect on that point in further deliberations. However, if the right hon. Lady's main criticism of Opposition Members is that we have identified the wrong member of the family tree, and that it is not in fact granny, but mummy, daddy, hubby and wife who are being clobbered, that is cold comfort.

Dawn Primarolo (Labour, Bristol South)

May I tell the hon. Member for Yeovil (Mr. Laws) that, if my memory serves me right, the number in the threshold rose by about 3,000 last year—more than indexation or the rate of inflation would have required? It is not unreasonable to look back over a period and to take 1986 as the base year.

John Baron (Conservative, Billericay)

rose—

Dawn Primarolo (Labour, Bristol South)

May I answer the hon. Member for Buckingham (Mr. Bercow) before moving on? On the point that he makes about the application of the new clause, I was simply seeking to help Conservative Members. I understand that they wish to abolish inheritance tax, and I look forward to finding out where the £2.4 billion that the Government currently raise from inheritance tax would come from. The hon. Gentleman will want to question many aspects, but I was seeking to correct Conservative Members by saying that the new clause does not deal with those issues; it specifically and narrowly deals with issues that arose from a particular case involving married couples.

John Baron (Conservative, Billericay)

The Paymaster General is being slightly selective in her figures. It is all very well to go back to 1986, but I am sure that she will accept that the period included one of the biggest house price falls in recent memory. House prices fell from their peak in about 1988 and bottomed in 1994–95, after which they picked up slowly, so such a comparison does not give the complete picture. I hope that such a price crash will not happen again. Recent history—the past eight or nine years—shows that inheritance tax thresholds lagged far behind the rise in house prices.

Dawn Primarolo (Labour, Bristol South)

The facts speak for themselves in respect of the average house price throughout the country and in specific regions where house prices are much higher. The hon. Gentleman should consider the role of the Conservative party when in office in establishing the inheritance tax threshold. As I have demonstrated, the increase in the threshold has kept pace with the increase in house prices, but it is not the role of inheritance tax to help to regulate house prices; its role is fairly to tax assets according to rules that operate for all the people who are caught by them.

John Burnett (Liberal Democrat, Torridge and West Devon)

The Paymaster General talks about the rules being interpreted fairly, but the capital taxes office sometimes interprets the rules in a draconian manner. I ask her to give some thought to such matters because, sometimes, entirely innocent transactions are caught—for example, the outright gift of a dwelling by parents to their children, where the parents move out, but move back two years later to be nursed by the children. Surely the capital taxes office should not apply the reversion of benefit rules, which will be amended by the new clause today, in such cases?

Dawn Primarolo (Labour, Bristol South)

I will certainly reflect on the point, but I am trying to explain the new clause and its narrow application to married couples.

I wish to make two final points, the first of which relates to what the hon. Member for Billericay (Mr. Baron) said about home reversion plans. He may not know this, but his hon. Friend the hon. Member for Eddisbury (Mr. O'Brien) is aware—we debated it in a statutory instrument Committee only a few days ago in relation to the transfer to the Financial Services Authority of the regulation of mortgages and other financial products—that the Chief Secretary to the Treasury announced that a consultation paper, in which the options for regulating the sale of home reversion schemes would be examined, would be published this autumn.

Various aspects of the home reversion market will be considered, as mortgage-backed equity release schemes will fall within the scope of the FSA. So the answer to the hon. Gentleman's question is, yes, the Government are considering those wider points, and we enter the consultation with an open mind to hear what the industry has to say about the important role of such products and what their future may be. That issue was also raised the hon. Member for Arundel and South Downs (Mr. Flight) and the hon. Member for Eddisbury, who takes a particular interest in it and is knowledgeable about it.

John Baron (Conservative, Billericay)

May I urge on the Paymaster General the importance of the issue and the urgency of the situation? If one believes the latest figures, there is no doubt that the whole industry is growing very rapidly, as is the practice of using equity release schemes. Often, as we all know, very vulnerable people are involved, so I ask her to ensure that the Government put their full weight behind the issue and that it is looked at very quickly indeed.

Dawn Primarolo (Labour, Bristol South)

If the hon. Gentleman scrutinises the record of debates in the Statutory Instrument Committee he will see that the new FSA regulatory regime was discussed. Hon. Members on both sides of the Committee agreed that the Government must ensure that future regulation of this important and complex area is correct. We recognise the importance of the issue, so to legislate in haste may not be the best way forward. The Chief Secretary to the Treasury issued more details in a press release on 5 June, and I am sure that the hon. Gentleman will be interested in reading it.

The hon. Member for Arundel and South Downs referred to the fact that the new clause will come into force only from June 2003. The tax-effectiveness of earlier Eversden-type schemes is still dependent on the courts' final view of whether schemes work under the old law. The House of Lords will decide whether to agree to a further appeal, but my advice is that, although the Inland Revenue is confident about the interpretation of the old law it believes that enough tax is at stake to lead us to act now to prevent any subsequent arrangements from being made. However, pre-June 2003 issues are clearly matters for the courts.

John Baron (Conservative, Billericay)

I wish to return to the potential for an increase in the break-up of homes. Has any assessment been made of whether the new clause will have any tangible effect on the tendency to break up or disperse family units, or certainly family homes, as the Government would have to pick up the cost of that?

Dawn Primarolo (Labour, Bristol South)

Again, I remind the hon. Gentleman that we are dealing with plans, which are at an early stage, to provide lifetime protection from any inheritance tax on those estates.

I understand that such plans are made considerably in advance of any discussion or requirement regarding the vulnerabilities that might exist in the household in future. The proposals are long planned and for the lifetime, as I have suggested. They are an attempt to remove from inheritance tax rather than a response to specific circumstances. The measure on specific avoidance by married couples is narrow. It is sensible and it is fair to taxpayers who comply with their obligations. That is the aim of the new clause and I commend it to the House.

Question put and agreed to.

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

New Clause 1 — Tax Credits for Individual Savings Accounts and Personal Equity Plans

Stephen O'Brien (Conservative, Eddisbury)

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

This year's Red Book stated:

"Individual Savings Accounts . . . are the Government's primary vehicle for tax-advantaged saving outside pensions."

However, the Finance Bill contains no provisions to prevent the 10 per cent. tax credit for individual savings account and personal equity plan dividends from being removed after April 2004. As we well know, the removal of the dividend tax credit for pensions—worth £5 billion a year in tax—has resulted in typical personal pension savers retiring on half what they would have received only five years ago.

It was not surprising that the director general of the PEP and ISA Managers Association and the director general of the Investment Management Association wrote to the Chancellor of the Exchequer on 4 June. The letter said:

"We were highly disappointed that there was no announcement in the Budget that the 10 per cent. dividend tax credit for stocks and shares ISAs would be extended beyond April 2004.

Our research, which we have shared with the Financial Secretary, among consumers and ISA providers clearly demonstrates that abolishing the dividend tax credit will significantly discourage, rather than encourage, equity based savings through ISAs. In the present investment climate, this is precisely the wrong incentive to be giving people needing to build their long-term savings."

The letter continues:

"In excess of 12 million ISA and PEP account holders will be disadvantaged, not to mention those potential savers that have already been dissuaded by the looming abolition of the tax credit, as ISAs will, according to the FSA, lose their tax-free status in 2004."

The letter urges the Government, at this late stage, to consider approving new clause 1 and says that it is important

"to extend the life of the tax credit and thereby the sustainability of Stocks and Shares ISAs for other than high rate tax payers."

I shall illustrate why we find ourselves in such an extraordinary situation. The Government are long on rhetoric by saying, "For the many, not for the few", but they are deliberately taking action to avoid prolonging an important tax credit with the intended effect—they cannot pretend that it is unintentional—of preferring the few higher rate taxpayers rather than the many, despite the fact that there is such a blight on all income groups' savings.

A PIMA press release was published on the same date as the letter and said:

"However, this figure of 12 million"—

people—

"is not taking into account the number of potential savers that have already been dissuaded . . . Recent evidence shows that stocks and shares ISA Subscriptions have slumped by 40 per cent. in April 2003 compared to the same period last year, in spite of a surge in investment in bonds.

By removing the tax credit, PIMA research has shown that the Chancellor will significantly discourage rather than encourage, equity based savings through ISAs."

Mr. Tony Vine-Lott, the director general of PIMA, said:

"PIMA will continue to lobby for this recommendation throughout the passage of the Finance Bill. 12 million accounts is a significant amount and the Chancellor needs to recognise that the removal of the tax credit will do more harm than good for consumers and the savings industry alike". 2.45 pm

I have examined carefully the representations that we received, which happens with all representations received by the Opposition. It is important for those who observe our proceedings to have the opportunity to submit representations and for them to be reflected. I have given the comments careful thought. As hon. Members will note from the amendment paper, I, like several of my colleagues, have a registered interest, which I put on the record. It is no surprise that many of us hold PEPs and ISAs as part of our best efforts to save during our earning lifetime. We try to be responsible so that we will not be dependent on the state when we are no longer in a position to earn.

A representation that we received said that because

"the Government have promised to abolish the 10 per cent. tax credit that ISAs receive on dividend distributions . . . investment in Equity ISAs will only be attractive to higher rate taxpayers."

Perhaps the easiest way to explain the situation is to go through an example. Like always, it would be easier to use a slide-show presentation while dealing with figures, but as I cannot do that, I shall have a go at outlining my point.

Let us consider a basic rate taxpayer who receives a cash dividend from a company—outside an ISA—of £90. Under the current rules, which are familiar to most people, a notional tax credit of a ninth—£10—is added, which gives a notional gross dividend of £100. The situation is exactly the same for a higher rate taxpayer: £90 plus £10 equals £100. The basic rate taxpayer is taxed at 10 per cent., which means that there is a 10 per cent. deduction. The £10 tax credit is deducted from that, which effectively means that there is no tax liability. The cash dividend was £90, there was a notional tax credit of £10 and £10 of tax was deducted, so we return to a situation of no tax and £90 cash.

The situation is different for a higher rate taxpayer. After receiving a notional gross dividend of £100 made up of a cash dividend of £90 and a notional tax credit of £10, a higher rate taxpayer pays tax at a rate of 32.5 per cent. Therefore, he or she is liable to £32.50 of tax on the £100. The £10 tax credit is taken off that—although it is notional, it is removed—so the tax liability on a higher rate taxpayer is £22.50, meaning that the cash receipt is not the £90 received by a basic rate taxpayer, but £67.50.

Why is that important? In a basic rate taxpayer's equity or stocks and shares ISA, a cash dividend of £90 attracts a notional tax credit of £10, which adds up to £100. Of course, there would be a cash equivalent of £90. The situation is exactly the same as before: there is £90 real cash and lots of 10 per cents. flow all over the place for the purposes of the tax regime, meaning that basic rate taxpayers end up with £90 in their hands. A higher rate taxpayer also ends up with £90.

Let us consider what will happen after 2004 when the notional tax credit is removed from equity ISAs. The basic rate taxpayer would receive £90 cash but not receive the tax credit, and thus end up with £90 rather than £100, which was the case with the notional tax credit. The tax position would be reduced to £90, yet the cash outside an ISA would also be £90. What is the incentive for the basic rate taxpayer if the measure is removed? A higher rate taxpayer would end up with £90, nevertheless, versus £67.50. So there is a huge incentive for a higher rate taxpayer to remain in the scheme given that instead of receiving £67.50 outside an equity ISA, they will receive £90, whereas the removal of the £10 notional tax credit gives the basic rate taxpayer no incentive whatsoever. Unsurprisingly, the higher rate taxpayer will benefit. Why should the basic rate taxpayer, for whom the scheme has been an important part of their thinking and activity in terms of saving and the incentive to save, be penalised?

Jonathan Djanogly (Conservative, Huntingdon)

Surely the purpose of products such as ISAs is to get lower rate taxpayers into investments.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to my hon. Friend for making that point and I have data to illustrate it. Sadly, I have become used to Ministers not wanting to hear the facts from us, but they should want to hear them from those whose evidence is less partisan. Every citizen of this country, not just the members of so-called middle England, have a right to think that the Government are trying to help them to save and to be responsible for themselves. Instead of that, however, we have a demeaning and individual-defying attempt to thrust everyone into dependency on the state by means-testing. The Government want people to be thankful for what they are doing rather than realising that they are getting in the way of their lives and freedoms.

When the Government unveiled ISAs in 1997, the then Paymaster General spoke of a tax system for savings that was

"to benefit the many, and not just the few".

The equity ISA tax credit does benefit the many, not the few, which is the point of the argument about seeking to retain the 10 per cent. The new clause is important because it would remove the scrapping of the tax credit, which gives a significant incentive for basic rate taxpayers to save and has proved extremely popular among that target group. ISAs are a well-known tax-free product which has become a familiar feature in the savings marketplace. Increasing the tax levels will increase confusion and may increase financial exclusion among the public.

I have referred to the helpful note issued by the two organisations. It says:

"The tax credit encourages investment in stock markets, which ultimately benefits the economy by providing additional capital to industry".

We should not lose sight of that fact. The benefits to the Government are that the

"tax credit encourages people to save money and build up a pool of savings to supplement their pensions."

We could have a wide debate on that, but you would be correct to haul me up for straying down that path, Mr. Deputy Speaker. However, the claim resonates loud and clear not only with my right hon. and hon. Friends, but with Labour Members, too, if only some of them were decent enough to listen to our proceedings. Surely Labour Members recognise that their constituents are hammering on their doors about the attack on pensions. Our constituents are deeply anxious about the lack of security for their futures. How on earth will they cope when they can no longer make up for all the Government's mistakes and the shortfalls in the market when their earning lifetimes are over? I know that all parties are worried about that. It is very important.

The note also says:

"The ISA range is now well established in the public mind. ISAs have increased savings of people on lower incomes. The change proposed by the Chancellor will undermine investors' confidence in ISAs as a tax efficient form of savings and may reverse this savings trend . . . PEPs and ISAs have led the growth of retail funds over the past 10 years"—

I stress, led the growth—

"while investment in mutual funds outside PEPs and ISAs grew from £20.1 billion to £51.1 billion, PEP and ISA funds grew from £3.3 billion to £57.9 billion over the same period."

The Government have urged people to save and to make adequate provision for their retirement. They have tried to make savings products simpler. ISAs are a successful and simple savings product and should be at the centre of their strategy to encourage long-term savings. This is not the time to undermine them.

If the Government stick to their plans, equity ISAs will be disadvantaged compared with other ISAs. When we consider the importance of the composition of any portfolio and spread of risk, it is critical that the equity market is not disadvantaged in that way. We have already experienced the recent challenging and unnecessary pension tax grab by the Chancellor of £5 billion a year, which even on a notional basis amounts to £30 billion when one considers the compounding effect and the application of the stock market price earnings. The untold damage that the Chancellor has done to the stock market needs to be repaired by encouraging confidence in an equity ISA. That would bring people, not least those from the basic rate taxpayer target group, back into the market, which is critical if we are to take a responsible view of futures and pensions. If the proposal succeeds, people will be given an incentive to invest in cash and bonds, not shares, and that might not be the most appropriate investment for people's needs.

We also have to consider whether the Government have been consistent. In their response to the Sandler report—much trumpeted by the Government, although we cannot be sure whether they will get their stakeholder plans off the ground—the Government emphasised the importance of helping ordinary people to save more in the long term. Yet their plans would remove that savings incentive for ordinary basic rate taxpayers, precisely the people they want to target. ISAs and PEPs have been successful in achieving greater penetration of savings in every income group when compared with the penetration of PEPs and TESSAs. From the great founding of the PEPs and TESSA movement under the previous Government, which has been well regarded and understood, ISAs have made an even greater penetration, not least because of the 10 per cent. tax credit, which is critical.

The evidence for that comes from the Government's figures. We have only to refer to column 844W of the Official Report of 3 March 2003 for confirmation of the success of ISAs on building on TESSAs and PEPs in encouraging people in all income groups to save. For example, of those earning under £10,000 a year, one in five have chosen to save in an ISA. Recent research shows that if the tax-free status is withdrawn, the success in increasing the savings habit will be at risk of a dramatic reversal.

Research has been commissioned by the two organisations I mentioned and others. It found the following:

"If the tax-free benefit is reduced or abolished on stocks and shares ISAs, only a third of existing customers would continue to invest in these products. A knock-on effect for the rest of the equity markets could also be expected, as only two-fifths of customers would expect to invest in these commodities. Six in 10 consumers expect to seek alternative, tax-free investments in ISAs, with high interest accounts, pensions and cash ISAs being the likely beneficiaries. Seven people in 10 are of the view that the proposal would be seen as another Government stealth tax."

That is the opinion of independent research on the proposal. The people involved in the research obviously have an interest in terms of the marketplace, but they are rightly worried because they have ensured that the market has been well served and popular. The Government want to strike away that achievement. Unless they reverse their decision, I shall divide the House on the new clause.

Jim Cousins (Labour, Newcastle upon Tyne Central)

I shall make only a short contribution, which perhaps befits my position as the only Labour Back Bencher in the Chamber.

The hon. Member for Eddisbury (Mr. O'Brien) did not acknowledge all the Government's achievements. ISAs have been an extremely effective savings instrument, and we should protect them. Some of the information supplied by the hon. Gentleman illustrates that some ISAs are held inappropriately by non-taxpayers. That should give sections of the financial market cause to think about their selling methods. None the less, he did acknowledge that ISAs have been a huge success.

The hon. Gentleman was not entirely fair to the Government when he said that they were deliberately taking action on that. The opposite is true. When ISAs were introduced, the Government reserved the position of the dividend tax credit in ISAs until April 2004.

So far as I am aware, the Government have not struck a position on the future of the dividend tax credit or on any successor arrangement that might preserve the benefits of the DTC after April 2004. For the record, I do not possess any equity ISAs. I was one of the fortunate people who got out about six months before the stock exchange reached its height. However, we are talking about a feature of the ISA scheme that the Government should seek in some form, albeit not necessarily in its present form, to preserve. Those who hold equity ISAs have had a bad time on the markets. That being so, there is great reluctance to continue to invest in equity ISAs. It would be unfortunate if the DTC were withdrawn, and there was a market perception that that was a reason either not to invest or to sell up. That would be singularly unfortunate and might have the effect of producing market distortion at what I suspect, in April 2004, might be quite a sensitive moment.

There is another feature that needs to be examined, and that is that the dividend tax credit, as its name suggests, is given to dividends. People who invest in stocks and shares ISAs and hold them in the form of bonds are unaffected. It would be unfortunate at this stage in the development of the bond market if there were to be an apparent tax quirk that favoured building up investments in the form of bonds rather than in the form of straightforward equities. That would be an unintended distortion of the market, and it cannot be the Government's objective to allow that.

I hope that the Government will consider how the dividend tax credit within the equity ISA can be preserved in some form, albeit not necessarily in its existing form. I am not aware that the Government have yet struck a position on that. I hope that they will consider these issues extremely carefully and be able to come up with a scheme that will preserve the good common sense of the present arrangement.

David Laws (Liberal Democrat, Yeovil)

The hon. Member for Eddisbury (Mr. O'Brien) has raised an important point about one of the anomalies relating to the way in which the Government tax different forms of savings and financial assets. To some extent, my hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins)—

Jim Cousins (Labour, Newcastle upon Tyne Central)

Not hon. Friend.

David Laws (Liberal Democrat, Yeovil)

The hon. Gentleman is a former colleague on the Treasury Select Committee, even if he is not an hon. Friend. He has acknowledged the points made by the hon. Member for Eddisbury (Mr. O'Brien).

I shall raise one specific issue that perhaps the hon. Member for Eddisbury was not able to cover. Perhaps it is appropriate for the Paymaster General to respond on the substance of the matter because she may have access to information that the hon. Gentleman would not have had when he made his comments.

First, what would be the cost of the new clause and the amendments that are essentially being proposed by the hon. Gentleman? We should know how much money we are talking about if we are to make the changes that the hon. Gentleman proposes. Secondly, what effect would his proposal have both on the total stock of savings and on the distribution of savings between different classes of assets? Perhaps we could not have expected the hon. Gentleman to be able to address that issue.

Stephen O'Brien (Conservative, Eddisbury)

On the second point, I think that the movement would be upwards. That is the idea and the purpose. The hon. Gentleman wonders whether the Paymaster General will deal with specific cost. I, too, will be interested to hear what she has to say on that. In former times, it was expected that that might have been about £180 million. Over recent times, that is estimated to have come down to about £130 million. I put that on the record as an answer, to compare and contrast with whatever we may get from the Paymaster General.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the hon. Gentleman. That intervention was extremely helpful on two fronts, the second of which related to the effect on the total stock of savings, to which I shall return briefly. The first front related to the cost of the proposed measure. One beneficial effect of the hon. Gentleman's intervention may have been to give the Paymaster General time to gather her thoughts on the cost issue. I hope that she will be able to give us a detailed estimate of the cost.

In raising the issues of cost and the effect on the stock of savings, I wish to concentrate on what the effects of the hon. Gentleman's proposal may be. Although he has indicated that he believes that the effect will be to increase the stock of savings—presumably in a significant way, otherwise he would not have bothered to table and introduce the new clause—he will probably know that many independent economic commentators who have assessed the effects of tax relief on savings over many years, both in respect of PEPs and TESSAs, and also in respect of ISAs—have often expressed scepticism in their economic research about the effects of these tax incentives in terms of the total stock of savings.

In other words, evidence has often indicated that while tax reliefs can often benefit those who have savings, and while they may certainly effect the distribution of savings between particular financial assets, they do not always result in a significant increase in the total stock of savings. We may be talking about how tax relief is distributed across a particular group of taxpayers who are wealthy enough to be able to save, but the hon. Gentleman will be aware that the vast majority of taxpayers have incomes that are so low that they are not able to save. When we consider the new clause, we should have in mind not only what effect it will have and what its cost will be in terms of existing savers. We should surely be reflecting also on how the moneys might be used to restructure the entire system of savings and pensions—a very big issue at present—to help those at the bottom end of income distribution who, at the moment, do not benefit from the reliefs that we are discussing, and who, in a substantive sense, are too poor to save.

Stephen O'Brien (Conservative, Eddisbury)

In addition to the citation from Hansard about what the Government said about the increase in savings in ISAs in 2001 over every income group, including, most significantly, the lower income groups, there was the increase in savings in TESSAs and PEPs during 1998–99. That gives some credence to the overall take-up. It is interesting that there is evidence to show that from 1992 to 2000 there was an exponential increase in retail funds under management, and therefore savings. We can chart the acceleration of growth in relation to the introduction of tax savings and tax attractive schemes throughout all income levels. With the higher rate preference, as it were, the proposal is rough on those who pay the basic rate of tax.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the hon. Gentleman for his intervention. Of course, I do not want to take us too far away from the new clause. I am sure that the hon. Gentleman would accept that it is one thing to demonstrate that particular forms of savings increased rapidly during a period when financial markets were buoyant, when people may have been switching savings between particular asset classes, and another thing to show that the total stock of savings has been increased by these types of relief. The evidence from many independent commentators, such as the Institute for Fiscal Studies, suggests some scepticism about the effect of these sorts of relief on the total stock of savings rather than on distribution between different forms of financial assets. I hope that the Paymaster General will say something on that. Her response may help us to understand whether these types of relief in themselves are useful and efficient.

John Redwood (Conservative, Wokingham)

The tax relief has been welcome, and I disagree with the hon. Member for Yeovil (Mr. Laws), the Liberal Democrat spokesman, in that to me it is self-evident that if people are offered an incentive to do something financially, they are more likely to do it. All these schemes have been actively marketed by City firms on the basis of the tax relief that is available, and they have been very successful. I have saved through TESSAs, PEPs and ISAs, and I know many others who have done similarly. That is because we do well by forgoing taxation on some of our savings out of income that has already been heavily taxed. We see that as an advantage.

I therefore welcome the decision of my hon. Friend the Member for Eddisbury (Mr. O'Brien) to highlight that as a major issue for debate, and to set out the Opposition's case for more savings and continuing with a family of tax reliefs to encourage that. One of the most worrying features of the Government's economic policy is the precipitate and continuous decline in the savings rate during their years in office. People have found it more difficult to save, as income has been taken away from them through stealth taxes of all kinds. They have recently suffered the double whammy of national insurance and council tax hikes, so they have less disposable income available to save. However, they have also faced a collapse in the returns on their savings. The Government have presided over a massive boom and bust in the equity market, which they did a lot to extend through their decision to take huge sums of money out of that market near its peak through their taxes on telecoms and pensions. We have moved into an era of low returns on bonds and deposits, which has been welcomed by borrowers but which, of course, has been upsetting for people who had saved for their old age, but who now discover that their deposit income is a modest fraction of what it was 10 years ago, through no fault of their own.

One would have thought that at this juncture the Government would want, first, to increase savings overall, responding to the collapse that they have helped to generate and, secondly, to increase savings through equity-type vehicles, claims on real assets and investments in productive British companies. One would expect them to want to do so now because the equity market has fallen a great deal over the preceding three years, so better values are now available, and because British companies have been starved of cash for some time and, in many cases, need to be refinanced. A better flow of new moneys from the share market in Britain to those companies would be welcome, and would enable them to begin to see again the opportunity both to strengthen their balance sheets and for new investment.

The new clause is not just about the question of the saver but the use that the money can be put to by companies through the UK marketplace. Another worrying feature of the Government's mismanagement of the economy is the fact that in recent years there has been a shortage of new money going into companies through the stock market. It would therefore be perverse in the extreme for the Government to remove one of the last remaining tax incentives for Mr. and Mrs. Everyman to save through company shares at exactly the point at which companies may again see the advantage of turning to stock markets and raising capital for their investment programmes. The House should therefore urge the Government strongly to pledge that they will not go ahead with their plan to remove that important last remaining tax relief.

My hon. Friend the Member for Eddisbury made it clear that it would be perverse of the Government to persist with their intentions, not least because helpful tax relief would be taken away from people on average or about average earnings who pay standard-rate tax. However, some benefit would be left for people on higher earnings. The Minister, in discussions on the Bill has been keen to close every conceivable loophole for people on above average earnings or who own assets of above average value. It would be interesting to hear why, in this case, she thinks that it is good idea to help people who are doing a bit better than average and clobber those who are not. I urge her to do the decent thing and affirm in the House that the Government do not wish to hit hard people on about average earnings who pay standard-rate tax, and that the tax relief will remain.

If the Minister cannot make that pledge or guarantee—I fear that she may not—she owes the House and the country an explanation of why the Government have such a downer on savings and savers and why they do not want to have any pro-savings policy at all. The Government have wrecked the telecoms industry with a £22 billion telecoms tax and the pensions industry with a £5 billion a year pensions tax—[Interruption.] Government Members are laughing, but they ought to talk to the people who lost their jobs, shareholdings and family livelihoods as a result of those punitive taxes. The Government are now offering to remove an important tax relief for non-pension savings.

Jim Cousins (Labour, Newcastle upon Tyne Central)

I am probably wrong to be tempted to intervene, but I am grateful none the less to the right hon. Gentleman for giving way. He ought to acknowledge two things. First, his last speech was about rising housing asset values, so he should acknowledge that asset values possessed by ordinary British people have never been greater than they are now in all their various forms. Secondly, the telecoms sale was, indeed, a sale—the £22 billion was a market response. It turned out to be thoroughly ill judged, but it was a market response none the less.

John Redwood (Conservative, Wokingham)

It was a market response in a rigged market, where the Government decided to sell the air, for heaven's sake. Our air is always for sale with this Government, and I suspect that they will put a tax on breathing when they have run out of ways to raise money for their nefarious and often wasteful purposes. The hon. Gentleman made one sensible point—of course house prices have gone up, which has led to increases in paper wealth for many people and practically all home owners. However, unless people resort to massive borrowing against the perhaps insecure foundations of that inflated asset price, they are not better off. They still need to live in their own home, and do not have the real wealth generated by the ownership of a PEP, TESSA, ISA or any other asset that can be freely traded and spent when the need for money arises. The hon. Gentleman should therefore accept that many of us do not think that borrowing a lot against the security of our homes is a particularly good idea for consumption purposes, and particularly not as people get closer to retirement.

People are being driven into such behaviour by the wreckage and carnage of their pension funds, which was caused by the £5 billion a year tax and the Government's insouciance about equity values. I therefore urge the Government to accept the advice of my hon. Friend the Member for Eddisbury and add to the Bill his new clause, or a Government variant drafted as they see fit. That would show for the first time during their term in office that they recognise the plight of the saver and want to rescue something at least from the disaster that they have created.

Jonathan Djanogly (Conservative, Huntingdon)

The Government's proposal to abolish the 10 per cent. tax credit that equity ISAs receive on dividend distributions is one of the most ill considered measures in the Budget, and clearly shows that the Government have simply lost touch with what the people of country want and what business needs.

My right hon. Friend the Member for Wokingham (Mr. Redwood) rightly mentioned the savings ratio, which has collapsed in recent years, reducing the large number of savers whom Labour inherited from the Conservative Government. Low interest rates may be good for floating rate mortgages which, of course, the Chancellor wants to abolish. However, for every borrower there are many savers, including millions of pensioners, and it is they who have been suffering under the Government. Indeed, under the leadership of this Government, our savings culture has been transformed into a debt culture, with credit card debt sky-rocketing to unprecedented levels, despite a stagnant economy.

The Government have dealt with that serious problem by hitting savers once again and smashing one of the few remaining tax breaks. The savings culture and, dare I say, prudence have been chucked out of the window in the Chancellor's desperate attempt to raise more money to spend on the black hole of our unreformed public services.

Mark Tami (Labour, Alyn and Deeside)

Is the hon. Gentleman suggesting that the Conservatives are the party of high interest rates, and will they advocate that at the next election?

Jonathan Djanogly (Conservative, Huntingdon)

Interest rates reflect international markets. However, one of the last remaining tax breaks which gave the average low taxpayer a small window of opportunity is now being locked firmly shut by the hon. Gentleman's Government.

Business remains concerned about the continuing slump in equity prices, and increased concern for the market is stopping investment in companies and reducing their ability to move forward. Businesses have been calling for measures such as the abolition of stamp duty on shares, but the Government are having none of that. Not only does stamp duty stay, but they are regressing by discouraging investment in shares. Let us not forget that business investment was 8 per cent. lower in 2002 than in the previous year—the largest fall since 1991. I repeat that the measure is bad for savers and will be bad for business. It is the measure of a Government who have lost their touch.

John Baron (Conservative, Billericay)

I am concerned about the abolition of the 10 per cent. tax credit for a number of reasons. The first is the simple unfairness of it. The only people for whom equity ISAs will remain attractive, as we have heard, are higher rate taxpayers. They will be the only people to benefit from the tax break in future, because they will not have to pay the difference between the higher and lower rate tax. Is that fair? I believe it is not. When the Government unveiled ISAs in 1997, we heard the Paymaster General shout from the rooftops that it was a tax system for savings that was to benefit the many, not just the few. Why do the Government appear to be discriminating against basic rate taxpayers in this form of saving?

Secondly, the measure goes against the Government's stated policy of encouraging long-term savings and encouraging people to make adequate provision for retirement. The current tax credit offers a significant incentive for basic rate taxpayers to save, and has proved to be extremely popular among that target group. The Government's own figures, for example, show how successful ISAs have been, building upon TESSAs and PEPs, in encouraging people in all income groups to save. I give one example. Of those earning under £10,000 per year, one in five has chosen to save in an ISA. That is an incredible figure.

There is little doubt that the tax credit encourages people to save money and build up a pool of savings to supplement their pensions, as they increasingly have to do, bearing in mind the pension tax that has sucked £5 billion out of the system and had a disproportionate effect on the stock market. I mentioned that one in five of those earning less than £10,000 was saving through an ISA. Looking at the broader income scales, we see that of those earning between £20,000 and £25,00, one in four saves in an ISA, and in the next group, those earning between £25,000 and £30,000, one in three uses an ISA as part of their long-term savings. The Government should not ignore those figures if they are serious in their intent to encourage savings for the longer term.

John Bercow (Conservative, Buckingham)

Does my hon. Friend agree that the Treasury is classically guilty in this case, as so often, of short-termism in its thinking? If it pursues a policy that deters people on low incomes from saving in order in the short term to maximise its revenue, the chickens will come home to roost and the Government will ultimately face a higher bill to public funds in the form of means-tested benefits, as sure as night follows day.

John Baron (Conservative, Billericay)

That is an excellent point. There is a short-termism about the tax measure that worries me. It will contribute to a decline in savings over the longer term and add to the pension problems that the Government are manufacturing by way of the pensions tax. It is a problem that the Government will have to face over the longer term.

There is little doubt that the tax change proposed by the Chancellor will undermine investors' confidence in ISAs as a tax-efficient form of savings, and may reverse the savings trend that we have seen. ISAs are a well-known "tax-free" product, but the tax levels will increase confusion among the public. That will serve no one's interest—neither the Government's, nor the public's, as I have suggested. It is interesting that in the United States, the Government seem to be moving in the opposite direction. The US is cutting tax payable on dividends and encouraging savings and wider share ownership, because it realises the benefits of so doing. The American economy has performed well, and we should look at that example as a means of encouraging savings and wider share ownership.

The measure goes against the Government's longer-term aim of changing the proportion of public and private retirement savings from 60:40 to 40:60. The measure will not serve that purpose at all. I shall be interested to hear from the Minister how the Government believe the tax measure will help to achieve that stated objective. Recent research suggests that if the tax-free benefit is reduced or abolished on stocks and shares in ISAs, only one in three savers will continue to invest in that tax-free environment. That figure must worry the Government, if they are intent on improving the balance between public and private retirement savings.

I shall put two other brief points to the Minister, and I look forward to the reply. There is another sense in which the measure will distort the market. A number of other hon. Members have touched on the point. By reducing the tax incentive for people to invest in equity ISAs, the Government will increase the incentive to invest in cash and bonds, not shares. That probably will not be appropriate for most people's investment requirements. There is a danger that the Government will inadvertently create a scenario where the tax tail is wagging the investment dog.

People will increasingly see that there is no tax incentive to invest in equity ISAs, and may think that investing in cash or bond ISAs producing a higher short-term income is more appropriate, and certainly more attractive. Over the longer term, equities have proved to be the better investment. People of the younger generation especially should have a good element of their overall investments in equities, rather than bonds and cash. I ask the Minister to address the issue, because there is a danger that by removing the tax incentive for equity ISAs, the Government will inadvertently distort the market.

One or two other hon. Members have touched on my final point, which is about the way in which equity investment in the longer term benefits the economy. The United States fully appreciates that, which is why it has very recently reduced the tax paid on equity dividends in that country. We all know that economies and the business environment are becoming increasingly competitive. Companies must be able to look to stock markets to raise additional capital, but if shareholders shun the equity markets, that process becomes more difficult. Ultimately that has real economic implications for our standard of living and for the profits that pay for the public services that we all want.

To revert to the intervention by my hon. Friend the Member for Buckingham (Mr. Bercow), I emphasise that a short-term measure such as the Government propose will in the longer term produce a negative effect on the economy as a whole and the standard of living of us all. People will shun equity markets, which will ultimately have a detrimental effect on companies wanting to raise additional capital on the stock markets.

John Healey (Labour, Wentworth)

We have heard a full and useful exploration of the issues behind and surrounding new clause 1. The hon. Member for Eddisbury (Mr. O'Brien) is right to say that the ISA is the Government's primary vehicle for savings. My hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) pointed out that ISAs have been a great success. In fact, there are 14 million, not 12 million, investors in ISAs in this country—6 million more than the number of investors in TESSAs and PEPs at their peak—and ISAs are starting to reach those groups that were under-represented in terms of saving through PEPs and TESSAs. About 7.5 million investors have accounts with stocks and shares and thus attract the current tax credit.

The hon. Member for Eddisbury hugely overstates the likely impact of the proposed measure, which his new clause is designed to prevent. Referring to a point he made based on the PIMA analysis, it is true that there has been a switch into corporate bonds in recent times. However, that principally reflects the state of the markets. Bonds may be seen to be a safer investment. However, as the hon. Member for Billericay (Mr. Baron) pointed out, bonds do not have the same potential for long-term growth that equities have. Investors will return to equities when they feel more confident about doing so, and the hon. Gentleman emphasised that he wanted that to happen.

My hon. Friend the Member for Newcastle upon Tyne, Central explained his concern about recent investors in equity ISAs. I shall examine the considered points that he made in his short contribution, and I am sure that my hon. Friend the Financial Secretary will do so as well when she returns to take up the reins of this portfolio.

Howard Flight (Conservative, Arundel and South Downs)

Does the Minister not agree that as a matter of principle, it is undesirable to have tax signals that could drive investment decisions? There are all sorts of reasons why people might buy bonds or equities, but the Government should recognise that a better deal on taxation of income being available on bond interest than on equity dividends will have an impact on the way in which moneys flow. In principle, that is not a good thing.

John Healey (Labour, Wentworth)

I think that the hon. Gentleman is referring to the fact that corporate bonds attract a relief at 20 per cent. and the tax credits are currently set at 10 per cent. However, I hope he understood my earlier point that that has not been a major driver of the recent switch to bonds.

The hon. Member for Eddisbury accuses the Government of imposing a stealth tax. A measure that was the subject of a high-profile announcement and was confirmed in the 1998 Budget, and one for which there is a long lead time and a five-year transition provision, can hardly be described as a stealth tax.

The hon. Member for Yeovil (Mr. Laws) asked the direct question about cost. The Treasury estimate of the cost of the new clause is approximately £200 million. The hon. Gentleman took me to task, claiming that the tax relief creates no new saving and that ISAs simply affect the distribution of existing savings. That is simply not the case. ISAs have been an undoubted success. More than £115 billion has been subscribed into ISAs since they began in April 1999; about 14 million investors—almost one in four adults in this country—hold ISAs—

David Laws (Liberal Democrat, Yeovil)

Will the Economic Secretary give way?

John Healey (Labour, Wentworth)

Let me finish my point. I might pre-empt the hon. Gentleman's intervention. He is especially concerned about those on low incomes. In fact, the holding of ISAs has increased at all income levels.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the Economic Secretary for addressing my specific concerns. Given the amount that the Treasury is spending on ISAs through tax relief, will he tell us whether it has made any estimate of the effect in terms of increasing the overall stock of saving, rather than shifting between different forms?

John Healey (Labour, Wentworth)

I have no estimate with me as to the narrow point that the hon. Gentleman raises.

Alex Salmond (Scottish National Party, Banff and Buchan)

I am afraid that I do not think that it is a narrow point. Unless those on the Treasury Bench know about the impact not only on one savings instrument, but across the range of savings, how on earth can they analyse and direct policy? If the Treasury does not know about that issue now, perhaps it should study it and investigate the effect on not only one aspect of savings, but on the overall savings ratio.

John Healey (Labour, Wentworth)

The hon. Member for Yeovil asked me whether I could give him an estimate of the precise calculation and I responded that I could not do so. I hope that that is clear.

At the risk of suggesting that the right hon. Member for Wokingham (Mr. Redwood) overstated his case, I say to him that the scale of incentive, especially for the majority of investors—perhaps this does not apply to him—is modest. I shall explain the detail a little later. He asked what pro-savings policies the Government were putting in place—an issue that is relevant to the comments and concerns of the hon. Member for Billericay about balance between public and private pension provision. I could reel off a long list of such policies, but I shall not bore the House. A short list would include the Inland Revenue's simplification of tax treatment for pensions, the development following Sandler of a suite of simplified financial products to encourage saving, the child trust fund introduced by the Chancellor, the saving gateway—a savings account targeted at low-income or younger individuals, with Government match funding for all the money saved—and the Financial Services Authority's decision to proceed with the abolition of the polarisation regime.

John Baron (Conservative, Billericay)

I appreciate that the Economic Secretary is addressing each point in turn, but may I suggest to him that this is a question of proportion and effect? The point is that the number of ISAs has grown exponentially in recent years. While he lists a series of other initiatives that would encourage saving, the bottom line is that they are dwarfed by the total moneys that are currently contained in ISAs. The Treasury should bear that in mind.

John Healey (Labour, Wentworth)

I am glad that the hon. Gentleman pays tribute to the success and growth of ISAs. Of course, the point that he makes is being borne in mind as we consider future policies.

I should like to deal now with some of the points that the hon. Member for Eddisbury made in the more measured parts of his contribution. He outlined his reasons for tabling his new clause and spoke about extension of the 10 per cent. tax credits payable on UK dividends in ISAs and PEPs beyond 5 April next year, when they are due to finish. He described the effect that he considers that ending the payable tax credit will have on savers who are basic and lower rate taxpayers, as well as on equity ISAs as a whole.

I say to the hon. Gentleman that the ISA and PEP payable tax credit cannot be considered in isolation. It has to be considered in the context of the major and carefully balanced 1997 package of corporation tax reforms designed to rebalance the effect of corporation tax on the economy. Before that, the payable tax credits on dividends acted to make distributing profits more attractive than reinvesting for growth. We removed that distortion while reducing the rate of corporation tax. As part of the changes, pension funds' payable tax credits ceased in 1997 and individual non-taxpayers have not been paid the credit since April 1999. Charities' payable tax credits also ceased in 1999, although we gave charities transitional relief on a sliding scale until April 2004 to help them to adjust. We also wanted to allow ISA and PEP investors sufficient time to adjust their investment portfolios to take account of the change. Exceptionally, the 10 per cent. ISA and PEP payable credit has therefore been available for a period of five years, from April 1999 until April 2004.

Howard Flight (Conservative, Arundel and South Downs)

Does the Minister accept that when these changes, whatever their merits, were made, the taxation of dividends received by individuals was adjusted to end up much as it had been? It is therefore inconsistent not to leave at least a modest tax advantage on equity investment within ISAs. There is no consistency between the two aspects.

John Healey (Labour, Wentworth)

I hope in a moment to explain the impact of the move that we have made.

The withdrawal of payable tax credits for ISAs and PEPs does not represent a new or additional tax: it simply means that an additional payment is no longer to be made. Of course, tax credits remain and continue to cancel out any tax liability for individuals liable to tax at lower and basic rates.

John Baron (Conservative, Billericay)

Will the Economic Secretary please address the point that I and other hon. Members have made, namely that many people feel that the removal of the tax credit discriminates against basic rate taxpayers because they gain no advantage whatsoever from investing in equity ISAs, whereas an advantage remains for higher rate taxpayers? The Government seem to be discriminating, however inadvertently or unintentionally, against basic rate taxpayers. Would the Economic Secretary address the unfairness of that situation?

John Healey (Labour, Wentworth)

I shall explain why the threat posed by the removal of this payable tax credit has been hugely overstated and why the claims about severe discrimination against those on lower incomes and lower and basic rate taxpayers are similarly overstated.

John Bercow (Conservative, Buckingham)

Will the Economic Secretary give way?

John Healey (Labour, Wentworth)

Although the hon. Gentleman's Front Benchers are reluctant for me to give way, I shall of course do so.

John Bercow (Conservative, Buckingham)

I am extremely grateful to the Economic Secretary. While he is dealing with the salient point raised by my hon. Friend the Member for Billericay (Mr. Baron), will he also reveal to the House what assessment he has made of the likely increase in take-up of means-tested benefits as a result of the extremely short-sighted stance that the Government have adopted?

John Healey (Labour, Wentworth)

I have to be honest with the hon. Gentleman: I did not make that specific assessment as part of my preparations for dealing with the new clause.

Retaining the ISA and PEP 10 per cent. payable tax credit beyond April 2004 would unbalance the general package of reforms that we have put in place, which the hon. Member for Eddisbury described as the looming abolition of tax credits. Although he suggests that the ending of this payable tax credit will put off savers, especially those who are basic and lower rate taxpayers, from investing in equity ISAs, the average tax credit per person per year is only £25. For the majority, it translates into a reduction in tax benefit of less than that, and for more than 40 per cent. the reduction amounts to less than £10 a year. Two thirds will experience a reduction of payable tax credits amounting to less than £20 a year. Only 3 per cent. of basic rate taxpayers will experience a reduction in tax benefits amounting to more than £100. In recent times, a major factor in connection with confidence in equity investments has been the general state of the markets, not the threat of the ending of this payable tax credit.

After April 2004, ISA and PEP investors will still pay no income tax on the investment returns from their PEPs and ISAs. Other tax benefits, such as exemption from capital gains tax on long-term capital appreciation, and the fact that they do not have to return details of their PEPs and ISAs to the Inland Revenue, will remain attractive for many investors, including those who are lower and basic rate taxpayers.

For all those reasons, I am unable to accept the new clause. I hope that in the light of this useful debate, the hon. Gentleman will not press it to a vote; if he does, I shall have to ask my hon. Friends to vote it down.

Stephen O'Brien (Conservative, Eddisbury)

The debate has been useful and notable because hon. Members from several parties have contributed. That includes the curiously supportive as well as curiously critical contribution of the hon. Member for Yeovil (Mr. Laws). It was slightly "On the one hand, on the other". The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) made a helpful contribution, and that description applies especially to the speeches of my hon. Friends. The figure of 14 million people has been mentioned, and lower income groups are targeted by another potential Government stealth tax. It has been said—not by me—that the Government's success over all income levels is now threatened. The ultimate issue was whether there would be a question mark over overall savings or shifts between different sorts of savings products. The Economic Secretary did not know. The last thing that Parliament should do is to risk diminishing savings; we should always try to enhance them. Removing section 76(1)(a) of the Finance Act 1998 and thereby retaining the 10 per cent. tax credit on the products that we are considering, especially for basic rate taxpayers, would be beneficial. The hon. Member for Banff and Buchan (Mr. Salmond) expressed that well. We give that priority and I urge hon. Members to support the new clause.

New Clause 2 — Debits and Credits Treated as Relating to Capital Expenditure

Howard Flight (Conservative, Arundel and South Downs)

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

This is a technical proposal to sort out a continuing anomaly from the Finance Act 1996, and is designed particularly to sort out some problems for PFI companies. PFI companies can account for the cost of construction assets for the public sector as either fixed assets or financial assets depending on the interpretation and application of financial reporting standard 5, application note F. The corporate tax treatment does not always follow the accounting treatment and, with either accounting treatment, the cost of construction can be taxed on a capital basis.

The current loan relationship legislation under the 1996 Act provides that where interest is capitalised into a fixed asset for accounting purposes, a corporate tax deduction can be taken in the accounting period in which the interest is incurred. Where interest is capitalised into a financial asset, the Revenue's view is that the corporate tax deduction should be spread over the life of the asset, with the profile of the deductions following the write-down of the asset in the balance sheet. The tax deduction will not be taken at a time when there is an equivalent debit to the profit and loss account and does not follow the accounting treatment.

The pricing of PFI contracts takes into account the time value of money. An interest deduction is worth more and will reduce the price to the public sector if it is available sooner rather than later. Many PFI companies have priced on that basis. The current rules prejudice companies that account for the construction costs as a financial asset. New clause 2 is designed to correct this anomaly, providing that the timing of the deduction for capitalised interest is not dependent upon the interpretation of accounting guidelines. The new clause amends the loan relationship legislation as enacted by the Finance Act 1996.

Dawn Primarolo (Labour, Bristol South)

I am a little surprised that the hon. Gentleman is still pushing this new clause, particularly as I understand that it was prompted by a practitioner group seeking clarification of the operation of the existing legislation. That clarification has been provided and accepted by that group. The new clause is unnecessary. I shall ask the House to reject it, but I should briefly explain the position regarding existing legislation. The practitioner groups to which the hon. Gentleman has referred have accepted the guidance from the Revenue.

The new clause provides for an interest deduction to be allowed to a company when that interest is accrued, even though the interest may not be debited to the company's profit and loss account. That can occur quite properly in accordance with the UK generally accepted accounting practice as part of the capitalisation of the construction costs of a major capital project.

The new clause is intended to ensure that where interest and associated construction costs are accounted for as financial assets, the interest costs can be deducted for tax purposes as they accrue. The new clause is unnecessary. The loan relationships legislation in the Finance Act 1996 already provides for capitalised interest to be deducted as it accrues despite not having been taken into the profit and loss account.

As I said, I understood that the new clause, tabled some weeks ago, was related to clarification for particular practitioner groups. Following the tabling of the new clause, constructive dialogue took place between the Revenue and the external representatives of the head office, PFI contracts group. I am sorry that the hon. Gentleman has not been informed that that reassured the group that existing legislation already provides the certainty that it requires—specifically, that the Revenue accepts that, where a PFI property is a fixed asset for tax purposes, it will fall within the definition of a fixed capital project in paragraph 14 of schedule 9 of the Finance Act 1996. That ensures that relief for interest is properly given as it accrues. The Revenue has confirmed the provision and will confirm it again in new guidance in the very near future. I ask my hon. Friends to vote against the new clause, should it be put to the vote. It is unnecessary because the current legislation is quite clear.

Howard Flight (Conservative, Arundel and South Downs)

I am grateful for the Paymaster General's comments, which had not been relayed to me. The briefing behind the new clause was not the group to which she referred. As it appears that the Government picked up the point from the new clause that we tabled, it would have been helpful if the Government could have advised us. However, on the basis that the problem has been dealt with, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 3 — Continuation of Children's Tax Credit for Persons Subject to Immigration Control

Howard Flight (Conservative, Arundel and South Downs)

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

This is a probing new clause, which provides for children's tax credit to continue under the new child tax credit arrangements for persons subject to immigration control. We are essentially seeking Government comment, and perhaps an undertaking to review the tax credits regime as it applies to immigrant workers and impacts on their children. Practical issues are lurking, and nothing in the new child tax credit guide says that migrant workers who were previously entitled to children's tax credit will not be entitled to the new child tax credit. That is likely to result in applications being made in ignorance of the changes to payments and then to potential problems in recouping the moneys paid from parents who may not be able to afford it. In those circumstances, do the Government intend to pursue reclaims? There is also an issue of whether it is right to prejudice the children of genuine migrants, especially when the Chancellor's Budget speech specifically mentioned improvements to skilled migrants' programmes and to the skills needed.

David Laws (Liberal Democrat, Yeovil)

We support the new clause and commend the hon. Gentleman for bringing it forward. The low income tax reform group has also helped to highlight the issue. The most important aspect of the new clause is that it aims to restore the position of certain skilled migrants to what pertained before the abolition of the children's tax credit and the introduction of the child tax credit in April this year. It seems that there have inadvertently been some losers as a consequence of the changes introduced in the Budget. Among those losers are skilled migrants from non-EU countries who lose entitlement under the new regime to a tax credit that they previously enjoyed. In some cases, individuals could be as much as £10 or even £20 worse off per week, which is unfortunate given that we are talking about a group of people who may already be on low incomes.

The situation gives rise to three issues of fairness, the first of which is the fairness of where we are now under Government regulations by comparison with where we were before the changes were introduced. It appears that a particular group of workers has been put in a worse position with no apparent justification. The second potential unfairness is the comparative treatment of EU and non-EU individuals working in this country, with only the EU individuals receiving child tax credit, even though they may be in exactly the same jobs as the non-EU individuals. The third issue is the need to flush out Government thinking about why particular individuals should be denied a tax credit when they are paying tax on the earnings from the employment that they are entering into in this country. That calls into question the thrust of the Government's approach on tax credits and whether they are supposed to represent the reimbursement of tax already paid or constitute some kind of benefit that the Government can withhold on the basis that tax credits are regarded under existing rules as being public funds to which individuals subject to immigration controls are not entitled to have recourse. That seems to be the basis on which the Government are withholding child tax credits from the individuals in question. This is an important matter, and we have too little time to explore it. I hope we have given the Paymaster General enough time to address some of the issues.

Dawn Primarolo (Labour, Bristol South)

The issue is quite straightforward, and the new tax credits follow the practice adopted with the working families tax credit and the disabled person's tax credit. The child tax credit replaces elements of both those tax credits as well as children's tax credit relief. From 2004, the child elements of out-of-work benefits from income support and jobseeker's allowance will build on the benefits of child benefit itself.

It is a long-standing requirement of immigration rules that those who come to the United Kingdom should be able to support themselves without recourse to public funds. For that reason, persons subject to immigration controls are not able to claim the new child tax credit, as they were previously not able to claim the working families tax credit and the disabled person's tax credit. The new child tax credit incorporates elements from a range of systems of support—tax, tax credits and social security. It is inevitable, therefore, that there will be changes in comparison with the existing system.

The issues for income tax relief, such as the children's tax credit, are different in this area from those for the payable tax credits, because the value of the relief can never exceed the income liability. On that point, the working families tax credit—the main method of support in the last Parliament for working families on lower incomes—provides a precedent for how to proceed in these circumstances. The rules for the new tax credits need to fit within the same wider policy framework as those for working families tax credit.

The child tax credit is the means by which we now support children. In terms of immigration laws, we are simply following the long-established policy that some people are allowed to remain here subject to certain conditions, which means that they must be able to support themselves. Conditions attached to leave to remain are a matter for the Home Office, not for our regulations. Within the wider policy framework, we have worked to ensure that the rules are fair and work fairly between couples.

David Laws (Liberal Democrat, Yeovil)

The Paymaster General says that there are long-established conventions, but will she acknowledge that a category of individual skilled migrants will be worse off as a consequence of the changes being implemented?

Dawn Primarolo (Labour, Bristol South)

Reliefs can change, as can the tax system. Behind the new tax credits, and the requirements that are not subject to change by me as a Treasury Minister, are the policies that the Government, and previous Governments, have pursued with regard to conditions that are placed on people who have leave—

It being three and a half hours after the commencement of proceedings on the first Ways and Means motion relating to the Bill, Mr. Deputy Speaker, pursuant to Order [this day], put forthwith the Question already proposed from the Chair.

Question negatived.

Alex Salmond (Scottish National Party, Banff and Buchan)

On a point of order, Mr. Deputy Speaker. On two occasions, first in the Committee of the whole House and now on Report, we have lost a vital amendment that affects my constituents and many others who are concerned about North sea oil exploration and the thousands of jobs that depend on it. As you know, Mr. Deputy Speaker, I am not a paranoid sort of guy, but I am beginning to wonder whether there might be something so powerful in the amendment that the Government are resorting to these underhand and shabby techniques to avoid debating it. If not, is not the whole timetabling of the Finance Bill deficient if important amendments, duly selected, are not being considered?

Your knowledge of Standing Orders is much greater than mine, Mr. Deputy Speaker, so my point of order is this. Is there anything in our Standing Orders to state that if an amendment is selected for the third time it must be debated? Do we have a "three strikes and you're in" policy in the House and, if we do not, should we have such a policy to stop vital amendments being lost in that fashion?

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

I understand the hon. Gentleman's concern, and I am sorry that new clause 9 was not reached this afternoon. However, he will understand that the Chair can do nothing about that; I am purely the servant of the House in such matters and we are only doing what the House has already decided it will do today. I am sure, however, that the hon. Gentleman has put his point firmly on the record.

Clause 9 — Bingo Duty

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 3, page 6, line 22, leave out "15" and insert "5".

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

With this it will be convenient to discuss the following: amendment No. 1, in page 7, line 8, at end insert

"less the amount of value added tax paid or payable by the person on those payments".

Government amendment No. 4.

Stephen O'Brien (Conservative, Eddisbury)

If proof were needed that there was no need for the knife to have fallen, the point of order made by the hon. Member for Banff and Buchan (Mr. Salmond) provided it. It is well known that I was deeply opposed to the timetable. Given the progress that we are making, it would have been possible to cover all the new clauses.

The amendments relate to bingo duty. Hon. Members will recall the extended debate on the issue in the Committee of the whole House. We highlighted a number of serious shortcomings and a complete mismatch between the Chancellor's rhetoric in his Budget speech and the Government's actions in the Finance Bill.

Our amendments have a common aim: to put in law the Chancellor's promises to all bingo players in this country. In his Budget speech, the Chancellor said:

"I turn now to bingo. I will abolish the bingo tax . . . just as I have abolished direct taxes on the pools and on betting on horse racing."

The phrase "just as I have" was clearly intended to give bingo players and clubs a promise from the Government. The Government successfully created the expectation among all those interested in bingo—the providers or the millions who play the game—that there was to be direct equivalence. The Chancellor continued:

"The tax on bingo players' stakes and the tax on bingo prizes will be replaced in the same way as the tax on betting and the pools."—[Official Report, 9 April 2003; Vol. 403, c. 278.]

When the Chancellor used language such as "just as I have" and "will be replaced in the same way", were not bingo players and clubs right to think that he intended to create an expectation that there would be direct equivalence? Indeed, that expectation was built up well before the Budget speech, when the bingo industry and players were led to believe, from discussions with Customs and Excise, that the tax system would make participation fees VAT exempt and that the new gross profits tax would be levied at 15 per cent., "just as", or in the same way as for betting and the pools.

It is with the deepest regret—although, unfortunately, it is no surprise with this Chancellor—that we find that the Chancellor has not lived up to the words in his Budget speech. The Finance Bill made it clear not only that VAT would remain but that it would not be treated as expenditure in the GPT calculation, which will result in double taxation. Faced with that reality, the bingo industry will not be able to meet players' expectations of increased prizes. That deliberate and intended consequence shows that the Chancellor's actions are the opposite of his words.

Amendment No. 1 would remove the double taxation. It would not be necessary if the Government lived up to their promises and introduced an amendment to make participation fees VAT exempt. The House will appreciate that I am not permitted to table such an amendment, but the Government could easily address the matter. I note that the Government have tabled a similar amendment—amendment No. 4—clearly prompted by my call on the Floor of the House on 13 May.

When the Government tabled the amendments and issued the Treasury press release, they claimed all sorts of wonderful things for bingo, but we can show that their words do not match their deeds. Frankly, that would be too much to expect. Indeed, it never happens. No credit whatsoever is given to parliamentary procedure, to accountability or, of course, to Her Majesty's official Opposition, who have pressed the point to the extent that, with deep embarrassment, the Government have had to admit to the fact that they have failed to live up to their promises.

I welcome Government amendment No. 4, and I am delighted that the Economic Secretary has been persuaded by my arguments. If the Government assure me that they will move their amendment, I will be able to seek the leave of the House to withdraw amendment No. 1, but, yet again, I will have to wait to hear whether Ministers can live up to their words. I will have to wait to see whether the Economic Secretary moves that amendment.

I also tabled a second amendment, amendment No. 3, which is tied to the fact that I am not permitted to table an amendment to make participation fees VAT exempt. The reason I am not allowed to do so is plain for all to see: such matters have, in effect, been delegated to the European Union, and we cannot hold the Government to account about them on the Floor of the House.

The Chancellor created an expectation that the bingo industry would be put on a level playing field with the rest of the gaming industry and suffer an effective GPT rate of 15 per cent., with VAT-exempt participation fees. I understand that, as participation fees remain liable to VAT, the net VAT cost to the bingo industry is approximately 10 per cent. Under amendment No. 3, we would reduce the GPT rate to 5 per cent., so the effective rate of tax would be kept at 15 per cent.

Amendment No. 3 is less elegant than simply making participation fees VAT exempt, and I trust that, as with double taxation, the Economic Secretary will be similarly persuaded by my arguments and will agree to make participation fees VAT exempt. That is entirely within his gift; I cannot do it, but I can certainly introduce my amendment, which would have the same effect. Why deal with the issue in a more difficult way when it is in the Government's gift to ensure that things happen in the most appropriate, straightforward and elegant way that would be easily understood by all bingo players throughout the country, as well as the clubs themselves?

John Greenway (Conservative, Ryedale)

I am grateful to my hon. Friend for the interest that he has shown in this matter. Until yesterday, I was the shadow Minister with responsibility for gambling—I had been for some time—and I can tell him that the bingo industry is deeply annoyed and angry at the way in which the Government have treated it over this issue. However, may I clarify what he is saying? He says that he cannot commit the Conservative party to a VAT exemption, but is he saying that it is our policy to ensure that there would be tax equalisation between bingo and other forms of gambling, because that would certainly be a worthy aim that this country's 7 million bingo players would deeply appreciate?

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to my hon. Friend for that intervention, and I know that he takes a tremendous interest in and supports not only the bingo industry, but all the gaming industries, which are so important to constituents throughout the country.

I am sure that my hon. Friend followed the technical position in relation to the Finance Bill: as members of Her Majesty's Opposition, it is not in our terms of reference, or in the Standing Orders, to table amendments that adjust VAT rates, so we have had to look for an alternative. By doing so, we are seeking to ensure that the Chancellor lives up to his promise, which was the bingo industry's incentive to move from GPT to bingo tax, as that may happen with the consent of pools and betting on horse racing, but against the express wishes of the bingo industry. To get those in the bingo industry to agree, they were promised a level playing field.

We have to hold the Chancellor to account for his words. I am waiting for the Government to deliver. It is up to them to find the resources to match their promises with the deeds on taxation that they should have implemented in the first place. If they do the honourable thing and step up to their promises rather than having to be dragged inch by inch in such an appalling way, we will inherit that position after the next general election. We have absolutely no intention of changing that position if the Government live up to their promises.

The Economic Secretary might well argue that the Government's measures deliver benefits to the bingo industry worth £35 million. He might also argue that the bingo industry will always want more, but every industry would. He might argue that the Government must make difficult decisions on the scope and size of tax cuts and draw the line, but that misses the point. The Chancellor's Budget speech raised the expectation of a level playing field with the rest of the gaming industry. Indeed, the expectations of the industry and bingo players were raised before the speech was made. The line was drawn before and during the Budget speech but, as has happened so often during consideration of the Bill, the Government moved the line.

When I moved an amendment to implement my call for the removal of double taxation at a benefit of £10 million per annum, the Treasury issued a press release saying that

"the tax reforms will now mean around £125 million a year more in prizes or other player benefits".

That raised false expectations. It is fair to note the fourth note to editors in the press release, which said that the reform will mean

"half a million more visits to bingo clubs, and a £30 million increase in the industry's profits in 2007."

It was interesting to read the bingo industry's reaction, because it had rightly been involved in negotiations with the Government. That is no surprise because the Government's technique is to try to get anyone who is about to criticise them into new Labour's big tent by saying, "Come and have a chat with us. Don't get offside because if you start to get too difficult we will not be able to deliver anything because we cannot stand up to that."

The Government claimed that a £10 million boost would deliver £125 million of benefits, but an article written by Susie Mesure, which was published in The Independent on 20 June, said:

"Sir Peter Fry, the chairman of the Bingo Association, said: 'You don't have to be a mathematical genius to work out that a net saving of £35m won't give £125m in extra prizes yet that is the impression that is being given. There is no way the £125m in extra prizes can be claimed in anything like the near future."

The article continued:

"While Sir Peter acknowledged that an additional £10m was helpful, he said the Treasury's suggestion that this would create £125m in extra prizes was false. 'This will cause aggravation among bingo members', he said. 'Not to make it clear that the extra £125m would not happen today but was years off happening was rather naughty.'"

I think that he was exceptionally measured and that he pulled his punches by saying that. It is clear that the Treasury's intention was to try to see off the industry but not to give it the level playing field promised by the Chancellor.

It is an absolute outrage that we have had to table an amendment and drag the Government along kicking and screaming—I fear that they will scream rather than kick their proposal into touch and adopt ours, although I would be jolly glad if they did. I do not anticipate that they will do that because they cannot bring themselves to accept that there is some democracy in this country and that there is a purpose of having an official Opposition who can spot when the Government are playing fast and loose. It is time for them to step up to meet their promises.

It is critical that the Government accept the amendments. The mention of bingo in the Budget speech gave the Chancellor his only opportunity to make a joke—it fell completely flat—and he raised expectations. I call on him to live up to his promises and create a level playing field for the bingo industry, rather than playing with numbers and bingo players' expectations, so that this country's bingo players get the fair deal that they deserve, and they can be assured that they would get that from the Conservatives. I urge hon. Members to accept the amendments because it is a matter of honour to meet the expectations created by the Chancellor. Depending on whether we receive a satisfactory response from the Economic Secretary, I hope that hon. Members will join me in the Lobby.

John Greenway (Conservative, Ryedale)

I shall be brief because I do not want the House to experience the problem highlighted by the hon. Member for Banff and Buchan (Mr. Salmond) of not having time to debate the most important amendment—in this case, arguably, on insurance companies—which is in the last group.

The Minister addressed the Bingo Association conference the other day and I had the pleasure of speaking soon after. In their cack-handed way, the Government have done two things. First, they have united a bingo industry that, in most other respects, is divided. The two big bingo club organisations, which have about half the bingo clubs between them, support the Government's proposal for bingo in casinos. That also means that a casino could be in a bingo hall if their deregulation plans are successful. It will be interesting to see how that develops. However, the rest of the industry—all the smaller clubs—do not want that to happen. They would rather protect bingo as it is, but to do that the game has to compete with other forms of gambling. That is why the industry is united in its opposition to the Government's proposal. When I intervened on my hon. Friend the Member for Eddisbury (Mr. O'Brien), I said that it is annoyed and angry, but that is putting it mildly. As he argued, the Chancellor made a promise that he has not kept.

The second consequence of the Government's actions is, in social terms, deeply disturbing. I do not suggest that only men go into betting shops and only women go into bingo halls, but the majority of punters who go into betting shops are men and the large number of people who go into bingo clubs are women. I hope the House accepts that generalisation. As a result of the change to gross profits tax for bets in betting shops, when the husband has a bet on the 3 o'clock at Doncaster he will pay less tax on the outcome of that race than his wife will pay when she spends an evening in a bingo club, because she will be taxed twice—on the VAT on the participation fee and as a result of the 15 per cent. profits tax that bingo proprietors will have to pay. That has been explained to the Government and I cannot understand why, having heard that message, they continue to set their face against the change.

The Minister said something interesting at the Bingo Association conference. It came as a surprise to most bingo proprietors present when he said that the Government did not intend to equalise the tax across different forms of gambling. That is not the impression given to the bingo industry in the suggestion that there should be a gross profits tax.

I am left with two thoughts. The first is that whatever the House decides to do, we have not heard the last of this. It would not surprise me to find that next time we debate the subject, the Labour Benches are not deserted. Right hon. and hon. Members from all over the country will be in the Chamber because their bingo club members, whose votes they will wish to garner at the next general election, will have urged them to be here.

My second thought is to question how the Chancellor could introduce this measure. What is he up to? What is the point of this proposal? Apart from the tidiness of moving to a gross profits tax for bingo, as for other forms of gambling—I can understand that and think, in general, it should be welcomed—what were his motives? The truth is—this is a general point in relation to the overall debate on the Finance Bill—he is saying, "I realise that I am for ever raising taxes. I want to announce a cut in tax." The proposal was sold on the day of the Budget as a cut in tax. The reality, however, is that there is no cut in tax. There is a cut in tax for people who go to the betting shop—that has been delivered—but there is no cut in tax for the 7 million people who play bingo. Gradually, as they discover that they have been cheated by the Government, they will be deeply angry.

I believe that the House will want to reconsider the measure. I hope that the Minister thinks long and hard before he rejects amendment No. 3. He should consider what the Government need to do about the problem now. If they do nothing, they will lose face in future.

Jonathan Djanogly (Conservative, Huntingdon)

In the face of a strong showing from the bingo industry and after much hard graft by my hon. Friend the Member for Eddisbury (Mr. O'Brien) the Government have announced an extra £10 million tax cut for bingo. The Government have not been shy in suggesting that that should create an extra £125 million in prize money, or as the Daily Express, obligingly for Labour, put it on 19 June:

"Bingo—it's a £125 million bonus".

However, as with so much else that we see from the Government, when the initial media stunts and spin calm down, the catches and inaccuracies begin to creep out of their dark holes.

It seems that, to achieve their £125 million, the Government are maintaining that by cutting the tax 500,000 extra people will rush out and play bingo. Perhaps the Government have based that conclusion on the thousands of people who will now be looking for a return on their money following the Government's demolition job on ISAs. Whatever the Government's pie-in-the-sky reasoning may be, I can only note, as did my hon. Friend the Member for Eddisbury, the disbelief of the chairman of the Bingo Association in the Government's figures. He said that the £125 million would not happen today but was years off, and would be ruined in any event if the Government increased the tax on machines in bingo clubs.

This might be a good opportunity to ask the Minister whether the Government have any such intention. One wonders whether the Daily Express will now print "Bingo—it's a £125 million fraud." Somehow I doubt it.

John Healey (Labour, Wentworth)

I welcome Opposition Members' contributions, especially that of the hon. Member for Ryedale (Mr. Greenway). I welcome his declared interest, he having stepped down from the Opposition Front Bench to take an interest in and devote more time to the gambling industry. I am glad that he participated in the debate.

I say to the hon. Member for Eddisbury (Mr. O'Brien) that whatever the wishes and whatever the expectations, especially within the industry, there is no mismatch between what my right hon. Friend the Chancellor of the Exchequer said in the Budget and what is delivered in the Bill. There was no promise to deliver direct equivalence between the gambling regimes, and no promise to abolish VAT on participation fees. The words "level playing fields" were not those of the Chancellor, and they were not mine. They were the hon. Gentleman's, and they might also have been those of some of his contacts in the industry.

Of course the bingo industry wanted more from the tax reforms. Indeed, it argued for more during consultation. It argued, unsurprisingly, as does the hon. Member for Eddisbury, for the full removal of VAT from players' participation fees. That would have cost at least another £50 million more than the proposals set out in the Budget and in the Bill.

I shall respond to some of the detailed points that have been raised and explain the purpose behind Government amendment No. 4.

John Burnett (Liberal Democrat, Torridge and West Devon)

Before the Minister does that, perhaps he will help the House by telling us whether it is the Government's long-term aim to move to equality between bingo and betting and the pools. If it is their aim, when does he seek to achieve it?

John Healey (Labour, Wentworth)

The short answer is no. The hon. Member for Yeovil (Mr. Laws) presses the same argument in relation to the excise regime for alcohol. It is certainly an objective to have a fairer balance between the different gambling and alcohol regimes, but it is not the Government's objective or policy to seek direct equivalence. I hope that that makes the matter clear and categoric for the hon. Gentleman.

I understand why the hon. Member for Eddisbury wants to claim credit for Government amendment No. 4 and for my decision that lies behind it. I made it clear during the debate on bingo duty reform in the Committee of the whole House that I was already in discussion with the bingo industry. I undertook that, following those discussions, I would consider how the calculation of the gross profits tax interacts with the treatment of VAT on bingo participation fees.

To recap briefly, our reform of bingo taxation was driven by our desire to boost the bingo industry and give players a better deal. The current tax structure discouraged innovation and penalised bingo companies that lowered their margins. My right hon. Friend the Chancellor announced in the Budget that we would therefore abolish duties on bingo players' stakes and added prize money and replace them with a 15 per cent. tax on bingo companies' gross profits—the difference between the amount spent on the playing of bingo and the amount paid out in prizes. The reform would have delivered a £25 million tax cut to the bingo industry.

During discussions with officials after Budget day, the bingo industry argued that the new tax structure would produce an unfortunate consequence in the interaction between the gross profits tax and VAT on the participation fees that bingo companies charge players for running games of bingo, and asked us to consider amending clause 9 to remedy that flaw. It also asked us to extend the period for the introduction of reforms, which were scheduled for 4 August, saying that it would take three months to put the arrangements in place. It said that it would prefer a new start date, and 27 October has been specified in the Bill. After discussions with the industry, and at its request, we have altered the definition of the accounting period for the purposes of the new tax so that it better fits the industry's accounting arrangements and record keeping. That demonstrates my commitment to consider carefully the arguments that the industry makes to the Government.

John Greenway (Conservative, Ryedale)

The Minister accepts that the placing of a bet in a betting shop carries no VAT, but the stake on a game of bingo, because it involves a participation fee—the entrance fee for the evening's games—attracts VAT. I understand the niceties of that. However, if the bingo industry told the Minister that it would re-examine its charging structure for playing bingo to achieve equivalence with the stake in a betting shop or a gaming machine, would he consider that carefully? It appears from what he is saying that he has set his face against a reduced VAT rate for bingo, which will remain standard rated as long as the route of participation fees is taken.

John Healey (Labour, Wentworth)

The hon. Gentleman has made a serious point. It is correct that the gross profits tax on the betting industry is set at 15 per cent, but he will know better than any other Member that that is not the full picture, because bookmakers are required to add a levy from the gross profits that they make on horse racing as a contribution to supporting the industry, thus increasing in many respects the effective tax rate. Curiously but historically, VAT has been levied on bingo playing, but not betting, since the introduction of the VAT regime.

The hon. Gentleman referred to a speech that I made to the Bingo Association at its annual general meeting in May. I made it clear then that the reforms that we are putting in place are not necessarily a full stop for bingo tax reform. Just as happened with our reforms to gambling, betting and the lottery, we have monitored the present reforms carefully and are ready to consider good evidence and a well-argued case for further reform. Indeed, the Bill makes further reform to duty and tax, particularly on betting exchanges. We had a long discussion of that in Committee.

As a result of the discussions that the industry had with me and with officials following the Chancellor's Budget statement, amendment No. 4 has been tabled for consideration by the House. It builds on our original reform and will increase the tax cut for the industry from £25 million to £35 million, and reduce the effective tax rate—that is, tax as a percentage of profits—on the playing of bingo from 31 to 24 per cent., similar to the effective tax rates for the national lottery, casinos and gaming machines. The hon. Member for Ryedale cannot deny that that is a cut in the tax for the industry, as he seemed to do in his remarks.

I have spoken to the bingo industry about the amendment, which I know it welcomes. In the Bingo Association's press release of 19 June, Sir Peter Fry, its chairman, said:

"The revision will make a significant difference, especially for smaller operators."

John Kelly, the chief executive of Gala, the biggest bingo operator, said that the change would benefit players. The industry, through its work with the Henley centre, has predicted that it can build on this initial £35 million tax cut, and estimates that by 2007 there could be an extra 500,000 visits per year and an extra £125 million in prizes and other benefits to players, compared with its predictions for the same date if we had continued under the old tax system. I can tell the hon. Member for Eddisbury that the industry also projects that this should improve its profitability.

I welcome the fact that the Opposition have indicated that they can support amendment No. 4 and the change. I believe that it achieves what their amendment No. 1 tries to do, so it may help if I explain why I would be reluctant to accept their version. [Interruption.] The hon. Member for Eddisbury encourages me to move on, so I shall simply say that Opposition amendment No. 1 would have produced a perverse outcome. It would have delivered only about three quarters of the revenue benefit delivered to bingo companies by our approach in amendment No. 4, and companies that have smaller margins or invest more would receive proportionally less benefit than companies that do not.

As I explained when rejecting a similar amendment in the Committee of the whole House, although we appreciate that the bingo industry wanted a bigger tax cut, we have delivered what we believe will boost bingo, give players a better deal and is affordable in the current situation of fiscal neutrality. To accept amendment No. 3 would require us to increase taxes elsewhere or to reduce spending elsewhere. We are not prepared to do either.

It is a curious reflection—I put it no stronger than that—that a party that is not prepared to match the investment that we are making in health, education and other vital areas of public services, should choose to make this a priority for a future regime.

Stephen O'Brien (Conservative, Eddisbury)

The Minister is quoting again from the Labour lie machine handbook.

John Healey (Labour, Wentworth)

In that case, I quote the hon. Gentleman's boss, the shadow Chancellor, who said:

"We are not bound by any of the pledges of the last election"—

pledges to match the Labour party's commitment to increase investment in health and education. The hon. Gentleman's leader said:

"I explicitly on three separate occasions when asked said we will not match Government spending plans. And I stand by that because our spending on the health service, on education, will be both different from a central Government standpoint and in terms of private and voluntary participation."

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

Order. We are straying a little far from bingo.

John Healey (Labour, Wentworth)

I am grateful for your reminder and admonishment, Mr. Deputy Speaker.

To accept amendment No. 3 would require us either to increase taxes or to make spending cuts elsewhere. We are prepared to do neither. Our bingo reform is designed to deliver a boost to bingo and a better deal for players. Government amendment No. 4 builds on the original £25 million tax cut by further reducing the tax on bingo by £10 million. That is a good deal for the bingo industry and its players. I commend the Government amendment to the House and look forward to the hon. Member for Eddisbury withdrawing amendment No. 1. I hope that, in the light of my comments, he will not press his other amendment; if he does, I will ask my hon. Friends to resist it.

Stephen O'Brien (Conservative, Eddisbury)

I listened carefully to the Economic Secretary. I am grateful to my hon. Friends the Members for Ryedale (Mr. Greenway) and for Huntingdon (Mr. Djanogly) for their contributions. I understand that any acknowledgement that the Government's decision to table amendment No. 4 was prompted by our actions will not be forthcoming. Of course, if amendment No. 1 was not grouped with other amendments, I would be happy to withdraw it, but as it is not a lead amendment I cannot do what the Minister invites me to do.

The Minister said that the Government amendment is more generous than ours. That comes as no surprise. As I explained, it is uniquely in the Government's gift to change the rate of VAT. The Opposition had to work extraordinarily hard to find a way that did not contravene the Standing Orders of the House as they apply to the Finance Bill to raise the issue and at the same time make our point about the deep anger and anxiety felt by bingo players and the bingo and gaming industry.

The Economic Secretary frankly admitted that the playing field was not intended to be level and that no promise of direct equivalence was made, and said that the Chancellor had not used those phrases. However, in his Budget speech, the Chancellor used the phrase "just as" and said that bingo tax would be

"replaced in the same way as the tax on"—[Official Report, 9 April 2003; Vol. 403, c. 278.]

other forms of gaming. I understand that Members of Parliament are in the business of words when we trade arguments and make our case, but I am conscious that the words we use have direct intended meanings for those outside this place who listen carefully to what we have to say. I know that if I used the phrases "just as" and "in the same way as" in this context, all those who were listening would perceive my intention to be to produce a level playing field and direct equivalence. That is what the Chancellor hoped would be perceived by the bingo players and bingo clubs of this country.

As my hon. Friend the Member for Ryedale said, there was tension in the bingo industry between small clubs and the large ones, all of whose interests need to be protected. To the very large number of bingo players in this country the clubs are an important source of entertainment, profit and revenue and community facilities—we should not lose sight of the importance to our local communities of such clubs, not least the Top Ten bingo club in Winsford in my constituency. It is a spurious use of spin to suggest that the Government may use words without being too worried about the precise effect that those words have. Above all, Governments are judged on their actions, and in this respect the Government have been found wanting in not having brought bingo into line with other forms of gaming, namely, pools and betting on horse racing.

It is a further spurious use of spin to suggest that a £10 million tax reduction will lead almost immediately—no time line was cited—to a £125 million benefit to the bingo industry. Notwithstanding its welcome for the £10 million cut, the industry has been criticised and castigated by commentators. When holding the Government to account, we should emphasise the importance of matching the words in the Chancellor's Budget statement with the deeds that the Government propose through the Finance Bill. That view must be reflected, given the deep anger and anxiety I mentioned earlier and—to answer the point made by the hon. Member for Torridge and West Devon (Mr. Burnett)—given that there was no commitment and no expectation in respect of time.

I think that we have flushed out the Government's true belief and intent. Unfortunately, they are not matched by what I believe were the intended consequences of the words that the Chancellor used. It is incumbent on us to hold the Government to account on that basis, so I ask my hon. Friends and all those in the House who believe that the future of bingo depends on an equal competitive position in respect of other forms of gaming, as was intended and as was the price for moving to gross profits tax, to join me in the Lobby to support the amendment.

Clause 17 — Requirement of Evidence or Security — Clause 18 — Joint and Several Liability for Unpaid VAT of Another Trader

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 52, in page 15, line 15, leave out Clauses 17 and 18.

The amendment relates to clauses 17 and 18. We recognise that we have had considerable discussion and debate in Committee, but further developments have arisen on those important clauses and it is therefore important to hold a debate. The Committee considered them in some detail, and in the light of that additional information the only way to ensure that a debate takes place on Report is by having, in effect, a clause stand part debate through the technique of tabling amendments to delete the clauses.

In expressing the situation in those terms, I may have hinted that I am not keen for the clauses themselves to be deleted here and now. It should be well understood that I realise that missing trader fraud is by far the biggest single fraud confronting tax authorities. It is pan-European in scope and practised by highly sophisticated individuals. The explanatory notes put the total cost of such fraud to the United Kingdom at between £1.7 billion to £2.75 billion in 2001–02. I fully support, therefore, the objectives of clauses 17 and 18, which seek to secure the VAT that would otherwise be lost through missing trader fraud.

Because of the way in which our procedures work on Report, my amendment, which would delete clauses 17 and 18, has been structured to allow a clause stand part debate. I do not want to get into a false dialogue, however, so I should point out that it is not our intention to strike down the clauses' objectives.

Jonathan Djanogly (Conservative, Huntingdon)

Many arguments are circulating to the effect that the Government are to some extent responsible for much of the VAT fraud to which my hon. Friend refers. Investigations are ongoing in that regard, and it seems unfortunate indeed that it is the taxpayer who will have to bear the cost.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to my hon. Friend for that intervention. We are dealing with a very difficult issue. It is right that any Government be entitled to collect duly levied revenue, and it is not part of our agenda to seek to wreck that. However, we do have to examine the balance between the rights and responsibilities of citizens and taxpayers, and those of the Government—that is part of the democratic accountability that we are elected to provide. I ask my hon. Friend to bear with me, because although I certainly welcome interventions, it is important that I go through this issue with some care—I shall try not to detain the House for too long, but I cannot pretend that this will be the briefest of our episodes on Report—not least because the House of Lords had something to say about it in Committee. It is important to ensure that we give due consideration, given that the other place will not be able to scrutinise this provision in any other way. My hon. Friend will therefore find that the context in which his remarks are placed is a little more proportionate, given the seriousness of the issues with which we are dealing.

Since our deliberations in Committee, we have continued to receive representations that, as drafted, the proposed legislation may catch legitimate traders. I understand that Her Majesty's Customs and Excise believes that the draconian powers in clauses 17 and 18 are necessary to target the abuse. As I recall, the Economic Secretary said in Committee that in practice, the powers will be applied in such a way as to protect legitimate traders. However, the concern remains that the legislation is widely drafted and is not subject to external review before being applied. I am therefore concerned that the necessary separation of powers to protect the innocent appears not to exist.

The third report of the House of Lords Select Committee on Economic Affairs echoes those comments. Paragraph 5.10 states, in respect of clause 17:

"With reference to the self-denying undertaking by HMCE"—

Her Majesty's Customs and Excise—

"we note that the necessary degree of satisfaction on the part of the Department that all reasonable checks have been applied by a legitimate trader is not subject to any external review. Indeed, under the normal powers of delegation of the Commissioners of Customs and Excise, that discretion could rest with the investigating officer. We have therefore concluded that in the Clause, as drafted, the protection for legitimate traders can be said to be deficient in that their access on appeal to the VAT and Duties Tribunal arises only after HMCE have applied their new power to require security, albeit following a warning. By this stage, the negative economic consequences for their business could already be significant. We considered that a part of the solution could lie in a suggestion made by the ICAEW"—

the Institute of Chartered Accountants of England and Wales—

"that, before taking steps to require security under Clause 17, HMCE should be obliged to seek leave from a Tribunal Chairman."

5.15 pm

The report continues, in paragraph 5.11:

"We recommend that consideration be given to creating an enhanced statutory safeguard for legitimate traders, which would ensure that the conclusions related to Clause 17 arrived at by the investigating officer are reviewed at Board level within the Department and by an external judicial authority before the power to require security is exercised. This two-stage review would precede the issue of the preliminary warning letter contemplated as an essential element of Departmental practice in operating the new power. Under the procedure which we envisage, the application, which should be approved by the Commissioners of Customs and Excise themselves, without power of delegation, should be on an ex parte basis. Before giving leave, the Chairman of the VAT and Duties Tribunal would have to be convinced by the HMCE case against the trader that the business was involved or complicit in the alleged fraud."

To make sure that the scene for the debate is properly set, I shall quote paragraphs 5.20 and 5.21 from the report. They deal with clause 18, which would also be deleted by the amendment. Paragraph 5.20 states:

"We recognise the considerable educational effort that is being undertaken by HMCE to provide help and guidance for legitimate traders, in order not to find themselves through inadvertence, becoming involved in an "artificial" supply chain. However, we still have some misgivings that, as in the case of Clause 17 . . . the protection afforded to the legitimate trader by challenging the step of being made jointly and severally liable for the unpaid net tax in a supply chain only after the event would be insufficient. We acknowledge that the procedure begins with a "Notification Letter". The trader then has 21 days in which to demonstrate to HMCE a legitimate reason. If he or she fails to do so, at the end of that period a Demand Notice will be issued for the unpaid net tax. But we still see the need to enhance the protection for a legitimate trader from the burden of being faced with a "Notification Letter" in the first place. The detailed arguments that we advanced at paragraph 5.10 in respect of enhanced statutory protection for the legitimate trader apply with equal force in the case of Clause 18."

Paragraph 5.21 states:

"We recommend that consideration be given to providing that, before taking steps to hold a trader liable under the joint and several liability provisions of Clause 18, HMCE should be obliged to seek leave from a Chairman of the VAT and Duties Tribunal. The application, which should be approved by the Commissioners of Customs and Excise themselves, without power of delegation, should be on an ex parte basis. Before giving leave, the Tribunal Chairman would have to be convinced by the HMCE case against the trader that the business was involved or complicit in the alleged fraud."

The House will note that paragraphs 5.11 and 5.21 end with very similar wording.

I am sure that that the Economic Secretary will take those comments from the House of Lords seriously. I hope that he will address the concerns of many legitimate traders, learned professionals and Opposition Members. Indeed, similar concerns were raised, in Standing Committee by hon. Members from other parties, and they have also been voiced by those in another place. I look forward to his response.

I come now to another important matter in connection with clauses 17 and 18. I want to be slightly cautious and make sure that the point is well understood, but I understand that a firm of solicitors has served a letter before claim on the Chancellor of the Exchequer, the Attorney-General, the Treasury and the Chairman of the Board of the Commissioners of Customs and Excise. I understand that they have the opinion of counsel that Parliament does not have the power to legislate in the way clauses 17 and 18 seem to intend, as the clauses are in contravention of Community law. In addition, I understand that those concerned contend that the provisions are not in accordance with the Human Rights Act 1998. Further, those served with the letter before claim have now been put on notice that should they seek to apply the clauses, any loss or damage caused to any business, director or shareholder that is attributable to that application will be sought in accordance with the decision of the European Court of Justice in Frankovich, reference C-6 and C-9/90.

Given the value of the industry sectors concerned and the fact that the explanatory notes puts the total cost of missing trader fraud to the UK at between £1.7 billion and £2.75 billion in 2001–02, the level of damages from legitimate traders could very well be significant. I understand that the annual turnover for mobile and computer chip traders in the UK is now £50 billion. There are 400 traders, approximately, paying annual corporation tax of £600 million; there are 10,000 jobs, involving national insurance contributions and PAYE. These figures do not take account of major retailers such as Carphone Warehouse.

I have raised the issue of Community law on the Floor of the House before. When we debated clause 22 on 13 May, I raised many arguments that that clause was incompatible with Community law. It should be noted that these arguments in relation to the Seeling case have not been answered. On clauses 17 and 18, we have significant concerns about the compatibility with Community law. I am not a barrister, nor have I had access to the Government's legal opinion on the compatibility of clauses 17 and 18; nor, for that matter, on clause 22, despite repeatedly asking for it. Nor have I seen counsel's opinion supporting the solicitor's letter concerning the people who have sent the letter before claim, which I understand has been served.

I do know that we now have uncertainty for the industry and for taxpayers. We have seen case after case where the European Court of Justice has upheld the taxpayers' case against the UK, so we must take these matters seriously. A further concern regarding clauses 17 and 18 is the threat of Frankovich damages. I do not know the merits of the case but, if successful, legitimate traders—a number of whom have already suspended trading as a result of these clauses—can seek to recover any loss or damage caused to any business, director or shareholder. Without overstating the case, this could be in the order of tens of billions of pounds. Who would bear the cost? The taxpayer.

In Committee, the Paymaster General stated that, as far as Ministers were concerned, parliamentary counsel was "all four aces" when it came to being the final arbiter on the drafting of Bills, adding that Ministers challenged the interpretation at their peril. She went on to say that she sincerely hoped that aspiring Ministers in the decades to come—let us hope it is not anywhere near that long—would also consider such challenges unwise.

In Committee on 15 May, the Economic Secretary gave assurances that clauses 17 and 18 were in accordance with Community law, but gave scant legal support to those assurances. To that end, I recognise that we have a letter before claim, but we are not sub judice; we are certainly on notice. I have been provided with the documentation, and I know the Government are aware of that. I know that they will be prepared for my arguments.

As I now understand that another legal counsel has a different opinion and considers clauses 17 and 18 not to be in accordance with Community law, one could say that the Government's aces have been called. The Government have been put on notice. If they are wrong, they are putting UK taxpayers at risk of having to meet significant damages. I do not believe that it is right for UK taxpayers to be put at such risk.

Let us take the simple example of a planning application. If those considering a planning application are advised that their course of action may be successfully challenged—this could happen to any councillor in any authority in the country—and they proceed, those considering the planning application are held personally accountable. That is often one of the biggest issues in terms of getting an open discussion. In this case, I recognise that it is not thought that Ministers will be held personally accountable in such a case, but this is a direct equivalent. Importantly, neither should the UK taxpayer be held accountable when the Government have been put on notice, just as officials in a local authority would put councillors on notice that they are taking a huge risk for themselves and for local council tax payers. It is therefore incumbent on the Economic Secretary to give a full answer.

The Paymaster General warned that Ministers challenge parliamentary counsel at their peril. However, ignoring my personal views on that assertion, surely the position changes when another legal counsel—naturally, legal counsel will have different opinions—formally puts forward a clearly different opinion. The Chancellor and others have been served with the letter before claim. Given the importance of those issues, particularly for UK taxpayers, I call on the Economic Secretary to make the Government counsel's opinion available to the House, so that we can make an informed judgment about whether the clauses are compatible with Community law. The Economic Secretary knows that precedent exists, not least when the Attorney-General's legal advice was made available in advance of the Government decision to take us to war with Iraq.

The House should think exceptionally carefully before allowing these clauses to pass without considering the potential burden on the taxpayer. As Sir Humphrey Appleby might have said: "It would, Minister, be very courageous to proceed on this basis." Such advice should be enough to stop any responsible Minister in his tracks. We need a full exposition. Above all, if Ministers decide to proceed, one way of avoiding the very serious peril that I have identified—as I say, I shall not make a judgment on the merits of the legal case—would be to postpone the implementation date until such time as the legal matters have been fully resolved.

John Burnett (Liberal Democrat, Torridge and West Devon)

There are real concerns about the draconian nature of clauses 17 and 18. We also endorse the view that something should be done to combat missing trader fraud, which is international and, according to the Treasury, costs a huge sum of money—between £1.7 billion to £2.75 billion. The abuse has to be tackled, but I should like to quote the House of Lords Economic Affairs Committee, which is drawn from all three major parties and includes eminent members from all parties. In its introduction to the report, that Committee made it clear in paragraph 1.9 that

"a proper balance has to be struck between those efforts and the need to safeguard the rights of legitimate traders."

The efforts to which it refers are, of course, attempts to crack down on fraud, which the Government are rightly doing.

Several organisations have highlighted their misgivings about the clauses, and members of the Committee that considers the Finance Bill are fortunate to be sent details of representations from major organisations such as the Law Society, the Institute of Chartered Accountants, the Chartered Institute of Taxation and so forth. I do not want to go into great detail or repeat the further matters raised by the hon. Member for Eddisbury (Mr. O'Brien) in respect of quotations from the House of Lords Economic Affairs Committee report. However, I should like to return to some of the points that were properly raised in the representations of the tax law committee of the Law Society. Ministers receive them and I hope that the Economic Secretary will have had an opportunity to study them carefully.

The Law Society flagged up several points and I should like to go over three of them. New sub-paragraph (1A) in paragraph 4 to schedule 11 of the Value Added Tax Act 1994, which is inserted by clause 17(3), should make it clear that the amount of security that needs to be provided is proportionate to the amount of tax at risk. It does not do so, but the explanatory notes make it clear that it should. That is how the explanatory notes state that the clause should operate: it does not do so and should be amended in order to do so. The new sub-paragraph (1A) in paragraph 4 to schedule 11 should authorise only the requirement for security as regards future input tax claims. As drafted, that means that a business could seek to recover VAT and be informed at that stage that security was required in respect of a prior transaction.

The "relevant goods or services" in the new sub-paragraph (3) of schedule 11 are not defined. I understand that Customs and Excise is to put out a statement of practice that will indicate that the supplies to which it wishes to apply the enhanced security provisions include oil, fashion goods, computers, phones and accessories thereto. Nevertheless, as it would be possible to extend the types of goods affected by the enhanced provisions by an amending statutory instrument, legislation should surely set out the goods and services in question.

Those are just three of the points made by the tax law committee of the Law Society, and I have raised them not at random but because they are important. I must stress the central points made in the House of Lords Select Committee report. I hope that the Economic Secretary will make it clear that he has understood the importance of a separation of powers and of the report's recommendation, in paragraph 5.11, on the interposition of an external judicial authority. That is, of course, the least of safeguards. I hope that the response to this short debate will give us some comfort and that the Treasury has understood the legitimate criticisms of those of us who, though we understand the necessity for the provisions, believe that the rights of the individual must not be trampled in order to combat a serious fraud on the Exchequer. The human rights considerations cannot and should not be overlooked, and, in the hope that the Economic Secretary has had a chance since Committee to consider the point carefully, I look forward to hearing his considered view.

John Healey (Labour, Wentworth)

I welcome the detailed, serious and measured way in which the hon. Members for Eddisbury (Mr. O'Brien) and for Torridge and West Devon (Mr. Burnett) have approached the amendment. I accept their recognition of how serious missing trader fraud is, and I welcome their support for the objectives of clauses 17 and 18, which the hon. Member for Eddisbury also offered in Committee. I intend to deal with the points made as probing points, although it will be up to the hon. Gentleman to decide whether they are. I hope to set out clearly the legal basis on which we propose these measures and the safeguards that we are putting in place, particularly for legitimate businesses that may be concerned about the impact.

The measures before us are both proportionate and necessary. They are necessary because we must deal with what both hon. Gentlemen have recognised is a systematic and widespread attack on the VAT system, which is costing the British taxpayer billions of pounds a year. We are dealing with a form of VAT fraud, and any misconception that it is some sort of tax evasion that is pushing at the margins of legitimate tax legislation should be clearly nailed. The affected trade sectors—there are two principal sectors—are clearly riddled with this fraud. In many cases, the goods involved have gone backward and forward between member states so often that their boxes are falling apart.

The level of such transactions is often staggering; for example, sales to Ireland of a certain type of computer chip in the first six months of 2002 exceeded the total market for those chips in the continents of Asia, Africa and Europe. In another case, in a three-month period, a 21-year-old supposedly supplied 10 per cent. of the entire world production of a type of computer chip. As hon. Members will realise, what was happening, in effect, was that the same chips were going around in circles, and huge amounts of VAT were stolen each time.

The Customs have also intercepted single shipments of mobile phones, in one case weighing 14 tonnes—enough phones to fill a football stadium—which were useless for the legitimate UK market because they were of the two-pin plug variety. That did not matter to the fraudsters, of course, because the phones were not destined for UK customers but only to perpetrate a large-scale fraud.

Amendment No. 52 would remove both clause 17 and clause 18 and I shall turn to the arguments used to justify the concerns reflected in the proposal. In response to a point made by the hon. Member for Eddisbury, I shall demonstrate that we have the legal vires for the clauses and explain why we reject entirely the case put to us by the firm of solicitors to which he referred.

I shall try to put to rest the questions about legality in relation to EU VAT directives and to the European convention on human rights by explaining the legal position in some detail. First, on EU legislation, article 22, subsection (8) of the sixth VAT directive provides the vires for clause 17. It states:

"Without prejudice to the provisions to be adopted pursuant to Article 17 (4), Member States may impose other obligations which they deem necessary for the correct levying and collection of the tax and for the prevention of fraud, subject to the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers."

The imposition of security via clause 17 is for the prevention of fraud. Built into the clause is a safeguard requirement for Customs to satisfy the tribunal that there has been evasion of VAT or an attempt to evade VAT.

Secondly, on the ECHR, clause 17 is compatible with article 1 of protocol 1—on the protection of property—contained in schedule 1 to the Human Rights Act 1998: because, first, it is prescribed by law; secondly, when used, it will strike a fair balance between the demands of society and the interests of an individual; and, thirdly, it is taken for a legitimate purpose. The proviso to article 1 is that it should not

"in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties".

Those powers are not arbitrary and the provisions are proportionate to the pernicious attacks on the VAT system, such as VAT missing trader fraud.

Finally, clause 17 has inbuilt safeguards. It will be applied only in appropriate circumstances: where Customs can satisfy the tribunal that there has been an evasion of VAT or an attempt to evade it and where it is accompanied by a statement of practice—as the hon. Member for Torridge and West Devon mentioned—which lays down stringent guidelines as to how security is to be applied and introduces even further safeguards. Although the statement of practice itself does not have the force of law, once it is published, Customs will be expected and, if necessary, required by the courts, to follow it.

John Burnett (Liberal Democrat, Torridge and West Devon)

On this important matter, is the Economic Secretary assuring the House that, before action is taken, the VAT tribunal will have to be satisfied in all the circumstances that he has outlined?

John Healey (Labour, Wentworth)

No, we are not dealing with an application to a tribunal before action is taken. Such action must be based on Customs evidence sufficient to satisfy a tribunal, so those involved in taking the action will be conscious of that test, which a tribunal will apply if the case is brought to tribunal by a trader who wishes to contest the action taken by Customs and Excise.

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the Economic Secretary at least consider the issue, referred to by the hon. Member for Eddisbury and myself and raised by the House of Lords, that an application should be made before action is taken? We understand that that should be ex parte, but to an independent judicial authority.

John Healey (Labour, Wentworth)

We have received a range of views on these provisions from all sorts of parties, as hon. Members might expect. We have considered the hon. Gentleman's suggestion that Customs should have to seek the tribunal's go-ahead before taking action, but my concern about that is twofold. First, it could delay the ability of Customs to take action. Secondly, he may wish to consider further that any pre-implementation hearing with a tribunal chairman on any ex parte basis could be perceived to compromise the tribunal's very integrity and independence, which is, of course, a mainstay of the system. Of course, when these clauses are in place with the safeguards that I am outlining, we will keep them very closely under review to ensure that they have the intended effect on fraud, not an unintended effect on legitimate businesses. I shall return to the inbuilt safeguards in clause 17 in a moment.

I come now to clause 18. Article 21(1) and (2) of the sixth VAT directive defines the persons liable for payment of the tax. Article 21(3) of the EC sixth Council directive provides the legal vires for joint and several liability. It states:

"In the situations referred to in paragraph 1 and 2, Member States may provide that someone other than the person liable for payment of the tax shall be held liable for payment of the tax."

Or, to put it another way, member states may legislate for someone other than the person liable for the payment of the tax—the missing trader in this case—to be held jointly and severally liable for the payment of VAT.

On human rights law, clause 18 is compatible with article 1 of protocol 1, which deals with the protection of property, contained in schedule 1 to the Human Rights Act 1998 because, first, it is prescribed by law; secondly, when used, it will strike a fair balance between the demands of society and the interests of individuals; and, thirdly, it serves a legitimate purpose. The proviso to article 1 states that such a provision should in no way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes, other contributions or penalties. Again, these are not arbitrary powers and the provisions are clearly in proportion to the scale of the systematic attack on the VAT system.

Again, the measure has inbuilt safeguards. It can be applied only in appropriate circumstances—in other words, where Customs can show that a business knew or had reasonable grounds suspect that VAT would be unpaid in its supply chain. Customs has to establish some sort of knowledge—either guilty knowledge, or reasonable grounds to suspect a business. There is a full right of appeal and the right of judicial review.

Clause 18 is accompanied by a statement of practice, which lays down stringent guidelines on how the measure should be applied, so there are further safeguards. Although the statement of practice does not have the force of law, once published, Customs will be expected and, if necessary, required by the courts to follow it in appropriate cases. I hope that I have cleared up any questions that hon. Members might have about the legal vires of clauses 17 and 18.

I want to deal with the more substantive questions of not only why the measures are justified but, especially, how we will ensure that innocent parties are protected during the operation of the tough new powers that we deem necessary, which was the concern raised by the hon. Member for Eddisbury.

I shall emphasise that last point first. I made it clear in Committee that I do not underestimate the gravity of the measures that we propose to use under clauses 17 and 18. We fully understand that although they will help to crack down hard on fraud, if appropriate safeguards are not put in place and the measures are not properly targeted and restricted, the impact on legitimate businesses will be unacceptable. Let me spell out clearly, as I did with the clauses' legal basis, how legitimate businesses will be protected under the proposals and why I do not accept that we need additional measures that have been suggested by a range of bodies from all walks of life.

I start by considering the measures under clause 17. The revised public notice 700/52 is Customs' statement of practice. It outlines the procedures and circumstances in which Customs will require security. Customs will be expected to follow it and, if necessary, required to do that by the courts. The measure is aimed at businesses that are repeatedly involved in supply chains in which there are substantial tax loses. Businesses that are known to have dealt with high-risk businesses or individuals in the past will be given advice by Customs on the steps that they should take to avoid dealing with such businesses. Security will be required only if they continue to do that.

The measure will not be applied without a formal written warning, which will give businesses the opportunity to mend their ways. A new right of appeal will be introduced—an appellate rather than a supervisory right—that will allow the tribunal to reduce or vacate any security requirement. An appeal will be allowed unless Customs satisfies the tribunal that there has been, or is likely to be, evasion in the supply chain. I would fully expect a tribunal to uphold any appeal in which Customs failed to follow its procedures, for example, if no warning were given before applying the measure.

The measure in clause 18 is limited in law to two trade sectors. It will theoretically affect 50,000 of the 1.7 million businesses that are registered for VAT but, in practice, it is likely to affect no more than 5,000 or 6,000. The law means that Customs will not apply the measure unless it can establish that a business knew, or had reasonable grounds to suspect, that VAT would go unpaid. A business may rebut any presumption if the low price paid for goods is unconnected with unpaid VAT.

Businesses will be notified if they are caught by the measure before it is applied, which will give them the opportunity to provide an explanation. I make it clear that the measure will not be applied to businesses that demonstrate that they have not become involved in a supply chain in which VAT has gone, or will go, unpaid. Businesses will have the right of appeal to an independent VAT and duties tribunal if they receive a joint and several liability notice.

I hope that my remarks have helped to reassure hon. Members about their greatest concerns, and demonstrated that there is robust legal basis behind clauses 17 and 18 and that the measures proposed are properly restrained and balanced by comprehensive and effective safeguards to protect the innocent. We do not take the powers lightly. As I explained in Committee, we have examined other options, but none would be as effective as measures set out in clauses 17 and 18. The scale and nature of the fraud, often involving complacency or collusion, require us to take the measures to complement Customs existing actions to clamp down on the VAT fraud.

In light of the explanation and assurances that I have set out for the hon. Member for Eddisbury and other hon. Members, I hope that he withdraws the amendment. If he wishes to press it to a vote, I must ask my hon. Friends to reject it.

Stephen O'Brien (Conservative, Eddisbury)

In the interests of time, as other business is pressing, I shall just say that I am grateful to the Minister for the spirit in which he treated the issues raised. As he rightly observed, the gravity of the subject merits that and he did, indeed, treat it seriously. We needed to take a technical approach to have what is, in effect, a stand part debate. Our exchange has been important. It has provided us with the chance to raise concerns.

On the House of Lords report, no doubt the other place will look to the Government for a response. The debate on whether there is prior, rather than post, protection, and where the balance of rights and responsibilities lies, will develop. Furthermore, on a letter before a claim, that may, or may not, end up being a matter for the courts. It would be irresponsible of me to speculate further on that other than to say that it has been a useful exchange and we have ensured that the issues are well understood.

The Minister rightly observed, as part of the article 1 and protocol 1 attached to schedule 1 of the Human Rights Act 1998, that we have discussed the fair balance of a judgment to be applied between society and the individual. On that basis, a useful exchange has taken place, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 1 — VAT: Face-Value Vouchers

Clause 207 — Payments for Service of National Debt

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 5, in page 138, line 41, leave out subsection (3) and insert—

"(3) For subsection (3) substitute—

'(3) For the purposes of making their determination under subsection (1)(b) the Treasury shall be required to apply generally accepted accounting practices in determining whether all or part of any payments represent such interest as is referred to in that subsection.'.".

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

With this it will be convenient to discuss the following amendments: No. 6, in clause 208, page 139, line 10, at end insert—

", such determination to be made in accordance with generally accepted accounting practice.'.".

No. 7, in clause 209, page 139, line 17, leave out 'the Treasury consider appropriate' and insert

"conforms with generally accepted accounting practice.".

Howard Flight (Conservative, Arundel and South Downs)

There was not time in Committee to address the amendments, which contain important points of principle. Clause 207 allows the Treasury to determine which payments should be classified as payments of interest on the national debt to allow the existing out-of-date definition to be updated, but there is no indication of the way in which the Treasury will decide what should be treated as interest. There is no obligation to determine whether the true nature of a payment is in whole, or in part, disguised interest. Indeed, is it envisaged that part of the payments to Departments should be recategorised as interest when they are effectively borrowing, for example, through the private finance initiative? It can be argued that that should be the case.

Amendment No. 5 would set an obligation on the Treasury to make any determination on the basis of generally accepted accounting practice. The national debt should be accounted for to the same standard as any other liability. In the wake of the Government's tricks to keep Network Rail off balance sheet, so causing the appalling management problems that have ensued, I regret to say that the good faith of the Government cannot be taken for granted. It is necessary to ensure that they are not tempted to disguise the extent of the cost of servicing the national debt.

Clauses 208 and 209 allow the Treasury to determine the assets of the national loans fund and the form and content of the accounts of the Consolidated Fund and the national loans fund. Again, that needs to be subject to appropriate constraint. Those are national accounts and the basis of their preparation should not be left to the determination of the Treasury without any requirement to adopt generally accepted accounting practices. It should not be possible to move assets and liabilities off balance sheet. Accounts should be accurate and prepared in accordance with accepted principles. I hope that the Minister will at least address those issues by putting on the record an undertaking on both counts.

John Healey (Labour, Wentworth)

I welcome the generally sober way in which the hon. Member for Arundel and South Downs (Mr. Flight) has approached these matters. The amendments are directed to clauses that are of central importance to Parliament and the ability of Parliament to hold the Executive to account, and they deserve that recognition.

I shall explain why the amendments will compromise the objectives that we have for the clauses and why, if the hon. Gentleman wishes to press them to a vote, I would ask my right hon. and hon. Friends to resist. The amendments would require the Treasury to conform to generally accepted accounting practice—GAAP—when accounting for the operations of both the Consolidated Fund and the national loans fund. There are three reasons for asking the House to resist the amendments that would put that requirement in the Bill.

First—I hope that the hon. Gentleman will welcome and accept this—the Government are committed to preparing their accounts in accordance with GAAP, subject to such adaptations that are necessary in the context of the public sector. That is as true for the national loans fund accruals-based account as it is for departmental resource accounts. However, as GAAP is not designed with either the particular needs of Government accounts or the complex legislative framework governing the NLF in mind, the Treasury needs the flexibility to depart from it where strict adherence to GAAP would not be sensible. This is in line with the position already accepted for the debt management account, with which the NLF is closely linked.

I can assure hon. Members that the Treasury will use its discretion responsibly and will use it in the public interest. Also, Parliament's position is properly protected because the NLF account will still be audited by the Comptroller and Auditor General, who can bring any matters of concern to the attention of Parliament.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

Will the Minister give way?

John Healey (Labour, Wentworth)

The hon. Gentleman has only just come into the Chamber but I will of course, give way to him.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

That is kind of the Economic Secretary. Will the Treasury publish reasons for departing from general accounting practice where it needs to do so?

John Healey (Labour, Wentworth)

If the hon. Gentleman holds his fire and has a little patience, he will find that I shall go further than that.

First, the Treasury is currently discussing the format of accounts in detail with the National Audit Office, which is content with the structure of the amending clauses in the Bill. Secondly, the Government see no need at present to draw up the accounts for the Consolidated Fund on an accruals basis. As the hon. Member for Arundel and South Downs knows as well as anyone, the Consolidated Fund is essentially a bank account that receives the proceeds of taxation and funds the spending of Government Departments. The Treasury will therefore continue to account for those flows on a simple receipts and payments basis. Again, the NAO is content with this proposition, which reflects the nature of the account.

I shall give the House a further reassurance. The Treasury will set out its detailed proposals for the Public Accounts Committee and the Treasury Select Committee before making an order to abolish the requirement to produce the supplementary statements.

Thirdly, in the context of amendment No. 5, the law currently allows the Treasury to define income items as if they were interest receipts for the purposes of determining the transfer from the Consolidated Fund to the national loans fund in respect of net debt costs. However, there is no flexibility at present within the law whereby expenditure items are similarly treated. Hence we cannot at present treat discounts on gilt issues as expenditure items for the purpose of the standing service payment from the Consolidated Fund to the NLF. The proposed change rectifies that. We have discussed the proposed legislative changes and the income expenditure treatment of individual types of transaction with the NAO, which, once again, is content. In this context, GAAP has no bearing on whether a particular payment should be treated as interest for the purpose of calculating the deficit on the NLF's net debt servicing flows, as that is met by the consolidated fund. The amendment would therefore not achieve the desired effect, so I encourage the hon. Member for Arundel and South Downs not to seek to press it to a vote.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister for his comments. In view of our wish to discuss schedule 21, I shall not respond further, and beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 21 — Approved Share Plans and Schemes

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 13, in schedule 21, page 251, line 9, at end insert

"and insert 'or 4 (in respect of shares acquired under approved CSOP schemes pursuant to rights granted before 9th April 2003)'.".

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

With this it will be convenient to take the following amendments: No. 14, in page 251, line 14, after "schemes)", insert

"pursuant to rights granted on or after 9th April 2003".

No. 19, in page 251, line 22, at end insert

"pursuant to a right acquired on or after that date.".

Howard Flight (Conservative, Arundel and South Downs)

Amendments Nos. 13, 14 and 19 offer alternative ways of addressing an issue raised in Committee. Since then, a number of US multinationals and their legal representatives have expressed strong objections to the Paymaster General's response to matters that we raised with her. The issue, as we all know, is the imposition of employer NICs on approved options granted in the three years until 9 April in this Budget year. The multinationals and, indeed, the Conservatives regard the Government's measures as retrospective, and we object to the Paymaster General's reference to people breaking the rules by exercising options before the three-year period and not paying NIC charges on them. The rules and the law are clear and well known. Indeed, the Government could have applied three recent pieces of legislation, which were designed to apply NICs to unapproved schemes, to the early exercise of approved schemes, had that been their wish and intent. The problem of NICs and options, as well as the Government's failure to address all the issues related to unapproved schemes have taken up a lot of parliamentary time. Because the rules were clear, the Inland Revenue positively objected to the inclusion of tax withholding and NIC transfers from employers to employees in approved option schemes. For a long time, certain benefits have been subject to income tax, but not NICs. Although the Government have narrowed the territory, some still remain.

It has not been suggested by anyone, let alone the Revenue, that before paragraph 25 of schedule 21 was drafted not paying NICs on benefits not subject to such contributions was equivalent to breaking the rule. In particular, US multinationals frequently included the possibility of early vesting before the three year period in their UK-approved schemes, reflecting standard parent arrangements in the USA. For example, they would allow 25 per cent. of options to be exercised each year after the granting of rights. UK-approved schemes required Revenue approval, and many multinationals discussed early vesting with the Revenue. The tax rules were clear—early vesting resulted in an income tax charge in place of a capital gains tax change on gains that were realised. The view was that the main protection here was the fact that approved schemes were limited to a value of only £30,000 per participant.

In those circumstances, clever avoidance was not the issue. The law was the law, and the Revenue was well aware that many multinationals had such early vesting provisions. The Paymaster General told me in a recent letter that multinationals were advised in the past by the Revenue that shorter shareholding periods were not in the spirit of the rules for approved schemes. However, that was not generally the case. Some multinationals may recently have received such advice, but certainly that was not general practice going back three years. The fundamental issue is, what was the law at the time? The Government, as I said, had ample opportunity in the past four years to add an NIC employer and employee charge to the early exercise of approved share options.

Schedule 21 would clearly introduce a stealth tax, as it imposes a retrospective NIC on employers for the early exercise of options granted within the three years up to 9 April. I was greatly surprised that the Paymaster General's letter to me concluded:

"When employees choose to exercise their approved options within three years and employers have given them that choice, they do so with the full knowledge that income tax and NI is payable".

That is simply not the case. Schedule 21 makes provision for that, but until it was drafted there was no suggestion from the Government that that would be so. When multinationals included early vesting in their approved schemes in the past three years, that was cleared with the Inland Revenue. The law was the law, and the tax result was quite simple—early exercise resulted in income tax rather than a capital gains tax on employees, and did not result in NIC for employers.

I am afraid that the provision will introduce retrospective taxation as part of the Government's desperate drive for tax revenues. They have made enemies of many US multinationals, which feel that the Government have acted in bad faith. More generally, deliberate anti-avoidance usage of approved schemes has been limited, as the schemes themselves have tight limits, and circumstances do not usually allow for approved schemes to be used for such purposes—they have to be blessed by the Revenue. Penalising employees retrospectively is wrong and, moreover, there is no evidence that making the proposals prospective would result in any substantial tax cost. I urge the Government to accept one of the routes proposed in our amendments and also to recognise the truth of the situation.

Dawn Primarolo (Labour, Bristol South)

I urge my colleagues to vote against amendments Nos. 13, 14 and 19 which, in various ways, seek to stop the application of PAYE and national insurance to company share option plans granted before 9 April 2003. Let me make it clear that the Government believe that it is right that employees should pay their fair share of tax and national insurance on all forms of employment-related remuneration. Bringing options granted after 9 April 2003 within PAYE and NICs rules would mean that companies and employees who have sought to avoid paying their fair share of tax and national insurance will continue to do so.

Howard Flight (Conservative, Arundel and South Downs)

rose—

Dawn Primarolo (Labour, Bristol South)

I will not give way to the hon. Gentleman, as I want to put this on the record.

Such a change would effectively reward employers and employees who have been using company share option plans instead of unapproved options, allowing them to be exercised early to avoid paying NICs. Companies should not be able to gain an advantage over their competitors by failing to operate their company share option plans within the spirit of the legislation. It is right that companies that have used CSOP options as a means of providing short-term, share-based remuneration should be expected to pay PAYE and national insurance. As I said in Committee, I do not accept that the change is retrospective. The hon. Gentleman is wrong to assert such a thing on the Floor of the House. The change is not retrospective. If employees hold their options for three years after grant, they will not pay tax and national insurance. That has always been so and is not changed. Where employees choose to exercise their options within three years and employers have given them that choice, they do so in the full knowledge that tax and national insurance is payable.

The proposed change in the schedule and clause means that businesses will no longer be able to gain an unfair advantage over their competitors by failing to operate within the spirit of the company share option plan legislation. It is right that companies that proceeded to use company share option plan options as a means of providing short-term share-based remuneration should be expected to pay their PAYE and national insurance. Company share option plan options have been used to undermine the principle that tax and national insurance should be paid on such employment remuneration. By tackling that and ensuring that company share option plan options exercised early are subject to PAYE and NICs for both existing and future options, we are correcting the unfair position that has arisen when employers have used company share option plan options as a substitute for unapproved options.

It is clear that in the name of fairness to taxpayers and the operation of the rules as they are expected to be operated—on the basis of fairness to all taxpayers—the hon. Gentleman seeks, through the amendments, to give a huge advantage to the few, while the rest of us pay for it. That is not acceptable. I ask the House to reject the amendments.

Howard Flight (Conservative, Arundel and South Downs)

The Paymaster General is quite incorrect to assert that the situations that I described were about tax avoidance. They were cleared with the Revenue, the tax position was understood, and if the Government wanted a regime where employer NICs were payable on early exercise, they should have put that into the law when they changed the general rules on NICs and unapproved schemes.

What is retrospective is the NIC charge on employers. I can tell the Paymaster General that the overwhelming majority of lawyers in the City of London specialising in these matters agree strongly with that. She has made an enemy of the very type of US multinational companies that we need to go on investing in this country. She is mistaken in her views and there will no great tax gains to the Revenue as a result. We therefore intend to press the amendment to a Division.

Schedule 22 — Employee Securities and Options

Schedule 33 — Insurance Companies

New Clause 10 — Registered Social Landlords: Treatment of Certain Leases Granted Between 1st January 1990 and 27th March 2000

Paul Boateng (Labour, Brent South)

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

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

With this it will be convenient to discuss the following: amendment No. 8, in page 29, line 30, clause 42, leave out 'stamp duty land' and insert 'property transaction'.

Government amendments Nos. 53 to 57.

Amendment No. 98, in page 35, line 40, clause 53, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 9, in page 37, line 30, leave out Clause 56.

Government amendments Nos. 58 to 63.

Amendment No. 21, in page 42, line 28, clause 62, leave out 'stamp duty land' and insert 'property transaction'.

Government amendments Nos. 64 to 68.

Amendment No. 22, in page 47, line 23, Clause 68, leave out 'stamp duty land' and insert 'property transaction'.

Government amendments Nos. 69 to 76.

Amendment No. 23, in page 59, line 24, clause 93, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 99, in page 65, line 11, clause 104, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 24, in page 69, line 1, clause 114, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 25, in page 69, line 10, clause 114, leave out 'stamp duty land' and insert 'property transaction'.

Government amendments Nos. 77 to 79, 143 and 144.

Amendment No. 26, in page 75, line 2, clause 123, leave out 'stamp duty land' and insert 'property transaction'.

Government amendment No. 80.

Amendment No. 100, in page 75, line 22, clause 125, leave out 'SDLT' and insert 'PTT'.

Amendment No. 101, in page 75, line 23, clause 125, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 102, in page 75, line 26, clause 125, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 103, in page 75, line 28, clause 125, leave out 'stamp duty land' and insert 'property transaction'.

Government amendment No. 81.

Amendment No. 10, in page 161, line 35, leave out Schedule 5.

Government amendments Nos. 82 to 86.

Amendment No. 104, in page 219, line 33, schedule 13, leave out 'stamp duty land' and insert 'property transaction'.

Government amendments Nos. 87 to 90.

Amendment No. 27, in page 232, line 37, schedule 15, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 28, in page 234, line 4, schedule 15, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 29, in page 234, line 10, schedule 15, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 105, in page 234, line 26, schedule 15, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 30, in page 234, line 29, schedule 15, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 31, in page 235, line 1, schedule 15, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 32, in page 235, line 4, schedule 15, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 33, in page 235, line 11, schedule 15, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 106, in page 235, line 14, schedule 15, leave out 'stamp duty land' and insert 'property transaction'.

Government amendments Nos. 91 to 95.

Amendment No. 34, in page 240, line 17, schedule 18, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 35, in page 240, line 21, schedule 18, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 36, in page 240, line 25, schedule 18, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 37, in page 240, line 27, schedule 18, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 38, in page 240, line 29, schedule 18, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 39, in page 240, line 32, schedule 18, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 40, in page 240, line 37, schedule 18, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 41, in page 241, line 11, schedule 18, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 42, in page 241, line 15, schedule 18, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 43, in page 241, line 21, schedule 19, leave out 'SDLT' and insert 'PTT'.

Amendment No. 44, in page 241, line 28, schedule 19, leave out 'SDLT' and insert 'PTT'.

Amendment No. 45, in page 241, line 31, schedule 19, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 11, in page 241, line 32, schedule 19, at end insert

'but no order under this paragraph shall appoint a date earlier than 1st December 2004.'.

Amendment No. 46, in page 241, line 35, schedule 19, leave out 'SDLT' and insert 'PTT'.

Government amendment No. 96.

Amendment No. 47, in page 242, line 22, schedule 19, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 48, in page 242, line 26, schedule 19, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 49, in page 242, line 37, schedule 19, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 107, in page 243, line 10, schedule 19, leave out 'stamp duty land' and insert 'property transaction'.

Amendment No. 50, in page 243, line 13, schedule 19, leave out 'SDLT' and insert 'PTT'.

Amendment No. 51, in page 243, line 14, schedule 19, leave out 'SDLT' and insert 'PTT'.

Amendment No. 108, in page 243, line 15, schedule 19, leave out 'stamp duty land' and insert 'property transaction'.

Government amendment No. 97.

Amendment No. 15, in page 246, line 8, schedule 20, after 'other', insert 'transitional'.

Amendment No. 16, in page 246, line 9, schedule 20, leave out

'appear to them appropriate in consequence of abolition'

and insert—

'are necessary or reasonably incidental to effect the replacement'.

Amendment No. 17, in page 246, line 13, schedule 20, leave out

'appear to the Treasury to be appropriate'

and insert—

'are necessary or reasonably incidental to the replacement of stamp duty except on instruments relating to stock and marketable securities; but any such provision or any such regulation which is not necessary or reasonably incidental to such purpose shall not take effect.'.

Amendment No. 18, in page 246, line 15, schedule 20, leave out

'annulment in pursuance of a'

and insert 'an affirmative'.

Paul Boateng (Labour, Brent South)

No one listening to you read out that little lot, Madam Deputy Speaker, could say that we have not listened. I am afraid that the hon. Members for Arundel and South Downs (Mr. Flight) and for Torridge and West Devon (Mr. Burnett) will say that we have not listened, but we have. We have now reached a group of amendments on stamp duty and stamp duty land tax. I shall deal first with new clause 10, which is one of the many examples of our having listened to the concerns of stakeholders. I shall then deal with the Opposition amendments. Finally, I shall deal with the Government amendments. Some of them are technical, but most again reflect our willingness to listen to concerns that have been expressed in Standing Committee and by stakeholders.

New clause 10 further extends the targeted relief from stamp duty for registered social landlords. Many RSLs have been using a particular form of lease under the impression that it was exempt from stamp duty. However, it now appears that those leases should have been stamped. Recognising the valuable role played by RSLs, we do not believe that it is appropriate now to seek stamp duty on the many lease agreements currently in place, not least because under current stamp duty provisions, it is unclear whether the liability should be met by those RSLs or their tenants.

The new clause therefore exempts from stamp duty indefinite tenancy agreements granted between 1 January 1990 and 27 January 2000 where the landlord at any time before 26 June 2003 has been an RSL. That means that it will apply to indefinite tenancy agreements both granted by and assigned to RSLs. The new clause also removes the administrative burden of stamping tenancy agreements that have not previously been stamped, which means that RSLs will now have certainty that their tenancy leases comply with stamp duty legislation. I commend this worthwhile new clause to the House.

I now turn to the Opposition amendments. Amendments Nos. 8, 21 to 51 and 98 to 108 simply attempt to change the name of the tax and would have no effect on its scope or operation. Their aim is clearly to cause unnecessary alarm and confusion among house purchasers and their advisers by suggesting that the Government are introducing a new tax—[Interruption.] Quite so; Opposition Members attempted to make that suggestion throughout the proceedings in Committee. I should have thought that it had been rebuffed sufficiently for them not to want to repeat their folly on the Floor of the House, but I fear that that is not the case.

George Osborne (Conservative, Tatton)

rose—

Paul Boateng (Labour, Brent South)

I fear that we are now about to hear folly in triplicate from the hon. Gentleman.

George Osborne (Conservative, Tatton)

I am not sure I am grateful to the Chief Secretary for giving way on that sour note, but perhaps he will answer this question: in what sense is this tax a stamp duty, since it involves neither a stamp nor a duty?

Paul Boateng (Labour, Brent South)

It is a reflection of a continuing process of modernisation that was begun by the Conservative party, which should welcome it. I am surprised that, having heard the arguments, the hon. Gentleman, who has an open mind, should persist in that one.

Let me emphasise that those who already pay their way—the vast majority of purchasers and their advisers—will notice little difference as a result of the implementation of SDLT. The rates for residential purchases will remain the same. The main difference will be that payment of SDLT will be accompanied by a return rather than an original document, but the information on the return will be virtually the same as that already provided to the Revenue, so there is no change there.

The legal and accountancy professions are familiar with the name "stamp duty land tax" as a result of the customer education programme that we have already launched. It would cause a great deal of needless confusion if, in the unlikely event of the amendment appealing to the House, that name were to be changed. Those who will notice a difference are those who have used the archaic features of stamp duty for avoidance purposes. The modernised structure and procedures will ensure that they pay their proper share. I hope that the Opposition will support us in that aim and the changes that are necessary to achieve it.

This is where I shall labour the point at a little length—

Mark Prisk (Conservative, Hertford and Stortford)

It will not make any difference.

Paul Boateng (Labour, Brent South)

That is very unfair. It is important to point out the history to Opposition Members. In 1986, the then Conservative Government introduced stamp duty reserve tax. Precisely the same strictures that the hon. Member for Tatton (Mr. Osborne) threw at me might have been thrown at my predecessor or the Financial or Economic Secretaries of the time. Of course, what was introduced was a tax on transactions involving chargeable securities, which does not involve the physical stamping of a document, but I cannot remember anyone, whether from the Government or the Opposition, suggesting at that time that the name was misleading. [Interruption.] I was not in the House at that time. Indeed, I suspect that the hon. Member for Tatton was still in primary education or, as that is not possible even for one so youthful, in the sixth form.

George Osborne (Conservative, Tatton)

I was doing O-levels.

Paul Boateng (Labour, Brent South)

The hon. Gentleman was in the fifth remove; no doubt he was the terror of the fifth remove.

There is absolutely no basis for the amendments that the Opposition have tabled in an attempt to persuade the House of the virtues of a change of name, and I urge the House to reject them.

Amendments Nos. 9 and 10 are perhaps the more serious Opposition amendments. They would remove the provisions relating to the SDLT charge on the rental element of leases. Of course, Opposition Members are well aware that there is an existing stamp duty charge on the rental element of leases. However, since stamp duty on land transactions will in general be abolished from the implementation of SDLT, the amendments would mean that there was no charge at all—not even the current one—on the rental element of the leases. That in itself is enough to make me urge my hon. Friends to resist the amendments. Indeed, I hope that on reflection Opposition Members will recognise the error into which they have fallen in tabling them.

Mark Simmonds (Conservative, Boston and Skegness)

Will the Chief Secretary give way?

Paul Boateng (Labour, Brent South)

Of course I shall give way to the hon. Gentleman, who may have been reflecting even as I have been speaking and may want to assure us that that is not the intention.

Mark Simmonds (Conservative, Boston and Skegness)

I am grateful to the Chief Secretary for giving way. He is being a little disingenuous in suggesting that the stamp duty on leases will disappear altogether. He knows as well as I do that many predictions suggest not only that there will be an increase of four to eight times in the stamp duty payable on an average 10-year lease, but that, in many circumstances and in exceptional cases, the amount payable in relation to longer leases could be very much higher.

Paul Boateng (Labour, Brent South)

I am afraid I do not accept that analysis, and I shall explain why. As is so often the case when the effect of amendments would by any definition be disastrous, we will no doubt hear from the Opposition spokesman that these are merely probing amendments designed to allow a debate—in this case on the lease duty proposals. As the Opposition denied themselves in the Committee of the whole House by concentrating at length—I do not criticise them for this—on the other, perhaps less significant, aspects of the Bill, it is right for me, as they clearly desire it, to set out in a little more detail the Government's approach to the charge on the rental element of leases.

Stamp duty payable on the rental element of leases, which is often called lease duty, has long been out of step with the duty payable on purchases, and the existing structure of lease duty distorts commercial decision making. The current charge is on just one year's rent, at rates that vary according to the length of the lease. A lease of 35 years is charged at 2 per cent., whereas one of 36 years is charged at 12 per cent. The Government believe that the decision to own a property leasehold or freehold, or on what type of lease to take, should be business led, not tax led.

After extensive consultation, we now propose a new lease duty structure to reduce such distortions while securing a fair amount of tax from those transactions. The Government are still open to comment on the proposals. My officials have recently had positive and constructive meetings with interested parties. We are perfectly prepared to consider an alternative structure that meets the Government's objectives equally well. Under the proposals, lease duty will, as now, be a one-off, up-front charge on rents, but based instead on the value of the lease over its term, using total rent discounted to net present value. That approach surely better captures the value of a lease to the lessee and reflects modern commercial practice in the treatment of future payments.

The £150,000 zero rate threshold for purchases will apply equally to the value of rents on commercial leases, so that leases where the net present value of rent over the term is less than £150,000 will be exempt. That will take 60 per cent. of all commercial leases out of the charge completely; and businesses that do pay more under the proposals will pay at a flat rate of 1 per cent., which is still considerably less than the 4 per cent. on an equivalent purchase. That decision was welcomed by the industry.

The structure narrows the gap between charges on leasehold and freehold transactions without imposing an unfair burden on large businesses, and removes the burden completely for smaller leases such as those typically used by small businesses and start-ups, where help is most needed and where this Government have done much to assist. Most residential rental leases are currently liable to lease duty, but under the proposals the vast majority will fall below the £60,000 threshold. A small number of residential leases, about 5,000 per year, will be liable—broadly those with the very highest rents. The proposals thus reflect the Government's commitment to fairness, to encouraging enterprise and to reducing regulatory burdens. I ask my hon. Friends to show their support for those commitments by rejecting the amendments decisively.

Amendment No. 11 aims to defer the introduction of stamp duty land tax until at least 1 December 2004. Hon. Members will be aware that the right hon. and learned Member for Folkestone and Hythe (Mr. Howard) has already written to my right hon. Friend the Chancellor on that subject; the hon. Member for Hertford and Stortford (Mr. Prisk) kindly informed me that my reply to that letter was received yesterday. The terms of that reply were similar to those in which I shall suggest to the House that the amendment should be roundly rejected.

Deferring the modernisation process for another year simply does not make sense. We have already told the House about the widespread avoidance of stamp duty, which will undoubtedly continue if reform is not pursued. We received general recognition in the course of our deliberations in Committee that the issue was a cause for concern: that ought not to divide the House. We have explained that half of all commercial property transactions worth £10 million or more pay stamp duty at 4 per cent., whereas the other half pay nothing. That cannot be right. The continuation of such unfairness for another year cannot be justified, and would lead to a loss of yield of around £250 million.

I note that Conservative Members did not seek to defend to my hon. Friends or me in Standing Committee unfair tax avoidance of the sort that we described. Indeed, the hon. Member for Hertford and Stortford said that he supported the Revenue in challenging

"unreasonable actions that seek to enable someone to avoid their fair tax liabilities."—[Official Report, Standing Committee B, 3 June 2003; c. 312.]

Why, then, would Conservative Members table an amendment that would leave the door wide open to avoidance for another year—especially given that they tabled the same amendment in Committee of the whole House, then chose not to explore it but instead to have an extended debate on other issues?

A target date of 1 September 2003 aims to strike a balance between the urgent need to tackle avoidance and allowing sufficient time for taxpayers and their agents, including solicitors and other conveyancers, to make the necessary preparations. Deferral would merely ensure that the existing unfairness endures for another year—good for avoiders, but bad for everybody else. I therefore urge the House to reject amendment No. 11.

Amendments Nos. 15 to 18 seek to restrict the power of the Treasury to make regulations to amend or to repeal enactments relating to stamp duty and stamp duty reserve tax following from the abolition of stamp duty, other than on instruments relating to stock or marketable securities and certain partnership transactions. They would also make the regulations subject to an affirmative resolution of the House. That is undesirable, because limiting the scope of the regulations in that way would prevent the making of regulations that ensure that stamp duty and stamp duty reserve tax on shares work properly together.

Moreover, amendment No. 18 would lead to uncertainty over whether regulations that are in place have full effect. I fear that that would create the danger—to which the hon. Member for Torridge and West Devon (Mr. Burnett) will be acutely alert—of lacunae arising. That of course would never do, so I hope to see the hon. Gentleman in the Lobby with us on this group of amendments, if nothing else.

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the Chief Secretary acknowledge that one of the many lacunae in the stamp duty provisions is the fact that there is a continuing raft of legislation? He has even offered to reconsider lease duty. When will it stop? When will we know exactly what are the Bill's provisions on stamp duty?

Paul Boateng (Labour, Brent South)

I am very fond of the hon. Gentleman, but he really must avoid falling like so many of his Liberal Democrat colleagues into the trap of wanting it each and every way: they want the best of all possible worlds—to have their cake and eat it. Realistically, he cannot take us to task for not consulting enough, then, when we do consult and say that we are open to making new proposals—if they meet our objectives—in the light of those consultations, complain about a lack of certainty. That is unfair. The hon. Gentleman is a fair-minded man, so for him to take us to task for being open and consultative is uncharacteristically unreasonable.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am extremely grateful to the Chief Secretary—or should I call him the chief? Hail to the chief. My point is that we do not want continuing stamp duty land tax legislation for perhaps another six months without proper scrutiny or a proper opportunity for this House to debate it in detail. That is what disturbs us.

Paul Boateng (Labour, Brent South)

I hear the hon. Gentleman, who makes his point in his usual way. However, that argument would not lead us to abandon our commitment to consultation and the careful consideration of alternatives—nor does it make the amendments any more acceptable. The purpose of regulations under schedule 20 is to enable stamp duty legislation to be repealed when it is no longer needed and to ensure that the current effect of the legislation is preserved for stock and marketable securities. Regulations will not be made under schedule 20 to increase the scope of stamp duty or the rate at which it is payable. I hope that that will be of some comfort to the hon. Member for Torridge and West Devon. There is no need to make regulations subject to affirmative resolution. I hope that, on the basis of that assurance, hon. Members will not try to divide the House.

Hon. Members are anxious to hear from the hon. Member for Hertford and Stortford, so I shall deal with the Government amendments expeditiously. They fulfil the commitments that I made in Committee and clarify other aspects about which we have received representations. Some—for example, those on appeal procedures—are essentially technical. However, most make substantive changes, for example, on the rules for sub-sales, to meet genuine concerns that were shared by all members of the Committee. I should like to take the opportunity to thank all those inside and outside the House who have engaged in constructive dialogue and continue to do so. We had some good sittings in Committee, and they have led to improvements to the measure.

Amendments No. 96 and 97 cover issues that relate to the transition from stamp duty to stamp duty land tax. Amendment No. 96 ensures that there is no charge on anyone who substantially fulfils a contract before Royal Assent. That deals with anxieties that such a charge could be perceived as retrospective. Amendment No. 97 preserves the current practice whereby an agreement for a lease can be presented for stamping at the same time as the exit duty lease without incurring interest or penalties. Amendments Nos. 53 to 56 deal with the treatment of sub-sales and other circumstances in which the purchaser's rights under a contract are transferred to a third party.

Clause 45 as drafted would impose a charge on a contracting purchaser, whether or not he completed, at the latest when the ultimate purchaser completed. Hon. Members know that we debated the issue at length in Committee. There was particular concern that there might be a charge on contracting purchasers who do not complete or, indeed, substantially fulfil the contract. I gave an assurance that it was not our intention that such purchasers should be subject to a charge. The amendments would give effect to that assurance.

Contracting purchasers will not be charged stamp duty land tax solely as a result of completion or substantial performance by the ultimate purchaser. On the other hand, a contracting purchaser who substantially performs, for example, by going into possession, will be charged stamp duty land tax. That charge is fair and creates a level playing field for different classes of taxpayer, but we are anxious to know about specific transactions that might operate unfairly. Hon. Members, as well as the professional associations and others, will doubtless have views to express if such instances arise.

Amendments Nos. 57 to 59 and 81 amend clause 58 and make consequential amendments to other clauses. The clause allows relief for the acquisition of an existing dwelling by a house builder when a new dwelling is being given in exchange for the existing one. The amendments fulfil the commitment that I made in Committee to extend the relief to cases in which the house that the builder acquires is worth more than the new dwelling and the householder is downsizing. Members of the Committee will remember our specific concerns about senior citizens who try to downsize in preparation for their old age.

Stephen O'Brien (Conservative, Eddisbury)

Thank us.

Paul Boateng (Labour, Brent South)

I certainly thank Opposition Members for their contribution to a constructive debate in Committee.

Amendments Nos. 70, 78, 79, 143 and 144 make the necessary adjustments to ensure that stamp duty land tax works in the context of Scots law and conveyancing practice. I am grateful to my hon. Friend the Member for Glasgow, Maryhill (Ann McKechin) for her contribution to that debate.

Amendments Nos. 60 to 67 and 84 to 86 cover our commitment to ensuring that the Bill covers the relevant Welsh institutions and planning institutions. The hon. Member for East Carmarthen and Dinefwr (Adam Price) made an important contribution to our deliberations on those matters in Committee.

Amendment No. 68 replaces a reference to an obsolete Act, in relation to which we had some fun in Committee. Amendments Nos. 69 and 71 widen the definition of financial institutions to allow for the wider development of alternative property financing arrangements such as Islamic mortgage products. Many inside and outside the House welcomed that.

Amendment No. 72 clarifies the circumstances in which purchasers need to self-certify when they register land with land registries. Amendments Nos. 73 to 76 deal with applications for deferred payments, clarify the way in which tax is calculated and ensure that there are sufficient powers to provide for appeals, returns and postponements. Amendments Nos. 77, 87 and 95 ensure that the appeals regime for stamp duty land tax is in line with that for other taxes.

Amendment No. 80 covers instruments that will remain within the remit of stamp duty rather than being subject to stamp duty land tax after the tax has been implemented. Those instruments give effect to contracts that are entered into on or before the date of Royal Assent, provided that the contract is not varied or assigned after Royal Assent. Anxiety has been expressed that instruments that complete such contracts would not be within the remit of existing stamp duty and thus might escape charge altogether. That was never the Government's intention. The amendment puts it beyond doubt that instruments that complete such contracts remain within the remit of the stamp duty charge.

Amendments Nos. 82 and 83 make technical changes to schedule 7, which deals with group relief, in line with the commitments that I made in Committee. I commend all the amendments to the House.

Mark Prisk (Conservative, Hertford and Stortford)

I draw hon. Members' attention to my entry in the Register of Members' Interests. I thank the Chief Secretary for his remarks. I am not sure that they did not neatly erase some parts of the debate in Committee, but the process was positive and I thank him for his opening comments.

Before considering the amendments that we tabled, I should like to consider new clause 10 and the 45 other Government amendments. The fact that the Government have to make 46 changes to a single aspect of the measure at this late stage shows the shoddy handling of their proposals for a new land tax.

I welcome the Government's action in new clause 10 and their belated recognition of an omission. It is a shame that the action had to be rushed at the last minute, but the change is nevertheless welcome. However, I have two concerns and I hope that the Chief Secretary will be able to deal with them in his reply.

As the right hon. Gentleman said, new clause 10 relates to registered social landlords and subsection (1)(e) sets out one of the five conditions in which the new clause operates. It states that as a condition,

"the landlord's interest has at any time before 26th June 2003 been held by a registered social landlord."

The danger is that that is open to uncertainty and therefore abuse. Perhaps the right hon. Gentleman will answer the following questions. What happens if the registered social landlord holds the property or the interest for only one month? What if that month is before 26 June 2003 but outside the qualifying period of 1990 to 2000? That could lead to uncertainty and possibly abuse. I hope that the Chief Secretary will put on record the Government's interest and intent.

I also wish to draw hon. Members' attention to subsection (3). It states that the commissioners shall pay to each person

"as they consider appropriate an amount equal to the duty . . . so charged."

There is a potential contradiction with subsection (5), which states:

"Entitlement to a payment under subsection (3) is subject to compliance with such conditions as the Commissioners may determine".

My concern is that this language is somewhat open-ended. I recognise that there is a need for subjective judgment by the Revenue, but can the Chief Secretary explain to the House and put on the record exactly the conditions that he and the Government have in mind? Subject to the answers to such questions, we are willing and happy to support this important correction to the original Bill.

Government amendments Nos. 54 to 56 refer, as the Chief Secretary said, to what we know as off-plan sales. During the convivial debates—as he seems to remember them—that took place in Committee, there were occasions when, among that conviviality, it appeared that there were very large holes in the Bill. These amendments, among the many others, are intended to fill one such hole: the question of how the Government intend to treat off-plan sales. May I be the first to welcome the Government's U-turn on this issue? [Interruption.] I can see that the Chief Secretary does indeed accept what I have just said. I understand from his comments that these amendments will seek to fulfil the terms of our own proposal as presented in Committee, which was that off-plan sales should be exempt. Indeed, we withdrew that proposal in Committee only in order to allow the Government to introduce their own solution.

As I and other Members have had only 48 hours in which to consider these amendments, along with the other 42 Government amendments, I do have a couple of brief questions, as the Chief Secretary might expect, and I should be grateful if he would respond to them. Which representative bodies did the Government consult in drawing up the amendments, and can he name the organisations that have expressed support for them? Can he confirm whether the Government intend to include all off-plan sales, or are there any that they are seeking to exclude through these amendments?

The Government have tabled a series of amendments that are intended either to correct previous omissions or to provide clarity. Naturally, we welcome any attempt to clarify this legislation, but it has to be said that had the Government consulted properly in the first place and allowed sufficient time in Committee, many of the amendments would not have been required.

In fairness, I do welcome amendment No. 74, which seeks to include provision for appeals under clause 90. I accept that that seems a sensible move. Do amendments Nos. 93, 94 and 95—they apply to schedule 17, which deals with appeals procedures—represent an enhancement or a diminution of an appellant's rights? I appreciate that many people will have assumed that the former is the case, but I should appreciate his confirming that that is indeed so.

I turn to Government amendments Nos. 58, 57, 59 and 81, which seek to amend clause 58. Members of the Committee will recall that we, Her Majesty's official Opposition, sought to amend this clause. The underlying problem is that the Bill as drafted would permit people to part-exchange their home for a new one, but only if they are trading up to a more expensive property. The result would be the bizarre situation in which a multi-millionaire could benefit from such relief by trading up to a new mansion, but an elderly couple hoping to trade down would in fact face a tax bill. Despite the earlier protestations from Ministers—I remember them, but perhaps the Chief Secretary is happier to gloss over them—they have now at last relented. I should therefore like to welcome the amendments: on this occasion—but perhaps only on this occasion—it is true that the Government have actually listened.

Stephen O'Brien (Conservative, Eddisbury)

I think that the Chief Secretary missed that.

Mark Prisk (Conservative, Hertford and Stortford)

Indeed, but I hope that he will be listening later.

I turn to our amendments and to the substance of the issues behind them. Amendment No. 8 relates to clause 42, which introduces an entirely new tax. I did enjoy the exchanges involving my hon. Friend the Member for Tatton (Mr. Osborne), but the truth is that when something is called a tax, it is a tax; the Chief Secretary will, we hope, learn that soon. Supported by 82 other clauses and 17 schedules, this provision represents the single most important tax element in this year's Budget and in the Bill before us. Amendment No. 8, together with its consequential amendments, would correct the name of this tax to reflect what it is seeking to charge. It also highlights the fact that, despite the Chancellor's promises of last year, this initiative is about not tax reform but raising tax revenues.

Clause 42 describes this new tax as a "stamp duty land tax", yet any first-year lawyer knows that stamp duty and land tax are two entirely different things, both in law and in practice. Stamp duty is a charge on authorising documents; land tax is applied to real estate—in this case, to land and to property transactions. So the bizarre idea of bolting the two together in the hope that no one will notice is most peculiar: it is to create something that, in tax terms, is both fish and fowl; it is a contradiction in both term and tax. As someone said to me recently, it is an attempt to create a push-me-pull-you tax, but I suppose that it is no surprise that this Government should wish to face both ways at once.

The real reason why the Government have chosen this oxymoronic name is to hide the fact that they have broken their promise to modernise stamp duty. Their consultation document promised that the reforms would create a system that

"better reflects modern commercial practice".

Most important of all, we were promised that this new reform would deliver fairness for all, and yet, almost immediately after the consultations began last year, things went horribly wrong for the Revenue and the Government. Their choice of discount rate was shown to bear no relation to the open market, and the leading experts on their consultation committees described their preferred charging for leases as

"the worst of all possible options . . . which would lead to extreme charges."

It was then pointed out that the Government had forgotten to account for the thousands of hotels, restaurants and shops that pay variable rents. So by January of this year it was clear that the position was irretrievable. That is why, on 21 January, Ministers instructed the Revenue to stop consultations immediately and without explanation. The result is that this property transaction tax—for that is what it is—is neither fair nor modern. It is an ill-conceived tax, and, after a heavily guillotined parliamentary programme, it remains ill considered.

I shall give the House two simple examples of why this tax is wrong. When the Government promised us last year that they were going to modernise stamp duty and achieve fairness, everyone assumed that would include removing what is known as the slab effect. This term refers to the tax's rate structure, whereby a single rate applies to the whole purchase price. Thus, a young couple buying their first home at £250,000 would be liable for £2,500 in tax; but were they to pay a pound more, they would have to spend £7,500 in tax—three times the lower figure. This iniquity is repeated at each threshold: at £60,000, at £250,000 and at £500,000. So this was a great opportunity for the Government to sweep away this ancient and unfair tax legislation, yet what do we find? Through this Bill, they have written that iniquity back into legislation. What a wasted opportunity. What a failure to reform.

Just as bad is the Government's determination to persist with applying this tax on VAT on any consideration. Despite our apparently convivial discussions in Committee, and all the pleas from the professional bodies, the tax as it stands tonight will still be charged on any VAT paid. It is therefore a tax on tax.

Will the Chief Secretary explain the logic behind the proposal? In what possible way is it modern commercial practice? In what sense is it fair? In respect of the slab effect—the tax on tax—the Government had the opportunity to deliver on their promise of fairness and modernity, but they have failed in both.

As the Chief Secretary anticipated, our concerns about the tax go further. Most important of all is the way in which the new tax hits leasehold occupiers—hence our amendments Nos. 9 and 10. At present, stamp duty on leases is calculated by reference to the lease length and the average annual rent. Under clause 56 and schedule 5, the new tax will be charged at 1 per cent. of the value of the rent payable over the whole lease term. In practice, as all the outside experts have shown, that would lead to exceptional tax rises. I should add that the Chief Secretary admitted in Committee that those rises were over and above any revenue that would come from clamping down on tax avoidance. This is extra money that businesses will have to pay.

For example, retailers face an additional tax bill of £130 million on new store openings. Dixons told me that it faces a tax bill of £2 million if the tax is implemented, and B&Q advises me that, for an average store, the tax bill will rise from £35,000 to £285,000—an eightfold increase.

Mark Simmonds (Conservative, Boston and Skegness)

My hon. Friend is making a powerful and articulate case. Is he aware that the latest figures from the British Retail Consortium show that the annual additional cost to retailers would be £238 million?

Mark Prisk (Conservative, Hertford and Stortford)

I am grateful to my hon. Friend. As always, there appears to be a gap between the reality perceived by the Government and the reality that Opposition Members deal with. He is right: this is a bill that businesses will have to pay, and that is the problem.

With a starting threshold of £150,000, the new tax—despite the Government's warm protestations—will catch most occupiers with an annual rent of between about £12,000 and £15,000. That includes the vast majority of companies in the Chief Secretary's London constituency, and most companies in our major cities. Thus the Royal Institution of Chartered Surveyors has shown that, for example, a factory of 1,000 sq ft in London on average rents for 11 years will pay £5,251 more in tax. An office of 1,000 sq m in Leeds, however, on average rents for a 10-year period, will pay £17,000 more in tax. In Glasgow—and this may be of particular concern to you, Mr. Speaker—a 500 sq m shop on average rents for 15 years will have to pay another £50,537 in tax. That is a fivefold increase.

Opposition to the Government's plans does not come only from the retail sector. It is much wider than that—pubs, clubs, bars and restaurants are all up in arms. The Association of Licensed Multiple Retailers has highlighted the fact that pubs, for example, tend to operate on longer leases of between 10 and 30 years. Assuming an average pub rent of £30,000 over an average lease term of 20 years, the value of the transaction would be about £600,000. At present, the existing stamp duty would amount to £600, but the new tax would cause the cost to rise tenfold, to £6,000. How does the Minister justify that rise? The ALMR has said that it would result in

"major market distortions, drastically increasing the entry hurdles for small businesses."

What is the Chief Secretary's response to that?

In his Budget speech, the Chancellor specifically cited tax avoidance as the key reason for tackling lease duty, and the Chief Secretary repeated that today. I can perhaps understand that argument when it is applied to the abuse of special purpose companies, but it makes no sense when applied to organisations taking out leases. Is the Chief Secretary seriously telling the House that businesses choose to lease a shop or office just to avoid tax? It is nonsense.

Moreover, in his Budget speech the Chancellor also excused the changes by telling the House that

"there will be no duty on 60 per cent. of commercial rental contracts."—[Official Report, 9 April 2003; Vol. 403, c. 279.]

Loyal to his boss as ever, the Chief Secretary has repeated that statement today. Yet, when challenged—as it has been in recent weeks—the Revenue has been unable to provide any information about the statement, or even the data on which it was based. Many people suspect that it was wrong.

Indeed, as my hon. Friend the Member for Boston and Skegness (Mr. Simmonds) mentioned, the British Retail Consortium has conducted a comprehensive survey. It was released today, and I have a copy here. The survey found evidence that contradicts what the Chief Secretary has said. It covered 125 retailers, 10,000 outlets and 7,584 leases. Its figures paint a picture that is wholly different from the one presented in the Budget. Instead of the much vaunted claim by the Government that 60 per cent. of leases will be exempt, the truth is that 71 per cent. of those surveyed will have to pay. That is the complete opposite of what the Chancellor and the Chief Secretary claimed.

Will the Chief Secretary tell the House what the basis for his claim was? How many properties and leases were used in the sample? Was it really just a few hundred—including, I am told, lock-up garages? Will the Revenue now publish its data and end the speculation that the Chancellor's Budget statement on this matter has been—to use the common parlance—sexed up?

The Government's proposals in clause 56 and schedule 5 for taxing leases fail to create a system that is either modern, effective or efficient. Instead, new distortions in the leasehold market will be created. Businesses could have to pay £200 million or more in tax, over and above tax-avoidance measures, and vital market sectors—such as retail, the licensed trade and tourism—will be badly affected. That is why Opposition Members reject clause 56 and schedule 5, and why, with your permission, Mr. Speaker, we intend to press amendments Nos. 9 and 10 to a vote.

Throughout the outside consultation and the Committee stage of the Bill independent experts have all advised against implementing legislation about which so many unanswered questions remain. What is the true cost of compliance? What will be the impact on private companies participating in private finance initiative and public-private partnership schemes? How will complicated transactions such as sale and leasebacks be treated? Who will be able to apply for the new subsale relief, and who will not? Why has the Treasury chosen a discount rate that bears no relation to the property market? To date, not one of those questions—and there are many others—has been answered satisfactorily. Some of them have not been answered at all.

I understand that the other place has endorsed the view that the legislation is incomplete. In its 10 June report, the House of Lords Select Committee on Economic Affairs stated that

"we have heard the strength of the essentially unanimous views of our private sector witnesses urging that the tax would not be in a fit state to introduce on 1 December 2003 . . . We recommend that the Government should review early in the Autumn of 2003 whether the tax can be got right in time."

That is why we tabled amendment No. 11.

In his Budget speech, the Chancellor recognised the need to get the legislation right and offered to delay implementation until 1 December 2003. Yet it is clear that the proposals are incomplete, and that some sections of them are incoherent. Amendment No. 11 has the support of the leading organisations in business and property. They include the Confederation of British Industry, the Royal Institution of Chartered Surveyors, the Law Society of Scotland, the British Retail Consortium, the Association of Licensed Multiple Retailers, and the British Property Federation. The intent of the amendment is to ensure, whatever our reservations about the underlying principles, that the legislation that is enacted is workable, fair and acceptable to the majority of those whom it affects. After all, bad law leads only to greater tax avoidance.

Because we consider amendment No. 11 to be a constructive proposal, we gave the Chancellor early notice. My right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard), the shadow Chancellor, wrote to him last week. Yesterday, the Chief Secretary replied. In his letter, he rejected our amendment on the ground of fairness—that old word again—and because it would lead to a loss of yield of around £250 million. There we have it—the rush to push the Bill through is all about the growing hole in the Chancellor's Budget. The Government are beginning to realise that they will need every penny because they are wasting money, and that they will need to spend more and more if they are ever to have a hope of fulfilling their manifesto commitments.

Jonathan Djanogly (Conservative, Huntingdon)

The proposed tax increase seems to sit rather oddly with what the Chancellor said in his Budget speech:

"I will freeze stamp duty on homes and business property purchases." —[Official Report, 9 April 2003; Vol. 403, c. 279.]

How could he possibly say that in the context of the reaction of businesses to the proposals?

Mark Prisk (Conservative, Hertford and Stortford)

What an appropriate quote. Most Members increasingly realise that what the Chancellor says and what he does are often entirely contradictory. The worry for many now is that with this Government one must always read the small print.

The Chief Secretary made an admission in his letter: that despite what he said earlier, the Bill was not perfect. He admitted that it was so bad that it will need refining, not just over the next few weeks or months but, inevitably, over the next couple of years. What an appalling admission. Does the Chief Secretary not realise what a message that sends out: that he and his colleagues are perfectly happy to rush through a new tax that is so ill considered it will take years to correct? If the Government's wish truly is to tackle tax avoidance, what possible logic can there be for pushing through a Bill that will take years to correct? What possible confidence can we, or taxpayers, have in the Government, or in what I can only describe as their dodgy duty?

Given that, and given the lamentable and short reply that the Chief Secretary gave to our amendments, I have grave concerns about the way in which he is approaching the matter. I hope that he will be more positive at the end of the debate. We have many reservations about the Bill, but amendment No. 11 is offered as a genuine way to help to improve the law. I hope that he will reconsider and accept our offer, but if he does not we will—with your permission, Mr. Speaker—be determined to press this matter to a vote.

David Laws (Liberal Democrat, Yeovil)

It pains me to start off this collection of clauses and amendments by welcoming one of the elements with which the Chief Secretary has already dealt—new clause 10, the successor to new clause 6. We are pleased that the Government have listened to our representations, and to those of others such as the National Housing Federation, on the issue. The Chief Secretary will be aware that we originally tabled amendments Nos. 195 to 197 and 201, which emerged initially in new clause 6 and then in new clause 10.

The proposal is important because it affects many social housing tenants who would have been adversely impacted by the situation as it was in the original Bill, under which many of them would have faced the uncertainty of a system in which they would have to get their tenancies stamped before they were effective in law. That archaic, unfair and impractical requirement would have caused uncertainty and a great deal of cost.

The Chief Secretary will know that, by custom and practice—and in Inland Revenue guidance—it has been the responsibility of individual social housing tenants whose rent exceeded particular annual thresholds to ensure that their tenancy agreements had been properly stamped. For a period, this seemed to be a rule or regulation that was not heeded, but it became clear over the last couple of years—as a consequence of a number of cases that came to court—that it was vital that this stamping occurred. Without it, there could be legal uncertainties that would affect the social housing tenants and the landlords.

The payment of stamp duty under the previous circumstances gave the document a legal standing in a court; without it, a judge could refuse to accept the contract as evidence of the tenancy. The Finance Bill initially formalised the previous situation, which had been uncertain under the law—and certainly under the practice—by essentially making the individual tenants legally liable.

After considerable negotiation between the National Housing Federation and the Inland Revenue, the federation secured a form of words to ensure that new social housing tenancies were effectively exempt from stamp duty. That is extremely welcome. However, many thousands of tenancy agreements held by social housing tenants and landlords remain unstamped. The concern was that without some exemption or backdating, those individuals would be unprotected in law and their court cases might be thrown out in a court case brought by either of the two parties.

The National Housing Federation was lobbying the Treasury directly, and we are pleased that Treasury officials listened. The federation also made representations to us, leading to our amendments. We welcome very much the fact that the Government engaged in a dialogue that led not only to the clarification of the new social tenancies, but to the putting in place of an exemption that went back not to the 1995 cut-off—as was initially suggested in our amendments—but to 1990, which is extremely helpful.

The Chief Secretary will be aware that the concern arising from new clause 6 was that it might not cover those tenancies managed by RSLs where the tenancy had been transferred to the RSL from a local authority. Unfortunately, we were unable to deal with new clause 6 in substance during the Committee, but we are grateful that—in private conversation and correspondence—the Paymaster General was willing to confirm that it was the intention of the Government to make sure that the tenancies in question were also exempt.

There was a question mark among those on the borders of the Committee—we did not have time to debate the issue in Committee—as to whether new clause 6 offered protection to such tenancies, as envisaged by the Government. The National Housing Federation is again to be commended for detecting the possibility that new clause 6 would not implement in full the Government's intention to exempt such tenancies. We are extremely grateful that the Government have listened to representations, initially by proposing the measures in the original Finance Bill but also by tabling new clause 6 and then new clause 10. The Chief Secretary will want to put it on record today that new clause 10 will provide certainty for RSLs by clearly providing for the fact that the relief will be available both to tenancies granted by RSLs, and to tenancies transferred to RSLs from local authority providers.

We welcome that element of the new clauses and amendments, but we share the concerns outlined by the Conservative spokesman, the hon. Member for Hertford and Stortford (Mr. Prisk). We welcome the fact that, in Committee, the Government listened to some of the other representations and produced their own proposals to meet matters such as the concerns in respect of trading down.

However, in spite of the fact that the Government have consulted on this specific matter for perhaps a year, it is clear that the consultation has not been substantial enough and we are left wondering whether the Government's new process—of having a pre-Budget in which serious consultative measures are supposedly brought forward and then implemented in the Budget itself—has really worked in respect of stamp duty land tax. It still seems that we are in for a period of great uncertainty until later this year, when the Government may introduce further proposals on this part of the Finance Bill. As the hon. Member for Hertford and Stortford (Mr. Prisk) touched on, we have the prospect, as the Chief Secretary has himself confirmed, of a further period of uncertainty while the Government contemplate further changes.

A balance has to be struck between the Government's responsiveness to proposed changes and good suggestions that emerge in the course of our proceedings, and introducing proposals that are not properly thought through, leading to a long period of uncertainty, of amendment and the inability of this place to scrutinise all the proposals seriously. Although I welcome some of the Chief Secretary's proposals that address the issues raised in Committee, I hope that he will be willing to accept amendments Nos. 9, 10 and 11, which would delay some parts of the stamp duty land tax. We could then get it right rather than opt for a period of one or two years in which many further amendments would have to be made. That would be destabilising for businesses.

Mark Simmonds (Conservative, Boston and Skegness)

The hon. Gentleman makes a pertinent point. The Chief Secretary's earlier dismissal of new clause 11 showed that he did not understand what it is about. It would be possible to close the tax loopholes while at the same time undergoing a full and proper consultation to ensure that the full detail, particularly of the lease duty element, is thoroughly thought through, so that proper and sensible structures go on to the statute book.

David Laws (Liberal Democrat, Yeovil)

I am grateful for that contribution. The hon. Gentleman is right that there is no reason why the Government should not bring forward anti-avoidance and other provisions. However, with changes to tax law as significant as this, it should be thought out, so that we can make sensible amendments in Committee without requiring a further period of consultation and uncertainty for six months and then potentially yet another year of amendment and uncertainty beyond it. When the Government introduced the pre-Budget consultative process, we welcomed the possibility that tax legislation would be better thought through before it came before the House as the Finance Bill, but it has not worked successfully in this case.

Jonathan Djanogly (Conservative, Huntingdon)

I shall deal first with the issue of the name of the new tax. I know that considerable time has been spent discussing that. It would be difficult to improve on the simplicity of the explanation of my hon. Friend the Member for Tatton (Mr. Osborne) as to why it is not relevant, and I am not sure that the Chief Secretary can overcome that objection. However, the explanatory notes provide a straightforward explanation of why the tax is new and why the proposed name for it is wrong:

"Stamp duty is over three hundred years old and the legislation was last consolidated in 1891. It is a charge on documents that transfer property, and when duty is paid, stamps are still impressed physically on the document concerned. Unlike more modern taxes there is no provision for the tax to be collected directly from taxpayers by assessment."

We have assessment, not a stamp, so I do not understand how we can possibly call it stamp duty. To that extent, I fully support the amendment to change the name to a property transfer tax.

Based on last year's Budget, the Inland Revenue initiated a series of consultative committees to examine technical issues related to the stamp duty reform programme. The Government have provided no particular reason why that consultation came to an abrupt halt, but for some reason it did so in January. Can the Chief Secretary advise us on why that happened? As my hon. Friends have made clear, professional organisations and company after company told us that more consultation was needed. In that regard, it would be interesting to know exactly how many consultations the Chief Secretary has had. He made light of the implications for business, implying at one point in his speech that business welcomed the changes. I find that hard to believe, but it would certainly be helpful if the Chief Secretary could describe the feedback that he has received from business. I doubt very much that it would have been positive.

To understand the importance of having more consultation before introducing legislation, we need look no further than at the 35-odd Government amendments under review today—with promises of even further reviews. It is obvious that the legislation has not been clearly thought out or properly consulted on.

I move on to the complex issue of stamp duty and leases. Disgracefully, in my opinion, that issue has not been dealt with during the whole course of the Bill until today, largely on account of the lack of time allowed by the Government for scrutiny. I shall refer to clause 56 and schedule 5, and to amendment No. 9, which would delete them.

In summary, the main result of the provisions will be significantly to increase the stamp duty payable on leases and unnecessarily to increase the complexity of the legislation and to penalise retailers and people in industry who want to enter into long-term leases by depriving them of the security and certainty of their premises. On the contention that the provisions are necessary to combat tax avoidance, the most objectionable tax-avoidance methods using leases have been counteracted by the introduction of stamp duty land tax, so that the transaction rather than the document is made taxable and charges to payments are extended in return for variations of lease. The residual stamp duty avoidance technique, which the provisions could be said to have counteracted, should be capable of being dealt with in a far simpler way, without penalising commercial transactions. In any event, it arose mainly because of the distortion made in commercial transactions by having rates of duty as high as 12 or even 24 per cent. being chargeable in respect of rents on long leases.

In addition, it should be borne in mind that the inventiveness in the utilisation of stamp duty schemes has primarily been the result of significant increases in stamp duty since 1997, when the Government came to power. Many of the schemes put in place are utilised by taxpayers only on the basis that the current rates of stamp duty payable are seen as an unfair additional cost, which makes a difference between a transaction making economic sense and making no economic sense whatever. As other hon. Members have mentioned, we are talking about an awful lot of taxpayers.

Stamp duty at 1 per cent. on the value of commercial property transactions was a price that could be regarded as inconvenient, but acceptable. The current rates of stamp duty mean that the need to pay it may make a deal uneconomic or may significantly depress the value of the properties owned by the investors.

In the press notice published on Budget day, the Government gave the example of a 10-year lease with £10,000 rent per annum. Stamp duty of £200 is currently payable on such a lease, but under the new regime, duty of £835 will be payable, which is a fourfold increase. That is because rental payments total £100,000 over the life of the lease, but once discounted, the net present value is £83,166. However, if the lease were for 20 years, the duty would increase sevenfold or eightfold. For a 35-year lease, the duty might be 15 times as much.

The Estates Gazette of 3 May stated that an operator such as J D Wetherspoons, which requires 35-year leases and has average rentals of around £150,000 per annum, may be looking at additional costs of £50,000 for each lease after the tax is introduced. I cannot reconcile that with the Minister's statement that businesses were somehow accepting of the new tax. To add insult to injury, if the landlord charges VAT, that is added to the rent in calculating the net present value of the lease.

The net present value of the rent payable over the term of a lease is calculated by applying one of the most complicated formulas that I have ever seen. In case the Minister has not been told, I must say that most professionals see it as totally ridiculous and way beyond the comprehension of most, if not all, business people. The impact of these changes for companies such as those in the retail and leisure industries, which rely on long leases, will be massive.

The consultation that the Government carried out on the proposals was, in the end, meaningless, and was shown to be nothing more than the Government having a trawl through the property sector to look for stamp duty loopholes. If the Minister thinks that the industry has not picked up on that, he is mistaken. That is what the industry believes, and I assure him that it will not be forgotten next time he wants consultation on some tax measure.

Let me look at why I think the changes unnecessary. The most objectionable use of leases for stamp duty mitigation has been counteracted by the introduction of stamp duty land tax. Techniques involved the grant of leases, often to nominees, and their assignment in circumstances in which there was no practical need for stamp duty to be paid on the assignment, resting on the contract schemes. Those schemes would have been counteracted by the fact that stamp duty land tax is a tax on transactions, not documents. After 1 December, it will no longer be an effective means of avoiding the tax. A variant of that was to arrange for a lease to be granted that had a low value because of provisions placed on it that either required the rental rate to be paid or significantly reduced the commercial marketability of the lease. A payment was then made in exchange for the variation of the lease and, under current stamp duty legislation, such payment did not give rise to a charge to stamp duty. Under the new SDLT, such payments will give rise to a charge to tax.

In addition, taxpayers can no longer rely on the fact that a lease is for a period of less than 21 years to give them the opportunity not to pay stamp duty on the document on the basis that it cannot be registered with the Land Registry and that it might never be necessary for them to rely on it in legal proceedings, which would require it to be stamped. Under the new tax, if SDLT is payable, the tenant is obliged to pay it.

The main scope for stamp duty mitigation, which is not clearly caught by the mere introduction of SDLT, is therefore the use of rent averaging—for example, providing under a lease for between 99 and 999 years that the rent after, say, the first 20 or 35 years should be the greater of market value or £1,000, thus reducing the average rent over the term of the lease by reference to which the stamp duty was calculated. However, that was often used in situations in which the current stamp duty regime would, without such a device, have resulted in an inequitable charge arising.

For example, where two investors decide jointly to buy a property, one way to structure the transaction is for one joint venturer to acquire a freehold property and the other to acquire a leasehold property in respect of that property. In the case of property that costs £20 million, and assuming a rental return of 8 per cent. per annum, which is £1.6 million, the first purchaser could acquire the freehold interest for £10 million plus VAT and, at the same time, the vendor would grant a leasehold interest to the other purchaser for another £10 million plus VAT, under which amount, equal to half the overall rent, each freehold and leasehold interest would, in general, be equally valuable. One would therefore expect the same amount of stamp duty to be payable in both cases. However, that is not the case. Under the current stamp duty regime, it should be assumed that the acquirer of the freehold would pay stamp duty of 4 per cent. on £11.75 million, which is half the value plus VAT. The amount payable would be £470,000. The acquirer of the leasehold interest would pay the same amount on the premium paid on the grant of the lease, but would also pay stamp duty of 12 per cent. on the rent payable in the case of a lease of less than 99 years, and of 24 per cent. in the case of a lease of more than 99 years. For example, 12 per cent. on £940,000 would be £112,200 and 24 per cent. would be £224,000. That amount could be reduced by drafting the lease so that after the first 35 years, the lease would be reviewed to the greater of market value or £1,000. That, in itself, would significantly reduce the average rent on which duty would be calculated, and there would appear to be no good policy reason why such high stamp duty should be payable in those circumstances.

I do not deny that these are complicated provisions or, to be frank, that the calculations can be made beyond looking at them on paper. However, from all that I can make out from my own work and from what businesses and professionals tell us, the tax is unfair, the Government have not consulted adequately and the consultation that was carried out has only put up the industry's back. I shall certainly support the amendment.

Mark Simmonds (Conservative, Boston and Skegness)

I draw attention to my entry in the Register of Members' Interests, particularly my chairmanship of two surveying practices that provide advice to tenants and landlords in the property market, mainly in the United Kingdom.

I rise primarily to speak in support of the amendments tabled by my hon. Friends on the Front Bench. The provisions would remove clause 56 and schedule 5 and suggest that implementation should be delayed until December 2004, although I do not have the same confidence as my Front-Bench colleagues that the Government will be ready to put the measure into operation by that time. If the consultation process that ended in January is anything to go by, as well as the lack of discussion and responsible answers to the pertinent and appropriate questions and probing amendments put by my hon. Friends in the Standing Committee, I have no confidence that the Government will be ready by December 2004. Indeed, the fact that the Government have tabled 46 new clauses and amendments demonstrates to Members and to people outside the House what a shambles and a mess this part of the Bill is.

On Second Reading, I spoke about the stamp duty proposals in some detail. At the time, knowing that I had not been fortunate enough to be selected to serve on the Standing Committee, I hoped that I could illuminate some of the problems emanating from the Bill. I hoped that the Government would take that opportunity to explain the methodology, and that they would close some of the obvious apertures and deal with the discrepancies in the Standing Committee. Needless to say, owing to the Government's apparent disingenuousness and to the inevitable programme motion, few of the issues that I raised were clarified. In fact, the inverse is true: the more time elapses, the greater the confusion, uncertainty and bewilderment.

I do not want to repeat the Second Reading debate, but the House should note that, in my view, commercial property should be decoupled from residential property. Indeed, the Red Book states that

"the Government will be able to differentiate between the commercial and residential markets. in order to take into account significant differences in the economic circumstances of the two sectors".

That makes excellent sense, but it is not what is proposed in the Bill.

Commercial property is an investment vehicle; it is an investment sector, alongside stocks, shares, gilts and bonds and its stamp duty treatment should be the same as for other investment vehicles. It is generally accepted—at least by everybody except Ministers—that not decoupling residential and commercial property has nothing to do with economic benefit or slowing down the commercial property market; it is purely a revenue-raising and revenue-generating exercise.

There is another more suspicious, bigger picture. As the Government are taking us—some would say slowly, others would say too quickly—towards possible entry to the European currency, where we would lose control over our economy and our monetary and fiscal policy, one of the few levers remaining in the Chancellor's control is the power to control the taxation of property in its various guises. I suspect that that is one of the main arguments that will be forthcoming as the euro entry discussions heat up and we get closer to that possible—but unacceptable—event. The danger is that a precedent will be created for a retrospective view of property transactions and property taxation, hailing a return to the disastrous 1970s, with such things as purchase tax and development land tax, which ruined the development market.

I have some specific points about the leasehold stamp duty taxation proposals. It is debatable whether rental can be capitalised as if the lease were an asset. Admittedly, some leases carry values: long leases of up to 99 years, some of the ground leases that underlie many residential tenancy arrangements, and some prime retail leases in our main shopping thoroughfares. Although I support the Chief Secretary in his efforts to close the abuse of tax loopholes, most companies lease premises from occupational necessity. Office tenants require space for workers. Industrial tenants require space for plant and machinery. Retailers require an outlet, or outlets, to sell their products. They do not sign leases to avoid paying stamp duty on the alternative freehold purchase. In my experience, that has never happened. The reverse is true for those occupants; they do not want to tie up capital in property but to release it for investment in their business and in job-generating expansion.

The Chief Secretary said in his introduction that decisions should be business-led, not tax-led. That is right and it is exactly what happens at present, but it will not happen if the proposals reach the statute book.

Tenants, whether they are industrial, office or retail, want flexibility to react to the market at a particular time. The retail sector, in particular, is constantly changing and evolving. The proposals would stifle innovation and entrepreneurial dynamism. Indeed, I understand that Marks and Spencer might not have initiated the roll-out of its latest small food stores to compete with Sainsbury Local and Tesco Metro if the stamp duty proposals had been in force at the time of that decision.

Mark Prisk (Conservative, Hertford and Stortford)

My hon. Friend eloquently highlights the dangers in the commercial market. Does he share my concern that the Government seem to be ignorant that, in the real world, the reason retailers are leasing and not buying is that 40 per cent. of them lack an alternative, as is shown in a British Retail Consortium survey published today? Is not that the case?

Mark Simmonds (Conservative, Boston and Skegness)

I am grateful to my hon. Friend for that information. He makes an extremely good point; it is indeed the case. From my experience of involvement in that marketplace before I entered the House—something to which I shall refer later—trends over the past 15 years show that retailers who for historical reasons had many freeholds in their portfolios have engaged in sale and leaseback, released capital to invest in new plant and machinery, new shopfitting and new employment, and have opened new branches. Unless the Chief Secretary can clarify exactly what will happen, such activities will be much less economically advantageous.

Jonathan Djanogly (Conservative, Huntingdon)

The problems that my hon. Friend describes are dramatic and he gives useful examples. An article in the Estates Gazette states:

"Possibly what will evolve is a more liberal association between landlord and tenant, such as a form of partnership or franchise rather than a lease."

Does my hon. Friend believe that the effect of the proposals will be so dramatic that leasehold could, in effect, go into demise and that people will look for other ways of holding property?

Mark Simmonds (Conservative, Boston and Skegness)

My hon. Friend makes a good point. I suspect that, to some extent, that might occur, but depending on the interaction of supply and demand in a particular marketplace, at some point, a retailer or occupier may be prepared to take the decision to pay the stamp duty to get a particular store or industrial unit. However, that does not make the provision right and the direct impact will be to reduce the rent that the occupier is prepared to pay, which will have a knock-effect because if an occupier is prepared only to pay a lesser rent, or is only capable of paying less, the building will be worth less to an investor. In the big league, shopping centres and office blocks are owned by pension funds, so all hon. Members and everyone outside the House who has a pension fund will be affected because the value of the properties in those funds will reduce.

The stock exchange is not particularly safe bet at the moment, so many investors are reluctant to put their money into stocks. Many private individuals are putting their money into commercial property because they believe that it is a safer bet, especially as the leasehold system only allows rents to increase at the moment, but that it is separate argument and I would not wish to go down that route, Mr. Deputy Speaker, because I am sure that you would rule me out of order if I were to do so. However, as was implied by my hon. Friend the Member for Huntingdon (Mr. Djanogly), imposing severe additional costs on many tenant occupiers would have very serious implications.

Jonathan Djanogly (Conservative, Huntingdon)

Again, my hon. Friend makes an extremely valuable point, tying in the implications of leasehold stamp duty proposals to the wider implications for the economy. Clearly, the economy has been held up in the past few years by retail sales and the property sector. Does he believe that those proposals could turn the property sector, thus destroying one of the last good bits of the economy?

The rest of the debate is in Hansard.