Finance Bill

Public Bill Committee, 6 May 2004.

Standing Committee A

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39)

Paul Boateng (Labour, Brent South)

I beg to move

That, during proceedings on the Finance Bill (except Clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289 and Schedules 1, 3, 11, 12, 21 and 37 to 39), the Committee do meet at half-past Nine o'clock and half-past Two o'clock on Tuesdays and Thursdays when the House is sitting, other than Thursday 10th June 2004.

On behalf of the Committee, I extend a warm welcome to you, Mr. McWilliam, and to Sir John Butterfill, as you assume your responsibilities at the commencement of our proceedings. I know that I speak for the whole Committee when I say that I particularly welcome your stewardship. You are noted for being tough-minded, but at the same time we know that, when that twinkle in your eye appears, you are about to extend a latitude that, having looked around me, I have no doubt many Committee members will take advantage of.

Mark Prisk (Conservative, Hertford and Stortford)

Surely not.

Paul Boateng (Labour, Brent South)

I fear so.

I also know, Mr. McWilliam, that your co-Chair, Sir John, will add his particular style and experience to the Committee, not least because, many years ago, a number of us had the pleasure to serve with him on a Finance Bill. Even though on the Government side, he demonstrated a capacity to speak at some length in the furtherance of the entirely justifiable cause of widows who had found themselves at a disadvantage as a result of a financial instrument that was causing many of them to lose their homes. Such was the length at which he spoke that it caused a certain amount of alarm at that time—way back in 1988—on the part of the then Government Whip. I very much hope that none of my colleagues will follow his example in that respect, because my experience is that disturbing the peace of mind of the Government Whip, my hon. Friend the Member for Poplar and Canning Town (Jim Fitzpatrick), in any way is likely to have extremely unfortunate results. I fear that Labour Members will not be emulating Sir John in that respect.

On our part, I also extend a particularly warm welcome to the hon. Member for Arundel and South Downs (Mr. Flight), who leads for the Opposition on the Committee. As a noted City expert, he brings a depth of experience and knowledge to the proceedings. Joking apart, he always participates fully and with a great deal of knowledge and warmth in the debate.

My right hon. Friend the Paymaster General will lead on the Bill and will do so, I think, in a way that demonstrates her mastery of successive Finance Bills. I

think that she has the longest record of any Minister as a leader of proceedings on the Government side in a Finance Bill. We will particularly welcome her leadership.

Looking around me at those who sit on the other side, I think that it would be wrong for me not to mention one old stager, who is not present this morning but will be joining the Committee at some stage. I refer to the hon. Member for Grantham and Stamford (Mr. Davies). He has been around for some time. I remember serving with him in the early 1980s on the Finance Bill. He is an object lesson to several of the younger Members sitting on the Opposition Benches. They knew who they are—I do not feel the need to point them out or name them. We on the Government Benches know them as the Beastie Boys—Beastie as opposed to beastly—of the Conservative Benches. They are led by an hon. Member who, although young and very much a Beastie Boy, has risen to some prominence in the course of his brief political career. He has left his mark on the stamp duty land tax as a result of his contribution in opposition to myself the last time the Committee sat.

We welcome the contribution of all right hon. and hon. Members—a contribution that will be faithfully recorded by Hansard, whose representative we also note in his place and welcome. The Clerks, who are particularly experienced, will keep contributions perpetually in order. I say that advisedly, Mr. McWilliam, because I note that from time to time the Clerks stir into life, and even the most experienced of Chairs—

John McWilliam (Labour, Blaydon)

Order. It is my job to keep things in order, and if the Clerk stirs into life and says a word, it is because we are very old friends.

Paul Boateng (Labour, Brent South)

I see. That is a very helpful explanation of the signs of life that are so occasionally demonstrated by your distinguished Clerk, Mr. McWilliam, whom I would also count as an old friend.

This is an important Committee, on which we all value sitting, and we all look forward to the hours and days of proceedings that lie ahead.

Howard Flight (Conservative, Arundel and South Downs)

May I add our welcome to your chairing our deliberations, Mr. McWilliam? I know that it will be humorous as well as firm. May I also add a welcome to Sir John Butterfill. With 158 pages of pension legislation, it is appropriate that he should join you, Mr. McWilliam, given his own background and specialist knowledge. I thank the Chief Secretary for his kind and, I might say, fruity and patriarchal words.

Paul Boateng (Labour, Brent South)

Fruity and patriarchal? I am not sure I like that.

John McWilliam (Labour, Blaydon)

Order. Nothing unparliamentary has been said so far.

Howard Flight (Conservative, Arundel and South Downs)

I also welcome the Paymaster General. I believe that this is her 10th Finance Bill, and as I have said in the past, I greatly admire her grasp of tax law, even though I may not agree with her views. It is my fifth Finance Bill, so I am still quite a youngster,

relatively. May I also add our welcome to the Financial Secretary and the Economic Secretary? At 574 pages, this will be a long Bill.

I express my particular pleasure at being joined by my team on the Opposition Benches. As the Chief Secretary said, my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) was very much blooded by his experience with the ghastly stamp duty land tax provisions. I am delighted to have my neighbour and hon. Friend the Member for Chichester (Mr. Tyrie) here, who has the advantage of knowing the Treasury from the inside, and my hon. Friend the Member for Tatton (Mr. Osborne), who will be working on and contributing to the new, 158-page pension regime.

We also have invaluable support from Conservative Members of Parliament with great experience, including my right hon. Friend the Member for Fylde (Mr. Jack) and my hon. Friend the Member for Grantham and Stamford. My hon. Friend the Member for South Norfolk (Mr. Bacon) brings the discipline of the Public Accounts Committee to the proceedings. I add my welcome to our Liberal Democrat colleagues, the hon. Members for Yeovil (Mr. Laws) and for Torridge and West Devon (Mr. Burnett). As time goes by I am more and more of the impression that they should join us: we have a lot in common. I also welcome the Clerk—who will have to put up with my tabling activities for another three months—the police and the officials.

There will be some important debates during consideration of this year's Bill, particularly in relation to the new pension regime, and perhaps there will be less agreement on the various new avoidance disclosure measures. There are a lot of technical measures, some of which have not been thought through fully. As we begin considering the Bill, I would just comment that there is a tendency for tax legislation to go down the route of ''Let's have something that you can use to hit everything,'' when there may not be the intent to use it other than in situations of perceived wrongdoing. I feel that such a legislative approach is wrong, because it can put a lot of innocent employees in a difficult position, but we will get into the meat of that in due course. I thank you, Mr. McWilliam, for looking after us.

David Laws (Liberal Democrat, Yeovil)

I, too, welcome you to the Chair, Mr. McWilliam, and I thank the Chief Secretary for his comments. We look forward to him and his team playing an important part in our debates during the next few weeks. I join the shadow Chief Secretary in paying tribute to the work that the Paymaster General has done on Finance Bills over the years. To serve on Committees considering 10 Finance Bills is quite a record. Only the Chief Secretary can advise us what she has done to deserve such a sentence, but we look forward to her part in the debates, and we welcome other Labour Members who have been given the great opportunity to serve on the Committee. I am also grateful to the shadow Chief Secretary for his kind, if somewhat frightening, words, and I welcome him and his excellent team to the debate.

The Bill is not one of the greatest political Finance Bills of all time. Indeed, some would say that in parts it

is even on the dull side. I hope that our debate will be more constructive that it might have been if we were dealing with a more political Finance Bill. I hope that we can tempt the Chief Secretary and his colleagues, including the Economic Secretary, to be more generous than they would be if they were dealing with a more political Finance Bill in taking on board amendments and improvements where they seem to be justified.

Question put and agreed to.

Resolved,

That, during proceedings on the Finance Bill (except Clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289 and Schedules 1, 3, 11, 12, 21 and 37 to 39), the Committee do meet at half-past Nine o'clock and half-past Two o'clock on Tuesdays and Thursdays when the House is sitting, other than Thursday 10th June 2004.

John McWilliam (Labour, Blaydon)

I thank hon. Members for their warm welcome.

I have several announcements to make. First, copies of the Ways and Means and money resolutions agreed by the House, on which the Bill is founded, are available in the Room.

In view of the resolutions of the House relating to the declaration of interests, right hon. and hon. Members are required to declare relevant interests when they table amendments as well as when they speak to them. Copies of the rules are available from the Clerk. I suppose I had better declare an interest: as I am retiring at the next general election, the pensions clauses are of particular interest to me. As usual, because of the quantity of paperwork, boxes are available to store papers between sittings and hon. Members who make use of that facility should note that the cabinet that contains the boxes will be locked when the Committee is not sitting.

I remind the Committee that adequate notice of amendments must be given. Neither I nor my co-Chairman will as a rule call starred amendments, including any that may be reached during an afternoon sitting.

I give a health warning on the briefings that hon. Members may have had from various people. Sometimes, those who try to brief Committees do not realise that there are rules on how we go through the Bill, and that it is therefore not in order to discuss something that is not being considered by the Committee at a particular time. It becomes especially complex when we are dealing with groups of amendments.

Finally, I ask everyone to switch off their mobile telephones and refrain from using electronic devices.

Resolved,

That the order in which proceedings in Standing Committee on the Finance Bill are to be taken shall be: Clauses 1 to 3 and 6 to 19; Schedule 2, Clauses 21 to 27 and 29; Schedule 4; Clause 30; Schedule 5; Clauses 31 to 41; Schedule 6; Clauses 42 to 47; Schedule 7; Clause 48; Schedule 8; Clause 49; Schedule 9; Clauses 50 to 52; Schedule 10; Clauses 53 to 56 and 78; Schedule 13; Clauses 79 and 80; Schedule 14; Clauses 81 to 84; Schedule 15; Clause 85; Schedule 16; Clause 87; Schedule 17; Clause 88; Schedule 18; Clause 89; Schedule 19; Clause 90; Schedule 20; Clauses 91 to 110 and 112; Schedule 22; Clauses 113 to 127; Schedule 23; Clause 128; Schedule 24; Clauses 129 to 134; Schedule 25; Clause 135; Schedule 26; Clause 136; Schedule 27; Clauses 137 to 155 and 157; Schedule 28; Clauses 156 and 158; Schedule 29; Clauses 159 to 168; Schedule 30; Clauses 169 to 193;

Schedule 31; Clauses 194 to 205; Schedule 32; Clauses 206 to 267; Schedule 33; Clauses 268 and 269; Schedule 34; Clauses 270 and 271; Schedule 35; Clause 272; Schedule 36; Clauses 273 to 281 and 290 to 307; new Clauses; new Schedules; Clause 308; Schedule 40; Clauses 309 and 310.—[Mr. Boateng.]

Clause 1 - Rates of tobacco products duty

John Healey (Labour, Wentworth)

I welcome you to the Chair, Mr. McWilliam. It is a pleasure to serve under your co-chairmanship. I know from experience that you are fair and firm, and I look forward to seeing that twinkle in your eye to which my right hon. Friend the Chief Secretary referred earlier.

I also look forward to the scrutiny process that the Committee is about to embark on and to our debate with hon. Members on the Opposition Front Bench. I notice that the Liberal spokesman, the hon. Member for Yeovil, is virtually sharing the Front Bench. I trust that the physical positioning does not presage a political repositioning, even though the hon. Member for Arundel and South Downs might welcome it.

Clause 1 increases the excise duty on all tobacco products in line with inflation, raising the duty on a typical packet of 20 cigarettes and on a 25 g pack of hand-rolling tobacco by 8p, and increasing their cost by 9p when VAT is added.

The increase supports the Government's desire to reduce smoking prevalence by maintaining the real price of cigarettes. Smoking is the single greatest cause of preventable illness in the UK: it is responsible for the premature death of about 120,000 people every year.

The effects of tobacco are not restricted to smokers: a recent report by the British Medical Association entitled ''Smoking and Reproductive Life'' stated that studies showed links between smoking and fertility problems, cervical cancers, miscarriages and low birth weight. The report and its statistics underline the case for reducing the prevalence of smoking. As a result of the real terms duty increases introduced by the Government and previous Administrations, tobacco prices in the UK are at an historically high level. A decision this year to raise duties in line with inflation in the Budget will maintain their real price and thereby continue to encourage people to smoke less or to quit altogether, and to discourage children and young people from taking up the habit.

We believe that we can achieve those results without increasing smuggling, and since the introduction of the strategy to tackle tobacco smuggling three years ago, which my right hon. Friend the Chief Secretary played an important role in launching, Customs has succeeded in halting the growth in cigarette smuggling to the UK, and last year exceeded the target we set it yet again, restricting the illicit share of cigarettes still further to 18 per cent., compared with 34 per cent., the projected level of the illicit market if no action had been taken to counter the problem.

David Laws (Liberal Democrat, Yeovil)

The Economic Secretary has mentioned that the Government have been successful in reducing the smuggled share of the market to 18 per cent. in 2002–03, which is a particular achievement when one considers previous trends. Does he have any projections for that share of the market over the next couple of years? Does he expect it to reduce further, or merely to stabilise at the existing level?

John Healey (Labour, Wentworth)

The hon. Gentleman may know that we have set a public service agreement target for 2006 for Customs to bring down further the illicit share of the market to 17 per cent. Compared with three years ago, when we were faced with a steeply escalating market share for illicit tobacco, Customs has succeeded in halting the rise, stabilising the level and now driving down the size of the illicit market. He may be interested to know that during the three years that the anti-smuggling strategy has been in place, Customs has seized 7.3 billion illicit cigarettes destined for the UK market, disrupted 190 tobacco smuggling gangs, and protected an estimated £3 billion of revenue for the public purse and the taxpayer.

Mark Prisk (Conservative, Hertford and Stortford)

The Economic Secretary has rightly highlighted Customs and Excise's welcome successes in these measures. Can he confirm to the Committee that 27 per cent. of all tobacco consumed here is non-UK duty paid? The worry is that that masks hidden smuggling and counterfeiting.

John Healey (Labour, Wentworth)

The hon. Gentleman will find that the volume of illicit tobacco and cigarettes that finds its way into the UK with no UK duty paid is greater than 27 per cent. Our main tobacco smuggling problem comes not from travellers from the European Union, where they may pay duty at other EU member state rates, but from large-scale organised smuggling through freight. In most instances, the tobacco and cigarettes that are smuggled by freight have no duty paid anywhere before coming into this country.

I can confirm not only the progress that we have made to date but that we are seeking to reduce the illicit market share further in future years. We shall maintain concerted pressure on all aspects of the illicit market and take further measures where they become necessary to restrict the supply of illegal cigarettes. However, this duty increase continues the Government's twin track of maintaining the high real price of cigarettes while clamping down hard on the unregulated supply of the illicit market. Together, we believe that these measures will help to reduce smoking and lower the financial, social and personal costs associated with it. On that basis, I hope that the Committee will endorse and support the clause.

Mark Prisk (Conservative, Hertford and Stortford)

I add my welcome to you, Mr. McWilliam. I shall not continue your embarrassment with references to your eye and whether it twinkles, but we know that you will be able to guide us when we stray from the straight and narrow. I also welcome the Economic Secretary. We have debated, one might perhaps argue too frequently in the past 10 days or so, but it is always a pleasure, and he is always determined to ensure that we have a full debate, which is to be welcomed. I also welcome the hon. Member for Yeovil

and his move to the right—if it is not political, it is certainly a physical move, although the former would be most welcome as well.

It is a daunting task to consider clause 1, and the forthcoming 310 clauses and 574 pages of the Bill. I always feel that Room 10 is appropriate for us to consider it, because behind you, Mr. McWilliam, is a magnificent illustration of Alfred inciting the Saxons to prevent the landing of the Danes. Occasionally, as an Opposition spokesman dealing with the size of the Finance Bill, one cannot help feeling some sympathy for Alfred's position.

In this year's budget, as the Economic Secretary said, the Chancellor increased duty levels on cigarettes and other tobacco products by the rate of inflation. I think that it was the third or fourth Budget in a row in which such a change was made. The Minister explained to us the reason behind it, which is reaffirmed in a statement in the Red Book that accompanied the Budget:

''Smoking remains the greatest cause of preventable illness and premature death in the UK. Maintaining high levels of tax helps to reduce overall tobacco consumption.''

I doubt that any member of the Committee wishes to challenge the first of those two sentences. However, there is a serious question, which I hope we can consider in the debate, about the evidence that high duty levels have reduced overall consumption in any meaningful way.

Tobacco duties in this country must be seen in the context of the international tax environment. For our near neighbours in the European Union, a packet of 20 cigarettes generally costs between £1.85 and £3.40, depending, of course, on the brand; here, the equivalent packet costs about £4.60 to £4.75. The large price differential between neighbouring countries is worrying. It will, as the Minister said, continue to create significant opportunities for smuggling, fraud and counterfeiting.

The question, therefore, is whether high duties and increases cut consumption. We have to consider the industry figures and the Government figures to try to ascertain whether they do. Let us consider the industry figures in particular. The latest figures are for 1993 to 2003, and it is clear that there has broadly been stability. There was a small rise in 1999–2000. We are not sure whether that related to the millennium, but in 1993 the figure for consumption was about 99 billion cigarettes or their equivalent, and the figure is broadly the same this year.

The Committee will be interested to learn, however, that there was a much greater difference in the previous 10 years. In 1983, the figure was about 113 billion and it dropped to 99 billion. The 1970s saw the greatest change: in 1973, the figure was about 153 billion and it fell over the following 10 years to about 117 billion. I suspect that we have seen a natural reduction in the number of people smoking and are left with a hard core of smokers who are not likely to stop their habit. They may wish to change the way in which they consume the product, but they are unlikely to be deterred significantly. The figures produced by

Customs and Excise and the industry reinforce that assumption.

It is fair to say that duty rises over the past three or four years, including the one set out in the clause, have created stability in the sense of the tax revenue. In the past four or five years, the Government have pulled in about £8 billion in tax revenue. However, it is not clear from any independent evidence or evidence from the Government that the tax changes have made any significant difference in terms of cutting overall consumption. What has changed in the past few years with regard to supply is the counterfeiting—which of course is run by organised crime—and the level and nature of cross-border purchasing. It is difficult to know how to measure that and to judge whether the changes made by the Government have had an impact.

According to the Government's figures, there has been one interesting change, which the Committee will wish to note. The estimated revenue loss that the Government have endured has changed radically. In 1997, they were losing about £60 million in revenue; by 2002–03, the figure had risen to £1.41 billion. There has therefore been a big change in purchasing habits. As all members of the Committee will be aware, people are opting for cross-border cigarette purchasing, which is very different from what they were doing just seven years ago.

Equally, there has been a dramatic change in the nature of illegal activity, with a shift from smuggling to counterfeiting. The Economic Secretary referred to Customs seizures in his opening remarks, and last year some 41 per cent. of them involved counterfeit goods. In the previous year the figure was just 15 per cent, so there has clearly been a change in the nature of organised crime. I fully accept that some of the steps that Customs and Excise has taken on smuggling have had good results, and I am sure that the Committee supports that.

The problem with counterfeiting is that it means that, whether one's views on the totality of the product are positive or negative, consumers do not know what they are buying. The danger is that the carcinogenic elements, for example, may be far greater in the counterfeit product, but the consumer will not know. As such, there is a worry that the shift in the supply habits of organised criminals from smuggling to counterfeiting goods is serious for the consumer.

My point is that the tax rises in this Budget and the past few Budgets have done one thing: changed but not reduced habits. On the consumer side, smokers have not cut their consumption in the past 10 years. They are buying abroad, switching to cheaper brands and, by the sounds of it, willing to buy counterfeit goods. The point is that the total consumption is static, so the tax rise has not achieved the Government's apparent aims. At the same time, on the supply side, organised crime seems to have been just as active, but has changed its activity from smuggling towards counterfeiting. That is clearly a more sophisticated activity, but one that is nevertheless highly profitable.

How does the Economic Secretary feel that the increase in price helps to tackle organised crime and cut total consumption? Those two aims are laudable, but it is not clear that the policy set out in the clause will achieve them. I hope that we will be able to have a proper debate about that. I look forward to receiving the considered thoughts of the Economic Secretary.

David Laws (Liberal Democrat, Yeovil)

I hope not to detain the Committee on every clause, but clause 1 covers a particularly important issue that merits consideration.

I start by saying to the Economic Secretary that I accept that the background to the debate is the long-term and considerable political consensus in this country that tobacco duties should be raised to reduce the incidence of smoking and to provide what has become a good revenue source for the Exchequer.

Looking at some of the, as ever, excellent briefing notes produced by the House of Commons Library, I note that the support for higher tobacco duties has been broad-based over the years. Debating the Finance Bill in 1994, the then Chief Secretary to the Treasury, now the right hon. Member for Kensington and Chelsea (Mr. Portillo), described the position of that Conservative Government:

''Our tax philosophy is to tax alcohol and tobacco at quite a high rate. That position has been shared across the parties over the years. In return, we do not extend our value added tax base as broadly as many other countries.''—[Official Report, Standing Committee A, 24 February 1994; c. 379.]

When the then Chancellor of the Exchequer, the right hon. and learned Member for Rushcliffe (Mr. Clarke), spoke in the 1996 Budget about the large increases in tobacco duty and the escalator that was introduced to continue those increases over time, he said that they were

''necessary masochism in the wider public interest''.—[Official Report, 26 November 1996; Vol. 286, c. 168.]

It is fair to say to the Economic Secretary that the policy that he is introducing and defending has been followed by all predecessor Governments for a considerable time. It is fair to note that neither the Conservative party nor the Liberal Democrats have tabled amendments suggesting that the rise in tobacco duty in line with inflation this year should not go ahead or that there should be a reduction in duty.

However, the comments made by the hon. Member for Hertford and Stortford, and those that I shall make in a moment, suggest that there is cause to consider whether the Government's strategy is still working and delivering the intended benefits, to what extent their strategy is being undermined by smuggling, which remains a large problem notwithstanding recent progress, and the fact that the European single market has widened with the recent accession of eastern European countries. In a market where it is more difficult to maintain barriers to trade, there is a major question mark about whether the Government's duty differentials can be sustained in a way that delivers public health objectives.

The Economic Secretary mentioned the extent of recent Government success against smuggling. There were concerns several years ago that smuggled cigarettes could account for one in three cigarettes consumed in this country. The Government have had success with their strategy, particularly in ensuring that the projected increase in the smuggled share has not been realised. However, I am sure that he will acknowledge that the figures showing the proportion of tobacco and cigarettes consumed in this country that are non-UK duty paid, because they are either smuggled or brought in through cross-border shopping, are dramatic and shocking. Even with the progress in the Government's smuggling strategy, 27 per cent. of tobacco consumption in the UK—more than a quarter—is non-UK duty paid.

On the basis of Government figures, which are open to debate, the share of smuggled tobacco is down to 18 per cent. That is still only a few percentage points below the high of 2000–01, and it is a higher share of the overall cigarette market than the 1999–2000 figure of 17 per cent. We do not know how successful the Government's strategy will be. The Economic Secretary said that there was a public service agreement target to reduce the smuggled share to 17 per cent. by 2006. That would be only a 1 per cent. reduction from the current share over a few years, which does not suggest that the Government are confident that they will be successful in driving down the smuggled share over the years ahead.

What is happening about the other part of the non-UK duty paid trade: cross-border shopping? That has significantly increased over the past few years, as one might expect in the context of an EU single market in which it is increasingly difficult for the Government to impose limits on the amount of tobacco and alcohol that people bring back across borders, not least after recent rulings. I remind the Economic Secretary that, according to my figures, although there has been a peaking out in the smuggled trade in cigarettes, the share of cross-border shopping has almost doubled from 5 per cent. to 9 per cent. over three or four years.

Given the recent publicity about the duty differential between the UK and other EU countries and the entry into the EU of eastern European countries with far lower levels of duty on cigarettes, one must assume that the share of the non-UK duty paid market will increase. Therefore, there could still be a rise in the share of the overall tobacco market that is non-UK duty paid. It would not take a very large increase in that share to get us to something like one in three cigarettes—one in three units of tobacco—evading UK duty. That is a pretty dramatic failure by anyone's terms to impose a UK duty on a UK product. It raises the question whether, in a single market, where barriers to trade are necessarily coming down, it is possible to maintain that strategy in the way that previous Governments desired.

When we look at some of the other figures for the non-UK duty paid market we can see how dramatic developments have been over a slightly longer time scale. The figures going back to 1993 show that the non-UK duty paid element of the overall market was pretty small: 3.5 billion cigarettes out of a total market

of 88 billion. In 2003 the figure was 20.5 billion out of a total of 74 billion, which is a massive percentage increase.

The figures in the hand-rolled market are even more striking. Some 10,000 tonnes of hand-rolled tobacco are consumed in the UK each year, and in 2003 70 per cent. of that was non-UK duty paid. The Government were unable to collect their duty on 70 per cent. of one product market. It is no surprise, as the hon. Member for Hertford and Stortford indicated, that the Government's strategy to reduce tobacco consumption is suffering because many people are able to bring in non-UK duty paid tobacco from other markets.

We can also reflect on the success or lack of success of the Government's policy on tobacco consumption when we look at the long-term figures for tobacco consumption in the UK over the past 40 years. There has been a marked decline in the post-war period. The graph that I am looking at has figures only since 1973. Between 1973 and 1992 there was a 50 per cent. decline which took place at a time when the affordability of tobacco went up by 60 per cent. because of the movement of income in relation to tobacco taxation. That is an indication of some of the non-UK duty and non-price factors affecting tobacco consumption. They may be far more significant than the Government's chosen weapon of tax increases.

After 1992 two different Governments brought in escalators on tobacco. In 1993 the Conservative Government introduced an escalator of 3 per cent. It came in after a period of massive downtrend in tobacco consumption. After its introduction, rather than falling tobacco consumption initially stabilised. When the present Chancellor increased the escalator to 5 per cent. in 1997–98 there followed the first sustained increase in tobacco consumption for many years. Bizarrely, at a time when tobacco taxes have increased by something like 58 per cent. in real terms, tobacco consumption has stabilised and even increased, so the strategy of relying on increases in taxation and price to reduce tobacco consumption seems to have been notably unsuccessful of late. One reason may be that the increase in tobacco taxation, instead of bearing down on consumers' demand, has precipitated a huge increase in smuggling and gone hand in hand with an increase in cross-border trade at a time when the European single market has allowed consumers to bring tobacco from abroad without having to worry about traditional trade barriers.

When one looks at the differential between UK tobacco prices and those in other EU countries, one understands the incentive to smuggle and the reason that consumers bring tobacco back from abroad. The average price in the UK for a pack of 20 cigarettes is around £4.65, and the EU average is closer to between £2.20 and £2.70. In the countries that are joining the EU at the moment, such as Poland, average prices are even lower, at around 74p a packet, compared with £4.65 in the UK. That is a massive incentive to smuggle in a single market, and we may be confronting the difficulty within a single market of nations running their own tax policies regardless of those in other countries. That does not lead me to say, as Labour

Members may try to tempt me to say, that we should harmonise taxes. In practice, it is refreshing tax competition, the effect of which helps to hold down tax levels in some countries when others have taxes that are way out of line.

I have read in the newspapers, even since the recent entry of the eastern European countries into the EU, a number of stories about disappointed consumers returning laden with tobacco from countries such as Poland and discovering that the Government, or perhaps the EU, had introduced measures to prevent them from bringing back the quantities that they can from other EU countries. No doubt, Customs has done good business and good work in preventing citizens who, deliberately or unintentionally, bring back quantities of tobacco in excess of the permitted amount, but one questions, first, whether that will lead to additional smuggling and, secondly, whether it will be a new factor that will put even further pressure on the Government's strategy on tobacco taxation.

When one looks at the policy in the round, one sees that during a long period after the war there was a decline in tobacco consumption despite tobacco becoming more affordable, but in recent years, when both Conservative and Labour Governments have increased tobacco taxes particularly rapidly, consumption has stabilised and even increased, indicating that those policies have not been very successful. That raises two questions. First, can we continue to rely on higher taxation and prices to deter consumers, or should we use different mechanisms, and should that include a bigger role for the Department of Health, rather than the Treasury?

The second question, on which I shall touch only briefly—I can see that the Economic Secretary is impatient to rise to his feet to respond to our concerns—is what precisely is the cost of maintaining the duty differential? Even if we assume that the Government's policy is still successful in raising more revenue than would be raised if they reduced tobacco taxation to the EU average, what is the cost of having to police the existing system and what is the lost revenue consequent on almost one cigarette in four or, in future, one in three being non-UK duty paid? What is the cost to the taxpayer and the policing services of the organised crime rings that are making a huge amount of money from such activities, some of which may be routed into other undesirable areas, including, for all we know, terrorism?

Michael Jack (Conservative, Fylde)

The hon. Gentleman questioned the current duty regime on tobacco products and suggested that an alternative way of controlling the problem of consumption of tobacco would be through the Department of Health. If, as a result of the proposal he puts forward, there were to be a revenue loss, what alternative means would his party adopt to raise the missing money?

David Laws (Liberal Democrat, Yeovil)

That is a good question. It highlights the need for the Government not only to assess what the costs are but to evaluate the implications of reducing the taxation of tobacco. The right hon. Gentleman will be aware that, prior to 1997, the right hon. and learned

Member for Rushcliffe had to consider that issue in relation to the taxation of spirits. It was argued that that could be reduced without losing revenue, because it was so high.

At that time, organisations such as the Institute for Fiscal Studies supported the proposition that the tax on spirits could be reduced without losing revenue. As far as I know, the institute has not yet argued that a similar outcome could be achieved by reducing tobacco taxes. However, the factors that we are discussing—smuggling and cross-border trade—have begun to bear on the issue only in the past few years, and it is possible that the revenue implications of changes in duty might change rapidly while the debates continue.

Rob Marris (Labour, Wolverhampton South West)

Speaking from memory, I believe that in 1999 the province of Quebec lowered the excise on cigarettes because of cross-border smuggling, particularly from native people's reserves, and found that consumption of tobacco increased markedly. The province therefore put the excise duty back up because of the health implications.

David Laws (Liberal Democrat, Yeovil)

I shall not take on the hon. Gentleman on the subject of Canada, on which he is a world expert, and about which he speaks frequently in our debates. However, he should accept that the recent use of tobacco taxation in order to reduce tobacco consumption has not been a success in the UK under this or the previous Government. The Chancellor recognised that by ending the escalator on tobacco taxation. I am not trying to make a party political point, because I believe that that move was supported by all the political parties, including mine.

Chris Bryant (Labour, Rhondda)

It seems to me that the hon. Gentleman's argument is a syllogism. If one were to reduce duties, as he suggests, to compete with other countries in Europe and to eliminate the trend—although he has not suggested a figure to which those duties should be reduced—that would incur the risk of significantly increased consumption, as pointed out by my hon. Friend the Member for Wolverhampton, South-West (Rob Marris). That is the element of the hon. Gentleman's argument that cannot be proved.

David Laws (Liberal Democrat, Yeovil)

The assumption that the hon. Gentleman appears to make has not been well borne out by evidence. Not only over the past decade, but over the past 20 or 30 years, significant declines in consumption do not appear to have been related to affordability. Recently, this Government and their predecessor have had an excellent opportunity to carry out an experiment in increasing taxation to reduce consumption, but that has been a notable failure. Consequently, the Government and all other political parties, including my own, have changed their policy of increasing the real taxation of tobacco. I suggest that hon. Members of all parties should come to terms with an economic situation that is different from that which we faced a decade ago.

I hope that the Economic Secretary will be able to say something in his response about the revenue that is

lost, the crime that is stimulated, the costs, which must be significant, of trying to police the smuggling, and the costs that are faced by legitimate businesses in the UK, particularly in the south-east, as a consequence of the fact that so much of the tobacco business is now non-duty paid. Those are new factors that any Government should take into account—the fact that neither the Conservative party nor the Liberal Democrats have tabled an amendment indicating that we believe that duty should be reduced by a particular amount shows that no political party has yet come to terms with the implications of those recent trends.

I suggest to the Economic Secretary, who I have no doubt will need to defend the Government's position, that the Government, in partnership with the Department of Health, take the opportunity over the next year or two to consider the issue of tobacco consumption, to see whether the tax policies that we have pursued for the past 10 or 20 years have been successful, to consider the implications of the single market on the Government's strategy in this sector, and to see whether we need a new strategy on tobacco consumption that is less dependent on maintaining duty differentials with other countries in Europe, which increasingly seems unsustainable without unacceptable criminal trade and unacceptable cross-border trade.

Howard Flight (Conservative, Arundel and South Downs)

I declare an interest: I am probably the only person present who has been smoking for more than 40 years.

The current strategy, which has been adopted by Governments from the two main parties, has run out of steam. No one is yet putting in place a new strategy and no one has modelled the effect on consumption or revenues of moving duty in the other direction. However, it must be acknowledged that the strategy has ended its useful life. From the figures, it is obvious that tobacco consumption has been unchanged for roughly a decade. It has not gone down. If anything, it might even have gone up a bit. The proportion of cigarettes and tobacco on which duty is not paid—either because purchases are made at cheaper duty rates in the EU or because of smuggling—has also remained roughly static at about 69 per cent. for hand-rolled tobacco and 27 to 28 per cent. for cigarettes. We are stuck in a groove.

The figures that I have seen for loss of revenue put it in the order of £4.4 billion per annum. There are projections that need to be done. Would moving somewhere else on the duty supply and demand curve lead to an increase in consumption, as in Quebec, and would the change be more than offset by a decline in the volume of non-duty-paid tobacco?

My major concern about setting the price higher and higher is that it is incredibly regressive. A large proportion of smokers are single women, and in particular single mothers, who are often the least best placed to afford to pay huge sums on tobacco. It would be worth having a study into where the concentrations of smokers are, but I am aware that among young people there is a rising trend for girls, more than boys, to take up smoking.

We are kidding ourselves if we think that putting up duty, even at the rate of inflation, is a strategy that will work. That strategy is five—perhaps even 10—years past its sell-by date. Although none of us has an alternative to suggest, it is unwise to continue with the current approach when it is no longer achieving its objectives.

John Healey (Labour, Wentworth)

We have had a useful and measured debate, but the arguments have been somewhat overstated by the hon. Members for Yeovil and for Arundel and South Downs. They claimed that there has been a breakdown in consensus that has existed over the past couple of decades about the role of high prices in helping to drive down and constrain consumption, and declared that the role of duty levels, and therefore of price, as part of a strategy is past its sell-by date.

There is little serious doubt that, under Conservative and Labour Governments, high duty levels have played a part in high prices and that they have helped to reduce the prevalence of smoking from about 35 per cent. of the population in the early 1980s to about 26 per cent. now. Clearly, as the proportion of the population who smoke is reduced, gains become increasingly hard to deliver. Nevertheless, there has been a fall of about 2 per cent. during the past 10 years, continuing a slower but general trend. Common sense and our modelling indicate that consumption would rise if we were to cut the price by cutting the duty, as hon. Members have urged. That would run counter to health objectives, on which I believe there is still consensus.

I reject the argument that the strategy is at the end of its useful life, as the hon. Member for Arundel and South Downs said. I made it clear that it is not the only answer but that it plays a part in maintaining pressure on the level of consumption. It also plays a part in our overall approach, particularly the strategy that that the hon. Member for Hertford and Stortford welcomed and said was successful, to clamping down on smuggling and the illicit marketing of cigarettes and tobacco on which duty has not been paid.

Mark Prisk (Conservative, Hertford and Stortford)

It is important to tease out answers on the efficacy of the policy, because the end aims, particularly in respect of illegal supply, are crucial. It is not clear from what the Economic Secretary just said whether it is the confident view of the Government that continuing to increase the duty on UK-purchased tobacco products cuts overall consumption. That assertion was made in the Red Book that accompanied the Chancellor's decision, but we have not heard it from the Economic Secretary.

John Healey (Labour, Wentworth)

The provisions will increase the duty on tobacco by the rate of inflation. They do not increase the high rate but maintain it. In other words, they are part of maintaining, not increasing, the price and thereby maintaining pressure on the level of consumption. That is only a part of our strategy for dealing with the health risks and damage from smoking and the problem that we faced in severe form three or four years ago of increasing levels of smuggling and, therefore, criminal and illicit market activities, and of loss of revenue to the Exchequer.

It is important to distinguish between the nature and scale of the illicit market in tobacco and cigarettes and the nature and scale of products that are legitimately purchased in other EU member states by UK consumers. We are absolutely clear about, and strong in our support for, the right of EU citizens to shop for and bring back as much tobacco as they want for their personal use without paying UK duties.

It is important to bear it in mind that we are not alone in using cigarette duties and prices to achieve health objectives that we share with other Governments. Since January 2002, prices have risen in Australia by 11.6 per cent., in Belgium by 20 per cent., in France by 39 per cent., in Germany by 20 per cent., in Ireland by more than 21 per cent., in the Netherlands by nearly 30 per cent. and in Portugal by more than 19 per cent. In that same period, the UK's duty rates and prices have been constant in real terms. The equivalent price rise in the UK has been just 8 per cent.

The other important conclusion to draw is that the increased cross-border shopping that has taken place during that period is not necessarily driven, as hon. Members argued, by an increasing differential in duty rates between the UK and other EU states, because the differential has reduced in EU countries where shopping is most prevalent.

Mark Prisk (Conservative, Hertford and Stortford)

Will the Economic Secretary enlighten the Committee as to what has driven that process? In relation to cross-border shopping, tax revenue loss has increased from £60 million in 1997 to £100,410 million. That is a huge change. Is he going to argue that that is simply a consequence of cheap flights? What analysis have the Government carried out on the subject?

John Healey (Labour, Wentworth)

There are three contributory factors. One is the change in travel patterns, the second is the change in shopping and consumption patterns and the third is the move that we made as part of the second phase of our tobacco strategy in October 2002 to raise the minimum indicative levels—the guideline levels—for tobacco and cigarettes that UK citizens can bring back to the UK from other EU states. Customs will use those guideline levels in making a judgment about whether people are bringing back excise goods for their own use. That has helped Customs to distinguish between the genuine shopper and traveller, and the regular smuggler and bootlegger.

I now turn to the issue of counterfeit cigarettes, which the hon. Gentleman rightly raised. He rightly detailed the recent rise in the trade of such cigarettes. Counterfeit cigarettes pose the problems he suggests. They may carry increased health risks, and are generally completely untaxed and unregulated. There is some evidence—he cites Customs' own operational evidence and figures—that organised criminal gangs are increasingly switching to the smuggling of counterfeit cigarettes rather than legitimate goods with no duty paid.

We are working closely with the UK industry. Understandably, it shares our concern about counterfeit goods. They undermine the brand integrity and identity of the companies and their

markets. We are now targeting gangs that are beginning to smuggle counterfeit cigarettes. We disrupt their supply chains where we can and try to increase their costs and reduce their profit margins. We are targeting the source countries where such goods are produced and we are using our overseas network of Customs officers to tackle the problem.

The hon. Member for Yeovil tried to argue at one point that the success of the anti-tobacco smuggling strategy during the past three years demonstrated that it was not ambitious enough in the first place. In doing that, he undermined the seriousness of the problem that we face and, therefore, the importance of putting the strategy in place.

David Laws (Liberal Democrat, Yeovil)

Even with the success of the Government's smuggling strategy, by 2006, over a quarter of the tobacco market in the UK will still be non-duty paid. Given that the Government have acknowledged that we are in new circumstances and have moved away from the tobacco escalator as a consequence, is there not an argument—without prejudice—for the Government to investigate the issue during the next couple of years? The Treasury could do that in partnership with the Department of Health to consider whether we have the right strategy and to see whether it can be sustained in the new circumstances of a large single market.

John Healey (Labour, Wentworth)

I will come to the point that the hon. Gentleman wishes to introduce about EU duty rates, but tries to qualify with the words ''without prejudice'', in a moment. As he would expect, we are refining the modelling that we use to analyse the dynamics of this complex set of factors. We are continually analysing that with academics. It is clear that, if you significantly reduce the duty level and therefore the price of tobacco or cigarettes, you will reduce the revenue to the Exchequer and inevitably impact on consumption levels, which will increase.

The hon. Gentleman tried to say that our PSA target of a 17 per cent. share for the illicit market in cigarettes by 2006 was somehow unambitious. That target was set at the start of the current spending review period. If we had taken no action, the projections are that that share would have reached 34 per cent. last year. It was set when we were facing a rapidly escalating illicit market share, and it was generally viewed as a pretty tough, not soft, target for Customs.

As the hon. Gentleman would expect, publication of part of the current spending review in the summer will include new PSA targets for Customs for the year ahead, and as part of that process we are examining the question of illicit tobacco and cigarette market share and the scale of smuggling.

David Laws (Liberal Democrat, Yeovil)

May I press the Economic Secretary on the need for a joint inquiry with the Department of Health? Although his models indicate that, if you reduce the price of tobacco, you will increase the demand for it in the short term, they have to be set against the fact that many other EU countries with far lower tobacco taxation and prices have far lower

tobacco consumption. That may indicate that factors other than price and taxation are more important in the long term.

John McWilliam (Labour, Blaydon)

Order. ''You'' means me in this Committee, and I have no intention of increasing or reducing anything.

John Healey (Labour, Wentworth)

I will come on to the points that the hon. Gentleman raised earlier and tried to raise again in an intervention.

I do not accept the argument for a joint inquiry with the Department of Health into the matter. I refer the hon. Gentleman to the recent report by Derek Wanless, which, with its careful scrutiny, makes an important contribution to the issue.

The hon. Gentleman, in his argument about Europe and European prices, is trying to have his cake and eat it. That is pretty typical of the Liberal Democrats. Whatever he says without prejudice, it is clear that he makes strong arguments for tax harmonisation across Europe.

David Laws (Liberal Democrat, Yeovil)

Competition.

John Healey (Labour, Wentworth)

The logic of the hon. Gentleman's arguments and his critique of the problems that we face lead us very easily to see him as a tax harmoniser.

David Laws (Liberal Democrat, Yeovil)

Will the Economic Secretary give way?

John Healey (Labour, Wentworth)

No. Let me finish this point. The hon. Gentleman asked about the price of cigarettes in other European countries. It was a shame that no one from the Front or Back Benches of his party was in Committee last week when we considered the question that he now asks about the position of the 10 accession countries that have just joined the European Union. We considered price levels in those countries and—he obviously is not aware of this—the basis for maintaining quantitative cigarette restrictions on travellers from eight out of those 10 countries.

There was no Liberal in that Committee. We had a full debate as it was a very serious issue, and it dealt with some of the questions that the hon. Gentleman has raised this morning. For his information, we discussed the fact that in Latvia the current price of a packet of 20 cigarettes is 40p; that in Lithuania it is 55p; and that eight out of those 10 countries have taken advantage of a derogation that allows them to avoid setting the minimum duty rate for tobacco, which European rules insist upon, for a period in which they bring their own levels up to the European minimum. The hon. Member for Hertford and Stortford played a very important part in the scrutiny of that measure.

That Committee discussed and agreed that the UK was right. Indeed, other member states from the original 15 have taken advantage of an agreement that allows us to maintain quantitative restrictions on the number of cigarettes and the amount of tobacco that people bring back from those countries until they meet the minimum duty levels.

The hon. Member for Yeovil asked for figures on cost. If the UK were to reduce our tobacco duty levels to that of the EU 15 average and not include the 10 accession states, the cost would be between £2 billion

and £2.5 billion. As the right hon. Member for Fylde put it so succinctly, it is down to those who advocate that move to explain where revenues would be raised from to compensate for the revenue that was not available for the public purse.

David Laws (Liberal Democrat, Yeovil)

Will the Economic Secretary give way?

John Healey (Labour, Wentworth)

I will give way to the hon. Gentleman if he is going to answer that question and I look forward to his answer.

David Laws (Liberal Democrat, Yeovil)

It is a perfectly legitimate question. I am grateful to the Economic Secretary for raising it. Is he willing to publish the research that underlies the figure about the expense of reducing tobacco tax to the European average? Will he also publish his assumptions about the implications for other costs, including policing costs? I think that that would allow us to have a more sensible debate about what is not an easy issue.

John Healey (Labour, Wentworth)

The figures that I draw on to make those calculations are clearly available.

David Laws (Liberal Democrat, Yeovil)

Where?

John Healey (Labour, Wentworth)

The calculations are not that difficult. The hon. Gentleman needs only to look at the duty rates levied in the other 15 EU states and the duty rates levied in this country and make his own calculations. It is fairly straightforward.

David Laws (Liberal Democrat, Yeovil)

Will the Economic Secretary give way?

John Healey (Labour, Wentworth)

No. I am going to finish.

On the question of policing costs, I am not sure that the hon. Gentleman is sure what he is asking. The Government invested £209 million in the strategy to tackle the funding problem that we had three years ago. Having brought the share of the illicit cigarette market down from what it would have been last year—34 per cent.—to 18 per cent., we are determined to drive it down further still.

That is money well spent, because it safeguards and protects £3 billion to the public purse, reduces illicit and criminal activity in this country and helps to protect legitimate traders such as newsagents and retailers, whose livelihood in part depends on their ability to continue to sell licit duty-paid tobacco products.

Howard Flight (Conservative, Arundel and South Downs)

Is the Minister saying—and is the present position—that the overall policy on duty on tobacco should be to optimise tax revenues?

John Healey (Labour, Wentworth)

I think that I have been clear. As with a number of decisions about tax policy, concerns about revenue and protecting the public purse form a part of the decision, but important concerns about health and levels of smoking are part of the decision that the Chancellor makes each year about duty levels on tobacco. We are concerned to take into account the potential impact on smuggling and criminal activity. It is a judgment based on an assessment of those factors, with a number of objectives in place for the Government, not simply a question of revenue to the public purse, important though it is.

Richard Bacon (Conservative, South Norfolk)

I did not realise how much fun the clause was going to be. If it is any augury of what is to follow, I look forward to

the collective chance to poke fun at the hon. Member for Yeovil, especially from a sedentary position. Before my hon. Friend the Member for Arundel and South Downs intervened, I was about to ask the Economic Secretary a similar question. If, as a consequence of the clause, people such as my hon. Friend have to pay through the nose for cigarettes, is not the issue mainly about getting the cash?

John Healey (Labour, Wentworth)

The hon. Gentleman asked the same question as the hon. Member for Arundel and South Downs and I refer him to the answer that I gave. We are determined to drive down levels of tobacco consumption in this country. I look forward to the personal contribution that the hon. Member for Arundel and South Downs will make to that decline in due course.

My hon. Friend the Member for Poplar and Canning Town was not impressed by the hon. Gentleman's suggestion that the debate on this clause may somehow set a precedent and pattern for the remaining clauses. My hon. Friend would be concerned about our progress if it did. On that basis, I hope that the Committee will support clause 1.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.

John McWilliam (Labour, Blaydon)

Before we move to clause 2, I should point out that it has been drawn to my attention that the clock is not working. To avoid any doubt, we will go by the time on the House of Commons Annunciator rather than the House of Lords Annunciator—they are not always in synch.Clause 2 Rate of duty on beer

Clause 2 - Rate of duty on beer

Mark Prisk (Conservative, Hertford and Stortford)

We have had an excellent and surprisingly thorough debate on the issue of tobacco. We now turn to the question of beer. The comments that I shall make about beer are equally applicable to clause 3 on wine, and I do not intend to deter the Committee further. Deter? I mean ''detain''. It is obviously still early in the morning, and talking about beer at 10.15 am—or 10.16 am according to the House of Lords Annunciator—is questionable.

We note the rises that the Government propose in the clause; I have received no significant representations against those decisions. However, I have three brief questions. First, will the Minister confirm that following the freeze on beer duty in 2001–02, revenue received by the Government rose and the industry benefited from a rise in sales? Secondly, what estimates has the Treasury made of the total impact on Government revenue? As with cigarettes, there has been a change in consumer behaviour: there has been a switch from licensed trade sales to off-licences as the total tax burden has risen. The figure for the latter rose from roughly 23 per cent. of sales to 39 per cent. between 1993 and 2003—that is a big shift in the way that people buy beer. Given that off-licence VAT revenues are

approximately half those of pubs, what studies, if any, has the Minister commissioned on the total impact on revenues of a further rise in the duty charge? Finally, will he tell us how the approach fits into the Government's overall strategy on alcohol?

John Healey (Labour, Wentworth)

I hope that I can answer the hon. Gentleman's points during my brief remarks on the clause. Clause 2 increases the rate of excise duty charged on beer by 3.01 per cent. in line with general inflation. As the hon. Gentleman said, that has generally been accepted, and I, like him, have received no fierce representations against the rise. Excise duties on alcohol provide a crucial £7 billion a year for investment in public services and other Government spending. Beer accounts for more than 40 per cent. of alcohol duty receipts. The inflation-only increase, which together with VAT is equivalent to about a penny a pint, is necessary to maintain an important source of revenue. Since coming to office in 1997, the Government have made no real-terms increases in beer duty. This modest increase, which is a freeze in real terms, comes after freezes in beer duty in three of the previous five Budgets.

As with tobacco, it has been said that our levels of excise duty on alcohol are too high in comparison with those of continental European neighbours and that the inflation-only increases will somehow strengthen the motivation to buy beer and wine on the continent. Our commitment to the right of individual citizens to shop freely across borders in the EU for consumption for their own personal use is absolute. It is important not to view excise duty in isolation. A large proportion of cross-border shopping by the British is done in Belgium, the Netherlands and France, and it is true that those countries generally have lower rates of excise duty on alcohol. However, figures from the Organisation for Economic Co-operation and Development show that the UK is a relatively lightly taxed economy with one of the lowest total tax burdens in the EU, certainly far lower than the average.

The hon. Gentleman asked specifically about the level of revenue receipts following previous Budget decisions. If he cannot find the references in the Red Book—I cannot do so immediately—I will write to him with them. He points to a significant shift in the way in which people buy their beer, from on-trade to off-trade. I have discussed that with members of the all-party beer group in Parliament and the British Beer and Pub Association. It is a matter of concern to the pub and drinks industry and of interest to the Treasury. We are doing what we can to track and analyse the matter, and the industry has undertaken some useful analysis.

The matter does not lend itself easily to fiscal decisions that might follow because it is not easy to see how it might be possible to distinguish between on-trade and off-trade sales in determining fiscal policy. My conclusion is that there is a significant shift in consumption patterns which we need to understand, but we have limited scope in fiscal policy terms to influence that or to respond directly.

Mark Prisk (Conservative, Hertford and Stortford)

I understand that the Minister may not be able to pursue policy further, but I am not clear whether the Government have assessed the overall problem. Clearly, if one set of taxes is raised, there will be a knock-on effect on other taxes, and I assume—the Minister may contradict this—that the Government have looked at the total revenue. If a change made to one fiscal measure has a detrimental effect elsewhere, the Government could end up in deficit in tax terms. What studies have been commissioned?

John Healey (Labour, Wentworth)

As I said, we have discussed the matter with the industry in recent months and we have looked at the industry's analysis of shifting consumption patterns. I would not describe it as a problem, as the hon. Gentleman does, but it is clearly an emerging feature. We are studying, analysing and assessing it as it becomes clear.

I am aware that there is, in part, a shift that is contributing to the pressures on the beer and pub industry, which plays an important part in the economy, our heritage and, for those of us who like a pint or two, our leisure time. This is a modest, inflation-only increase, which recognises the industry's concerns but maintains an important stream of revenue that is necessary to maintain our commitment to improving public services. I hope that the Committee will support the measure.

Question put and agreed to.

Clause 2 ordered to stand part of the Bill.

Clause 3 ordered to stand part of the Bill.

Clause 6 - Road fuel gas

Andrew Tyrie (Conservative, Chichester)

We have a battery of clauses on hydrocarbons coming up, and I shall not make many general comments about them, except to say that it seems to me that the underlying purpose of virtually all of them is to raise revenue. We had a reminder yesterday that the Transport Minister wants to tax people out of their cars.

I have taken a close look at the clauses and my impression is that, when one scratches the surface, one finds that many of the environmental arguments are slightly less rigorous than they initially appear. We have already had a good canter around clause 5 on the Floor of the House. I should at this point alert the Committee to my interests, which are listed in the Register of Members' Interests. As far as I am aware, none could possibly be said to conflict with the clause or any other clause that will be considered in Committee. I worked for BP some 20 years ago, so I have a vague idea about these hydrocarbon clauses and I have reacquainted myself with some of the terms over the past few days.

John McWilliam (Labour, Blaydon)

Order. Some 30 years ago I looked after the lines going into the Grangemouth refinery. I do not think that that gives me an interest either.

Andrew Tyrie (Conservative, Chichester)

I am sure that we will find out more about your deep knowledge of this subject, Mr. McWilliam, as we examine these eight clauses.

As the Minister will no doubt explain, the clause deals with liquefied petroleum gas. Its main effect is to increase the LPG duty by almost 45 per cent., from 5.4p per litre to 7.82p per litre. My biggest worry is the effect that that will have on the LPG market. The case against the Government's action has been emphatically summed up by the chief executive of the Retail Motor Industry Federation, Matthew Carrington, who said:

''The duty increase on LPG could be the beginning of the end for the fuel in the UK. This anti-green measure is a backward step environmentally. It could be a death-blow for the fledgling LPG market, and could destroy public confidence in the viability of all alternative fuels.''

He went on to say:

''At a time when we are all being encouraged to think beyond conventional fuels, it seems paradoxical that the government would take away any incentive to try alternatives, especially since it was the government that encouraged us in the first place.''

That leads to a number of questions, which I should be grateful if the Minister could answer. What is the Government's long-term intention for LPG? Do they have a long-term policy? Where can we find it in a form that looks credible if the Minister does not present it to us today? Why have the Government reversed the freeze that they introduced in 2001? There has been a complete reversal of policy in four years. I will give the Minister time to think about those.

No doubt a brief has already been prepared for him on the question about 2001; I have been trying to think of some explanations for the change myself. First, the Government might intend to encourage people out of LPG and into biofuels because another effect is to narrow the differential between the two. Another possibility is that the Government believe that the industry has now invested enough to make it self-sustaining to switch to LPG, so they can afford to raise rates. If that is the explanation, it is not the majority view of those who were recently consulted. Finally, I ask the Minister to comment on the fact that the majority of respondents in that consultation wanted to see no change in these key differentials.

Rob Marris (Labour, Wolverhampton South West)

I welcome the increase in excise duty on LPG. I am not an expert and the right hon. Member for Fylde will perhaps correct me, but I do not think that LPG is nearly as clean as its proponents claim, particularly in terms of its outputs of carbon monoxide and nitrous oxide. There were some interesting figures in The Sunday Telegraph about two months ago, indicating that LPG vehicles pollute more than petroleum vehicles—not in every case, but there are significant differences. That gap has increased historically to the point where LPG vehicles have been, to coin a phrase, overtaken by petroleum vehicles due to developments in petroleum technology in vehicles, particularly cars.

Those developments include the common rail diesel engine and Volkswagen's FSI high-pressure petroleum engines. LPG vehicles are now passé technology—a road transport dead end in terms of environmental

friendliness, because they burn more fuel per mile. A few years ago, there was an excise incentive for their use, because they were then thought to be less environmentally damaging than petroleum engines. That is no longer the case, and I welcome the increase in excise. It is unfortunate for those who have invested in that technology—whether individuals or the industry—but it is a dead end and the Government have rightly recognised that. They are right to put up the excise duty and should increase it by more.

Michael Jack (Conservative, Fylde)

May I at the outset remind the Committee of my business interests, which I fully declared on Second Reading? It is a pleasure to be under your chairmanship again, Mr. McWilliam.

The hon. Member for Wolverhampton, South-West reflected some arguments that I have made in my advocacy of improved fuels for diesel engines, such as biofuels and bioethanol, which we shall come on to later. He is right: it depends where one starts. I should like to ask the Economic Secretary, when he responds to the debate, to justify why 40p was chosen as the rate that will now reduce the inducement for people to run on liquefied petroleum gas.

The hon. Member for Wolverhampton, South-West is right to point out that natural gas-driven vehicles have detriments, particularly carbon dioxide emissions, and are not as good as the best of modern diesel engine technology. In terms of air quality and certain pollutants that have an adverse impact on health, particularly in congested city centres, LPG has a good case to make. It would appear that the Government considered that health improvement objectives have a higher value and that LPG should attract a higher level of discount than biodiesel. When the LPG discount came in, that generation of diesel engines was not as well controlled as modern ones are today.

If we are to understand the logic of the Government's alternative fuel policy, can the Economic Secretary tell us in detail why the rate of 40p has been chosen? What is the logic of the numbers that have been selected, and why is the clause drafted in that way that it is? Has the Treasury done any research to justify the change, and if so, will he lay it in the Library of the House of Commons, so that we can understand with greater clarity the way that the Government are approaching the new fuel world in which we are operating? We are going to debate aspects of bioethanol, and that relates to the question of the future approach towards the hydrogen economy. It also touches on clause 1 of the Energy Bill, which deals with the Government's obligations on national fuel security; it comes before the House next Monday. I look forward to detailed and specific responses to the questions that I have posed.

John Healey (Labour, Wentworth)

I shall try to respond to the points that have been raised; they are important in helping to set the context for the proposal in clause 6. I should say first to the hon. Member for Chichester that Matthew Carrington has form in the view that he might take of policies originating from the Labour Government. The hon. Gentleman quoted Matthew Carrington, so I shall quote three other sources, which are just as, or arguably more, informed and more

representative of the views of those affected in the industry by the measures that we propose.

Howard Kerr, whom I met in the run-up to the Budget decision, is managing director of Calor Gas Ltd. and chairman of the LPG Association. He said that following the Budget announcement, Calor was looking further to expand the number of refuelling sites in the UK. Clive Mather, chairman of Shell, said that the stability offered will enable it to

''continue investments to further develop this market . . . it sends a clear and welcome signal to industry regarding investment in other cleaner alternative fuels.''

Tom Fidell, director general of the LPG Association, wrote after the Budget decision to thank us for what he described as

''striking the right balance with respect to the duty rate adjustment.''

I submit that the measures are not likely to drive the industry out of business in the way that Matthew Carrington apparently believes.

I caution my hon. Friend the Member for Wolverhampton, South-West against placing too much reliance on figures that he reads in the Sunday papers. The industry is not a dead end in terms of providing road fuel for the future, and we can make environmental gains through greater use of LPG fuel. However, it is relatively less green than it was in 2001, and the environmental gains are relatively less substantial than they were then. In part, that answers the point made by the right hon. Member for Fylde. I refer him and the hon. Member for Chichester to December's pre-Budget report and the Budget documentation. They set out the logic of the policy that we are pursuing and the results of the research and consultation that we conducted in reaching the principal decision in the pre-Budget report and deciding on the specific duty in the Budget and clause 6.

Andrew Tyrie (Conservative, Chichester)

Does the Minister believe that the industry has invested enough in the LPG sector for it to be self-sustaining?

John Healey (Labour, Wentworth)

I will make some specific points about the development of the industry later. However, since we made the commitment on duty rates in 2001, we have seen a sustained increase in investment in the industry, an expansion in the number of retail outlets for LPG and an expansion in the fuel's use and production. Alongside the industry's investment, the Government have made an equally substantial investment in seeing the industry establish itself and begin to flourish.

In the Budget decisions, we were keen to avoid alterations in the duty rate that, although justified on environmental grounds, would have led to the industry taking the sort of nosedive that Matthew Carrington argues it is about to do. We want to see the continued development of, and investment in, the industry, which the chairman of Shell and others clearly see in prospect. The Government will continue to support the development of the industry in several ways, including the PowerShift programme and the duty rate discount.

The comments so far have concentrated on liquid petroleum gas, but in the pre-Budget report last year, we announced that we would treat natural gas differently from LPG. Clause 6 creates a separate rate of duty for natural gas used as a fuel in road vehicles and increases the rate of duty on LPG and other gases used as fuel in road vehicles.

In the pre-Budget report in December, we published the alternative fuels framework, which included our principles for setting duty differentials for environmentally friendlier alternative fuels. At the heart of that is the principle that support for fuels from the Government and taxpayer will be based primarily on the environmental benefits that they offer. Reflecting that, we announced in the Budget that the duty differential for LPG would have to be reduced over time towards a level that is more commensurate with its environmental benefits, and that the duty differential for natural gas would be frozen at its current rate until at least 2007.

Michael Jack (Conservative, Fylde)

Is the Economic Secretary prepared to place in the Library the detailed formulations that show how the environmental benefits to which he has referred are calculated? Clearly, there is a range of alternative fuels. The Department for Transport is running a consultation exercise on these matters, and it would be helpful to know how the value of the gains is calculated.

John Healey (Labour, Wentworth)

I will undertake to look back at the pre-Budget report and the Budget documentation. We have published the results of the consultation and of the research and analysis that we have done on the environmental benefit and the implications for duty changes. Those judgments and analyses underpinned the production of the alternative fuels framework. If I believe that they do not answer the right hon. Gentleman's question, I will certainly do as he suggests.

I recognise that clause 6 marks a departure from the policy that we established in 2001, but it reflects our desire to assess and respond to the changes that have occurred over the past few years and to set tax rates accordingly. When we made the commitment in 2001, few vehicles used natural gas or LPG. Since then, the market has developed. Natural gas vehicles need large fuel tanks, so the fuel is typically used by larger vehicles, such as delivery vehicles and buses. The fuel does not generally lend itself to private motorists and cars. Natural gas vehicles can deliver significant environmental benefits as compared with diesel vehicles, particularly in terms of noise reduction in urban areas late at night and early in the morning.

LPG is used differently: it is more commonly used in cars. As I hope the Committee will recognise, the UK can be proud of the growth in the industry since 2001. More than 100,000 such vehicles are on the road, and drivers throughout the country have access to the fuel. LPG vehicles still offer some environmental benefits, but traditional petrol and diesel vehicles—the benchmark against which we measure them—have got cleaner, as the right hon. Member for Fylde said. There have been genuinely impressive advances in engines and vehicle technology. Today's vehicles have

a much lower climate change and air quality impact, even compared with the situation four years ago.

As I hope I have explained, we are no longer comparing like with like. We have decided to treat the two fuels differently, because the vehicles in which they are used are different. The differential for LPG will be reduced to reflect better the environmental benefits that it offers. In line with the alternative fuels framework, we have set out how that will happen. There will be a reduction of 1p a litre in 2004 and a further reduction on the same scale in 2005 and 2006.

Andrew Tyrie (Conservative, Chichester)

Can the Minister clarify whether the reduction in the differential is driven entirely by a reassessment of the relative environmental benefit derived from LPG?

John Healey (Labour, Wentworth)

Our starting and principal point is an assessment of the environmental benefit that the fuel delivers, relative to alternative fuels. However, a number of other factors come into play in such decisions. A concern to see continuing investment and the industry flourishing is part of our Budget judgment. A concern to see a continuing expansion in the number of drivers using LPG vehicles and in the number of refuelling stations at which it is available is also an element. However, our principal point of judgment revolves around the environmental gains that may come from LPG, precisely as we set out in the alternative fuels framework in the pre-Budget report in December.

The changes in clause 6 mean that the rate of duty for LPG will be 13.03p per kilogram from 1 September this year, which is equivalent to a differential of 40.7p per litre between LPG and main-rate road fuels. The rate is still almost 2p per litre lower than it was in 1997.

I emphasise that the decision was taken after extensive and detailed consultation with the industry. I am therefore confident that it is the correct decision, which strikes the right balance, as the director general of the LP Gas Association said. We cannot support the fuels at any cost, but we must appreciate that some certainty and stability in the industry is necessary to allow it to plan its expansion and to invest for the future. Setting out the differentials three years ahead goes a long way to giving firms the certainty that they need.

Government and industry have invested heavily in the LPG industry in the past four years, and with the UK's manufacturing expertise, a good-size fleet and the infrastructure, the industry is well placed to meet new challenges in the period ahead and set for further expansion in the years to come. I commend the clause to the Committee.

Question put and agreed to.

Clause 6 ordered to stand part of the Bill.

Clause 7 - Sulphur-free fuel

Andrew Tyrie (Conservative, Chichester)

The clause separates sulphur-free fuel from other ultra-low sulphur fuels, creating a new class of product that from September will attract duty at half a penny less than ultra-low sulphur fuels. I understand that initially only a few motorists will have access to it, but since it will be mandatory under EU law to use the fuel from January 2005, with a four-year transition period, there will be a major change in respect of sulphur-free fuel.

I have few queries about the proposal, mainly because the policy is already cast in stone; the Government have signed up to it and it would be difficult for them to shift away from it, even if they wanted to do so. However, I was struck by some of the comments made in our previous debate, which are relevant to the clause. I accept that the Government face the problem that the technology of what constitutes environmentally friendly fuels is constantly changing, which makes it difficult for them to develop long-term policies on the issue. On one hand, the industry wants stability, on the other the rates that need setting may have to be varied to encourage use of the right sort of fuel.

For almost 20 years I have been worried that the environmental impact assessments, and the assessment of the costs and benefits of many of the changes, have not been fully examined. There is a cost-benefit analysis of the switch from ultra-low sulphur to sulphur-free fuel, but I am not convinced by it, as it was not a particularly robust analysis. The hon. Member for Wolverhampton, South-West, who is listening carefully to the debate, made a similar point about LPG, which may or may not be correct; neither of us knows for sure. Has the proper analysis been carried out?

I make one general plea to the Minister. It is that he should require much greater attention and resources to be given to such issues by the Treasury. It is vital for better studies to be undertaken than at present.

To bring that point home, it is a fact that sulphur-free fuel is more aromatic, and the more aromatic a fuel is, the more carcinogenic it is likely to be. Probably for that reason, the clause contains a limit on the aromatic content of ultra-low sulphur fuel, whereas it proposes no limit on the aromatic content of sulphur-free petrol. By implication, therefore, that could lead to much higher levels of carcinogens becoming part of sulphur-free fuel. I am not convinced by the documentation that I have seen that a full cost-benefit analysis of those health effects was carried out when assessing whether it was worth moving from very low sulphur fuel to sulphur-free fuel. The Government need to devote more resources to that area. Is the Minister clear that the change will have an overall economic benefit and, if so, what is that benefit?

We will have to implement such a policy sooner rather than later, because we have to obey an EU directive. In that context, will the 0.5p differential introduced by the clause be enough to secure a switch? I believe that, in consultation, most of the industry believed that something nearer 1p would be required. How long do the Government intend that the incentive should last? Do they intend to alter it, if they do not

see immediate effects? Is it intended that the incentive should cover the whole cost of the conversion from ultra-low sulphur fuels to sulphur-free fuels?

John Healey (Labour, Wentworth)

As the hon. Gentleman mentioned, the clause introduces definitions of sulphur-free petrol and diesel and enables us to introduce the differential for those fuels, as announced by the Chancellor in last year's Budget. The differential will mean that the duty on sulphur-free petrol and diesel will be 0.5p per litre less than that for ultra-low sulphur petrol and diesel.

The movement of the market towards replacing ultra-low sulphur fuels with sulphur-free ones is, in anyone's book, a major undertaking for the oil industry. Since the introduction of the differential was announced in the 2003 Budget, the industry has worked hard to install hundreds of millions of pounds worth of sulphur-removal plants at UK refineries, and to ensure that those more environmentally-friendly fuels will be available to the motorist.

As a result of the efforts made by the industry and the Government, the UK will be leading the way in Europe in this area. The hon. Gentleman said that he understood that very few people would have access to sulphur-free fuel in September, but we expect sulphur-free fuels to be widely available from 1 September. We estimate that sulphur-free diesel should be available everywhere from September and that sulphur-free petrol will fully replace ultra-low sulphur petrol by the end of the year. That estimate has been confirmed by the UK Petroleum Industry Association.

The hon. Gentleman mentioned the European directive. By introducing these measures with regard to the fuel supply in the UK, we will be well ahead of what is required of us by the directive, which requires us to make the switch by 2009.

When we announced the differential for sulphur-free fuels, there was some scepticism about whether that would lead to the kind of market switch that we wanted. However, I am confident, from what the industry is now telling the Government, that those fuels will be available throughout the UK. That was certainly the case when we made the switch—driven similarly by duty differentials—to the ultra-low-sulphur fuels a couple of years ago. We have listened to the industry on implementation and, in particular, on how the definition should be formed in law so that there are no barriers to the fuel coming on to the market. We will pick that up when we consider clause 9.

Motorists will benefit from sulphur-free fuels because they will bring significant improvements in air quality, as well as major savings in carbon dioxide emissions. Above those environmental benefits, sulphur-free fuels will also assist the development of petrol-injection engines in cars. When used in engines such as direct-injection engines, sulphur-free fuels can produce fuel savings of between 2 and 4 per cent., compared with ultra-low sulphur fuels. In the long term, sulphur-free fuels offer not only environmental benefits, but genuine savings to motorists by giving more miles to the gallon through more efficient

engines. The new rates come into effect on 1 September this year, when duty rates will be revalorised and ultra-low-sulphur fuels increased by 0.5p a litre above that level.

Question put and agreed to.

Clause 7 ordered to stand part of the Bill.

Clause 8 - Definition of ''fuel oil''

Andrew Tyrie (Conservative, Chichester)

The clause is a relatively minor anti-avoidance measure and should not detain the Committee for too long. The measure is designed to capture in tax the atmospheric residue that is left after the refining process. As far as I know, only one product will be affected by the measure: PULSAR, which is being sold by a relatively small number of companies. The Economic Secretary will be able to confirm whether that is the case—I think that I have already had that confirmation.

I have only one question of substance: are there any other perceived abuses—that is clearly what the Government consider is going on in this instance—which the Government intend to bring into the duty charge under the proposed statutory instrument? The clause falls into a category in which a relatively general anti-avoidance measure is introduced to cover a very specific issue. As my hon. Friend the Member for Arundel and South Downs said much earlier, he deprecates clauses that can have more general effects. I would like clarification from the Economic Secretary.

John Healey (Labour, Wentworth)

The clause enables the Treasury to amend the fiscal definition of fuel oil by statutory instrument. The Government intend to use the measure to extend the scope of the duty on fuel oil to encompass a class of hydrocarbon oils known as atmospheric residue. I confirm that its principal effect will be on PULSAR.

In taking this step, we are following the principle of internalising environmental costs into prices, or, in other words, making the polluter pay. From 1 September 2004, duty on fuel oil, which is a high-sulphur fuel used in electricity generation and in industry, increases to 6.24p a litre, but there is a loophole in the current fiscal definition that allows fuels classed as atmospheric residue to escape duty altogether. Since atmospheric residue is in direct competition with conventional fuel oils, there is a clear distortion of the marketplace as well as a resulting loss in revenue to the Exchequer. Before we use the power to remove that anomaly, we must ensure that the revised definition of fuel oil is robust, clear and does not result in any unnecessary regulatory burdens.

I can confirm to the Committee that Customs officials will be speaking to the industry during the coming months to find the best solution. The process will require consultation with the industry, drafting of regulations and formal consideration in Parliament. Therefore now is not the time to examine the drafting

of regulations, but I can confirm to the hon. Member for Chichester that our intention is to deal with this single fuel. The provision will allow us to do so with other fuels in the future because we want to have the capacity to respond to new fuels as they are developed and come on to the market. We have no other products in mind at present.

If we conclude that a duty differential for lower sulphur fuel is justifiable as a result of further discussions with the industry, we shall use the power under the clause to amend the definition to coincide with the introduction of a differential. I anticipate that the time scale will take us into the autumn. We shall conduct the consultation with industry with all possible speed and minimum delay. On that basis, I commend the clause to the Committee.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.

Clause 9 - Mixing of rebated oil

Andrew Tyrie (Conservative, Chichester)

This is a concession to allow the mixing of fuels, and deal with the excise on the mixing of fuels. It gives oil companies certainty about the duty rate and is welcome for that reason. The clause need not detain the Committee for long. It replaces provisions that were made in legislation in 1996, which charged duty when two road fuels of differing duty rates were mixed. The clause removes those provisions in an attempt to simplify the introduction of new, more environmentally friendly fuels. We shall not oppose it on this side of the Committee.

I have only one question of substance, and I would be grateful if the Minister answered it. Is the clause intended to provide a permanent concession in the rules or will it apply for only a short, transitional period? Will the Minister give us some confidence that this concession on the mixing of fuels will remain on the statute book unaltered?

John Healey (Labour, Wentworth)

The clause underlines our continuing commitment to promoting the use of cleaner, environmentally friendly fuels. It is designed to aid the smooth introduction of sulphur-free fuels. Those cleaner fuels will come on-stream in the UK well ahead of the EU imperative to do so, as we discussed under clause 7.

At first glance, the clause may appear to be more substantial than it is. It replaces and updates an entire section of the Hydrocarbon Oil Duties Act 1979. In doing this, the sections covering road fuels are omitted, thereby allowing the mixing of fuels and aiding the introduction of sulphur-free fuel. The problem we faced and the problem raised by the industry, to which the clause is a response, is that under the current duty system for hydrocarbon oils duty is charged when two road fuels of differing duty rates are mixed together. The rules were originally introduced as an incentive to make new fuels available to the consumer and ensure that environmental benefits were not lost by mixing cleaner fuels with

lower-grade alternatives. However, in reality, the mixing provisions have hindered the introduction of new fuels. Some mixing will inevitably and always occur at filling stations, and the additional duty has discouraged oil companies from making a rapid changeover.

In September, with the introduction of sulphur-free fuels, the UK faces its biggest changeover of fuel since the introduction of ultra-low sulphur petrol and diesel. We have therefore reviewed the measures that may be required to ensure a smooth transition.

I have discussed the matter at least twice with the Association of UK Oil Independents and received representations from it in the in the run-up to the Budget, as it felt that the change in clause 9 was needed to enable its members to make the switch. The clause removes the hindrance of the mixing provisions and it will ensure a smooth changeover to sulphur-free petrol and diesel.

The clause also rationalises the existing rules on mixing non-road fuels, which remains prohibited. The clause is permanent. It is introduced to aid the changeover and it will smooth and accelerate the transition to sulphur-free fuels from September. Its main use will be in the transition period, but it will remain on the statute book if the Committee agrees to it. The Government believe that the clause will assist the oil industry and help to meet consumer demand for sulphur-free fuels, which we all want, more quickly. On that basis, I commend it to the Committee.

Question put and agreed to.

Clause 9 ordered to stand part of the Bill.

Clause 10 - Bioethanol

Andrew Tyrie (Conservative, Chichester)

This is a much more substantial clause, and it has potential long-term implications for a major section of the market. I am sure that the Economic Secretary has become one of the country's leading experts on the subject, but, luckily, we already have another of the leading experts present in Committee, my right hon. Friend the Member for Fylde. I have no doubt that he will have some thoughts to pass on about bioethanol, as he has in past Finance Bills, so that makes me chary about making too many points that he can make far more forcefully.

The clause creates a new reduced rate of 28.5p per litre for bioethanol when used as any type of engine fuel. It currently attracts about 47p, so the clause creates a 20p differential, which will come into force in January 2005. Its purpose is to encourage a sharp increase in the exploitation of bioethanol as a fuel, and in that respect it is well behind biodiesel, the rates for which we briefly discussed on clause 5 on the Floor of the House.

I am a bit worried about the measure, not because I disagree with the direction of policy in principle, but because I am not sure that the decisions that have been taken relate successfully and directly to the policy intentions. First, where has the justification for 20p

come from? After I consulted the industry, it told me that to get the market going we need a differential of between 28p and 34p—a good deal more than 20p. The industry sometimes overcooks the books, but that is a very big difference in estimated costs, and the Government could have analysed them.

One industry expert told me that the extra cost of refining and delivering bioethanol to the forecourt would be more than the 20p differential, so his company did not intend to develop it at this stage.

A major Government document has been produced on the subject, and it was also briefly discussed on the Floor of the House. Entitled, ''Towards a UK Strategy for Biofuels'', it just so happens to produce a justification for the figure of 20p. If one looks carefully at the justification, they realise that it is not a coherent argument for 20p. Frankly, it is difficult to come away with a view that it does anything other than cook the books.

I wonder why the Government did not decide to kick-start use of the fuel with a figure of at least 30p. One possible explanation is the cost. I have been given several estimates that indicate that that would cost a great deal. We must take into account behavioural effects, but I would be grateful if the Economic Secretary could give an estimate of the cost of introducing it at 30p, given some intelligent behavioural assumptions. I am worried that the measure is much more a sop to the environmental lobby than a fundamental shift in policy that will radically alter the market. I cannot be sure; all of us are guessing, but that is a major concern.

I have another concern that appears to point in the other direction. It relates to what I have consistently said about cost-benefit analyses. I worry that many changes are put through on alleged environmental grounds, yet the environmental arguments are far more complicated than what has been set out in consultation documents made available to the wider public, inasmuch as such documents are available. For example, I have been told that it would be far better if biomass were used for power generation rather than for biofuel, given the overall effect on carbon dioxide emissions.

I do not know whether that claim is true, nor do I know which numbers were involved in working out the overall economic and environmental effects, bearing in mind that CO2 emissions are only one part of the much broader environmental assessment that must be made. Again, the Economic Secretary did not really respond when I raised the point on another clause. Government policy, and public policy more generally, would benefit hugely if the Treasury—this will have to come from the Treasury—would give much more emphasis than it has hitherto to cost-benefit analyses of environmental measures in order to reassure the public that the Government are going in the right direction. Such analyses should be sufficiently robust intellectually and economically to convince doubters.

I do not believe that such information is in the public domain at present. It may be in some cases, but

in many cases it is not. The regulatory impact assessment and cost-benefit analysis process has become a bit stylised and lacks real clarity of thinking from first principles. I would be grateful if the Economic Secretary would comment on that.

There are one or two other points that I could make on bioethanol. I may come back to them, but I suspect that they will be made before very long by my right hon. Friend the Member for Fylde.

Michael Jack (Conservative, Fylde)

With a build-up like that, I tremble to address the Committee. I never like it being cast about that I am an expert in anything. However, as Chairman of the Select Committee on Environment, Food and Rural Affairs, I have had the benefit of a fairly extensive investigation of biofuels. As well, with a debate on the Floor of the House on the subject and in this Committee today, particularly on bioethanol, we can say that we as parliamentarians have been exposed to a range of views.

I have a slight difference of opinion with my hon. Friend the Member for Chichester. I do not believe that the Government have yet published the details of the case for 20p. The consultation document ''Towards a UK Strategy for Biofuels'' gives 20p as the number but does not actually produce any analysis as to why it is the right number. That serves only to emphasise the industry's claim that a figure greater than 20p—possibly as high as 34p but more likely 30p—per litre would be required to generate a supply. I wish to spend a few moments outlining why we should take that seriously.

I was struck by an earlier comment that the Economic Secretary made about natural gas and LPG and by how much weight he put on what industry told him. He is clearly a Minister who believes what it says. If we reverse the logic, we have an industry asking for an increase in duty reduction. I am sure that, as a fair man who takes a great interest in these matters, he will, when we put the arguments before him, at least agree to re-examine the case that the bioethanol industry makes for more assistance.

I will put the matter into context by explaining why it is important to have a bioethanol industry. We chuck around the names of new and alternative fuels and it sounds as though they are for those who are keen on different green things, but what we are really concerned about is the availability and price of mainstream hydrocarbon fuels. All kinds of problems could be solved if we concentrated on those.

Here is the background to bioethanol. First, the Government have made laudable attempts to reduce the amount of carbon dioxide in the atmosphere. They have just increased their own targets for said reduction. Against that is the background that CO2 emissions have been going up in the past few years. The Government acknowledge that one principal difficulty is the transport sector. One can but hope that our arguments in favour of bioethanol will persuade them that now is the time to be bold if they wish to achieve their policy objectives. Bioethanol would offer up to 70 per cent. reductions in CO2 emissions. If, in fact, we used straw or wood, as

lignocellulistic materials, as a feedstock for bioethanol, we could get a 100 per cent. reduction in CO2. The clause talks effectively about biomass, but I am not clear whether that, in definitional terms, takes into account those lignocellulistic materials.

The reason that is important is that it gives the Government the opportunity to achieve a further policy objective—that is, the reuse for beneficial purposes of waste materials. They have enough difficulty in meeting recycling targets under the European Union directives. Here is something that could be of benefit, in addition to the agricultural benefits that I will come to in a moment. So, one gets two hits for the price of one.

Let us consider for one moment bioethanol production in the United Kingdom compared with the rest of the world. The United Kingdom effectively does not have any recognisable large-scale production of bioethanol. Brazil, which exemplifies the most extreme use of that fuel, produces 125 million hectolitres of it. The European Union produces 3.3 million hectolitres, and Canada produces 2.38 million hectolitres. Europe, as a whole, is substantially behind leading countries such as Brazil and the United States in the use of that fuel.

Why does Brazil use it? It uses it as a way of taking up surplus sugar, which it is good at producing—its climate is excellent for growing cane sugar—but, more important, to give it not only an environmental gain but an element of fuel security. I remind the Minister that clause 1 of the Energy Bill, which the House will consider on Monday, tasks the Government with an obligation to secure the fuel of the United Kingdom. I do not want to be accused of alarmism because, at the moment, we are adequately supplied with hydrocarbon fuel, but if we wish to achieve the objectives of favouring the bioethanol industry, we need to recognise that we can get a third hit of helping fuel security by moving towards the generation of an indigenous industry. We have certainly got sufficient land on which to produce the raw material.

We have to move forward in that direction. The Economic Secretary will be aware of the United Kingdom's obligations under the European Union's biofuels directive. By 1 July this year, the Government must notify the European Commission of the volume of biofuels that the UK will use by the end of 2005. By 2006, they must give a further indication of the volume of biofuels that will be used by 2010. He will be aware that the targets are 2 per cent. by 2005 and 5.75 per cent. by 2010 and it is important that bioethanol is encouraged. As my hon. Friend the Member for Chichester said on the Floor of the House, we have discussed biodiesel during previous Finance Bill debates but it cannot, by definition, be used in petrol-driven vehicles as an element in a combined fuel stock. Bioethanol is the dilutant and must be used.

If we are to meet the target for 2010, the United Kingdom will be required to produce 1.2 million tonnes of bioethanol. British Sugar advises me that, from a standing start, that would require us to have 10 plants, each of which was capable of producing 100,000 tonnes of biofuels. A fourth hit is that, if the industry can be encouraged, it is estimated that for every one of those plants 970 jobs would be created. That could be an agricultural new deal—the Government are fond of new deals. The Opposition may disagree with the current, but I shall go with the flow of Government thinking and give the Economic Secretary as many reasons as possible for looking again at the clause.

I did not table an amendment to the clause to revise the duty rates because I want to hear in detail the Government's argument for their current position. The industry has made it abundantly clear that at 20p—the effective derogation of duty that the clause confers on biofuel—the industry will not be able to go forward and, with confidence, start production of bioethanol in this country.

What are the alternatives? British Sugar is considering a bioethanol plant in Poland where labour costs are much lower. There may be other inducements. There is an opportunity within the single market to sell bioethanol to a Europe that is starved of the raw material, but why is British Sugar thinking about making a substantial investment in a bioethanol plant in Poland? I have nothing against investing in Poland, but there are some imperative agricultural arguments in favour of a bioethanol industry in the UK. It is worth looking at those for a second or two.

The Economic Secretary will be acutely aware that the European Union has put forward proposals to reform the sugar regime. That presents a challenge to our sugar industry. Variations could open the European market to considerably increased importation of cane-based sugar products, which is a challenge to sugar beet producers in the United Kingdom. The one thing that is clear is that we can produce sugar beet, which is a fundamental raw material for bioethanol. If we met the 1.2 million tonne figure associated with the 5 per cent. target by 2010, we would need 300,000 hectares of land. That is not a problem. The Economic Secretary could have a fifth hit of benefit because land that is set aside under the new revised common agricultural policy could be used productively to produce sugar beet for the basic feedstock of the United Kingdom's bioethanol industry.

The only problem, which Ministers have offered as their line of defence to their current position—

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

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

Standing Committee A

Clause 10 - Bioethanol

Michael Jack (Conservative, Fylde)

It is a great pleasure to have you as our Chairman this afternoon, Sir John. You are a veteran of many Finance Bill Committees on which I have had the honour and pleasure of sitting and I know that you will guide our proceedings with distinction.

At the cessation of business at 11.25, I was just about to say that, in the context of justifying the 20p level of reduction in duty on biofuels, Ministers have often argued that because some of the agricultural land that is used to produce crops for biofuels, for example set-aside land, receives a £45 a hectare payment, that, together with the benefit conferred by the Treasury by means of the duty reduction, is in some way sufficient to ''kick-start'' the industry. There is a flaw in that argument. Even if it were to stack up statistically—it does not in my judgment—the problem is that the benefit is conferred on the grower of the crop and the argument automatically implies that the grower of the crop will be prepared to receive a reduced price from the processor, who would say, ''You've had your £45 a hectare. This is the number of litres of fuel I will get out of your crop contribution to my feedstock, and therefore this is the lower price.'' That is not quite how things work in the real world of agriculture. If we are talking about a market mechanism determining the price between the seller of the crop and the processor, I do not see how the argument holds water in the real world. The £45 a hectare is insufficient in itself to make up for the deficiency between the figure of 20p and the 30p that is argued for.

The benefit of having a break at luncheon is that if one chooses to devote it not to the consumption of food, but to following up what the Economic Secretary said in reply to an earlier debate, one comes to some interesting conclusions. When my hon. Friend the Member for Chichester (Mr. Tyrie) challenged the Economic Secretary about where other calculations of duty reduction came from, he uttered the magic words, ''pre-Budget report—go seek and find!'' We were told that we would find the arguments laid out in that report, which was published in November 2003, and so I went back to it and found box 7.1, entitled ''Alternative Fuels Framework''. I thought that this

was going to be the moment of revelation, but when I came to look in the wonderful box on page 155 for the detailed calculations that set out how the figure of 20p came about, I could not find that information. In fact, the page is completely figureless. There is no calculation.

In fairness to the Economic Secretary, who is a good and straightforward man, he was definitely guiding us, so I went back to the document referred to on page 155: ''Tax and the environment: using economic instruments''. I thought that that would give me the answer that I sought. It is 67 pages long so I did my best to skim-read it during the luncheon interval. I found some reference to biofuels, but no reference whatever to a breakdown of the costs or how the figure of 20p came about. I had gone back to 2002, at the direction of the Economic Secretary, but I could not find that information. I put my hand up and admit to my human frailty, but I look to the Economic Secretary for further guidance.

John Healey (Labour, Wentworth)

The right hon. Gentleman has obviously had a busy lunch hour. I hope that he does not get too hungry during the proceedings this afternoon. Did he by any chance also go back to the January report of the Environment, Food and Rural Affairs Committee, which he chairs? In that report, the Committee published the memorandum that I submitted that gave the detailed costings and calculations—precisely the sums that he is looking for. He will see the information set out there.

Michael Jack (Conservative, Fylde)

I happen to have that document with me, but I would be less than correct if I did not admit that I have not completely refreshed myself with every submission. My recollection is that we did not get the breakdown that we wanted. I found another source. The Economic Secretary made a speech on 4 February 2003, which I am sure, with his assiduousness and memory, he will recall with entire clarity. In that speech he let the cat out of the bag about how the figure of 20p was reached, saying that it was down to the quantification of the environmental benefits. I also checked with British Sugar, representatives of which the Economic Secretary has met. It confronted him with the matter and the impression gained was that when the Treasury calculated the environmental benefits, it got a figure slightly below 20p for bioethanol, but decided that it could not give bioethanol a different deal from biodiesel, so it came up with the figure of 20p.

A Department for Transport consultation document verifies that impression to an extent, and again I apologise if I have misunderstood the information that it contained. On page 15, a table gives an indication of the relationship between fuel usage and the value of the carbon that would be saved by using biofuels. If we take the forecast total fuel sales and divide it into the total annual value of carbon saved, we get a figure of 16.4p per litre. On the other hand, if I have misunderstood that and I divide it by the smaller sum that is supposed to be the direct biofuel, I get a much larger number.

It would be helpful if someone were to explain how the figure of 20p came about. Is 16.4p the right number? Have I calculated it the right way? If I have not, I apologise, but please explain how the figure came about.

In the Economic Secretary's speech of 4 February 2003, in which he listed the agricultural benefits, the potential increase in security of supply, the new industry and all the economic benefits, why did he not go beyond 20p? He stated a large number of benefits.

I have given more than five plus points so far, and I will give the Economic Secretary a sixth. He, being an assiduous man who reads Select Committee proceedings with care, will no doubt be aware from the evidence presented by the Royal Society for the Protection of Birds to the Select Committee during its inquiry into sugar regime reforms that one key environmental gain from sugar beet crops is the pink-footed goose; and he will know that the tops of sugar beet are the main food source for that remarkable bird, which comes from Iceland to the United Kingdom in the cold season to feed. There is considerable value in producing a sugar beet crop as the feedstock for biofuels alongside the other environmental gains that I have listed.

There are other pieces of evidence to suggest that the Economic Secretary could, even at this late stage and perhaps on Report, be bolder than the Treasury wants to be. In the multi-faceted world of biofuels, where we have the Department for Environment, Food and Rural Affairs, the Treasury, the Department of Trade and Industry and the Department for Transport all in there mixing it, it would be helpful if he were to tell us who is in charge of biofuels policy in the United Kingdom.

In clause 128 of the Energy Bill, as before the House on Monday, there is a clause entitled, ''Renewable transport fuel obligation''. Its contents follow the line of argument that I put forward during last year's Finance Bill when we discussed this very area. I pointed out to the Economic Secretary that he could, if he was really bold and imaginative, have his cake and eat it. He could have a UK biofuels policy at zero cost to the taxpayer. I am sure that he has read clause 128 of that Bill, which effectively requires targets to be set about how industry will blend biofuel and existing hydrocarbon fuel to achieve the EU objectives of which I spoke this morning. He will understand that following the Department of Trade and Industry's line and giving statutory weight to clause 128 in that Bill would mean that there would be an obligation on industry to show how it was going to meet the EU requirements by blending biofuels and hydrocarbon fuels targets. The price of that fuel would be the price of the fuel. The same logic would operate for biofuel as for the renewables obligation on electricity.

If the Department of Trade and Industry has, for the time being, accepted clause 128 of the Energy Bill, why are we discussing clause 10 in this Bill as cast? Clause 128 delivers, at no cost to the taxpayer, the policy objective that the Treasury is following, at cost to the

taxpayer, in clause 10. If the Treasury decided to blend the duties itself, there would be a modest change in the price of fuel. Blending bioethanol and petrol to meet the 2 per cent. target would require a 0.6p per litre increase in the price of fuel, thereby passing on some of the costs to users and enabling people to pay for the environmental gain. However, we do not have that before us. The Economic Secretary is falling back on clause 10 in a way that does not give sufficient inducement to the industry to make the necessary investments in plant and against a background of the Economic Secretary not justifying the situation properly.

Rob Marris (Labour, Wolverhampton South West)

I understand the chemical difference between biodiesel and bioethanol, but why is a 20p per litre differential sufficient to stimulate the biodiesel market, which has grown in the two years since the differential was introduced in July 2002, but not the bioethanol one?

Michael Jack (Conservative, Fylde)

That is a fair point. I think that those who seek an oilseed rape-based biodiesel business would argue that 20p is, in its own way, insufficient. What the hon. Gentleman has put his finger on is that there is an embryonic biodiesel industry that uses recycled cooking oils, which is what the Motherwell plant, which has been prayed in aid of the Government's stance on stimulating investment in this area, is all about.

We do not use UK oilseed rape as a feedstock; we send surplus stock to the continent to be reprocessed and returned to the United Kingdom as biodiesel. That goes against the DEFRA pamphlet, which says:

''The production of biofuels from arable crops would provide a useful new market for rural Britain.''

If we were following the Government's own line, as outlined by DEFRA, we would want to see an increase above the 20p per litre derogation to encourage a rapeseed oil biodiesel industry not solely dependent on leftovers from cooking processes. So, I think that the line being taken between the two fuel sources is consistent.

I remind the Economic Secretary of what page 7, paragraph 4.1 of the Department for Transport consultation exercise says. I quote:

''The Energy White Paper . . . identifies liquid biofuels and hydrogen as the most promising candidates for tomorrow's low carbon transport fuels.''

I checked with British Sugar at lunchtime and we have no bioethanol industry or production in this country now, notwithstanding the fact that the industry has known about the 20p derogation for some time. Not a pound has been invested in achieving the Government's objectives. Against that background, I want the Economic Secretary to tell us how industry is supposed to meet the 2 per cent. target that the EU has set on the biofuels directive, never mind the 5.75 per cent. one.

The note from the Department for Transport goes on to say:

''Biofuels also have the advantage that, unlike other potential future low-carbon transport fuels such as hydrogen, they can be used as direct substitutes for conventional fuels without the need for new vehicles or refuelling infrastructures.''

Biofuels are clearly a very good buy, which the Government should be encouraging with all their enthusiasm.

This is where the policy stance falls down, however. The Treasury seems to have made its mind up about the approach. Of the DEFRA Ministers, only Lord Whitty thought that 20p was enough, if I recall correctly the evidence that he gave to the Select Committee. On page 14 of the consultation document we have the magic question asked of consultees by the Government:

''A key question for this consultation is whether, and if so to what extent, the Government should provide additional support to aid the development of the UK biofuels industry.''

That consultation document is months late. The Department for Transport has asked a question to which the Treasury has already given an answer—''It's 20p and we're not going any further''—but we do not have a bioethanol industry. We have no investment and the industry is saying that it does not have enough money.

The policy is a mess, against a background of the DTI including a clause in the Energy Bill that encourages the development at no cost to the taxpayer of a bioethanol business. Where is that in relation to clause 10? Departments are coming at the problem in four different ways. The Economic Secretary should take the opportunity to explain when we are going to have a coherent policy that will deliver one pound's worth of extra investment in bioethanol.

Throughout all the documents, the environmental, farming, industrial and employment benefits all come shining through. However, at a meeting a year and a quarter ago, the Economic Secretary looked British Sugar in the eye and said, ''Will 20p be sufficient for you to build a bioethanol plant?'' It said no. If he was good enough to listen to the liquefied petroleum gas industry, which has said that it does not mind a reduction in the help it receives, I hope he will do the bioethanol industry the service of listening to it when it argues that 20p is the wrong amount if he wants to pump-prime investment in this country. An amount greater than that is required to trigger our bioethanol industry.

John Healey (Labour, Wentworth)

I welcome you to the Chair, Sir John. I look forward to serving under you during your co-chairmanship of the Committee's proceedings.

I shall try to respond to the main points of the hon. Member for Chichester and the right hon. Member for Fylde (Mr. Jack), and I shall then speak briefly to the clause. The hon. Member for Chichester was very flattering, but false, in describing me as a leading expert on biofuels. It would certainly be an apt description of the right hon. Member for Fylde, because he is clearly an expert and, as he explained, he

now chairs the Environment, Food and Rural Affairs Committee, which recently considered the issue of biofuels and reported in January.

The hon. Member for Chichester talked about the proposed 20p per litre discount for bioethanol and contrasted it with his own figure of 30p, which he said was needed to kick-start the industry. The danger of considering the duty discount simply as a way of stimulating the development of the industry in the UK is that it makes the UK market more attractive for established producers in other countries, which could encourage imports from elsewhere. That view was shared by the EFRA Committee when it reported in January, having taken evidence. Its report stated:

''We share the Treasury's view that a greater level of duty derogation on biofuels introduced now would be more likely to encourage imports of biofuels than the development of domestic production''.

Nevertheless, he wanted to press me on the question of cost and the 30p differential. I can confirm that our calculations suggest that a 30p per litre differential would cost the Treasury £15 million in 2004-05, as the industry gears up its production, and £65 million in 2005-06 and £70 million in 2006-07.

Andrew Tyrie (Conservative, Chichester)

Is that the cost of the increment over 20p or the full cost of 30p?

John Healey (Labour, Wentworth)

That is the full cost of a 30p differential.

The hon. Gentleman asked what work we had done to underpin the judgment of a 20p per litre discount. The right hon. Member for Fylde did the same but at greater length and in greater detail. I could go over all the ground that I set out in detail in written form for the EFRA Committee, including the figures and the method of calculation. Rather than risking boring members of this Committee, I simply refer them to that document, if they are that interested.

Michael Jack (Conservative, Fylde)

I have now had a chance to refresh my memory as to what the figures showed. Can the Economic Secretary confirm that the data that he gave the Select Committee concentrated on the evaluation of the carbon savings only?

John Healey (Labour, Wentworth)

I can certainly confirm that that was our starting point and central concern. The Government declared in the alternative fuels framework that the principal case for support through fiscal and economic instruments must rest on a calculation of the environmental benefit and gain that would accrue.

Mr. Jack rose—

John Healey (Labour, Wentworth)

If the right hon. Gentleman will bear with me, I shall explain briefly for the benefit of the Committee the supplementary analysis that was provided on top of that.

The incentives set out in clause 10 to support the development of bioethanol are in fact significantly more than the monetary valuation of the fuel's environmental benefits. The method of calculation that we used produced a quantified environmental benefit for biodiesel of just 2.7p per litre and for

bioethanol of just 2.5p per litre. Nevertheless, we set the proposed duty discount at 20p per litre. It was introduced in July 2002 for biodiesel and 1 January next year is proposed in the clause for introducing the discount for bioethanol.

The proposed incentives also follow a further assessment that was built in on top of the environmental benefits set out in the alternative fuels framework. As for LPG, we took into account what may be necessary to make the policy economically sustainable, social considerations, and of course what the public purse can afford.

I have to say to the right hon. Gentleman and the hon. Member for Chichester that I remain unconvinced that a duty incentive of more than 20p per litre for bioethanol would be justified. There are still eight months before we introduce the incentive. It is rather early to write it off, although I realise that for many reasons potential producers are keen to ensure that the duty discount is as generous as possible.

By way of encouragement—I believe that the right hon. Gentleman knows and accepts this—I have probably had more meetings about appropriate Government policy on and potential economic instruments of fiscal support for biofuels than on virtually any other subject during my short time at the Treasury. I remain willing to conduct such discussions with colleagues in this House and in the other place and also with the industry. I am always interested, as are Treasury and Customs officials, in new evidence and new research that will help to give us a better analysis of the situation and the policy options. Indeed, it was, in part, better evidence and fresh information from the industry that led us to this proposal. At one time, we were not convinced that there was a role for a duty discount to support the development of bioethanol. Supplementary evidence and further information from the industry helped to convince us of the case, and I would simply leave that invitation and declaration of our readiness to consider further evidence and research for the benefit of the Committee.

Turning to a couple of more specific points raised by the right hon. Member for Fylde, the Committee has a shared interest in greater use of biofuels and the attendant environmental benefits. We also share an interest in the development of a UK biofuels industry, which is currently fledgling at best.

The right hon. Gentleman asked about lignocellulosic materials, and he was right to say that the potential offered by those materials and processes for environmental benefits are significant. There are two areas in which we are considering policy measures to help the development of certain processes of production. First, we are examining the scope for a duty regime, which may be based on the nature of the feedstocks, or the inputs to the process, rather than the nature of the fuel producers, or the output at the end of the process. Secondly, we are constantly examining

the case for enhanced capital allowances to support the development of and investment in some of the best environmental processes.

The right hon. Gentleman tempts me to confirm, for the benefit of the Committee—if you will indulge me, Sir John—the measures that must be seen alongside the duty discount in the clause. We must do so with the recognition that duty differentials are, frankly, blunt instruments. I have explained how I and the EFRA Committee believe that there is a danger that they may encourage imports as well as domestically produced fuel, but alongside the clause, which introduces the 20p a litre discount, the Budget confirmed that that level of discount will be in place for at least three years as part of our commitment to the alternative fuels framework. I hope that that will give the industry some certainty and confidence as it considers future investment plans.

We are examining the potential for input-based taxation, which will allow us to support the development of biofuels and other green fuels in a different way in future. We are examining the possible role for enhanced capital allowances in the way that I mentioned.

Finally, the Department for Transport is leading consultation on the measures that may play a role in helping us to set targets in the UK for the take-up and use of biofuels in the context of the European Union directive. The right hon. Gentleman will know that those targets are indicative and not mandatory. When we have concluded the consultation, we shall be in a position to make a judgment about the appropriate targets for the UK in 2005 and 2010. We shall then publish that and inform the European Commission, as we are duty bound to do.

A key potential policy instrument is the biofuels obligation and the sort of figures and debate that the right hon. Gentleman tempted me with are precisely the matters that we are encouraging people to make submissions on during the consultation.

Rob Marris (Labour, Wolverhampton South West)

Will my hon. Friend confirm that the consultation will consider bioethyl tertiary butyl ether? It is a petrol extender often used as a substitute for the much more damaging methyl tertiary butyl ether, and British Sugar has stated that it is absent from clause 9 and possibly from clause 12.

John Healey (Labour, Wentworth)

If my hon. Friend or British Sugar would like to make a detailed submission to the consultation on that topic, I assure him that we will consider it.

John Butterfill (Conservative, Bournemouth West)

Order. I appreciate that I was not here when the hon. Gentleman was tempted along this road, but I hope that we will not widen the debate to a discussion of all options that may be available.

John Healey (Labour, Wentworth)

I appreciate your guidance, Sir John.

Clause 10 introduces a new, reduced rate of duty for bioethanol used as a fuel for any engine, motor or other machinery, set at 28.52p per litre. It supports our environmental objective to promote the take-up of such greener fuels and follows the steps that we have

taken to encourage the growth of a successful biofuels industry in the UK, such as the introduction of a duty differential for biodiesel in July 2002. Before that, only very small amounts of biodiesel were produced in the UK; since the duty incentive, sales have grown to around 2 million litres a month, and it is now available in more than 130 outlets in the UK.

We expect production of biodiesel to accelerate further as new production plants come on stream and other outlets for waste vegetable oils, as part of the feedstocks for biodiesel plants, cease to be available.

Bioethanol is ethanol produced from crops such as sugar beet, and when blended with petrol it reduces tailpipe emissions of greenhouse gases and local air pollutants. With the first commercial plant for the production of cellulose ethanol being built in Canada and ethanol being produced from straw and other lignocellulosic sources, as the right hon. Gentleman stated, there is the prospect of even greater reductions in greenhouse gases in the future.

We hope that, as with biodiesel, the response to the duty incentive set out in the clause will be encouraging, and that the UK will quickly develop a thriving bioethanol industry. In line with our approach set out in the alternative fuels framework, the new incentive for bioethanol will remain in place until at least 2007. We expect that such certainty will be welcomed by the biofuels industry and give confidence to investors. We are, however, considering other options and policies to support the growth of the biofuels market and industry in the UK.

Michael Jack (Conservative, Fylde)

May I press the Economic Secretary on whether clause 128 of the Energy Bill is one of those options?

John Healey (Labour, Wentworth)

That clause, the consultation being conducted by the Department for Transport and the support of diversification of agriculture being led by DEFRA are all potential elements, alongside the strictly fiscal instruments that are my responsibility, that the Government are considering. On that basis, I commend the clause to the Committee.

Andrew Tyrie (Conservative, Chichester)

Who is in overall charge of that policy?

John Healey (Labour, Wentworth)

Clearly, the Departments have their own leading responsibilities for certain policy areas. The liaison between all Departments with an interest and a responsibility in the field under discussion is good. We meet regularly through the low carbon group and separately. It would be difficult to see how one Department could be given a lead responsibility, given the wide range of policy areas that will play a part in the future of the bioethanol market and industry in this country. That would not be the right approach, and it is not the approach that the Government are taking.

Michael Jack (Conservative, Fylde)

I found some of what the Economic Secretary said heartening. He has taken a particular personal interest in the matter, and I am glad that he has confirmed that to the Committee.

I do not want to go over all the issues that the Economic Secretary said the Government were still considering, but perhaps I can persuade him to commit the Government to pulling together the results of all of the work on the issue when they publish their response to the Department for Transport consultation paper, or if that is too soon, no later than the pre-Budget report. He is right that people will want to think carefully about what he has said and about the clause, should the Committee agree to it. However, the United Kingdom still does not have a bioethanol plant, and people may want to see further documentation on the Government's thinking on the matter before they consider their investment proposals.

John Healey (Labour, Wentworth)

As the right hon. Gentleman will know, the pre-Budget report and the Budget rightly concentrate on the economic instruments. However, they are part of a wider context in which the policy instruments that may bear on a particular issue are summarised. That was the case in the most recent pre-Budget report and Budget, in which the Government confirmed for the first time our interest in a potential biofuels obligation. I suggest that he looks to the autumn pre-Budget report for the summary and the overview in which he is interested.

The right hon. Gentleman appeared to be taking me to task when he said that this country did not have a bioethanol plant. This country does not yet have a bioethanol duty discount, and that is precisely what the clause introduces. If the Committee endorses the clause, and it becomes part of the Bill, it will still be eight months away.

Question put and agreed to.

Clause 10 ordered to stand part of the Bill.

Clause 11 - Biodiesel

John Healey (Labour, Wentworth)

The clause is largely technical. It will ensure that biodiesel that is set aside or used for the production of bioblend is charged with duty. Bioblend is a mixture of biodiesel and heavy oil that has not been charged with the excise duty on hydrocarbon oil. Bioblend is made in-warehouse in duty suspension.

The clause is intended to make the charge to duty for biodiesel used in the production of bioblend accord more sensibly with warehousing rules. If immediately entered for warehousing, the duty will be suspended.

The change comes into effect on 1 January 2005, at the same time as the new reduced rate of duty for bioethanol. There will be a similar provision relating to bioethanol blends. On that basis, I commend the clause to the Committee.

Andrew Tyrie (Conservative, Chichester)

This is a subject on which my right hon. Friend the Member for Fylde could wax lyrical at great length, but I hope that we will not allow him to do so.

Chris Bryant (Labour, Rhondda)

Tory discipline.

Andrew Tyrie (Conservative, Chichester)

It is improving.

I have one very narrow question. Is part of the purpose of the clause to discourage imports of bioblend?

John Healey (Labour, Wentworth)

No.

Question put and agreed to.

Clause 11 ordered to stand part of the Bill.

Clause 12 - Fuel substitutes

Andrew Tyrie (Conservative, Chichester)

I have one brief question. It seems that the Minister will explain the measure to the Committee so I shall not do so. Is it an EU requirement that we pass the clause? The issue is a minor, technical one.

John Healey (Labour, Wentworth)

The clause makes a necessary technical amendment to the Hydrocarbon Oil Duties Act 1979. It is not a requirement of the European Union that we do so. The purpose of the clause is to ensure the agreement of all Finance Bill provisions relating to biofuels. It is a necessary change to ensure consistency in the application of duty charges on fuels and it takes into account the current and future development of new fuels.

Question put and agreed to.

Clause 12 ordered to stand part of the Bill.

Clause 13 - Warehousing

John Healey (Labour, Wentworth)

This clause will allow regulations to be made to bring some new energy products under duty suspension procedures. That is a necessary change, which will allow for free movement of those products within member states, and it updates UK legislation in line with Council directive 2003/96, known as the energy products directive.

The clause provides for warehousing regulations to apply to petroleum gas and biodiesel, as well as animal and vegetable fats and methanol intended for use as motor or heating fuel. Those products reflect current and potential future developments in the production of new fuels. By introducing the clause, the Government are ensuring that UK legislation keeps pace with revenue and trade requirements.

The clause helps to provide a package of measures, which will implement parts of the energy products directive. The directive, of course, repeals two earlier directives, which are incorporated into UK legislation, and largely includes the provisions contained in those directives. In making the relevant practical and necessary changes the Government have taken care

not to affect the scope or rate of duties in the UK. On that basis I commend this clause to the Committee as largely technical, but none the less necessary.

Question put and agreed to.

Clause 13 ordered to stand part of the Bill.

Clause 14 - Treatment of certain energy products

John Healey (Labour, Wentworth)

The clause amends section 10 of the Finance Act 1993 to provide a power to treat energy products in the same way as hydrocarbon oil or road fuel gas is treated under the Hydrocarbon Oil Duties Act 1979. The clause will update the legislation to take account of current and potential development of new energy products, which are made from animal and vegetable fats and non-synthetic methanol. The change is a consequence of the introduction of the European energy products directive, which gives a unified framework to the treatment of motor and heating fuels. The change will ensure that when new energy products are used as motor or heating fuels they will be dealt with under the 1979 Act.

Andrew Tyrie (Conservative, Chichester)

I have one brief remark to make, which could equally have been made on the previous few clauses. There is nothing the matter with the clause, as far as we can tell. The trouble is that it is not clear that the Government have a coherent and easy-to-understand policy on the new energy products. Policy seems to be moving along in a makeshift way in different parts of Whitehall.

Not that long ago we were talking about bioethanol, and several times the question was raised of who is in charge with respect to issues concerning the new products. The reply was, ''There's some liaison going on.'' The word ''liaison'' reminds me of other words, often French, such as ''modality'', which lack content. I am guilty of that myself, I am sure. However, I do not think that there is much liaison going on in that area. If there is, it seems to be generating more heat than light.

We need joined-up government and we need somebody to think through the policy. To do that, someone must be put in charge of it. In my experience, that nearly always ends up having to be the Treasury, because the Treasury holds control over the key levers. Those are, of course, fiscal. That is what will decide how the industry develops. I strongly urge the Minister to build up his political muscles as quickly as possible to try to bring some clarity to bear.

The industry does not think that there is a coherent policy. It thinks that the Government are moving along on an ad hoc basis. I suspect that if we do not get this sorted out we will pay a price. It is, I acknowledge, difficult. Technology is constantly challenging any settled understanding of the area. I urge the Minister to give consideration to how he might, with the

honesty and integrity that he always demonstrates, answer the question of who is charge with something better than ''liaison''.

John Healey (Labour, Wentworth)

I am grateful for the hon. Gentleman's concern for my political muscle. I am not sure how welcome a fitness and development programme would be with my colleagues. I am content that the arrangements in Government are working well. I am particularly content that we in the Treasury, and I as the Minister responsible, have the scope to make the decisions that we need to make and to propose the sort of legislation before us.

Question put and agreed to.

Clause 14 ordered to stand part of the Bill.

Clause 15 - General betting duty: pool betting

Richard Bacon (Conservative, South Norfolk)

I welcome you to the Chair, Sir John. I said on Second Reading that I was an undergraduate student of Finance Bills and I think that that has been demonstrated amply. My hon. Friend the shadow Paymaster General is, of course, delirious about the subject of betting duty in general, and pool betting in particular, but unfortunately he has been unable to join us this afternoon, so he asked me to comment on the clause. It provides for all pool betting, on both dog racing and horse racing, to be brought under the general betting provisions.

As online betting exchanges have developed in recent years, there has been growing concern that they provide not only an innovative and convenient way for clients to place a bet, but a way for some people to establish themselves as, in effect, unlicensed bookmakers, and therefore escape the 15 per cent. tax on profits incurred by traditional bookmakers. It certainly appears that there has been a broad welcome for the clause from the industry, at least from the traditional industry, because it has become increasingly clear that there has not been equal tax treatment of traditional bookmakers and those who act as bookmakers on betting exchanges.

I have just one question for the Minister. At present, the liability of certain types of pool betting to general betting duty depends on where and by whom the betting is being provided or promoted. Although the Government's proposed changes will mean that any pool betting, at least on dog racing and horse racing, will fall within the scope of general betting duty, so long as the promoter or the totalisator is in the UK, an obvious question arises. As proposed new section 12(4A) of the 1981 Act, in subsection (8), says:

''A bet is an on-course bet for the purposes of this Part of this Act''

if it is made

''with a bookmaker present at the meeting''

''by means of a totalisator situated in the United Kingdom''.

That raises concerns about what assessments the Government may have made of the potential size of the shift towards offshore online betting as a result of such changes. If an individual who currently practises as an unlicensed bookmaker through a betting exchange were to move his activities offshore, there could be considerable scope for abuse of the rules on UK residency. I can imagine that it would be quite easy for someone to seek to avoid the effects of the proposed changes by locating outside the UK, or at least purporting to do so, while actually continuing to spend significant periods of time here.

In conclusion, the clause is broadly welcome, but there are concerns about whether it may result in some unintended consequences. I look forward to hearing what the Minister has to say about that.

Harry Cohen (Labour, Leyton and Wanstead)

I suppose that I should declare an interest—although it has to do more with money being paid out than money coming in—in that I half own a greyhound with my hon. Friend the Member for Walthamstow (Mr. Gerrard). In total, she has won about 10 races out of 64, including the one before last. I can give a tip to my hon. Friends: I think that she will win again in the next two or three races that she runs. The all-party greyhound group have a dog called Go Running Whip, which starts its campaign in the greyhound derby this Saturday. My hon. Friend the Member for Walthamstow tells me that he is on it at 500:1, so he will be very rich if it wins.

The clause is about gambling and the greyhound industry. I welcome the fact that there will be no betting tax for dog racing, which will be a boost to the industry. I understand that there has been an agreement between the British Greyhound Racing Board and the bookmakers for an increased levy on the bookmakers, the proceeds from which will go to the industry. Some of that money will also go to the welfare of the greyhounds, particularly retired ones. That is important; not enough has been done on that in the past. The industry has made improvements to look after retired greyhounds. I welcome that, although more needs to be done. I am also sympathetic to an important campaign on the issue by the League Against Cruel Sports.

The problem with the levy is that it is voluntary. In the past, a number of the bookmakers have not paid up. They are a minority, but I believe that even now a number of bookmakers are saying that they will not pay up to the levy. They are freeloading on the sport and on the industry. My right hon. Friend the Minister for Sport and Tourism has made some strong statements on the issue and expressed his concern about non-paying bookies. I would like the Economic Secretary to say whether he will keep an eye on the situation. All the bookies should pay. If the voluntary scheme does not operate properly, it should be made compulsory, so that the money can be available for the industry. Will my hon. Friend also look at how the money from the levy is spent and ensure that it goes towards the rehoming of retired greyhounds?

I recently made a donation. Under the gift aid scheme, if an individual gives £100, another £28 can go to the charity. Would it be possible to extend the scheme to businesses such as greyhound tracks and bookmakers, perhaps by allowing an offset against their tax bill, so that additional money could be raised for the retirement of greyhounds? I hope that the Economic Secretary will consider that suggestion.

John Butterfill (Conservative, Bournemouth West)

Order. I appreciate the hon. Gentleman's concern, which I share, for retired greyhounds. However, I hope that the Economic Secretary will not be tempted too far into a response, as the matter does not closely relate to the clause under discussion.

Howard Flight (Conservative, Arundel and South Downs)

May I briefly add my welcome to you, Sir John? I almost feel that we should consider setting a precedent by allowing you to speak when we get to clauses 139 to 270 and all the schedules on pensions.

These measures are part of a wider opening up of gambling everywhere. There is a coincidence of interest between the Government and the industry, in that the Government get more tax and the industry gets more business. It may sound old-fashioned, but I have moral concerns about a business that is based on exploitation of the weaknesses of the less privileged. I can think of a certain past Prime Minister who may have had some objections in principle. I wonder whether the Government have any wider policy on the subject, given that we may end up with forms of gambling on every high street.

John Healey (Labour, Wentworth)

A number of interesting and wide-ranging points have been made. I shall touch on them but not dwell on any for too long.

Clause 15 is not part of the opening up, as the hon. Member for Arundel and South Downs (Mr. Flight) put it, of the gaming industry. However, he raises proper concerns. Having given evidence to the cross-party pre-legislative scrutiny Committee that was set up by both Houses to consider the draft legislation on the future of the gaming industry, I am aware that such concerns were put to it and that it has examined them. At present, the Government are considering the observations of that Committee, which reported just before Easter. In due course and before long we will set out the Government's conclusions and proposals for the way ahead, taking into account the serious work undertaken by that Committee, which was chaired by the hon. Member for Ryedale (Mr. Greenway).

I must admit to my hon. Friend the Member for Leyton and Wanstead (Harry Cohen) that, to be perfectly honest, I never know where I am with a Running Whip. Even odds of 500:1 do not make it any more likely that I would go with it, but I was interested to hear about his involvement with the industry. I recognise his interest in the welfare of retired greyhounds, but I point out that the operation of the levy is principally a matter not for me but for my right

hon. Friend the Minister for Sport and Tourism. I shall certainly draw his attention to my hon. Friend's concerns.

I understand the broader points that the hon. Member for South Norfolk (Mr. Bacon) made about betting exchanges and offshoring in the bookmaking industry. Both concerns are wide of the tightly drawn provisions in clause 15, but let me say that I am keeping a close eye on betting exchanges and have done so for the past year or more. As the Budget confirmed, officials are taking another close look at whether we have an appropriate taxation regime for betting exchanges, and in particular considering the concerns that some have raised about the use of betting exchanges by people who are effectively running businesses through them, rather than acting as individual punters.

The clause, however, is being introduced to maintain the existing equitable treatment and level playing field in the current tax treatment of pool betting. It is being introduced as a consequence of changes to social law that are making their way through the other place at present, which will affect the current administration of pool betting for horse and greyhound racing.

Those changes are being introduced by the Horserace Betting and Olympic Lottery Bill and will result in the dissolution of the Tote, which has the current responsibility for the administration of pool betting for British horse racing. The changes introduced by that Bill will allow the Tote's successor company, which is expected to be a racing trust, to retain exclusive rights to administer British horse race pool betting for a maximum of seven years. After that, the market will be open to competitors to enter.

In order to maintain the current equitable treatment, clause 15 will amend the Betting and Gaming Duties Act 1981. It will amend or remove some soon to be outdated references, such as references to ''bookmakers'', ''totalisator odds'' and the Tote itself. The amendment will also maintain the current equitable treatment for the administration of pool betting on horse and greyhound racing by mandating those activities liable to general betting duty. That will protect their current on-course duty exemption and will avoid burdening the Tote's successor with liabilities to both general betting duty and pool betting duty. On that basis, I commend the clause to the Committee.

Question put and agreed to.

Clause 15 ordered to stand part of the Bill.

Clause 16 - Rates of gaming duty

John Healey (Labour, Wentworth)

Simply put, the clause increases the duty bands for gaming duty in line with inflation, ensuring that their value is maintained. It is a measure

that continues the practice of the last six Budgets. It is supported by the casino industry and is designed to prevent a tax increase being caused by the erosion in the value of duty bands by inflation. I commend the clause to the Committee.

Richard Bacon (Conservative, South Norfolk)

The table in clause 16 will replace the table in section 11(2) in the Finance Act 1997. The figures in the bands in table of the 1997 Act amount to a total of £5.4 million, and anything over that is taxed at 33.3 per cent. The amounts stated in the table in the clause add up to £4.817 million, and anything above that level is taxed at 40 per cent. I would like the Economic Secretary to clarify for the record the fact that, in comparison with the 1997 Act, the clause sets out a higher rate of tax.

Michael Jack (Conservative, Fylde)

When the Economic Secretary replies, I would be grateful if he confirmed the measure of inflation that is used for the process of revalorisation.

Sitting suspended for a Division in the House.

On resuming—

John Healey (Labour, Wentworth)

Let me respond to the two points made respectively by the hon. Member for South Norfolk and the right hon. Member for Fylde.

The hon. Member for South Norfolk asked me to confirm that the clause makes no tax increase.

Richard Bacon (Conservative, South Norfolk)

I am sorry to intervene so soon, but I did not ask the Economic Secretary to confirm that there was no tax increase. I asked him to confirm that the clause makes a tax increase when compared with the Finance Act 1997.

John Healey (Labour, Wentworth)

If the hon. Gentleman will be a little patient, I shall answer his question. I had not even finished summarising the proposition that he put to me.

The 1997 Act was the first point at which the bands were set out in their present form. There was an increase in duties in 1998, but there is no change in the rates this year; instead there is a revalorisation of the bands to which those rates relate. I hope that that answers whatever question the hon. Gentleman thought he had asked.

I turn to the question asked by the right hon. Member for Fylde. The measure of inflation was the retail prices index. The figure for inflation was 2.8 per cent. That was the rate in December 2003, a figure taken by convention under an agreement with the industry that has been in place for five or six years.

Michael Jack (Conservative, Fylde)

A number of measures of inflation are used by the Government for different purposes. The Economic Secretary will be aware that if the new measure of inflation had been applied, by definition it would have been a lower percentage increase. Was that option offered to the industry? By the Minister's own admission, the current regime has been achieved not by statute but by agreement.

John Healey (Labour, Wentworth)

No. For consistency and comprehensibility, we have used the same measure of inflation that we have used in past years. We chose not to use the new measure that the right hon. Gentleman has in mind, which is used principally by the Bank of England in deciding monetary policy.

Question put and agreed to.

Clause 16 ordered to stand part of the Bill.

Clause 17 - Amusement machine licence duty: rates

John Healey (Labour, Wentworth)

Amusement machine licence duties are charged on the licences that allow amusement machines to be provided for punters to play. The clause makes a routine revalorisation of the rates of amusement machine licence duty for gaming machines in categories B to E. The rate of duty on category A machines—they are purely amusement machines such as pub quiz machines and video games—has been frozen.

Richard Bacon (Conservative, South Norfolk)

Even the Association of Licensed Multiple Retailers recognises that the provision is simply an increase to take account of inflation. Although it would welcome no change, it acknowledges that the impact of the duty change will be slight.The main issue for the industry is the rationale for the licensing system as a whole. Indeed, the Government say in the Red Book that they will defer reform of amusement machine licence duty, and major reform of the taxation of gambling, to align with the forthcoming gambling Bill.

There is no doubt that pub gaming machines, in particular, are being hard hit by the proliferation of fixed-odds betting machines in high street outlets. The ALMR reports that its members have seen takings from pub machines go down by 6 per cent. on average, and in some cases by as much as 18 to 20 per cent. In small outlets and rural areas especially, that level of loss threatens the profitability and even the viability of some small businesses.

I have two questions for the Minister. First, could he confirm that the position remains as outlined at the Budget and that no further change will take place until there is a chance to consider it in the context of the gambling Bill? Secondly, can he outline the extent to which Treasury thinking on the more general reform of gambling has moved on?

Chris Bryant (Labour, Rhondda)

I am grateful to sit under your chairmanship, Sir John. This is my first time on a Finance Bill, and I am glad that there is someone with experience to guide me should I go in the wrong direction.

In my constituency, gaming machines form a vital part of the local economy by preserving our labour clubs. Many of those clubs would not be able to survive financially without the benefits provided by gaming machines. Many people who run the local

labour clubs are concerned to know where Government thinking is going when it comes to taxing that pleasure. The discussion is similar to an earlier one about cigarettes, and we must ask: do the Government want to try to discourage people from using gaming machines and is that the prime purpose of duty, or do they simply want to raise money?

The Government have proposed that we have four bands of gaming machines, rather than the present five. In one case, that will allow for unlimited stakes. As we move into that future, some idea of where the Government's thinking on gaming duty will be important.

John Healey (Labour, Wentworth)

Let me say to the hon. Member for South Norfolk that the policy and the approach set out in the Red Book have not changed. It makes sense to consider and make decisions about any prospective reform in gaming duty in the context of the wider and more radical potential changes in social law. It makes sense that we make those decisions in tandem and implement them in tandem, which is why we are aligning any potential reform of amusement machine licence duty with the wider changes, precisely as set out in the Red Book.

It is a pleasure to see my hon. Friend the Member for Rhondda (Chris Bryant) on the Back Benches of the Standing Committee for the first time. He poses a good question: what is the principal purpose, or what is the range of purposes, for the design and operation of amusement machine licence duty? That was our starting point last year when we issued a public consultation on the current system and on proposals and possibilities for longer term reform. It is true that this system, like some of the previous gaming duty systems that we have now overhauled, is outdated and inflexible. In many ways, aspects of it are unfair, particularly for the category A machines, and in some parts of the industry it acts as a barrier to entry. Those were the questions that we posed as part of the consultation. We are now revisiting them, and we will need to do so again when we make decisions about whether to reform amusement machine licence duty, and if so, how.

I hope that the Committee will give the much narrower question of the revalorisation set out in clause 17 its backing.

Question put and agreed to.

Clause 17 ordered to stand part of the Bill.

Clause 18 - Fee for payment of duty by credit card

Andrew Tyrie (Conservative, Chichester)

We do not like the clause and we would much rather that it were not in the Bill. The intention of the clause is to enable payment of vehicle excise duty

by credit card. That sounds reasonable and sensible but the clause has many nasty little aspects. It gives the Treasury an open-ended power to levy the fee at any level. It could decide to set it at 1 per cent. this year, 2 per cent. next year and 3 per cent. the following year. The fee could be constructed in the form of a surrogate tax. [Interruption.] The hon. Member for South Derbyshire (Mr. Todd) is querying what I am saying.

Mark Todd (Labour, South Derbyshire)

Will the hon. Gentleman clarify whether it is compulsory to pay the Driver and Vehicle Licensing Agency by credit card?

Andrew Tyrie (Conservative, Chichester)

I was just coming on to the practical difficulties of getting hold of a tax disc. People have to stand in a queue at the post office with their V11 licence renewal form, an insurance certificate, an MOT certificate and a cheque or postal order. It has often struck me that the best possible thing would be for the tax to be abolished and replaced, with the yield being collected in some other way. There is a number of other suggestions I could make. I am now straying from the subject under discussion, but, for example, revenue could be collected from foreigners—[Interruption]—who use our roads, but do not pay vehicle excise duty.

John Butterfill (Conservative, Bournemouth West)

Order. The hon. Gentleman is being tempted to go wide of the scope of the clause. I hope that he will revert to the subject under discussion.

Andrew Tyrie (Conservative, Chichester)

You are absolutely right, Sir John. I am being dragged away into a much broader discussion, which clearly excites a large number of Members, many of whom obviously enjoy queuing for their tax disc at the post office and going through other unnecessary rituals.

Chris Bryant (Labour, Rhondda)

Is not one of the most important points about the queuing process that it is the only time in the year when we know whether somebody's car is insured?

Andrew Tyrie (Conservative, Chichester)

We are again straying well away from the clause. The short answer is that other countries run a perfectly acceptable insurance disc display system. People display the insurance certificate or its equivalent, which can be obtained through the post, on their windscreen. There are many practical answers to the hon. Gentleman's point, but I am not going to stray any further from the clause.

What is nasty is that the Government are telling users that they have to pay what is euphemistically described as a ''convenience charge''. More than 20 years ago, retailers on forecourts and at petrol pumps decided to try to pass on the costs that they had to pay to the credit card companies, and there was a great deal of aggravation and trouble. In the end, to cut short a very long story involving the Monopolies and Mergers Commission, the Office of Fair Trading and various other organisations, that attempt largely collapsed.

As a consequence, legislation that is conceivably relevant to this clause was put on to the statute book. I want to ask the Economic Secretary about the Price Indications (Method of Payment) Regulations 1991,

which enable retailers to vary the amount that they charge customers, provided that they make that clear, in order to collect a payment that has to be made. I wonder why the Government are not using those regulations. Perhaps there is a technical reason that can be explained to me. The reason why very few retailers use the power is exactly the same as the reason why the Government do not need to introduce this measure.

I have a number of questions. The first is about the 1991 regulations. Secondly, do the Government intend to allow payment by debit as well as credit card? Thirdly, and importantly, will the Government charge only the net external costs for collecting the charge, or will they adjust the charge downwards to take account of the evident saving that they will make by not having to handle cash?

Similarly, will the Government take account of the increase in early payment that is likely to be the consequence of changing to a credit card system? Retailers do not, on the whole, use the 1991 regulations and recoup the full 2.5 per cent. because they gain by letting customers use credit cards. They handle less cash, which would carry the risk of theft and is costly in one way or another—paying Securicor to collect it, or installing safety measures in the shop, for example—and payment is certain to be received and arrives earlier. In most cases, the 2.5 per cent. cost is more than offset by the benefit. That is why retailers do not even bother to try to collect it, even though they may do so by law.

The Government could well go down the same route. If they introduce payment by credit card without introducing an accompanying charge, I suspect that they will cover all or part of the cost of paying credit card companies. However, will the Economic Secretary clarify whether, if they do not recoup all the cost, they will reduce the charge to take account of the savings that they will make? Will they charge only the net external cost and take account of the behavioural effect—receiving more payments, earlier? If the Government cannot give that commitment, this is a tax by the back door. They will increase the total take from vehicle excise duty without having to increase the rate. Far from being a convenience measure, this will be a form of surrogate self-tax.

David Laws (Liberal Democrat, Yeovil)

I, too, welcome you to the Chair, Sir John. We are slightly more charitable than the hon. Member for Chichester about this small clause, but we have some practical concerns on which I would like the Economic Secretary to comment.

We share the view of the hon. Member for Chichester that the clause deals to only a modest extent with the underlying problem with the tax. Many of us feel that vehicle excise duty is an old-fashioned, regressive and irritating tax whose time should probably have expired long ago. The Committee may know that the tax is one of the hardest to collect both from those outside this House and from those inside it. A number of prominent politicians, even the right hon. Member for Hartlepool (Mr. Mandelson) and, I think, a Chancellor of the Exchequer, have appeared in the

newspapers for not having paid vehicle excise duty. Others of us have occasionally had difficulties over the timing of payment. I hope that our discussion of the clause will—within the constraints that you will permit, Sir John—prompt the Economic Secretary to focus on whether he should make more radical changes.

We should give credit to the Government for trying to make it easier to pay the tax. Anything that brings the payment of vehicle excise duty out of the dark ages and away from a paper-based system is welcome. However, I should like to touch briefly on some practical issues, some of which have been mentioned by the hon. Member for Chichester, as well as on longer-term issues associated with the substance and intention of the clause.

The questions asked by the hon. Member for Chichester, together with a couple that I shall add, cover the matters on which we would like to hear a response from the Economic Secretary. First, we would like clarification about when the provision will come into effect. Secondly, do the Government have any intention of extending the provision and the manner in which it operates to other taxes?

Given that the Treasury has taken upon itself an open-ended ability to increase the level of the charge beyond that of cost recovery, should the Bill not include a cap on the charge? That would provide the reassurance that a future Government, as the hon. Member for Chichester said, would not be intent on using it to raise revenue rather than recover costs. I am sure that that was not in the mind of the Government when they drafted the clause, but I am not so confident that any Government might not be inclined to tweak the cost recovery and the charge to raise revenue rather than cover costs.

Will the Economic Secretary clarify the point that the hon. Member for Chichester touched on when he asked whether the charge would cover only the net external costs or allow any profit for the Government? The hon. Gentleman asked for the Government's definition of net external costs and whether that would include an offset for the savings made from not having to process cheques and cash. He asked whether payment could be made by debit card, and we also seek that clarification.

There is the issue about whether the measure goes far enough to simplify payment of vehicle excise duty. It is a very old-fashioned tax in terms of its collection. As the hon. Gentleman mentioned, systems in operation in other countries delink the payment from insurance renewal and MOT payments. I hope that the Government will consider reforming the tax to make it easier to pay, to move it to an insurance disc and abolish something that has little environmental logic. As the Government accept, there is an environmental rationale behind shifting the taxation of motor vehicles from ownership to use. It seems to form the thrust of Government policy in the area under discussion.

As well as the problem experienced by those of us who occasionally have difficulties paying our vehicle excise duty on time due to administrative complexities,

there is the problem of tax evasion. The lost revenues are about £250 million or £300 million a year, so reform would help to tackle that concern as well.

Michael Jack (Conservative, Fylde)

I am always interested in body language, and that of the hon. Member for South Derbyshire clearly indicated that he did not think that the argument advanced by my hon. Friend the Member for Chichester that the proposals represented another tax was valid. However, it is. I can understand that the Government want to safeguard the revenue of the Driver and Vehicle Licensing Agency but, as the hon. Member for Yeovil (Mr. Laws) said, this matter raises an interesting question. For some people, using a credit card provides a way of spreading the burden of paying the tax.

We have had many debates about the effects of the cost of motoring on people on low income under this Government. The use of the card as a mechanism to guarantee payment of the road fund licence, set against the deterrent effect of being told that there will be a charge, however small it might be, raises an interesting question. It would be very interesting to hear about the work that was done to ensure that certainty of payment did not get in the way of lost revenues.

I want to raise a point of principle about the clause. In four parts of it, further developments will be confirmed by regulation. This is a theme that runs right through the Bill: large amounts of legislation will be by the secondary route. This matter could have been dealt with in a schedule, and some of the detail could have been given here and now. Subsection (2), for example, says:

''''credit card'' has such meaning as may be prescribed by regulations''.

That is what caused concern to the two hon. Members who asked whether the clause applies to debit cards. That detail should have been included at this point in the Bill in a way that was beyond reasonable doubt. Similarly, there are other issues about the timing and the level of the fee, all of which must be determined by subsequent legislation. It is about time the detail was defined in a schedule and not by having unnecessary powers to create secondary legislation.

My hon. Friend the Member for Chichester mentioned the standard credit card deduction rate for transaction. Bearing it in mind that we are looking for certainty of payment, have the Government had any discussions with the credit card providers on the use of a lower rate in official transactions? Whenever I use debit cards to buy premium bonds, for example, or to pay extra tax, no charge applies. This is a comparative exercise between the costs of transaction of cash, cheques or other means of payment, and a credit card. Could not a lower rate be applied?

Quentin Davies (Conservative, Grantham and Stamford)

I agree with many of the points made by my right hon. Friend. I thoroughly share his protest about the extent to which the Bill relies on giving the Government the power to make regulations

subsequently. We all know that the parliamentary scrutiny given to those regulations will be an absolute farce, even if they go through a delegated legislation Committee, which is most undesirable.

I very much agree with my hon. Friend the Member for Chichester that what is particularly undesirable about the clause is that the levy is not capped. The Government appear to be asking Parliament to give them the right to levy any amount that they want to under the name of this transaction charge. I also agree with the hon. Member for Yeovil that it is completely unacceptable that the Government have not even made it clear that the amount that they will levy will be limited to any costs that the DVLA incurs when having to pay credit or debit card companies if they prove to be included.

This is unsatisfactory, and we should not leave this discussion without the Minister answering those questions very specifically. This is a tax on a tax, which is a most unattractive and sinister development. I use the word ''sinister'' advisedly. There have been various attempts to define rather dishonest euphemisms for the charge by saying that it is a ''convenience charge'', or something of that sort. It is actually a tax on a tax. It is a tax when the state forces the citizen through the law to pay something.

Michael Jack (Conservative, Fylde)

Has my hon. Friend been a witness to or a part of the many discussions in which businesses and individuals have attempted to recover from Government the costs of doing the Government's business, but have been firmly rebutted?

Quentin Davies (Conservative, Grantham and Stamford)

Indeed. We all know that one of the Chancellor's great achievements is stealth taxes through all sorts of means. An obvious way of taxing the citizen without him or her appearing to realise it—at least, in the first instance—is to ensure that the taxpayer pays for part of the administrative cost that the state used to pay. Private businesses now have to levy all sorts of things, including national insurance charges, Child Support Agency charges and all sorts of other levies. All that is for the benefit of the state. In our complicated tax credit systems, the taxpayer is forced to take on administrative costs that the Government previously accepted. They have effectively defrayed their costs by imposing them, statutorily, on the private sector and on private individuals. If anything is a stealth tax, that is.

The issue of a tax on a tax raises an interesting point. A citizen might offer to pay his vehicle excise duty by credit card and have that offer accepted. The point applies even if the offer is not accepted. If he then refuses to pay the additional charge under the clause, an agent of the DVLA may refuse to accept the money unless both charges are paid at the same time. Possibly inadvertently, he might accept the money for the vehicle excise duty charge and try to levy the additional, clause 18, charge separately.

What would be the legal position in that situation? It seems to me that the citizen would have defrayed his obligation to pay for his vehicle excise duty, so could use his vehicle at liberty, and the Government would have to reclaim the additional charge from him by

some other means. The courts would be reluctant to convict someone of not having paid his vehicle excise duty—and, therefore, going around without a current tax disc displayed on his car—if that taxpayer had made a bona fide attempt to pay the money, turned up with his credit card and been turned away not on the grounds that the credit card was not acceptable and valid but that he had refused to pay the additional levy. He or she had not refused to pay the tax, but was willing to do so but offer was rejected. That seems to me to be an interesting case that the courts might have to examine.

Rob Marris (Labour, Wolverhampton South West)

Has the hon. Gentleman read new section 19C(2) at the top of page 16? The beginning of it says, ''Before issuing the licence'', so the hypothetical scenario to which he refers could not occur within the wording of the clause.

Quentin Davies (Conservative, Grantham and Stamford)

I have indeed read the clause. It is perfectly possible that, inadvertently, the agent of the DVLA, which might be a local post office, might have accepted the money. In any event, the issue would arise if the car owner offered to pay the vehicle excise duty and that offer was rejected because he had refused to pay the additional and separate levy and tax. I think that that is a matter that would have to be determined by the courts—perhaps it will be so determined. It is an interesting question as to whether the courts will decide that such a taxpayer is not entitled to drive his or her car because he or she had refused to pay a different tax, which is the tax on a tax to which I have referred. The situation seems to raise a lot of uncertainties.

I was glad that my hon. Friend the Member for Chichester touched on the fundamental economics. It seems to me that the Government have got the fundamental economic logic completely wrong, because the assumption behind the proposal is that it is cheaper for the Government—or cheaper generally—if people pay by cash or by cheque. It also seems as if people who pay by credit card are imposing a cost on the state or on their fellow citizens and they ought to compensate the state or their fellow citizens for it. In fact, the exact reverse is the case. The resource cost of paying for something by credit card is much less than the resource cost of paying for something by cash or by cheque. When people pay by cash or by cheque, exactly the same electronic changes have to be made to the data in the relevant bank accounts as are made if they pay by credit card, but in addition, the costs of the physical handling of the cash or cheque and the security treatment of them—Group 4 or another security firm carrying the cash around the country—are incurred. Carrying cash around, holding it, depositing it and insuring cash payments is expensive.

Payment by purely electronic means is a much better deal for society and has a lower economic cost. There is no doubt about that. The Government are being perverse in trying to push people away from paying electronically. Nevertheless, that would be the effect of the clause. I shall certainly not pay electronically if the Government succeed in putting the clause on the statute book. I shall not deliberately pay a tax that has

been imposed in such an irrational fashion, and nor will a lot of our fellow citizens. It would be a mistake to pay it.

The Government are moving in entirely the wrong direction. I totally agree with my right hon. Friend the Member for Fylde that if the Government had adopted a businesslike approach to solving the problem—that would, perhaps, have been a little uncharacteristic—they would have embarked on negotiations with credit card companies and done a deal, instead of trying to pile more legislation on the statute book by making this already overly long and complicated Bill even longer and more complicated. Given the scale of the transactions involved, I do not see why they could not have done a very satisfactory deal.

The Government will indict themselves and their competence unless the Minister can tell me that he has undertaken such negotiations, what the results were and how the Government took them into account before introducing the clause. If the Government, with their vast majority, have decided that the easy route is to increase the size of the Finance Bill and to load more legislation on the public—that they can abuse the law in that way because they are so powerful that they can get away with anything in this place, however badly thought through—and that they need not have businesslike negotiations to solve a genuine economic problem, they will have said all that needs to be said about their attitude to legislation and the governance of this country.

John Healey (Labour, Wentworth)

This is not the place for the wider debate that the hon. Member for Yeovil seeks on the philosophy and the long-term purpose of vehicle excise duty. The clause is really very narrow and relates to our ability to levy a charge on motorists who choose to pay for their vehicle excise duty licence by credit card.

I am sorry that the hon. Member for Chichester and other Opposition Members do not like the provision. In effect, it gives motorists another method—in this case, their credit card—by which to pay vehicle excise duty. We have already— sensibly and, I hope, with the support of the Opposition, in principle at least—committed ourselves to electronic licensing, and the facility to pay by credit card is obviously key to making that happen.

Andrew Tyrie (Conservative, Chichester)

May I clarify the Opposition's position? We are strongly in favour of—[Interruption.] I hear a cacophony of suggestions from Labour Members, who clearly agree with me on so many of these issues. We all strongly agree with the principle that motorists should be permitted to pay by credit card or debit card, and if possible to pay through the internet. What we do not like is the charge.

John Healey (Labour, Wentworth)

The hon. Gentleman may be aware that the measure is likely to be welcomed by motoring organisations, and indeed by members of the public, who have been pressing us for some time to allow them to pay for their licence by credit card. Preliminary market research shows that up to 60 per cent. of motorists are interested in taking advantage of a facility to purchase their licence by credit card.

Quentin Davies (Conservative, Grantham and Stamford)

Is not it the case that motoring organisations, motorists and those who were presumably asked about the proposals in the survey have expressed a desire to have the opportunity to settle this liability by credit card? However, they are not prepared to have the additional tax or charge, and it would be quite disingenuous of the Minister to confuse the two issues. Surely he is not trying to tell the Committee that motoring organisations and the survey suggest that there is public demand for the additional charge.

John Healey (Labour, Wentworth)

I am not confusing the two. I am about to make it clear that it is necessary for us to be able to introduce the charge if we are to introduce the choice.

Arguments have been pressed on us in favour of introducing the facility to pay by credit card, and some people are no doubt attracted to the proposition as a way of making payments online. No doubt others, as hon. Members have mentioned, are attracted by the ability to use a credit card to spread the cost of a licence, rather than making a single payment, as they do now.

The clause enables the Driver and Vehicle Licensing Agency to pass on the credit card handling charge when vehicle owners choose to pay by credit card. Such practices are becoming commonplace. Anyone who has recently gone online and used a credit card to purchase flights, theatre tickets or tickets for a sporting event from any such booking agent may have found that the operator passed on the handling charge for the use of the credit card.

In such transactions, those who choose to pay by credit card are not being subsidised by those who choose to pay by another method. We are proposing precisely the same position for vehicle licensing. All the existing methods of payment, including debit cards, remain free of charge. The rate of the charge will be set by statutory instrument, in accordance with the cost of the licence and in a way that ensures that the system does not become too complex. However, there is still work that we need to do before we can set the charge.

Richard Bacon (Conservative, South Norfolk)

Can the Economic Secretary address himself to the question that my hon. Friend the Member for Grantham and Stamford (Mr. Davies) asked? Given the Government's negotiating power, their vaunted and supposedly improving skills in procurement, and the advantage to the credit card companies of having such volumes of business, have the Government cut a deal with the companies, or do they propose to do so?

John Healey (Labour, Wentworth)

I have much respect and time for the hon. Gentleman, but I slightly regret having given way to him, because I am about to deal with precisely that point. As he said, the point has been raised and I shall try to answer it, if he will be patient.

Let me be clear: principally, the purpose of the provisions is to allow us to deal with the handling fee that the credit card companies charge to the DVLA. The DVLA will negotiate with the credit card companies to get the lowest possible costs and the best

possible deal for motorists. As hon. Members well know, different credit card companies charge different fee rates, ranging from less than 1 per cent. of the cost of the purchase, to more than 2 per cent. Once the DVLA has negotiated the best rates possible, it will be able to set a simple rate for car drivers, if that is the most appropriate way to proceed. We aim to do what the right hon. Member for Fylde urged, which is to put in place what he called certainty of payment.

Quentin Davies (Conservative, Grantham and Stamford)

The Economic Secretary envisages negotiations leading to agreements on different rates with different card companies, and an average rate—I hope that the eventual rate is no more than that—being charged to the public. Under such an arrangement, however, would not that part of the public whose credit card companies charge the lowest rate be subsidising other credit card holders? Would not that arrangement conflict with the principle that the Economic Secretary himself enunciated a few seconds ago?

John Healey (Labour, Wentworth)

What I am outlining is the approach that we intend to take and the decisions that we aim to come to, if that is appropriate, in light of the negotiations that we conduct. There will, in the end, be a trade-off between the complexity entailed in passing on to the DVLA the precise handling charges from every credit card company and charging a single rate based on the average of the best deals that the agency can negotiate. That might not suit the hon. Gentleman, but it may be the best option available. I hope that that explains why there is no precise numerical cap in the Bill. We are simply not in a position to specify one at present.

By way of reassuring hon. Members who are rightly concerned about the matter, I repeat that the charge will be set through statutory instrument. The statutory instrument process has certain limitations. The checks for that process mean that we are limited to introducing a charge. We do not have the freedom to introduce a new tax by statutory instrument. This provision is, therefore, not a new tax, nor is it a tax on a tax.

Andrew Tyrie (Conservative, Chichester)

The Economic Secretary has explained, I think, that he is going to charge only for the costs that the Government will have to pay to the credit card companies. He has not said whether he will reduce that charge to take account of any likely early payment that may come to the Government as the result of the introduction of a charge. Will he commit the Government to do that?

John Healey (Labour, Wentworth)

I hope that the hon. Gentleman appreciates that it is too early in the process to give him such a commitment today. We shall take that fact into account and consider it. The measure is an important one, and it demonstrates the Government's support for developments in technology and electronic communication. It is a direct response to customer demand.

David Laws (Liberal Democrat, Yeovil)

Does the Economic Secretary anticipate that the change will have any impact on the location in which the processing of vehicle excise duty

applications takes place? Does he think that it will reduce the number of VED applications that are processed by the post office network?

John Healey (Labour, Wentworth)

It is difficult to give a definitive answer to the hon. Gentleman at this stage. It is difficult to anticipate precisely how many people will take advantage of the new method of paying for their licence. It is also difficult to anticipate with any certainty what inroads we shall be able to make in relation to the concern he raised about the number who currently do not pay for their licence but should.

The important point is that the clause offers more flexibility for motorists in paying their vehicle excise duty. Most importantly, it gives them the choice of taking advantage of the new facility or continuing with the existing options without additional charge. I therefore commend the clause to the Committee.

Question put and agreed to.

Clause 18 ordered to stand part of the Bill.

Clause 19 - Disclosure of VAT avoidance schemes

John Healey (Labour, Wentworth)

This is an important clause, along with the associated schedule 2. Hon. Members will be aware of the Government's commitment to reduce revenue losses that have historically occurred in the VAT system, and in particular our commitment to tackle artificial VAT avoidance schemes. We set out that strategy in our document ''Protecting Indirect Tax Revenues'', which we published alongside the 2002 pre-Budget Report.

In 2001-02 losses from VAT avoidance were estimated to amount to between £2.5 billion and £3 billion—money that could have been used to support our investment in public services. Alongside these losses to the Exchequer, those engaged in VAT avoidance obtain a significant advantage over their competitors. An effective response to aggressive VAT avoidance is needed, and it is needed without delay.

The clause and the associated schedule introduce measures that target the secrecy and concealment on which avoidance thrives and which make it difficult for the Revenue authorities quickly to identify avoidance schemes and those using them. In future, those who use certain VAT avoidance schemes will be required to disclose the details to Customs and Excise under the provisions of the clause and schedule.

We require disclosure of two types of scheme: first, schemes described and published in a statutory list, and secondly, those schemes that bear certain hallmarks. The measures, in parallel with a new disclosure measure to counter large-scale avoidance of direct taxes, will allow a faster and more targeted response to abuses in the tax system.

It may assist the Committee if I give some examples of the sort of abusive schemes that the measures are designed to help deal with. Let us imagine that a retailer who sells high-value, standard-rated goods—

perhaps furniture—sells some furniture with another item that attracts a lower rate of VAT, or no VAT, such as certain forms of insurance. The total amount that the customer pays is the same as the price of the furniture, but a portion of that price—often an artificially high portion—is attributed to the insurance. By doing that, the retailer avoids VAT on that part of the transaction. The distortion of competition in such a scheme is immediately apparent. The VAT that has been avoided enables the retailer to undercut competitors or take a bigger profit.

Another example might involve a bank that pays VAT on a large purchase of goods for its banking activities. Those activities are, of course, VAT-exempt, so it cannot recover the VAT. The bank therefore contrives to sell the goods on to an associated company and claims that the VAT incurred on its purchase of the goods relates to that contrived, taxable sale, and not to its usual exempt banking activities. It claims back all the VAT. It can go still further: to obtain the effective use of the goods, the bank then contrives to lease them back from the associated company, and although it will incur irrecoverable VAT on that lease, it will typically be spread over several years, so it gets the benefit of full VAT recovery up front, and pays the VAT only in small amounts spread over an extended period.

Michael Jack (Conservative, Fylde)

In formulating the approach that is taken in the clause, and taking into account examples such as the scenario that Economic Secretary just gave, did the Government conduct any exercise to discover why the original VAT law was not better and more tightly drafted, and how the vulnerabilities were let in that the Government are now trying to deal with through the clause?

John Healey rose—

John Butterfill (Conservative, Bournemouth West)

Order. Before the Economic Secretary responds, I point out to the Committee that there is a danger that we shall have a long debate on the clause, and a similar debate on schedule 2. Perhaps hon. Members would prefer that debate to be dealt with along with this clause; it may be best to do that now, and to deal only with the particularities of schedule 2, not the generality of the need for the clause. I shall proceed in that way if the Committee is happy. Two debates on the same subject seem to me a waste of time.

John Healey (Labour, Wentworth)

I am grateful for that guidance, Sir John. I am making my remarks now on clause 19, as it is the principle item, although the schedule of course contains many specific measures.

The right hon. Gentleman will know from experience—not just from serving in Committee on Finance Bills, but from his time as a Treasury Minister—that there is an almost constant process of altering legislation when its abuse through systematic avoidance has been identified. That is change of a different nature from the clause. The clause is not about the specific avoidance schemes to which the sort of legislation that he referred to might be appropriate. It is essentially meant to give Customs and Excise more

information, more quickly, about the nature of activities that may be an abuse, or may be systematic VAT avoidance, and may, therefore, create a need for the sort of legislative change that he describes.

Quentin Davies (Conservative, Grantham and Stamford)

It makes no sense to introduce the clause and schedule, which are rather extraordinary—and we must discuss that—with examples of abuses, as the Economic Secretary has done, unless he needs the provisions because there is at present no other remedy against the specific abuses that he listed. If the abuses—I agree that they are abuses—are legal under the present law, we may need to change the law, but if they are illegal under the present regime, the provision is irrelevant and it is wrong to use that as excuse for the clause and the schedule.

John Healey (Labour, Wentworth)

I gave them as examples of the sort of avoidance schemes that Customs is up against. I am about to explain how the provisions set out in clause 19 and schedule 2 will give Customs early warning about such schemes, but not particularly the power to tackle them.

Howard Flight (Conservative, Arundel and South Downs)

I intended to say this in relation to the schedule, but perhaps I could ask a crucial question about the mechanics. If the provision works and, as has happened in the States, all sort of things are reported, Customs and Excise will have masses to look at and it is likely that it will end up finding that a lot of schemes are within the law. What happens then? The expectation is that the Government will change the law so that those schemes are without the law. One cannot have the machinery of Government overriding the law. Something is either legal or not legal. There may be thoughts of deterrence operating, but the provision does not address the issue. Customs and Excise may have all the information, but if a scheme is legal, how can it stop it? The Economic Secretary will be aware that in the States 1,700 schemes were reported and only 20 turned out to be illegal.

John Healey (Labour, Wentworth)

I hope that the hon. Gentleman will bear with me as I explain the way in which I envisage the provisions operating. It will be business as usual in the sense that the assurance operations of Customs will be no different from the present. Decisions made by Customs and Excise commissioners or Ministers on any legislative and operational changes will be as now. The clause and schedule are designed to alert Customs earlier and more comprehensively to the possibility of avoidance schemes and their use.

I gave two examples to the Committee to exemplify the schemes that Customs are up against. There are many others, all involving a significant element of contrivance. All deprive the Government of substantial revenue. We estimate the savings arising from the measure at around £200 million in a full year. All distort competition, and as they are often available only to large businesses, they are particularly distorting and unfair to small competitors.

Tackling such schemes is onerous, time-consuming and complex. Customs must identify the existence of such schemes, and avoidance, by its nature, is secret and covert. Many schemes will remain hidden indefinitely or for many years, and the revenue will continue to be lost to the public purse. Even when schemes are identified, Customs must analyse the risk and identify every business that uses them. It must then investigate each and every one to discover whether tax is being avoided, and only then can it take action to deal with the avoidance. When taxpayers have disclosed information under the clause and schedule and it has been evaluated, they will be treated no differently as a result of the measure. The measure will bring the use of avoidance schemes to the attention of Customs at a much earlier stage, enabling it to take the appropriate action to safeguard the revenue much earlier. For taxpayers, it will be business as usual, and they will be subject to no different inquiries or treatment than they currently are when Customs discovers an avoidance scheme.

There will be clear criteria for listing the schemes. There must be an avoidance scheme involving contrivance or artificiality, which must be abusive, in that it does not comply with the spirit of the law, and it must represent a serious potential risk to the revenue. The legislation will not provide Customs with an opportunity to go on a fishing expedition into taxpayers' affairs. In any case, before a scheme is listed, Customs will publicly announce its intention to list it, and will allow one month for representations to be made on why a listing is not appropriate. The listing will then be subject to parliamentary scrutiny under the statutory instrument process.

On top of that, there are de minimis limits, which are set high and designed to ensure that smaller businesses are not affected. They require an annual turnover of £600,000 for the listing scheme, and £10 million for the hallmark scheme.

Michael Jack (Conservative, Fylde)

The Economic Secretary used the word ''abusive''. Will there be any description, explanation or document to enable us clearly to define the meaning of that word and others that he used that are not subsequently defined in the schedule?

John Healey (Labour, Wentworth)

I would hope that I had answered that question when I said that a scheme would need to be abusive and qualified that by saying that it must be contrary to the spirit of legislation that has been passed.

Michael Jack (Conservative, Fylde)

For the avoidance of doubt, I ask whether that means that each body of VAT legislation will be accompanied by some description of the spirit of that legislation, taking into account, for example, the implications of judgments such as Pepper v. Hart.

John Healey (Labour, Wentworth)

No, what I am explaining and proposing is no different from the current situation. We already examine, categorise, and, where appropriate, take action against abusive schemes that are contrary to the manifest purpose and spirit of current legislation. That will not change with the

introduction of this legislation, and neither will the conduct, judgment and follow-up action of Customs. It will be business as usual.

The hallmarks part of the scheme means that hallmarks will be selected as being features that are most closely connected with avoidance—for example, conducting normal commercial transactions artificially offshore, where they are intended to be used in the UK, purely to obtain a tax advantage. That will not give Customs a fishing licence. The primary legislation makes it clear that taxpayers will be required to disclose only if a main purpose is to obtain a tax advantage.

Notification of a hallmark scheme will not be an onerous procedure. Once a taxpayer has notified, they will not need to take any further action. Customs will examine the notified scheme and will undertake further investigations only when it considers that there is avoidance. Even then, investigations will be no more than it would undertake had it identified the scheme as part of its normal assurance programme.

To make the measures as effective as possible, I propose penalties for failure to comply. The penalties have different aims. I have explained that there will be two types of scheme: listed, and those that bear the hallmarks. We have judged listed schemes to be avoidance schemes, and we intend to pursue and assess such schemes if necessary. I think that members of the Committee will immediately understand that there is, therefore, a strong incentive for taxpayers not to tell us about their use of a listed scheme. The penalty must be substantial enough to counter that.

On the other hand, we have made no advance judgments on the nature of the arrangements of hallmark schemes or whether they constitute avoidance. We simply wish to be informed of such activities so that we can properly study them and take further action if necessary. The proposed penalty in that case is a regulatory one, in line with the penalty for breaching a direct tax disclosure requirement.

The new measures are designed to enable Customs to take quick and effective action against schemes through the provision of information on the extent to which known schemes are used and through early notice of potential new schemes. Once schemes are disclosed to a central point in Customs, they will be carefully managed, along with any follow-up action that is taken. If Customs did not already know that a taxpayer was using a listed scheme, it will investigate and issue an assessment to secure the revenue. If disclosure of a scheme is under the hallmarks part of the measure, Customs will consider ways in which to challenge it at an early stage. Officers will be given guidance on how to challenge such schemes as they discover them at other businesses and if they are judged, on the basis of information received and further study, to be avoidance.

Michael Jack (Conservative, Fylde)

I would be grateful if the Economic Secretary, in the light of the adjudicatory processes that he has just described, would explain whether there will be some mechanism for referring a case to the European Court, bearing in mind the sixth VAT

directive, if a person involved in a scheme objects to some of the interpretations and subsequent actions taken by Customs?

John Healey (Labour, Wentworth)

Nothing in clause 19 or schedule 2 changes the existing entitlements and routes for challenging the judgments and assessments that Customs makes as a result of such investigations.

We do not take this step lightly. The way in which the provisions operate and the way in which Customs manages the information that is disclosed will be closely monitored. I will keep a close eye on that and also on the results over the next year or so. In summary, the provisions are necessary. They are a proportionate response to aggressive VAT avoidance and are likely to be effective. They will enable Customs swiftly to identify, and if necessary tackle contrived and abusive VAT avoidance schemes. On that basis, I commend the clause to the Committee.

Howard Flight (Conservative, Arundel and South Downs)

We have considerable reservations about the proposals, but I begin by saying that we had thought that the Government would have grouped this arrangement with the later part of the Bill dealing with Inland Revenue disclosure arrangements, as there are several common points of principle as well as practice. In the main, we will raise our concerns under that part of the Bill.

On Second Reading, I said that hon. Members needed to see the regulations and understand how they would work in order to discuss such arrangements. I learned a little earlier this afternoon that the regulations are available, but I have not received a copy. I would be grateful if the Economic Secretary would ensure that in future at least those regulations pertaining to the Inland Revenue part of the Bill are sent in good time.

The Economic Secretary will no doubt be aware of some fairly detailed criticisms that have been raised by the Institute of Chartered Accountants. I shall refer to some of them, but there are too many to raise them all in this debate. I hope that the Government will be able to deal with them, because it seems that many of the proposals have been cobbled together rather speedily and without the necessary thinking through of all the ramifications of the drafting.

My right hon. and hon. Friends made the essential point, which is that in some senses this mechanism, which I fear will not work, is a sloppy way of not doing the job that ought to be done—that is, the correct drafting of VAT law and the eager investigation by Customs and the Revenue of the avoidance schemes that are knocking around.

Sitting suspended for a Division in the House.

On resuming—

Howard Flight (Conservative, Arundel and South Downs)

I made the point that the better approach might have been to have a thorough review of VAT law to address the problem of its misuse in significant

avoidance schemes, and for Customs and Excise and the Revenue to have conducted their own investigation of the sorts of schemes being used.

We have some practical concerns. The US recently introduced similar measures to those under discussion and the UK introduced money laundering legislation, both of which led to massive reporting. Everybody was naturally motivated to protect themselves, the costs of assessing those reports was huge and, at the end of the day, there was pretty low output for all that effort. We fear that the measures under discussion will follow that course, and our amendments are specifically designed to reduce that.

We are particularly concerned about the duty to disclose which applies to businesses with a turnover of £10 million or more. As drafted, the Bill states that businesses have a duty to pay the maximum VAT that they can and, if they do not, they should disclose it as an avoidance scheme. The conceptual problem emanates from a failure when drafting by the Government and Customs to produce any definition of unacceptable VAT avoidance. We must clarify what constitutes acceptable VAT and tax planning and what does not. The definition of unacceptable tax avoidance in new schedule 11A is so widely drawn as to mean that anything not maximising VAT costs to a business could be deemed unacceptable avoidance.

Customs stated in its November 2002 paper that

''every business has the right to plan its tax affairs efficiently, so that they do not incur higher tax liabilities and increase costs more than they need to.''

Schedule 2 contradicts that statement.

I return to the extent of the problem to which the Economic Secretary referred earlier. There has not been any adequate research or evidence assembled. The VAT gap, which we would all like to see a lot less of, was 16.1 per cent. in 2002-03, and it was down to 12.8 per cent. in 2003-04. It may have reduced substantially further as the gap included losses for error, insolvency and companies in administration. However, as Members know, VAT revenues in 2003-04 exceeded Government estimates by £3.1 billion. The reasons have not been satisfactorily analysed or explained. As far as I can see, the figure of £3 billion comes from a paper produced by Customs and Excise in 2002, headed ''Measuring indirect tax losses''. It was based on a 10-fold multiple of an assessment of what businesses were spending on legal fees for tax avoidance schemes. The key point is that there needs to be better evidence and better chronicling of the extent of tax loss through such avoidance schemes.

There has also been no quantification of the cost to the taxpayer of the measures that are being introduced, which could lead to significant additional costs for businesses—as well, I suspect, as significant unallowed for and unestimated costs to Customs and Excise. A quantification should be published so that the methodology can be the subject of informed examination. The proposals should also target those areas where there is a demonstrable risk of loss of revenues.

There is also the fundamental issue of whether the measures will be effective. The Committee will be aware that the carousel proposals, which go back to the Finance Act 2002, are already subject to European Court of Justice scrutiny. As I understand it, the sixth directive states that member states may impose other obligations deemed necessary for the correct collection of tax, and for the prevention of evasion; but Community law principles require that such measures are proportionate to the objective to be achieved and do not go beyond what is necessary to achieve that objective.

The Government's stated purpose is to increase transparency in the tax system. The new rules will provide Customs and Excise with information about tax avoidance schemes, and about those using them, much earlier than at present, which will enable swifter and more effective investigation and, when appropriate, counteraction. They are intended as a disincentive to the creation and use of contrived and elaborate schemes, whose main purpose is to avoid tax.

The question is whether the legislation goes beyond what is allowed by the sixth directive and the principle of proportionality, and whether the United Kingdom can require disclosure relating to measures that avoid but do not evade tax—the directive distinguishes between the two. Arguably, specific disclosure of transactions that avoid but do not evade tax can be required only under the catch-all of the correct collection of tax.

The disclosure duty is extended to arrangements that, in the view of the Treasury, would be unlikely to be entered into unless the main purpose or one of the main purposes was the obtaining of a tax advantage. Although one can see that the Treasury needs that wide power to designate schemes, it must be exercised reasonably or with some power of appeal. That could be presumed under the principle of natural justice, but it would be preferable to have a clear line of appeal or challenge.

The 15 per cent. penalty would appear to bite even if it is subsequently agreed with Customs and Excise or determined by the courts that, as a matter of law, the tax planning scheme is legitimate. That does not seem proportionate, and the penalty might better be limited to cases where unlawful schemes lead to a loss of tax.

From a constitutional perspective, such legislation may require its authority to be in the form of a derogation under article 27 EC of the sixth VAT directive. That would certainly seem more appropriate as within an internal market additional obligations should be kept to a minimum and at least be subject to the scrutiny and approval of the Commission. I would ask the Minister whether the Government will be going for such a derogation or whether they will be running the likely risk of the proposals being raised with the European Court of Justice.

The definition of the key term in new schedule 11A of what constitutes a tax advantage is so widely drawn that all sorts of perfectly normal transactions could be included. For example, leasing cars, as opposed to purchasing them outright, reduces VAT costs. There is

an exemption when a business leases goods rather than buys them, which defers VAT and so reduces the VAT liability. Rent may be pre-paid to achieve a discount, but that also reduces the VAT paid.

The Institute of Chartered Accountants has raised a number of other important practical points. How will businesses be informed about designated schemes and when will they know when their reference numbers have been allocated? When will they be deemed to have been so informed? Would it not be sensible for Customs and Excise to advise up front on schemes that it considers to be legally ineffective in order to save everybody a great deal of time?

Clarification will be needed on reporting requirements when a scheme that a business intends to notify is slightly different from one for which a reference number already exists. Surely everything that is notified to Customs should be placed on the public record. The process should be transparent. Turnover definitions need considering and potentially changing to avoid discrimination against other EU member states, depending on the different ways of arriving at turnover figures. Surely there should be an exclusion of one-off input supplies.

There is particular concern about notifiable schemes and in that area uncertainty is added to all the difficulties that I have already raised. The two principal areas of uncertainty relate to the concept of advantages associated with designated schemes and the subsequent calculation of any tax advantage. A VAT advantage may be obtained by opting to tax a building to be used by a fully taxable lessee. Is that disclosable by a business that exceeds the turnover limits? A purchaser of that property can exercise the option to tax in order to benefit from transfer-of-going-concern relief. Is that disclosable? It is perfectly legitimate and common accepted practice. What about the business that restructures its operations—for example to make up for the deficiency of capital allowances for non-UK property investors or to obtain a direct tax deduction—in a way that results in an unanticipated VAT efficiency? Is that disclosable? It would appear to us that, under the rules as currently drafted, provided that turnover limits are exceeded, that is the case.

I fear that the provisions will be like the money-laundering provisions, and that they will not achieve their objectives, but will cause a bureaucratic snowing under of the authorities. The Institute of Chartered Accounts commented as recently as this March on the December 2003 Customs draft proposals, which are relatively similar to what is in the Bill:

''We are doubtful whether the proposals will achieve their derived aim. If they do, then it is likely that the rate at which businesses move certain functions offshore will increase. If they do not achieve their intended objectives then they will serve only to add another layer to VAT complexity that businesses have to face.''

Finally, I will cheekily ask the Economic Secretary whether I am correct in understanding that the VAT avoidance scheme under which people can structure the acquisition of a head lease in a property as a transfer of a going concern through a newly created subsidy, thus treating the property acquisition as a

business acquisition rather than as a property, will not be covered by these arrangements, but will be subject to a separate regulation. As the Economic Secretary knows, the Labour party is alleged to have used this avoidance scheme to save £1 million of VAT in March 2002 when it acquired its new old Queen street property.

Our amendments are relatively limited and modest, and they are designed to bring back proportionality. We fear that the clause is a sledgehammer. It will be less than effective, and it will add considerable costs and burdens to Customs and Excise. The Minister talked of the fruits of the clause being some £200 million per annum. If £3 billion per annum of VAT has been lost in avoidance schemes, what has happened to the £2.8 billion difference? Surely what is wanted is better VAT law?

John Butterfill (Conservative, Bournemouth West)

I must clarify my earlier ruling. We are debating clause 19, and we are having a de facto schedule 2 stand part debate, so we will debate only the amendments to schedule 2 when we come to that point. Members who are storing up a debate on schedule 2 stand part should include that in their observations on clause 19.

David Laws (Liberal Democrat, Yeovil)

Thank you for that guidance, Sir John. We support the stated objective of Government policy in this area. The Economic Secretary spoke of abusive tax avoidance schemes and schemes that involved contrivance and artificiality, from which we can understand the Government's intent. However, he will be aware that the framing of clause 19 and schedule 2 has caused considerable concern. Business and the tax profession are sceptical about whether the existing legislation is simple enough to be implemented clearly and whether it will impose a significant burden on them.

I am aware that the Minister published the draft order a couple of days ago, which was helpful. I saw it only yesterday, which did not give us much time to ask tax practitioners' advice about whether it helps to clarify some of the outstanding issues. I understand that the order is a list of some of the designated schemes. The feedback that we have received so far is that it is helpful but does not deal with the major outstanding concerns that the hon. Member for Arundel and South Downs set out very clearly. I will not repeat all of them, because that is not necessary. There are, however, several salient issues, to which I would be grateful for a response from the Minister. A very important issue is the legal status of the clause, to which the shadow Chief Secretary referred. There is real concern about whether the Government's measures comply with the EC sixth VAT directive, and whether the Government could be challenged on the basis that that directive deals with tax evasion but that this legislation appears to deal only with tax avoidance. It would be interesting to know from the Minister whether advice has been taken on that point, and whether the Government are confident that they will not fall foul of that element of the sixth VAT directive or whether they believe that they will need a

derogation from article 27 of the directive, as the hon. Member for Arundel and South Downs suggested might be necessary.

I understand that there is also a question about the penalties that the Government propose to implement in relation to the sixth VAT directive, which would be 15 per cent. of the tax in question. Several tax practitioners argue that such penalties could be regarded as excessive in situations in which the non-disclosed scheme would have been perfectly lawful. In the past, the European Court of Justice has taken a dim view of such types of penalties, particularly when the Treasury determines the arrangements and its view plays a large part in determining whether the tax advantage will be granted. There is a major issue of EC legislation in the area and it would be helpful to know whether the Government have taken any definitive advice, not only from their own advisers but from EU VAT advisers. Do they think that there will be any problems?

All the tax representative bodies have set out their concerns about clause 19 and schedule 2. They all relate to the breadth of the Government's proposals to catch all sorts of tax avoidance schemes, which the Government cannot anticipate at this point in time. The introduction to the paper from the Institute of Chartered Accountants in England and Wales sets out the salient concerns particularly clearly. More than anything, the tax practitioners are concerned that the proposals are so widely drawn that virtually anything that appears to reduce VAT liabilities could be regarded as avoidance, even if it is quite legitimate. One cannot imagine from the Economic Secretary's comments that he means to capture those who carry out such activities. It is reassuring to have those comments, but one wonders what the safeguards will be in practice.

The Economic Secretary may be aware that alongside the examples raised by the shadow Chief Secretary to the Treasury, the Institute of Indirect Taxation raised the example of a transaction where a company outsources its IT function. That outsourcing would be a transaction or arrangement that potentially gives a tax advantage: the outsourcing fees attract input VAT whereas the previously paid salaries did not. It is quite possible that the company would not have gone ahead with such a transaction if there were no particular tax advantage. I am sure that the Government do not intend to catch such schemes in the legislation, but the Economic Secretary's reassurance would be useful. Perhaps more importantly, it would be useful to have his reassurance that there will be mechanisms to avoid such schemes being caught.

The shadow Chief Secretary also referred to the lack of evidence supplied by the Government to show that the cost of implementing the tax avoidance legislation will be proportionate to the benefits. It would be interesting to know whether the Government have undertaken any assessment of the compliance and administration costs involved. The greater the

uncertainty about the clarity of the legislation, the greater the administrative burden that will fall on firms and tax practitioners. There is also concern that parliamentary scrutiny will potentially be curbed because of the scope for secondary legislation, and that the Treasury will push through wider schemes in the future without the opportunity for as much parliamentary scrutiny as there would be if the issues were debated on the Floor of the House.

Finally, there is the issue of what appeal rights will be available for individuals and companies whose schemes would be caught under clause 19 and schedule 2. That is obviously a major concern, and it is linked to the issue of whether the penalty payments that would already have been imposed by the Treasury would be recoverable by the entity in question where an unlawful scheme has led to a loss of tax. Those are serious concerns. Although we understand why the Government are introducing the legislation—to avoid the loss of tax that may result, which could be spent in far better ways or used to reduce other elements of tax—we are concerned that its scope is so wide that it is creating uncertainty and concern among practitioners and businesses, and that it would involve additional costs for them.

Michael Jack (Conservative, Fylde)

I rise simply to underscore the concerns already made about the breadth of the clause and the difficulties with some of the definitions. I am worried, and I want to draw together the concerns. What information will be available to help taxpayers to understand the difference between the normal activities of VAT payers who reduce the amount of VAT that they remit and those of people who deliberately enter into schemes that, although legitimate, are marketable?

Some of the boundaries between saying, ''If we look at it this way and you pay VAT that way, then you will pay a little less,'' and the aggressive and abusive scheme that the Economic Secretary put to us earlier will be difficult to define. We read in schedule 2, under designation by order of avoidance schemes:

''If it appears to the Treasury—''.

That is a very general phrase; we are not given much clue as to what kind of activity is envisaged. The Economic Secretary said that this is not a fishing expedition. However, that strikes me as giving carte blanche to examine any VAT activity, call it in and turn it over. Many practitioners and companies will simply use the failsafe route: they will bombard the Treasury, the commissioners and anybody else they think appropriate with details of what they are doing. We shall have the same problem that we have with money laundering; we will not have enough people to see the wood for the trees. It will be interesting to hear from the Economic Secretary how the Treasury will cope if that occurs.

One of the points raised by the Chartered Institute of Taxation—in paragraph 21 of its submission to hon. Members—is that:

''The new Schedule 11 paragraph 2 can be summarised by stating that any ''scheme'' gives rise to a ''tax advantage'' if a taxpayer pays less (or recovers more tax) ''than would otherwise be the case''. It is not entirely clear what the comparator should be in the context of this provision.''

I do not propose to go through further representations, because they parallel those that have been recorded. However, that quote demonstrates the clear need of all who either pay VAT or receive advice on it for advice about where the boundaries between legitimate activity and abusive activity will be drawn, and for help with some of the definitions in what amounts to new territory for some of them.

John Healey (Labour, Wentworth)

I appreciate the comments and the tone in which they have been put. This is in some ways new territory, as the right hon. Member for Fylde says.

On regulations, I, like the Paymaster General, accept that, whenever we can, we should provide substantive draft statutory instruments for debate in Standing Committee as part of our consideration of the Finance Bill. With regard to the main supporting statutory instrument to this set of provisions, this is our first day of sittings and I remember signing the Dear John and Sir John letters on Tuesday night. My office faxed copies of the draft to members of the Committee and I am sorry if it did not reach the hon. Member for Arundel and South Downs. It remains our declared intent to put the main substantive draft statutory instruments before the Committee for consideration alongside the relevant clauses.

I understand that a degree of uncertainty might exist among the professional bodies. Like Committee members, we have received representations and detailed comments from the Chartered Institute of Taxation, which the hon. Gentleman quoted, and the Institute of Chartered Accountants, which the hon. Member for Yeovil mentioned. We take them seriously and will take them into account in drawing up the draft orders that will derive from the legislation, and in planning to put into operation the Customs response to the powers.

If Committee members have not yet examined the draft statutory instrument that we have circulated, I encourage them to do so. To be clear, it is a statutory instrument for affirmative resolution, so there will be substantive debate in the House on the measure. It covers the schemes that we are proposing to list. It also covers the hallmarks that are, in our judgment, associated with, or characteristic of, avoidance schemes. I hope that studying the draft will help to settle some of the questions about specific schemes that the hon. Member for Arundel and South Downs raised and give the right hon. Member for Fylde some reassurance. I hope that it will be clear to him that the schemes listed are, and will be, clearly identified. The

importance of that, of course, is that a business will be able to assess whether it is adopting a listed scheme and do so with sufficient certainty in the future.

The hon. Member for Arundel and South Downs mentioned, as I did, the strategy for tackling indirect tax which we published in 2002. He suggested that our assessment of the cost of avoidance of between £2.5 billion and £3 billion per year is unreliable. I simply say to him that the UK remains the only country that makes a serious and systematic attempt to assess the scale of the indirect tax gaps. Ironically, that measure will help us to make a better and more reliable assessment of such avoidance in the future. It will also, as I said, help us to reduce, but not remove, the scale of that VAT gap, and I agree with the hon. Gentleman that we need better VAT law. That is certainly something that we strive for, not always successfully, in the Treasury and in Customs.

Both the hon. Members for Yeovil and for Arundel and South Downs asked whether the provisions in clause 19 and schedule 2 go beyond the sixth directive. They do not. The notification obligations are legitimate, proportionate and comply with Community law.

Michael Jack (Conservative, Fylde)

Have there been any discussions about the proposal with the Commission?

John Healey (Labour, Wentworth)

As the right hon. Gentleman would expect, we make the normal checks and assessments of that in making such a firm statement and declaration. The obligations that we propose in clause 19 and schedule 2 are proportionate in terms of a response to the loss of revenue that is arising from not identifying businesses that have implemented VAT avoidance schemes and from identifying them too late.

In so far as the additional burdens imposed on the taxpayer are concerned—the hon. Member for Yeovil was concerned about this—I reassure the Committee that article 22(8) of the sixth directive authorises such obligations. The proposed de minimis thresholds will limit the impact of those additional obligations and assist in supporting their proportionality.

Finally, I mention the specific point about how businesses will know if the penalty will be imposed. If, as part of its normal assurance work, Customs finds that a business has not disclosed or notified as it should, Customs will issue an assessment for the penalty. It will do so, as normal, by sending a notice in writing by post. The business will then have, as at present, the right to appeal against the imposition of the penalty and against its amount.

On that basis, I hope that the Committee will give the clause and, when we come to it, the schedule, its support.

Question put and agreed to.

Clause 19 ordered to stand part of the Bill.

Further consideration adjourned.—[Jim Fitzpatrick.]

Adjourned accordingly at eleven minutes to Six o'clock till Tuesday 11 May at half-past Nine o'clock.