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)

Public Bill Committee, 13 May 2004.

Standing Committee A

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)

Quentin Davies (Conservative, Grantham and Stamford)

On a point of order, Mr. McWilliam. I realise that you were not in the Committee this morning, but at the end of our proceedings on clause 51 I raised a point with the Economic Secretary about the interpretation of subsection (4). He replied after a moment's hesitation that the matter had been dealt with on Tuesday, when I was not in the Committee, and had I been present, I would have known about it. He got a slight cheer from some of his supporters—I do not know whether it was a cheer of relief—for having said that and for so elegantly disposing of the problem. However, I made use of the lunch hour to check the Hansard for Tuesday and can find no explanation of the point that I raised this morning. It was not even raised, let alone answered.

Not only was the Committee bluffed, if I may use parliamentary language on this occasion, but the public were deprived of an explanation. Nobody, not even the Economic Secretary, denied that the point was worthy of explanation; indeed, his reply this morning indicated that it needed elucidation. I wonder whether it might be in order for him to revert to that point and give me an explanation, which I am sure exists and which needs to be set out publicly if those who send us to Parliament are to understand that aspect of the Bill.

John McWilliam (Labour, Blaydon)

I am constrained by Standing Orders, which tell me that the Committee has disposed of clause 51. However, it has not been disposed of finally; that is, there will be an opportunity to raise points about it at other stages that the Bill will go through, such as Report, and in another place. However, that opportunity does not exist here and now.Clause 52 Amendment of enactments that operate by reference to accounting practice

Clause 52 - Amendment of enactments that operate by reference to accounting practice

Column Number: 176Schedule 10 - Schedule 10 - Amendment of enactments that operate by reference to accounting practice

John McWilliam (Labour, Blaydon)

I apologise for putting the question on clause 52 as I did earlier. I had a good lunch—not a particularly alcoholic one.

We now come to schedule 10. The question is that schedule 10 be the Tenth schedule to the Bill.

John Healey (Labour, Wentworth)

I am glad to hear that you had a good lunch, Mr. McWilliam. I trust that other members of the Committee did as well. Half my KitKat is outside in the Corridor.

At the risk of testing your patience, Mr. McWilliam, may I just double back and say to the hon. Member for Grantham and Stamford (Mr. Davies) that I tried to explain this morning that clause 51(4), which he was querying, contains standard wording in respect of transfer pricing? Transfer pricing was dealt with in a previous part of the Bill. As he said, the detail did not come up because the wording is an established standard. However, if it will help him, I will write with the detailed explanation that he seeks of that standard provision and formula.

Quentin Davies (Conservative, Grantham and Stamford)

I am grateful to the Economic Secretary for that assurance and for his acknowledgment that I was right in saying that the matter had not been raised on Tuesday. We have set the record straight.

However, as a matter of principle, the fact that wording is standard should not mean that it is not open to challenge during annual passage of the Finance Bill. The whole purpose of this exercise, which you, Mr. McWilliam, and many colleagues who are more distinguished than I spend many hours on every summer, is to expose to public scrutiny and debate the Taxes Acts. As it is the only opportunity that we have to do so, it would be contrary to the role of Parliament if the notion that is implicit in what the Economic Secretary just said were to become accepted in this Committee— that, because a piece of wording is standard, it is no longer open to challenge or even subject to explanation by the Government.

John McWilliam (Labour, Blaydon)

Order. That intervention was a bit long. The hon. Gentleman knows well that we are not on clause 51, because we have dealt with it. It is a matter for the members of this Committee, or at later stages, the Members of either House, to seek to amend any legislation in any way they like, provided that it is in order in the context of the legislation.

John Healey (Labour, Wentworth)

If I may, I will address schedule 10, which accompanies clause 52. The schedule makes a number of detailed technical changes to the legislation about the tax treatment of debt and securities—the loan relationships legislation—and about derivative contracts, intangible fixed assets and currency accounting. The hon. Member for Arundel and South Downs (Mr. Flight) raised a number of points on the clause and, as he said, they probably need to be the subject of detailed discussion with the Revenue.

Indeed, the points that he raised are already the subject of discussion with the Revenue under the consultation arrangements that I explained earlier.

John McWilliam (Labour, Blaydon)

Order. I think that we may have been sidetracked a bit by the point of order. Although the Economic Secretary is addressing schedule 10, he is supposed to be moving amendment No. 90. We cannot deal with the schedule until we have dealt with the amendment.

John Healey (Labour, Wentworth)

I beg to move amendment No. 90, in

schedule 10, page 317, line 1, leave out '93A(3)' and insert '93(3)'.

The amendment corrects a typographical error. I trust that the Committee will accept it.

Amendment agreed to.

Question proposed, That this schedule, as amended, be the Tenth schedule to the Bill.

John Healey (Labour, Wentworth)

The points that the hon. Member for Arundel and South Downs raised are already being discussed with the Revenue, but I suspect that he would appreciate a general indication of their merit. He asked whether credits and debits were the wrong way round in the relevant area of the schedule. He and his advisers may well have a point. We will consider the matter more closely and see whether it can be dealt with in guidance, or whether an amendment will be necessary.

The hon. Gentleman asked what would happen if a company with a dollar functional currency incurred a trading loss. The short answer is that the loss would be carried forward in dollars. That point has already been explained to the Law Society. I reassure the hon. Gentleman that the points that he raised will be covered in discussions with the Revenue.

The schedule is a long one and is being discussed in detail with the industry and the professional bodies. In summary, it modernises the interaction of tax and accounting. It allows the concepts and methods of accounting used in the international accounting standards to be followed for tax. It retains existing rules where they perform a useful function, and where IAS may give inappropriate results compared with current tax treatments.

John Burnett (Liberal Democrat, Torridge and West Devon)

This is just a small cosmetic point. If debits and credits are wrongly referred to in the draft, we should make sure that we get the primary legislation right, rather than dealing with that superficially in the guidance. We should be taxed not by Revenue fiat but in accordance with the law.

John Healey (Labour, Wentworth)

I give way to the hon. Member for Arundel and South Downs.

Howard Flight (Conservative, Arundel and South Downs)

I was going to make the same point in a different way. To the extent that there are places where the drafting needs changing, I hope that the Economic Secretary will confirm that the Government will

propose amendments and not simply rely on guidance notes for the interpretation of basic law that may be wrong.

John Healey (Labour, Wentworth)

The hon. Gentleman may not have heard me correctly. I explained that we will consider whether the matter can be dealt with in guidance or whether an amendment is necessary. If it is necessary, we will certainly introduce an amendment. I place just as high a premium on getting the primary legislation right as he does.

Finally, the schedule smoothes the transition from existing UK generally accepted accounting practice to IAS, and the revision of UK GAAP based on IAS. The schedule is welcomed by business. It reduces compliance costs by allowing accounting practices to be followed more closely for tax. I commend it to the Committee.

John McWilliam (Labour, Blaydon)

Order. I will just let hon. Members know my intentions. If there is a vote, I will suspend the Committee for 15 minutes. In any event, I intend to suspend the Committee at or about 5 o'clock, because although members of the Committee may drift in and out, we must have consideration for members of staff—[Interruption.] Good Lord, I could have got burnt at the stake for that in the middle ages.

Sitting suspended for a Division in the House.

On resuming—

John McWilliam (Labour, Blaydon)

I suppose I should say, belatedly, that gentlemen may remove their jackets. As I was saying, before I was rudely interrupted, it is my intention to suspend the Committee for half an hour at 5 o'clock or thereabouts, because the staff will need a break, and then resume again.

Question put and agreed to.

Schedule 10, as amended, agreed to.

Clause 53 - Treatment of expenditure on research and development

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 98, in

clause 53, page 59, line 15, at end insert

'such that deductions are available as and when the expenditure is incurred.'.

Mr. McWilliam, I welcome you to the Chair this afternoon. It has been assumed that the purpose of clause 53 is to put relief for research and development on an incurred basis, which was contemplated and referred to in the Budget press release. However, it is not entirely apparent that that purpose is achieved by the clause, which disapplies intangible fixed assets legislation. There seems to be an underlying assumption in the clause that, in the absence of that legislation, a deduction is obtained on an incurred

basis, which is not necessarily always the case. The Minister will be aware of the case of Gallagher v. Jones.

Outside the intangible fixed asset rules, generally accepted accepting practice is imposed, as distinct from the incurred basis. As a result of clause 50, which we debated earlier, GAAP will be in respect of IAS in companies that prepare accounts in accordance with IAS. It seems that clause 53 will not achieve anything. Our amendment is designed to address that problem and is consistent with some of the points raised by the Chartered Institute of Taxation. It goes further, and states that it is unsatisfactory to reintroduce the traditional tax capital revenue distinction, which is well known to be imprecise in its effects, in clause 53. While that may be the case, the distinction is currently ingrained in British tax law, and the Economic Secretary may comment on the difficulties faced in applying the test, but we still feel that an amendment is necessary.

The related point has been made as to whether the intention is to preserve existing UK GAAP in the timing of deductions for research and development expenditure, or whether such deductions should be made on an incurred basis, the effects of which would not be the same, but are not that different.

John Healey (Labour, Wentworth)

In trying to deal with the points that the hon. Gentleman raised, I shall, for the benefit of the Committee, briefly discuss the aim of the clause.

The current tax rules for research and development allow relief only when expenditure is taken to the profit and loss account. When it is added to the cost of an asset, relief is given over a period of years only as the expenditure is written off. The clause permits an immediate deduction to revenue expenditure on research and development where the expenditure is added to the cost of an asset and not taken to the profit and loss account. By ''immediate deduction'', I mean a deduction that is given when the expenditure has occurred. That is the effect of clause 53, and it needs no extra words.

The extra words proposed in the amendment may cut across some of the necessary conditions for a research and development deduction. By turning what is a permissive rule into a mandatory one, the amendment would bypass the conditions for obtaining relief: the expenditure must be related to a trade, must be directly undertaken by the trader or be on his behalf, and should not include payments for R and D rights.

The arguments advanced by the CIOT are based on a complete misunderstanding of the clause. The intangibles asset regime is not supplied in the clause. We are introducing the change because companies adopting international accounting standards will find that some expenditure that they could have taken to the profit and loss account under UK accounting rules would have to be added to the cost of the asset instead. That would delay the deduction and any consequent claim for enhanced expenditure under the R and D tax relief regimes.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am quite interested in what the Economic Secretary says. Is he saying that there is considerable flexibility about the relief, and it will either be available against the profit and loss account or, at the taxpayer's election, the expenditure, including past expenditure, can be added to the cost of the asset, so that the taxpayer, whether corporate or unincorporated, can take whatever suits them best?

John Healey (Labour, Wentworth)

Essentially, the answer is yes—either but not both. We could have considered changing the tax rules only for those companies using IAS, but we have taken a broad, simplifying approach instead to allow all companies the deduction when the expenditure is incurred.

In answer to the point made by the hon. Member for Arundel and South Downs also, that approach allows companies using UK GAAP to choose whether to add expenditure to an asset or take it to profit and loss on the basis of what is best for their accounting purposes. They will not be driven to account in one way because of the tax treatment. In no case will there be a delay in granting R and D tax relief, including the payable credits, to companies carrying out R and D. That is one of several improvements to the R and D rules in the Bill. It supports our aim of increasing productivity through the growth of the knowledge economy, and I hope that it commends itself to the Committee.

Howard Flight (Conservative, Arundel and South Downs)

I find it slightly strange that the accountancy profession and not just the CIOT did not understand the clause as cleanly as the Economic Secretary has described it. I was concerned that seeking always to put relief on an incurred basis would always apply. I think that he is saying that that will be the case and that the worries pertaining to Gallagher v. Jones are redundant, even if the drafting of the clause is not hugely clear. On the basis of what he has said, and our point having been addressed and put into the record, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Quentin Davies (Conservative, Grantham and Stamford)

I make two brief points. I ask for clarification from the Economic Secretary, and I hope that the culture of reasonable answers to reasonable questions has returned. The first question relates to the phrase,

''if not of a capital nature''

in the first line of the clause, which begins:

''Expenditure by a company on research and development, if not of a capital nature''—

I now summarise—does not prevent it from being the subject of a tax offset by virtue of the fact that it is expended in connection with the creation of an intangible asset. Surely, if the expenditure is part of the creation of an intangible asset, it is being capitalised. It does not matter if the asset that is being created is fixed or intangible, it is still an asset, so it is capitalised. So, what is the meaning of the phrase,

''if not of a capital nature''?

It seems to be a contradiction in terms. No doubt there is a simple explanation, but we should have it before we proceed.

I am a little concerned about the phrase, ''writing down'', in subsection (3). I suspect that it is absolutely fine and that the Minister will say that everything is all right, but we know that tax cases can turn on the use of language in a context such as this. I am concerned about a situation in which a company spends money on R and D and creates an intangible asset; for example, a patent or a piece of software that it capitalises.

I welcome the thrust and the purpose of the clause, which is an excellent tax reform. It means that it does not matter whether the expenditure is used to create an intangible asset or written off as a current expense in the year—the tax treatment is the same. That is splendid; it is the way it should be. If the intangible asset is then depreciated over its useful life, as would be the normal situation, it is clear that one cannot get a double deduction, which is also a purpose of the clause, and I agree with that, too.

However, what happens if the intangible asset being created is not written off in the normal way and depreciated over its useful life but written off immediately—in other words, written off rather than written down? For example, the company may spend the money, create the patent or the software, decide the next year that the technology is useless and have to write the whole thing off, so it is not depreciated in the normal way; it is written off in the following financial period. In such circumstances, I take it that the purpose of the clause is that equally there would then be a full offset, but for tax purposes the amount already written off in terms of the expenditure as part of the creation of the asset would not be deductible; only the balance would be deductible, which is perfectly reasonable. However, I want to ensure that the balance would be fully deductible in that year in which the asset is written off and I would like the Minister's assurance that that would indeed take place, in case the point subsequently arises in the courts.

John Healey (Labour, Wentworth)

I welcome the hon. Gentleman's description of this as an excellent tax reform. He is right: in general, the tax relief for R and D has been a significant success. It is very popular and has played an increasingly important role in helping to support the competitiveness and development of British business. It is costing the Government about £500 million a year, but it is money that we are ready and well prepared to invest in the development of a much greater R and D capacity, particularly in the private sector. The measure is of particular value to manufacturing because 80 per cent. of private sector R and D is carried out in this country by the manufacturing sector. Some of my hon. Friends who represent traditional manufacturing areas strongly support the measure and are interested in the reform.

The reform that we are considering is part of a process: if we can make the operation of the R and D tax credits work more effectively, and respond to suggestions from industry about how it works, we will. It is an example of the sort of reform that has been urged on us by British manufacturing companies. Rolls-Royce, in particular, has an interest in the clause.

I will answer the two specific points raised by the hon. Member for Grantham and Stamford. First, on the question whether something is not of a capital nature, for tax purposes the expenditure is not capital, even if it is capitalised. [Interruption.] As the hon. Member for Arundel and South Downs acknowledges from a sedentary position, it is an instance where tax and accounting have a different concept of capital. That is probably the explanation that the hon. Member for Grantham and Stamford was looking for.

Quentin Davies (Conservative, Grantham and Stamford)

The Minister has given me the explanation that I was anticipating. Does he agree that it is one more example of the principle that I set out this morning: that unfortunately tax law and tax lore, the whole culture of tax, diverge more and more from economic reality, and that that is a worrying state of affairs? Should not it be the concern of responsible Ministers, whichever party is in power—it should not be a matter of party politics—to try to do something about it and bridge that gap, or narrow it?

John Healey (Labour, Wentworth)

The hon. Gentleman tempts me, but there is no great difference between us on the matter. In general, the Government are committed to the principle of trying to harmonise the definitions and operation of accounting practices and to make them as suitable as possible for tax purposes. There are instances in the Bill, some of which we have already discussed, that take us in that direction. There may be occasions and purposes where, for tax reasons, that is not possible, but the general principle is one that I agree with.

John Burnett (Liberal Democrat, Torridge and West Devon)

It may be the case that the tax accounting system—this may be the case under the clause, too—is more generous to taxpayers than the strict accounting system that the hon. Member for Grantham and Stamford is referring to. The relief provides flexibility, giving the opportunity to see exactly what the value of the asset is going to be—whether it will be worthless or otherwise—and, in subsequent years, it gives the taxpayer an opportunity to choose whether to capitalise the expenditure or write it off. That is not a bad thing.

John Healey (Labour, Wentworth)

The hon. Gentleman re-emphasises a point that I made earlier, which is that the provisions give taxpayers greater choice, allowing them to decide how to act according to what is best for their accounting purposes.

The hon. Member for Grantham and Stamford raised a concern about writing down. He asked whether in-year write-off would be allowed. If write-off is allowed when it is incurred, then it may not again

be written off. I hope that that is the answer that he was looking for. On that basis, I commend the clause to the Committee.

Quentin Davies (Conservative, Grantham and Stamford)

The Economic Secretary said that if it is allowed at all, it is obvious that the amount that has already been allowed is deducted. We accept that. I want to make it absolutely clear that the tax affected is exactly the same regardless of whether the subsequent deduction takes place as a total write-off of the asset—because the asset is deemed to be worthless—or as a normal depreciation. That is the assurance that I want.

John Healey (Labour, Wentworth)

Indeed, yes.

Question put and agreed to.

Clause 53 ordered to stand part of the Bill.

John McWilliam (Labour, Blaydon)

I noticed the secretary of a Member passing a piece of paper to that Member a few minutes ago. As the Member did not leave the Committee, that is not allowed and should not happen.Clause 54 Trading profits etc. from securities: taxation of amounts taken to reserves

Clause 54 - Trading profits etc. from securities: taxation of amounts taken to reserves

Howard Flight (Conservative, Arundel and South Downs)

The CIOT has expressed concern that the clause does not appear to have been discussed in earlier consultations and that there is an assumption that where items are marked ''to market'' on the balance sheet with any revaluation surplus taken to reserves, the revaluation surplus should, none the less, be taxable. The CIOT's concern is that that rule will introduce an unwanted element of volatility into the computation of taxable profits. Although it may be that few companies are likely to be affected, it suggests that that is an unwarrantedly hasty implementation of a somewhat dubious principle. I think that we appreciate the points that it makes. This is essentially a matter of tax policy, but I would welcome the Minister's comments thereon.

Quentin Davies (Conservative, Grantham and Stamford)

The clause reflects the two points that I made this morning, which seem to run through the Bill as a theme. One is that the Revenue's intention is to have its cake and eat it. If there is a change in accounting rules, as there is with the introduction of IAS, and that change provides a benefit for the taxpayer, as it would were it not for this clause, the Revenue and the Government are proposing to make sure that the taxable profit is still judged on the previous GAAP basis. Once again, the position is ''heads you lose, tails I win''.

The other principle to which I referred this morning, and which I think is a bad principle that runs through the Bill, is that as accounting principles progress and better reflect economic reality—I think that we all agree that not only is that the purpose of IAS, but it is one that is largely achieved—the gap between that reality and the view of reality taken by tax law increases, because tax law gets left behind and we still

have tax applied on the previous GAAP basis. That will be the effect of the clause; it is retrograde and problematic.

I wish to ask a few practical questions. Again, we should be concerned with the theory, coherence, fairness and justice of tax—I make no apology for raising such issues—but we should also be concerned with the immediate practical impact of it. The Economic Secretary may tell me that I have misunderstood the proposal, but from henceforth and despite the introduction of IAS, if a company as defined in subsection (1) has assets that are available for sale, even if they are not regarded by the company as there for the purpose of trading, any profit on them will be taxed as if they were trading assets. The Economic Secretary indicates through his body language that I have misunderstood the effect of the proposal.

A question arises as to the possible perverse impact of such a definition of assets available for sale. I can think of all sorts of examples in which a company as defined in subsection (1) may have assets available for sale that are significant in relation to its net worth, or at least to its profits. Any taxation of changes in the value of such assets would be a major contributor to the volatility of the company's profits, as my hon. Friend the shadow Chief Secretary explained.

Let me give the Economic Secretary some examples. I hope that he will tell me that my concerns are unfounded. If a bank takes a strategic stake in another bank—a quotable security, an asset that would be marked ''to market'' or held at the lowest of cost or market—and there is a profit, would that profit be taxed? The profit would be considerable if the strategic stake were in a bank with which the tax-paying bank had a strong relationship. Perhaps the strategic stake is accumulated for the purpose of a long-term relationship that is relatively stable; however, the value of the shares is not stable at all. Perhaps the stake is accumulated for the purpose of making an eventual acquisition. The taxpayer would not regard it as a trading asset. Would a strategic stake of that kind be caught? If so, the effect that my hon. Friend outlined would undoubtedly occur. There would be considerable volatility of profits and exposure of the tax-paying bank to substantial amounts of tax as a result of a structural investment. That seems completely contrary to the traditions of our tax law and certainly very bad for business generally.

Let us say that a bank were faced with the prospect of making a debt-equity swap. Should we discourage banks from making such swaps? Suppose the bank had a customer that ran into considerable trouble and the only way of saving it, rather than throwing it into bankruptcy and putting thousands of people out of work—I do not suppose that the Government would really want that to happen—would be to take over part of the equity of the company through a debt-equity swap. Is it the Government's intention that the tax law should prevent such a transaction from taking place?

Howard Flight (Conservative, Arundel and South Downs)

The thought crosses my mind that the same would be true in reverse. Selling an asset sold when the booking to reserve is negative may result in an entirely questionable loss to be offset.

Quentin Davies (Conservative, Grantham and Stamford)

My hon. Friend shows what a good Chief Secretary he will be. He is already concerned about the revenues of the Inland Revenue and, with his usual expertise and insight, immediately puts his finger on a potential loss of revenue that the Government apparently have not even considered. That was a very valuable contribution to our debate. I hope that his question will be subsumed in mine and we shall get an answer to that from the Economic Secretary if we get an answer to nothing else.

Debt equities concern Governments, too; they have been a feature of the restructuring of the debt of third-world countries. I thought that there was a consensus in the House in favour of restructuring the debt of over-indebted, poor and developing countries. If bank X holds several billion dollars' worth of the loans of a highly indebted country and is prepared to swap them into shares in privatised utilities in those countries, why should we introduce into our tax system a disincentive or barrier to that? We should be told whether the clause introduces such a disincentive.

Another aspect of the matter is securitisation. Subsection (4)(b) makes it clear that loan relationships are excluded. Therefore, if a bank has advanced a loan, that has nothing to do with this issue. However, it might decide to securitise the loan, and to hold some of the resulting loan in the form of debt securities and sell others of those debt securities to other institutions. Would it, by dint of that transformation, change against its interests or, as my hon. Friend suggested, in its interests and against the interests of the Inland Revenue? Would it change the tax nature, the tax treatment or the taxability of what is actually the same economic reality—an underlying debt asset, a debt instrument held by a bank? That would be perverse, and certainly contrary to any economic rationality. I should like an assurance that that is not the effect of the clause.

Perhaps my last two points are connected. There is often a considerable secondary market in the debt of countries that have a dubious credit rating, the value of whose debt is volatile. Take Argentina or Brazil: it is amazing how the value of their debt goes up and down. Sometimes it is quoted at a discount of 50 per cent. or 30 per cent., and sometimes it is 20 per cent. It can go all over the place. Substantial amounts of apparent trading profit could be created if there were to be the slightly perverse implementation of the clause which I fear, and in such circumstances considerable differences could be made to the tax position of a bank as a result of securitisation.

Those are some of the questions that arise from the clause, and I should be grateful for a sober, calm, reasoned, informative and helpful response.

John Healey (Labour, Wentworth)

May I say at the outset, just to reassure hon. Members, that before it was brought to the Committee the clause was consulted on extensively, particularly through the Inland Revenue website. Generally, it has been accepted.

It applies to companies and others who deal in shares either as their main business—such as stock exchange market makers—or as part of a larger financial business, say banking or insurance. Under UK GAAP the profit from such share dealing appears in the company's profit and loss account. That means that it is included in the computation of profits from the company's business. Under IAS 39 and the proposed UK standard based on it, that treatment is likely to continue. However, it might be possible for some companies to put such profits in what is called the statement of changes in equity. Under current tax law, those profits might escape taxation or be deferred. The clause ensures that it does not matter whether the profits—or losses—are shown in the profit and loss or another account. The profits will still be taxed, and any losses allowed, when they are shown in the accounts.

The hon. Member for Grantham and Stamford raised three points. The first concerned available-for-sale assets. Under both IAS and revised UK GAAP, such assets will be subject to fair value. That means that unrealised changes in value will be shown in the accounts, and will be taxed or relieved as they arise.

In general there is no reason to stop that happening. Fluctuations in profit can be ironed out by the ability of a company to carry back and carry forward losses. The question whether something should be done when companies move to fair value accounting can really be answered only when we see, come 1 January 2005, whether the transitional adjustment is significant.

Quentin Davies (Conservative, Grantham and Stamford)

Am I right in summarising the answer that the Minister is giving me thus: the danger that I have outlined exists; a strategic stake such as I described would indeed be taxable on the relevant basis; but he intends to wait to see how great the effect will be in practice before deciding whether he needs to do something about it?

John Healey (Labour, Wentworth)

That is basically a fair summary. I was making the point about being able to make a clearer judgment after 1 January. I remind the Committee that the schedule contains a power to make regulations with respect to the case in question, if they are needed. We shall monitor the situation closely.

The hon. Members for Grantham and Stamford and for Arundel and South Downs suggested, as I believe the Chartered Institute of Taxation did, that what is happening might introduce an unwarranted and unwanted element of volatility into the computation of taxable profits. In our judgment that is not so. The rule ensures that a company dealing in shares will not be able to escape taxation by designating its portfolio as available-for-sale assets under international accounting standards or the revised UK GAAP. It applies only to those companies

that are already taxed on a fair-value or mark-to-market basis in respect of their portfolios of shares. It is difficult to see how it introduces a new element of volatility.

Clause 54 does not cover or relate to debt equity swaps, securitisations or other loans.

Quentin Davies (Conservative, Grantham and Stamford)

It is reassuring, in a sense, to hear that the second and third of my examples—debt equity swaps and securitisation—will not result in any difference in the taxation regime applied to the relevant institutions. However, I must ask why not. It seems to me that they are assets available for sale. What assurance do we have that there will indeed not be a change in the taxable profit?

John Healey (Labour, Wentworth)

The short answer is that the clause is drafted in such a way that it is not relevant.

Question put and agreed to.

Clause 54 ordered to stand part of the Bill.

Clause 55 - Duty of company to give notice of coming within charge to corporation tax

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 110, in

clause 55, page 61, line 1, leave out 'three' and insert 'six'.

As hon. Members will know, the clause is about new companies being required to notify the Revenue within three months of their first accounting period. In the past, if companies have not been sent a corporation tax return, they have been obliged to notify the Revenue within 12 months of the end of their accounting period. That could amount to 24 months after the start of the business.

In practice, the Revenue has traditionally found out from the registrar of companies when new companies have formed. Each new company has been sent a form to complete, requesting basic tax information and other details such as when the company started and who the directors are. It was not a statutory return and could be ignored without penalty, but if it was ignored the Revenue's practice was to assume, provisionally, that the first accounting period would run for 12 months from the date of incorporation, and a return would be required accordingly.

By way of a description of the changes under the clause, the Revenue's Budget notice document ''Protecting Revenues'' stated that

''the requirement for newly incorporated businesses to disclose basic tax information will be strengthened''.

What is actually introduced is an obligation for the companies to tell the Revenue in writing that an accounting period has commenced because they have come within corporation tax for the first time, and notification has to be given within three months of commencement. The obligation is underpinned by the threat of a penalty of up to £300 for initial failure and £60 per day for continued failure. As with other comparable penalties, they can be avoided with a reasonable excuse, but ignorance is not one of them.

The provision is reasonably straightforward, although unincorporated associations and clubs that are subject to corporation tax have been excluded. Will the Economic Secretary confirm that the arrangements also apply to dormant companies? Are they related to incorporation or to coming within the charge? In either event, the provision needs significant publicity as many people buy companies via the internet and may be unaware of it. There should be some form of reminder issued automatically.

The Chartered Institute of Taxation, which we are inclined to support, believes that the notice period of three months within which an entity must give notice of falling within the charge to corporation tax is rather short, and we see no reason why the requirement to notify should not be replaced with a requirement to file or with a longer period. We would expect tax legislation to impose less stringent requirements on companies moving into the corporation tax system on the grounds that they are naturally less familiar with the rules and with their obligations.

It is tempting to think that the Treasury has seen another nice little earning opportunity and that, as with self-employed notification where the £100 penalty has been quite a successful source of money because of people not meeting the timing requirement, the same thinking is that the provision may be a not unworthwhile source of income.

Amendment No. 110 would extends the time for giving notice to six months.

Michael Jack (Conservative, Fylde)

In following the argument made by my hon. Friend the Member for Arundel and South Downs, will the Economic Secretary clarify one or two points when he replies? There is at least a verbal inconsistency between the explanatory notes on the clause and the way in which it is drafted.

The amendment would provide a longer period for a company to respond to its obligations. The clause says that the company

''must give notice to the Board of the beginning of its first accountancy period''.

It seems clear that when a company comes into existence it must identify itself to the Revenue. The explanatory notes state:

''It places a statutory obligation on companies to notify the Board within 3 months of when they first come within the scope of''

corporation tax.

If one had an enterprise and the business plan said that for the first 12 months the company was going to make a loss, it would not be unreasonable for the owners to say, ''Well, we won't incur a corporation tax liability, so there's no need for us to notify anybody of our existence.'' It becomes relevant only if the loss accumulates and carries over into a second accounting or tax period and the business moves into profit. It then becomes liable for payment of corporation tax on the normal basis, but equally to utilise its losses. The company then engages with the mechanism of corporation tax.

To avoid doubt, if someone believes that their business will not have a real world liability, does the clause means that they will have to pay corporation tax to the Revenue, because that is what the explanatory notes suggest?

John Healey (Labour, Wentworth)

I shall ask the hon. Gentleman to consider withdrawing the amendment, which relates to a narrow point, and ask the Committee to reject it if he chooses not to do so.

The amendment would frustrate the object of the new requirement in the clause for early notification and the provision of information to the Inland Revenue, so that the Revenue can ensure compliance with a wide range of company obligations and offer timely help and support.

The hon. Member for Arundel and South Downs and the right hon. Member for Fylde (Mr. Jack) made a couple of broader points and asked a couple of broader questions. I should say that the clause is intended to ensure that companies that come within the charge to corporation tax comply with their obligations from the outset. A company will usually come within the charge to corporation tax when it starts a business.

Details of newly active companies are important for tax compliance purposes at the point at which they come within the charge to corporation tax. Equally importantly, the new requirement will enable the Revenue to make earlier contact with companies to offer help and support. I trust that all members of the Committee accept that helping businesses to get it right is much better than having to put things right later if they go wrong.

The clause therefore places a statutory obligation on companies to notify the Revenue within three months of their first coming within the charge to corporation tax, and within three months of coming back into the charge to corporation tax following a period of dormancy. I will answer the question asked by the hon. Member for Arundel and South Downs on dormancy in a moment.

The obligation requires a company to provide details of the company, its activities and directors. Precise details of the prescribed information are contained in the draft regulations that I circulated to the Committee earlier this week, which were also published yesterday on the Inland Revenue's website.

Howard Flight (Conservative, Arundel and South Downs)

To some extent, I like things to be cut and dried, but it strikes me that reasonably naive new entrepreneurs will not have a clue about this unless they are all well organised by their accountants. Three months also go very quickly. If I were in that situation, I would certainly find it extremely annoying—as annoying, say, as receiving a parking ticket when one is a minute or so late—to find that I had been given a fine that was building up. It is good Germanic order to have this period of three months, but the number of companies that may not comply out of ignorance may be rather more than one might expect.

John Healey (Labour, Wentworth)

All newly incorporated UK companies will receive information about the requirement soon after they set up. They will also be able to obtain advice and support from the Revenue. We will publicise the provision very widely, and will certainly consider any need for additional publicity as the provisions bed in. To summarise the more general points, it is important that the Revenue can ensure compliance with tax obligations by all businesses, including companies, right from the start of their business lives.

These arrangements would apply only to companies with a corporation tax accounting period, not to dormant companies. They therefore apply only to new companies or to companies that have restarted in business after a period of dormancy.

The amendment would create an asymmetry in the obligation to notify between the self-employed and incorporated businesses. It would be three months for the former and six months for the latter. The need for early notification is the same for all kinds of business, irrespective of their legal form. It would be an odd result if the same business were to be subject to a three-month requirement while self-employed, but to a six-month requirement if it incorporated.

The three-month time limit is not unreasonable. The first accounting period begins when a company comes within the charge to corporation tax, by which time all the information required will almost always be available. In the rare case when a company may have some doubt about the time of the start of its first accounting period, measures of protection are built into the clause, in particular the reasonable excuse provisions. Those prevent the levy of a penalty where a company has made a genuine mistake and rectified it at the earliest possible opportunity. It is unlikely that a company faced with such uncertainty would be any better off after six months rather than three.

On that basis, I hope that the hon. Member for Arundel and South Downs will consider withdrawing the amendment, and if not I shall have to ask my hon. Friends to oppose him.

Howard Flight (Conservative, Arundel and South Downs)

As the Bill more than removes the major fiscal incentive given to small business incorporation, I see that there is an argument basically that the notice period should be the same for the self-employed as for businesses. I trust that the Revenue's guidelines will be to act in a reasonably mature and helpful manner and not to start whopping people with fines in an aggressive fashion. I also make the point that there could be a nice little earner in the measure, notwithstanding that. It is debatable. I can see the symmetry with the self-employed and I do not think that we want to raise the issue as a major point. I trust that the Revenue's guidelines will be to act in a reasonable fashion, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 111, in

clause 55, page 61, line 21, at end insert—

'(6A) In paragraph 2 of Schedule 18 to the Finance Act 1998 (duty to give notice of chargeability) insert—

''(5) This paragraph shall not apply where notice has already been given under section 55(1) of the Finance Act 2004 (duty of company to give notice of coming within charge to corporation tax) for the accounting period.''.'.

This follows from what I have talked about in relation to amendment No. 110. It is more practical and removes the existing obligation to notify chargeability to corporation tax where notice has already been given for the same accounting period.

John Healey (Labour, Wentworth)

What is at issue is the interaction between two separate and distinct obligations: first, the obligation under schedule 18 to the Finance Act 1998 to notify chargeability to tax as an annual obligation, which applies only if the company has not received a notice requiring a company tax return, and secondly, the obligation introduced by the new clause, which is not annual and is triggered only when a company first comes within the charge to corporation tax or comes back into charge after dormancy.

There are important differences between the separate requirements to notify. One applies only in the first year of starting a business; the other is an annual and recurring obligation. One does not depend on any liability to corporation tax; the other depends on such a liability. In one case, it is important to get things right from the start for both companies and the Inland Revenue; in the other, it only applies where there has been a failure by a company.

The amendment would switch off the failure to notify chargeability obligation for the first accounting period of a company starting in business where the clause 55 obligation has already been satisfied. The amendment adds little of value and our concern is that it could prove to be counter-productive. Switching off paragraph 2 would, in a small but possibly significant number of cases, reward non-compliance. It would pay companies deliberately to drop off the radar, as it were, when notifying under clause 55; only when the Revenue catches up with the company would it have to pay tax and interest, but it would not receive a penalty for an attempt deliberately to evade.

In practice, a compliant company that gave notice within three months of first coming within the charge to corporation tax, or within three months of coming back into charge following a period of dormancy, would also have notified its chargeability to tax for that accounting period, as required under schedule 18. There is no need to provide for that explicitly in the clause. I therefore ask the hon. Gentleman to consider withdrawing the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I do not want to be a pedant—perhaps the amendment could be improved—but the intent is rather the other way round. During the first year, companies giving three months' notice under the clause should not have to repeat the obligation of notice under schedule 18. As the Minister pointed out, it would be relevant only during that first year; but they would have to continue complying with the requirements of schedule 18. It seems that bureaucracy should be aimed at removing double reporting of the same information.

I repeat that we may have got it drafted the wrong way round, but it seems that the new arrangements for that first year should give the Revenue all it needs, albeit for different purposes, and schedule 18 should come afterwards. Would the Minister comment on that?

John Healey (Labour, Wentworth)

I believe that I have dealt with the points made by the hon. Gentleman. The two obligations have slightly different purposes. We believe that the existing obligation under schedule 18 is fine for the purpose for which it was designed, but the obligation under clause 55 serves a different purpose, which would be undermined by the amendment. I shall therefore encourage my hon. Friends to vote against it should the hon. Gentleman choose to press it.

Howard Flight (Conservative, Arundel and South Downs)

I hope that the Revenue can sort it out. It is clearly silly to have to give the same information in year one under two different parts of the law; it is the same information. That is what the amendment is about. It is not a huge point and it is not worth voting on, but it is the other way round from what the Minister argued. I have made my point. Perhaps the Revenue can get its act in order, so that companies will receive one request that meets both schedule 18 and the new requirements. Otherwise, it will be a classic example of the bureaucratic incompetence that is sweeping our society that people will have to send the same information twice under separate provisions. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Rob Marris (Labour, Wolverhampton South West)

I seek your guidance, Mr. McWilliam. Clause 55 has provision for prescribed regulations. A draft of those regulations has been circulated. Is it in order for me to make brief comments on those draft regulations?

John McWilliam (Labour, Blaydon)

It is in order.

Rob Marris (Labour, Wolverhampton South West)

Following the point made by the hon. Member for Arundel and South Downs, paragraph 2(3) of the draft statutory instrument seems to require a company to provide information that would already have been supplied to Companies House on the incorporation of the company. It seems to be a duplication. Can the Minister explain whether it is for data protection reasons that Companies House is not allowed to pass even such basic information across to the Inland Revenue?

John Healey (Labour, Wentworth)

If my hon. Friend will allow me, I shall look into the point and write to him. In general, the purpose of circulating regulations in draft is to give Committee members—and others, as the consultation is much wider—the chance to pick up and query any points in just that fashion.

Question put and agreed to.

Clause 55 ordered to stand part of the Bill.

Clause 56Relief for community amateur sports clubs

Relief for community amateur sports clubs

John Burnett (Liberal Democrat, Torridge and West Devon)

It would be churlish not to welcome the clause, because it is a relaxation for the clubs.

John McWilliam (Labour, Blaydon)

Order. I declare to the Committee that I am a life member of Blaydon rugby club, but that is not covered by the clause.

John Burnett (Liberal Democrat, Torridge and West Devon)

You jog my memory, Mr. McWilliam, because I am president of a number of such clubs in my constituency in Bideford, Great Torrington, Okehampton and Tavistock, and other places.

Steve Pound (Labour, Ealing North)

I am not sure whether I should address this question to the hon. Gentleman or to you, Mr. McWilliam. I am the patron of Hanwell Town football club, a darts team and the sadly now redundant Viaduct public house marbles team. [Hon. Members: ''He's lost his marbles.''] I have, in fact, lost my marbles team, rather than my marbles. Should not we all declare the amateur sports clubs with which we are associated?

John McWilliam (Labour, Blaydon)

Order. Actually, that is a matter for me. If any hon. Member has a declarable interest—that is, membership of a sports club—covered by the clause, they do need to declare it. I advise the hon. Gentleman that the marbles team is okay, since it is redundant.

John Burnett (Liberal Democrat, Torridge and West Devon)

As usual, Mr. McWilliam, you bring an element of sobriety to these events that is welcome.

It would be churlish not to welcome the clause. Amateur clubs are important to all our constituencies. I wonder whether the Economic Secretary could clarify one or two matters. The clause proposes to increase the turnover exemptions from £15,000 to £30,000, and I wonder how much that will cost the Inland Revenue. Sporting clubs in my constituency with bars will find it pretty easy to exceed the £30,000 limit. It is a matter of interest to me exactly what the cost of that turnover measure will be.

One of the other reliefs in the clause relates to bank and building society interest. It repeats the bank and building society interest exemption. I take it—and I hope the Economic Secretary will agree—that bank and building society interest for such community amateur sports clubs is relieved of corporation tax and all other taxation. I would like to know—I should know this but I am afraid I do not—whether community amateur sports clubs can invest in gross interest yielding investments. Would all the interest from those investments be free of tax? I return to where I started. It is a welcome provision, but I wonder whether the Economic Secretary would be good enough to respond to the two specific points that I have raised.

Richard Bacon (Conservative, South Norfolk)

I, too, have an interest to declare. I am not sure whether sheep judging qualifies as a competitive sport, but two

Sundays ago, I became a member of the Diss and District Stockmen's club and was able to pay my subscription with my winnings from the sheep judging category. Regrettably, I did not win breeding ewes, but came top in lambs for slaughter. It certainly seemed competitive at the time.

Like the hon. Member for Torridge and West Devon, I welcome this clause. It seems churlish not to. It expands the exemptions introduced by the Finance Act 2002. I want to amplify the point that he made. As the threshold is based on turnover not profit, it would be easy for any club—particularly one running a bar—to reach it. Indeed, when the hon. Member for Ealing, North (Mr. Pound) was running the London School of Economics students union, I think that he and his friends in the Labour club would have reached the turnover threshold in propping up the bar in a matter of weeks.

Steve Pound (Labour, Ealing North)

We were a not-for-profit company, but we did not start out that way. We believed that profit was normally explicable in terms of surplus value, and something to be abjured.

Richard Bacon (Conservative, South Norfolk)

As ever I am grateful for the elucidation.

John Burnett (Liberal Democrat, Torridge and West Devon)

Of course, they would have had terrible problems if they were a trading company. The hon. Gentleman will be aware of the principle of Sharkey v. Werner, appropriating trading stock to own use.

Richard Bacon (Conservative, South Norfolk)

I will not try your patience by exploring Sharkey and Werner any further, Mr. McWilliam, but—

John McWilliam (Labour, Blaydon)

Order. If it was sunny, I would take the class outside in the sunshine, but it is not.

Richard Bacon (Conservative, South Norfolk)

It does not surprise me that something that the hon. Member for Ealing, North was involved in turned out not to be profitable.

The fact is that community amateur sports clubs—while they are plainly not, in all cases, charities, in many cases are, by definition, not charities, and in some cases are not eligible to apply to be charities—are widely understood to be essentially philanthropic ventures that play a vital role in promoting health and exercise and have other benefits such as social inclusion. They are not, in essence, about money raising for withdrawal by members or shareholders but money raising for the purpose of continuing their activities.

In that context, although the clause raises the threshold, given that it is a turnover threshold it does not look quite so generous. If experience shows that the threshold is too low for trading purposes for organisations that are genuinely amateur clubs, will the Government consider raising that threshold to £50,000? That would align it with the limit that is generally available to charities in respect of non-primary purpose trading.

Secondly, I ask about take-up. The hon. Member for Torridge and West Devon referred earlier to the potential cost to the Treasury. As at the end of November 2003, only 529 clubs—out of an estimated 150,000 such clubs in the UK—had registered as

community amateur sports clubs. I understand that the Central Council for Physical Recreation is responsible for promoting the scheme. One might doubt how successful it has been in doing that. One of the tax partners at Deloitte and Touche put it thus:

''It is a problem of getting the message from the Gordon Brown level to the level of Joe Smith who runs the village cricket club.''

Will the Economic Secretary expand on how the Government plan to improve the take-up of what is, in essence, a worthwhile scheme?

John Healey (Labour, Wentworth)

This has been a useful short debate. I think that it has demonstrated how wide are the associations that members of the Committee have with local and community sports organisations and how wide the range is of the sports that they are associated with.

Andrew Tyrie (Conservative, Chichester)

What does the Economic Secretary have to declare?

John Healey (Labour, Wentworth)

From tomorrow evening, I hope to be forging a long association with Upper Haugh cricket club, where I hope that our nine-year-old son will take up the opportunity to start training and possibly even succeed in making the under-11 team for future matches.

Clause 56 extends the relief from corporation tax on trading and property income enjoyed by sports clubs registered with the Inland Revenue as community amateur sports clubs. In the Finance Act 2002, we introduced a broad package of reliefs for CASCs similar to the reliefs available to charities. It included gift aid on donations by individuals and corporation tax reliefs for the clubs themselves. The package was widely welcomed.

We continue to seek to improve the scheme where it is sensible to do so and last year introduced legislation to provide mandatory business rates relief of 80 per cent. for registered CASCs in England and Wales from 1 April 2004.

With this measure, we are doubling the corporation tax thresholds for registered CASCs. That means that CASCs will be exempt from corporation tax on profits derived from trading if their trading turnover is under £30,000 a year, and from corporation tax on profits derived from property if their gross property income is under £20,000.

The hon. Member for Torridge and West Devon asked about the cost—

John Burnett (Liberal Democrat, Torridge and West Devon)

Forgone.

John Healey (Labour, Wentworth)

I understand the question. The hon. Gentleman asked about cost of the way in which we score tax. In our judgment, the cost counts as negligible—it is under £5 million a year. He expressed concern that the trading exemption may be too low. That probably will not be the case. Much of the income of most clubs is derived from their members. It lacks the required level of commerciality to be treated as trading income. The exemption threshold applies only to income derived from non-members and income derived from members that has a commercial nature.

If the clubs in the hon. Gentleman's area have bar takings that push them comfortably over the £30,000 threshold, he has some successful and very vibrant local clubs, and I am very pleased to hear that, but generally CASCs do not have such bar takings.

John Burnett (Liberal Democrat, Torridge and West Devon)

By a quirk of the law on charities, which might be being remedied in the draft Charities Bill—I am ashamed to say that I have not got my head around the draft Charities Bill yet—sporting clubs, as the Economic Secretary knows, are not charities. If the cost is negligible in terms of public expenditure and tax forgone, will he consider being even more generous in next year's Budget? In order to ensure that they flourish, many clubs have bars and ancillary activities. Of course we are talking about trading income, if that is what people want to call it, but that money must be ploughed back into the club for the benefit of the community. The institutions are very worthy and I hope that the Economic Secretary will give the matter consideration for next year.

John Healey (Labour, Wentworth)

I am very happy to take that as an early 2005 Budget representation. If the hon. Member for South Norfolk (Mr. Bacon) will allow me, I will treat his argument for a £50,000 threshold in exactly the same way.

The hon. Gentleman asked for an update on the process of registration for CASCs. As far as anyone can estimate, there are probably more than 100,000 local sports clubs and associations. We estimate that between 30,000 and 40,000 are eligible for registration as CASCs. To date, 3,960 have applied for registration.

Under the clause, clubs are not treated as trading when their main activity is providing sporting and ancillary facilities to their members. Therefore, that income will not be taken into account in establishing whether a club has a trading income above the £30,000 threshold.

The majority of registered CASCs will pay no corporation tax, and will be removed from the annual cycle of completing tax returns. The clause is another valuable measure for grass-roots sport. I am pleased to say that it has backing on both sides of the House, and I commend it to the Committee.

John Burnett (Liberal Democrat, Torridge and West Devon)

I hoped that the Minister would answer my question about bank and building society interest. I should like to know—I apologise to the Committee, as I should already know this—whether CASCs can invest in gross interest-yielding investments in banks and building societies, and whether, if they do, all such bank and building society interest would escape taxation.

John Healey (Labour, Wentworth)

If the hon. Gentleman will allow me to do so, I will consider that point more closely and write to him with the relevant information.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am entirely satisfied with that response. Presumably, as with all such matters, any such letter will be circulated to all members of the Committee.

Question put and agreed to.

Clause 56 ordered to stand part of the Bill.

Clause 78 ordered to stand part of the Bill.

Schedule 13 - Childcare and childcare vouchers

Dawn Primarolo (Labour, Bristol South)

I beg to move amendment No. 91, in

schedule 13, page 328, line 32, after 'under' insert

'Part 1 or 2 of'.

Good afternoon, Mr. McWilliam. I apologise for the fact that the amendment is needed to make a correction to the Bill. Since the Bill was published, we have identified the need to alter a reference in proposed new section 318 to regulations on approved child care in Scotland. The amendment provides a clearer definition and makes a correct cross-reference to the relevant Act in Scotland. It does not change the substance of the Bill. I commend it to the Committee, and apologise that it needs to be made.

Mark Prisk (Conservative, Hertford and Stortford)

It is clear that the Government amendments merely correct minor errors. We therefore have no objections to them.

Amendment agreed to.

Dawn Primarolo (Labour, Bristol South)

I beg to move amendment No. 92, in

schedule 13, page 331, line 20, leave out from 'an' to second 'the' in line 21 and insert 'organisation accredited under'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss Government amendments Nos. 93 and 94.

Dawn Primarolo (Labour, Bristol South)

As before, the amendments correct minor drafting errors that have come to light since the Bill was published. One relates to a reference to regulations on approved child care in Wales, and the other two amend incorrect references to tax credit regulations. They are important for the sake of correctness, completeness and ease of understanding. I repeat my apology, and commend the amendments to the Committee.

Amendment agreed to.

Amendments made: No. 93, in

schedule 13, page 331, line 40, at end insert

(d) by a child care provider approved by an organisation accredited under the Tax Credit (New Category of Child Care Provider) Regulations 1999.'.

No. 94, in

schedule 13, page 332, line 20, leave out from 'an' to 'the' in line 21 and insert 'organisation accredited under'.—[Dawn Primarolo.]

Question proposed, That this schedule, as amended, be the Thirteenth schedule to the Bill.

Mark Prisk (Conservative, Hertford and Stortford)

I formally welcome you to the Chair, Mr. McWilliam.

The schedule is the result of a review by the Government of the way in which the tax system can affect the provision of employer-assisted child care. According to the Government's original documentation, the aim of the review was to

''widen the current workplace nurseries tax exemption, simplifying the requirements that employers need to meet to qualify for the exemption and offering a better incentive for employers to support a wider range of good quality childcare provision.''

That same document correctly concludes that, therefore, the

''requirement for the employer to have management responsibility of the childcare facility would be removed.''

That is a clear statement of intention by the Government.

Those are worthy aims. Unfortunately I am not clear, nor are most experts, that the schedule will achieve those aims. In particular, the employer's responsibilities for management and funding will be retained, not removed, unless the costs are under the new £50-a-week ceiling.

The Daycare Trust estimates that average child care costs are around £128 per child per week. Most provision for most parents will reach the £50 cap and will not be eligible. In a representation to the Committee, the Chartered Institute of Taxation says of that aspect of the provision:

''This is very disappointing. The new provisions will do nothing to increase workplace nursery provision. Employers can now choose between the existing burdensome workplace nursery rules (which require significant involvement in financing and management) and new rules which are subject to the £50 cap. Neither is attractive.''

That feature of the schedule, the original aims of which were entirely worthy, is a real letdown. I am sure that all Committee members recognise the advantage of good child care provision in the workplace. Given the understandably proud boasts of the Government about the review, many, in particular working families who were trying to make best use of the provision at work, feel let down. I hope that the Paymaster General will confirm the actual amounts of money that are involved. By all accounts, the figures involved are small—at most, according to the Red Book, £20 million in the first full year.

The second disappointment of the schedule is that it does not include the self-employed. Why have they been omitted? I cannot believe that we cannot find some means of assisting working parents who happen to be self-employed, yet there is no provision in the schedule. After IR35, section 660A and the latest turn around in clause 28 for the self-employed, I am sure that the Paymaster General will understand that many self-employed people will feel let down by the omission. Conversations and reviews continue. Is the Revenue preparing separate provisions that would

inform the debate? The Opposition would look favourably on any Government proposals to help self-employed parents, so perhaps she can enlighten us on the issue.

Without such provision for the self-employed—for unincorporated enterprises—the schedule could give firms a further incentive to incorporate. That would run entirely counter to the spirit and the letter of clause 28, which deals with the difficulty into which the Government got themselves over incorporated and unincorporated firms. There is a danger that some small enterprises will look at the provisions and say, ''If we attract working parents into our enterprise and we remain unincorporated, we'll be at a significant disadvantage to incorporated businesses.'' So there is a genuine problem, and I hope that the Paymaster General can respond positively. If the self-employed were considered as part of a wider review, that would send a positive message—incorporation should, as the Government have said, and we have always felt, be for business rather than tax reasons. I hope that she will understand and respond.

Essentially, schedule 13 has two aspects. First, it revises section 318 of the Income Tax (Earnings and Pensions) Act 2003, which deals with the rules and management of company creches. Secondly, it deals with the introduction of the £50 exemption for child care vouchers, under which there would be no tax or national insurance liability.

Earlier, I mentioned the disappointment at the retention of employers' management and funding responsibilities over the £50 limit, but that was clearly not the intention at the beginning of the consultations. The words that I quoted at the start made it clear that the Government wanted to remove those responsibilities, so why the change? That is the question to which I seek an answer.

The change will impose a new administrative burden. Let me briefly enlighten the Committee as to how that will work in practice. We are talking about a weekly limit, so employers will have to track child care provision weekly. If one is in a market sector in which there is a reasonably high turnover of staff and one finds that staffing levels have dropped or increased, one's ability to stick to the limit of £50 per week per parent—it is not per child—could suddenly change, and the danger is that one could go over the threshold. For a couple of months or, indeed, only six weeks in the year, businesses may find that they have exceeded the weekly limit, so tax and national insurance would apply. Of course, the sums involved may be small, but the Government have rightly and continually said that any tax and national insurance liability should be identified by the business. Given that the limit is not annual or quarterly, but weekly, there could be quite an administrative burden.

Dawn Primarolo (Labour, Bristol South)

I think that the hon. Gentleman is going the wrong way. Businesses do not have to do the tracking; that is the whole point of the voucher going directly to the child care provider. The requirement in the Bill is there, so that businesses do not have to

undertake all that tracking. The £50 is simply passed over. In the consultation, business said that it wanted us to do precisely that to avoid the issues that the hon. Gentleman is outlining, but which do not arise in the Bill.

Mark Prisk (Conservative, Hertford and Stortford)

I am interested by that because it mirrors the Revenue's advice to businesses at its open day. That view is understandable until one stops and thinks about the implications. The valuation problem to which the Paymaster General has just referred does not remove the compliance burden. Rather, it moves it from the company to the child care provider. If the provider finds that their costs have gone over the £50 limit, tax and national insurance will still be a liability for them, and they will need to ensure that they comply with the law. The employer's compliance burden is simply shifting to the provider. I see the Paymaster General shaking her heard vigorously. I hope that she can set providers' minds at rest because it appears, on first reading the schedule, that, if a provider goes over the £50 threshold, they will have liability, and will be responsible for making sure that they are within the rules. I would appreciate it if she could clarify that. My initial reading of the schedule is that what she has described merely moves the problem from one group of organisations to another—that is, from the employer to the provider.

I hope that the Paymaster General will consider an alternative. I put this forward as a suggestion, not an amendment, because it is a complex, although important, point. Will she consider removing the need for the employer to manage and fund the provision, irrespective of the value placed on it, if the child care is provided by a qualified agency? If a clause were brought forward to that effect, we would certainly be willing to look upon it favourably, because we feel quite strongly that there is a danger of potential liability. Companies will rightly wish to account for that and track it, and that represents a compliance burden.

There is an anomaly in the schedule that must be borne in mind. The measure will bring more financial benefit to higher rate taxpayers than to some low-paid workers. That is because most employees take up child care provision from employers in the form a salary sacrifice or on a salary swap scheme. The best way of illustrating my point is to run through the examples.

A higher rate taxpayer would give up £29.50 in income to get £50 of vouchers. That is obviously after 40 per cent. income tax relief and 1 per cent. on national insurance. The basic rate taxpayer would give up a net £33.50 to get the taxable benefit of £50, but a low-paid worker who gets tax credit—that is obviously an important group—would have to give up the full £50 to get the £50 because of the impact on working tax credit. The danger is that the poorest will get the least. I hope that the Paymaster General will be able to tell us whether that was the Chancellor's original intention.

I have two last detailed and important points. First, the provision of child care can sometimes, although not always, incur VAT. It is unclear from the schedule whether the £50-per-week limit is inclusive of VAT. I

hope that the Paymaster General will clarify that. Secondly, there is the issue of nannies and grannies. When the announcement was made in March, there were proud statements from a number of outside organisations—I am not saying from the Government—to say that nannies would now be eligible. However, having trekked through the Government's statements, I am unclear about whether that is so. Can she clarify whether grandparents and nannies are eligible in the circumstances that we have mentioned? She will be aware of the conditions about people's homes and so on that relate to that. I am sure that the Committee would be appreciative if we could identify whether nannies and grannies are eligible.

The widening of provision for workplace child care is a worthy aim and one that we support in principle. However, it is not quite clear whether elements of the schedule will achieve that in practice. Concerns were expressed by the Chartered Institute of Taxation, which said:

''Overall, we think that the promises of tax reliefs for employer-supported childcare have not been fulfilled and we would be very surprised if, as a result of these new rules, there was any increase in the amount of childcare funded or provided by employers—there may even be a decrease because of the change to the NICs''—

the national insurance contributions—

exemption.''

It concluded:

''Dawn Primarolo, in her foreword to the Consultation Document, said that it 'represent(ed) a major step forward in the Government's strategy to increase childcare support.' We fear that it may in fact be a step backwards.''

I hope not, and I am sure that the Paymaster General will want to demonstrate that it is not. It is important that we clarify not necessarily the aims of the legislation but what is set out before us. I hope that the points that I have raised will enable us to do that.

David Laws (Liberal Democrat, Yeovil)

Good afternoon, Mr. McWilliam. I apologise for stepping over the line, or perhaps not, earlier in proceedings.

The hon. Member for Hertford and Stortford (Mr. Prisk) raised a number of practical concerns expressed by tax practitioners about clause 78 and schedule 13. As he has clearly set those concerns out, there is no need for me to repeat them in detail. The principal concerns are about the extent of the relaxation of employers' responsibilities in respect of the management and funding of workplace nursery schemes. The hon. Gentleman indicated that there is concern about whether the relaxation goes far enough.

Will the Government consider relaxing the regulations further, so that employers do not have to be involved with schemes exceeding the £50 threshold? Is it not possible for the Government to be more generous and flexible, so that employers can involve local providers and schemes without having to micro-manage the issues? I am grateful that the Paymaster General is indicating that she may comment on the matter later.

Dawn Primarolo (Labour, Bristol South)

I was indicating that employers can do that—that is exactly what the measure provides for. When I respond I will explain why that is.

David Laws (Liberal Democrat, Yeovil)

I am grateful for that clarification and await the forthcoming explanation.

The second practical issue raised by the hon. Member for Hertford and Stortford was about the much publicised suggestion that grannies could be involved in the delivery of child care. As well as causing enthusiasm among people who might have benefited, the idea raised concerns about whether such a scheme would be open to abuse. Our understanding is that under the proposed system a grandparent taking care of children could not be paid by the voucher unless the service is carried out at the grandparent's registered child care home rather than at an employee's home. We understand why the Government have introduced that restriction—one could imagine the scope for avoidance were that not so. However, several practitioners have suggested that the grandparent could be paid by vouchers if they are registered and approved for child care. That might at least provide hoops for the individual to leap through. How have the Government approached that issue? Will there be scope for greater flexibility in the future?

Having joined the hon. Member for Hertford and Stortford in raising those concerns, I shall raise some different issues about the clause and schedule. It would be helpful to understand the thinking behind the Government's proposals and what the precise cost over the next few years will be. He spoke about some of the costs that are set out in the Red Book—£20 million for 2005-06 and £25 million for 2006-07. The Government introduce many reliefs and allowances, but rarely publish the economic justification of the costs and benefits underlying policy changes. One often wonders how much economic analysis underlies the estimates, and what the assessed benefits will be from the expenditure of even a relatively small amount of taxpayers' money.

Were any assessments undertaken of how many additional people may be able to enter employment as a consequence of this assistance with child care? Is it envisaged that the assistance will make employment more accessible for people who otherwise would not enter it, or is it a perk for people with those child care responsibilities, without necessarily having any positive impact on the number of people in employment? In other words, in crude economics speak, will it be a deadweight cost to the Exchequer, or do the Treasury's estimates make any allowance for additional income that might accrue as a consequence of having more people in employment? It would be helpful to know what underlying assumption the Government have made, and whether they believe that their policy will have any impact. My concern is that quite a few of the policies to introduce new allowances and reliefs seem to have been introduced without much evident assessment of whether they will have any economic benefit over time.

Has the Paymaster General undertaken any investigation into the potential scope for legitimate tax avoidance that these proposals would create? She will know that many employers have already considered the possibility of a salary sacrifice being made in exchange for vouchers, in order to reduce tax liabilities. One complaint about that measure is that it relatively modest and moderate, and will not cost much. The Paymaster General might respond that, for many people, it might not be worth bothering with, but one can imagine that in a large company, if there were a strategy of asking employees to give up income to swap for vouchers in order to take advantage of the tax returns—

Dawn Primarolo (Labour, Bristol South)

Fifty pounds.

David Laws (Liberal Democrat, Yeovil)

The Paymaster General scoffs at her own policy, but if she does not believe that £50 is a significant tax avoidance, it is unlikely to have much impact on incentivising child care. She seems complacent about the issue, despite the fact that tax avoidance measures are supposed to be central to this Budget. I am already aware of clients approaching tax advisers to ask whether such schemes could be put in place. I alert the Paymaster General, who in so many of our debates on the Bill is telling us that we must close tax avoidance opportunities, to the fact that she may be opening one up here. I should be interested to know what allowance she has made in her costings for that, so that she does not have to come back to the Committee—if she is still dealing with the Finance Bill in three or four years—to tell us that she is closing this loophole, in the same way as the Government have had to come back to us on other issues, such as the film industry tax relief, to tell us, to their great embarrassment, that the measure has ended up costing far more than they were expecting.

If the Paymaster General can deal with the practical concerns that were clearly addressed by the hon. Member for Hertford and Stortford, she may also be able to give some time to my concerns about whether the economics behind the proposal have been thought through, and tell us clearly what the benefits are expected to be.

Rob Marris (Labour, Wolverhampton South West)

I believe that the state should make provision for childcare. In the 1970s and 1980s I spent a lot of time—I suspect that the Minister spent even more—fighting for equal pay for work of equal value, and equal pay for men and women, on the basis that people should get paid for the work that they do, not for who they are or for their personal characteristics or circumstances. The momentum of the proposals in schedule 13 is to reinforce a trend that is already happening in certain workplaces such as the NHS, of people being paid additional amounts because they have children, rather than because of the work that they do. That is iniquitous, unfair and unequal, and it goes against what I—and, I strongly suspect, the Minister—struggled for in the 1970s and 1980s. When replying to the debate, I should be grateful if the Paymaster General—to use her sexist title—could explain the momentum behind this schedule.

Dawn Primarolo (Labour, Bristol South)

I congratulate the hon. Members for Hertford and Stortford and for Yeovil (Mr. Laws) for so eloquently putting to the Committee the representations made by the Chartered Institute of Taxation and the Institute of Chartered Accountants. I commend the Inland Revenue website to both hon. Gentlemen, should they have been unable to peruse it, and suggest that they look at the consultation document and the responses to it. There they will see what was said by those organisations and what was recommended to the Government as a result.

Far from the impression given by the hon. Member for Hertford and Stortford—I am sure that it was inadvertent—of there being a swathe of disappointment outside the House about our provisions, the Government have received congratulations on the process. Indeed, I have spoken on the issue at a number of business breakfasts and on Business Link days, and employers have been requesting information on how to proceed.

It might help the Committee if I first touch on the current position and how the schedule will change it. I shall then deal with the points made by both hon. Gentlemen. Throughout the consultation, employers pressed on the Government that although they were keen to see the proposals developed they wanted it done in a way that minimised further administrative requirements and gave employers the opportunity to expand the types of provision that they could make available to their employees.

The clause is modest. The proposals are not a panacea for working parents seeking child care in order to return to part-time or full-time work. They are part of a series of provisions put in place by the Government to expand child care facilities—through child care payments and tax credits, direct investment in nursery education, Sure Start and child trust funds. Time and again, and especially now, with employment being so high and recruitment therefore being so difficult, employers need to plan and develop their businesses to take account of the child care responsibilities of their staff—both to retain staff and to recruit them.

The consultation specifically engaged employers on the basis that, although many provisions are made under the tax system, we wanted to know what else would encourage them to provide more child care support for their staff—balanced, of course, by the cost to the taxpayer, by value for money and by issues such as those raised by my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) of whether salary would be sacrificed or fairness in the work force compromised. I shall come to each of those points now as I answer hon. Members' questions.

Mr. Laws rose—

Dawn Primarolo (Labour, Bristol South)

If the hon. Gentleman has another question, he can certainly ask me it now. However, if he is about to repeat what he has asked me, perhaps he might give me a chance to answer it first.

David Laws (Liberal Democrat, Yeovil)

We understood that the proposal was only part of the Government's child care strategy. Indeed, at £20 million per year, it would be worrying if

it were the entire strategy. Can the Paymaster General clarify how many additional child care places it will create?

Dawn Primarolo (Labour, Bristol South)

With respect, the hon. Gentleman has obviously forgotten that he has already asked me that question. I was about to answer it. If I fail to answer any questions, I am sure that I shall be informed.

John McWilliam (Labour, Blaydon)

Order. It is late on a Thursday afternoon. Time is pegging on and whoever's telephone is bleeping like mad had better switch it off now. I should be obliged if members of the Committee could remember the questions that they asked before they ask them again. It might also be useful for them to listen to what is being said; they can always return to their questions.

Dawn Primarolo (Labour, Bristol South)

Thank you, Mr. McWilliam. You are right. It is late on a Thursday, and we have been in Committee for a long time.

I wish to remind members of the Committee what will be available before the schedule is enacted. Child care vouchers are fully taxable, but exempt from class 1 employers' and employees' national insurance. Vouchers can be used to pay for both informal and formal child care. The provision of a place in a workplace nursery is exempt from both tax and class 1A national insurance, and the provision of child care contracted by the employer and provided to the employee as a benefit in kind is taxable, but exempt from national insurance class 1A.

The changes made under the schedule are modest. The first will introduce a new tax exemption on child care vouchers of up to £50 a week. The employer will give the value of the vouchers to the total maximum of £50 to the child care provider for the employees. There is no need to calculate whether it is near the limit or around the limit. It will be a straight limit of £50, and it will be restricted, in line with other Government policies, to registered and approved child care. That touches on the point about nannies made by the hon. Members for Yeovil and for Hertford and Stortford. It means that any child care provider that is registered and approved by the Government will receive that. The Department for Education and Skills is about to publish regulations for consultation that will extend the areas of recognised child care providers. At present, nannies are not accepted. There is an equivalent in the tax credit legislation. When the new regulations are finally agreed, which will be soon, they will expand the approved area. The area must be approved.

If grandparents are registered as child minders, they are approved carers and, thus, registered under the scheme. If grandparents are not registered and therefore in the informal child care market, they would not be included in the provisions—they must be registered. A clear principle is involved. When the Government are providing taxpayers' money for the care of children, whether through a voucher or by way of a tax credit—direct payments of up to 70 per cent.—

it has to be clear that quality and safety are assured, even if that is, at the minimum, through a registration scheme. Despite the fact that nannies are highly qualified, where they are registered is a rather complicated matter. I hope that the DFES will be able to clarify that.

David Laws (Liberal Democrat, Yeovil)

The Paymaster General has helpfully clarified Government policy. Will the regulations allow relatives of the employee who receives the vouchers to care for an individual and carry out child minding responsibilities at the employee's home, having been properly approved and registered to do so.

Dawn Primarolo (Labour, Bristol South)

It is very difficult to give the hon. Gentleman an absolute answer, because the regulations will have to be consulted on. Ofsted is doing the registration. The issue that he raised will have to be addressed, for a number of reasons. For example, the parent might do shift work, which would make caring for the child in their own home more appropriate; or, if the child has a disability, adaptations might have been made in the home, making such care much more appropriate. At present, no registration cloak covers all such matters.

The issue was not on the political agenda of the previous Government when we were elected in 1997, so we have advanced from zero. We have provided nursery places and child tax credits, and with these provisions we are encouraging the development of child care places, be they in public sector, employer-provided or in the private sector, and whether they be playgroups, out-of-school clubs and so on. All such measures need to be appropriately regulated. The Department for Education and Skills is addressing that issue in its regulations.

The proposals also deal with the cap of class 1 national insurance exemptions on child care vouchers to £50 a week. The provisions limit that cap to formal child care, as we have explored, to match the new exemption. The full tax and national insurance exemption on workplace nursery provisions is being left in place. I shall return to that, because the hon. Member for Hertford and Stortford asked why the consultation started by saying one thing but ended up somewhere else. The proposals extend the exemption to cover any direct provision of formal child care by the employer—I think that that was the point that my hon. Friend the Member for Wolverhampton, South-West made. That would include where an employer contracts directly with a registered or approved child carer, for example, a child minding network—such organisations now exist—a commercial nursery or an after-school club. The extended exemption for employer-contracted child care would, like the vouchers, be limited to £50 a week.

I have tried to explain what we have and what the schedule moves us to. We have tried to ensure that the provision of workplace nurseries, which works well under the current exemptions, is not disturbed, and to widen the scope of the type of child care available, but limit it by cash. I shall return to how many families we

think will benefit, how much it will cost over the five years, how many employers currently provide child care vouchers and to how much we expect that to increase.

Mr. Laws rose—

Dawn Primarolo (Labour, Bristol South)

If the hon. Gentleman will bear with me, I will get to those points. I am trying to deal with this in a logical manner.

As I said, £50 is not nearly enough to cover most parents' child care costs. I am not disputing that. The Government are putting in place assistance to parents on the basis that a contribution of £50 is better than nothing at all. We also must consider the cost to the public and whether such assistance can be afforded. As the hon. Member for Hertford and Stortford said, the proposal in the consultation document was to extend the workplace nursery exemption to cover all registered and approved child care but to limit the exemption to £50 a week.

Respondents to the consultation told us that limiting the existing full exemption for employer-run provision to £50 a week would impose difficult valuations of the benefit. In some sense, that is precisely what the hon. Gentleman suggested. We took that on board, and on reflection decided to keep the original full exemption for genuine workplace nurseries and extend it to people who work at a location but who are not necessarily employed by the employer who provides the on-site nursery facility.

Employers have been saying to us that they cannot afford to provide their own workplace nursery, that it just does not make sense. They do not have enough employees who would use such a nursery, but they would like to buy places in the nursery provision of a company just up the road. We will allow them to do that. I am sure that the hon. Gentleman would agree that an exemption to cover other registered and approved child care provision is a good and sensible step forward. Each time, we look at what is already in the system and ask whether we can make it better. In a sense, he is right: we tweaked the exemption because we thought it necessary to do so.

Mark Prisk (Conservative, Hertford and Stortford)

The Paymaster General is carefully and thoroughly providing answers that will reassure those people who are affected. I sought to present a concern that was raised at the Inland Revenue open day. Although there is a diminished responsibility for employers in the valuation context, given the weekly nature of the cost and the chances of its moving up and down—it is not an annual but a weekly cost—there is a danger that the valuation, or compliance, burden has moved rather than been removed. That is the essence of the concern. I wonder whether she can clarify that point.

Dawn Primarolo (Labour, Bristol South)

Yes, I did pick up that point from the hon. Gentleman. If he will bear with me, I will get to it. I am trying to group my answers. First, I laid out current policy, then the changes that the clause makes and why. I plan to move on to discuss the £50 figure, then how much higher rate, basic rate and lower rate taxpayers will gain, and then questions such as how

many parents, how many employers and how much money. Finally, I will deal with his points, including his question about weekly assessments.

Let me deal first with why we settled on £50. It was not unreasonable for us to consider the typical level of support being paid to employees, as the voucher system was already in place but only for national insurance. It is not brand new; it is already in the system, but just for tax relief. The typical support at present is £30 to £40 a week. Perhaps hon. Gentlemen think that I have been too generous. In the consultation, some people asked for a lot more—up to £100—but the £50 a week exemption seemed sensible to encourage employers to help their staff with child care and to encourage more employees to accept such help. That is what we are trying to do.

Rob Marris (Labour, Wolverhampton South West)

I may be misreading page 333 of the Bill and the provision to insert new section 270A, but it seems that, if a non-resident parent is paying partially to maintain his child—it is usually a he—both parents could receive the £50 voucher, pursuant to line 7 of page 334. Will the Paymaster General clarify that?

Dawn Primarolo (Labour, Bristol South)

My hon. Friend is correct. Let me explain. This is an exemption in the tax system, so it honours independent taxation. If both parents were in employment and both parents' employers made the voucher available to them on a weekly basis, both would be entitled if they were responsible for care of the child. That is cross-referenced to tax credit regulations—hence my needing to tidy up a few things earlier with Government amendments—and to definitions of ''parent with care'', because that operates well for tax credits, as it did for the working families tax credit.

I was asked how much national insurance employed parents would save with the £50 a week exemption. It is important to remember that it is a voucher that goes to the child care provider, and nowhere else. The situation is simple: it involves the employer and the child care provider. The answer depends on the employee's earnings and the value of the qualifying child care that the employee uses, but let us take a couple of examples. A higher-paid employee, paying income tax at the highest marginal rate, would save up to £20.50 a week on his or her child care costs. That relates to 40 per cent. tax and 1 per cent. national insurance. An employee paying the basic rate may save up to £16.50 a week. That relates to 22 per cent. tax and 11 per cent. national insurance.

I considered providing the relief only for the basic rate, but to be honest that would be too complicated. It would cause a problem for employers and I am seeking to encourage employers to make the provision, not to put more obstacles in their way. Higher rate taxpayers benefit by a greater amount, but of course they are unlikely to have access to tax credits.

We expect the number of employees using child care vouchers for under-fives to grow from the current 30,000 to 90,000. With regard to other forms of child care provision by employers, we expect the number to go from 30,000—the number currently using workplace nurseries—to 85,000. That will include

holiday play schemes and out-of-school clubs as well as nursery play schemes. It is difficult to be precise, and I apologise to hon. Members, but the number of employers currently offering child care vouchers is between 1,200 and 1,500, and we expect that to rise to 5,000 by 2009-10.

David Laws (Liberal Democrat, Yeovil)

I apologise for doubting whether the Paymaster General would provide us with those figures. She says that she expects the number of places to rise from 30,000 to 90,000. Does she anticipate that all those additional apparent places will be extra child care places that did not exist before, or does she expect there to be switching from other forms of child care?

Dawn Primarolo (Labour, Bristol South)

I cannot rule out some switching. It would be impossible to give an undertaking. The measure is about seeing a growth in the provisions for child care made by employers—because employers are doing a lot. We do not see it as a substitution. Frankly, if people were to move across from one child care provision to another as a result of the voucher, they would free up the child care place that they have left for someone else.

The hon. Gentleman chided me earlier on, saying that I should ensure that we track the provision. It is cash-limited for a specific purpose. The tax planning industry would even have to surprise me, which takes some doing now, if it could tell us how £50, cash-limited, only for child care, paid direct to the child care provider and then cashed in from the voucher issuer, with a complete audit trail, could fail to be transparent—let us wait and see. I think the hon. Gentleman was trying to have a bit of fun, given what I have had to say before about tax planning.

I turn now to the question of the self-employed. Allowing a tax deduction for the cost of child care for all working parents rather than through a targeted exemption would be expensive and poorly targeted. I will not make any bones about that—the Government just would not do it. We believe that financial help towards child care cost for low to middle-income families should be provided in the tax credits. Self-employed people can receive help with the cost of formal child care through the child care element of the working tax credit.

We believe that the whole point of the arrangements is that employers have an important role to play in helping their staff to balance their work and family lives. The measure provides the incentive to encourage employers to support their employees with child care. The Daycare Trust estimates that only one in 10 large employers currently help their staff with child care. We believe that the measure is targeted at employers, and it is right that it should be. There is help elsewhere for the self-employed and it is impossible to see how we could make a voucher system work in such a way.

Mark Prisk (Conservative, Hertford and Stortford)

In her last few words, the Paymaster General may just have answered my question. However, I have two concerns. First is the natural

sense of disappointment that the self-employed will feel because they are not included in the measure. I do not know whether she has other schemes through an enhancement of the working tax credit that would enable the self-employed at least to feel that they are getting reasonable support equivalent to that received by the employed. Just as importantly, given the concern that the Government have had about the difference between incorporated and unincorporated enterprise and the nature of the incentive that that might provide for companies to incorporate on a tax basis and not on a business basis, we would be happy to work in a positive manner with her—I know that the Government are looking at the taxation of owner-managed businesses in general, so there is a opportunity there if she is willing to consider how we might help the children of the working self-employed.

Dawn Primarolo (Labour, Bristol South)

I will come to the points about incorporation, because I think that they are a bit daft. I cannot think of any other way to describe the idea that a £50 voucher will drive companies to incorporate. There is a huge range—

Mark Prisk (Conservative, Hertford and Stortford)

Staffing.

Dawn Primarolo (Labour, Bristol South)

We are talking about the self-employed, not staffing.

Mark Prisk (Conservative, Hertford and Stortford)

They employ them.

Dawn Primarolo (Labour, Bristol South)

That is interesting and we will come back to it.

The self-employed are within the tax credit system and very generous support is available to them through the working tax credit because of that. There are many examples demonstrating clearly that the presence of the tax credit, including the payment of child care through the working tax credit, enables the self-employed to start their business in the first place and to develop it. The idea that there is nothing for the self-employed is wrong.

The point was also made, and I hope that I have now disposed of it, that there will be a far greater administrative burden on employers. The Chartered Institute of Taxation might think that, but employers do not. They are saying, ''This is the method that's easiest for us to administer. We want to provide for this but you, the Government, have to give us more help and encouragement with the way that the rules operate.'' We have responded accordingly. It is totally unrealistic to suggest that people would incorporate simply to provide themselves with a child care voucher.

The hon. Gentleman also made the point about applying the exempt limit to a tax week. As the exemption is subject to a financial limit, it is necessary to apply it on a per week basis. That is how the tax system works. It ensures that an employer knows how much of the benefit is exempt for a PAYE period, as they will not have to consider accrued or future exemptions.

The weekly limit will ensure that there is no duplication of the exempt limit when an employee changes employment during the tax year and,

therefore, no subsequent tax underpayment. The weekly limit will allow exact alignment of the national insurance rule, something that the hon. Members for Hertford and Stortford and for Yeovil have impressed on me on several occasions. We should have closer alignment, and that will ensure that the exemption is applied in accordance with the national insurance PAYE period.

The question of the burden on the company of a provider is simply not an issue. The limit is simply the cost to the employer of providing the voucher or child care, and no complex evaluations need to be undertaken.

Mark Prisk (Conservative, Hertford and Stortford)

The Paymaster General has identified several issues and satisfactorily answered several questions, but will she answer this question to reassure people? If a provider finds that the value of the child care provision that it makes is over that limit in any one week, is there a tax and national insurance liability?

Dawn Primarolo (Labour, Bristol South)

If there is an increase in the provision, the parents will have to make up the difference. The provider of the child care will determine whether it is within the national insurance levels and how its employment is accounted for. Calculation is on the excess.

Mark Prisk (Conservative, Hertford and Stortford)

So there is a liability.

Dawn Primarolo (Labour, Bristol South)

Yes, but the provider already has a liability by virtue of the fact that it is a provider earning, so anything in excess of £50 would be treated in the same way. If an employer had paid the excess, it would come out of the system through the employee's national insurance and tax in the same way as it currently does with the necessary tax, whether it came within the benefit in kind or from the national insurance exemption.

Mark Prisk (Conservative, Hertford and Stortford)

I just want to clarify for those who are affected that the parents would have a liability and that the Government would expect them to pay if provision were to cost more than £50. Is that what the Paymaster General has just said? How are they to account for it?

Dawn Primarolo (Labour, Bristol South)

It will be accounted for in the same way as with the current benefit-in-kind legislation. We are discussing people who currently have to account for all of it. Why is it such a huge intellectual challenge to take £50 off it? This is getting a bit daft. Sorry, I should not have used the word ''daft''.

John McWilliam (Labour, Blaydon)

Order. ''Daft'' is all right, particularly if you have an accent like mine.

Dawn Primarolo (Labour, Bristol South)

The argument is unrealistic, considering the reality of how accounting currently operates. We are discussing a provision that is already in operation, and we will make it more generous. So why is it such a huge intellectual challenge? I am afraid that the hon. Gentleman has lost me. Child care in an appropriate, registered creche, playgroup or nursery is in the arrangements before us.

The hon. Gentleman asked about VAT. As he is probably aware, creches, playgroups and nurseries are VAT exempt under both UK and European law. That ensures that parents are not charged VAT on the care provided to their children.

Rob Marris (Labour, Wolverhampton South West)

I take my right hon. Friend back to the point about intellectual challenge. Perhaps I misunderstand the tax system, but it seems to me that if an employer gives out vouchers for private health care, such that provided by BUPA, it should operate under a similar tax regime as that proposed for child care vouchers. If not, why not?

Dawn Primarolo (Labour, Bristol South)

The provision of private health care is entirely different in that it does not qualify for tax relief.

John McWilliam (Labour, Blaydon)

Order. This is not within the scope of the clause.

Dawn Primarolo (Labour, Bristol South)

Okay, I will not go down that path.

My hon. Friend asked a question about pay advantage for those with children. It does not occur here. This is not a tax relief for a selected group of employees, and it is not an allowance as an expense that does not directly result from employment. It is a ring-fenced exemption for child care benefits in kind meant to encourage employers to engage with the issue of child care and to offer some help to those employees who want it. My hon. Friend is right and his point goes to the heart of the issue.

How do we encourage employers, while ensuring that that encouragement is fair and equitable, as simple as possible and cash-limited in terms of the exposure of the Exchequer? After consultation on the issue, I contend that the clause and the schedule offer the best way forward: cautious but helpful, in broadening the amount of money and the child care facilities available. I commend the schedule to the Committee.

Question put and agreed to.

Schedule 13, as amended, agreed to.

Further consideration adjourned.—[Jim Fitzpatrick.]

Adjourned accordingly at thirteen minutes past Five o'clock till Tuesday 18 May at half-past Nine o'clock.