Finance Bill

Public Bill Committee, 20 May 2004.

Standing Committee A

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Schedule 15 - Charge to income tax on benefits received by former owner of property

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Amendment No. 62, in

schedule 15, page 348, line 4, leave out

'the year of assessment 2005–06'

and insert

'any year of assessment following the year of assessment 2004–05 (''the relevant year'')'.

[R] Relevant registered interest declared.

Amendment No. 63, in

schedule 15, page 348, line 8, leave out 'that' and insert 'the relevant'.

Amendment No. 64, in

schedule 15, page 348, line 11, leave out

'the year of assessment 2005–06'

and insert 'the relevant year'.

Government amendment No. 150.

Amendment No. 65, in

schedule 15, page 348, leave out lines 13 to 19 and insert—

'(b) the property shall subject to the provisions of paragraph 6 of Schedule 20 of the 1986 Act be treated for the purposes of Part 5 of the 1986 Act (in relation to the chargeable person) as property subject to a reservation;

(c) and for as long as the property is so treated section 102(3) and (4) of that Act shall apply; and

(i) no other person or persons shall for the purposes of the Inheritance Tax Act 1984 be treated as beneficially entitled to the property and the property shall not be treated as ''relevant property'' under the provisions of section 58 of that Act; and

(ii) on the death of the chargeable person the property shall be deemed for the purposes of the Taxation of Chargeable Gains Act 1992 to be disposed of and immediately reacquired by the person or persons then competent to dispose of the property and no chargeable gain shall accrue on that disposal;

(iii) the provisions of the Taxation of Chargeable Gains Act 1992 shall apply on any disposal of the property as if

the person disposing of the property was the chargeable person.'.

Amendment No. 102, in

schedule 15, page 348, line 23, at end insert—

'(4) An election made under this paragraph shall not be valid and the chargeable person shall be treated as the settlor of the property under the provisions of Schedule 4 of IHTA 1984 if—

(a) within two years of death of the chargeable person the relevant property is transferred to a maintenance fund; and

(b) a direction is given in respect of the property under the provisions of paragraph 1(1) of Schedule 4 of IHTA 1984.

Government amendment No. 151.

Amendment No. 66, in

schedule 15, page 348, line 26, leave out

'the year of assessment 2005–06'

and insert

'any year of assessment following the year of assessment 2004–05 (''the relevant year'').'.

Amendment No. 68, in

schedule 15, page 348, leave out lines 29 to 36 and insert—

'(a) the property shall subject to the provisions of paragraph 6 of Schedule 20 of the 1986 Act be treated for the purposes of Part 5 of the 1986 Act (in relation to the chargeable person) as property subject to a reservation.

(b) and for as long as the property is so treated section 102(3) and (4) of that Act shall apply; and

(i) no other person or persons shall for the purposes of the Inheritance Tax Act 1984 be treated as beneficially entitled to the property and the property shall not be treated as ''relevant property'' under the provisions of section 58 of that Act; and

(ii) on the death of the chargeable person the property shall be deemed for the purposes of the Taxation and Chargeable Gains Act 1992 to be disposed of and immediately reacquired by the person or persons then competent to dispose of the property and no chargeable gain shall accrue on that disposal;

(iii) the provisions of the Taxation of Chargeable Gains Act 1992 shall apply on any disposal of the property as if the person disposing of the property was the chargeable person'.

Amendment No. 67, in

schedule 15, page 348, line 30, leave out

'the year of assessment 2005–06'

and insert 'the relevant year'.

Government amendments Nos. 152 to 154.

Amendment No. 69, in

schedule 15, page 348, line 46, leave out '2007' and insert

'following the end of the relevant year'.

Government amendment No. 155.

Amendment No. 70, in

schedule 15, page 349, line 2, leave out '2007' and insert

'following the end of the relevant year'.

Government amendment No. 156.

Amendment No. 71, in

schedule 15, page 349, line 5, leave out '2007' and insert

'following the end of the relevant year'.

Howard Flight (Conservative, Arundel and South Downs)

I welcome you to the Chair, Mr. McWilliam.

The Government amendments in the group go some way towards softening the deadlines for election to

bring an asset back into the estate for inheritance tax purposes, so that court situations after 2005–06 are covered; otherwise, unfairly, it might not have been possible for people to sort out their affairs. The amendments extend the deadlines for the election from the fixed 2007 date to the filing date for the first income tax year in which the chargeable benefit would otherwise arise. We welcome that change, but it addresses only the issue of the timing of the election, and not other aspects covered by our amendments Nos. 65, 68 and 102.

I bracket together amendments Nos. 62 to 64, 66 and 69 to 71. It makes sense to take them together as they are all, in different ways, included to enable taxpayers to re-order their affairs—as is fair—by making an election under the schedule in relation to any tax year. There are many situations in which a taxpayer might be liable to the new charge as a result of an unexpected change in their circumstances. For example, if one of the joint owners of an affected property moves abroad, the ability to elect to have the property revert to the donor's estate for inheritance tax purposes should surely, in fairness, be available in each tax year—that is, the tax year in which the change of circumstances bites.

John Burnett (Liberal Democrat, Torridge and West Devon)

I support what the hon. Gentleman says, but has it not always been enshrined in inheritance tax legislation that ''revert to settlor'' should be exempt and available at any time?

Howard Flight (Conservative, Arundel and South Downs)

I thank the hon. Gentleman for his intervention. He knows a great deal more about the law on the matter than I do. I am sure that he is right, and he is in essence reinforcing my point.

If someone elects to have transferred property revert to the estate of the donor for IHT purposes, as the transitional provisions allow, surely, in fairness, the donor should be allowed to pursue or put in place the option that he would have had anyway before making the original transfer—that of transferring a property to a maintenance fund. Why should he not be able to mitigate his tax position thus, especially as he may not have taken the time, or the opportunity, to take out life insurance to cover the IHT liability on his death, believing that he had made a perfectly legal transfer to the next generation? In essence we are saying that, at the very least, the quid pro quo for the retrospection of the arrangements is that one can turn the clock back and have all the options that were available when one made the legal arrangements.

On amendment Nos. 65 and 68, a proviso ensures that having elected to be subject to the gift with reservations rules, the chargeable person will not be liable to inheritance tax charge if he falls within one of the normal exemptions to those rules. There is, first, a provision to avoid double taxation, by ensuring that, following an election, the property in question is also not treated as part of someone else's estate or subject to inheritance tax for discretionary trusts.

Secondly, a provision is included to avoid double taxation by ensuring that, following an election, the

property would be subject to an uplift for capital gains tax purposes on the death of the chargeable person. It is generally accepted that one should not be subject to both inheritance tax and capital gains tax in relation to the same asset. It is clear that there is an automatic capital gains tax base value uplift on death and that should surely also apply to property that is deemed to have reverted to the taxpayer's estate under the transitional provisions of the schedule. As I understand it, the present situation is that if one elects to pay inheritance tax, one pays it on the value at death. However, the new base cost that the child or other heir takes on is not that value, but the historic value at which the transfer into a trust was originally made. That seems to be unfair and unreasonable.

Thirdly, a provision is included to ensure that the reliefs to which the chargeable person would have been entitled, such as principal private residence relief, taper relief or indexation relief, would apply had they not disposed of the property. In other words, as far as possible the provisions ensure that the chargeable person is not prejudiced by having disposed of the property under one set of tax rules. For cash-flow reasons they are now effectively obliged to opt to pay IHT on the value at death. I can imagine the Paymaster General saying, ''Well, hard luck to old people who are engaged in those schemes. Why should they be returned to a starting again basis?'' That is unreasonable. We have argued extensively, and virtually everyone other than the Paymaster General perceives, that the impact of the changes is retrospective on elderly individuals. Surely, if we are to have the option to pay IHT it should be on the basis of turning the clock back, and one should enjoy the same arrangements as one would have done at that time.

Amendment No. 102 is in essence one that was put to me by the Historic Houses Association. It includes a further sub-paragraph to the effect that if an election had been made under paragraph 20 and within two years of the death of the chargeable person, the relevant property would be transferred to a maintenance fund. The election would not have effect, but the chargeable person would be treated as the settlor of the property for the purposes of schedule 4 of the Inheritance Tax Act 1984.

John Burnett (Liberal Democrat, Torridge and West Devon)

I have a simple point to make to the Paymaster General and I hope that she will address it. Does she not agree with Opposition Members that, if the provisions to which we are referring were to come into play, other reliefs and exemptions should not be denied?

Dawn Primarolo (Labour, Bristol South)

Good morning, Mr. McWilliam. Before I respond to the hon. Gentlemen, may I say that I have developed an abscess on one of my teeth. I wanted to finish the debate and ensure that we can make progress. I am on a pretty hefty course of antibiotics and painkillers, so if I am not quite as—

John Burnett (Liberal Democrat, Torridge and West Devon)

Generous.

Dawn Primarolo (Labour, Bristol South)

I was going to say ''helpful''.

John McWilliam (Labour, Blaydon)

Order. It is not out of order, but it is wicked to mock the afflicted.

Dawn Primarolo (Labour, Bristol South)

I may have to resort during the course of the morning to asking for the Committee's forbearance because I may need to write to hon. Members about some matters. I am afraid that antibiotics and painkillers inhibit the speed at which one's brain can operate. I hope that hon. Members will bear with me.

Overall, this has been a very long debate. The last group of amendments is large, and I thought it would be best to respond to them in one go, having heard the comments of the hon. Member for Arundel and South Downs (Mr. Flight). As he rightly says, the Opposition amendments are concerned with and, in a sense, substantially duplicate what the Government are doing in amendments Nos. 149 to 156, but there are some slight differences that I will highlight.

The amendments would make the election, which is already part of the schedule, into a permanent feature of the new charge and extend the time limit for making an election in relation to any property until the time that that process would otherwise have given rise to the charge or benefit. The Government originally regarded the election as solely for people who are already caught by the schedule, so that they can, if they choose, have second thoughts about the tax plan that they have already undertaken. It would be relevant to people who are making substantial cash gifts.

Continuing election has nothing to offer people who know that they want to retain the asset that they have purported to give away. As was originally intended, they can either make a genuine gift, so that they are within the IHT framework, with all its reliefs and supports, or they can remain in the arrangements that they have made and not operate the election, and they would therefore would be subject to the income tax charge, should it arise.

The other relaxations proposed in Government amendment No. 137 mean that people will not have to worry about any future consequences of their giving once they have parted with the money for seven years without it giving rise to benefit, which echoes the inheritance tax provisions. However, there is a middle ground where people who make large gifts might worry about the consequences under schedule 15 if events developed in such a way that they would enjoy substantial benefit from their donee subsequent to those seven years. The extended election that they could make only as and when their gift came back to them could address those concerns by ensuring that they would never be faced with an income tax charge they had not bargained for. It is clear that the Opposition amendments share that objective. There is not a great deal between us on the amendments, apart from the detailed choice of words that seek to reach shared objectives. I hope that the hon. Gentleman will accept the Government amendments and withdraw his own.

John McWilliam (Labour, Blaydon)

Order. The only amendment before us at the moment is Government amendment No. 149, so nothing else need be withdrawn at this stage.

Dawn Primarolo (Labour, Bristol South)

Thank you, Mr. McWilliam.

Opposition amendments Nos. 65 and 68 go further. They state that where an election is made, the property subject to the election effectively does not belong to anyone else for inheritance tax purposes. I really cannot countenance that. In particular, they would mean that the property would not belong to the person who actually owned it. I am sorry, but we cannot have that—in fact, I am not sorry, because that would be contrary to the purpose of the inheritance tax rules that we seek to operate.

The amendments go further and rewrite the capital gains position of the actual owner on the same assumption that the formal owner making the election will still own the property. They clearly would not still own it, because the whole point of the election is to transfer the property back to its original owner—if that decision is made—to prevent the income tax charge by bringing themselves back into the inheritance tax rules.

Howard Flight (Conservative, Arundel and South Downs)

The amendments may be imperfectly drafted, but I hope that I have made the reason for them clear: as we understand it, the present arrangements are unfair. Let us imagine that, 10 years ago, someone gave another person a property that was worth £300,000. They die, and the property is now worth £2 million. If inheritance tax is paid on that, surely the heir should have a base value of the £2 million on which the tax has been paid and not of the £300,000 that was the value at the time of the gift. It is not common sense for that not to be the case. I am seeking a solution to that problem.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman misses the point of the schedule, which is quite clear. Either people are within the inheritance tax rules, and therefore those rules and reliefs apply, or they choose not to allow those rules to apply and engage in a contrived scheme that enables them to claim that they do not own the asset, but to carrying on benefiting from it in exactly the same way as they would if they owned it, in which case an income tax charge could be levied—obviously with regard to all the exclusions that we have discussed. There can be no halfway house and the schedule does not provide for one.

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I will when I have finished this point.

Either people are within inheritance tax rules, or they are subject to the charge. The rules say that inheritance tax is charged on the estate according to its value when the owner of the estate dies. The hon. Member for Arundel and South Downs is asking for something else. Say I decide to give my son my house now, and I have it valued. I do not want to pay the income tax charge so, having used a contrived scheme, I elect to say that I want to transfer the house back. However, I still want to pretend that I transferred it to my son so that if I live for another 40 years—as a young woman, I am hoping to live slightly longer than that—my son will be liable to inheritance tax not on the worth of my estate at the time of my death but on its worth when it was transferred in 2004. That is not agreeable.

Howard Flight (Conservative, Arundel and South Downs)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I did not mean to provoke the hon. Gentleman. Will the hon. Member for Torridge and West Devon (Mr. Burnett) allow me to give way first to the hon. Member for Arundel and South Downs?

John Burnett (Liberal Democrat, Torridge and West Devon)

Given the Paymaster General's predicament, I can do nothing else.

Howard Flight (Conservative, Arundel and South Downs)

I must be communicating poorly. That is not what I am seeking, neither is it the point that I am making. Let me try again. My point is simply this: if someone has elected to pay inheritance tax and the value on which it is paid is the value at death, is it not fair that when the estate is then left to the next generation that should be the base value for capital gains tax, not the value when it was transferred 10 years ago?

John Burnett (Liberal Democrat, Torridge and West Devon)

There must be fairness.

Howard Flight (Conservative, Arundel and South Downs)

Correct.

Our understanding of the way in which the rules work at the moment is that inheritance tax is paid on the £2 million but the deemed base cost at which the heir takes it is the value when it was transferred into trust 10 years ago—£300,000. That seems to be unfair, but we are certainly not arguing for a benefit the other way round.

Dawn Primarolo (Labour, Bristol South)

I understand the hon. Gentleman's point. He is attempting to rewrite the capital gains rules in a way that they do not currently apply to that regime. He seems to be saying that the way in which capital gains tax and inheritance tax rules rub up against each other, although they are attempting to deal with two different types of gain, does not work appropriately in that situation.

I do not agree with the hon. Gentleman because—

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

May I just finish my point? I will not forget the hon. Gentleman.

I do not agree with the hon. Member for Arundel and South Downs because the purposes are different. I will try to find out whether the circumstances that he describes can happen or whether they are hypothetical. It is in the back of my mind that in coming back into the inheritance tax rules the interaction of gifts with reservation should smooth that out. That is the interaction that is missing if it is in the contrived scheme. It returns to the point made by the hon. Member for Torridge and West Devon. I am happy to confirm that if people elect to return to the inheritance tax regime, the full relief for gifts with reservation and so on is at their disposal. If they dispose of assets and have no access to them for seven years, those assets are no longer deemed to be part of the estate.

John Burnett (Liberal Democrat, Torridge and West Devon)

I think that we are seeing some light on this. Since 1965, when capital gains tax was introduced, death has given rise to an automatic uplift and, even since estate duty times, capital transfer tax and now inheritance tax—if someone opts to pay the full value for inheritance tax purposes at death they should always receive an uplift for capital gains tax purposes. If that is not the case, I am sure that the

Paymaster General will agree with Opposition Members and perhaps some Labour Members that it would be incredibly unfair and amount to the most draconian double taxation.

Dawn Primarolo (Labour, Bristol South)

As I have said throughout this debate, there is no double taxation in any of these proposals.

Howard Flight (Conservative, Arundel and South Downs)

We hope.

Dawn Primarolo (Labour, Bristol South)

Well, I hate to go over old ground, but during the debate on section 660A, for example, hon. Gentlemen identified what they believed was double taxation but was not; it was clear taxation for different purposes on different actions. They sought to telescope that into the change, and that is what they are doing now.

The simple proposition is that if people have contrived schemes, which is basically when they have transferred ownership but continue to benefit as if they were still the owner and are living in the house free of charge, the taxpayer will be offered a choice. The first choice is the subject of the schedule and the amendments. Rather than having to go through the unwinding of their schemes to which the hon. Member for Arundel and South Downs drew attention, they will simply make a declaration—binding on them and their estate—to the Inland Revenue that they wish to return to inheritance tax rules. So, the contrived scheme seeking to negate those rules will be cancelled. In those circumstances all reliefs are available. Everything else, whether it be capital gains, houses, chattels or whatever, returns to inheritance tax and the rules and reliefs set.

Mr. Burnett rose—

Dawn Primarolo (Labour, Bristol South)

Hang on a minute. If the taxpayer chooses to allow their scheme to continue, they could be subject—I say ''could'', because with some of the exclusions they have to get the benefit of the asset that they claim no longer to own—to an income tax charge as laid out in the schedule. At that point, the taxpayer's concentration should be triggered and they will have to decide whether they really want their scheme to continue and pay the income tax charge, or whether they do not want to pay it and must therefore opt for the election.

Nothing else in the scheme's running, whether it be capital gains, inheritance tax, tangible benefits and intangible benefits or whatever, is disturbed. It is a simple, straightforward proposition. Hon. Gentlemen have criticised it, but we are not rewriting inheritance tax; we are simply seeking to ensure that the inheritance tax rules work.

John Burnett (Liberal Democrat, Torridge and West Devon)

The Paymaster General made a good point—well, she made a point. This is an intervention for clarification, because she knows that some people enter those schemes without appreciating their full consequences. The people who make the first choice are those who can declare to the capital taxes office binding them and their estate, which brings the matter back to IHT. She said that in those circumstances ordinary inheritance tax reliefs will continue. Do they qualify for those ordinary reliefs before entering into the arrangements?

Dawn Primarolo (Labour, Bristol South)

The taxpayer has agreed to a package—a contrived scheme—and the proposition, ''If you enact this contrived scheme, you will not have to pay inheritance tax on any of your estate''. ''Any of your estate'' means above the thresholds and exemptions. The taxpayer may or may not understand the detail, but the central proposition is not to pay inheritance tax. The Government are saying, ''No, taxpayer, you cannot do that. If you do not want to pay inheritance tax, you will pay an income tax charge, so the choice is yours.''

Quite simply, all the taxpayer has to do is say, ''OK, we tried not to pay inheritance tax on our estate. Fair cop.'' They sign the election and they are back in the rules. What they subsequently do is up to them. Some may not leave it at that, but the Government will have to consider that if it arises. The process is plain and simple, and I have tried valiantly since Tuesday morning to remind the Committee that that is all we are doing. I cannot understand why it seems unreasonable to taxpayers that they should all comply, as many of them still do, with the tax rules of the land, which are made by Parliament for all our citizens. It is such a simple request and the Government are going to enforce it.

Howard Flight (Conservative, Arundel and South Downs)

I do not wish to raise again the emotive issues surrounding houses, but the essence of the confirmation that we are seeking is the following. The Paymaster General made the situation as near to being clear as possible. It is that either one pays the new income tax charge, or one elects to pay inheritance tax as though one never paid the charge. If one does that, one will enjoy all the reliefs, as though one never set up the trust. My point is that the meaning of ''all the reliefs'' is unclear. There are some related reliefs that are not specific inheritance tax reliefs but part of the territory.

I raised the issue of the ability to transfer property into a maintenance fund. I cannot remember whether the Inland Revenue website has information on that. It might be viewed as not being a specific inheritance tax relief, but it has that effect. Similarly, we have spoken long and large about the impact on uplift of capital values on death. That may not be described as a relief relating to inheritance tax, but it is an automatic consequence. So, our amendments endeavour to test whether, if one opts to pay inheritance tax, one ends up in the same position as if the transfer never existed. I think that it would be a little unfair if that were not the case.

Dawn Primarolo (Labour, Bristol South)

I will come to the point about maintenance funds because I think that that is what amendment No. 102 relates to. With regard to the hon. Gentleman's point about capital gains and the uplift, that is not the case where there is a gift with reservation. The situation in schedule 15 is comparable with that. If normal inheritance tax rules are operating, and it is appropriate to transfer those rules to enforcement as well under schedule 15, we will do that.

That is why I said to the hon. Gentleman that all the reliefs and interactions work. He is right that some

of the reliefs in inheritance tax already interact in different ways, often with capital gains tax. My response is that we want schedule 15 to operate in the same way as inheritance tax does.

The hon. Gentleman raises the disagreement about how inheritance tax operates when there is a reservation with gifts and what happens with the interaction with CGT. That may be a fair criticism of the inheritance tax system, but it is not the subject of the arrangements. Those arrangements do not disturb any inheritance tax rules but use them in the appropriate place.

Quentin Davies (Conservative, Grantham and Stamford)

I think that the Paymaster General can clear up the confusion if she will give a simple answer to a simple question. On the basis of the law as potentially redrafted by the schedule, if there is a transfer of property by inheritance, and inheritance tax is therefore paid, if appropriate, does that constitute a base price for the purpose of future capital gains tax liabilities of the inheritor or the beneficiary of that inheritance? That is a simple question. If the answer is yes, much of the confusion will be cleared up.

Dawn Primarolo (Labour, Bristol South)

To answer the hon. Gentleman's question, it would depend on how the taxpayer chose to deliver the transfer under inheritance tax rules. If they were to do it through a gift with reservation, there would be no uplift. I hope that the Committee will be tolerant with this suggestion: rather than our going around in circles, I will write to each member of the Committee to explain how schedule 15 affects capital gains and uplift if the taxpayer chooses not to elect or if they choose to elect and use gift with reservation. That would be the best way to deal with the question.

Quentin Davies (Conservative, Grantham and Stamford)

This is as much a point of order for you, Mr. McWilliam, as it is an intervention on the Paymaster General. She wants to address the ambiguity that I just described by writing to the Committee. That is perfectly acceptable, and it is desirable that we should have absolute clarity on the central point about the interaction between inheritance tax and capital gains tax. I thought that the position was clear, but I am completely confused as a result of the past half hour. I am sure that I am not the only person in the Committee who has been confused by the debate. We need to clear up the matter.

My point of order, Mr. McWilliam, is whether we can reopen the matter on Report if we do not like the letter when we get it; of course, we will get a letter, because the Paymaster General has promised one. That will be our only opportunity once we understand the effect of the proposed legislation to say that we do not like it. If Parliament is to do the job that it should on the Bill, it will be undesirable to be told on Report, ''Sorry, that point was dealt with in the Committee debate on schedule 15.''

John McWilliam (Labour, Blaydon)

That is not a point of order for me but a decision for the Speaker, who is a fair man. He will listen to representations and will make the decision. I remind the Committee that there is a Standing Order about tedious repetition—it is not about one person tediously repeating themselves but

about the tedious repetition of the same point during a debate. We have come very close to that.

Dawn Primarolo (Labour, Bristol South)

I am disappointed that the hon. Member for Grantham and Stamford (Mr. Davies) is confused. I thought that the explanation was clear.

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the Paymaster General give way on a point of clarification?

Dawn Primarolo (Labour, Bristol South)

I just want to finish this point. It would be best that I attempt to explain the matter in writing. The letter will basically say the same thing as I have said here, but I am always happy to help the Committee.

John Burnett (Liberal Democrat, Torridge and West Devon)

I am grateful to the Paymaster General and look forward to receiving her letter. I believe that she is saying that, if someone falls under the existing rules for gifts with reservation of benefit, they will get the worst of both worlds. They will pay inheritance tax, because they will be deemed not to have made the gift, but they will forsake the capital gains tax uplift. We do not like the existing rules, and we do not want them imposed under this arrangement.

Dawn Primarolo (Labour, Bristol South)

I absolutely understand that. I have been trying to explain to hon. Members that that is how inheritance tax rules operate, as much as they may not like them. I do not recollect any amendment or new clause in a Finance Bill in the past seven years to address that issue, which I have clearly explained in our debates on clause 84 and schedule 15. The explanation has been clear, as the hon. Member for Torridge and West Devon understands. He just does not like it—he is free to take that position—but that is how inheritance tax rules work. The arrangements are simply an either-or choice. They do not rewrite the underlying inheritance tax rules.

Howard Flight (Conservative, Arundel and South Downs)

At the risk of being accused of tedious repetition, will the Paymaster General undertake to unwind the unfairness that she has confirmed exists, and which my hon. Friends and I have raised? Whatever the structure of existing law, it is manifestly unreasonable in practice that, if someone is paying inheritance tax at full market value, the heir should not take on the property with that base cost. There is a problem with the way the law is drafted, but for someone to end up paying the full whack of inheritance tax and paying another great whack of capital gains tax is double taxation, which is unfair.

John McWilliam (Labour, Blaydon)

Order. Unless we can think of some new points—I have not heard any in the past 40 minutes—it is time to bring this debate to a close. All I have heard is the same point repeated, and it is getting tedious.

Dawn Primarolo (Labour, Bristol South)

I shall move on. The hon. Member for Arundel and South Downs tempts me into rewriting the capital gains and inheritance tax rules. As he knows, that is a substantial area. He also knows that the changes that the Government have made to capital gains tax make the approach to taxation far more encouraging and lenient than before the review and amendments.

The hon. Gentleman will not be surprised to hear me say that I always look keenly and in detail at inheritance tax and its interactions, hence the clause and schedule. He can be sure that there are different views about the fairness of the operation of inheritance tax rules from the ones that he holds. When I receive representations that suggest that the inheritance tax rules should be tighter, as I often do, I shall certainly bear in mind the hon. Gentleman's points on the other side of the scales when considering the question of fairness.

I shall move on to the remaining amendments. Most of the points addressed in amendments Nos. 65 and 68 have been covered in my response and the interventions on inheritance tax rules, gifts with reservation and capital gains tax.

Michael Jack (Conservative, Fylde)

It is clear from all the Paymaster General has said that information about her lines of argument are clearly communicated to taxpayers who may wish to reconsider their position. If those taxpayers now live in, say, Spain, what will the Treasury do to advise taxpayers, subject to the Committee and Parliament passing schedule 15 into law, to alert them to the new state of affairs?

Dawn Primarolo (Labour, Bristol South)

Clearly, the Treasury will expect financial advisers, without whom it would not be able to run such schemes, to inform taxpayers of the changes, as they will be subject to an income tax charge that their advisers told them they were not subject to. All taxpayers have access to the information on the Inland Revenue websites and tax bulletins. As a former Financial Secretary, the right hon. Gentleman knows that those are the traditional routes that the Treasury uses. Unless the advisers decide to tell the Inland Revenue directly the names of clients whom they have signed up to these regimes, guaranteed direct communication with all taxpayers will be difficult.

Several hon. Members rose—

Dawn Primarolo (Labour, Bristol South)

Hang on. On the question of taxpayers' tax returns, the Inland Revenue will provide specialist additional information stating that there are new regulations, as it does to all taxpayers, including MPs.

John Burnett (Liberal Democrat, Torridge and West Devon)

I know that the Paymaster General is not feeling too fit at the moment.

Difficulties of communication are obviously involved, and the right hon. Member for Fylde (Mr. Jack) has discussed moving to Spain. As the Paymaster General knows, if those individuals shifted their domicile to Spain, they would not be within the UK inheritance tax net. If they shifted their ordinary residence for income tax and capital gains tax purposes, they would escape those charges as well. No doubt she will confirm that.

Dawn Primarolo (Labour, Bristol South)

Absolutely. I obviously made the error—well, I do not think that it was an error—of assuming that the right hon. Member for Fylde, as a distinguished former Financial Secretary, knew the rules. I understood his question to relate to somebody

living in Spain, but I assumed that he meant that they were still within the UK tax net. If they were not, and were in the circumstances that the hon. Member for Torridge and West Devon has described—this is getting like a tax seminar—clearly, we would not need to communicate with them in the first place.

John McWilliam (Labour, Blaydon)

I suppose I had better declare my interest as the vice-chairman of the all-party British-Spanish group.

Quentin Davies (Conservative, Grantham and Stamford)

I do not know whether, from something that she just said, the Paymaster General is not feeling well this morning. She seems as lucid and forceful as usual. She has just said something revealing, which I ought to pick up, about the liability for taxpayers who fall within the proposed new income tax charges. If a taxpayer fails to declare their tax liability, and is subsequently challenged by the Inland Revenue with non-declaration, will it be a defence that they did not know that the advice that they were previously given—to the effect that there would be no problem in avoiding inheritance tax under the scheme that they had adopted—was no longer valid, and that an income tax charge had arisen? Would that be a defence, if their advisers had not returned to tell them that the scheme had been retrospectively invalidated?

John McWilliam (Labour, Blaydon)

Order. Before the Paymaster General replies, I should say that the hon. Gentleman has raised a basic point of law, which has nothing to do with the amendment.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman is very knowledgeable about these affairs, and he well knows that ignorance is not a defence for failure to comply with obligations. I remind the Committee that we are talking about the transfer of huge assets, and about the taxpayer consciously taking the decision to make arrangements so that—they hope—they will not be liable for inheritance tax.

I have no doubt that financial advisers, accountants and tax planners, given their professionalism, will be keen to ensure that their clients understand the obligations that now impinge on them. It may well be that those advisers, accountants or tax planners encouraged them down that route in the first place and will feel an obligation to tell them. There is a Finance Bill each year, and the part under discussion has had much coverage even though taxpayer groups have been reluctant to reveal to the Inland Revenue the extent of their planning and have acted similarly to the examples cited by the hon. Member for Grantham and Stamford. We can rest assured that taxpayers are aware of such matters.

Amendment No. 122 is a mystery to me. It contemplates a retrospective relief and earlier the hon. Member for Arundel and South Downs said we should have retrospection under no circumstances. The relief is not retrospective, and I am not going back over that ground. Hon. Gentlemen understand full well that retrospection is to place a charge going back, but the charge is going forward, in respect of assets in future years, and the taxpayer will have the benefit of that.

I cannot justify contemplating a retrospective relief on the charge under schedule 15 when property is put into a maintenance fund following the death of a person who is currently caught up in avoidance. That would be rewarding individuals for having undertaken avoidance in the first place and allowing them to say, ''I have had all the benefits of my avoidance and now, thank you very much, I would like to go back to the other system.'' That is like their having their cake and eating it.

There are generous tax reliefs on property going into maintenance funds. If people who are currently alive have a property eligible for a maintenance fund and appropriate assets to fund one, they can and should be doing so now. Instead, the person has chosen to engage in inheritance tax avoidance of the sort that the schedule is aimed at, and I do not believe that we should make special provision for that. People can make the election, come back and make provisions to go into the maintenance fund, but it is not on for them to go from avoidance to a maintenance fund.

Over many years, several Committees—the Public Accounts Committee for one—have chastised the Inland Revenue about the penalties, or whether someone could tax plan, be caught out, but not suffer penalties for it, and come back into the system and not suffer a subsequent charge. That is not fair to the overwhelming majority of taxpayers. In fact, amendment No. 102 would provide the route for such action. If, following death, the person's beneficiaries decided to reconsider the attraction of a maintenance fund, whatever tax breaks are available would be given to them.

We greatly value our heritage and we have wide-ranging and generous reliefs to prove it. Those reliefs carefully balance the interest of the owners, the importance of the heritage and the rights of the general public who will be funding it through the general reliefs to enjoy access to assets that they are helping to preserve under the tax system. It beggars belief that we should be asked to preserve our heritage, to which all of us contribute, but should not be allowed to enjoy it. That is why those reliefs are the routes that heritage owners should use if they wish to mitigate their inheritance tax liabilities. That is on top of conditional exemption and the other arrangements that are made. If the hon. Member for Arundel and South Downs chooses to press his amendments to a Division I will ask my colleagues to oppose them.

Howard Flight (Conservative, Arundel and South Downs)

I have sympathy with the Paymaster General, as I had two tooth abscesses recently and that made me feel pretty rough. However, I think that what she just said was unfairly rough, because as she knows, this maintenance fund element is simply about heritage assets—about achieving the objective of preserving heritage assets. She has said that the broad intent is to give people the choice of whether to pay the new income tax charge or to go back to square one and pay the inheritance tax, and she stressed that the intent was that all the reliefs would go with it.

A fair point is being made. People who tried to preserve a heritage asset by routes that were perfectly legal at the time but are now being retrospectively cancelled are asking whether it is not reasonable that

they should have the option to do what they could have done with the property in the past.

Dawn Primarolo (Labour, Bristol South)

They can.

Howard Flight (Conservative, Arundel and South Downs)

According to what the Paymaster General just said, they cannot, because they cannot put it retrospectively into a maintenance fund. In essence, these amendments address whether that can or cannot be done. People are saying, ''Fine, what we did no longer works, so we will go back to square one and unscramble it all; can we retrospectively have it as if it had been in the maintenance fund?''

In this context, amendment No. 102 is not as unreasonable as the Paymaster General suggested. When people are sorting things out at death, the key decision may be between selling up and continuing to look after the heritage. I do not know whether a two-year period is reasonable, but the amendment is intended not to be some fancy tax avoidance measure but to sort out a heritage asset.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman is missing the point. I said that following the death of the owner, the beneficiaries can decide to transfer the assets into a maintenance fund and all the reliefs will be available. He has put a theoretical proposition to me. He has said that owners of historic houses have been using contrived schemes, and that they chose not to use the maintenance fund route, even though that has existed since 1986. If they now decide that they want to go into a maintenance fund, all they have to do is elect to do so and then make the arrangements. I fail to see why we need to deem retrospectively that the asset had been in the maintenance fund all along. The taxpayer had the option to do that when instead they opted for the contrived scheme. Why should we allow them to revisit the past and change their mind with hindsight? That is not reasonable, for any period.

The charge will apply from 2005–06. If people say, ''No, we want a maintenance fund,'' and all the arrangements are made, the charge will not apply. All that I am saying to the hon. Gentleman is that I do not see why a special group of taxpayers who theoretically originally chose not to have a maintenance fund—I have no proof that that is what they originally chose, because no one has told us that they made that choice and that this is an issue—why should we now let them decide with hindsight that they really want it? There are no retrospective charges over that period, so why should they have retrospective reliefs?

Howard Flight (Conservative, Arundel and South Downs)

I am sad that the Paymaster General's talk about wishing to preserve our heritage assets is skin-deep. She will know that heritage assets cost people far more than they ever make out of them. The fact that they may have gone down one route or another is a matter of history. Similarly, there is nothing unreasonable about people going to their lawyers, saying, ''We want to preserve this for the next generation and thereafter. What is the best way to structure it?''

Dawn Primarolo (Labour, Bristol South)

I have a parallel example. I cannot go to my mortgage company and say, ''Five years ago I should have opted for a fixed-rate rather than a repayment mortgage, and I should like to change my mind. Can you please give me the fixed-rate mortgage that I would have got five years ago?''

Chris Bryant (Labour, Rhondda)

It is quite a good idea.

Dawn Primarolo (Labour, Bristol South)

Yes, it would be—although perhaps not five years ago. The building society or bank would say, ''You made a choice. If you want to choose to have a fixed-rate mortgage now, let's make the arrangements.'' That is the parallel. Why should this tiny group of taxpayers be allowed to revisit their historical free choice? It is nothing to do with heritage.

Howard Flight (Conservative, Arundel and South Downs)

We have aired this matter pretty fully, but it is everything to do with heritage. The Paymaster General will know that from 1945 to 1970, we lost about half our historic homes, which were pulled down because people could not afford to maintain them after taxation. Their contents were dispersed all over the place. Half our nation's heritage was lost as a result of excessive taxation.

The arguments around this matter are not for the general run of circumstances. They relate to people doing their duty in endeavouring to preserve heritage assets. The crafting of measures that are fair in that circumstance, as opposed to more run-of-the-mill circumstances, needs to be slightly different to take that into account. Time will tell whether the net effect will be a lot fewer of our heritage assets being looked after. They may be sold, converted into offices and not opened to the public. The public at large will not say a big thank you for tax arrangements that have such a result.

I understand, as we have discussed already, that the Revenue is continuing in dialogue with the Historic Houses Association. It is often difficult to articulate precisely what are the concerns and worries—what are bona fides and what do not exist—and how they can be addressed. I hope that that dialogue continues constructively and that if any further thoughts about ensuring that our heritage is preserved come out of it before the Bill is enacted, the Minister will be sympathetic to them.

I am not sure technically how to address this point, but our amendments Nos. 65 and 68 are the most fundamental, for all the reasons that we have debated. I welcome your guidance, Mr. McWilliam, about how and at what time votes on some and not others would be organised.

John Burnett (Liberal Democrat, Torridge and West Devon)

On a small but valid point, the Paymaster General complained that there had not been one amendment about the double whammy around the existing gifts with reservation of benefit—and she has considerable experience, because in one capacity or another she has done every Finance Bill since Labour came to power. Does the hon. Gentleman agree that the reason for that is probably the same as why we are being lumbered with all these clauses—that the gifts with reservation of benefit legislation was very easy to avoid? That is why we have never sought to table amendments. If a

professional had allowed a client to make a gift with reservation of benefit, that would have been negligent.

John McWilliam (Labour, Blaydon)

Let me help. If the hon. Member for Arundel and South Downs wants to move amendments Nos. 65 and 68 formally I will ask him to do so when we get to them. I hope that the Committee will bear with me, as there is a long and complicated list of amendments to be moved formally.

Howard Flight (Conservative, Arundel and South Downs)

I have something further to say as we have, in essence, had the clause stand part debate. The Paymaster General pointed out that there may be 30,000 participants in schemes, and values of £500,000, and the potential for a substantial tax take. My view is that the extra tax take will end up being very small for a variety of reasons, and that we will have ended up cluttering up the tax system yet again.

Dawn Primarolo (Labour, Bristol South)

This is not a tax take—it is preventing a tax loss. Given the comments of the hon. Gentleman's party about what it might do if it was ever in power, the baseline of what we expect to get in in taxes is important to defend. My point is that there is a difference here: we are stopping a tax loss.

Howard Flight (Conservative, Arundel and South Downs)

I fear that the Paymaster General is making a purely semantic point. Regardless of whether this is stopping a loss or adding to the tax take, all I am saying is that it is clear that the Government think that there is significant tax to be pulled in that might not be pulled in without this legislation. I think that that is extremely unlikely. In most cases, people will simply vacate the properties and go and live wherever they can, because otherwise they will pay the income tax charge and they may or may not have any money to pay the inheritance taxes and so forth. My assessment is that the overall tax impact will be minimal.

Dawn Primarolo (Labour, Bristol South)

In that case, the hon. Gentleman will agree that if we—as Members of Parliament, let alone as Ministers—fail to ensure that all our citizens pay the tax that the law says they should, the burden on the remaining taxpayers will have to grow ever larger if we are to sustain the type of investment in the public services that we are committed to. Surely he cannot be subscribing to that point of view?

Howard Flight (Conservative, Arundel and South Downs)

The starting point should be to manage the public sector efficiently. Even the Government admit that £20 billion has been wasted, so there is plenty of scope to do that. That is not the issue. The issue is that taxation should be as clear and efficient and cost as little as possible.

John Burnett (Liberal Democrat, Torridge and West Devon)

And be as fair as possible.

Howard Flight (Conservative, Arundel and South Downs)

Indeed. What we have here is a classic example of socialist intellect triumphing over reality. We now have a mightily complicated system. As the Paymaster General commented, people with significant tax liabilities at risk will examine how to address them. The tax take will not increase, but the complexities have increased. The Revenue's administration costs will increase enormously. The exercise will not achieve its purposes.

There are some unfairnesses. We have sought to raise most of them, and the Government have addressed many of them, for which we are grateful.

However, some remain outstanding, and there are some that none of us has even thought about because this is so complex that people can be hit over the head without anyone knowing. I still greatly regret that approach, and again, the whole principle of talking in legal terms about retrospection and retroaction is playing with words. The meaning of retrospective taxes on individuals is very clear to the individuals, and that is something rather different from the nice legal distinction. We are grateful that several issues have been addressed by the various amendments to schedule 15. There are more to be dealt with, but we fear that the exercise will be rather expensive and self-defeating.

Rob Marris (Wolverhampton, South-West) (Lab) rose—

John McWilliam (Labour, Blaydon)

Before I call the hon. Gentleman, may I warn him not to trigger a repeat of the debate that we have just had?

Rob Marris (Labour, Wolverhampton South West)

I had no intention of doing that, Mr. McWilliam. I rise briefly to oppose amendment No. 102 and the points about historic homes that the hon. Member for Arundel and South Downs has made. They are absolute nonsense. The figures on Tuesday showed that 1,250 of the 1,800 historic homes are not open to the public at all; 350 are fully open; and 200 are partially open. The examples that he cited on Tuesday were some of the worst examples of inherited wealth, and he should turn his phrase around, because he is allowing his monopoly-capitalist intellect to override reality. Some of the homes that he cited have been in families for hundreds of years. That is not about people who are rich through creating something for society; it is about something that their forebears did hundreds of years ago. That is not to be supported, and I oppose amendment No.102.

Amendment agreed to.

Amendments made: No. 150, in

schedule 15, page 348, line 11, leave out 'year of assessment 2005–06' and insert 'initial year'.

No. 151, in

schedule 15, page 348, leave out lines 24 to 27 and insert—

'21 (1) This paragraph applies where—

(a) a person (''the chargeable person'') would (apart from this paragraph) be chargeable under paragraph 8 (intangible property) for any year of assessment (''the initial year'') by reference to any property (''the relevant property''), and

(b) he has not been chargeable under that paragraph by reference to the relevant property in respect of any previous year of assessment.'

No. 152, in

schedule 15, page 348, line 30, leave out 'year of assessment 2005–06' and insert 'initial year'.

No. 153, in

schedule 15, page 348, line 44, at end insert—

' ''the relevant filing date'' means 31st January in the year of assessment that immediately follows the initial year within the meaning of paragraph 20 or (as the case requires) paragraph 21.

No. 154, in

schedule 15, page 348, line 46, leave out '31st January 2007' and insert 'the relevant filing date'.

No. 155, in

schedule 15, page 349, line 2, leave out '31st January 2007' and insert 'the relevant filing date'.

No. 156, in

schedule 15, page 349, line 5, leave out 'before 31st January 2007' and insert

'on or before the relevant filing date'.—[Dawn Primarolo.]

Schedule 15, as amended, agreed to.

Clause 85 - Relief where national insurance contributions met by employee

Richard Bacon (Conservative, South Norfolk)

The clause will be widely welcomed by the Committee. Along with schedule 16, it introduces a new income tax relief for employees who agree to meet some or all of the employer's secondary national insurance liability arising from restricted or convertible employment-related securities. The ability to visit on the employee the employer's national insurance charge is already available and used with traditional share options, and the clause extends that ability to other sorts of share incentive schemes involving restricted and convertible securities.

Such securities operate in a similar way economically to traditional share options, but with some advantages. With a traditional share option, if one wishes to take advantage of it, assuming it is in the money and there is some point in taking advantage of it—

John McWilliam (Labour, Blaydon)

Order. May I give the hon. Gentleman some advice? He is addressing the schedule, not the enabling clause. If we dispose of the enabling clause first, we can move on to the schedule.

Richard Bacon (Conservative, South Norfolk)

Thank you for your advice, Mr. McWilliam. I shall restrict my comments to the clause.

I would like to ask a question that relates to subsection (3), which provides for the order to come into effect on an appointed day to be made by Treasury order. I know from the debate today and on Tuesday that the Paymaster General is in a backdating mood, and there would be considerable advantage in backdating the effect of the clause—one could call that backdating, retrospectivity or retroaction. Some employers will have built up substantial national insurance liabilities because of the rise in the value of securities in share incentive schemes that were arranged not through traditional share options but through convertible or restricted securities. It would be helpful for employers with those liabilities if, with the agreement of the employee who would benefit, they were able to pass them on by election.

The Minister has been in a backdating mood, so will her largesse apply to this clause?

Dawn Primarolo (Labour, Bristol South)

Let me deal briefly with the date on which the tax provisions come into force. As the

hon. Gentleman is probably aware, the National Insurance Contributions and Statutory Payments Act 2004, which the tax provisions support, was debated in both Houses and received Royal Assent on 13 May. The Treasury order is designed to ensure that the clause 85 provisions come into force at the same time as that Act, so that they are both operational at the same point. The Treasury order is required to switch that on. Whether he decides to call that backdating is up to him. This is a question of timing for the coming into force of the Finance Bill and the national insurance Act that it mirrors for tax purposes. He is probably aware that Finance Bills cannot make national insurance provisions.

Question put and agreed to.

Clause 85 ordered to stand part of the Bill.

Schedule 16 - Relief where national insurance contributions met by employee

Richard Bacon (Conservative, South Norfolk)

Having taken note of your careful guidance on when I should make my comments, Mr. McWilliam, I shall now comment on the schedule, which puts into effect the clause 85 provisions.

The new forms of share incentive schemes plainly have some advantages over traditional share options, such as various kinds of restricted and convertible securities for employees. To exercise a traditional share option one must either have the money to purchase the shares, borrow the shares or sell the shares to crystallise the gain, and then be able buy back the proportion that one wishes to hold. I think that my hon. Friends and I, the Government and major institutions, such as the Association of British Insurers, share a desire to encourage senior executives in this area; I also think that this should be spread to all employees, which is what my hon. Friend the Member for Tunbridge Wells (Mr. Norman) did successfully when he was in charge of Asda—so successfully, in fact, that the Treasury had to take another view on the matter, because he had interpreted the provisions for senior executives rather more broadly than some of his fellows in industry.

Surely the advantage of the schemes—which the ABI is strongly in favour of—is the ability to ensure that executives build up meaningful shareholdings in the businesses that they direct. Anything that enables them to do that more easily is to be welcomed, other things being equal; and a system that does not require them to sell their shares in order to crystallise the gain is, other things being equal, a better one.

There are a couple of other advantages to restricted and convertible securities—depending, obviously, on the covenants and restrictions put on schemes. Notably, one can in effect abolish the money problem, and the problem of traditional share options going under water. Such securities also typically result in less dilution for the shareholders, although that depends on the exact structure chosen, and that is broadly to be welcomed.

It would seem that there are few objections in principle to extending the national insurance provisions that apply to share options to restricted and convertible securities. Presumably, the Government are taking a more favourable view of restricted and convertible security share incentive schemes. If so, is it their intention to introduce Inland Revenue-approved restricted and convertible schemes, such as those that exist for traditional share option schemes, and if not, why not?

It is hard to see anything bad about share incentive schemes involving restricted or convertible securities that would not also apply to traditional share option schemes. Perhaps the Paymaster General could illuminate the Committee on that. Is there an economic difference between the newer—I might even say more new Labour—share incentive schemes and traditional share incentive schemes? Of course, as I have pointed out, there is a certain economic difference for the shareholder, because of the lesser dilution effect, and that is to be welcomed.

Rob Marris (Labour, Wolverhampton South West)

Why does the hon. Gentleman see lesser dilution as desirable, when wider share ownership is itself often seen as desirable?

Richard Bacon (Conservative, South Norfolk)

Very simply, the answer is this: the ABI's guidance on executive share incentive schemes says that they should entail the minimum possible dilution for shareholders who are not executives. A share incentive scheme that can achieve the same effect with lesser dilution is, other things being equal, a better scheme from the point of view of all other shareholders, including members of the public and institutions. Plainly, we want senior and other executives to be rewarded under share ownership schemes, but preferably ones that result in minimum dilution. I repeat my two questions: is the Inland Revenue proposing to introduce an approved scheme for convertible and restricted securities, and if not, why not?

Dawn Primarolo (Labour, Bristol South)

The major debate on the new share schemes legislation and the reasons for restrictions in certain areas was held when we considered schedule 22 to the Finance Act 2003. In that debate, there was extensive discussion about the use of shares and other securities in what, at times, amount to complex commercial transactions. The Government were seeking to encourage and support reliefs for employee share ownership and schemes. They, on all our behalves—and indeed the taxpayer—put a great deal of money into that. The schemes need to be directly linked with the employees having a stake in the future of the company. As the hon. Member for South Norfolk (Mr. Bacon) rightly said, it should not be restricted to any one section of the work force. He gave the excellent example of the way that some companies—he mentioned Asda, but there are others—have sought to ensure that there are employee share-ownership schemes for the whole of their work force.

There are various types of specialist schemes, and this Government have done more than any other to provide for their expansion. The other problem with the area that we are discussing is that it is fraught with avoidance, where individuals are rewarded in ways

that are only a substitution for their salary in order to access a lower level of taxation or more reliefs. That is a highly complex area, and when schedule 22 was discussed last year I made it clear, and I think that the Committee accepted this general point, that it is difficult to strike a balance to ensure that there is not a loss to the taxpayer from contrived schemes, but the investment in employee share ownership is important. This schedule does not reopen any of that debate. Following the tax law rewrite and last year's schedule 22, it implements commitments to change national insurance and allow tax to follow it in the one specific area that we are discussing.

I will comment on the two general points raised by the hon. Member for South Norfolk. Restricted and convertible shares may be used in certain approved share schemes that are currently cleared by the Inland Revenue. However, this House, through the Finance Act 2003, introduced certain hurdles before that approval can be granted.

As I said, in future those approved schemes may extend. There are already a number of approved schemes and both I, as a Minister, and the Government are comfortable that that strikes the balance between giving flexibility in a very dynamic area and encouraging, as the hon. Gentleman is right to, giving employees a real stake in their company and allowing them to share in its growth, as well as protecting the taxpayer. That is the answer in a nutshell. If schemes fall within the criteria they can be approved schemes. The Government are carefully watching that area, as they always do. I have forgotten the exact amount of relief that is given in that area each year—but it is hundreds and hundreds of millions of pounds—to millions of employees, and it is working well.

Richard Bacon (Conservative, South Norfolk)

I am very grateful to the Paymaster General for her explanation. I hope that she will just elucidate one point a little further. What can she offer to those employers who set up restricted and convertible security schemes some time ago, not necessarily in Revenue-approved schemes, who, because of the rising value of the securities over a number of years, now face a substantial national insurance charge? What can she offer them in terms of their ability to visit that liability on the employee, admittedly by election or by agreement?

Dawn Primarolo (Labour, Bristol South)

Well, it must be done by election or by agreement, and the hon. Gentleman is right to touch on that point. I am sure that he realises that what the fair balance between the responsibilities of the employer and those of the employees to pay is, has been a matter of debate and consultation for some time, particularly in the area of national insurance.

At the time of the consultation on the measures that the Government took in last year's Bill, not all the consultees were entirely happy—some wanted the Government to go further—but we decided that the changes that we are making are welcome. There has, to my knowledge, been no criticism, and we have received no submissions about clause 85 and the connected schedule saying, ''We do not like it and it is unfair.'' Of

course, taxpayers are always pressing the Government for more in every area, and this is no exception.

I say to the hon. Gentleman that all the guidance, support and discussion with scheme providers have struck the correct balance, but that does not remove the fact that there is still a delicate discussion to be had about how large a liability is being transferred.

During the discussions on the National Insurance Contributions and Statutory Payments Bill, the proposals for the elections on the national insurance contributions, which can be large, were discussed in terms of ensuring that the employee was not put under undue pressure by an employer and that a decision was reached correctly and by agreement. The elections may be used to transfer future employer's national insurance to the employee on restricted and convertible shares already awarded, as long as that liability has not yet arisen.

We built in as much as can to give both the employee and the employer the flexibility that they need, with a safeguard for the employee of not being under undue duress, and a safeguard for the employer to ensure that, when a contribution has been transferred, it has been done properly. I say to the hon. Member for South Norfolk that the Government's judgment is that that is as far as we can go at this point.

This is a changing and highly dynamic area, and we work closely to maintain consultation with scheme providers to ensure that the legislation is appropriate. I think that that is what the Committee and the House will accept, and it may mean subsequent changes to the legislation in future Finance Bills. I do not know, but I will not hesitate to bring the issue back if I think it appropriate.

Howard Flight (Conservative, Arundel and South Downs)

I cannot resist chiming in that I addressed a large group of business men this week, and their complaints all related to schedules 22 and 23 to the Finance Act 2003 and to the problems that we highlighted. They complained that unapproved share options are a shambles, giving people a tax charge of more than 50 per cent. and driving up pay.

This is just a tidying up of the territory, but the notion that tax law and the drafting of that law are all hunky-dory is a complete illusion. In the real world, the arrangements are causing many problems.

Dawn Primarolo (Labour, Bristol South)

The proposals in the clause and schedule impose no additional obligations on employers or employees. Part of the debate that the hon. Member for Arundel and South Downs just referred to is the heated debate that rages about whether privileged schemes, which may affect only a small number of employees, should have reliefs that are designed to be available to all-employee schemes. It is very interesting that he says that the end result will drive up wages. That might reflect the point that I made earlier, which is that some of the schemes are wages in disguise, and it is not unreasonable that we should seek to tax them in that way.

The area is highly complicated—not in this clause and schedule—but it is part of the wider debate, and I am sure that debate on it will continue in the House, and I am sure that Opposition Members will not hesitate to table amendments relating to it in the future.

Question put and agreed to.

Schedule 16 agreed to.

Clause 87 ordered to stand part of the Bill.

Schedule 17 agreed to.

Clause 88 - Enterprise investment scheme

Howard Flight (Conservative, Arundel and South Downs)

I should first declare an interest, as I have been an investor in several enterprise investment scheme companies, nearly all of which have failed.

The clause and the accompanying schedule make a number of amendments to the EIS. These include increasing the maximum amount that can qualify for relief to £200,000 from £150,000, and relaxing a number of the technical rules as to what types of shares and companies can qualify. Those provisions are welcome. One or two technical issues have been raised in relation to them, and it would be helpful if some clarification could be put on record about those.

The EIS same-day rule is causing some concern, and although conversion of debts or loans to share capital is regarded for the purposes of the Companies Acts as the issue of shares for cash, it has not been treated as such for EIS purposes. The issues of shares in such circumstances can disqualify other shares issued on the same day. Paragraph 3 of the notes on the clause refers to the same-day rule, and paragraph 6 refers to the rules relating to the payment of loans being relaxed. The concern is that the conversion of debt or loans will disqualify other shares issued on the same day, by virtue of section 289(1)(B) of the Income and Corporation Taxes Act 1988. Will the Economic Secretary give some assurance on that point?

All moneys subscribed for shares in a company are technically loans for the company until shares are subsequently issued. There are concerns that schedule 18 might mean that any subscription for shares will be defined as a return of value when shares are issued if the cheques are banked before the issue is confirmed by the recording of shares in the company register. Again, some clarification would be appreciated.

John Healey (Labour, Wentworth)

I recognise the hon. Gentleman's personal experience with such schemes, and regret that his investments mostly appear to have failed, but I trust that the loss relief available to him for such schemes may have proved useful.

The clause will make a number of improvements to the enterprise investment scheme, as the hon. Gentleman recognises, to increase the flow of funds to small entrepreneurial companies in the higher-risk bracket, making it more flexible and responsive to

commercial factors. The main changes are as follows. First, we are increasing the amount of investment in a tax year that can qualify for EIS income tax relief from £150,000 to £200,000. Secondly, under current rules, all the shares of the same class issued by the company on the same day have to be paid for in cash. For example, shares issued to professional advisors in lieu of payment could taint the EIS shares. That requirement will no longer apply, but it will still be necessary for an investor who wishes to claim EIS reliefs to subscribe for shares in cash.

Thirdly, the active company rule is abolished. That rule requires that the company's trade or research and development benefits from the money that is raised under the EIS is earmarked at the outset and must remain the same, usually for three years. The new rule will enable that trade or research and development to be moved within the group, provided it is carried on by the company in which the investment is made, or by a qualifying 90 per cent. subsidiary.

Fourthly, the rule is amended that allows any EIS company to have subsidiaries, but only if it has a direct or indirect 75 per cent. interest in each of them—the so-called 75 per cent. qualifying subsidiaries rule. The new rules require that any subsidiary must be a 51 per cent. subsidiary of the EIS company. However, any subsidiary that was carrying on the activities for which the investment funds were raised, and any property managing subsidiary, must be a qualifying 90 per cent. subsidiary.

John Burnett (Liberal Democrat, Torridge and West Devon)

Will all the losses of a 51 per cent. subsidiary, if there are any, be available throughout the group, to be channelled as and where they are required by the holding company?

John Healey (Labour, Wentworth)

I hope to deal with that. If I do not, the hon. Gentleman will need to come back to me.

Fifthly, we are making an important change. Investors cannot currently make a short-term loan to help to tide a company over a cash-flow problem without jeopardising their eligibility to EIS income tax relief on investments in the company's shares that are made in the next 12 months. That impediment is removed, provided that any repayment of the loan is not connected with the share issue. There is no question of giving EIS relief on loans that are converted to equity.

I should like to respond to specific points that have been raised. The answer to the question asked by the hon. Member for Torridge and West Devon is no. I hope that I have dealt with the first point raised by the hon. Member for Arundel and South Downs. On his second point about return of value, that has been raised with us by some of the professional bodies, and we have given an assurance that there will be no return of value. We intend to make that clear in the Inland Revenue guidance that will accompany the changes.

The changes respond to a number of representations that we have received. They have been warmly welcomed and demonstrate our commitment to encouraging the provision of capital for smaller, high-risk companies. I commend the clause and schedule to the Committee.

Question put and agreed to.

Clause 88 ordered to stand part of the Bill.

Schedule 18 agreed to.

Clause 89 - Venture capital trusts

Howard Flight (Conservative, Arundel and South Downs)

We have some amendments to schedule 19. Although clause 89 only introduces the provisions of schedule 19, I should like to make some general comments on the arrangements before dealing with the schedule and our specific amendments.

As Committee members will aware, the arrangements make a number of changes to the operation of venture capital trusts, some of which are in line with the amendments that we have just discussed with regard to EIS companies. The maximum amount on which relief can be claimed is likewise increased to £200,000. The main point is that the nature of the tax has been changed. Capital gains tax deferral relief is abolished and income tax relief is increased to give relief at the higher 40 per cent. rate of tax; the previous rate was 20 per cent. There are a number of other amendments in respect of what companies qualify for investments and how they carry on their trade. Again, that is broadly in line with the changes that we have discussed.

There are some points of principle that I would like to raise, and some background I should like to discuss. I presume that the shift to a more generous income tax relief and the abolition of the capital gains tax shelter largely reflect the fact that there have been very few capital gains to shelter during the past few years. I presume that the industry has therefore told the Government that there is not much incentive provided by the capital gains tax deferral for the present.

It would be helpful if the Minister made clear what the Government really mean by limiting the extra income tax shelter to a two-year period, and what they meant in announcements about the abolition of the capital gains tax deferral all together. I understood that the Government intended to review the situation in two years' time and that—if they were still in power, and we had not come in and changed things—in principle they might switch back to the existing arrangements and stimulate venture capital investment, if they felt that capital gains deferral was likely.

However, from the way in which the announcements were made, it has come across to many that capital gains tax deferral is dead and gone for ever, that the higher rate of income tax is only for two years and that this is really about the Government looking to phase out the VCT altogether. Clarification on that central issue would be helpful.

A venture capital management company, which I regard as among the most professional and conscientious, wrote me a long letter saying that it

was pretty uncomfortable about the changes, although they looked attractive on the surface. It said that the changes could have some undesirable effects, and that they had not been thought through.

The company's argument was that capital gains tax deferral was a suitable tax incentive for long-term venture capital investments, and that, typically, a period of 10 years or so should be allowed for a normal venture capital investment to fructify. With a VCT, the expected process is that some investments will go bust, some will do nothing and some will do well. The company said that that should not be thought of as an income tax avoidance vehicle, and that the focus should be on the long term.

There is a danger of bringing in a 40 per cent. income tax incentive similar to that which operated under the old business expansion scheme under the last Conservative Government, and which started to get structured and designed as a tax shelter vehicle rather than as a long-term venture capital vehicle. I think that there is something in those concerns, and I would be interested to hear what the Minister has to say about them.

When one makes a VCT investment to shelter capital gains tax, there is a clear message that one is in it for the long term. In the marketplace, there will be considerable temptation to structure VCTs to attract shorter-term savings of income tax, and doing that would affect the sort of investments that VCTs make. For example, it might be more attractive and safer to invest in companies that are in essence off-balance-sheet financing vehicles for larger companies and give a safer type of return, than to make genuine early stage long-term venture capital investment, which of its nature is very uncertain. There is some possibility that it could make VCTs that really are long-term early stage investment vehicles more difficult to market above those that address the income tax shelter market.

To go back to my earlier comments, that is why it is important for the Government to get across their message very clearly. My understanding is that the provisions in clause 89 and schedule 19 are a short-term, palliative measure to retain some incentive for the venture capital industry because, with the fall in the securities markets, very few people have capital gains to shelter, and that, in a couple of years, the decision might be taken to revert to the regime that is now being left behind. I hope that that is the case, because that might reduce the risk of the increased income tax advantage slightly distorting what venture capital trusts invest in and the way in which they are used. Our amendment No. 27 is a probing amendment dealing with just that issue.

The provision is generally sensible, welcome and understood, but we would appreciate the Minister's response to those concerns and thoughts.

Rob Marris (Labour, Wolverhampton South West)

I have a brief question for the Minister. Does ''issued'' in subsection (1) in line 22 on page 79

mean the same as ''allotted''? If not, is it really the Government's intention to use ''issued'' or ''allotted''?

John Healey (Labour, Wentworth)

The hon. Member for Arundel and South Downs made several general comments on the clause and raised two points of principle. I shall do the same and deal with some of the more detailed aspects when we come to the schedule.

The clause and the schedule make a number of improvements to the incentives to individuals to invest in the venture capital trust scheme and relax the rules relating to companies that are invested in. Taken together, they mark a significant change in the attractiveness of VCTs to investors and to smaller companies seeking finance from them.

For shares issued by a venture capital trust between 6 April 2004 and 5 April 2006, the rate of income tax relief available to investors is doubled from 20 per cent. to 40 per cent. The maximum amount of the investment on which that relief can be claimed is also doubled to £200,000 a year. Those measures should greatly stimulate investment in VCTs.

The hon. Gentleman asked me about removal of capital gains tax deferral. That is a longer-term structural measure, not something with a temporary rationale. That provision is one of the tax aspects that has contributed to unsustainable fluctuations in VCT funding year on year. By removing it, we believe that we will make this less susceptible to the peaks and troughs of VCT funding. An unreliable or unstable investment flow through VCTs can hamper both the investment fund industry and smaller companies that are looking for investment and relying on it through that route. The facility for deferring capital gains tax by reinvesting a gain in VCT shares is being abolished for shares issued after 5 April 2004.

To link the two principal points made by the hon. Gentleman, we believe that the temporary increase in income tax relief more than compensates for that. The increase in the income tax relief is aimed at a temporary stimulus to increase investment in VCTs. No longer-term decisions have been taken, but we will look at the position in detail before the two years have passed.

I hope that I have been able at least to make clear the rationale and our thinking behind the changes. We are also relaxing the rules for companies in which VCTs invest, but the details are largely in the schedule, so I shall not dwell on them now.

In summary, the changes constitute a response to the many representations made to us and have been warmly welcomed by the venture capital industry. For example, the European Venture Capital Journal reported that the

''UK Chancellor of The Exchequer Gordon Brown gave a potential shot in the arm to the fund raising efforts of Venture Capital Trusts''

in his Budget.

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

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

Standing Committee A

(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) - Clause 89 - Venture capital trusts

John Healey (Labour, Wentworth)

I welcome you to the Chair, Sir John.

I was making the point that the changes proposed in the clause have been warmly welcomed by the venture capital industry. I had offered one quote as confirmation of that and will offer another. Senior consultants at Ernst & Young reckon:

''These changes will provide a considerable boost for cash-starved firms looking for investment capital.''

I turn to a couple of specific points raised by my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) and the remaining point of principle raised by the hon. Member for Arundel and South Downs (Mr. Flight).

On the word ''issued'' as used in the clause, there is a difference between shares that are allotted and those that are issued, as my hon. Friend loyally pointed out. The provisions for venture capital relief are determined by reference to the date on which shares are issued, not the date on which they are allotted, so it is entirely appropriate that the changes made by schedule 19 take effect according to the date of issue.

I turn to the general point of principle that was troubling the hon. Member for Arundel and South Downs, who said that the changes may look appealing but, at first sight, particularly with the interplay between capital gains tax deferral abolition and the increase in income tax relief, the venture capital industry is concerned that it will lose out in the long term. I understand that the industry must plan ahead and that the valuable tax incentives offered to it are an important part of that planning. More than half the responses to the consultation on the changes were in favour of replacing capital gains tax incentives with enhanced income tax relief, with approximately one third taking a contrary view.

The most common benefit cited for enhanced income tax relief was that that would lead to a less volatile form of funding than CGT-based incentives because of the dependence of CGT accruals on cyclically affected asset markets and, therefore, the capital gains that investors would have reason to look to shelter in VCTs. The other benefit often cited was that income tax relief was likely to be simpler and

more attractive to a younger and broader range of investors.

The challenge facing us is that industry professionals have told us, and published data on investment via VCTs demonstrate, that in recent years levels of VCT investment in small companies have fallen. Our analysis, plus the views of industry, show CGT deferral relief to be a factor in that. Investors cannot make use of it unless they have capital gains that they want to shelter. On the day after the Budget in March, the Financial Times commented that

''VCTs are often used as a shelter for capital gains, but this has been their undoing over the past three years.''

We sought to deliver in the clause a kick-start to revive the industry, and we have done that by shifting the tax incentive towards income tax relief. We have limited the relief to two years because it is generous, and no member of the Committee would dispute that.

Rob Marris (Labour, Wolverhampton South West)

Referring to my hon. Friend's earlier answer to my question about ''issue'' versus ''allotment'', what is to stop a venture capital company issuing shares during that two-year window but not allotting them until much later, thereby getting around the window that the Economic Secretary seeks to impose?

John Healey (Labour, Wentworth)

Generally, as my hon. Friend is probably aware, allotting takes place before issuing, so the sequence is usually the other way round. Because the Bill specifies the date of issue, that is the relevant date at which the provisions apply.

Decisions on what will happen in two years will be based on evidence of the effect of the changes that we seek to make in the Bill, on what we learn from our continuing discussions with the venture capital industry and, importantly, on the direction that the industry itself takes. It is impossible to say with any certainty at this point what we should do in two years. The industry is flexible: it is continually looking for new ways to make its offering attractive. It is only right, therefore, that the Government should retain some of the same flexibility within the clear and constant objective of improving access to capital for small, growing companies.

The approach that we adopt in the Bill appears to be right in the eyes of a number of commentators. It attempts to balance the objectives and concerns that I have explained to the Committee. I end my remarks with a comment from Mark Fox of the British Venture Capital Association, who said after the Budget:

''The reforms will go a long way to helping VCTs invest in smaller and more entrepreneurial businesses''.

On that basis, I commend the clause to the Committee.

Howard Flight (Conservative, Arundel and South Downs)

I want to respond on two issues, to reinforce my point. The very genuine concern of what I would call the heavy part of the early stage venture capital industry is that although the changed incentive—the 40 per cent. income tax relief—has obvious attractions to people, it is virtually the same as the old business expansion scheme incentive, which led to the construction of schemes that were of a short-term, tax shelter nature. Serious long-term early stage venture capital investment is tricky. It is not

surprising that, in the short term, an industry tends to welcome anything that might deliver more money to manage. That should be the case, because otherwise no one would have any capital gains left to defer.

However, there is a serious risk that the structuring of venture capital funds will be driven down a route that is bad news in all sorts of ways. That route will discredit such funds and it will not, above all, channel money to early stage venture capital, which is where the famous gap tends to exist. The Economic Secretary should not be entirely persuaded by the BVCA or one or two other bodies. There is a serious danger. I am aware from my own knowledge of the industry that, quite understandably, people are now looking at structuring tax shelter vehicles out of the incentive.

The second point, which surprised me, is that I had understood from other discussions that the new regime was an experiment on the part of the Government and that, as I said earlier, they might intend to revert to the old regime. However, the Economic Secretary made it clear that, as far as this Government are concerned, the ending of CGT deferral is permanent, and its revival is not under consideration.

The Economic Secretary made it clear that the very generous 40 per cent. is for two years only. I have to make the obvious point that if we end up with a 20 per cent. income tax incentive, that will be the death of venture capital trusts and the move will amount to a rather subtle phasing-out of the whole VCT incentive. I am afraid that there is no other interpretation of what the Economic Secretary said at the beginning of his speech. I do not think that the industry understands that that is the situation. It thinks either that the 40 per cent. is likely to be there for ever, or that we will revert to the old regime if markets go up and people have got lots of capital gains. However, if this Government were, unfortunately, still in power, we would end up with just a 20 per cent. income tax incentive, and the message would go out loud and clear to the industry: ''Forget VCTs. They're being phased out, mate.''

John Healey (Labour, Wentworth)

I accept the hon. Gentleman's point about genuine concerns and his caution, which is based on his experience, especially on the question of long-term incentives to hold investments. There is a genuine debate about the most effective way to put in place the right incentives to allow the flow of funds to continue through VCTs. However, let me be clear on one point. The clause is not the first part of some sort of phasing-out of support for VCTs. It is not in any way a slackening of our commitment and support for the role that they play.

The challenge that we face, which I have tried to explain, is to kick-start the low levels of funding that have been routed through VCTs over the last two or three years. There is a concern about the long-term effect of CGT deferral relief amplifying the structural peaks and troughs that we have experienced with VCT funding. I have tried to explain very clearly that we shall introduce the new income tax relief at 40 per cent. for two years. Before the end of that period, we shall have to make decisions about what we will do beyond

that. Those decisions will be made in light of the impact that the new package of incentives appears to be having on the industry and on levels of investment. They will also be informed by the opinions that we receive from the industry and by developments during the next couple of years in what is a very flexible and fast-moving industry.

Norman Lamb (Liberal Democrat, North Norfolk)

With regard to the assessment, if the policy is seen to be working and introducing new money into VCTs in two years' time, is the Minister saying that that will be a significant factor in encouraging the Government to continue the higher rate of relief?

John Healey (Labour, Wentworth)

It is a shame that the hon. Gentleman was not here for the start of the debate. Self-evidently, our major objective, which is shared by the Committee, is to ensure the highest possible level of investment for small, generally risky, companies being routed through VCTs as one of the streams of potential funding. The purpose of our proposals is to try to improve on the investment of the last couple of years, which will be a decisive factor and a continuing objective in any decisions that we make. I made it clear before the break—which was the point of my gentle admonishment of the hon. Gentleman—that we would make decisions on what should happen before the end of the two years, not afterwards, as the hon. Gentleman suggested.

Question put and agreed to.

Clause 89 ordered to stand part of the Bill.

Schedule 19 - Venture capital trusts

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 27, in

schedule 19, page 369, line 23, leave out from beginning to end of line 7 on page 370.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following amendments:

No. 28, in

schedule 19, page 374, line 23, at end insert—

'17 (1) Schedule 33 to the Finance Act 2002 (Venture Capital Trusts) is amended as follows.

(2) After paragraph 7 insert—

''7A Without prejudice to the generality of the foregoing of this Part of this Schedule, a VCT-in-liquidation or a VCT-in-liquidation that has been wound up shall be deemed to remain a VCT (that is to say, a company whose shares are deemed to be shares whose approval as a venture capital trust is not withdrawn) for the purposes of Schedule 5C of the Taxation of Chargeable Gains Act 1992''.'.

No. 29, in

schedule 19, page 374, line 23, at end insert—

'17{**th**}(1) Section 151A of the Taxation of Chargeable Gains Act 1992 (Venture Capital Trusts: Reliefs) is amended as follows.

(2) At the end of sub-section (1) of that section, insert—

''save that a loss arising on the disposal of such ordinary shares shall be an allowable loss in the case where and to the extent that a claim was previously made under paragraph (2) of Schedule 5C to this Act and the expenditure on such ordinary shares was treated for the purposes of that schedule as qualifying expenditure.''.'.

Howard Flight (Conservative, Arundel and South Downs)

I should welcome you to the chair this afternoon, Sir John, and I apologise for not doing so earlier.

All three amendments are probing. The first is designed to tease out whether the Government statement means the deferment of CGT relief is to be abolished for ever. I repeat the point that I had understood in discussion with others that in nearly two years' time the regime would be up for grabs—all things being equal—and a decision could be made to revert to the present regime. What the Economic Secretary has just said confirmed that the Government are not thinking of leaving that option open for the future. That is a mistake; very different circumstances may prevail in future.

When I was going through amendments Nos. 28 and 29 last night, I thought that they were not very good. The tax position on venture capital projects that go bust, be they VCTs or enterprise investment schemes, is complex, and one forgets what the rules are.

Circumstances have arisen in which venture capital investments that have had the income tax shelter and that of CGT deferral go bust and, at best, the investor is left to refund the 20 per cent. income tax allowance. The previous Conservative Government introduced the measure, and although its logic is clear, the other side of the coin is that people would have been better off never having risked their money in the first place, paying their capital gains tax and leaving the money in the bank. Well, fair dice—take a risk and hard luck if it does not work—but that has seriously damaged the perceived attractions of venture capital investment. Money has dried up not just because people have had less capital gains tax to defer, but because they have had the unpleasant experience of finding that a lot of their investment has gone bust and that they have a tax refund bill at the end.

The rules are incredibly complex. From my own experience, finding out when something has gone bust and precisely what the tax rules are has burned up hours. I corresponded with Sir Nick Montagu about that and he admitted the problem but said that it was too difficult to address. It is a very complex and tedious aspect of taxation. Ultimately when businesses go bust the tax situation is relatively harsh.

I stray a little in talking about EIS investments, which are a little more specific and cut and dried than VCT investments. It is unusual for VCTs to go bust because of their spread of investments, but in market value terms many have done extremely badly and stand at one third of their start-off value.

We are also moving to a time of possible enforced realisations. Although the five-year rule has been changed to three years for income tax, it has happened only latterly. For the great majority of venture capital money, if the loss crystallises in five years, the income tax charge must be fully refunded.

The rules about how one can take capital losses were complex. In some cases, it was a 100 per cent. loss and one could take it against income if one had enough to take; in others, and I have forgotten the

technicalities, one could obtain a capital gains tax offset.

The point of the amendments is to highlight the fact that when things go completely bust or pretty badly for historic venture capital and VCT investment, the tax situation is complex and harsh. That is one reason why people are jaundiced by it; if nothing else they did not expect the situation to arise. I freely admit that the previous Conservative Government introduced the regime, but as with the changes today no one thinks about the future. People's knowledge of their tax position and its tax consequences is unsatisfactory.

The amendments are rather crude and do not work particularly well because they would either add no advantage or create too generous an advantage. However, they highlight a problem that underpins one reason why people are less keen on venture capital trusts. The Economic Secretary will say, ''We are not interested in the past, so hard luck on those poor devils, but changing to an income tax regime means a new regime that will have its own attractions.'' However, it has its own potential weaknesses as well. Does the Economic Secretary have any thoughts about addressing the complexities of the tax situation and its relative harshness for venture capital investments that go back for years? Do the Government have any proposals to address those problems?

John Healey (Labour, Wentworth)

The hon. Gentleman describes his amendments as probing. I hope that he feels that, on the first of his concerns, which is raised in amendment No. 27, he probed sufficiently during the debate on clause 89. I simply say to him that venture capital is a dynamic industry; it constantly strives to alter its attractiveness to investors. We want the flexibility—as a Government, I think it right that we claim it—to ensure that we can respond accordingly and play our part in ensuring that VCTs remain attractive. We will consider how to do that during the next two years.

Amendment No. 27 seeks to reverse the abolition of the CGT deferral relief for investors. I hope that I have explained why that would be a backward step and given the hon. Gentleman the information—if not the reassurance—for which he was probing.

Howard Flight (Conservative, Arundel and South Downs)

Thinking back, I heard the Economic Secretary say that there would be no consideration of a changed regime that might bring back CGT deferral. He then talked, slightly more generally, about the situation being open. I want to know whether the Government's position is that there is a clear understanding, as per the original announcement, that this is the end of CGT deferral.

John Healey (Labour, Wentworth)

If the hon. Gentleman consults the Official Report for the Committee, he will see that I did not, at any point, say that. I explained why we have taken the view that CGT deferral relief exacerbates some of the cyclical problems of VCT fund flows. He will have heard me say that the majority of respondents to our consultation were of a similar view and wanted reforms such as those in clause 89 and this schedule. At no time will he have heard me say that anything is ruled out as we take stock during the next two years and consider what we should put in place to try to maintain the attractiveness, and

maximise the volume, of investment funds through VCTs.

On amendment No. 28, I remember the proposal that the hon. Gentleman made during the proceedings on the Finance Bill in 2000. I also remember the discussion that we had in Committee during the scrutiny of the Finance Bill in 2002 when, as a Government, we provided for VCTs to merge or, as relevant here, to wind up in an orderly fashion without risking the loss of VCT tax reliefs, about which the hon. Gentleman was consistently concerned.

It may be more appropriate to discuss this point in the debate on the next group of amendments, but I just say that, although the hon. Gentleman talks of VCTs going bust, I am not aware of any doing so, and nor are my advisors. If the amendment's purpose, apart from probing, is, as I think, to ensure that a VCT in liquidation—what, in draft regulations, would be termed a VCT that is winding up—would be treated as continuing as a VCT so that CGT deferral relief was not revived solely on account of the winding up, I can reassure the hon. Gentleman that the provisions in schedule 33 of the Finance Act 2002 are already adequate.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Economic Secretary for that response. As I said, the amendments were tabled to air some issues. I shall just comment on his last point. What I was trying to get at was slightly wider. In situations in which a gross investment in a VCT of £100 ends up being worth £10 or £20, which is not at all uncommon, or—this is really more relevant to EIS investments—in which individual venture capital investments go bust, as a large proportion do, investors generally find themselves in a rather more unpleasant situation tax-wise than they had anticipated. The CGT deferral comes back into play, and, if the period is less than five years, the income tax bill is restored. There are certain circumstances in which capital losses can be offset against income and others—I have forgotten how they work—in which one can actually claim a capital loss, but there is generally pretty bad news tax-wise when venture capital investments fail.

Both amendments were designed to raise the point that situations of total failure, which I grant are more suitable for EISs than VCTs, or of substantial loss have been a significant turn-off to VCT investment. There is probably no pragmatic argument for doing anything about that—there is a case for looking to the future—but the Revenue might look at the issue in more detail.

Finally, something that is not in the amendments at all but is relevant is the administration, which is a complete nightmare. It is difficult to define when something has gone bust, and the hassle for people filing tax returns when venture capital investments fail is formidable. That also is a big deterrent. What looks nice up front turns out to be a nightmare when it goes sour. I was simply asking whether the Government were at least considering the matter. 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. 32, in

schedule 19, page 374, line 23, at end add—

'17 (1) Schedule 33 to the Finance Act 2002 (Venture Capital Trusts) is amended as follows.

(2) After ''Obtained'' in sub-paragraph (2) of paragraph 8 (Power to facilitate mergers of VCTs) insert ''but not subject to any condition that would prevent a merger of two or more companies in the case where one company makes an unsolicited offer for the shares of one or more other companies (or otherwise makes an offer for such shares that has not been agreed by such other companies).''.'.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss amendment No. 33, in

schedule 19, page 374, line 23, at end add—

'17 (1) Schedule 33 to the Finance Act 2002 (Venture Capital Trusts) is amended as follows.

(2) In paragraph 10—

(i) subparagraph (1)(b)(i), after ''company'', insert ''such that company A comes to possess voting power in excess of 50 per cent. of the shares in the other merging company''.

(ii) in subparagraph (2)(b)(i), after ''company'', insert ''such that company B comes to possess voting power in excess of 50 per cent. of the shares of each of the merging companies''.'.

Howard Flight (Conservative, Arundel and South Downs)

The amendments are not probing amendments but endeavour to be explicit. The Economic Secretary was kind enough to refer to my proposal in 2000 and to the Finance Act 2002. I had raised the need for mechanisms to sort out venture capital trusts. Some are done well, some are done badly, takeovers are required and so on. Rationalisation was, in essence, blocked by the rules governing VCT investment because if trusts did not invest in a security that met the definitions, they disqualified themselves. The point was taken by all sides and provisions were introduced in the 2002 Act to implement it. However, nothing has happened yet. There have been several consultations, but we still do not have secondary legislation to implement the principles in the 2002 Act. First, on a practical point, when will that happen? We are two years later on.

Secondly, the amendments address two practical issues, and from my knowledge of where the Revenue has got to I do not understand the problem. The Revenue has insisted within the regulations that mergers should be agreed, but that will never be achieved unless there are common fund managers. The fund manager of a VCT will probably resist it because they lose the business of running it and the number of voters in such situations is never an overwhelming majority. It would be entirely healthy to permit hostile bids, as they would shake out the market. In producing the regulations, is the Revenue still insisting on agreed mergers? If so, that is inappropriate.

The Revenue proposes that where there is a share-for-share offer by one VCT for another, more than 90 per cent. of shareholders should be required to accept it in order for a merger to qualify for VCT relief. Given the average size of VCT investments, which round up to £25,000, if that, the chances of getting 90 per cent. of shareholders to vote at an AGM are remote to say the least. That is why the amendment

suggests a 50 per cent. target, but even that will not be easily achieved.

We are two years down the line from the measure in the 2002 Act. There have been nine drafts of the regulations and still nothing has happened. I do not know whether I have got this right, but if the two issues that I have mentioned are the sticking points, I cannot see why the latter cannot be resolved by a 50 per cent. vote and the former by removing any requirement for agreed mergers.

Rob Marris (Labour, Wolverhampton South West)

I understand what the hon. Gentleman means when he talks about 50 per cent. of the voting power, but he also referred to 90 per cent., which in the Bill is

''90 per cent. of the issued share capital . . . and not less than 90 per cent. of the voting power''.

Why in amendment No. 33 has he not referred his 50 per cent. to the issued share capital as well as to the voting power?

Howard Flight (Conservative, Arundel and South Downs)

I thank the learned hon. Gentleman for his comment. The answer is that it should be there, for which I apologise.

John Healey (Labour, Wentworth)

The hon. Gentleman made three points: he contested the idea that mergers must be agreed; he argued that in this field hostile takeovers are a good thing; and he stated that 90 per cent. of the votes is too high a merger-acceptance figure. I hope that I can be helpful as I explain our position and the approach that we plan to adopt.

As the hon. Gentleman says, amendments Nos. 32 and 33 attempt to change the primary legislation that introduces regulations allowing VCTs to merge with each other or wind up in an orderly fashion without jeopardising the generous VCT tax relief. Far from nothing happening, the next draft—he may be right that it is the 10th draft—of the regulations that provide for the merger and takeover of VCTs is imminent. The Inland Revenue and the VCT industry have been working very closely and hard on the issue. It has proved to be a highly complex area, which has been quite resource intensive for both sides, not least in terms of the paper that has been used for the drafts. We aim to have the next draft of the regulations available about the end of next month.

The hon. Gentleman will be pleased to have confirmation that amendment No. 32, which aims to prevent the VCT merger regulations from imposing conditions that prevent the VCT tax reliefs from being available in circumstances where there is a hostile takeover by one VCT of another, mirrors the point put to us by the industry following the last exposure of the draft regulations. Having considered his arguments and suggestions carefully, we agree and accept that the amendment has merit, and the next draft of the regulations will reflect that accordingly.

Similarly, amendment No. 33 reflects a point that has been made to us by the industry following the exposure of the previous draft of the regulations, which rather underlines the value of the process of drafting, exposing and re-drafting regulations in order to get them as right as we can. The draft stipulated that the acceptance figure needed for a VCT merger to fall within the regulations would be set at 90 per cent.

of the vote. We recognise and accept that to achieve 90 per cent. acceptance before a merger can proceed might create practical difficulties. I assure the hon. Gentleman that the next draft of the regulations will deal with that point and set the level of acceptance for proposed mergers at 50 per cent., as he proposes in amendment No. 33. With those assurances, I hope that he will consider withdrawing the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I am delighted to hear those confirmations from the Economic Secretary. Can I just ask him please to get it done by the time of the next election, which as he well knows may well be in the autumn? Two years is enough, and the industry needs a lot of sorting out as soon as possible. On the basis of his remarks, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 19 agreed to.

Clause 90 - Corporate venturing scheme

Howard Flight (Conservative, Arundel and South Downs)

Our understanding is that the clause and the schedule make technical changes to corporate venturing schemes that are essentially similar to enterprise investment schemes in scope, but apply to companies and corporates. The technical changes are essentially the same as those to EIS and VCT investment parameters, and we welcome the proposals.

Question put and agreed to.

Clause 90 ordered to stand part of the Bill.

Schedule 20 agreed to.

Clause 91 - Enterprise management incentives: subsidiaries

Howard Flight (Conservative, Arundel and South Downs)

Again, our understanding is that the clause amends a technical rule in relation to the definition of a qualifying subsidiary for the purposes of enterprise management incentives. Previously, to be a qualifying company all subsidiaries were required to be 75 per cent. subsidiaries; that requirement is now relaxed to 51 per cent., and there are new tests if the subsidiary is a property management subsidiary, in which case it will be required to be a 90 per cent. subsidiary. During the course of many—I forget how many—Finance Bills, we have consistently made the point that EMIs need to be widened, and we are glad to note that since they were introduced the Government have widened them. The clause is another sensible bit of widening, which we welcome.

Norman Lamb (Liberal Democrat, North Norfolk)

I welcome you to the Chair, Sir John.

What assessment has been made of the extent to which the arrangement is used? I understand from the background note that it was introduced in the Finance Act 2000. What is the Treasury's view of how successful it has been since?

John Healey (Labour, Wentworth)

The hon. Member for Arundel and South Downs is right that in a sense the clause makes technical changes to the qualifying rules for EMIs, but that underplays the fact that we are making the changes in response to representations that we have received to do just that, and that the changes are likely to make EMIs much more useful and attractive.

To answer the hon. Member for North Norfolk (Norman Lamb): when we introduced EMIs, we estimated that they would be taken up over the first three years by perhaps 2,500 companies; in fact, about 4,500 companies have taken them up and in total more than 70,000 EMI options have been granted. That gives the Committee an indication of how the success of the scheme has outstripped our expectations and how the reforms that we propose in the clause will reinforce it for the future.

Question put and agreed to.

Clause 91 ordered to stand part of the Bill.

Clauses 92 and 93 ordered to stand part of the Bill.

Clause 94 - Permanent establishments and ''25% associates''

Andrew Tyrie (Conservative, Chichester)

It is very nice to see you this afternoon, Sir John.

There is not a great deal in chapter 6—clauses 92 to 101—and I do not intend to delay the Committee very long. Everybody looks happy about that.

Steve Pound (Labour, Ealing North)

We are disappointed.

Andrew Tyrie (Conservative, Chichester)

There seems to be one person who would like to hear more from me, but perhaps he will make a few interesting interventions.

The chapter is motivated by the desire to move away from source-based taxation. The idea is that within the EU people should be able to make payments of interest and royalties without withholding tax. That is the intention of the directives that have been going through. As a result, the country with taxing rights would be the recipient country. The UK already has a vast battery of double taxation agreements designed to have just that effect. I do not know how many there are—[Interruption.] I have been informed that there are just over 100. There has also been a lot of work going on at EU level. The EU interest and royalties directive comes on top of the 1992 work on dividends. Along with other directives, it is designed to enable the free flow of interest, royalties and dividends without any application of withholding taxes. We all welcome that, so it is not really an issue.

I hope, Sir John, that you will allow me to refer briefly to the chapter in general. It contains some other advantages. A minor one is that some countries with double tax agreements do not supply zero taxation back to the UK. The tax liability remains 10 or 12 per cent., but that will fall to zero once the directive is in force. That benefit will come with implementation of these clauses.

The most important thing to consider when dealing with such clauses is whether there is any gold-plating on top of what the directive might in any case apply. Of course, putting a directive on the UK statute book sets the hearts and minds of small groups on both sides of the House racing. I have taken a good look for gold-plating, but apart from a few tiny odds and ends, I cannot find any at all. That is good, because it means we can spend less time on the clauses, but I would like the Economic Secretary to confirm that there is not any gold-plating that I have not spotted.

Thank you, Sir John, for your indulgence on those general points. On clause 94 specifically, only firms whose parent has at least a 25 per cent. interest in the subsidiary will take advantage of it. That raises several questions. I got into deep trouble by asking the Economic Secretary seven or eight questions the last time I spoke on a clause. As he felt that that was far too many at one go, I had better get my questions down to about three.

The first is a general question. Is the Economic Secretary confident that the clause deals with commercial reality, which often involves chains of companies that own small shares one after another? I am not sure that that has been taken into account, as the clause deals only with the direct subsidiary.

Secondly, why is the clause limited to direct holdings when most UK tax law deals with both direct and indirect holdings?

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman has slightly confused me. If the clause covered direct and indirect holdings, as he wishes, would not he call that gold-plating?

Andrew Tyrie (Conservative, Chichester)

That is a completely valid intervention.

Steve Pound (Labour, Ealing North)

All that glisters is not gold.

Andrew Tyrie (Conservative, Chichester)

It may not be. There are two types of gold-plating: gold-plating that may make life much more difficult for UK firms, and the tiny permissible changes that can liberalise a regime. I am suggesting one such approach. Indeed, had I known that this subject would be of such enormous interest to everyone here this afternoon, I would have tabled an amendment. I have one with me but decided not to delay proceedings by tabling it. [Interruption.] The Paymaster General tempts me to do so.

My suggestion would be of the liberalising variety. The hon. Member for Wolverhampton, South-West can stand up and disagree with me if he thinks I am wrong. It would be genuine gold-plating, not the ''All that glisters is not gold'' type of gold-plating.

Rob Marris (Labour, Wolverhampton South West)

I do not wish to draw the hon. Gentleman into falling foul of the Chairman, but he seems to be proposing two types of gold-plating. I have often heard the expression ''gold-plating'' from Conservative Members when dealing with European laws. Could he delineate a little further the conceptual difference between good and bad gold-plating, specifically in terms of the clause?

Andrew Tyrie (Conservative, Chichester)

I thought that I had managed to do that.

John Butterfill (Conservative, Bournemouth West)

Order. The banter about gold-plating is going down like a lead balloon with the

Chairman. I think that we had better get back to the clause.

Andrew Tyrie (Conservative, Chichester)

I am grateful for your guidance Sir John.

If the hon. Gentleman reads what I said a moment ago, he will find a basic, generic definition. I shall now move on quickly before I am ruled out of order.

It would be logical to include the phrase ''and indirect'' somewhere in the clause and I would like the Economic Secretary to consider that suggestion. I do not think that there would be any downside whatever—there may be an upside to that appropriate and attractive gold-plating.

My third question is a practical one. To get the withholding tax back, someone must obtain an exemption notice from the Inland Revenue and, in practice, it may take months for that to be issued. Can anything be done to speed that up and avoid the long delay? For example, why not permit the exemption to be applied from the moment that the application is made? Someone with an application under a double tax treaty arrangement would be in that position. They would not have to have the exemption certification in their hand. They could make the application and, from that moment, it would be active. There is always a risk that the Inland Revenue would challenge that arrangement and that it would have to be reversed, and in that case they would have to cough up, but they would have to do that anyway under a double taxation arrangement.

I should be grateful for an indication of the Economic Secretary's view on those three questions.

John Healey (Labour, Wentworth)

As the hon. Gentleman says, clause 94 is part of the package of clauses 92 to 101. Together, they implement a European directive into UK law. They provide an exemption from UK tax for companies in other member states when a related company in the UK pays them interest or royalties. When the directive is fully implemented by all member states, it will ensure that tax is levied on those payments only once in the European Union—by the state in which the recipient is resident for tax purposes. That has not been fully achieved through the network of 100-plus bilateral double taxation treaties that we have with other member states.

The hon. Gentleman raised three particular points. First, he said that he had had a good look for gold-plating and had not found any. At the risk of trying your patience, Sir John, I do not know whether gold-plating will help the Paymaster General with her current tooth problem, but the hon. Gentleman did not find any gold-plating because there is none. The legislation closely and accurately implements the Council directive. It does not go further. To go further would have little practical benefit for UK companies and would have a downside for the Exchequer. It is important to recognise that the changes are useful but modest. The purpose of the clause is to implement the directive. Most of the advantages are already available through double taxation treaties.

A general point is the answer to the hon. Gentleman's second question: why are the Government not providing similar benefits when

there are indirect relationships? In the first instance, companies can often achieve the same results through bilateral tax treaties, but the directive—this is the important point—is being implemented throughout the Community. Unless all member states implement the directive similarly, the reciprocal effect will be lost, creating more winners and losers among member states. To be frank, the Government would welcome a general widening of the directive's application to more associated companies than are currently within its scope, but there is no advantage to us or to UK companies in acting unilaterally beyond the measures that other member states are putting into place.

Norman Lamb (Liberal Democrat, North Norfolk)

What is the time scale in which other member states will implement the measures? Are we ahead of the game, or is this happening across the EU at the same time?

John Healey (Labour, Wentworth)

The hon. Gentleman will be aware that there is an implementation date that applies across the EU. The national legislation and appropriate moves of the 15 states that were members prior to 1 May are proceeding together. Arrangements are being put in place and negotiated for the 10 latest members of the EU. Therefore, the short answer to his question is that the other member states are proceeding pretty much together with us.

Andrew Tyrie (Conservative, Chichester)

Will the Economic Secretary confirm that it is his view that there will be no benefit whatsoever to business activity—in terms of removing complication and unfairness—by adding the word ''indirectly'' to the clause? He seemed to be saying that adding it would have no effect. I understand his first point—that we are faithfully reproducing the directive and putting it straight on to the statute book. My point was that this might be one of those rare occasions where a benign bit of gold-plating will reduce some unfairness and eliminate some complications.

John Healey (Labour, Wentworth)

Perhaps I did not make myself clear enough. My main point is that for the benefits of the provisions—modest though they are—to come to UK companies, consistency with the provisions that are being put in place in other member states is important. Unilaterally widening the scope—I understand the hon. Gentleman to be arguing that we should—would be inconsistent with what is happening across the European Union.

The hon. Gentleman asked about exemption notices. He said, rather loosely, that it can take many months for exemption notices to come through. The directive provides for a period of three months. In many case, the Inland Revenue issues an exemption certificate well within that period. He asks why we do not allow relief when the application is made. The procedure that we have in place, and which will be consistently followed if the Finance Act contains the clauses, is that the Inland Revenue needs to ensure that a non-resident is entitled to relief. There is no other way to collect tax when payment has crossed the border. That is the reason that we have exemption certificates at the moment.

Andrew Tyrie (Conservative, Chichester)

Why can we not treat those payments in exactly the same way as we treat the existing double taxation agreements?

John Healey (Labour, Wentworth)

We are treating the payments in the same way as we treat the existing double taxation treaties. We are treating interest payments differently from royalties, as the hon. Gentleman will know. The reason that we have a cautious system for interest payments in place is that the potential flows of those payments are enormous—around £100 billion is at stake in such transactions. Therefore, it is right that we take a cautious approach and have a system of prior approval. That is what the exemption certificates are designed to provide. On that basis, I hope that the Committee will support the clause.

Question put and agreed to.

Clause 94 ordered to stand part of the Bill.

Clauses 95 to 101 ordered to stand part of the Bill.

Clause 102 - Introductory

Andrew Tyrie (Conservative, Chichester)

rose—

Chris Bryant (Labour, Rhondda)

We were doing so well.

Andrew Tyrie (Conservative, Chichester)

We were doing so well, but a tiny bit must be said about chapter 7. I will do my best to be even quicker on it than I was on chapter 6. There is even less to say about chapter 7, but the whole area is a result of the huge withholding tax debate that took place in the EU. I found it absolutely fascinating and followed it closely. In response to popular demand and if I am provoked, I might develop some of the arguments.

We have an exchange of information regime to prevent evasion because, quite rightly, we do not want to go down the withholding tax route. We managed to fend off pressure, particularly from Germany, for a withholding tax, and chapter 7 reflects part of a series of agreements to deal with countries that have strict restrictions on disclosure. Those countries, Austria, Belgium and Luxembourg, are not prepared to go down that road and they want a withholding tax anyway, which is consequential upon a citizen of the UK or of any of the other countries having an account in those three countries.

We want UK citizens to get a credit on any interest they earn from an account in those countries. Under the clauses in chapter 7, they will be able to do so and get a complete tax exemption if they obtain a certificate. I cannot see any difficulties with the clauses, but it is very important that the Government do what they can to encourage citizens to certify themselves. It is important that people do not pay tax inadvertently, but it is unreasonable and very difficult for the Government to take active and vigorous steps to ensure that.

Generally, it is important to ensure that legislation cannot act as a first building block towards the spread

of a withholding tax beyond those three countries, and it would be helpful if the Paymaster General confirmed that the determination of the Government, which they eventually showed after some early hesitation, will continue. I wonder whether the battle is over and whether the issue will not return in one form or another. I will make a prediction, which I do not often do, that it will return, and it is important that the Government fight it vigorously. Beyond that, I have no objection to any provisions in chapter 7.

Howard Flight (Conservative, Arundel and South Downs)

If any British resident were foolish enough to put money on deposit in Luxembourg and Austria, under the current arrangements, would the British Government get the withholding tax stopped? There are obviously other jurisdictions to which the point applies, but are the arrangements robust enough? They are not much good to us if we do not get the tax into our coffers.

Dawn Primarolo (Labour, Bristol South)

May I deal with each point briefly? Clauses 102 to 110 are the last provisions necessary for the implementation of the savings directive, which will be considered by ECOFIN to ensure that all measures are in place in all component parts, member states and third countries. Its agreement will trigger the commencement of the directive on 1 January 2005.

Last year's Finance Bill had the lion's share of the regulations, including provision for the City of London and other providers to know exactly what information they would be required to collect about European citizens, over what period and at what point the regulations would be switched on.

It is important to say that the regulations are not active. The preparation has been made but the final switching on comes as soon as we are satisfied, and that is supposed to be this June when the final decision is made that all the measures are in place.

The hon. Member for Chichester (Mr. Tyrie) asked a general question about withholding tax versus exchange of information. As he knows through debates on double taxation treaties, the Government's view, and I think the Opposition's view as well, is that exchange of information is the fairest, simplest and best way to ensure that the right of amount of tax is paid by the right person in the right place. All the arrangements ensure that UK citizens pay tax to the UK, or that German citizens pay it, if liable, to Germany.

The debate about exchange of information ranges much wider than the European Union, although that is now very large. All accession countries must comply as of 2005, when the directive becomes active. It was part of the key negotiations with those countries. The three countries that the hon. Gentleman named are in a transition to exchange of information from withholding tax, which goes from 15 per cent. for three years, to 20 per cent. for three years and 35 per cent. thereafter, with an ultimate commitment to move to exchange of information. The directive will cover all member states of the European Union.

The same debates are being conducted within the Organisation for Economic Co-operation and Development. As the hon. Gentleman knows, the

Crown dependencies, overseas territories and Caribbean countries are also committed. They are going initially with a withholding tax, but on the same basis as the three member states. They have made a commitment to move to exchange of information when the three member states do so.

The debate is also being taken forward in the G7 on the basis that it is right to ensure that tax is paid in the correct place. Extensive discussions about providing for exchange of information on a much wider basis have taken place with several countries.

Withholding tax was first discussed under the previous Government. It was not that they managed to fight it off—it collapsed. This Government started in a minority of one, with 14 favouring a withholding tax, but we have clearly established an international principle in the European Union and elsewhere that exchange of information is the way forward.

Andrew Tyrie (Conservative, Chichester)

I remember being in a Treasury meeting in about 1989 when we succeeded in fending off withholding tax after a particularly vigorous French attempt to impose it, so the Paymaster General's suggestion that it collapsed—that it was not in any way an effort of the Government of the time—is quite wide of the mark.

Dawn Primarolo (Labour, Bristol South)

Actually, there was never a vote on the issue, so it was not fended off in that sense. As the hon. Gentleman knows, decisions in ECOFIN are taken on the basis of unanimity, so there is always the veto option and the debate never reached that point. Of course, I am not privy to the papers because the Government then—

Andrew Tyrie (Conservative, Chichester)

The right hon. Lady will have to take what I said at face value.

Dawn Primarolo (Labour, Bristol South)

I will certainly take the word of the hon. Gentleman, with just a little pinch of salt. I have heard what our European partners thought at the time. It is also true that that Government did not bring forward an alternative and say, ''Yes, there is a real issue with cross-border transactions of that type, where tax does not go to the relevant authority and most of the transaction is not taxed at all.'' They did not raise the question of banking secrecy, how that needs to be confronted in international forums and how it is not the way forward.

There have been some heated debates on that in the OECD, which has aimed to encourage those member states that still insist on banking secrecy—the three that the hon. Member for Chichester mentioned—and other countries in the world, that it is time that they moved away from that. It is perfectly possible to maintain confidentiality without condoning tax evasion.

With regard to sharing, 75 per cent. of the moneys collected through the withholding tax on British citizens in any of the three member states must be passed to the UK authorities and will be identified in the consolidated fund as a tax receipt. Those payments must be transferred no more than six months after the

completion of that member state's tax year. So, assuming that the mechanisms start in 2005, payments will be transferred in 2006, because all the arrangements will be in place, and 25 per cent. remains to cover the requirements of the member state that levies the withholding tax.

Howard Flight (Conservative, Arundel and South Downs)

How can that be done? Is it dependent on passports or on disclosure of address? This country will not be involved in that for obvious reasons, but it struck me that it is questionable technically whether we will get our fair cut.

Dawn Primarolo (Labour, Bristol South)

The member states concerned have to follow the arrangements in the directive that specify exactly when the withholding tax should be applied. It is important to remind everybody that this year's directive applies to individuals and not to corporates.

The gearing up of the withholding tax from 15 per cent. to 20 per cent. to 35 per cent. means that it will come in at a high rate. UK citizens who suddenly find themselves paying a tax when they were not before, need to decide whether they want to declare it for the purposes of getting the relief, so that they can claim that tax back and have their income counted in the United Kingdom system.

I am sure that the hon. Gentleman can imagine—he will know of our discussions with the City of London; it was an extremely good consultation and we worked together well—that, in the process of any agreement, the aim is for the details on collection to be as tight as they can be. In fairness to the three member states concerned, they intend to be bound by the directive and to make provision accordingly. Therefore, I do not think that we need to be concerned.

I think that we need to be vigilant on the point that the hon. Member for Chichester made, which is that we need to ensure that we move forward on exchange of information and that there is no sliding back, or any other way in which withholding tax could appear on the horizon. I give him and the Committee a categorical assurance that the Government intend to do precisely that, for all the reasons that we know about: the damage that a withholding tax would do to the City of London, to the financial service industries based in the UK and, in particular, to the eurobond market. I commend the clause to the Committee.

Question put and agreed to.

Clause 102 ordered to stand part of the Bill.

John Butterfill (Conservative, Bournemouth West)

It has been put to me that it may be convenient for the Committee to take clauses 103 to 110 en bloc. Is it the wish of the Committee that I do that? [Hon. Members: ''Aye.''] In that case, I shall proceed accordingly.

Clauses 103 to 110 ordered to stand part of the Bill.

Further consideration adjourned.—[Jim Fitzpatrick.]

Adjourned accordingly at fourteen minutes to Four o'clock till Tuesday 25 May at half-past Nine o'clock.