Orders of the Day — Finance Bill — [1st Allotted Day]

House of Commons, 6 July 2004.

Dawn Primarolo (Labour, Bristol South)

I beg to move,

That the Finance Bill, as amended, be considered in the following order, namely, new Clauses, amendments relating to Clauses 1 to 4, Schedule 1, Clauses 5 to 19, Schedule 2, Clauses 20 to 28, Schedule 3, Clause 29, Schedule 4, Clause 30, Schedule 5, Clauses 31 to 41, Schedule 6, Clauses 42 to 47, Schedule 7, Clause 48, Schedule 8, Clause 49, Schedule 9, Clauses 50 to 52, Schedule 10, Clauses 53 to 64, Schedule 11, Clauses 65 to 76, Schedule 12, Clauses 77 and 78, Schedule 13, Clauses 79 and 80, Schedule 14, Clauses 81 to 84, Schedule 15, Clause 85, Schedule 16, Clauses 86 to 92, Schedule 17, Clause 93, Schedule 18, Clause 94, Schedule 19, Clause 95, Schedule 20, Clauses 96 to 116, Schedule 21, Clause 117, Schedule 22, Clauses 118 to 134, Schedule 23, Clause 135, Schedule 24, Clauses 136 to 141, Schedule 25, Clause 142, Schedule 26, Clause 143, Schedule 27, Clauses 144 to 162 and 164, Schedule 28, Clauses 163 and 165, Schedule 29, Clauses 166 to 175, Schedule 30, Clauses 176 to 200, Schedule 31, Clauses 201 to 212, Schedule 32, Clauses 213 to 275, Schedule 33, Clauses 276 and 277, Schedule 34, Clauses 278 and 279, Schedule 35, Clause 280, Schedule 36, Clauses 281 to 290, Schedule 37, Clauses 291 and 292, Schedule 38, Clauses 293 to 296, Schedule 39, Clauses 297 to 317, new Schedules, amendments relating to Clause 318, Schedule 40 and Clauses 319 and 320.

The motion allows us to progress through the Bill in the normal way, starting at clause 1. I hope that that is clear to the right hon. Member for Bromley and Chislehurst (Mr. Forth).

Question put and agreed to.

New Clause 9 — Rent factoring of leases of plant or machinery

Dawn Primarolo (Labour, Bristol South)

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

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss Government new clause 10—Manufactured payments under arrangements having an unallowable purpose.

Dawn Primarolo (Labour, Bristol South)

As I explained briefly with regard to the ways and means motions, the new clauses introduce anti-avoidance measures to prevent a loss of tax through arrangements involving leasing and manufactured payments.

New clause 9 prevents the new avoidance using arrangements that are being marketed in an attempt to get around the impact of clause 134 of the Bill, which was introduced to prevent tax avoidance through sale and finance lease-back and lease and finance lease-back generating double benefits. Aggressive new schemes are now being marketed, which aim to achieve a similar result by generating a tax-free sum from the sale of rental income streams from the leasing of plant and machinery. The measure will ensure that the proceeds from the sale of such income streams are taxable as rental income, making the new arrangements ineffective.

New clause 10 will prevent companies from avoiding corporation tax by entering into a range of artificial arrangements involving manufactured payments. The arrangements vary in detail, but usually involve claiming tax relief for a manufactured payment while arranging for any counterbalancing income or gains to escape taxation in some way. The new clause works by introducing an unallowable purpose rule for manufactured payments. The rule denies tax relief for the manufactured payment to the extent that the payment is attributable to the unallowable purpose. To the extent that tax avoidance is a main motive, or one of the main motives, behind a company entering into those arrangements, it will be denied a tax deduction for the manufactured payment, thereby defeating the avoidance.

As was noted in 1996, when the original loan relationships unallowable purpose rule was introduced, companies entering into the arrangement with the primary aim of avoiding tax will inevitably be aware of the fact. The transactions against which the rule is aimed are not the sort that companies stumble into inadvertently. Provided that companies enter into arrangements involving manufactured payments for genuine commercial reasons, they should have nothing to fear from this unallowable purpose rule. That will be confirmed in guidance issued by the Inland Revenue today. If, however, companies go in for artificial tax-driven arrangements, they may and should find themselves caught.

As I said when the new measures were introduced, we will not allow the efforts of the tax-avoidance industry to undermine the will of Parliament or allow a small minority of businesses and individuals to get round the tax system at the expense of the vast majority who pay their fair share. We are determined to stamp out this type of tax avoidance and create a level playing field for all. The new clauses will assist in achieving that objective, and I commend them to the House.

Howard Flight (Conservative, Arundel and South Downs)

On the face of it, these two anti-avoidance clauses are perfectly reasonable and, indeed, a fair cop. I would, however, make the point that we have had 180 and more new clauses and amendments tabled for Report, which has left quite insufficient time for the various professionals to pore over them in detail to ensure that there are no unintended effects. I note that the Paymaster General mentioned that the guidance notes would only be published today, so there is clearly no chance to review those guidance notes ahead of reviewing the two new clauses. It also struck me that the measures being blocked by new clause 9 are, to some extent, a reaction to what have been seen as retrospective changes in the tax position relating to sales and lease-backs.

As to the territory of new clause 10, the key issue is how the unallowable purpose rules will work. The Paymaster General is quite right to say that people will know when they are doing things essentially to avoid taxation. There are many circumstances—the use of swaps, forward sells and various other financial instruments—where sound commercial purpose may go hand in hand with paying less rather than more tax. The unallowable purpose rule is yet to be tested either here or in loan relationship legislation.

We have not spotted anything in the two measures that would have unintended effects. There are many other avoidance measures in the Bill where unintended effects have not been adequately dealt with, but these new clauses appear to be perfectly practical measures. It is good to see the Revenue spotting these measures, which it might have done more diligently in other respects. If it had, we would not have needed the somewhat over-heavy reporting of anti-avoidance tax planning, which we will deal with later in the Bill.

David Laws (Liberal Democrat, Yeovil)

We support the two new clauses. The only question for the Paymaster General—I hope I did not miss the point in her earlier comments—is how the Treasury identified these abuses, particularly when she indicated in respect of new clause 9 that the abuses seem to have arisen very recently, even since the Finance Bill was first drafted. Will she say a little more about that?

Quentin Davies (Conservative, Grantham and Stamford)

I start by endorsing the hon. Gentleman's last suggestion. It would be helpful if, when the Government bring forward last-minute measures to deal with tax-avoidance schemes, they could describe in more concrete detail what the schemes actually consist of.

I have no problem in principle with new clause 9. I must say, however, that I am surprised. I have learned to my surprise this afternoon that, at the present time and until we change the position by passing the new clause, revenues that a company generates by selling its entitlement to lease rentals are not taken into account for the purpose of computing tax liabilities. In other words, those revenues do not feature in the computation of taxable profits. That seems very surprising. Usually, if a company discounts or factors its receivables, the amount of money that it receives from those receivables is a revenue and if the costs of generating those revenues mean less profit, the profit is taxable in the normal way. I am surprised that this particular anomaly should have arisen in the first place. It would all be less surprising if the Paymaster General were a little more explicit in telling the House about the type of scheme that she or her officials have identified and targeted.

I believe that we should not allow new clause 10 to slip by without any comment. Once again, we see the introduction of a general anti-avoidance rule—no, perhaps not a general anti-avoidance rule because that would be general, but an anti-avoidance rule. It is becoming an ever more frequent feature of our taxes legislation. There are similar examples in the current Finance Bill where the Government have had recourse to a specific anti-avoidance rule. In this instance, the anti-avoidance rule is in new clause 10(5).

At some point, we need the Government to make a clear statement of their views on anti-avoidance rules. Otherwise, we will find that, through adopting the anti-avoidance rule approach in a large number of individual cases, we have introduced a general anti-avoidance rule by the back door. At the end of the day, we will have an anomalous tax system in which anti-avoidance rules apply to certain activities, but not others. It will be unclear to the public and to Parliament—it is certainly unclear to me—on what principles it has been decided that certain types of transactions, trades, professions or businesses encounter anti-avoidance rules, but not others. It is a major philosophical point, and it must be dealt with—if not now, at some other stage—by the Government. There is an increasing lack of clarity on the matter, as the Government have recourse to more and more of these rules in specific cases.

The second issue raised by the anti-avoidance rule approach is the classic one of unfairness. Great unfairness can arise in individual cases precisely because of the subjectivity of a tax inspector saying that someone acted not for commercial but for anti-avoidance purposes. The taxpayer might respond by denying that. It may be clear and a fair cop in some cases, but not in others. A tax inspector may decide to apply the rule in good faith, but perhaps the taxpayer resists with equal good faith on the basis of the facts. Those matters will have to be resolved by jurisprudence, by the commissioners or the courts. Will the Paymaster General say what guidance is being given to tax inspectors on the application of the rule? That is an extremely important matter. Information about the guidance should be in the public domain, as there is no point in cluttering up the commissioners or the courts with disputes that could be avoided. I am sure that, like everyone else, the Paymaster General would not want unfairness to arise as a result of the application of the rules.

The third point is another classic problem raised by anti-avoidance rules. What provision has been made for pre-transaction rulings? If a company feels that it might fall foul of the anti-avoidance rule, equity demands that it have the opportunity to clear a transaction with the Revenue in advance. That company might want to adopt a certain course of action, with a perfectly honest commercial purpose in mind. It would not want to be hit, retrospectively, with an anti-avoidance rule. It would be neither satisfactory nor fair for the Revenue to say subsequently that the company should have done X rather than Y, and then clobber it accordingly. That is not a transparent tax system.

When the Government introduce anti-avoidance rules, they should make it clear that a pre-transaction ruling facility will be available. I hope that the Paymaster General, when she replies to the debate, will confirm that that will be the case. Such a facility must be available to taxpayers in a reasonable time, so that businesses that might fall foul of the rule can clear the position, in anticipation, with the Revenue.

Dawn Primarolo (Labour, Bristol South)

I shall begin by dealing with the series of questions posed by the hon. Member for Grantham and Stamford (Mr. Davies), who wanted to know whether these proposals amounted to the introduction of a general anti-avoidance rule. I assure him that they do not. The rule is targeted at a narrow area of tax in which abuse, unfortunately, is rife. I shall then move to the question, raised by the hon. Member for Yeovil (Mr. Laws), of when and how the Revenue became aware of two specific schemes.

Quentin Davies (Conservative, Grantham and Stamford)

I hope that the Paymaster General does not proceed on a false premise. I said in my remarks that this is not a general anti-avoidance rule, as such a rule would apply, by definition, to all transactions. However, with this new clause—and the same thing happens elsewhere in the Bill—the Government seem to want have recourse to individual anti-avoidance rules. As a result, a series of anti-avoidance rules is being built up in the tax system in a pretty haphazard fashion.

There seems to be no rhyme, reason or principle to determine which transactions qualify under the rule. I said that that raises philosophical problems and policy issues, and that practical difficulties would arise. I would be grateful for a statement about the Government's attitude to a general anti-avoidance rule before we get halfway there by the back door as a result of a build-up of specific anti-avoidance rules.

Dawn Primarolo (Labour, Bristol South)

I remind the hon. Gentleman that the Government consulted in 1998 or 1999 about whether a general anti-avoidance rule should be introduced, with the pre-clearance mechanism that he rightly says would be necessary. The consultation was generated by the frustration—also experienced by the previous Government—that ever more complex avoidance schemes give rise to ever more complex legislation to counter them. The clauses under discussion are examples of our approach.

Extensive consultation was held on whether a general anti-avoidance rule was needed or whether what is called a "mini-GAR" would be sufficient. Another question was whether the Government should deal with avoidance by measures that were specifically targeted, as the previous Conservative Government did.

The result of the consultation showed that businesses did not want the general anti-avoidance rule, although respondents were divided on the matter. Businesses did not want a mini-GAR either. At that time, the Government were dealing with an anti-avoidance method in respect of value-added tax. We decided not to go with a general anti-avoidance rule in that case, but we said that we would keep the matter under review.

The hon. Member for Grantham and Stamford will be aware that the Bill contains clauses on the disclosure of information. The Government are still valiantly trying to achieve a principled position in the matter, and I hope that the hon. Gentleman will agree with our approach. He was right to say that this is a grey area. Our aim is to target avoidance, without affecting reasonable commercial transactions. A general anti-avoidance rule can be a very blunt instrument.

New clause 10 deals with manufactured dividends, a point raised by the hon. Member for Yeovil. Officials made it clear to me in May that such dividends were a possibility. I regret that I cannot be more specific about the date. I agree that we need an arrangement to deal with the matter, and that we need to allow enough time for proper consideration.

On further investigation, it became clear that a great deal of revenue was at stake. A number of schemes, in various stages of development, were identified. They are very complex, and I am sure that the hon. Member for Yeovil will excuse me if I do not read them into the record. However, I should be happy to send him two examples of the main form that those schemes take.

As always, my officials and I looked to achieve consistency across the tax system. Our approach was to establish how the previous Government had responded to the problems that they encountered. That Government introduced the unallowable purpose rule—even though they said in 1996 that no such rule would be brought in—and it has worked. It is part of the system now, and it deals with specific problems that arise in connection with manufactured dividends. Although I cannot predict what tax planners will do in the future, the unallowable purpose rule also seeks to preserve transactions that are not undertaken for the purposes of tax avoidance.

In Standing Committee, the Government's view was made clear that the disclosure methods contained in the Bill would put the Inland Revenue in a better position to be aware of schemes as they are being developed, rather than only when they have been used. The Inland Revenue guidance in respect of the unallowable purpose provision is well used and understood. It is used by tax inspectors, and it is also published for the benefit of companies and their advisers.

I turn to new clause 9. Clause 134 seeks to prevent avoidance, and the need for the clause was generally accepted in Committee. Subsequently, schemes have been designed to negate clause 134. That is the bind we are in: the Government consult and publish a Bill, and while it is making progress through the various stages, other people are planning how to negate it. Therefore, clause 134 would not protect the revenue that it was designed to protect. New clause 9 would ensure that the scheme designed to negate clause 134—which has not even been used yet, because clause 134 has not come into force—would not be effective.

I feel the same frustration as other Members at the need for Treasury Ministers to act in that way, but such is the problem of the creativity of a small number of accountants, tax planners, legal professionals and companies. If they are not held in check, they are capable of ensuring that the Treasury loses vast amounts of revenue. That is why we needed the ways and means resolutions earlier and that is why I was unable to introduce the new clauses in Committee as I should have preferred. A responsible Minister must protect the Treasury and all honest taxpayers, and that is what new clauses 9 and 10 seek to do.

Question put and agreed to.

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

New Clause 10 — Manufactured payments under arrangements having an unallowable purpose

New Clause 11 — Gifts of shares, securities and real property to charities etc

John Healey (Labour, Wentworth)

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

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following:New clause 1—Gift aid and non-taxpayers—

'(1) Section 25 of the Finance Act 1990 (donations to charity by individuals) shall be amended in accordance with subsection (2) below.

(2) In subsection (8)—

(a) after "year of assessment" there shall be inserted "by more than £520"; and

(b) at the end there shall be added "over £520".

(3) This section shall be deemed to have effect for the year 2003–04 and subsequent years of assessment.'.

John Healey (Labour, Wentworth)

New clause 11 amends legislation providing income tax relief to a donor making a gift, or disposal at under value, of shares or securities to charity. The legislation, introduced in the Finance Act 2002, which was welcomed at the time on both sides of the House, enables a donor to offset the market value of a gift of shares or securities to charity against their income for tax purposes. The market value is the value of the gift in the hands of the donor at the point of disposal to the charity. In the first two years that the relief has been available, £370 million has been donated to charity.

However, we have uncovered evidence of complex avoidance schemes that severely reduce the benefit of the gift in the hands of the charity, while leaving the market value of the gift for tax purposes unchanged. The schemes operate where an individual makes a "donation" to a charity and, as a result of an obligation on the charity, the value of that donation to the charity is less than the market value of the assets donated. In that context, an obligation on the charity commonly means that the charity will undertake to sell the shares or gilts back to a third party. The effect of such schemes, which use complex arrangements of trusts and options, is to give the donor tax relief that can far outweigh the benefit to the charity and has the scope to return the whole value of the gift to the control of the donor. The charity receiving such a gift is left with very little benefit and, because the gift or an amount of nearly equivalent value returns to the control of the donor, the gift costs the donor much less than the amount of tax relief they claim.

The purpose of the new clause is to counter abuse not by charities, but by individuals seeking to take advantage of the generous income tax relief available to charity donors. The new clause ensures that the amount of income tax relief claimed by the donor cannot exceed the value of the net benefit to the charity. It will not affect genuine donors or charities. But when an obligation is placed on the charity—no matter by whom—that results in the value of the gift in the hands of the charity being less than the value of the gift in the hands of the donor, the income tax relief that can be claimed by the donor is restricted to the lower amount. That provision will operate either when the obligation can be linked to the assets given, or when it is probable that the gift would not have been made without the existence of the obligation.

The Government are committed to increasing donations to charity and the gifts of shares and securities legislation is an important part of that commitment. But schemes that seek to abuse charitable reliefs are unacceptable. We have shown with this new clause that when we identify such abuse, we will act quickly to prevent that abuse from continuing.

Howard Flight (Conservative, Arundel and South Downs)

rose—

John Healey (Labour, Wentworth)

I hope that the hon. Member for Arundel and South Downs (Mr. Flight) will welcome the clause as he did the last, as a reasonable and fair cop.

Howard Flight (Conservative, Arundel and South Downs)

As I recall, the income tax relief received when one gifts something to a charity is set against one's income for income tax purposes, so it is 40 per cent. for top-rate taxpayers. As I understand the Economic Secretary's description, it would still be worth practising the scheme because the gift to the charity might be two and a half times the effective benefit.

John Healey (Labour, Wentworth)

We believe that the new clause will prevent such abuse. Our concern is that the amounts that can be donated—and therefore the tax relief that can be claimed—are virtually limitless. We are, however, keen to ensure that we do not introduce a measure that discourages genuine acts of philanthropy or removes the incentive to the donor to give in the first place.

David Laws (Liberal Democrat, Yeovil)

In the spirit of the questions I put earlier to the Paymaster General, can the Economic Secretary tell us how long the abuse has been going on and how much it might have cost?

John Healey (Labour, Wentworth)

As I said earlier, we uncovered evidence of the scheme relatively recently. It is not yet widespread, but it has the potential to become so. As my right hon. Friend the Paymaster General said, a responsible Government have the duty to act as soon as evidence of such schemes is uncovered, to prevent the loss of potentially very large sums. We have uncovered evidence of a potential donation of close to £100 million. If a single donation of such size were to be channelled through the sort of scheme that I have described, the extent of the abuse would be obvious, as would the potential exposure of the public purse.

The new clause has the support of the Charity Finance Directors Group and the Charities Tax Reform Group. Indeed, the latter says:

"We welcome this measure which defends the tax breaks designed to encourage giving to charities. Any abuse of charitable reliefs by donors rebounds on the whole charity sector by tarnishing its reputation; we support all initiatives that protect the integrity of the sector."

I hope that the new clause will receive support from both sides of the House.

I turn briefly to new clause 1. Opposition Members will recall that we debated this proposal in the Finance Bill Standing Committee in 2002, when I cautioned the hon. Member for Arundel and South Downs that the consequence of such a measure would be to change the nature of gift aid. To understand our objections to new clause 1 we must return briefly to the operating principles of gift aid.

Gift aid donations are treated as having been made after the deduction of income tax at the basic rate. As charities are exempt from tax on that income, they are entitled to reclaim from the Inland Revenue an amount equal to the basic rate of tax on the donation. If the donor has not paid sufficient income or capital gains tax to cover the amount reclaimed, they are liable to be assessed for the shortfall.

If the new clause were accepted, it would allow donors to make donations using gift aid on which the amount of income tax treated as deducted from the gift can exceed the amount of income tax or capital gains tax paid by the donor in that year. It would allow an excess of up to £520 before further amounts became recoverable.

At present, where the tax reclaimed by the charity receiving a gift aid donation does not exceed the amount of income tax and capital gains tax paid by the donor, the repayment is treated as negative taxation. If the tax reclaimed by the charity exceeds the amount paid by the donor, we deal with the situation by making an assessment on the donor, as I said earlier. If, as the new clause proposes, we did not have that option, amounts repaid to charity could exceed tax paid by donors and the whole gift aid scheme would be reclassified as public expenditure. Since our debate in 2002, we have checked that point with the Office for National Statistics, which confirmed that such an extension would indeed represent public expenditure.

As gift aid acts as an incentive to encourage taxpayers to give to charity, it enables the donor, in effect, to direct some or all of the income and capital gains tax they have paid to causes that they support. New clause 1 would breach the central principle of gift aid if the scheme allowed non-taxpayers to direct where the taxes of others are used. On that basis, I hope that Opposition Members will not press the new clause to a vote.

Richard Bacon (Conservative, South Norfolk)

I shall comment briefly on new clause 11. On the face of it, the new clause causes us no great difficulty, although it was tabled rather late and we would have liked longer to consider it. I was at the Vote Office not two hours ago, yet I was unable to obtain any guidance notes on the new clause.

New clause 11 appears to be a targeted anti-avoidance measure designed to prevent donors from obtaining income tax relief in excess of the benefits received by the charity from the donation of shares or securities. Normally, one would expect the market value of a gift to reflect the value of the gift in the hands of the charity. There is potential for serious abuse; for example, by using offshore trusts and options to manipulate the value of gilts or other securities donated to charities so that the value of the gift in the hands of the charity could bear no, or little, relation to the market value of the underlying asset. Such manipulation could be used to write off entirely an individual's tax liability while conferring only limited benefits, if any, on the charity.

As genuine gifts of shares and other securities will continue to receive tax relief under new clause 11, we have no objection to it in principle. It appears to be a measure that will protect the Revenue while ensuring that charities continue to benefit from genuine gifts of shares and other securities. We shall, however, be keeping an eye out for unintended consequences.

The purpose of our new clause 1 is to probe the Government's thinking in the important field of gift aid relief, and the Economic Secretary gave us a hint of his thinking in his remarks earlier. The new clause would ensure that people on incomes too low to tax, who are often the most generous of givers, are able to benefit from the gift aid scheme, and it would remove the charge they unwittingly incur when they mistakenly sign a gift aid form.

The gift aid relief scheme is a great boon for charities, and it may also be convenient for those who donate to charities, if they pay tax; but for those of the poor who give generously to charity, the gift aid scheme can be a costly and significant trap.Gift aid relief can be claimed only by those who have paid enough tax in the year to cover the amount of tax on the gift, so, for example, if a person gives a gross amount of £100 in a year to a charity using the gift aid scheme, he or she will pay the charity a net sum of £78 and the charity will reclaim from the Inland Revenue basic-rate tax of £22; but the donor must have paid at least £22 tax in the year for that to work. A donor who has not paid enough tax to cover the gift, and still uses the gift aid scheme, remains legally liable to the Inland Revenue for that amount of tax. If the donor were a non-taxpayer, the Revenue would be entitled to pursue them—and sometimes does—for the £22, notwithstanding the fact that the donor was not liable to pay tax for any other reason.

Non-taxpaying donors might use the gift aid scheme for all sorts of reasons. They might not appreciate the technicalities, and the charity concerned might fail to warn them. Their incomes might decline unexpectedly—for example, if they lose their job, or if interest rates fall, taking them out of tax—and they may forget that they still have a gift aid declaration in place.

The low incomes tax reform group—the LITRG—which is part of the Chartered Institute of Taxation, has been campaigning since the introduction of the gift aid scheme to enable non-taxpayers to participate in it. Those on low incomes are often among the most generous givers in proportion to their means and, as the LITRG points out, it is not clear why low-income donors should not be encouraged to give to charity in the same way as wealthier donors.

Indeed, the group had originally thought that that was the Government's intention. When the Chancellor of the Exchequer announced the introduction of "Getting Britain Giving", he said that for every pound a citizen gave, the Government would contribute a further 28p. It is worth noting that the Chancellor said "citizen" not "taxpayer". In the event, however, as the measures have unfolded, we see that higher-rate taxpayers can get relief on their giving—indeed, if they give shares to a charity the relief can approach 80 per cent. in certain circumstances—whereas a charity can get no relief on a gift from a non-taxpayer. That seems a curious inversion of the idea of a progressive tax system. The exclusion of some citizens from the gift aid scheme can hardly be said to contribute to the building of an inclusive or a civic society.

When the matter was last debated, in the Finance Bill Standing Committee to which the Economic Secretary alluded, the hon. Gentleman gave two welcome assurances. First, he said that in practice, where the Inland Revenue finds that a non-taxpayer's donation has been included in a gift aid claim from a charity, it invites the charity to make good the shortfall rather than pursuing the individual taxpayer. No doubt most charities would respond positively to such an invitation.

Secondly, the hon. Gentleman undertook to keep the matter under constant review. New clause 1 would enable non-taxpaying donors to use the gift aid scheme when donating, but it would set a limit. It provides that they will not have a legal liability to pay the Revenue any tax reclaimed by the charity, provided that tax on any gifts they make under the scheme during a tax year does not exceed £520, or £10 a week. That restriction is intended primarily to meet the possible objection that fraud might be encouraged if non-taxpayers were able to donate to charity under gift aid without limit. New clause 1 would take effect from the last tax year—2003–04—since tax returns for that year are largely still to be made.

In the debate to which I referred a moment ago, the Economic Secretary objected—he reiterated his objection this afternoon—because the tax reclaimed by a charity in respect of a gift by a non-taxpaying donor would be effectively public expenditure, not a tax relief. That raises the question of whether the gift aid scheme could be classified in two ways for public accounting purposes: as tax relief to the extent that it is used by taxpayers and as public expenditure to the extent that it might be opened up to non-taxpayers.

On 9 June 2003, Lord Freeman wrote on behalf of LITRG to the Financial Secretary to ask whether the ONS could consider that question at one of its review meetings, and on 19 June last year, the Economic Secretary replied to that letter, saying that he had arranged for the ONS to give definitive advice. He referred to that advice in his opening remarks, and I ask him to consider publishing it, as I am not aware of seeing it in the public domain.

It is hard to understand why a split classification should present a problem, given the proliferation of the various tax credit schemes that we have seen under the Government. Those schemes raise very much the same issues as those we are discussing and their total cost is divided between tax relief, on one hand, and public expenditure, on the other, in so far as the credits reduce tax liabilities or lead to payments to claimants.

In summary, we urge the Government to think again about extending the gift aid scheme to non-taxpayers, to give those on low incomes the opportunity to give to charity as they would wish, to prevent them from falling into what for them could be a costly and unlooked-for trap, particularly where they are ill-advised by the bodies to which they donate, and to simplify generally the administration of the scheme for charities.

John Healey (Labour, Wentworth)

May I welcome the hon. Member for South Norfolk (Mr. Bacon) to the Dispatch Box? He offers distinguished service to the House on the Public Accounts Committee. I understand that he is making only a temporary appearance at the Dispatch Box, but I fear that his permanent presence cannot be far off, and I look forward to that.

The hon. Gentleman asks first about guidance. He said that he had looked for guidance published by the Inland Revenue alongside new clause 11. He will appreciate that it is important that the House considers the clause first, but the Inland Revenue will publish guidance to support the new clause. That guidance will give charities some certainty in respect of how the new clause will operate and where they stand. Let me repeat very clearly that this measure is carefully constructed not to discourage genuine philanthropy. It is designed to counter abuse not by charities, but by those individuals who seek to take advantage of what is a generous income tax relief scheme for charitable donors.

The hon. Gentleman made a number of other points. He took up the cause and case of the non-taxpayer, particularly the non-taxpayer or low taxpayer who may not fully appreciate the principles and operation of the gift aid scheme. I am sure that he will know, as do many hon. Members because many of them are strong supporters and give in this way, that any person who makes a donation under gift aid must complete a declaration to confirm that he or she has paid sufficient tax to cover the amount that the charity will reclaim. The requirement that charities must obtain such a declaration from the donor reduces the risk that the donor will accidentally use gift aid when it is not appropriate.

Where it is established, however, that a donor has not paid enough tax to cover the value of the gift aid, the Inland Revenue can, as I said, assess the donor to recover that overpayment. However, as the hon. Gentleman said, I gave an undertaking during the proceedings on the Finance Bill in 2002 that, in many cases, the Inland Revenue will explain the situation first to the charity, which will then decide voluntarily to repay the amount of the tax reclaimed.

The hon. Gentleman spoke about citizenship and asked why non-taxpayers should be barred from donating to charity. Non-taxpayers can give to charity in other ways, but it is not appropriate for them to do so under gift aid. He will be aware that, even for those who pay a small amount of tax, gift aid can apply to any amount no matter how small, so long as some tax is paid, gift aid is a scheme of which the charity can take advantage.

Finally, the hon. Gentleman urged the Government to think again and referred back to the debates on the Finance Bill in 2002, where I gave an undertaking that, as with all taxes, the Government would keep gift aid under review. We will do so. We are always open to fresh argument and to the case for further reform, particularly with such issues, where we believe that any further measure may boost the amount that people can give to charity, thus encouraging charitable giving more widely. However, as I tried to explain in my opening remarks, the basic objection to new clause 1 is that it contravenes the principles that lie at the heart of the operation of gift aid and that, at present, we simply do not think that that problem has been overcome by the case made by its proponents.

Howard Flight (Conservative, Arundel and South Downs)

May I ask the Economic Secretary how new clause 11 will work? He said that the income tax rebate cannot exceed the net value of the benefit to the charity. I am not sure whether or not the net value includes the tax rebate. However, if it does not include the tax rebate, for example, someone could give £100 and take back £80. The charity would get £20. The individual would get back £18 on his £100, so he would be out of pocket by only £2. In effect, that could be used to make all giving to charities tax deductible. If the net value includes the tax rebate to the charity, someone could give £100 and take back £100. The charity could still have £22, and the individual has benefited by £18. I just want to understand whether the new clause will be an effective deterrent to the abuse that the hon. Gentleman describes.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. We are in danger of getting ourselves into disorder. I was assuming that the hon. Gentleman's remarks were by way of a long intervention, to which the Minister may reply in concluding his speech, but if he does not wish to respond that is in order.

Question put and agreed to.

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

New Clause 12 — Overseas pension schemes: migrant member relief

Ruth Kelly (Labour, Bolton West)

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

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following: Government new clause 13—Non-UK schemes: application of certain charges.

Government new clause 14—Appeal against decision to exclude recognised overseas pension scheme.

Government amendments Nos. 111, 114 to 116, 118, 126 to 131, 133 to 137 and 149.

Government new schedule 1—Overseas pension schemes: migrant member relief.

Government new schedule 2—Non-UK schemes: application of certain charges.

Ruth Kelly (Labour, Bolton West)

The new simplified regime for taxing pensions will provide a more flexible regime that is much less heavily regulated than the existing eight regimes. That should prove attractive to individual pension savers and reduce costs and increase flexibility for the industry. Our aim is to make saving within the new simplified regime as simple, fair and attractive as possible for all pension savers. However, there will be some groups—individuals who come to the UK from overseas—for whom it makes sense not to move into the UK's tax-favoured regime. For example, individuals may prefer to continue to contribute to their home state pension schemes, or might even be obliged to continue to be members of such schemes.

Under the current regimes, there is provision for individuals to get UK relief for contributions made to their home state schemes. Those provisions are important in maintaining the UK's competitiveness as an attractive place to come to work. Briefly, individuals may currently claim relief for contributions to overseas schemes that correspond to UK schemes either under a double taxation agreement, or the existing corresponding relief rules.

It is, of course, important to maintain the UK's competitiveness as an attractive place to work and do business. We will therefore be keeping these two routes to relief in the new regime. However, we will simplify and rationalise the conditions for getting relief under the new corresponding relief, which is to be known as migrant member relief in the future. The rights to relief under a double taxation agreement will, of course, remain as they are under the terms of existing agreements. The new rules will ensure that the relief under both routes will have an appropriate fit with the new regime. Government new clauses 12 and 13, which introduce new schedules 1 and 2, and amendments Nos. 111 and 115, provide for these two routes to relief and set out how certain tax charges will apply to overseas schemes.

New clause 12 and new schedule 1, which it introduces, make provision for individuals and their employers to claim tax relief on contributions to certain overseas schemes. The migrant member relief that they introduce will be available to relevant individuals and their employers. The new rules are more generous than the existing ones for corresponding relief and match the new rules for relief in respect of contributions made to registered pension schemes. We are extending the qualifying criteria, both in terms of the individuals who can qualify for relief, and what constitutes a qualifying overseas pension scheme.

Internationally mobile overseas individuals who come to the UK to work for a period of time and continue to be members of an overseas pension scheme will be able to claim migrant member relief on pension contributions up to the level of their UK chargeable earnings. Employers will be able to claim tax relief on contributions paid in respect of these employees, and employees will not be taxed on the benefit of an employer's provision of retirement benefits in an overseas scheme. Individuals will be entitled to claim migrant member relief against earnings chargeable to tax in the UK, providing that they come to the UK as a member of a qualifying overseas pension scheme and that they joined that scheme when they were not resident in the UK.

Additional conditions are that such persons must have been UK residents when they paid the contributions on which relief was claimed, and that they were eligible for tax relief on the contributions in the country in which they were resident immediately before coming to the UK. Finally, individuals must notify scheme managers that they intend to claim migrant member relief. That is important because obligations are placed on scheme managers of qualifying overseas schemes to notify the Inland Revenue that a scheme is such a qualifying scheme. The scheme manager must also notify the Inland Revenue if that stops being an overseas pension scheme, and provide it with information about benefit crystallisation events relating to the individual.

New clause 13 and new schedule 2, which it introduces, will ensure that certain tax charges will apply in respect of overseas schemes when UK tax relief has been given on amounts in the fund. That will occur when there has been migrant member relief or relief under the terms of a double taxation agreement, or where a transfer has been made from a UK registered scheme to an overseas pension scheme. It is right that if UK tax relief has been given on funds in an overseas scheme, either directly or because funds have been transferred from a UK registered scheme, the same tax charges that apply to relief for UK registered pension schemes should also apply. That meets our objective of maintaining the UK's competitiveness as an attractive place to work and do business while preserving the integrity of the new regime.

There are three types of charges that might apply to an overseas scheme. First, member payment charges will apply to payments that would give rise to a UK tax charge if they were made from a registered scheme in the UK, such as an unauthorised payments charge, a special lump sum death benefits charge or a charge in respect of trivial commutation. Those charges will apply if individuals are resident in the UK in the year in which the payment is made, or resident in the UK during any of the immediately preceding five years. They will apply only to the extent that the payments are made out of funds that have benefited from UK tax relief. We have provided against double taxation by allowing credit against UK tax for foreign taxes paid in respect of those payments.

Secondly, the annual allowance provisions will apply to an overseas scheme as if it were a registered scheme to the extent to which the annual increase in individuals' pension rights under the scheme had benefited from UK tax relief. Thirdly, lifetime allowance provisions will apply to funds in an overseas scheme that benefit from UK tax relief on or after 6 April 2006. Additionally, individuals may elect for a benefit crystallisation event to occur when tax relief is no longer claimed, thus allowing individuals who leave the UK permanently to be sure that all UK taxation issues in respect of their overseas schemes are completed.

Amendments Nos. 114, 116, 118, 126 to 131 and 133 to 137 are merely consequential amendments to the new clauses and schedules. To provide continuity, transitional provisions introduced by amendment No. 149 will ensure that individuals who claim corresponding relief on 5 April 2006 may continue to claim that relief even if either individuals or the scheme would not qualify for relief if applying for the first time under the new rules. However, the scheme manager must comply with benefit crystallisation information requirements in respect of contributions paid after 5 April 2006.

The new rules are flexible and transparent, and will ensure that the UK remains a competitive place for internationally mobile companies and their employees to do their business and work. They will maintain the integrity of the new regime by creating a level playing field between UK and overseas pension schemes, so I commend the new clauses, new schedules and amendments to the House.

George Osborne (Conservative, Tatton)

The Financial Secretary said that the measures were simple, fair and attractive, but anyone who has tried to plough through new schedule 2 over the past couple of days would not agree that they were simple. It was not especially fair that the provisions were introduced at the last moment because that meant that the industry did not have the chance to comment on them at all. As for whether they are attractive or not, we will have to take the Financial Secretary's word that they are more generous than the current arrangements.

My colleagues have already made the point that it is unsatisfactory for new clauses and amendments to be introduced on Report, but it is especially unsatisfactory when they relate to the aspect of the Bill that deals with reform of pension taxation. As the Financial Secretary well knows, that matter has been subject to lengthy consultation over a couple of years, which I praised in Committee as a good example of the way in which to consult because the Government listened and changed their proposals on various occasions in the light of what the industry said. Unfortunately, she has blotted her copybook right at the end of the process by introducing a substantial change to the situation regarding overseas pension schemes without any consultation. The provisions were tabled on Friday and we are discussing them a couple of days after the weekend, so the industry has thus had no chance to have its say. The situation is especially unsatisfactory because we discussed the matter in Committee only a couple of weeks ago. Will the Financial Secretary tell us why the proposals have suddenly appeared on the doorstep so late in the day?

Will the Financial Secretary tell us something about the missing details? For example, amendment No. 111 is important because it defines an overseas pensions scheme as

"a pension scheme . . . which . . . is established in a country . . . outside the United Kingdom"—

one might have guessed that about an overseas pension scheme—

"and . . . satisfies any requirements prescribed for the purposes of this subsection by regulations made by the Board of Inland Revenue."

Are those regulations available so that we can look at and discuss them? Will the Financial Secretary tell us the requirements that will be imposed on those schemes, apart from the fact that they must be overseas pensions schemes?

Turning to the substance of the Government's proposal and the new concept of migrant member relief, the Financial Secretary implied when discussing new clause 12 and new schedule 1 that the measures were designed for non-UK citizens who came to work in this country. Does she anticipate that they will be used by UK citizens who go to overseas countries in which they enter into pension schemes before coming back to the United Kingdom? She seemed to be talking only in terms of non-UK nationals.

I accept what the Minister is trying to achieve in new clause 13. The schedule that it would introduce is complex, but explanatory notes have not been produced. When I was dealing with the Pensions Bill many new clauses were introduced on Report—indeed, parts of the Bill were virtually rewritten—but the Department for Work and Pensions produced explanatory notes to clarify what they were doing. There are no explanatory notes, however, for the Finance Bill or, if there are, I have not seen them.

Government new schedule 2, as the Financial Secretary made clear, is an attempt to ensure that a member of an overseas scheme eligible for UK tax relief cannot evade the rules on, for example, the annual allowance, short service refunds and trivial commutations, and is charged as if the scheme were a UK one. I accept what the Financial Secretary said about protecting the country's tax base, the Exchequer's interests and so on, but what would happen if the Inland Revenue's rules conflicted with the rules of the host country? That is unlikely to be the case with the annual allowance—presumably one would just look at the lower annual allowance in the other country—but the rules on trivial commutation or short service refunds may be substantially different elsewhere. There may be a requirement, for example, to provide a trivial commutation, which in the UK would push the member above the 1 per cent. limit on trivial commutation. How would conflicts between the rules or laws in this country and those in the host country be resolved?

What reporting requirements will be placed on overseas schemes? Government amendment No. 115 deals with that, but the Government are proposing to introduce a much lighter-touch regime for all pension schemes that will focus on registration rather than approval. There is concern that that is too light a touch for the UK, but there will be an even lighter-touch regime for overseas schemes. Is the Inland Revenue in a position to police the regime? Will it poke its nose into overseas schemes to make sure that they are providing accurate returns? How on earth will it know whether someone has received a trivial commutation or a short service refund? One hopes that operators of the scheme are honest about the requirement and that members are honest about their refunds, but there is no mechanism for the Inland Revenue to police the proposals. It may rely on the Exchequers of overseas Governments or on pensions regulators in other countries, but is the Financial Secretary satisfied that those safeguards will be adequate and that the Treasury will be on top of the situation?

The Financial Secretary and the Treasury are anxious to prevent the possibility of the new pensions taxation regime from being used as a tax avoidance mechanism. The annual allowance, she explained in Committee, was introduced for precisely that reason, as there was scope for people to come here, set up a scheme, put a lot of money in and then depart. I assume that she is satisfied with the measures that she has introduced to tackle that problem but, as we have not had an opportunity to question her about them, is she content that they will not be open to abuse? How do the proposals relate, if at all, to the EU pensions directive, or, to give it its proper name and get the snappy EU jargon on the record, the directive on the activities of institutions for occupational retirement provision?

The Opposition welcome attempts to create more of a single market in the financial services industry, and believe that the UK financial services industry is well placed to do extremely well and sell its products to other European countries. There are, however, great concerns about the directive. For example, it could cost UK schemes up to £300 billion—that is an extraordinary figure, but I have checked it, and the industry assures me that it is correct. Christine Farnish, the chief executive of the National Association of Pension Funds says that the directive

"is very dangerous and very costly to UK schemes, and because the rules cannot be scheme-specific, will no doubt lead to endless battles in the courts. It is ridiculous; it is not in the real world."

The directive attempts to allow people to build up a pension as they move between member states. Many new clauses added to the Pensions Bill on Report were meant to ensure that we complied with the directive. Do the present proposals belong to the same category, and can the Financial Secretary clarify whether they are an attempt to make sure that we comply with the directive? As I said, on a first glance—the Government tabled them only on Friday—the amendments do not appear to be unreasonable. We do not want people to come and work here and build up pension provision—we want people in this country to be able to go and work abroad and build up their pension provision. We are not against the principle behind the proposals, but I should be grateful if the Financial Secretary would provide us with assurances about their practicality and the reporting requirements on overseas schemes and their policing. How will she deal with conflict, if it arises, between the rules in this country and the rules of host countries? Will she explain to the House why the proposals have been made at the last moment, and why we still do not have many important regulatory details?

Quentin Davies (Conservative, Grantham and Stamford)

I shall start with negative strictures and concerns before making some positive points.

It is unsatisfactory that the Government should introduce legislation at the last minute without consultation. There are only two acceptable excuses for introducing substantive new clauses on Report. First, the Government might have to respond to events that they could not have anticipated. The Paymaster General made that excuse—it sounded reasonable, given the background that she described—when she introduced Government new clauses 9 and 10, and the House accepted it. The second reason is if the Government for once take account of debate, discussion and consideration in Committee and have a genuine rethink in the light of Parliament's reaction to their original proposals. That is how Parliament should work, and how it did work for hundreds of years before 1997. I hope that it will work that way again as soon as possible.

Unfortunately, however, neither of those excuses is available to the Financial Secretary, but if she proves me wrong I shall be pleasantly surprised. It is unsatisfactory, as my hon. Friend the Member for Tatton (Mr. Osborne) said, that explanatory notes are not available—at least, they were not half an hour before our proceedings began this afternoon, when I went to the Vote Office in the hope of finding them. Of all the epithets that the hon. Lady could reasonably use of her new clauses—I shall use some nice ones in a moment—"simple" is not one of them, as they consist of seven or eight pages of complex measures, including equations and so on. Explanatory notes would have helped our debate, and Parliament has been treated with something less than courtesy. Indeed, insufficient consideration has been given to the importance of our role. I hope that we receive an apology, and that in future the Treasury will try to do a bit better on both those fronts.

I have a more technical concern that is linked to the points made by my hon. Friend the Member for Tatton about the annual limit and the way in which it will be monitored or enforced. What is the position of people who are in danger of exceeding their lifetime limit because they are highly paid and have substantial pension provisions? Would it not be sensible for them to go abroad to join a qualifying foreign scheme, and then return here? A multinational company will have work forces and pension schemes in different countries—certainly in the European Union and north America—so in principle it should not be too difficult for someone who is transferred to another country to join another scheme. The person could presumably return to the United Kingdom and accumulate any amount up to another lifetime limit and enjoy the benefit in retirement.

How will the lifetime limit be monitored? Perhaps the answer is that a separate lifetime limit will be applied to contributions to overseas schemes while people are in this country. I am sure the Financial Secretary has thought about that. She did not deal with it in her introductory remarks, but perhaps she will do so.

Let me make some more positive comments, as I said I would. Despite my earlier remarks, it would be churlish not to praise the Government for having tried to move in the right direction. It is economically important that there should be no undue obstacles to people coming to work in the UK. In theory, the more highly paid they are, the greater the value they will add to our economy while they are here. It is important for high-tech industries, the City and so on that they should come to the UK to work. We all know that pensions can be a major obstacle to labour mobility. The Government are to be praised for trying to remove some of the obstacles.

The Financial Secretary, to give her her due, clearly set out the purpose of the new schedule. I thoroughly agree with that, but perhaps we could look at the other side. It is true that the British economy will benefit from the removal of obstacles, and individuals coming from abroad and supposedly returning abroad before they take their retirement pension will also benefit. There seems, therefore, to be a basis for reciprocity and for negotiation with countries, especially those in the EU, with which there is a reasonable exchange of labour, particularly highly paid professional labour. We should try to negotiate some reciprocal benefits for UK residents or citizens who go to other countries, especially in the EU, and wish to continue to contribute to a UK scheme on the basis that their contributions will be tax deductible, to allow them to enjoy the mirror-image benefits of those being introduced under the new schedule.

The Financial Secretary did not say anything about that dimension, but I should be interested to know whether an attempt has been made to generate some reciprocity and whether—this point was rightly made by my hon. Friend the Member for Tatton—the measure contributes to the emergence of a European pensions directive, which would be highly desirable. It is a major obstacle to labour mobility within the EU—a cause to which we all strongly subscribe—that differential pension regimes exist. In some countries, contributions are tax deductible, but in others they are not. In some countries, there are limits to tax deductibility, whereas in other countries there are not. In some countries, pensions in payment are relieved of tax, but in other countries, such as the UK, they are not. The situation is immensely confusing.

No doubt there are many opportunities for clever arbitrage—building up one's pension in a country where tax deductibility is high, and taking the pension in a country where the tax regime for pensions in payment is the most favourable—but there are also ample opportunities for getting it wrong in both directions. People who are in danger of doing that will not move, so our labour resources are not used as efficiently as they could be if the obstacles were removed.

It is important to achieve a European directive on pensions. It has been under consideration for an enormously long time. I do not remember when the idea was first mooted, and it is a major failure of the EU's efforts to build up an effective single market that a pensions directive still has not been agreed. I do not want to attribute blame—I would not know how to do so. I have not studied the matter sufficiently in respect of the Council of Ministers, the Commission and so on, but I am happy to allocate blame in general and say that the present position is not good enough and that progress ought to be made.

My question to the Financial Secretary, which is germane to the new clause, is to what extent the new clause has been considered in that context, as a basis for negotiating bilateral reciprocal arrangements with relevant other countries, and as a contribution to solving the enormous difficulties in finally getting agreement and launching the European pensions directive. If the hon. Lady has made a contribution to that, she will have done a very good day's work indeed for the economy.

Ruth Kelly (Labour, Bolton West)

There has been an extremely interesting exchange covering all sorts of issues. I can only apologise to the House for the fact that the new clauses were introduced at such a late stage. Clearly, it would have been desirable to introduce them in Committee. The new rules for migrant member relief are based on proposals that were set out in the December 2003 consultation paper, so they should not come as a complete surprise to hon. Members.

It was clear that the main rules for the new simplified regime were of most concern to employers, scheme providers and scheme members in the UK, but the migrant member rules are important to admittedly smaller numbers of people, and we wanted to introduce them during the current year, albeit at a late stage, to make sure that the people affected by the rules would have certainty in the run-up to the introduction of the measures in 2006.

I believe that the explanatory notes are available on the Treasury and Inland Revenue websites, and they were placed in the Library in the standard way. I have not checked personally, but I am assured that that happened. I apologise if there was any difficulty in getting access to them.

The draft regulations will be published over the summer and, as with the other pensions regulations, interested parties will be able to comment on them at that stage. Again, it is unfortunate that it was not possible to finalise the draft regulations in time for the debate, but the industry and others affected by the proposals will have ample opportunity to contribute to their formulation in due course. I am happy to summarise what the regulations made under the two new overseas schedules will do.

There will be four aspects to the overseas pensions regulations. First, the regulations will set out the detail of the conditions that must be met for an overseas scheme to be a scheme in respect of which an individual may claim migrant member relief, or a scheme to which funds from a UK-registered scheme may be transferred. Secondly, the regulations will set out the information reporting requirements that an overseas scheme must comply with in order for its members to be eligible for migrant member relief, or in order to receive funds transferred from a UK-registered scheme.

Thirdly, the regulations will set out the way in which the tax rules for registered schemes will be modified for application to overseas schemes. Finally, the regulations will provide detailed rules for identifying which part of the funds in an overseas scheme has benefited from UK tax relief. That is important for identifying, for example, which part of an overseas fund an authorised payments charge may apply to. Some of the questions raised by the hon. Member for Tatton (Mr. Osborne) touched on issues that will be covered in the draft regulations.

George Osborne (Conservative, Tatton)

Will there be a restriction on the countries in which an overseas scheme could be registered?

Ruth Kelly (Labour, Bolton West)

As I understand it, the regulations will cover all overseas schemes. To get it absolutely right for the record, I will write to the hon. Gentleman specifying the countries to which they apply.

On the hon. Gentleman's point about whether the provisions could be used by UK nationals, there would be no bar to UK nationals claiming migrant member relief, provided they met the relevant conditions in the way set out in the Bill—for example, that they were not resident in the UK and were a member of an overseas scheme and eligible for tax relief in their country of residence immediately before coming to the UK. UK nationals can benefit in exactly the same way as with other schemes.

The hon. Members for Tatton and for Grantham and Stamford (Mr. Davies) were interested in how we could enforce the tax charge in overseas schemes. I understand that that is an area of particular concern, and I have considered it in some detail. There are two ways in which that might be done, depending on how individuals benefit from migrant relief.

First, a UK-registered scheme might be transferred into an overseas scheme, which is by far the simplest case. In that case, a migrant worker comes to the UK, benefits from UK tax relief, transfers money from a UK-registered scheme into a scheme in a different country and, after benefiting from that tax relief, returns home. A UK-registered scheme will be able to transfer a member's fund to an overseas scheme under the new regime. The overseas scheme must be regulated as a pension fund in its country of establishment and undertake to comply with information reporting requirements regarding payments made to the member.

Such a transfer would, in itself, count as a benefit crystallisation event, which is a concept that we debated at length in Committee. Any funds transferred in excess of the lifetime allowance will be subject to the lifetime allowance charge at the time of transfer. The UK scheme will, of course, know whether the funds exceed the member's available lifetime allowance, and, along with the member, it will be jointly liable for any lifetime allowance charge. The situation on transfers is straightforward: any excess relief granted over and above the lifetime allowance will be recouped at the point of transfer, so there is no need to worry about collecting a lifetime charge decades after the individual has left the UK.

Secondly, the situation is more complex when funds in an overseas scheme receive migrant member relief, because there is no transfer between schemes at which a benefit-crystallisation event occurs. Again, such an overseas scheme must be regulated as a pension scheme in its country of establishment and undertake to tell the Revenue about any benefit crystallisation event involving the member. The individual will tell the scheme that they are claiming migrant member relief, so the scheme will know the cases in which it must tell the Revenue about benefit crystallisation events. Any contributions that enjoy migrant member relief, including employer contributions, will count towards the individual's annual allowance. The individual will then need to claim migrant member relief and self-assess any contributions in excess of the annual allowance.

The lifetime allowance will also apply to amounts within the member's fund that enjoyed migrant member relief. Those amounts, which are calculated by reference to total pension inputs, are tested against the lifetime allowance on the same benefit-crystallisation events that apply to UK-registered schemes. The individual, however, will be solely liable for any lifetime allowance charge due.

George Osborne (Conservative, Tatton)

rose—

Ruth Kelly (Labour, Bolton West)

I intend to elaborate further on how the scheme will operate. If the hon. Gentleman waits for a few moments, I may answer his point.

If an individual comes to the UK, contributes fairly large amounts each year to a UK pension scheme underneath the annual allowance limit and returns to their country of origin, they cease to benefit from UK tax relief, and a benefit crystallisation event will occur some years down the line at the point of retirement. In that case, no annual allowance charge will be imposed, but, depending on the lifetime allowance at the point at which that individual retires, a lifetime allowance charge may be due. The overseas scheme should tell the Revenue about such a benefit crystallisation event, and if it fails to do so it will cease to qualify for migrant member relief. The Revenue will know that a benefit crystallisation event occurred and the total in the fund, so it will be able to risk-assess the situation and concentrate its efforts on larger cases.

The scheme, the Revenue and the individual will have various records of the pension contributions made to the scheme, and the Revenue will be able to call on further information from the member and the scheme. That provision will deal with the problem in normal situations, and I emphasise that it will cover only those who accumulate large sums above the lifetime allowance.

Where a member is resident in a treaty partner country, EU directives such as the mutual assistance directive, the exchange of information provisions or the double taxation agreements will apply, but in the vast majority of cases individuals claiming migrant member relief will get nowhere near the lifetime allowance. The annual allowance limit is designed to slow the rate at which the individual accumulates UK tax-relieved funds. Migrant workers tend to come to the UK for short periods, so it will take them a long time to accumulate a fund in excess of the lifetime allowance.

Quentin Davies (Conservative, Grantham and Stamford)

I recognise that this point will apply only in a minority of cases, but the Financial Secretary's second approach to monitoring potential breaches of the lifetime limit is premised on the overseas pension scheme arranging its accounts so that it knows not only what proportion of the total fund is due to an individual, but what proportion of that personal element in the fund derives from contributions made during that individual's employment in this country. In the case of a defined contribution British pension scheme, it is not possible to allocate a percentage of the fund to an individual. The only way in which the Financial Secretary can achieve her purpose is to wait until the pension is in payment, and then apply her multiple of 20. Unfortunately, she will not know how much of the total pension in payment derives from contributions made during employment in this country, and how much of it derives from or relates to provisions made in respect of that individual's employment overseas.

Ruth Kelly (Labour, Bolton West)

Not only the scheme but the individual may hold useful information to deal with that point. The Inland Revenue also holds records, which it obtains in various different ways in the UK, and it can base its risk assessment on them.

Quentin Davies (Conservative, Grantham and Stamford)

The Financial Secretary is unduly optimistic, because the Inland Revenue will have access only to contribution records for the period of residence in this country, and it will not know information such as the capital gain and the interest gain accumulated over the 20 or 30 years before the pension is paid. It will not be able accurately to assess the capital gain and interest that accumulates on contributions made throughout the rest of the individual's career, when they are not resident in this country.

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman is right, which is why in the case of overseas schemes we will calculate the total pension input contributions, rather than the total size of the pot, when testing the lifetime allowance charge. That is the practical response to some of the issues that he raised.

The hon. Gentleman is also interested in EU fundamental freedoms, which dictate that migrant member relief must give relief on the same terms and to the same extent as relief is given for contributions to UK schemes, and he understands why that is the case. We must apply the lifetime allowance at the same time at which it would apply to a registered scheme.

George Osborne (Conservative, Tatton)

Before the Financial Secretary turns to the European aspects of the matter, there are a couple of other practicalities. What happens if an overseas scheme transfers to another overseas scheme that transfers to another overseas scheme? Is it possible that the Inland Revenue would lose track of such a pension fund? I know that the Financial Secretary will write to me on the countries in which schemes may be set up, but if a scheme were set up in the Cayman islands and a person became resident there for a couple of weeks, could the Inland Revenue lose track of the situation? In which currency will the calculation be made—presumably the answer is sterling—and when will the exchange rate be calculated?

Ruth Kelly (Labour, Bolton West)

The rules for collecting debts that leave the country with a foreign national will apply in the usual way. The mutual assistance and recovery of debt directive applies in EU countries, and the information provisions apply in respect of other territories—the hon. Gentleman mentioned the Cayman islands in particular.

The lifetime allowance charge is not a perfect science, and difficult cases involving practical difficulties in recovering debts will occur—difficult cases may occur whenever individuals leave the UK with debts that remain payable. However, the vast majority of people who come to work in the UK—for example, an American national working in the City of London—are here for a relatively short period, and will not be able to accumulate sufficient sums to make them liable for the lifetime allowance charge. For the vast majority of individuals, there is no problem whatsoever; and there are ways of recovering the charges due for a very small number of individuals with extremely large pension pots. However, for the reasons of fundamental freedoms that the hon. Member for Grantham and Stamford espoused, but also to be fair and to retain the competitiveness of the City of London and to maintain Britain's attractiveness as a place to work and do business, we think that this is a reasonable provision.

Quentin Davies (Conservative, Grantham and Stamford)

Before the hon. Lady draws her remarks to a close, will she address the issue of the European pensions directive?

Ruth Kelly (Labour, Bolton West)

I am not yet drawing to a conclusion, as I still have some points to deal with.

The hon. Member for Tatton asked what would happen if the foreign scheme rules did not match UK rules. I assure him that the regulations will amend the UK rules so that they apply to overseas schemes in a way that broadly corresponds to UK rules. That avoids problems relating to slight differences in rules. Generous UK relief is given on these contributions, and it is right that those who benefit by them should comply with UK rules. The requirements that overseas schemes will have to fulfil are set out in clause 140, which we discussed at length in Committee. The draft regulations that will be published in the summer will be revised to make a small distinction between schemes to which migrant member relief will apply and schemes to which transfers may be made; apart from that, they will be as published in clause 140.

I have already touched on some of the reporting requirements with which an overseas scheme will have to comply in order for its members to be eligible to claim migrant member relief or to receive transfers from UK-registered schemes. For example, a report will be required when an overseas scheme makes an unauthorised payment to an individual who has had migrant member relief.

The UK has a system of double taxation agreements, many of which provide reciprocity for pension contributions. We want to encourage that, because it provides a valuable means of assistance to people who work in different countries and encourages labour mobility.

The EU directive that was mentioned during the debate deals with how pensions schemes are regulated, but not with their tax treatment. We are firmly of the opinion in the UK that it is up to each country to determine how their pension funds are treated for tax purposes, because that is fundamental to national sovereignty. I am sure that Conservative Members would concur with that.

Following that extensive explanation, I hope that Conservative Members will agree that this is a valuable provision that will continue to make Britain and the United Kingdom a very attractive place in which to work. I apologise for the fact that the new clauses have been introduced late in the day, but rather than defer them to the next Finance Bill I thought it wise to give the small number of people who will benefit from the provisions the additional certainty of an extra year; and of course they will have time to comment on the draft regulations as and when they are published.

Question put and agreed to.

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

New Clause 13 — Non-UK schemes: application of certain charges

New Clause 14 — Appeal against decision to exclude recognised overseas pension scheme

New Clause 15 — Leases

Ruth Kelly (Labour, Bolton West)

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

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following: Government new clause 16—Chargeable consideration.

Government amendments Nos. 160 to 165.

Amendment No. 12, in page 562, line 25 [Schedule 37], at end insert—

'Application of paragraph 14

15A (1) Paragraph 14 does not apply to a lease if the following two conditions are met.

(2) The first condition is that—

(a) no chargeable consideration other than rent has been given by the Purchaser in respect of the grant of the lease; and

(b) no arrangements are in place at the time of the grant of the lease for any chargeable consideration other than rent to be given by the Purchaser in respect of the grant of the lease.

(3) The second condition is that the rent payable under the lease as granted was a market rent at the time of grant disregarding any provisions in the lease that operate to increase the rent payable after the fifth year of the term of the lease to an amount that exceeds the market rent at the review date.

(4) The market rent of a lease at any time is the rent that the lease might reasonably be expected to fetch at that time in the open market.

(5) The review date is a date from which the rent determined as a result of a rent review is payable.'.

Government amendments Nos. 150 to 159.

Government amendments Nos. 166 to 221.

Ruth Kelly (Labour, Bolton West)

New clause 15 is the first in a series of Government amendments to the legislation governing stamp duty land tax. Some of the amendments arise from the need to counter known avoidance opportunities, but most are in response to representations made to us since the publication of the Bill.

Mark Prisk (Conservative, Hertford and Stortford)

Do I take it that the Financial Secretary is suggesting that these avoidance schemes were known prior to the publication of the Bill? If that is the case, why were they not included in the original text?

Ruth Kelly (Labour, Bolton West)

As the hon. Gentleman is well aware, it takes some time to draft legislation. These avoidance opportunities have only recently been made known to us. As I say, most of the amendments are in direct response to representations made to us. Most are relieving measures that I hope the hon. Gentleman will welcome.

I shall deal first with the new clauses, then with the Government amendments in the order of the relevant provisions in the Bill. Finally, I shall deal with Opposition amendment No. 12. As full explanatory notes have been published, I propose to discuss only the more significant provisions.

New clause 15 deals with a number of matters concerning leases. The only change of substance is subsection (4), which concerns leases where the tenant is a company connected with the landlord. Section 53 of the Finance Act 2003 provides that the consideration for such transactions is deemed to be market value rather than the consideration actually given. However, many leases will have only a negligible market value, but there will still be a rent payable. Subsection (4) ensures that the rent is taken into account. That is similar to other "market value" provisions such as those governing exchanges.

New clause 16 concerns the termination of chargeable consideration in two sorts of transaction: first, the transfer of property subject to existing debt; and secondly, the variation of the testamentary disposition, which is not wholly exempt from charge. The more substantive issue concerns transfers subject to a debt.

Our intention in the 2003 Act was that transfers subject to a debt should be treated in the same way under stamp duty land tax as they were under stamp duty. However, inquiries from customers have suggested that the current provisions could benefit from clarification. No change of practice is intended. The examples in the explanatory notes show how the charge will work—the same way in which it worked under stamp duty.

I turn to the Government amendments, of which I shall mention only the most significant. Amendments Nos. 155 to 159 concern relief for charities and amend clause 294. They make it possible for charities to claim partial relief from stamp duty land tax. That issue was raised in Committee of the whole House by the hon. Member for Yeovil (Mr. Laws), and I undertook to consider it. If a charity makes an acquisition but does not intend to hold the entirety of the acquisition for qualifying charitable purposes, the charity will now be eligible for partial relief provided that it intends to hold the majority of the acquisition for qualifying charitable purposes. In such cases, a clawback of a relevant portion of the relief will occur when the charity disposes of that part of the acquisition. This will ensure that the relief granted is in proportion to the share of the acquisition held by the charity in furtherance of its charitable aims.

I turn now to some of the amendments to schedule 37 of the Bill. Amendment No. 161, introduced in response to representations, extends the circumstances in which overlap relief is available when one lease comes to an end and a new one is granted. Amendments Nos. 162 and 163 extend the circumstances in which the assignment of a lease is treated as the grant of a new lease to the case where the original grant was to a nominee or bare trustee for the lessor. Amendment No. 165 provides for a charge to stamp duty land tax when the lease is varied so as to reduce the rent or the term.

I turn now to the amendments to the partnership provisions in schedule 39. These amendments fulfil commitments that I made in the Committee of the whole House, in which we had an extensive debate on this point. Eighteen of them are required to restrict the charge to land in the United Kingdom. They change the phrase "interest in land", or something similar, to "chargeable interest", or something similar. This is in response to the concerns raised by the hon. Member for Hertford and Stortford (Mr. Prisk) in Committee, and I hope that he will be satisfied with our conclusions.

Amendments Nos. 175 to 182 inclusive amend the charge on transfer of land into a partnership by a partner, an incoming partner, or someone connected with such a person. Our intention is to deal with those situations in which joint owners outside a partnership transfer land into a partnership in which they, or persons connected with them, are partners. An example is when a husband and wife start up a business in partnership, and the business is run from their jointly owned property. The calculation now identifies the smallest proportion of the land transferred that remains owned by a person who both owns the land outside the partnership and is a partner. For example, when parents gift land to a partnership in which the partners are their children, there would be no charge as the children would be connected to their parents. Their ownership outside the partnership would therefore be treated as 100 per cent. There might be occasions on which land is transferred by way of sale rather than by gift. In such cases, any payment will be charged. The charge on the payment is restricted to reflect the proportion of the land that is exempt from the market value charge.

Amendments Nos. 192 to 201 inclusive make a similar restriction to the market value charge on the transfer of land out of a partnership to a partner, former partner, or someone connected with such a person. They also introduce a proportional charge on any payment made to the partnership. As part of this process, amendment No. 200 introduces a further restriction on the charge when land is transferred between partnerships that have at least one partnership in common, or the partnerships are connected through connected persons. There would normally be two charges as one partnership is transferring land to a partner or connected person, and the other partnership is having land transferred to it by a partner or connected person. The amendments restrict those two charges to the single highest charge. However, partnerships of bodies corporate cannot benefit from this treatment unless the connection between the transferor and the transferee is less than 75 per cent. Our intention is that when the connection is 75 per cent. or more, the transferee should claim group relief, as with other transfers between companies in the same group.

Amendment No. 219 provides that partners in a partnership are not to be treated as connected persons solely because of their being partners. Without this amendment, each partner in a partnership would be treated as owning 100 per cent. of the land in the partnership, and the charge on transferring land into and from a partnership would not be effective.

Amendments Nos. 185 to 188 align the requirements of a lease to be treated as a market rent lease more closely with commercial leases, in response to representations made after the publication of the Finance Bill. Market rent leases do not count as partnership property for the purpose of determining market value of land interests. Leases for less than five years only have to be granted at an initial market rent. Longer leases have to have rent reviews to market rent at least once every five years. In either case, there must be no chargeable consideration other than rent.

Amendments Nos. 202 and 203 address concerns that disadvantaged area relief might not apply to transfers of an interest in a partnership. They also ensure that groups and charities reliefs are available for these transactions. Amendments Nos. 201 and 215 introduce changes to the charge to stamp duty on transfer of an interest in a partnership, in response to concerns expressed by the hon. Member for Hertford and Stortford in Committee. These amendments have the effect of restricting the stamp duty to that which would be payable on the net value of any shares and securities held by the partnership when an interest in a partnership is transferred. Again, this accords with the principles of transparency.

Opposition amendment No. 12 returns to the subject of abnormal rent increases, which we discussed in Committee. At that stage, the hon. Member for Hertford and Stortford sought to remove the provisions in their entirety. In contrast, this amendment would limit their application, but it would do so in a way that would in practice prevent them from ever applying. Although we discussed the need for paragraphs 14 and 15 of schedule 37 at length in Committee, I shall briefly remind the House why the provisions on abnormal rent increases are needed. They are part of the scheme for charging stamp duty land tax on leases with variable rents. The general rule is that changes in rent after the end of year five are ignored. However, an abnormal rent increase—that is, one exceeding an annualised increase of RPI plus 5 per cent.—is treated as the grant of a new lease in consideration of the increased rent.

The rule for leases is intended to minimise the need for additional returns, and means that, in almost all cases, no returns will have to be made after the end of the five-year period. It will also make it difficult for tax avoiders to reduce their liability to tax by arranging for large increases in rent in the future by setting an artificially low rent in the first five years. The amendment would render those provisions ineffective. The result would be that, as long as the parties could arrange for the initial rent to be a market rent, there would be no liability to pay any more stamp duty land tax, regardless of the level of future rent increases. I suggest to the hon. Gentleman that it is easy enough for parties to arrange for a very low rent to be a market rent, by including, for example, onerous covenants in the lease. Subsequently, the lease could be varied for no consideration, so as to remove those covenants. Therefore, the market rent would rise.

In addition, the amendment would impose a heavy compliance burden on taxpayers, who, to bring themselves within its scope, would need to demonstrate at the outset that the rent was a market rent. That might involve paying for valuation advice, and paying advisers to negotiate with the Revenue. By contrast, the current provisions ensure that the initial compliance burden is minimal. Only when, if ever, the rent increases after the end of year five do the provisions need to be considered. The Government believe that the rules in paragraph 14, which provide for further returns only if rent increases are more than 5 per cent. per year plus RPI, will exclude ordinary business rents without the need for the proposed paragraph. As I said in Committee, the provision will not impose any charge until December 2008. Between now and then, I assure the hon. Gentleman that we will keep the provision under review, to make sure that it meets its purpose.

Mark Prisk (Conservative, Hertford and Stortford)

I shall no doubt come back to the broader points, but can the Financial Secretary explain, given the rigidity of a rule of RPI plus 5 per cent. or an increase of 5 per cent., what will happen in an area that is seeking to regenerate, where local market rent is at a certain level, and two or three years later, after successful regeneration, it is a much better area and the increase has been 15 or 20 per cent? Will additional tax have to be paid for that benefit?

Ruth Kelly (Labour, Bolton West)

As I am sure the hon. Gentleman knows, we have debated that point in a Committee of the whole House. I argued to him that that situation was most unlikely to occur. I assure him, however, that we will keep the proposal under review before it is introduced in 2008, to make sure that it is appropriate at the time.

The proposals that we have put forward carry a minimal compliance burden. They are designed to try to make sure that as few leases as possible are covered. I commend the new clauses and amendments to the House.

Mark Prisk (Conservative, Hertford and Stortford)

I thank the Financial Secretary for her opening remarks. First, I want to refer to amendment No. 12, before considering the Government's new clauses and 71 amendments to this part of the Bill.

The purpose of amendment No. 12 is to reduce the compliance costs for businesses of stamp duty land tax. It would do so by disapplying paragraph 14 of schedule 37 when a lease has been granted at a market rent from the outset. As such, many people feel that amendment No. 12 directly fulfils the Government's original aims for stamp duty land tax: to modernise stamp duty, without unduly creating a bureaucratic burden on business.

I wish that I could say the same about the Government's attempts to legislate for this tax. After a botched consultation, the legislation has proved ill considered and ill prepared, and there is a raft of areas in which it has significantly increased the regulatory burden for business. Where there was once a one-page tax form we now have 12 pages, plus more than 40 pages of explanatory notes—and that is even before the Bill becomes law.

The provisions concerning abnormal rents exemplify the problem. Believing that tenants and landlords are, as we speak, actively colluding to create tenancies with below-market initial rents, the Government have brought forward a ridiculous six-step, three-formula test. Tenants would be required to carry out this test at every rent review after five years. Of course, the premise that most landlords will give up a full rent now in the hope of higher rents at some point in the near or distant future is completely false. I fully accept that some peculiar and unusual agreements may arise, but given that in the vast majority of cases such an arrangement would clearly be against the interests of the landlord, they will be extremely rare.

The Financial Secretary has argued in the past, and again this afternoon, that having undertaken the six-step test few businesses are likely to find themselves liable. That may well be true, but they will still have to undertake the test to find out, which means that the burden of compliance affects most businesses. The purpose of amendment No. 12 is to relieve most businesses of the bureaucratic burden by disapplying the test when the lease is granted at a market rent. I am grateful to the British Property Federation for helping to identify the change.

As the Financial Secretary suggested, if I had my way it would be lovely to see the back of this nonsense. Sadly, however, we are not in that position, so we must try to amend the Bill in the current climate.

The amendment draws partly on paragraph 13 of schedule 39, which excludes leases granted at a market rent from being partnership properties for the purpose of this tax. To that extent, it is based on a principle initiated by the Government. It may not have been drafted perfectly, but I hope the Financial Secretary will acknowledge that it is a positive proposal, and will monitor it and act accordingly. She nods; I will hold her to that.

New clauses 15 and 16 change the provisions for agreements to lease, for granting and varying leases, and for the exemption of certain forms of chargeable consideration. The Financial Secretary tells us that the new clauses matter, and they may well matter; but why did they not matter in April, when the Bill was published, in December, when the regulations were debated, or at the time of last year's Finance Bill, when the Government first promoted this tax—or even during the consultation before the Bill, which the Government abruptly curtailed? Why are there suddenly 73 amendments and new clauses relating to a tax that is less than a year old? Last year the Chief Secretary waxed lyrical in his usual style, telling us that the tax would work perfectly well. Yet here we are, less than 12 months later, rewriting the rules before the ink has dried.

I also want to comment on the way in which the changes have been presented. Here I strike a note of disappointment as much as anything else. Why did the Government table all 73 amendments and new clauses on Friday afternoon, when the House was not sitting? What possible opportunity did that give Members, or those whom they represent, to consider the effects of the changes? I draw no comfort from this, but I think that the way in which the legislation has been presented suggests either incompetence or a wanton disregard for the House. I hope that the Minister will be able to explain. I hope that she will also be able to explain what led to the change of heart on the carrying out of works. Who will benefit from the change in new clause 15, and who will not?

What independent evidence can the Financial Secretary offer us to show that the granting of leases constitutes a significant tax avoidance scheme, as is alleged? What change in tax yield does she expect? Can she tell us whether it will rise or fall?

What assessment of the compliance costs has the Inland Revenue undertaken? This is, after all, the fourth version of the tax in 12 months. Can tenants expect renewed guidance, and if so, in what form and when?

New subsection (1A) in new clause 15(4) refers to market value. I assume that that is open market value. If so, can the Financial Secretary tell us on what basis the valuation is undertaken? Does new subsection (1A)(b) widen the scope of the term "chargeable consideration", or does it merely confirm its existing application?

On a wider point, does not the Minister recognise that the ability of landlords and tenants to vary leases to reflect changing commercial and trading circumstances is a vital part of a dynamic and successful economy? Does she not therefore accept that heavy-handed tax rules could hamper an open, flexible rental market in commercial property and thus create a drag on our competitiveness? To that end, I hope that she will be able to tell us what discussions she has had with ministerial colleagues in the Department of Trade and Industry and in the Office of the Deputy Prime Minister on Government policy to improve flexibility in leases. That is an established Government policy. Can she tell us when she has met them and what discussions she has had with them?

On subsection (3) of new clause 16, can the Minister describe the circumstances in which the change of rules applies? How will the changes in the rules concerning property with secured debt affect mortgaged property—residential or commercial? Can she clarify whether the new clause allows for properties with a second, or further charge? I appreciate that she may not be able to provide us with an immediate answer. I am sure that hon. Members on both sides of the House would, if it is appropriate for the Minister, be willing to receive a written answer.

I am also concerned about subsection (7) of new clause 16, which states:

"The other amendments made by this section are deemed always to have had effect."

Is that not a retrospective measure? If so, why is it being introduced in this way to this Bill?

I turn to some of the 71 amendments. I welcome the amendment to clause 294, which will allow charities, as the Minister suggested, to claim partial relief from stamp duty land tax on certain acquisitions. The Minister will know that we on the Conservative Benches retain concerns about the scope of the definition "qualifying charitable purposes" but, in the absence of a rethink on that particular point, it is only fair to say that the measure is helpful and I welcome it.

I also welcome several of the changes to schedule 37. I understand that they reflect some of the points that were raised not simply by those outside the House but by many members of the Standing Committee last year. It would have been nice to have resolved them last year but, again, I recognise that the Government are now acting to correct their past errors—it would be remiss of me not to recognise that. However, the Government are treating a variation as an acquisition of a chargeable interest. How, in law, does the Minister distinguish between a rent review and a variation of rent?

In amendment No. 161, there is a reference to

"the same or substantially the same premises".

Can the Minister clearly tell us what "substantially the same" means? There is uncertainty there.

The reference in other amendments to market value concerns me. The Minister and I have discussed market rents and discounted cash-flow valuation. Is this a discounted cash-flow valuation, or is it what someone will pay? It is an important distinction.

The Minister needs to realise that there may well be times when people will pay more than the market value because of other circumstances related to their business, or perhaps for a personal reason. That cannot be reflected in a DCF valuation, yet it is what the market is willing to pay. In those circumstances, if someone pays more than the DCF valuation of "market value", what happens to the difference in tax terms? How is it treated?

The changes to schedule 39 are quite extensive and they seek to legislate for almost every eventuality concerning partnerships. It would be remiss of me not to recognise that some matters that were discussed in the Standing Committee and raised by me and others have been responded to. I welcome that. However, I think that, given that we are given five-step and three-step formulae in addition to the existing six-step test on abnormal rents, there is still confusion and crudity in the legislation. Indeed, if a partnership of five or more people were to try to transfer an office to a similar partnership under this legislation, more than 25 pages of primary tax law would be involved on that narrow point alone. Given the Financial Secretary's original aim of a simpler and more modern tax, how on earth can she possibly justify this provision?

Although some of these amendments do indeed deserve our support, the truth is that their number and late introduction is a very accurate example of how poorly this Government sometimes behave towards this House. Where we get promises of simplicity, we end up with bureaucracy; where we are offered fairness, we end up with iniquity; and where we are promised certainty, we simply have ceaseless change. By way of contrast, our amendment has the potential to help thousands of businesses. I fully accept that it is not perfect, but it does merit serious consideration. For those reasons, I ask the Financial Secretary to reconsider her earlier remarks. Or will she now reject this amendment and, as I suspect she will, come back to the House in a year's time—be it on Report, in Committee or even at the beginning of next year's Finance Bill—and introduce something very similar in the end? I hope not. Rather, I hope that she will for once think beyond her briefing and listen, and thereby show that debates in this House can just occasionally be reflected in the actions of this Government.

Ruth Kelly (Labour, Bolton West)

We have had yet another full contribution to the debate from the hon. Member for Hertford and Stortford (Mr. Prisk), who takes a personal interest in these issues, given his previous experience in the field. Yet again, his contribution has ranged from questioning the concepts behind particular clauses to questioning the detailed drafting of individual amendments. However, he will agree that I covered some of the issues raised in my opening statement, and I shall now attempt to deal with the more general points. If specific drafting issues and matters of legal terminology remain unanswered, I promise that I shall write to him and fill him in on some of the detail.

I want to begin by welcoming the hon. Gentleman's welcome for some of the measures that we have implemented, such as granting greater relief to charities. That measure was called for by the hon. Member for Yeovil (Mr. Laws) and we have been able to respond, so he, too, will welcome it. I should also apologise to the House for the fact that it was not possible to make these amendments earlier. This is an entirely new tax, as the hon. Member for Hertford and Stortford knows, and it is impossible to know how such a tax will work in every particular before introducing it. Issues will always arise as the operational impact of a new tax becomes clear, and representations will always be made to the Government as it comes into effect. I should tell the House that some of those representations were made extremely late in the day—after the Finance Bill had been published and considered in Committee—so it was not possible to introduce these amendments sooner.

The hon. Member for Hertford and Stortford will accept that 18 of the 73 amendments are needed purely to restrict the charge to land in the UK—an issue that we discussed in Committee. Parliamentary counsel suggested that this was the appropriate way to bring that provision into operation.

Mark Prisk (Conservative, Hertford and Stortford)

The Financial Secretary is right to say that those 18 amendments were necessary, but I come back to the fundamental point over which we argued last year, and which I still regard as an important principle of tax legislation. It was clear last year, and it is clear from the Bill and the 71 amendments and two new clauses that, in keeping with the considered view of all outside tax and property experts, this was a Bill in a hurry. As a result, more mistakes were made than were necessary, and the compliance costs were greater. Does the Financial Secretary not accept that, as we and a long list of outside organisations, including the Chartered Institute of Taxation, have argued—they are more expert on these matters than I am—it would have been far better to get things right the first time, rather than adopting this "make do and mend" approach? That is our central concern, and I hope the Financial Secretary will respond to it positively.

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman will know that, in an ideal world, we would get legislation absolutely correct first time. I am afraid that that is impossible when we bring in a completely new tax.

Most of the amendments that we are discussing today are deregulatory in impact and have come about because of a greater understanding of operational impacts; for example, how stamp duty operates in Scotland compared with England and so forth. Issues have been raised with the Inland Revenue and the Treasury; some of them very late in the day, and after the usual consultation period had finished in some cases.

In order to achieve the objectives and published aims of stamp duty land tax, it has been necessary on occasion to table a substantial number of amendments. Of course we endeavour to avoid late amendments wherever possible and, as I said, most of the amendments we are discussing today are deregulatory in impact.

The hon. Gentleman asked about the effect on yield. There is not a substantial effect on yield, either upwards or downwards, from the measures that we are discussing today, very many of which are highly technical. However, some—such as the hon. Gentleman's new clause—have a more significant impact in terms of how the market operates in practice.

Amendment No. 12 is the main point of interest to the hon. Gentleman, who suggests that somehow lower rents now as an artificial means of avoiding lease duty will not be used widely because the landlord does not have the incentive. However, the professional press has recognised that a low rent payable for the first five years of a lease is a method to be considered for reducing stamp duty land tax. I cannot accept that an abnormal rent provision is unnecessary. However, I will look at his proposal in a positive spirit. We are always keen to reduce compliance burdens. In fact, I argued earlier that his proposal would increase the compliance burden compared with what we have put forward. We had an extensive debate on the compliance burden in the Committee of the whole House.

Mark Prisk (Conservative, Hertford and Stortford)

I am unclear as to why an additional independent valuation would be required, given that in any negotiation between a landlord and tenant there would be an independent valuation for the two parties to agree. I do not accept the Minister's point there, and she may wish to challenge her officials on that.

If someone takes on a new premises on a lease at market rent—agreed jointly between the two parties—that should remove them from the need to go through the hoop of the infamous six-step test. That is the essence of what we are trying to do here. I am not entirely confident that the exact wording of the amendment is perfect, but I hope the Minister will look at it. I ask her one thing: does she have evidence for the scope of the proposal? If not, may I ask her to commission a study before implementing the proposal any further? One danger is that I am speculating and she is speculating, but the tax is being introduced on the basis of no evidence. Will she agree to commission a study, which might answer some of the questions I am raising in the amendment?

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman is well aware that the proposals will not come into effect until 2008 at the earliest. We will keep the matter under review and we are constantly trying to improve legislation. He may not like us tabling new amendments, but where we see opportunities for improvement, we will do so. Given the attention on the issue, we will see if this is the most appropriate way to act. I do not accept the principle of his amendment, which is that where there is agreement between the landlord and the lessee, somehow the rent should not be tested after a five-year period. It is easy to avoid payment of duty in such cases. It is not a difficult process, and it is, of course, in the interest of both parties to come to a mutual arrangement under which less duty is payable. We have to be wise to that. If I remember correctly, the original five-year review was a concession to make the process much easier and to minimise the compliance burden in respect of variable leases.

The hon. Gentleman reverts to the argument about the six-step test, which he has made on previous occasions. I can tell him that a calculator for leases is already available on the Inland Revenue website. A calculator for rent increases after 2008 is not yet available, but I can assure the hon. Gentleman that it will be introduced closer to the time. It might confuse people to have it available at the moment. There is no easy way round the issue, but our provisions strike us as representing a sensible balance between minimising the compliance burden and capturing the avoidance.

Mark Prisk (Conservative, Hertford and Stortford)

I am grateful to the Financial Secretary for her positive words, but I should like to edge her one step further, if I can be that persuasive. If nothing is going to happen until 2008, it strikes me that we have a real opportunity to assess the scope of the avoidance. That is, after all, something that Treasury Ministers do in a raft of other areas and there is a logical argument for doing so. I have not yet seen evidence that it has happened in this particular respect. Given that avoidance issues have been presented to us as being easy to deal with and something about which the Government are concerned, may I ask the Financial Secretary whether she would be willing to consider such a study? Let us see the evidence, which would happily allow us to improve the legislation. Will she agree to an independent study to assess the scope of the avoidance in order to ensure that the legislation hits the people at whom she is aiming?

Ruth Kelly (Labour, Bolton West)

I fail to understand how it would be possible to commission an independent scoping study to establish how much potential avoidance could take place if a loophole were to exist in the future. It has not, as far as I am aware, been tried in any other area of tax law, because it is impossible independently to assess how many people would take advantage of a loophole in the legislation. I believe that we have produced a reasonably balanced compromise, reducing compliance burdens while allowing maximum flexibility. I have already given the hon. Gentleman an assurance that we will keep this under review until it is introduced in 2008. We will reflect on other proposals as and when they emerge in a constant attempt to improve the legislation. No doubt the hon. Gentleman will make his own representations to me before 2008 and I look forward to hearing them.

On a more minor point, the hon. Gentleman asked similar questions about Government amendment No. 161. It deals with the circumstances in which one lease comes to an end and a new one is granted. Substantially the same broad interpretation will apply to ensure that rent is not taken into account twice, so there is a relieving intention behind the amendment. As to other technical points, if the hon. Gentleman will allow me, I will respond to him in writing.

Mark Prisk (Conservative, Hertford and Stortford)

I am grateful to the Financial Secretary, but I hope that she can clarify one further point now. I asked about new clause 16(7), which states:

"The other amendments made by this section are deemed always to have had effect."

That sounds retrospective to me, so will the Financial Secretary confirm whether it is?

Ruth Kelly (Labour, Bolton West)

I can confirm that it is compatible with the Human Rights Act 1998 because it is a relieving measure. It has retrospective application, but, as it is a relieving measure, I do not think that anyone could possibly object to it. It is fully compatible with human rights legislation.

Mark Prisk (Conservative, Hertford and Stortford)

Given that it is retrospective, I want to register a small protest about legislation being introduced in this way. We all know that retrospective legislation often has unintended consequences. Will the Financial Secretary set out for us in writing—we have no explanatory notes—exactly how it will work and whom it will affect? I am concerned to ensure that people do not get caught out. In that process, we could minimise the number of people ending up not paying the tax that the Government feel is due.

Ruth Kelly (Labour, Bolton West)

I would be happy to set out for the hon. Gentleman exactly how it would apply in practice. I am sure that the provision will be widely welcomed in the industry. On that basis, I commend the Government new clauses to the House and I hope that the hon. Gentleman will not press his amendment.

Question put and agreed to.

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

New Clause 16 — Chargeable consideration

New Clause 2 — Access for disabled persons

Richard Bacon (Conservative, South Norfolk)

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

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

With this it will be convenient to discuss the following:

New clause 3—Expenses of disabled employees—

'(1) The Income Tax (Earnings and Pensions) Act 2003 is amended as follows.

(2) After section 203 (cash equivalent of benefit treated as earnings), insert— "203A Employment costs resulting from disability

There shall be exempted from section 203 any benefit which satisfies each of the following conditions—

(a) the benefit is provided to a disabled employee;

(b) the main purpose of providing the benefit is to enable the employee to perform the duties of his employment;

(c) the benefit consists in the provision of any equipment, service, or facilities;

(d) the benefit is made available to the employer's employees generally on similar terms."

(3) After section 336 (deductions for expenses, the general rule), insert— "336A Expenses of disabled employees

Where an employee has a disability, a deduction from earnings is allowed for any amount incurred by him if its main purpose is to enable him to perform the duties of his employment."

(4) This section shall apply for the year 2004–05 and subsequent years of assessment and shall be deemed to apply for the year 2003–04.'.

New clause 4—Definition of disability—

'In section 832 of the Taxes Act 1988, subsection (1), there shall be inserted at the appropriate place:

"disability" and "disabled person" shall, where the context so admits, have the meanings given to them by section 1 of the Disability Discrimination Act 1995, and cognate expressions shall be construed accordingly.".'.

New clause 8—Expenditure incurred in improving accessibility for disabled persons—

'(1) The Capital Allowances Act 2001 is amended as follows.

(2) In section 23(2) after "section 29 (fire safety)", insert—

"29A (disabled access)".

(3) After section 29 insert—

"29A Disabled access

(1) This section applies to expenditure if a person carrying on a qualifying activity has incurred it in making adjustments within subsection (2) below to premises which he uses for the purposes of the qualifying activity.

(2) The adjustments referred to in subsection (1) above are those specified in subsection (3) below which are or will be required to comply with section 21 of the Disability Discrimination Act 1995.

(3) The specified adjustments are—

(a) installation of ramps to facilitate either access to the premises or use of the premises by disabled persons, and

(b) alterations to the premises to provide accessible toilets for disabled persons.".'.

Richard Bacon (Conservative, South Norfolk)

I thank the Economic Secretary for his earlier kind words. What he said was very generous, although I have absolutely no idea whether he is correct.

These new clauses address a number of issues in the tax system faced by disabled people. They are essentially probing clauses designed to elucidate the Government's thinking in this important area.

New clause 2 would grant capital allowances on expenditure incurred by businesses in complying with their obligations under the Disability Discrimination Act 1995 to ease access to premises for disabled people. There is no doubt that the level of awareness of the needs of disabled people in the worlds of architecture and building design has grown significantly in recent years. For new building projects, it is often the case that careful thought and planning has been undertaken at the earliest stages in order properly to meet the needs of disabled people. None the less, it is also true that complying with the 1995 Act can impose significant costs on businesses, particularly in relation to older premises.

New clause 2 amends the Capital Allowances Act 2001, and applies to expenditure by a person carrying on a qualifying activity who has incurred it in pursuance of a duty under section 21 of the Disability Discrimination Act 1995.

New clause 3 recognises the extra costs disabled people incur in going to work. It would ensure that the tax system does not discriminate against disabled workers vis-à-vis their non-disabled colleagues.

The test for a deduction of an expense incurred when carrying out one's employment has remained virtually unchanged since its introduction in 1853. The general rule is that a deduction from earnings is allowed for an amount if the employee is obliged to incur and pay it as holder of the employment, and the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment. As a judge said 50 years ago, those words are

"stringent and exacting: compliance with each and every one of them is obligatory if the benefit of the rule is to be claimed successfully".

One of the main purposes of the Disability Discrimination Act 1995 is to ensure that disabled people are not discriminated against in their employment. Long before that legislation was enacted, there were—and still are—a range of exemptions from tax relating to disabled people's earnings from employment, focusing on matters such as home-to-work travel, adaptation of motor vehicles for business use, early retirement on ill-health grounds, and so forth.

As a rule, people with disabilities need to spend more than those without in performing the same tasks. Where additional expense is incurred solely by reason of their disability, one would expect a tax-neutral effect. Whether such additional expense has to come out of their own pockets, or be paid or reimbursed by a sympathetic employer, the logical result should be that people with disabilities should either receive an expenses deduction for tax purposes, or should not be assessed on any employer subsidy as a benefit in kind.

Therefore, new clause 3 would do two things. First, subsection (2) would exempt from tax any benefit in kind provided by an employer that consisted of equipment, services or facilities, the purpose of which was to enable the disabled employee to work. Its wording is loosely based on an existing set of regulations, the Income Tax (Benefits in Kind) (Exemption for Employment Costs Resulting from Disability) Regulations 2002/1596, which attempt to do much the same thing but which unfortunately are restricted to benefits that are provided under statutory arrangements such as the access to work scheme. Secondly, subsection (3) would relax the restrictive rule governing tax deduction for employees' expenses where disabled employees spend their own money in order to be able to work.

New clause 4 would bring the definitions of "disabled person" and "disability" in the tax legislation up to date by aligning them with the broad definition in the Disability Discrimination Act 1995. Many of the definitions of disability that are attached to tax reliefs, allowances and other forms of favourable treatment contained in the tax legislation are restrictive and outdated. The new clause seeks to introduce the more up-to-date and inclusive definition of "disability" into the tax legislation, bringing it into line with the modern thinking on disability in the Disability Discrimination Act 1995.

Section 1 of that Act defines a "disabled person" as one with

"a physical or mental impairment which has a substantial and long-term adverse effect on his ability to carry out normal day-to-day activities".

There is statutory guidance to enable courts and tribunals to assess whether a person meets the requirements of the definition. The draft Disability Discrimination Bill, introduced at the end of last year as a Government initiative for the European year of disabled people, will in due course widen the definition still further. By contrast, where disability issues are dealt with in the tax legislation, disabled persons and disability are defined in such a way as to restrict the scope of the relief or the exemption being conferred, or are not defined at all, so as to leave scope for official discretion. In the former case, not all the people who could usefully benefit from the tax relief or the exemption in question are able to do so, because of the restrictiveness of the definition. In the latter case, access to the benefit or the exemption can become a lottery, depending on the attitude of the official charged with applying the legislation, particularly—as is often the case—when there is little or no departmental guidance.

Both restrictive definitions and the absence of definitions are anachronistic and unnecessary in an era when we have the benefit of statutory definitions that recognise modern thinking on disability. Some definitions have survived intact for hundreds of years, such as the definition of "incapacitated person" in the Taxes Management Act 1970, which includes

"any infant, person of unsound mind, lunatic, idiot, or insane person".

With respect, I think the Treasury can probably do a little better than that.

The Low Incomes Tax Reform Group, in its report on the issue, which was called "Disability in tax and related benefits: the case for a modern and coherent approach" and published in December 2003, recommends the adoption of the Disability Discrimination Act 1995 definition of "disability" and "disabled person" throughout the tax legislation.

New clause 4 would enable the benefit of the tax reliefs and exemptions to be extended to all disabled people, and would provide guidance for officials charged with using their discretion to determine who is disabled and who should benefit from particular forms of tax-favoured treatment. It is unfair that some disabled people should benefit and not others, simply because the statutory definitions are out of date, ineffective, or absent.

In conclusion, the new clauses would recognise the special costs that can face both employers and employees in ensuring that disabled people can play a full part in the workplace and would also update the definitions of "disabled person" and "disability" for the purposes of tax legislation in a way that is almost certainly overdue.

David Laws (Liberal Democrat, Yeovil)

I want to speak to new clause 8, which is, I must confess, somewhat similar to the new clause 13 that we debated in the Standing Committee. On that occasion, the Financial Secretary responded on behalf of the Treasury and I indicated that some of her points were fair and reasonable. On reflection, however, I may have been too generous in acknowledging some of the hon. Lady's points so I want to take this additional opportunity and respond to them in relation to new clause 8.

I remind Members who were not present during our previous debate on the issue that the new clause was drafted by the CBI and the Disability Rights Commission and enjoys the support of both bodies. It relates to the duties imposed by the Disability Discrimination Act 1995, which will begin on 1 October 2004, whereby providers of services to the public will need to take reasonable steps to facilitate disabled persons wishing to make use of those services.

New clause 8 proposes that expenditure on ramps and accessible toilets for use by disabled persons be classified for tax purposes as expenditure on plant and machinery qualifying for relief as capital allowances. That would follow the established precedent of capital allowances being given for fire safety expenditure, as is currently the case.

In Committee on 24 June, the Financial Secretary put several counter-arguments to the new clause that we were debating, to indicate that the Treasury was not willing to support that proposal. I shall briefly run through her arguments. Her first argument was that the new obligations relating to disability access will apply to all service providers whether in the public, private or voluntary sectors, so it could be seen as unfair to give special financial support only to private sector businesses. That argument is partly countered by the fact that there is an existing precedent in relation to fire safety expenditure: it is possible to use capital allowances even though fire safety expenditure obviously relates to entities that are not merely business entities, which would have to fund such provision differently.

The DRC sent me a note raising several issues relating to what it described as the "spurious"—I hope it will not mind my quoting that word—arguments put by the Financial Secretary to counter our proposals. The DRC said:

"while we'd like to see more/better funding support across the board we would point out that there are sources of funding available to the public sector/voluntary sector to support physical alterations to premises which businesses cannot access".

The commission helpfully sets out a series of areas where specific grants are made available—often through the Government—to help with disabled access. Many Members will already know about the large capital investment programme in new school buildings through the schools access initiative, designed to make school buildings disabled-accessible at very large cost. Those grants have been directly provided by the Government.

In addition, local authorities often provide small grants for community groups and other local groups, to make their facilities disabled-accessible. Central Government provide grants to local authorities to facilitate physical access to polling stations, and other grants are available for both private and public bodies through the national lottery distribution fund, millennium funds and the Heritage Lottery Fund, which can be fruitful avenues for voluntary organisations and other groups.

In other words, quite a number of alternative mechanisms are already available for the bodies that the Financial Secretary felt might be disadvantaged by the proposal. New clause 8 would provide a relief for businesses that do not benefit from that other Government support.

The second point that the Financial Secretary made in arguing against such a new clause was that

"it is clear that many of the adjustments needed to meet the requirements of the Disability Discrimination Act, including some of the most expensive adjustments, already qualify for tax relief as either a revenue expense, or through capital allowances."—[Official Report, Standing Committee A, 24 June 2004; c. 773.]

Although that is a fair point, it is of limited relevance to new clause 8, because even the Financial Secretary was not trying to maintain that the existing reliefs relate to ramps and toilets in particular. Those are major items, which many organisations will need to purchase to make their premises disabled-accessible. Indeed, many Members of Parliament may discover that they need to make precisely those types of adjustment in the organisation of their own constituency offices. Many businesses will certainly want to make those adjustments.

At the time, I thought that the third reason that the Financial Secretary gave for not pursuing these proposals was a hopeful sign, but on further investigation, I am not sure whether it is quite so promising as the nod and wink that she gave me reason to believe that she was giving. The third reason that she gave was that

"we are considering the possibility of introducing such an allowance"

to cover structural alterations

"for most commercial buildings in the wider context of our ongoing"

review of the

"corporate tax regime."—[Official Report, Standing Committee A, 24 June 2004; c. 773.]

The Disability Rights Commission's response to that point is that

"the timing of any such changes"

to the corporate tax regime

"will be past the symbolically important point when the new duties come into force."

That is obviously in a few months' time. It points out:

"The incentive is needed now to maximise compliance by the Government's 2004 deadline . . . Moreover, it is likely that any such general allowance for expenditure on buildings would be at a rate similar to Industrial Buildings Allowance—currently 4 per cent. per annum."

That would be too small to make any difference to small and medium-sized enterprises, which are likely not to have made the necessary adjustments to disabled access already. It is likely that larger entities have already allocated expenditure for those purposes. They may even have completed that expenditure.

The final point that the Financial Secretary made on the issue was that the Department for Work and Pensions had discovered that cost was not a factor for many entities in making provision for disabled access. That may well be the case for the larger entities that have already undertaken a lot of those works and made the relevant expenditure, but it is not likely to be the case for many SMEs. The Financial Secretary indicated in Committee that it might be unfair to introduce a new tax allowance, which other entities could not have taken advantage of earlier, to facilitate conversion for disabled accessibility, but we must appreciate the fact that such an allowance could largely benefit the smaller businesses that are struggling to pay the cost of making their premises disabled-accessible. In other words, the allowance might turn out to be well targeted as a consequence of its late introduction, as it would probably affect particularly those businesses that are struggling to make such provision and that will find it most difficult financially to make those conversions.

On reflection, I might have been a little generous by accepting some of the points that the Financial Secretary raised on 24 June. However, I understand that the Economic Secretary will respond to today's debate, so there is hope for us. Perhaps he will accept that his colleague's arguments were not entirely convincing and respond positively to some of the arguments that have been put forward by the Disability Rights Commission and the CBI—a powerful alliance of two bodies with special interest and expertise in the matter. In the light of comments on the Financial Secretary's arguments, I hope that the Economic Secretary will indicate that the Government will undertake a more constructive and positive approach.

John Healey (Labour, Wentworth)

I am not sure whether I will disappoint the hon. Member for Yeovil (Mr. Laws) or not—he will have to wait and see—but as he would expect, I am entirely as one with my hon. Friend the Financial Secretary. We take seriously the arguments and evidence put to us by the Disability Rights Commission. I hope that I can give him an indication of the consideration that we are giving to the cases that it and others put to us.

The four Opposition new clauses relate to disability issues across the tax system. Labour's manifesto included a pledge to establish comprehensive and enforceable civil rights for disabled people, so I welcome the opportunity to reaffirm our strong commitment to those rights. I can also confirm that the Low Incomes Tax Reform Group, to which the hon. Member for South Norfolk (Mr. Bacon) referred, the Disability Rights Commission and the CBI are in detailed, continuing discussions with our officials on the range of issues covered by the new clauses and the points raised by the hon. Members for Yeovil and for South Norfolk. I place on record our appreciation for the thoughtful contributions that those organisations are making to help us to assess the case for future policy changes.

Given our strong commitment to the rights of disabled people and our support for them, we have no quarrel with the motivation behind the new clauses. However, we are not yet convinced that the specific changes to the tax system that they suggest would represent the best way of improving the rights of, and support for, disabled people.

New clauses 2 and 8 would provide capital allowances for the costs that businesses might incur when making their premises reasonably accessible to disabled people. As the hon. Member for South Norfolk made clear, the requirement on service providers to make their premises reasonably accessible derives from the Disability Discrimination Act 1995, which was passed by the previous Government. At the time, that Act was an important step forward for disabled people's rights, and we have been able to build on it. The requirement comes into effect in October this year.

New clauses 2 and 8 are similar in purpose to the new clauses 5 and 13 that were debated in Committee and subsequently withdrawn. However, new clause 2, which was moved by the hon. Member for South Norfolk, has a wider scope than those new clauses because its provisions are not limited to specific items of expenditure such as access ramps or accessible toilets. Our reasons for resisting it at this stage are compounded by our worry that such broad provisions could be manipulated and carry a high Exchequer cost. Additionally, as the provisions are broadly drawn, they could impose a significant compliance burden on taxpayers and the Inland Revenue, which would administer the scheme.

Like the previous Government, we have consistently encouraged all businesses to make adjustments as early as possible, rather than waiting for the provisions in the 1995 Act to come into force in October 2004. Common sense would suggest that many would think it unfair to introduce allowances at such a late stage. That would be especially unfair to businesses that had already acted promptly in the interests of disabled people by promoting the access that they may need. Research commissioned jointly by the Disability Rights Commission and the Department for Work and Pensions in 2002 showed that 40 per cent. of providers had made adjustments. Only 15 per cent. of respondents said that they had plans to make further adjustments to comply with the Disability Discrimination Act 1995. The research found that the cost of making adjustments to comply with the Act tended to influence the manner and timing of the adjustments rather than whether they were made at all. We have therefore concluded, as my hon. Friend the Financial Secretary has made clear, that the changes to the capital allowances system proposed both today and on an earlier occasion would not confer a significant benefit.

The research confirmed that many adjustments needed to meet the requirements of the Act, including some of the most expensive, already qualify for tax relief, either as a revenue expense or through existing capital allowances. The cost of structural alterations to most commercial buildings is not covered by the capital allowances regime, but we are considering the introduction of allowances for commercial buildings in the wider context of our ongoing project to reform corporation tax.

David Laws (Liberal Democrat, Yeovil)

Will the Economic Secretary give way?

John Healey (Labour, Wentworth)

May I just make an observation about the points made by the hon. Gentleman? If he still wants to intervene, I shall give way. He is sharp in wanting to intervene, but perhaps he will be patient while I explain that the fire safety example that he gave does not give the lie to my general argument.

David Laws (Liberal Democrat, Yeovil)

The Economic Secretary suggested that there might be a change to the corporation tax regime that would provide relief for some of the expenditure that we have discussed. Surely, however, that would take effect too far into the future?

John Healey (Labour, Wentworth)

I cannot give the hon. Gentleman a time scale for the completion of the work or the decisions that will flow from it, but it is unlikely that we will have conclusions from the review or legislation in place by the October start date of the provisions of the Disability Discrimination Act.

The new obligations under the Disability Discrimination Act will, as my hon. Friend the Financial Secretary has argued before, apply to all service providers, whether public, voluntary or private, so giving special financial support only to private businesses could be seen by other sectors as unfair. As I have just said, the example of fire safety cited by the hon. Member for Yeovil does not give the lie to the general argument. The list of grants, many of them modest—he used the phrase "quite a number"—available to some organisations does not undermine the argument against providing special treatment for the private sector in preference to other organisations that must meet the requirements of the Act.

New clause 3 proposes further tax relief for disabled people for employment benefits and expenses. Under existing law, wherever equipment, facilities or services are used wholly, exclusively and necessarily in carrying out the duties of employment, there is no benefits charge where the employer provides the items in question. Where employees themselves pay the cost, there is a full deduction against earnings, so problems do not arise in those cases, as the hon. Member for South Norfolk acknowledged. Where equipment, services or facilities such as specially adapted wheelchairs or hearing aids are provided for disabled people for work purposes, but for which there is some private use at home, there is a general exemption. Beyond that, in June 2002 we introduced regulations—the hon. Gentleman referred to them—which ensure tax exemption for any benefits provided to disabled employees under any statutory arrangements, provided that the main purpose of the benefit is to enable the employee to perform the duties of an employment.

The hon. Gentleman made a parallel point when he said that the benefits exemption was too narrow because it was confined to provision under statutory arrangements. In our experience that is unlikely to be significant. As regards cases where benefits are not provided by employers under statutory arrangements, I should be glad to see any specific examples that he may have.

Furthermore, as the hon. Gentleman mentioned, an employer can provide transport for disabled employees, and pay for or reimburse their transport costs to enable them to commute to and from work, without any tax charge. Where additional costs are a necessary part of a disabled employee's employment, he or she can already claim a deduction for those costs.

To go beyond that would make it difficult to target the relief effectively and to devise an affordable scheme. The expenses rule proposed in the new clause could entail considerable costs and is likely not to be properly targeted at helping disabled employees with the additional employment expenses that they incur as a result of their disabilities. In summary, the existing provisions together provide a comprehensive benefits exemption and expenses relief, along the lines of the provisions set out in the new clause.

Finally, new clause 4 proposes the use of the Disability Discrimination Act 1995 definition of disability across the tax Acts. At this stage I am not convinced that that is necessary or desirable. The insertion suggested into section 832 of the Income and Corporation Taxes Act 1988 would not override the existing definitions in use. It would apply only to the few provisions in which disability is not defined. I shall return to that in a moment.

The hon. Member for South Norfolk mentioned the work of the Low Incomes Tax Reform Group and the report that it produced. That report gave examples of areas where there is a lack of explicit definition of disability, but many of the areas cited as examples, such as council tax or power of attorney, lie outside the Taxes Act and therefore would not be affected by the new clause.

I am uneasy about the new clause. The DDA definition is not settled or certain at present. It allows exclusions, and as the hon. Gentleman acknowledged, the draft disability discrimination Bill proposes further changes to that definition. The main area of the Taxes Acts where the word "disability" is not currently defined is in relation to the taxation of certain payments from insurance policies. In some cases it is possible that a policyholder might receive less favourable treatment if the DDA definition were used.

I hope that Opposition Members will accept that these are matters that we are discussing in detail with groups that are interested in representing disabled people or representing employers of disabled employees. I hope that hon. Members will feel that the debate has been a useful contribution to that process and that they will not press the new clauses to a vote.

Richard Bacon (Conservative, South Norfolk)

I thank the Economic Secretary for that useful and detailed reply. I agree that the debate has been constructive, and I hope he will feel that our having raised these matters has enabled him to set out the Government's policy more fully. I join him in paying tribute to the Low Incomes Tax Reform Group and to the Disability Rights Commission and the CBI for the important work that they are doing. I indicated that the new clauses were probing measures, and I hope that they have served their purpose. On that basis, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 5 — Amendment of Individual Savings Account Regulations 1998 (SI/1998/1870)

Mark Prisk (Conservative, Hertford and Stortford)

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

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

With this it will be convenient to discuss new clause 6—Tax credits for ISAs and PEPs—

'Section 76(1)(a) of the Finance Act 1998 (c. 36) shall cease to have effect.'.

Mark Prisk (Conservative, Hertford and Stortford)

I begin by declaring that I have two individual savings accounts—sadly, I do not have any more than that—and that a member of my family works for the Financial Services Authority.

New clause 5 seeks to highlight the Government's plans further to diminish the benefits of ISAs by reducing the tax-free limits for savers and to include investments through the Ofex market, which is a key source of funds for many of the UK's smallest ventures, in the ISA wrapper. As such, it is a probing measure that seeks to help savers and stem the loss of confidence in ISAs.

The Government accept that Ofex securities should be included within the ISA tax-free wrapper, but they have unfortunately decided to defer that change for nearly two years until April 2006. Ofex is a highly effective source of finance for our smallest enterprises. Indeed, it is specifically focused on the £500,000 to £5 million to £10 million range, and it is generally accepted as offering an excellent means by which to bridge the equity gap. It is therefore peculiar that, given the Government's stated commitment to closing that gap, the Treasury should wait for two years before acting.

The second problem with that delay is that alternative investment market securities are already eligible, so there is a danger that a distortion could occur in the market and, indeed, in savers' investment decisions. Given that AIM securities tend to favour larger companies, the smallest enterprises might continue to lack funds, which the Government say that they want to encourage to be brought forward. Given the inclusion of AIM securities, why not include Ofex? Our smallest enterprises deserve the same chance of capital investment, so why wait?

The other aspect of new clause 5 is the retention of the established tax-free limits for savers in ISAs. Saving is sadly in danger of becoming a lost habit in this country—the ratio for savings has halved since 1998, and net retail investment in funds last year was among the worst in the past decade. The Government's decision to reduce the tax-free limits from £7,000 to £5,000 on maxi ISAs and from £3,000 to £1,000 on cash ISAs will only make things worse.

A recent survey by Invesco Perpetual shows that 35 per cent. of current equity investors will reconsider their investment, and 17 per cent., which is nearly one in five investors, may choose not to invest at all. Mr. Mike Webb, head of distribution for Invesco Perpetual, said:

"Our research proves that people are angry and confused by the Government's planned changes. The Government needs to be clear on what it wants to convey to investors. It talks openly about people needing to provide for their future, yet it plans to take away the very thing—tax incentives—that encourages people to save in the first place."

Mr. Webb is right.

If saving is to be encouraged, the Government are sending out the wrong signals by cutting those limits. The result could be that the savings ratio falls still further, leaving future generations increasingly vulnerable to events. We now need a period of stability for savers prior to any review in 2006; in other words, the limits should remain as they are. After all, what credible alternatives are the Government offering? Can the Minister tell us, for example, why savers should commit themselves over the next two years to a savings product that the Government are running down? In the absence of a credible Government alternative, does not the Minister recognise that a two-year hiatus will only further erode people's willingness to save?

The Government have committed themselves to a review in 2006, but what does that mean in practice? Will a review begin in 2006, or will the Government present their final decision in that year? If it is the latter, does not that further extend the delay? I hope that the Minister will be able clearly to set out, both for savers and for the financial services industry, exactly what the commitment means and when we can expect decisions and statements.

New clause 6 would reverse the Government's abolition of the 10 per cent. tax credit received by savers on their dividend payments. That would help current savers and future generations alike. In particular, it would ensure that all taxpayers, rich or poor, enjoyed the same incentives to save. I stress that this is a probing new clause.

The tax credit originates from the advance corporation tax regime that the Chancellor abolished in 1997. Hon. Members will recall that the result of that decision was to slash £5 billion a year from the value of people's pensions and investments. That was, frankly, an act of daylight robbery that will cost millions of people thousands of pounds. What is worse, many of those people remain, even today, unaware of just how much the Chancellor has short-changed them. It was, and still is, the worst and most insidious of this Government's stealth taxes.

When the Chancellor raided our savings and pensions in 1997, he also cut the dividend tax credit to 10 per cent. and the dividend income tax rate to 32.5 per cent. for higher rate taxpayers. Then, in the Finance Act 1998, he sought the abolition of the tax credit altogether, with effect from April this year. The net result, ironically, discriminates in favour of higher rate taxpayers over everyone else. The combined effect of the changes to the dividend tax credit and income tax rates strips away any tax incentive for basic rate taxpayers to invest in an equity-based ISA. Cash and bonds are still worth it, but not shares. Do not the Government believe that everyone who is trying to save should enjoy similar tax incentives? Why discriminate by precluding basic rate taxpayers from something that the richest in the land can enjoy? I hope that the Minister will be able to show us where in Labour's manifesto it says that Labour will provide a tax break for the few, not the many.

Last year, when my party tabled a similar new clause, the Minister argued that the markets, not the Government's actions, were encouraging people to invest in anything but shares. Since then, the stock markets have improved, yet there is still a residual problem. The recent survey conducted by Invesco Perpetual found that 47 per cent. of equity ISA investors will be less likely to invest in those ISAs because of this abolition—nearly half of investors are turning away from equity ISAs. Indeed, 13 per cent. said that it will put them off saving altogether. As the PEP and ISA Managers Association and the Investment Management Association said in their recent paper of earlier this year,

"ISAs are a successful and simple savings product and should be at the centre of the Government's strategy to encourage long-term savings. This is not the time to be undermining them."

The Government like to claim that any tax benefits are small, with the average tax credit being around £25. In fact, the actual benefits will vary widely. The whole point of saving is that every pound counts, especially over the long term, and every time the incentives diminish, the savings habit declines. Is that the Government's intention, or an unintended consequence of their proposals? I hope that the Minister will be able to tell us.

Indeed, in total tax terms, the benefit of this abolition will be far from small for one organisation. The Treasury has failed to highlight the small fact that the Inland Revenue expects to save £200 million every year. That is £200 million that will be lost to savers. Another result of the abolition of this tax credit will be to skew savers towards cash and bonds, distorting the market and therefore distorting prices. Equally, some investors might be pushed towards cash-based and bond-based ISA products when an equity-based product might be far more suitable for their needs. The Government are rightly quick to condemn advice that encourages savers to choose inappropriate products, yet here we have a policy that could well have exactly that effect. Never mind mis-selling, this is mis-taxing, and I wonder who will police the Treasury. This is another example of the Government's meddling with the tax system distorting people's decisions and investments, to their own and the markets' detriment.

The Conservative party believes that the halving of the savings ratio represents a dangerous trend, which the Government have at best neglected and at times encouraged. Savers have been short-changed by Labour, not least by the abolition of advance corporation tax. We believe that savers need certainty and encouragement, and we want to hear why the Government are intent on further eroding the incentives to savers in the absence of any credible alternative. The new clauses seek to encourage savers and to help small enterprises. I hope that the Government will be wise enough to think again on this, and I look forward to the Minister's reply.

Ruth Kelly (Labour, Bolton West)

The hon. Member for Hertford and Stortford (Mr. Prisk) has outlined the reasons behind his new clauses. The effect of his proposals would be to change the current secondary legislation, the regulations that govern investment in ISAs, through the Finance Bill and to reintroduce the 10 per cent. payable tax credit into the ISA.

The effects of new clause 5 would be twofold. First, it aims to extend the maximum investment limits for an ISA from £7,000 to £7,001 indefinitely. It would also increase the maximum amount that could be invested in cash savings within an ISA to £3,001. The purpose of that would be to retain the current annual investment limits for an ISA. The ISA regulations currently provide for these to be reduced in April 2006. The second effect would be to allow ISA investors to invest directly in stocks and shares traded on Ofex. Although Ofex is regulated for certain purposes—such as market abuse and insider dealing law—it is not a recognised stock exchange for the purposes of the Inland Revenue. Investors are therefore currently excluded from directly holding shares in companies traded on it within their ISA.

New clause 6 aims to reintroduce the 10 per cent. payable tax credit into the PEP and ISA regime. This credit was, until April this year, paid on top of UK dividends received on investments held in a PEP or ISA. I should like to cover each of these proposals separately, as each raises quite different issues. I shall deal first with the ISA investment limits. ISAs are the Government's primary vehicle for tax-free savings outside pensions. They have helped to make saving easier for ordinary investors. We do not believe that amending the ISA limits in the way the hon. Gentleman suggests would be appropriate at this stage, for the reasons that I shall set out.

When the ISA limits were first announced in the Budget in 1998, we made it clear that ISAs had two key objectives. The first was to develop and extend the savings habit. The second was to ensure that tax relief on savings was more fairly distributed. The aim was to rebalance the tax benefits provided through the PEP and TESSA, and to focus more on encouraging non-savers to start saving and those who saved little to save more. To achieve that, the maximum limits for investment were set at £5,000, with a maximum of £1,000 in cash savings, but for the first year those limits were increased to £7,000 and £3,000 respectively, to encourage take-up and to smooth the transition to the ISA. Those higher limits were subsequently retained until 6 April 2006, which is more or less two years from now. I put it to the hon. Gentleman that those limits are extremely generous: they have allowed savers to build up very substantial sums in savings, free of tax, as the amounts that they subscribe to the ISA accumulate year on year. Therefore, we need to keep the limits under review, to ensure that the ISA is still achieving its objectives.

The ISA has already started to change savings habits. Fifteen million individuals have invested in an ISA account, saving around £130 billion—one in three of the adult population are saving in an ISA, which is a far greater number than ever saved in a PEP or TESSA. The ISA has also been extremely successful in attracting individuals from groups who were previously under-represented in the PEP and TESSA. Around one in five ISA savers, for example, are from lower-income groups, compared with one in seven who had either a TESSA or PEP. Similarly, the number of people under the age of 25 with an ISA is more than double the number who had either a TESSA or PEP.

We are not complacent, however. Of course, we continue to keep all savings incentives under review, which is one reason why we are piloting the savings gateway scheme, which aims to provide more effective savings incentives to those on low incomes, who benefit less from the tax incentives provided through an ISA. It is also why, for example, we have developed the child trust fund, to provide children with the financial education that they need to understand their savings options, and to ensure that in the future, all children have some form of financial asset available to them at the age of 18—

Mark Prisk (Conservative, Hertford and Stortford)

Will the Financial Secretary give way?

Ruth Kelly (Labour, Bolton West)

Before I give way to the hon. Gentleman, I urge him to consider that there are two years to run before the ISA limits are due to change. We announced the higher level as a transitionary measure to ensure the success of the ISA and to encourage people to save. We will, of course, continue to review the ISA limits. We have made no announcements on that, subject, of course, to the 10-year guarantee provided by the Chancellor that savers should benefit from tax relief on up to £5,000 in savings each year until at least 2009.

Mark Prisk (Conservative, Hertford and Stortford)

Why would a saver wish to invest in a product to which the Government seem to have no commitment over the next two years? Does not the Financial Secretary understand that if an individual is trying to save for the next five, 10 or 15 years, the knowledge that that is a product in which the Government seem to have little confidence, because they are diminishing its effect, leaves open the question: why would one bother? Of course, that would further lower the savings ratio.

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman has a perverse view of the effects of the Chancellor's announcements. In fact, going back to the introduction of the ISAs, the higher limit was introduced purely as a first-year measure to encourage take-up in the initial year. The next positive announcement made by the Chancellor was to extend that until April 2006. We have not yet commented on what we will do after that, although, of course, we keep the limits under review. As the ISA regulations stand, however, they are due to end in April 2006.

Mark Prisk (Conservative, Hertford and Stortford)

Will the Financial Secretary give way?

Ruth Kelly (Labour, Bolton West)

I give way to the hon. Gentleman, but I have not yet finished covering his first point.

Mark Prisk (Conservative, Hertford and Stortford)

I am keen to try to draw out the full detail. What I am concerned about is the transition period. Given that in the past few years, under this Government, the savings ratio has fallen, does this not simply compound the existing problem? I could understand it if the savings ratio were booming—there might be an argument at that point. Given that it is falling, however, how can she do it?

Ruth Kelly (Labour, Bolton West)

The hon. Gentleman may have noticed that I had some debate with the right hon. Member for West Dorset (Mr. Letwin) last night about the relevance of the savings ratio as an indication of long-term savings in this country. I would argue that it was artificially high for periods during the late 1980s, as inflation was high: people were retrenching their finances, and saving as a precautionary measure in those circumstances. If we consider the Bank of England analysis of the savings ratio adjusted for inflation, we have a significantly higher savings ratio now than we have had historically. Of course, we are not complacent, and millions of people are under-saving for their retirement. That is why we have introduced our informed choice strategy, alongside a new suite of Sandler stakeholder products. We could have a long debate about savings now, but perhaps you will agree, Madam Deputy Speaker, that we should focus on the amendments and new clauses under consideration today.

Of course, we have a commitment to the ISA. We have made it absolutely clear that there is a 10-year guarantee on ISAs. Savers can benefit from tax relief on up to £5,000 in savings, each year, until 2009. We are committed, on an annual basis, to reviewing the tax reliefs, to make sure that the product remains attractive and meets the underlying objectives, which I set out at the beginning of my comments: to provide an attractive savings environment while ensuring that tax relief is more fairly distributed among all taxpayers. While we are considering the position with respect to ISAs, we are also encouraging savings in a number of other ways that I have already described, including the savings gateway and the child trust fund. We shall continue to test our measures against the objectives that they are designed to meet.

The hon. Gentleman is correct in his claim that ISA investors cannot hold stocks or shares traded on Ofex, but he is not correct about AIM. It is not a registered exchange, and therefore does not meet the criteria either. ISA investors who choose to invest directly in stocks or shares are limited to those listed on a recognised stock exchange. There are good reasons for that. The ISA is by its nature aimed at the less sophisticated investor. These are individuals who historically would not have considered investing in stocks or shares. It is only right that we initially encourage people to invest in products that are regulated in a way that gives investors an appropriate level of protection. That is what the UK listing rules aim to achieve. Similar aims apply to recognised stock exchanges worldwide. Other markets that are not recognised stock exchanges are not always subject to such requirements. For individuals who wish to invest directly in stocks and shares, we believe that it is still right to restrict investments to stocks and shares quoted on a recognised stock exchange.

Howard Flight (Conservative, Arundel and South Downs)

If the Financial Secretary believes in what she has just said, why is she arguing in a different context that no such investment restrictions should be placed on the same individuals' stakeholder pensions?

Ruth Kelly (Labour, Bolton West)

That is probably what caused the confusion in the mind of the hon. Member for Hertford and Stortford, because we are liberalising the pensions regime. We had a long discussion in Committee about why that was appropriate. I do not intend to repeat all the arguments that we had then about why ISAs aimed at retail investors should be treated differently. The hon. Gentleman has had sufficient opportunity to rehearse those arguments.

It would not be desirable to add Ofex to the ISA without considering the wider implications and ensuring that fair treatment is given to all markets. Let me give a couple of examples. First, in the light of EU requirements, we could not add an unrecognised market in the UK without extending the same treatment to other unrecognised UK markets, and potentially to all similar markets in the EU including those in the new member states. Indeed, there might be pressure for the extension to be made worldwide. We are talking about a fundamentally different proposition in respect of ISAs. Secondly, unlisted companies traded on markets that are not recognised stock exchanges also potentially benefit from a different range of tax incentive schemes to encourage wider investment. It is surely only right for us to consider whether they should continue to benefit from those schemes before giving investors in those companies access to tax benefits available only for investments listed on recognised stock exchanges.

Again, we shall continue to keep the savings incentives provided through the tax system under review, especially in the light of wider developments in the savings and investments arena; but on balance we think it inappropriate to make the changes proposed here without proper consideration of all the wider factors.

The 10 per cent. payable tax credit was removed for ISA purposes in April 2004. It was abolished more generally in 1999 as part of our wider corporation tax reforms. I understand that there is a heated debate in this place about the merits of those reforms, but as the hon. Gentleman knows, they were aimed at removing a major distortion in the tax system which encouraged companies to pay out their profits as dividends rather than retaining them for reinvestment in the business. The intention was to create a more profitable UK business sector over the longer term through productive investment, and more wealth for the UK economy and investors as a whole.

When the retention of the tax credit for the ISA and PEP regimes was announced in March 1998, the Chancellor made it clear that it was only a transitional measure—for a period of five years, up to 5 April 2004—to give investors time to adjust their portfolios. Outside the PEP and ISA, only a non-taxpayer would have benefited from the payable tax credit; but non-taxpayers investing in shares outside an ISA or PEP have not had the benefit of the tax credit since 1999.

The payable tax credit was paid to all ISA investors, whether they were higher rate, basic rate, starting rate or non-taxpayers, at a cost to the Exchequer of around £250 million a year. The withdrawal of payable tax credits for ISAs and PEPs simply means that an additional payment is no longer being made—an additional payment that mainly benefited higher rate taxpayers and people with a lot of capital to invest.

The change does not affect all ISA savers. Of the 15 million people who have saved through ISAs since 1999, only 6 million could be affected by the change, and that is if the ISA stocks and shares investment that they hold provides income through dividend payments. In addition, we think that around 1.6 million PEP investors may be affected.

I accept that there has been a lot of concern about the impact on basic rate and lower rate taxpayers and non-taxpayers but, as we made clear in the debate last year, the average payable tax credit received each year per person was worth only £25, a fact to which the hon. Gentleman referred. In reality, the vast majority of ISA investors saw far less than that. Over half of the investors benefited by less than £10 a year, and two thirds benefited by less than £20 a year.

Only 3 per cent. of basic rate taxpayers investing in shares within an ISA will have their tax benefits reduced by more than £100. Those are investors who have taken advantage of the ISA investment limits to build up high levels of tax-free saving and who have already benefited from the additional generosity of the payable tax credit over the past five years. All investors, however, including those holding shares through ISAs and PEPs, should benefit from the improved long-term company performance resulting from the 1999 corporation tax reforms.

I do not think that the new clauses are appropriate, necessary or desirable. I ask hon. Members to reject them.

Andrew Mitchell (Conservative, Sutton Coldfield)

I draw the House's attention to my interests, which appear in the Register of Members' Interests.

I support the new clause so ably introduced by my hon. Friend the Member for Hertford and Stortford (Mr. Prisk). As he rightly said, it is clearly a probing measure. It is designed not to increase the limits on the financial instruments by £1 but to test the Government's view on these important matters.

I was struck by the fact that the Financial Secretary quoted Government comments in 1998 and spoke of the importance that the Government said should be attached to—I think I quote her exactly—getting the savings habit. She said that the Government wanted to send some signals about saving in the measures that they introduced in that year. All I can say is that I believe that the Government, in the whole area of savings, which are important to all of us in our individual lives, have shown extraordinary complacency in the way in which they have allowed their policies on savings to develop.

The Government certainly mouth the mantra of saving. We have had lots of new policies, new initiatives and an unbelievable number of consultations but, when the savings ratio is at an all-time low, it is clear that the Government pay little attention, if any, to the serious risks for all of us in the lack of savings in our economy—risks that do not pertain hugely to the highest earners in the land but very much pertain to those in middle Britain, the many ordinary people whose savings are now so low and whose security in old age will be at great risk as a result.

The Government's attitude to savings is epitomised by their response to the new clauses. How have we got ourselves into this dreadful position with savings? The Chancellor of the Exchequer is, rightly, desperate to maintain the strong economy, but it is underpinned by consumption, a housing boom, enormous debt, which the shadow Chancellor set out in the House last night, and a massive Government job-creation scheme. As a result, the Chancellor has no serious intention of encouraging people to save, because to do so would undermine the nature of the economy as it is today. He wants to encourage people to save like he wants a hole in the head. That is extremely dangerous for our future, which is why I want to detain the House very briefly on the new clauses. They relate to one of the most important aspects of the Bill, which is why I am so pleased that my hon. Friends decided to move them.

I remind the House of the savings climate in 1997, when the Government came to power. We had expanding tax-exempt special savings accounts and personal equity plans, which this Government re-branded as individual savings accounts. The intellectual climate was such that the Secretary of State with responsibility for such matters introduced "pension plus", which was designed to encourage a massive boost in savings throughout the country. I remind the Financial Secretary that in those days Britain had more savings through funded pensions than the whole of the rest of the European Union. Many more people owned TESSAs and PEPs than are saving in their equivalent today.

Savings have become ever more necessary for old age. People no longer retire at the age of 65 to a pair of slippers and entry into the ante-room of the afterlife. People now live and work for much longer than their parents and grandparents ever did. Of course, the old age of many who are retiring now is underpinned by defined benefit schemes—company pensions—that were built up in the good times. That is not the case today, as we all know so well.

The problem that we all face with our savings is immense. Although the Government are not wholly responsible for the scale of the problem, the £5 billion per annum raid on pension funds certainly has not helped, as my hon. Friend the Member for Hertford and Stortford said. It has wiped billions of pounds off the value of pension funds, and in the case of many companies it has been coupled with the demise of the defined benefit scheme, which benefited many people in their retirement. The stakeholder pension was a flop, and the pension credit scheme is stark raving bonkers. Under the terms of that scheme, some 80 per cent. of people will be dealt with through a means-tested approach. It has fundamentally undermined the savings—

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

Order. I hope that the hon. Gentleman will relate his remarks to the new clause under discussion.

Andrew Mitchell (Conservative, Sutton Coldfield)

I certainly will, Madam Deputy Speaker, but I just wanted to place the new clause in the context of the dire complacency that the Government have shown in all areas of saving.

When the Government came to power, TESSAs were a very important savings instrument. Through PEPs, one could save £12,000 per annum but, as the Financial Secretary said, this Government have reduced the savings level to £7,000 per annum. Now, it is being reduced to £5,000 per annum. What sort of signal does that send? As the Financial Secretary will doubtless appreciate, over recent years and in a falling stock market environment, the nature of ISAs has saved the Government tax, because capital gains losses have not been reclaimable from the Inland Revenue.

I remind the Financial Secretary of what the polls and industry have themselves said about the measures that she proposes to introduce. Research conducted by YouGov reveals that once the tax credit on dividends paid out by shares held in an equity ISA is withdrawn, almost half of all equity ISA investors will be less likely to invest in them. One in eight ISA investors say that they will probably not invest any more. Tony Vine-Lott, director general of the PEP and ISA Managers Association, said:

"ISAs have proved the most popular savings vehicle this Government has introduced, and now form a key part of day-to-day retirement savings for millions of people. To ensure the continued success of the ISA scheme, we urge the Chancellor to drop his plans to abolish the ISA dividend tax credit and the reduction in ISA subscription limits."

Furthermore, the Skipton building society said that 80 per cent. of savers questioned think it wrong to cut the tax-free savings limits for cash mini-ISAs from April 2006. Some 45 per cent. said that that would put people off saving. Meanwhile, the Government want to promote stakeholder products and the child trust fund. TESSA customers said that the tax-free element of that account had been a big draw.

Figures based on data retrieved from the Inland Revenue website covering the financial years from 1999–2000 to 2002–03 show that subscriptions to maxi-ISAs have declined by 40 per cent. Moreover, the average subscription has declined from £4,620 to £3,890—a fall of almost 16 per cent. Average subscriptions in mini-ISAs of stocks and shares—often used by the lower-income families about whom the Chancellor is so concerned—have fallen from £1,240 in 1999 to £1,070 in 2002.

Those figures should greatly distress the Government, given that, during the financial year 2000–01, 52 per cent. of mini-ISAs in stocks and shares were subscribed to by individuals with an income of £10,000 or less.

I urge the Financial Secretary to repent of this great mistake in the signals that she sends to people about the importance of saving. I urge her to say clearly what she hinted at, in a slightly backhanded way, in response to my hon. Friend the Member for Hertford and Stortford, and to make it clear that the Government have every intention of regularly increasing the level—rather than reducing it from £7,000—to send the clear signal that we need to increase the amount that we save throughout society.

If the Financial Secretary does not do that, when the Government's epitaph is finally written, the fact that they were asleep when this country faced a massive savings crisis will be towards the top of their charge sheet. She must think again and send a clear signal that far from reducing the levels of saving one can make through this device, she will increase them significantly.

Mark Prisk (Conservative, Hertford and Stortford)

We have had a useful debate and my hon. Friend the Member for Sutton Coldfield (Mr. Mitchell) has demonstrated his expertise on the subject.

The Minister's response, sadly, offered no hope to the ordinary saver. I note her remarks on Ofex and I hope that she will reflect on the points that have been raised. Many hon. Members will be disappointed by the Government's failure to realise that the halving of the savings ratio is storing up real problems for the future.

On tax limits, the measure may well have been temporary when it was introduced, but any self-respecting Government would have responded more effectively to the situation before them and not to their own bank balance. As for the abolition of tax credits, is it not peculiar, Madam Deputy Speaker, that a Labour Minister should proudly promote a policy that discriminates against basic rate taxpayers, and does so—not as I meekly suggested—for a £200 million benefit to the Treasury, but for £250 million? I hope that ordinary basic rate savers will know where their money has gone.

I said earlier that these were probing new clauses and I hope that where the Government and the Opposition stand has now been put on the record, so I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 7 — Application of sections 298 to 301

Howard Flight (Conservative, Arundel and South Downs)

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

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

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

No. 39, in page 255, line 22 [Clause 300], leave out 'the prescribed period' and insert 'thirty days'.

No. 40, in page 255, line 31, leave out 'the prescribed period' and insert 'thirty days'.

No. 42, in page 259, line 12 [Clause 309], at end insert—

'(2A) Regulations made by the Treasury or the Board under this Part may provide for a threshold below which arrangements shall not be notifiable arrangements under section 298(1).'.

Government amendment No. 222.

Howard Flight (Conservative, Arundel and South Downs)

There has been a great deal of discussion in the media and important lawyers have written to the Treasury and the Inland Revenue about the new regime for the reporting of tax avoidance schemes. The Paymaster General has responded to a significant number of the issues raised and Conservative Members are pleased that she has done so in the interests of the British economy.

There remains, however, a central unresolved issue, which we call the dividing line. There is pretty much unanimous agreement that a regime requiring the disclosure of tax avoidance schemes that are being marketed is a sensible measure both as a deterrent and in order to make the Inland Revenue more actively aware of what is going on. Without a dividing line, though, and as a result of the drafting of the provisions, it is unfortunately probable that in order to protect themselves, large numbers of company accountants will feel obliged to report normal tax planning circumstances. The money that the Government are budgeting for the task and the numbers of extra staff employed at the Revenue will be wholly inadequate to cope with the level of reporting. Indeed, the Revenue will be snowed under and yet another burden will have been placed on British business.

The Government generally and the Paymaster General in Committee specifically referred to schemes, and the understanding of the population at large is that the target of the new disclosure regime is widely marketed tax avoidance schemes. However, the current drafting is such that the schemes will operate much more widely than should be intended, and uncertainty and additional compliance burdens will be created.

New clause 7 is designed to clarify and confirm the focus of the new rules on the marketing of avoidance schemes—hence the crucial dividing line between reportable schemes and non-reportable everyday bespoke tax advice. In Committee debates, I said that I hoped that the arrangements were intended to apply to promoters of schemes and not, for example, to tax advice in the normal course of business or to takeover activities, which always require tax advice.

The direct tax disclosure proposals as they stand have been changed marginally as a result of the Government's amendments, and the regulations to implement the rules framework will be amended further in the light of the Paymaster General's recent press release. However, what remain are legislation and a set of rules that still have an uncertain reach—and uncertainty is not what a tax system should be based on. Accountants want to comply with the rules but, as currently drafted, the rules are bound to lead to excessive disclosure, which would be counter-productive for the Inland Revenue as well as for commerce.

The new clause is thus designed to ensure greater certainty in the application of the rules to everyday client-adviser situations and to bespoke advice coming from continuing and continuous business arrangements. As I have already explained, when it comes to takeovers, it is inevitable that commercial arrangements will change rapidly and frequently as the deal is worked on. A tax input is necessary and a tax can be either a cost or a benefit of the deal, which is factored into the price. The advice will be normal everyday tax planning advice designed to ensure that those involved understand the tax consequences of what they have in mind and that they take advantage of the basic rights of taxpayers to minimise their tax liabilities within the law. It is crucial to get rid of uncertainty; otherwise, advisers, their clients and the Inland Revenue will waste a lot of time over disclosures that surely are not required. That will help no one, least of all the Revenue.

It is notable that the House of Lords Select Committee on Economic Affairs made exactly those points about the Government's proposals. It stated that it was

"not convinced that the legislation as it stands has been sufficiently thought through or exposed for serious consultation with those who will have to deal with its consequences . . . We have seen the good results which such consultation has produced in the case of the Government's measures to simplify the taxation of pensions. We would like to have seen something along the same lines for some at least of the revenue protection measures."

In its conclusions, the Committee stated that

"there is a need to avoid the risk of over-reporting to ensure that taxpayers and their advisers do not report ordinary tax planning arrangements . . . We have sympathy with the view expressed to us that the primary legislation and the regulations ought to be worded sufficiently tightly to put matters beyond doubt and that the function of departmental guidance is to elucidate rather than to make"

secondary market rules.

I hope that the Paymaster General will tell the House that it is her intent that the winnowing process of the regulations and, ultimately, the Revenue guidance will mean that marketed tax avoidance schemes are reported. However, tax law should not be run by Revenue fiat: it is wrong in principle that a law, as drafted, should not be clear.

The five-day time limit has been debated previously. It is obvious that there is no problem in reporting within five days avoidance schemes that are being marketed, and it is equally obvious that it is entirely impractical for the general run of tax advice to be reported in the same period. Moreover, the latter is a continuing process.

In addition, will the Paymaster General give an assurance that the voluntary sector will be excluded from the scope of the regulations? A growing number of charities and similar organisations offer advice on tax or tax credits to people on low incomes, on a pro-bono basis. The advice given by such bodies is not generally of the sort that would constitute avoidance schemes, but it is a way to help people to make the best of their opportunities. It often consists of simple advice to help a couple to structure their tax position to their best advantage.

The draft regulations focus on avoidance schemes rather than ordinary tax planning, and the draft guidance notes give some comfort. However, the difference at issue is the same as that between the business and marketing of tax avoidance schemes and the general giving of taxation advice in the normal run of tax planning.

We must have a clear dividing line in these matters. It is one of the major outstanding issues for the legal and accounting professions, and for much of business. If we do not get a clear dividing line, there will be huge problems for the Inland Revenue, and business will be faced with quite unnecessary compliance burdens.

I hope that the Paymaster General will be able to assure us that she has eventually made up her mind about the dividing line. If she has not, we will press the amendment on this major issue to a vote.

David Laws (Liberal Democrat, Yeovil)

I want to speak to amendments Nos. 39, 40 and 42. To some extent, I echo the comments of the hon. Member for Arundel and South Downs (Mr. Flight). One advantage for us in our review of this year's Finance Bill is that we have been able to study the report from the House of Lords Select Committee on Economic Affairs, to which the hon. Gentleman referred. It goes into some detail on some prominent aspects of the Bill, especially those that have been controversial with businesses and tax practitioners. Having served on the Treasury Committee, I am not convinced that it has been able in the past to give enough attention to specific tax measures, as opposed to the macro-economic impact of Budgets. Therefore, it has not been able to inform the debates that we have in this place, especially by taking evidence from outside bodies. For that reason, I welcome the fact that the House of Lords Committee has again prepared a report on the Finance Bill and I hope that we shall be able to learn from some of its assessments, often made by people with much expertise in the area who have considered the issues in a non-party political and non-partisan way.

The House of Lords Committee's report echoes to a large extent the support in this place and outside for the broad thrust of the Government's proposals on tax avoidance, especially the early notification of tax avoidance schemes and, in particular, those that are widely marketed. In paragraph 19 on page 15, the Committee states:

"We wholeheartedly support the objectives of this draft legislation when applied to contrived schemes of artificial avoidance, and we have focused on matters that might assist in its practical application."

The Committee goes on to distinguish—as have our debates today—the artificial contrived schemes, which are marketed to large numbers of counterparties, from the bespoke schemes, of which there are many more.

Dawn Primarolo (Labour, Bristol South)

Will the hon. Gentleman explain to the House the difference between a bespoke scheme that saves one taxpayer £300 million that they should have paid, and a marketed scheme that is sold to hundreds of thousands and also costs the Exchequer £300 million? Both involve a tax loss through avoidance, and that is what we should deal with.

David Laws (Liberal Democrat, Yeovil)

I agree with the Paymaster General about the potential tax loss. However, we need to distinguish between the two types of tax planning activity—schemes that are widely marketed, about which the Inland Revenue can be contacted and the schemes registered, and the more detailed tax advice that most tax accountants would not even consider constituted a scheme. Such tax advice may also be provided by a number of different entities within one group at the same time, and the practical steps that would have to be taken to report that information to the Inland Revenue could cause problems.

Dawn Primarolo (Labour, Bristol South)

I must press the hon. Gentleman on the issue, because he did not answer my question. If bespoke advice to one taxpayer saves them £300 million through avoidance that they should not have saved, why should not that bespoke scheme be notified to the Revenue?

David Laws (Liberal Democrat, Yeovil)

In terms of the practical application and the compliance cost, there is a material difference between artificial schemes that can be reported and cover tax advice given to many entities at the same time, and tax advice that is given to individual companies when dealing with their day-to-day affairs and which even the Paymaster General might agree did not constitute a "scheme".

Dawn Primarolo (Labour, Bristol South)

In that case, does the hon. Gentleman accept that those highly paid, highly qualified and intelligent tax advisers and accountants know full well that the advice they give will be used to avoid tax when it should not be avoided? Therefore, they would know the difference between a bespoke tax avoidance scheme and a bespoke tax planning scheme that would be within the rules.

David Laws (Liberal Democrat, Yeovil)

I do not want to disappoint the Paymaster General, but I genuinely do not believe that it is quite that simple. Like most tax practitioners, I think there is a spectrum—from actively marketed contrived schemes to advice given by tax practitioners in the ordinary course of events.

Our amendments address two practical issues that are dealt with in the House of Lords report. The first is whether there should be a requirement for a different reporting period for individual pieces of tax advice—perhaps the Paymaster General would prefer me to call them that rather than bespoke schemes, which carries the sense that they are indeed schemes—in contrast to that for the artificial and marketed schemes. The second issue is whether there should be a de minimis limit in order to reduce compliance costs.

Despite the Paymaster General's comments in Committee and in this debate, she has failed to convince not only many professional bodies and individual accountancy firms, which may worry her rather less, but a cross-party House of Lords Committee that has given the issue careful deliberation, no doubt bearing in mind the points that she has made. As the hon. Member for Arundel and South Downs noted earlier, the Committee's conclusion was that although it accepted the proposition that five days was long enough for "pre-packaged schemes", it had sympathy for the view that there were likely to be more complex commercial relationships where

"five days is too short a period in which to determine whether or not a report is due".

The Committee noted that, given its focus on ease of administration in keeping down the compliance costs of both sides:

"We recommend that consideration be given to adopting a 30-day time limit in respect of notifications under clauses 292 (1) and (3) of the Finance Bill".

The Committee also referred to the evidence given by John Whiting of PricewaterhouseCoopers. He commented:

"It is noticeable that the Inland Revenue, whilst requiring disclosure in five days"—

in relation to this type of tax advice—

"is then allowed 30 days to simply register the item and return with a number for the scheme."

The practical implications of such deadlines for that type of tax advice were set out in a letter from Grant Thornton, the tax accountants, which I am sure that the Paymaster General has seen and which describes from Grant Thornton's perspective some of the practicalities in reporting that information and how it intends to handle the process, highlighting some of the steps it will need to take. Grant Thornton's evidence makes it clear that the marketed schemes are not an issue; the material for such schemes should be at hand and there should be no difficulty in notification. The letter states:

"Grant Thornton intends to make notifications"—

of the individual advice—

"on a centralised basis. This should be of benefit to the Inland Revenue as it should avoid duplication and our submissions should be consistent in nature. However, with offices in 34 locations, the gathering, filtering, collation and summarisation of information within the five-day timescale will be virtually impossible to achieve. If we make each office responsible for its own notifications, then the Inland Revenue's Avoidance Intelligence Unit could potentially be swamped with duplicated notifications. A timescale of 30 days would be more realistic and would be in line with many other time limits for providing information".

When we consider how such information is likely to be reported and filtered in practice, we can see that a five-day deadline would be a rapid turnaround. If the Government insist on keeping to that deadline, they may receive information in much greater quantities, much less effectively filtered and from a number of different locations.

I understand the Paymaster General's concern about extending the notification period, thus providing an opportunity for tax avoidance. I hope that she will appreciate that that concern must be balanced by an understanding of the practicalities that many tax accountants will face in the circumstances and that, therefore, she will at least reflect on the deliberations of the House of Lords Committee even if she considers that tax practitioners have a commercial interest in amending the legislation in this way.

The second issue that I want to touch on is whether a de minimis threshold should be established. The House of Lords Committee discussed that issue and put it to the Inland Revenue officials who gave evidence to it. At paragraph 41, it says:

"The Revenue had practical objections to both the suggested measures for a de minimis rule"

in respect of the possible tax avoidance or the fees that would be charged. It says that the Inland Revenue

"anticipated that promoters 'might argue that they would not know with any certainty how much tax was at stake when their scheme was used by a particular taxpayer.' A fees-based test was ruled out because 'it would not be straightforward to isolate fees for a particular tax scheme from fees for general tax advice'."

I do not want to go into too much detail, as it is already outlined in the House of Lords Economic Affairs Committee report, but that Committee has also had the benefit, which we have not, of taking evidence from the United States Internal Revenue Service and hearing about its experience of early declaration and notification and using a de minimis rule. The House of Lords Committee points out that three of the five filters used for notification in the US include a de minimis element. At paragraph 48, on the basis of its deliberations about how such matters work in the United States of America, it rejects the idea that a de minimis limit would be unworkable. Indeed, it says:

"We accept the argument that setting a de minimis threshold could serve significantly to reduce compliance costs and, in the light of the US IRS evidence to us, we therefore recommend that further consideration be given to adopting a de minimis limit for the reporting of individual schemes."

Both those matters are not straightforward for the Treasury and concerns have been raised about whether tax avoidance could occur while individual tax measures are being reported, but I hope that the Paymaster General will accept that countervailing concerns have been expressed about the burdens that could be imposed and about requiring a short reporting period for detailed tax advice while the Inland Revenue appears to allow itself much longer to respond to its counterparties. If the Paymaster General is unable to respond constructively to the House of Lords Committee's proposals, I hope that she will at least indicate that she will keep the matter closely under review in the year ahead and that, if it turns out that adopting those proposals has benefits, she will be willing to keep an open mind and introduce changes at a later stage.

Dawn Primarolo (Labour, Bristol South)

Perhaps I should start with the point about artificial versus bespoke schemes made by the hon. Members for Yeovil (Mr. Laws) and for Arundel and South Downs (Mr. Flight). The purpose of the disclosure clauses is to address the precise issues highlighted by the hon. Member for Yeovil—the artificial and contrived arrangements that can occur in marketed schemes and bespoke arrangements. Neither the Government nor any hon. Member have advanced an argument to say that normal tax planning should fall within the disclosure rules; on the contrary, the Government argue that normal tax planning should not fall within the bespoke rules. Frankly, I would say to the hon. Member for Yeovil that if organisations such as Grant Thornton cannot tell the difference between an artificial and contrived arrangement and normal tax planning, I would be amazed. Indeed, I might thus seriously question the quality of advice that it gives to people who pay a lot of money for that service.

David Laws (Liberal Democrat, Yeovil)

Does the Paymaster General accept that not only Grant Thornton but all tax practitioners have expressed considerable concern about what they will be required to report and what they will not? Although it might be easy to distinguish between each end of the spectrum, it is more difficult to decide whether tax advice that falls in the middle of the spectrum constitutes something that the Government intend to be reported.

Dawn Primarolo (Labour, Bristol South)

With respect to the hon. Gentleman—and I shall address that issue later—he did not advance that scenario when he cited Grant Thornton. If he was quoting correctly, it sounded as though the company would send the Inland Revenue just about all the tax advice produced by every office in the country. I refer him back to the excellent speech made on Second Reading by the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb), although I shall not repeat it. That was the best speech that I have heard about corporate responsibility, and it demonstrated clearly the fact that professionals should know full well the precise activities that they undertake.

I want to address further issues regarding new clause 7 and amendments Nos. 39, 40 and 42, but I make it absolutely clear again that we are talking about artificial and contrived schemes, such as gilt strips and those that we addressed when we considered new clauses 9 and 10 today. We want to get information so that we can deal with such schemes in the way in which all hon. Members have implored Ministers to do.

Quentin Davies (Conservative, Grantham and Stamford)

As the Paymaster General says, everything turns on the words "artificial" and "contrived", because they determine whether something is notifiable. Does she agree that those terms are ambiguous because they involve an element of judgment—they are not mathematically precise? An adviser will need to know, ex ante, whether a scheme is artificial and contrived because it is no use waiting for a court to determine that. By that time, an adviser might have made a mistake and thus have been penalised. Will the Paymaster General give the House definitions of "artificial" and "contrived" to make their meanings unambiguously clear? If we use words that require an element of judgment, there will be, by definition, a large area of persistent doubt, and thus unfairness and perversity may arise.

Dawn Primarolo (Labour, Bristol South)

That was a long intervention. As the hon. Gentleman knows, the clauses and the filters in the regulations seek to make the position clear. We are talking about the operation of the provisions in only two areas of taxation—employment and financial products. He should cast his mind back to discussions on new clause 9, when we learned that tax planners have already designed a scheme to get round clause 134, even though the Bill has yet to receive Royal Assent. We were fortunate to receive the details of the scheme so that the House could close it off. If I explain how the relevant provisions will work in practice, the hon. Gentleman may not be satisfied but he will have a clearer understanding of them. By their very nature, artificial and contrived schemes introduce uncertainty into the system. I fail to understand how anybody could look at, for instance, the gilt strip arrangements and not conclude that they are contrived. I am trying to deal with those grey areas.

Howard Flight (Conservative, Arundel and South Downs)

Is there not a clear moral distinction to be made? The individuals to whom the right hon. Lady referred know when they are dealing in artificially contrived schemes, as opposed to tax planning to minimise tax liabilities. Legally, it is difficult to distinguish between the two, although the regulations may go some way towards doing so. The Bill, however, does not.

Dawn Primarolo (Labour, Bristol South)

I am not even going to attempt to go down the road of moral definitions.

There has been a universal welcome for the Bill's attempt to provide disclosure mechanisms in the light of the experience of the US and other countries. Tax avoidance is not limited to marketed schemes or even schemes that are sold without marketing, which is why the Government's approach is to target arrangements where the risk of avoidance is greatest. New clause 7 would give rise to significant practical problems, as I shall explain to the House, and does not address or improve the position that hon. Gentlemen are trying to tackle. I accept that it attempts to differentiate between an off-the-shelf scheme and bespoke advice, but applying the disclosure rules only where a promoter sells or markets a scheme could create the very uncertainty and arbitrary boundaries that they seek to remove. That problem arises from the very nature of contrived and artificial schemes.

There is a genuine difficulty, I acknowledge, in drawing a clear line between advice on marketed schemes, such as the gilt strip scheme that the Government have dealt with in the Bill, and planning advice—advice on a major commercial transaction such as an acquisition or merger, however, is clearly bespoke advice—and hon. Gentlemen are seeking to address that grey area. It is not clear on which side of the dividing line between bespoke advice and advice on marketed or off-the-shelf schemes particular advice will fall. Trying to target the disclosure rules in that way would make it even harder for the majority of compliant advisers to apply them and, at the same time, would unfortunately—I know that this is not the hon. Gentlemen's intention—provide scope for less scrupulous advisers to find ways of side-stepping them. That would create a significant defect in the disclosure rules. That is why the Government's approach is to target the types of schemes and arrangements in which we believe that avoidance is most prevalent.

It is not clear how the new clause is intended to affect the disclosure of schemes devised in-house, and there are many such schemes. The result of the new clause could be the introduction of different rules for the disclosure of schemes that are marketed and sold by a promoter, and in-house schemes where no promoter is involved. Were the Government to adopt that approach, they would rightly be open to accusations of discrimination against firms that rely on in-house tax advice.

Notwithstanding some of the comments that have been made, the Inland Revenue has had extensive consultation with the profession and the industry on the draft regulations and has set out details of what would be caught by the disclosure rules. During the consultation, concern was expressed that the financial products regulations might be too wide. I recognise that the new clause attempts to deal with those concerns by narrowing the scope of the rules for marketed and off-the-shelf schemes.

I appreciate that the hon. Gentleman also wants to ensure that the disclosure rules do not apply to the normal tax planning advice on commercial transactions that is provided by the vast majority of tax advisers. He wants to distinguish between that sort of bespoke advice and aggressive schemes that depend on exploiting loopholes. I can assure him that the Government do not want to impinge on straightforward tax planning. That is not what we are attempting to do. However, our concern remains—I made the point in Committee as well—that some bespoke advice also depends on the aggressive exploitation of loopholes.

We therefore believe that the response that the Government propose is more effective and will preserve the new disclosure obligations. The Inland Revenue is working hard with tax advisers to ensure that the rules catch only aggressive schemes. We will refine the text of the regulations to ensure that the financial products test is clear and easier to apply in practice. The regulations will contain new filters, which we discussed in Committee. They will ensure that financial products that gain a tax advantage by exploiting loopholes are dealt with.

Government amendment No. 222 corrects a drafting error. It removes from clause 299 some extraneous words referring to a trade, profession or business that involves the provision to other persons of services relating to taxation.

Amendments Nos. 39 and 40 seek to remove from the Board of Inland Revenue the power to prescribe in regulations the time within which promoters are required to make a disclosure, and set out in primary legislation that that should be 30 days. I make a simple point to the hon. Member for Yeovil: when the promoters make the scheme available for use, they know whether or not it should be declared. Five days after the scheme is made available is therefore reasonable. Thirty days simply allows more time.

The broad framework for a disclosure regime is set out in primary legislation and specifies who needs to make a disclosure and what they need to disclose. The regulations published in May require promoters to supply those details within five days. If they know on day 1, day 2, day 3, day 4, day 5, day 29 and day 30, I do not see why they cannot make the information available by day 5 and why that should wait until day 30. I am not convinced that the promoters cannot supply the information within five days. They clearly have all the information that they need, because they make the schemes available.

David Laws (Liberal Democrat, Yeovil)

Can the Paymaster General confirm that, like the House of Lords Economic Affairs Committee report, our proposal distinguishes between artificial marketed schemes, where we agree that the five-day limit is right, and more complex tax advice, where a potential problem exists and a 30-day limit might, as the House of Lords Committee suggested, be more sensible?

Dawn Primarolo (Labour, Bristol South)

Amendments Nos. 39 and 40 do not provide for that distinction, because they remove the five-day period. The operation of the disclosure rules means that the Government's arrangements are straightforward, and there is no reason why they should not work.

Amendment No. 42 gives the Treasury a new statutory power to impose a de minimis limit. It is difficult to see what it seeks to achieve, because it does not set the de minimis threshold, but merely enables the Treasury and the Inland Revenue to introduce such a limit. We resist the introduction of a de minimis limit for direct tax disclosure rules because it would not work in practice. For example, where such a limit applied to tax saved or to the turnover of a business, a promoter of a scheme might not be in a position to know those facts when they sold the scheme to the client, and would not know whether the de minimis limit applied and whether they should make a declaration. The disclosure rules in the Bill provide for the notification of the Government and the Inland Revenue when promoters and those giving advice believe that schemes fall within the definition of "artificial and contrived", which is vital if we are to defend tax revenues in order to invest in our public services.

Quentin Davies (Conservative, Grantham and Stamford)

The Paymaster General said that my intervention, which she was kind enough to take, was too long, so I rise to take her up on one or two points. This afternoon's debate has become quite amusing, because she used an argument that she herself dismissed earlier in the debate to reject new clause 7. She says that one cannot make a viable distinction between a marketed scheme and a non-marketed scheme, because one cannot define what is marketed, so, in her words, "a grey area" exists between marketed and non-marketed schemes. Conservative Members have put that argument to her on the definition of "artificial and contrived", and a considerable grey area clearly exists.

The Paymaster General says that everyone knows what is "artificial and contrived", but I shall give her an example and take an intervention, if she wants to make one. What about transferring capital allowances from profit-earning firms to non-profit-earning firms through finance leases? That mechanism is classic, but surely it is "artificial and contrived." It must be contrived—presumably some clever tax accountant or lawyer thought it up 20 years ago when finance leases started—and it became a classic method of financing. It enabled companies whose profitability was not sufficient to do so to get full benefit from capital allowances by investing in plant and equipment, which is a socially and economically desirable objective that both Conservative and Labour Governments have sought to secure.

The Paymaster General has not intervened yet, but does she regard that example as "artificial and contrived"? The practice certainly did not flow directly from the original purpose of the capital allowances, which were effectively used by firms that were not making the corresponding profits, so one could describe that as both artificial and contrived. The right hon. Lady clearly does not know the answer.

Earlier this afternoon, the Government moved new clauses 9 and 10, which we did not oppose and which are designed to prevent from coming into effect artificial and contrived tax avoidance schemes that, we were told, have been marketed over the past few weeks. But she did not rely on her "artificial and contrived" definition to try to dispose of those particular schemes: she used the different mechanism of an anti-avoidance rule. Why does she not stick with that? Why does she not simply say that schemes will be disregarded by the Revenue if their main purpose is to avoid tax, as under new clause 10? That is a much more objective definition than "artificial and contrived".

The right hon. Lady cannot pray in aid new clause 10 because she adopted an entirely different approach to solving the problem of that set of schemes. She certainly cannot reject the argument that it is undesirable to have areas of doubt and uncertainty—grey areas—in tax legislation when they are put to her in one context, then five minutes later reject an Opposition amendment on precisely the same ground. There is a certain amount of irony, to put it kindly, in the position that the Government have taken up this afternoon.

Dawn Primarolo (Labour, Bristol South)

The only irony is that the hon. Gentleman has not read the proceedings of the Standing Committee, during which I specifically gave the answer with regard to leasing and the disclosure rule.

Quentin Davies (Conservative, Grantham and Stamford)

The right hon. Lady did not then, or on any other occasion, define "artificial and contrived". I cited the lease as an example where doubt would exist ex ante as to whether it was artificial and contrived. She may well be able subsequently to say that she chooses not to regard it as artificial and contrived, yet it could have been considered to be so.

I am afraid that the right hon. Lady has not answered the question at all. We need a definition ex ante; otherwise, the only way in which we will get a definition is ex post, after a great deal of complicated and expensive litigation before the commissioners or the courts. What is more, as my hon. Friend the Member for Arundel and South Downs (Mr. Flight) said, it is inevitable that tax advisers will play safe. The e-mails and pieces of paper that travel between tax advisers and Revenue offices will increase greatly as everybody tries to cover themselves in knowledge of the penalties that will apply if it is subsequently, and retrospectively, deemed that a certain piece of tax advice was involved in an artificial or contrived arrangement.

The right hon. Lady may live to regret this. I am afraid that by not giving us any guidance on what is artificial contrivance, and accepting a grey area in these matters that she rejects elsewhere, she has laid the basis for the problem that I fear will ensue.

Howard Flight (Conservative, Arundel and South Downs)

All hon. Members will understand what the Paymaster General is trying to achieve and why. Our concerns, as echoed by my hon. Friend the Member for Grantham and Stamford (Mr. Davies), centre on why the arrangements as they stand can achieve it without leaving too great a grey territory in the middle. We have a lot to learn from the US experience in this area, and I trust that the right hon. Lady will continue to monitor that.

Morally, everyone knows when they are crossing the line between acceptable tax planning and artificial contrivance, but legally defining that is extremely difficult. For good reason, the Minister does not want a definition of artificial and contrived schemes in law. Only a few years ago, inspectors of taxes were telling people that trust arrangements were not caught by the gifts with reservation rules and were perfectly okay and acceptable, whereas now they are seen as artificial contrivances. Judgments as to where the line is drawn change over time.

We believe that the most important place to start in this regard must be with practical measures that will have some effect. That is why it is important to draw the line in relation to any form of promotion and selling; that is where we shall stop most of the problems, because that is where most of the abuse has taken place. We understand the Minister's point that a clever company could come up with its own fancy internal scheme. We do not deny that that could be a problem, and we understand why the Government are trying to catch that kind of problem. However, our concern is that the price of doing that will be a degree of mayhem in terms of how the financial industry and accountants operate, and in terms of what the Revenue gets landed with.

I am afraid that, although the Minister has convinced us of the worthiness of her intentions, she has not convinced us that she has addressed the problem of the grey territory in the middle. If that is not addressed, the arrangements will be damaging to the economy. For that reason of principle, we would like to register our point by pressing the matter to a vote.

Clause 4 — Duty stamps for spirits etc

David Laws (Liberal Democrat, Yeovil)

I beg to move amendment No. 35, in page 3, line 11, leave out clause 4.

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

With this it will be convenient to discuss the following amendments: No. 41, in page 265, line 2, leave out schedule 1.

Government amendments Nos. 50 to 70.

David Laws (Liberal Democrat, Yeovil)

The previous time we debated this issue in detail was on 27 April on the Floor of the House. The debate lasted some four hours, which was more than 50 per cent. of the deliberations. I hope that the debate today will be somewhat shorter, although, with the number of hon. Members from Scottish constituencies here, that is not guaranteed.

It was appropriate that we had a detailed debate about the issue, because it has caused much concern in the spirits industry in the United Kingdom, across all parties. I do not intend to go over all the ground that we covered on 27 April because that has already been written into the record, but it is worth reminding the House of the conclusion of the all-party Select Committee on Scottish Affairs, which reported prior to the debate in April. It concluded:

"Until definitive figures are available"

on the extent of fraud in the spirits industry,

"no estimate, whether from Customs or from the industry, can be accepted as accurate. For any Government to introduce important measures which could have major implications for industry and employment, based on what could be inaccurate figures, might be considered precipitate to the point of being reckless."

Since that debate, there have been two developments that are relevant to our discussions. The first is that the Lords Select Committee on Economic Affairs has had an opportunity to debate the issue in detail and to take evidence from the industry and others about the potential implications of the measures that the Government intend to take. Secondly, amendments have been tabled by the Government. Perhaps you, Mr. Deputy Speaker, will allow me to turn to the Government amendments first because, to the extent that they address this particular issue and concern, they will limit the rest of the debate, particularly the debate about the different estimates of the extent of the fraud in the sector and the cost that will fall on the spirits industry and particularly smaller producers as a consequence of the measures that the Government envisage.

We have already had some feedback from one of the major industries that will be affected by the measure and by the amendments that the Government have tabled in the past few days. In an e-mail on 5 July to my hon. Friend the Member for Argyll and Bute (Mr. Reid), who has been particularly active in lobbying on the issue alongside many other Scottish MPs from all political parties, the Scotch Whisky Association set out its view about the Government amendments. It says that in the first instance, contrary to some weekend newspaper reports, largely in the Scottish media, the amendments do not mean that the Chancellor is abandoning strip stamps either in principle or in terms of the conclusion that the Government have so far reached. It goes on to say that the amendments are positive in that they allow the industry and the Government to continue discussions about whether an alternative route to a piece of paper over the top of the bottle can be found and that this "might"—it underlines "might"—in the type B variant include a tax stamp appearing within the back label of a bottle, for example, or even under the type A proposal, the ability to attach a self-adhesive label somewhere on the bottle. The SWA goes on to say that such a solution would incur expenditure on the redesign of labels, but that that would be minor compared with companies having to buy strip stamp application machines, which was the Government's previous proposal. The SWA's assessment is that the amendments offer an important opportunity for ongoing discussions to take place against legislation that gives the chance of flexibility in design of the final tax stamp scheme. However, it points out that it has received no concrete assurance that the original preference will not in fact be the one that we end up with. It says that we need to satisfy Customs and Excise over the security aspects of the alternative and ensure that there is sufficiently broad support across the industry.

However, this is certainly a step in the right direction, and I welcome the fact that the Economic Secretary and his colleagues have had detailed discussions with the industry on reducing compliance costs, and on the principle of the scheme. My colleagues and I certainly will not oppose the Government amendments tabled today. If they are accepted, the compliance burden on the industry will potentially be significantly less than it would otherwise be.

That said, we have tabled a couple of amendments that would delete clause 4 and the associated schedule. We continue to table such amendments, and currently intend to vote on them, because we are still unconvinced that the Government have proven the case for introducing proposals of any kind.

Alongside the Government's proposals, which are a small step in the right direction, there has been another major development since we debated this issue in April: the assessment by the Lords Select Committee on Economic Affairs of various key aspects of the Finance Bill. It is a cross-party Committee, and in reporting on this matter it has come up with some clear—and very critical—conclusions. One of my colleagues on that Committee told me the other day that he considered this the most deficient aspect of the Finance Bill, and that the Committee was perhaps more concerned about the estimate of fraud than about any of the other salient elements of the Bill that they looked at in detail.

John Lyons (Labour, Strathkelvin and Bearsden)

The hon. Gentleman should consider the fact that the argument has moved on somewhat, as his earlier comments about the SWA e-mail underlined. The Scottish Affairs Committee, among others, was deeply concerned that because the stamp is designed to go over the top of the bottle, the costs for distilleries such as Bushmills would be rather high. So we were happy that the SWA endorsed a flexible approach, and that the Government were able to discuss with it an alternative to placing the stamp over the top of the bottle.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the hon. Gentleman for that intervention, which highlights where the debate is now. It is clear that the measures proposed in the Government amendments are a clear step forward. They have the potential to reduce the compliance burden associated with the measures that the Government are seeking to implement, but they still leave the SWA, the spirits industry and ourselves with an underlying worry about whether the Government have justified introducing this additional burden at all.

I remind the hon. Member for Strathkelvin and Bearsden (Mr. Lyons) of the Scottish Affairs Committee's conclusion, and underline the quotation that I referred to earlier:

"Until the definitive figures are available, no estimate, whether from Customs or from industry, can be accepted."

The hon. Gentleman will recollect that the Committee continued:

"Introducing changes of any kind would be considered precipitate to the point of being reckless, without actually understanding the extent of the fraud and getting some greater agreement over the figures."

The Lords Select Committee on Economic Affairs discussed the fact that Customs and Excise and the industry have given various estimates of the extent of fraud, and it discussed the National Audit Office assessment of those estimates. It refers to the fact that the potential variation in the estimate of fraud is between £10 million at the bottom end and £1,060 million at the top end, a huge amount. I do not know whether the hon. Gentleman has had a chance to see the report from the House of Lords Economic Affairs Committee, but it would be useful for him to do so.

Malcolm Bruce (Liberal Democrat, Gordon)

Does my hon. Friend agree that we have to put this into context? I have 12 distilleries in my constituency, and the spirits industry makes a huge contribution to the economy and is our major export. Yet the Government seem to be obsessed with a fraud they cannot prove and a mechanism that would affect the industry's competitiveness. We are the leading marketeer of branded spirits in the world. Is it really necessary for the Government to impose this kind of extra cost on the industry unless they can justify it in terms of fraud? The figures quoted by my hon. Friend show that the parameters are ridiculous.

David Laws (Liberal Democrat, Yeovil)

My hon. Friend is right. Although the Scotch Whisky Association and the spirits industry may prefer the Government amendments to the original proposals, that does not mean that they support even the amended proposals on the basis of the available evidence. The House of Lords Economic Affairs Committee concluded:

"While we accept that estimates of the scale of fraud are always uncertain, we are concerned by the extent of the differences in the estimates between those of the industry and those of the Government. Clearly the question whether the compliance costs of duty stamps represent a reasonable burden depends in part on the extent of the fraud. In this context we are particularly disturbed at the size of the statistical range in the Government's own figures, and have some sympathy for the view urged on us by the industry that uncertainty over the measure of the fraud means that a necessary pre-condition for the introduction of so burdensome a measure has not been met."

The Committee added that there was an urgent need for additional work to establish whether the cost estimates of the Exchequer were reliable, adding that it would be dangerous to introduce the additional potential costs without a clear understanding of the extent of fraud and, therefore, the extent of the benefit.

The House of Lords Economic Affairs Committee raised a number of important points that we discussed on 27 April; important issues but, compared with the overall issue of the amount of fraud, second-order issues. One is the question of the counterfeiting of tax stamps, about which representatives from Customs and Excise gave evidence to the House of Lords Committee. After considerable debate and consideration, the Committee concluded:

"We note the confident note struck by HMCE in respect of the risks of counterfeiting and that this reflected the reassuring tone of the Economic Secretary's response to the Scottish Affairs Committee, who, however, felt such a response to be verging on the complacent. Counterfeiting of stamps could in the event add to the overall burden of costs of the measure, and in this instance too, it is difficult to evaluate against the background of uncertainty over the measure of spirits diversion fraud."

In other words, the House of Lords Committee was not persuaded by the case that the Government were making on counterfeiting.

There are other points on which we would like clarification from the Economic Secretary. In particular, we need an update on the discussions taking place with the industry and the extent of progress in agreeing steps to reduce the compliance burden. The Economic Secretary said that he hoped that smaller producers—who might be particularly hard hit by the measure—would introduce some targeted measures to reduce the costs.

There has been some discussion about the cost of the stamps being borne entirely by the Government rather than falling upon the industry. I understand that there is scope within the Bill for debate about whether that will happen. I hope that the Economic Secretary will make it clear today that all of the cost of the stamps will be borne by the Government.

I hope that I have not been too ungenerous to the Economic Secretary, who has made some progress since we debated the issue about a month ago. He is bringing forward measures that address some of the concerns of the industry and therefore we will not oppose the amendments that he has tabled today. However, the big issue that remains, as identified by the House of Lords Economic Affairs Committee and in the Scottish Affairs Committee report, is what is a reasonable estimate of fraud in this sector. Is there not a real risk of introducing measures, in either their amended or original form, which will impose costs on the industry that are much more significant than the benefits that we could potentially secure?

John Healey (Labour, Wentworth)

I rise to explain the Government amendments in the group, but I welcome their approval by the hon. Member for Yeovil (Mr. Laws) and I hope to give him the progress report that he seeks. He said that he did not want to go over the ground covered by the Committee of the whole House on 27 April, but his amendments are drafted in such a way that other hon. Members may want to take advantage of them and go over those arguments, even though the debate was in a sense settled a couple of months ago.

I hope that hon. Members will recall that, as the hon. Gentleman said, that debate lasted for nearly four hours. It was a debate in which 22 Members took part, with me playing my part by taking 49 minutes for my opening speech. Much to the displeasure of my colleagues in the Whips Office, I took 23 interventions, and a further 20 minutes responding to the points raised in the debate.

Alex Salmond (Scottish National Party, Banff and Buchan)

In remembering that debate, as I do, does the Economic Secretary recall how many of the 22 speeches made from both sides of the House were enthusiastically in favour of the Government's proposals?

John Healey (Labour, Wentworth)

Even my own speech was not enthusiastically in favour of the Government's proposals. I made it very clear that it was a step that we did not wish to take, but that, having exhausted more than two years of work with the industry, we had come to the conclusion that there was simply no other way of trying to tackle the levels of fraud in the spirits sector. After the Committee of the whole House, the industry accepted that tax stamps were part of the Bill. It said afterwards that it would work with the Government to introduce the duty stamps—and it has. The Scotch Whisky Association said that the important thing was that the industry should be involved in detailed discussions with Customs and Excise and the Treasury to ensure that a workable regime was introduced. As my hon. Friend the Member for Strathkelvin and Bearsden (Mr. Lyons) has just said, the argument has moved on.

In case hon. Members are not aware of it, let me explain that, soon after the Committee of the whole House debate a couple of months ago, the trade formally proposed to Customs the solution of back labels. The case was prepared well and some of the security features that we were keen to see incorporated in any tax stamp were examined. The Government amendments before us this evening are the result of the detailed and constructive work that has taken place during 16 separate meetings between the Government and the industry since the Committee of the whole House.

During that debate on clause 4 and schedule 1, I emphasised the commitment made in the Budget that, while we would press ahead with the duty stamps regime, we would aim to ensure that the duty stamps were implemented in such a way that additional costs and complexity to the industry were minimised. I also welcomed in that debate the report of the Scottish Affairs Committee, chaired by my hon. Friend the Member for Paisley, North (Mrs. Adams), and I committed the Government to give due consideration to the Scottish Affairs Committee's advice that

"it would be far less disruptive to the industry for a tax stamp to be incorporated into the front or the back label of a bottle."

Malcolm Bruce (Liberal Democrat, Gordon)

The Economic Secretary is explaining the justification for the Government amendments, but does he not acknowledge that the industry is trying to secure the least bad solution? The industry would prefer not to have any sort of requirement that would add costs, so the Economic Secretary is being rather disingenuous in suggesting that this is the industry's preferred solution. It is the least bad one, given that the Government want to press ahead.

John Healey (Labour, Wentworth)

The hon. Gentleman needs to be a little patient. The industry has not let the Government forget that it would rather not have tax stamps. I make no bones about that but, since this matter was last discussed in the Committee of the whole House, the argument has changed. The industry has fulfilled its undertaking to work with us, and we have done much detailed and constructive work on the logistics of implementing the tax stamps regime. The introduction of the scheme is still 20 months away, and I look forward to the continuation of the consultation and the detailed discussion that we have had so far.

Irene Adams (Labour, Paisley North)

The industry was well aware of the problems with whisky fraud. In two years, it took no steps to produce suggestions about how to tackle that fraud.

John Healey (Labour, Wentworth)

My hon. Friend is right. She is Chair of the Scottish Affairs Committee, which pointed out the industry's lack of action in its report. The media did not give that element of the report much attention, but it was a central part of the Committee's analysis. It remains an important consideration.

In the earlier debate, I warned that the back label approach might not deliver the degree of simplicity that we hoped for without compromising the regime's effectiveness in tackling fraud, or suffering some of the other flaws of conventional strip stamps. Over the past three months, however, representatives of Customs and the industry have met regularly to look at the details of implementing a duty stamp regime.

As happened before the Budget, we have conducted consultations through the joint alcohol and tobacco consultative group. That industry forum is made up of representatives from producers, importers, retailers, travel retailers and warehouse keepers. Customs officials have worked with the JATCG's spirits group, and with two specially constituted specialist sub-groups looking at the detailed technical design of the tax stamp system, and at payments and compliance costs issues.

Work has also continued, again in discussion with the industry through the JATCG, on the package of regulatory measures announced in last year's pre-Budget report. The measures complement the duty stamp system in clamping down on the opportunities for spirits fraud, and in helping to prevent the possible displacement of the fraud, from the spirits sector to other parts of the drinks industry.

I pay tribute to the industry's approach to the work. It has never let us forget that it does not like tax stamps, but it has continued to emphasise its support for clamping down on fraud. Also, it has carried out its undertaking to work with us constructively to find a workable and effective duty stamps regime.

The progress that has been made over the past three months means that I have been able to table these Government amendments, which will do two things. First, they will build into the legislation the flexibility that will allow us to adopt a system for incorporating duty stamps into the labels on the back of bottles of spirits, if that can be made to work. Secondly, and consequently, they will provide flexibility to enable arrangements for payment of duty stamps to reflect that decision on the duty stamps.

I make it clear to the hon. Member for Yeovil that that does not affect the Government's commitment to bear the costs of printing and distributing tax stamps. If we decide to take the back label route, I do not think that the Government can be expected to pay for more than the duty stamp element of the back labels, as those labels serve much broader purposes for the industry, including product branding. However, I emphasise that the Government have not yet made a firm decision to go ahead with the back label system. Indeed, we are not yet in a position to make such a decision. There would be obvious concerns about the integrity and security of a duty stamps regime that permitted the full range of printers who currently supply labels to the UK spirits industry—and to those producers who supply to the UK market—to have access to the facilities that produced the tax stamps. However, it is at present uncertain whether any restrictions on the supply of labels would be compatible with EU law or World Trade Organisation rules. That is the issue that we need to examine further.

Alex Salmond (Scottish National Party, Banff and Buchan)

Given the unwillingness of the industry to accept strip stamps, given the uncertainty about the estimates that attempt to quantify the fraud, and given the new uncertainty that the Economic Secretary has spoken of—whether the proposal can be mitigated by the back label scheme—does he agree that we should not legislate on the issue? Everything he says suggests that the matter should still be at the discussion and formulation stage, not being considered during the Report stage of the Finance Bill.

John Healey (Labour, Wentworth)

It is just three months since the Budget confirmation that we wanted to press ahead with tax stamps and 20 months until their implementation, and now is the time that we must put the legislative framework in place. That framework needs to allow sufficient flexibility for us to make decisions that we are not yet in a position to make.

I do not believe that the SWA would press us for early decisions on the matter. If it had done so before, the early decision would have been to proceed with strip stamps, not back label stamps. We should consider the legislation now and build in the flexibility that we may need in the future.

John Robertson (Labour, Glasgow Anniesland)

I congratulate my hon. Friend on what he has said, but will he assure me and the whisky industry that his proposals are not just words to appease politicians and companies to stave off the fateful day, but a proper attempt to try to save the industry money and solve the problem of fraud? We want to see deeds, not words.

John Healey (Labour, Wentworth)

I do not believe that my hon. Friend could have picked up any doubt on the part of the industry about the seriousness with which Customs staff, Treasury officials and I have entered into detailed discussions on several occasions since the Budget and the debate in Committee on the Floor of the House. Together with the trade, we have been able to establish the potential benefits of a back label system.

David Laws (Liberal Democrat, Yeovil)

I appreciate that the Economic Secretary does not believe that the proposals are yet ready to be approved, but can he tell us how long it will be before he decides whether the amendments that he has tabled today can be implemented or that he will need to revert to the original proposals? How many months will it be before we know?

John Healey (Labour, Wentworth)

We are not in a position at this stage to make a decision. I hope that within two to three months we will be able to reach a firmer decision.

Mark Prisk (Conservative, Hertford and Stortford)

The amendments mention label type A and label type B as the two options available. Are those options mutually exclusive or would they run side by side?

John Healey (Labour, Wentworth)

We have not made those decisions yet. The purpose of the amendments is to give us the flexibility to make those decisions in due course, when we are in a position to do so.

My hon. Friends have been supportive of our efforts to find a workable solution for the introduction of the tax stamp regime and I am sure that they would be interested to hear about the conclusions that we have been able to reach about the potential benefits of back labels. I know that Labour Members who have played a big part in discussion of the issue on the Scottish Affairs Committee will certainly want to hear those conclusions.

Let me make three things clear. First, we have been able to establish that, as the vast majority of spirits products already carry back labels, both the initial and the ongoing compliance costs of the option would be significantly less for the industry than strip stamps. In particular, the requirement for new machinery for the industry to apply stamps would be substantially reduced.

Secondly, as duty stamps would in the vast majority of cases be incorporated in labels that already bore the product's brand name, a back label system could help to reduce the incentive for the counterfeiting and theft of duty stamps. Obviously, a potential fraudster would need to match a stolen or counterfeited stamp to something that could pass for the matching product. Thirdly, Customs is satisfied that a back label stamp could incorporate the full range of security and anti-counterfeiting measures that are vital for the prevention of stamp duty fraud.

Michael Weir (Scottish National Party, Angus)

The Minister has rather skimmed over the discussions held with the industry about other aspects of fraud in the supply chain. When the Scottish Affairs Committee looked at that matter, it found that a key element was that fraud did not arise at the distillery but further down in the supply chain. Whether the Minister opts for a back label or an over-bottle strip stamp, he needs to explain how either would necessarily deal with that problem. Can he be more specific about that?

John Healey (Labour, Wentworth)

To give the hon. Gentleman credit, he attended most of the debate on 27 April when we covered that issued comprehensively. As I have already made clear, alongside our detailed discussions with the industry about the potential for the use of back labels instead of strip stamps, we have been discussing compliance costs and how to reduce them, and looking into other regulations and measures that will help to deal with the sort of problems that he is concerned about.

Our amendments are intended to create scope for the design of the stamp to be determined once we have made the fullest possible assessment of the relative merits of a strip stamp and a back label scheme and, most important, when we have clarified the legal position. I commend the amendments to the House.

Mark Prisk (Conservative, Hertford and Stortford)

The United Kingdom whisky and spirits industry is important for exports and for jobs. Scotch whisky exports alone are worth more than £2 billion a year, and many jobs in the industry are located in communities where there are few other employment opportunities.

Throughout the passage of the Bill, the Government have told us that they want to impose tax stamps on spirits because they believe it is the only way to prevent fraud in the UK spirits market. The Opposition do not doubt that there is fraud. What is at question, however, is the scale of the fraud and whether strip stamps will deal with it without unduly harming the industry.

That is why, throughout the Bill's proceedings, we have urged the Government not to press ahead with the scheme. It is an impractical policy, based on questionable statistics, and it has been rejected by many of our competitors, which is why we support the amendment moved by the hon. Member for Yeovil (Mr. Laws).

The Government's briefing to Members of 18 March shows that, depending on the assumptions made, the fraud the scheme seeks to curtail could be as little as £10 million or as much as £1,080 million. In short, no one really knows the scale of the problem.

We fully accept that there is a problem and that action is required. However, the very uncertainty about the nature of the problem means that it is even more important that the Government work closely with the industry. To that end, I note the 21 amendments that the Government have tabled. I also thank the Economic Secretary for his letter to my right hon. Friend the shadow Chancellor of 2 July, which indicates acceptance of many of the points that we raised in earlier exchanges, both on Second Reading and in Committee.

The decision to respond positively to the suggestion that a duty stamp might be incorporated in existing product labels is to be welcomed. It could remove the danger, which we described, of small businesses having to buy expensive equipment simply to comply with Government regulations.

I have discussed the decision with the Scotch Whisky Association, which, among others, speaks positively about it—although, frankly, like us, the association would prefer the whole scheme to be replaced with something more practical. However, the Government are not committed to such an amendment. For the benefit of hon. Members, I shall quote the Economic Secretary's letter to the shadow Chancellor, in which he states:

"You should note that this does not mean that the Government will implement the industry proposal for a label mark. There are still a number of concerns over the label mark proposals, to which we need to give further detailed consideration with the industry and with Government lawyers."

He then sets out some of those practical problems, including the danger that such a scheme could be open to scrutiny, as it might create barriers to trade. Indeed, that is a significant problem. I hope that he will give those matters due care, and his record suggests that he will. The industry has made it clear to me and many other hon. Members right from the beginning that, if handled badly, the scheme could make UK production in the whisky market less competitive. Of course, it has also stressed that there are important legal hurdles in a single market.

When the Chancellor announced the scheme, he expressed a wish to hear alternatives. Despite what has been said earlier, the spirits industry has, in fact, suggested 17 alternative anti-fraud packages since then. In particular, the industry has based its approach on what, to be fair, in most other cases, the Government usually applaud—a risk-based strategy. By focusing on the higher risk movements, there would be a better chance of securing lost revenue, without unfairly burdening legitimate traders.

I hope that in his reply the Minister will be able to set out what progress is being made. He has mentioned some of it, but I hope that he can elaborate further. In addition, of course, as we learned during the earlier consideration of the Bill, the Minister has already made a series of valuable concessions. The combined cost of the capital fund, the printing support and a two-year tax freeze is approximately £123 million. Given that the Government expect to claw back only about £160 million in lost revenue, the net gain seems remarkably small. Will the Minister say whether those figures have changed?

The scheme remains, in our view, unduly onerous and based on uncertain evidence. We would rather that the Government listened to the industry before taking any further step. Despite the concessions that the Minister has made, to which he has referred, it remains our view that, on this scheme, in principle and in practice, it is time for the Government to think again.

Annabelle Ewing (Scottish National Party, Perth)

I, too, rise to support amendments Nos. 35 and 41, tabled by the hon. Member for Yeovil (Mr. Laws). As we have heard, those amendments would delete clause 4, thereby scrapping the Government's proposed tax stamp scheme. Like many hon. Members—certainly those who represent constituencies in Scotland—I have a direct whisky interest in my constituency: the headquarters of the Edrington Group is based in Perth. I can also lay claim to the oldest, albeit the smallest, distillery in Scotland—the Glenturret distillery, just outside Crieff, which is also in my constituency.

We have heard much about the importance of the Scotch whisky industry to the Scottish economy and that some 40,000 jobs are dependent on the industry throughout the length and breadth of Scotland. Indeed, it is one of Scotland's premier industries, so it is absolutely incredible that, notwithstanding all the uncertainties about the scheme, the UK Government still propose to go ahead with a damaging tax stamp scheme that has won no support outside the Treasury in London. I should have thought that the Government's role is to support our key industries, not actively to adopt measures that will damage them.

As the debate has unfolded over the past months, we have heard pronouncement after pronouncement against the adoption of the scheme in principle at this time. All the key players have made those pronouncements, including the industry, the unions, the Scottish Parliament and the Select Committee on Scottish Affairs. Even Scotland's estimable First Minister expressed his disappointment that the UK Government would proceed.

When I said a moment ago that the Treasury had no allies, I was perhaps not being 100 per cent. accurate because it has one ally—the Scottish Socialist party. It was the only party in the Scottish Parliament that failed to support a cross-party motion that called on the UK Government to reverse the damaging scheme. The fact that the Government have to rely on the support of the Trots says a lot about the unsoundness of their proposal.

Why is there such united opposition in Scotland? The introduction of the tax stamp scheme is seen as damaging to the industry because the case on which it is based involves figures that have been criticised as unreliable. We have heard today about the House of Lords Economic Affairs Committee report and previously about the comments of the National Audit Office—the Economic Secretary is smiling about that for some reason. There has been no proper rigorous analysis of the likely effectiveness of the proposals. Indeed, the Economic Secretary admitted on Second Reading that the Government intended to go ahead with the tax stamp scheme despite the fact that no proper assessment had been made of the risk of counterfeiting. At the same time, however, the UK Government were quick to reject out of hand the industry's entirely reasonable alternative proposals.

It is correct to say that Government amendments Nos. 50 to 70 offer the possibility of mitigating the significant cost of the scheme to the industry, but I would say no more than that, not least due to the lack of detail and the absence of any assurance from the Economic Secretary tonight about the back-label option. The fundamental point remains that the UK Government have not made an unarguable case for legislating for tax stamps in principle at this time. It is clear that tax stamps will cost the industry; the question is, "How much?"

Amendment Nos. 35 and 41 represent one last opportunity to scrap the daft and damaging proposals, which is why my Scottish National party colleagues and I will support them. I urge Scottish Labour Members to consider doing the same because in a democratic society, surely the vote should follow the voice. For once, I would have thought it would be important for them to put the interests of their constituents and country ahead of those of the London Chancellor.

Alan Reid (Liberal Democrat, Argyll and Bute)

It is quite clear that the case for tax stamps on bottles of spirits has not been made. Having said that, I am pleased that the Economic Secretary has held discussions with the spirits industry and tabled amendments that allow for the alternative option of incorporating the stamps on labels. I suggested in Committee that that option would not be as bad as the strip stamp proposal, so I am pleased that the amendments have been tabled.

Although the alternative proposal of incorporating stamps on labels would be less costly for the industry, I am still firmly of the view that the case for tax stamps has not been made for other reasons. For example, the industry will still face the problems and cost involved in keeping the tax stamps secure, and it might yet be faced with the cost of buying the stamps up front.

In response to the Scottish Affairs Committee report, the Government said that they were

"seeking to implement tax stamps without requiring upfront payment for stamps".

That sounded good, but they went on to say:

"Realising this ambition is not straightforward".

That wording is worrying. The Government want to pass the Bill without giving us any assurances that they will come up with a scheme for the deferred payment of duty. In fact, they may not be able to come up with a scheme for deferred payment of duty, which is extremely worryingly and reinforces the argument that it is premature to pass legislation today to introduce a tax stamp scheme.

Despite all the spin in the press over the weekend, and even though they have undertaken to consider the label stamp alternative, the Government have not abandoned the idea of putting strip stamps on top of bottles. Even if the Chancellor's amendments are made, clause 4 would still allow him to put strip stamps on top of bottles and compel the industry to buy the stamps up front. The Government have not given a satisfactory answer on the threat of forgery. The experience of other countries shows that if tax stamps are introduced, high-quality forgeries will quickly appear. An experienced customs officer could doubtless spot the forgeries, but a tax stamp scheme is meant to ensure that retailers and customers can tell at a glance whether duty has been paid on a bottle. Given that high-quality forgeries are likely to appear, they will probably be good enough to fool retailers and customers, so the scheme would fail.

There is a wide range of estimates on the extent of duty fraud, and that is no basis on which to introduce tax stamps. The Government should establish a methodology to provide an accurate estimate for the levels of fraud. Once they have done so, they should examine the many alternative anti-fraud measures proposed by the industry. I shall vote for amendment No. 35, because the case for tax stamps has not been made. I am pleased that the Government amendments leave the door open so that they can adopt the industry's suggestion of label stamps. I shall not oppose them because they would make the position less bad, but even with those improvements the case for tax stamps has not been made. The Government have not dealt adequately with security costs, the fact that the industry might have to pay for tax stamps up front and the risk of forged stamps, so I appeal to the House to vote to ditch clause 4.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

I welcome the fact that my hon. Friend the Member for Yeovil (Mr. Laws) has tabled amendments Nos. 35 and 41, as they allow us, even at this late stage, to say no to the Government proposal.

The Government have not made the case for imposing such a burden on the industry, but they have tabled amendments to improve a bad situation. My hon. Friend reminded the Economic Secretary of his wish to address the concerns of smaller producers and small businesses that produce specialist spirits in small production runs. The Government have not yet shown how they plan to address concerns about the burden on that sector, and there is a limited chance that it will be involved in duty fraud or importing and substitution fraud. Those businesses produce spirits that may, or may not, be aimed at the export market, so they will not know at the time of production whether they want to put labels on the bottles. There will therefore be added problems in the production process.

I hope that in their discussions with the industry the Government will propose ways of tackling the concerns of one or two-person businesses with small production runs of specialist spirits. Fraud is not a major concern for them, and they do not show up in the statistics on the problem. If the House supports the amendments tabled by my hon. Friend it can show that the Government have not yet made the case for their proposals.

David Laws (Liberal Democrat, Yeovil)

It was useful to have an update from the Economic Secretary on the discussions he has been holding with the Scotch Whisky Association and the wider industry about the Government's proposals. We welcome the Government amendments moved today, which are certainly an improvement on the proposals that the Government put to us when we debated the issue in April. However, two facts remain that make us inclined still to press our amendment to a Division.

First, there is still no guarantee that the Government will not go ahead with the same proposals that were put to us before and rejected by all the bodies that considered them, including the all-party Scottish Affairs Committee. There is no guarantee that those measures will not go through. Secondly and most decisively, I come back to the conclusion of the Scottish Affairs Committee, which stated in its report just a couple of months ago that, without accurate figures on the extent of fraud, it could be considered precipitate to the point of reckless to continue. We still have no reliable information on which to base an assessment of the balance of costs and benefits. For that reason we intend to press our amendment No. 35 to a Division.

Schedule 1 — New Schedule 2A to the Alcoholic Liquor Duties Act 1979

Alex Salmond (Scottish National Party, Banff and Buchan)

I should like to speak against that motion, if I may. It is 7.28 pm and we are debating the Finance Bill, which is a very important measure—arguably the most important of the parliamentary calendar. Several key issues were due to be debated today. The next groups of amendments deal with fuel duty, income tax, corporation tax, taxation in relation to historic houses, which I did not intend to speak on myself, although I am sure that it is a vital matter, pension scheme benefits and contributions and, finally, relief for petroleum exploration activities, on which I had prepared a few short remarks. I hope to have the opportunity to share that information with the House later this evening. My point is simple, and I was not intending to—[Interruption.]

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

Order. Hon. Members must come to order and listen to the hon. Gentleman who is addressing the House.

Alex Salmond (Scottish National Party, Banff and Buchan)

I was not intending to give the House the full extent of the remarks that I was going to make later this evening, but I am quite happy to do so if Members are enthusiastic enough to listen to them.

My point is a serious one. I do not think it right, when these matters in the Finance Bill have been set down for debate today, that the Government should announce their desire to pull stumps at 7.30 in the evening. I have no doubt that that has been done in co-operation with the official Opposition. As we know, however, on so many issues ranging from Iraq across the social and economic agenda, the official Opposition offer no opposition whatever. Everyone is aware of that, but some of us would like to go on debating the matters before us. I should like to hear from the Government, and from Treasury Ministers in particular, that provision will be made for us to discuss all these vital matters tomorrow or another day, and that the House will not be deprived of the opportunity to hear my remarks on petroleum exploration—[Interruption.] The Tories may giggle at that, but with so many jobs in Scotland—

Dawn Primarolo (Labour, Bristol South)

Will the hon. Gentleman give way?

Alex Salmond (Scottish National Party, Banff and Buchan)

Of course I will.

Dawn Primarolo (Labour, Bristol South)

I am sure that if the hon. Gentleman had had time in his busy day to look at the Order Paper, he would have seen that we have six and a half hours tomorrow to discuss the remaining business. That will be ample time and he will be able to make his contribution then.

Alex Salmond (Scottish National Party, Banff and Buchan)

I always feel a great friendship towards the right hon. Lady because, a few years ago in a Budget debate, she was one of the few Members who supported an intervention about the poll tax and a few other things in the middle of Lord Lawson's Budget. She had the strength and integrity at that time—and I dare say that she has carried them through into her Government position—to see a point of justice when it was made. She says that we have six hours tomorrow, but I note that we have already spent a considerable amount of time on our debate today, and we have reached only the seventh or eighth group of amendments.

I have not detained the House up until now. My colleagues have not detained the House either; they have restricted their remarks to the vital Scottish interest of tax labelling on whisky. I want some indication that, if we continue to make progress at this rate, time will be allowed for us to get to the vital matters that I and others want to debate. We had the choice to stay here beyond 7.30 this evening and to take the appropriate time for our debate, and I think that hon. Members should be prepared to stay later. That is what our constituents would expect of us. The Minister's saying that there are six hours tomorrow does not guarantee that proper time will be available to debate these vital issues. I would be happy to give way to her again, if she can give me an assurance on that. I really would like a wee bit more than to be told that there are six hours tomorrow, when we have already spent that amount of time on our debate today and made very little progress.

Dawn Primarolo (Labour, Bristol South)

I am trying to assist the hon. Gentleman. The estimate was that the remaining business would take approximately six and a half hours tomorrow. I can assure him that there will be enough time tomorrow to complete the outstanding business on the Finance Bill. He will have every opportunity to contribute to each of the debates tomorrow. There is plenty of time. I am giving him the assurance that he seeks.

Alex Salmond (Scottish National Party, Banff and Buchan)

I shall ignore the "Watch with Mother" voice in which that was presented to me, and take the assurance from the Minister, along with the nods from the Whips further along the Treasury Bench, which are even more reassuring. I shall hold the Government to that guarantee, and I look forward to seeing the Ministers in the debate tomorrow.

Question put and agreed to.

Bill to be further considered tomorrow.