Finance Bill

House of Commons, 7 July 2004.

Schedule 29 — Registered pension schemes: authorised pensions—supplementary

Clause 166 — Recognised transfers

Clause 184 — Relief for contributors

Clause 212 — Benefit crystallisation events and amounts crystallised

Ruth Kelly (Labour, Bolton West)

I beg to move amendment No. 117, in page 184, line 16, leave out from 'an' to end of line 19 and insert

'increased annual rate which exceeds by more than the permitted margin the rate at which it was payable on the day on which the individual became entitled to it'.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following:

Amendment No. 23, in page 184, line 20, leave out

'The aggregate of the amount of such of the sums, and the market value of such of the assets, representing the individual's rights under the arrangement as are applied to purchase the lifetime annuity'

and insert

'The lesser of:

(a) the aggregate of the amount of such of the sums, and the market value of such of the assets, representing the individual's rights under the arrangement as are applied to purchase the lifetime annuity; and

(b) AAF x A'.

Government amendment No. 119

Amendment No. 22, in schedule 32, page 472, line 27, leave out '50 pensioner members' and insert

'20 members or such other number of members as may be prescribed from time to time'.

Government amendments Nos. 120 to 124.

Amendment No. 24, in schedule 32, page 473, line 41, at end insert—

'Benefit crystallisation event 4: meaning of "AAF"

14A For the purpose of benefit crystallisation event 4 "AAF" is:

(a) in the case of a lifetime annuity which is not a level annuity, the relevant valuation factor (see section 263); and

(b) in the case of a lifetime annuity which is a level annuity, the factor certified from time to time by the Government Actuary to be appropriate. Benefit crystallisation event 4: meaning of "A" 14B For the purpose of benefit crystallisation event 4 "A" is the annual amount of the lifetime annuity which will be payable to the individual in the period of 12 months beginning with the day on which the individual becomes entitled to it (assuming that it remains payable throughout that period at the rate at which it is payable on that day).'.

Government amendments Nos. 125 and 132.

Ruth Kelly (Labour, Bolton West)

We turn now to a group of amendments on the lifetime allowance rules. I hope that Opposition Members will welcome Government amendments Nos. 117, 119 and 120 to 124 because they concern a matter that they raised in Committee with which I sympathised in principle and agreed to look at further. I have now done so, and am pleased to introduce our amendments, which have the effect that they sought.

When a scheme pension is increased, there may be a benefit crystallisation event, which we have discussed at length. There will be no such event, however, if the increase is within the "permitted margin". The amendments ensure that the permitted margin is applied to the overall increase in the pension from the time that it commences, putting someone who receives a one-off discretionary catch-up increase in the same position as someone who receives steady annual increases in their pension. Government amendment No. 125 adds to the existing rules that prevent a benefit crystallisation event from occurring twice on the same funds. It applies when an individual has a crystallised pension in payment, then transfers their pension fund to an overseas scheme.

Government amendment No. 132 merely clarifies the valuation rules that apply where an individual's uncrystallised rights need to be valued. It ensures that the valuation will be made in relation to someone's benefits at a specific date. I commend the Government amendments to the House. The remaining amendments on clause 212 and schedule 32 touch on points raised by Opposition Members in Committee.

Amendment No. 22 is another attempt to dilute the 50-member rule. To recap, that rule allows schemes to increase the value of pensions in payment above the permitted margin without creating a benefit crystallisation event, but only if the scheme has at least 50 members, all of whom benefit from that increase. That anti-avoidance rule acts as a curb on small schemes, giving generous pension increases to a small number of retired members without being caught by the lifetime allowance. Reducing the threshold to 20, as suggested by Opposition Members, would weaken the rule. I admit that no threshold is obviously right, and one could go round in circles arguing about whether 50, 30 or 60 is the appropriate number. We could spend hours on that, but we believe that 50 is about the right level to prevent circumvention of the lifetime allowance test. Hon. Members may be reassured to learn that that was announced in the second consultation document and has elicited very little comment.

Amendments Nos. 23 and 24 to clause 212 and schedule 32 deal with the rules on quantifying the value of an individual's pension fund at each benefit crystallisation event, particularly the rule for valuing a lifetime annuity. They seek to change the way in which lifetime annuities are valued at benefit crystallisation events and use the lower purchase price of the annuity and the amount given by applying a factor of 20 to the first year's annuity payments, or a different factor if the annuity does not increase year on year. The aim of the amendments is for people with large money purchase funds to receive a pension income equal to the maximum that a final salary scheme could provide without triggering the lifetime allowance charge. We discussed that at length in Committee, when I explained that the facility would be available if a scheme pension was used instead.

The amendments miss the point of the relevant valuation factor. We are not introducing the factor as a means of favouring defined benefit schemes, nor do we believe that that would be the effect. We are using it as a simple valuation mechanism where there is no identifiable capital amount to use. Where such an identifiable capital amount exists, it is right to use it as the most accurate, simple and straightforward way to value the pension fund and the actuarial profession, which contributed to the consultation process, supports that approach.

Moreover—hon. Members may find this argument more persuasive—the amendments would open up a huge avoidance loophole. They allow a non-level annuity to be valued at 20:1 based on the first year's annuity payments. That would allow an individual to set up an annuity that paid an artificially low income for the first year, keeping the amount crystallised below the lifetime allowance. Later years' payments could then be boosted to an unlimited extent without being tested against the lifetime allowance, which is a hugely attractive tax loophole. I trust that the hon. Member for Tatton (Mr. Osborne) agrees that we cannot afford to open up such avoidance routes and, even if he does not accept the principled arguments, will not press his amendments.

George Osborne (Conservative, Tatton)

May I say how sorry I am about the deferred Division, because it affects your constituency, Mr. Deputy Speaker? Perhaps that is not in order.

I welcome the Government amendments, because the Government have adopted our proposal in Committee. I have been in Committees since the beginning of the year—such is the life that I have led for the past six months. Occasionally, one tables an amendment and the Government say, "Yes, great idea", but they deny one the chance to change the law there and then by going away to rewrite the amendment. Nevertheless, I am delighted that they listened to us and are changing the Bill accordingly.

The Financial Secretary took a leaf from the Prime Minister's book and launched a pre-emptive strike on my amendments. Like the Government amendments, amendment No. 22 applies to schedule 32 and the crystallisation of benefits. Schedule 32 is important because the amount crystallised is tested against the lifetime allowance. Again, the Financial Secretary did not advance strong arguments why a special rule should apply to schemes with fewer than 50 pensioner members—she turned that point round by referring to the exception for schemes with more than 50 pensioner members. She did not give us a clear idea why the figure should be 50 and admitted that it is, at best, a guess.

The Financial Secretary's main argument, which she advanced today and has advanced previously, concerns the potential for tax avoidance or a scam. The example that she gave in Committee was based on a scheme with only two members. We believe that it is more than adequate to require the scheme to have at least 20 members, as my amendment proposes, and to give the Inland Revenue some flexibility by incorporating a device by which it can change that figure if it senses that it will become a vehicle for tax abuse. The amendment makes provision for it to close that loophole.

Amendments Nos. 23 and 24 attempt to tackle what remains the greatest flaw in these pensions tax proposals—the unequal treatment of defined benefit and defined contribution schemes. The Financial Secretary repeatedly denied that in Committee, but the facts speak for themselves. She cannot get around the basic fact that, under these proposals, a person with a defined benefit pension can have a substantially larger pension income than a person with a defined contribution pension. The Financial Secretary shakes her head. I therefore suggest that after tonight's awards ceremony she should log on to the Financial Services Authority's website. That is what I did last night to check out what a 60-year-old man who is a non-smoker—I am sorry to disappoint my hon. Friend the Member for Arundel and South Downs (Mr. Flight), but he gets a much better annuity than the rest of us—has a spouse three years younger, and is looking for a 50 per cent. survivor's spouse pension that rises with inflation and has a five-year guarantee, could buy with £1.5 million. In other words, I tried to devise what many defined benefit schemes offer, putting some pretty generous things into the package as I did so. When I carried out a similar exercise in Committee, the hon. Member for Wolverhampton, South-West (Rob Marris) picked me up on putting in a two-thirds survivor's pension, which he said was too generous, so I reduced it to 50 per cent. to satisfy him, should he be here.

In calculating those figures on the website, which is quite easy to do, I used the best—not the worst—annuity rate on offer from a major provider, which was the Prudential. I found that the 60-year-old could buy a pension that pays him £60,264 a year. If he was 55, which would be the minimum retirement age, he could get a pension of £53,496 for his £1.5 million defined contribution pension pot. However, if he was in a defined benefit scheme he could draw £75,000 or more—in other words, almost 50 per cent. higher than what was available to the 55-year-old with a defined contribution scheme. That is a simple fact that the Financial Secretary cannot deny and which exposes the truth—that there is one regime for defined contribution schemes and another for defined benefit schemes.

The Financial Secretary said in Committee, and has said here, "Well, of course people can always, in effect, go off and buy a defined benefit scheme, because they can convert their defined contribution scheme to a defined benefit scheme." I am not sure why the Government should rely on the market to address deficiencies in their legislation: they should ensure in the first place that it does not discriminate between defined benefit and defined contribution pensions.

In Committee, we tried to value defined contribution and defined benefit pensions in exactly the same way by multiplying the actual pension available; after all, most people will not go into the detail as we have, but focus on the pension income that is actually available to them. We suggested multiplying that actual pension income available to the individual, whether on a defined contribution scheme or a defined benefit scheme, by 20 and testing it against the lifetime allowance. That meant that an individual could have had a pension income of £75,000 a year from a defined contribution annuity purchased via a defined contribution pension, as well as from a defined benefit scheme.

The Government rejected those amendments in Committee and we have therefore tried a new approach of offering an underpin so that people with a defined contribution pension can have the pension pot valued in the way in which the Bill currently sets out or by multiplying the available annuity—A in my equation—by an appropriate actuarial factor, which is represented by AAF. Conservative Members can devise equations, too. That factor would be 20 for a lifetime annuity that increases, for example, with inflation or through being related to an asset value such as risk profits annuity, and less than 20 for a flat lifetime annuity, as defined by the Government Actuary. The latter would be initially higher than an increasing annuity.

The Financial Secretary claims that there is a great flaw in our scheme in that it creates a tax avoidance loophole that would enable someone to have an artificially low pension and subsequently increase it. If that is the case—I am happy to take that on advice—she is more than welcome to go away and consider my amendments, which could easily be tweaked to get around the problem, for example, through different definitions of types of annuity and their treatment. I should be more than happy for her to do that and table relevant amendments to next year's Finance Bill.

If the Financial Secretary is right that the Bill does not treat defined benefit schemes unfairly, she should not mind placing an underpin in the measure because, she would argue, it is not required. However, if the Government turn out to be wrong—I suspect that they will—the underpin will act as a guarantee.

Only a relatively small number of people will have £1.5 million. The pension incomes that we are considering—£55,000, £65,000 or £75,000 a year—are much greater than the pension incomes of almost everyone in the country and most of the people whom we represent. However, the Government are conveying a signal that they will treat defined contribution schemes differently from defined benefit schemes. Many people in the country believe that we in the public sector—there is an MPs' final salary scheme—feather our nests with those generous schemes while the final salary schemes of those in the private sector have closed and been replaced with money purchase arrangements.

A survey by JPMorgan Fleming showed that 61 per cent. of the top 350 pension schemes have closed or restricted availability to defined benefit schemes and 60 per cent. offer defined contribution schemes. They are almost exclusively in the private sector. The Bill will confirm a suspicion that there is one rule for us and another rule for the rest of the country. That is the wrong message to send when there is a general perception that pensions are in crisis and people are not saving enough for their retirement. There is a general view that the public sector is insulating itself against the changes and problems.

We should be scrupulous in our legislation in emphasising that defined contribution schemes are not discriminated against but treated equally by the Government, the state and the Inland Revenue. That is not the case in the Bill as it stands and it should be changed.

Howard Flight (Conservative, Arundel and South Downs)

rose—

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. It is somewhat unusual for two Front-Bench spokesmen of the same party to speak on the same group when we have had no intervening debate that needs winding up. It would be inappropriate.

Ruth Kelly (Labour, Bolton West)

I look forward to responding to the points that the hon. Member for Tatton (Mr. Osborne) made. First, I shall deal with the 50-member rule. As he made clear, he knows that the 50-member rule for providing an annuity to ensure that tax relief is used to grant a secure income for life is altogether different from what he referred to. I do not accept that there will be confusion. The measure is clear: the rules have different purposes.

I do not accept that the 20:1 valuation factor gives a more generous result to defined benefit schemes. The factor has been agreed, with consensus from the pensions industry, as providing a broadly accurate result for valuing defined benefit pensions. With defined contribution schemes, there is an identifiable amount available for the provision of benefits to the member, so it is possible to value pension rights accurately using that amount. With defined benefit schemes, that is simply not possible because there is no identifiable amount, so it has been agreed that the valuation factor of 20:1 provides a broadly accurate equivalent.

I accept that using two different valuation methods will inevitably produce slight tax differences. Whether they favour one individual over another in any particular year will depend on a variety of factors. If the hon. Gentleman had proposed a different age—perhaps 65, instead of 55 or 60, for example—he might have come up with a different result. If investment growth rates or annuity rates were to differ, that too would produce different results.

The valuation factor is a broadly accurate method of valuing defined benefit pensions. However, if any defined contribution schemes feel that the 20:1 valuation would give them an advantage, they may offer scheme members a scheme pension valued at 20:1 as an alternative. Indeed, any individual who wishes to access the 20:1 valuation factor can move his pension product to the product of his choice.

The representatives of the pension industry who were involved in designing the new simplification rules were not, at the outset, in favour of lifetime annuities being paid at 20:1, and they are still not in favour of their being valued in that way. They accept that, because there is no pot in a defined benefit arrangement, some sort of approximation must be used to value its capital worth, and the single factor is indeed an approximation, but it achieves that end. Those people are highly experienced representatives of the pension industry and they are firmly of the view that, when there is an identifiable pot—as in the case of a lifetime annuity—it is that pot that should be taken as the capital value to be tested against the lifetime allowance. That is the simplest and most accurate method. It does not seem sensible to us, or to them, to turn a real capital amount into a notional one.

Howard Flight (Conservative, Arundel and South Downs)

Will the Minister tell us what is the difference between a member of a pension scheme with fewer than 50 members who gets an annuity when they retire and someone with a money purchase pension who buys an annuity when they retire? Is she aware of any insurance company that offers some kind of magic formula that puts a defined benefit label on to a defined contribution scheme? I think that she will find that no such product exists. There is no difference between a bought annuity and a defined contribution pension.

Ruth Kelly (Labour, Bolton West)

I agree that such products may not exist yet, because there is no demand for them. However, as I said in Committee, I firmly believe that there is a market for this kind of financial product. It is not for me to tell the market what to do, but if there is a market for such a product, I am sure that the market will supply it. If not, presumably it will not. The Revenue's contacts in the pensions industry have confirmed that this is also their expectation.

We could continue to debate this matter at length, but we will not know the answer unless someone identifies a demand and proceeds to provide such a product. I would expect that any such demand will be met, and I am sure that the hon. Gentleman would accept that that is likely to be the case, given his feelings on the matter. In that case, the unfairness that he supposes to exist, and which I refute, will not exist at all. On that basis, perhaps he will acknowledge that his amendments are unnecessary.

Amendment agreed to.

Schedule 32 — Registered pension schemes: benefit crystallisation events—supplementary

Clause 220 — Transfers from recognised overseas pension scheme: general

Clause 228 — Cash balance arrangements: adjustments of closing value

Clause 232 — Defined benefits arrangements: adjustments of closing value

Clause 239 — Restriction of deduction for contributions by employer

Clause 243 — Taxation of non-pension benefits

Clause 271 — Valuation assumptions

Clause 274 — Abbreviations and general index

Schedule 34 — Pension schemes etc: transitional provisions and savings

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 25, in page 489, line 20, leave out '25 x ARP' and insert

'the aggregate of—

(a) the amount of any lump sum paid to the individual, increased from the date of payment to 5th April 2006 by the lesser of 5% per annum and the increase in the retail prices index over that period; and

(b) 20 x ARP'.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss the following:

Amendment No. 26, in page 496, line 22, leave out '25 x ARP' and insert 'the aggregate of—

(b) 20 x ARP'.

Government amendments Nos. 138 to 148.

Howard Flight (Conservative, Arundel and South Downs)

In Committee, the Minister argued that a rough justice approach was needed and justifiable in taking a 25:1 ratio for pre-commencement pension valuations.

The effect of that is virtually to force everybody to take the maximum lump sums, in order not to suffer a tax penalty. Someone who has prudently not taken a cash lump sum under one pension arrangement, when waiting to know what another pension arrangement may deliver on retirement, will suffer a major pension tax penalty for being cautious.

The Government's thinking was that it would be too complicated to address the issue on any other basis. I put it to the Financial Secretary that it is not complicated at all. Our proposed alternative, set out in amendments Nos. 25 and 26, is both fair and simple. In essence, they replace the 25:1 ratio with a standard 20:1 computation, but add whatever is the value of any cash lump sum that has been taken, increased by the lesser of 5 per cent. per annum and the actual increase in the retail prices index over the period. That is not a difficult calculation. It means that the Government do not send potentially wrong tax messages to people, effectively insisting that they take their maximum lump sums, and nor does it discriminate unfairly against those who have not done so. We can see no logical reason why the Government should not follow that much fairer and more rational way of approaching this issue.

Ruth Kelly (Labour, Bolton West)

I understand the purpose behind the hon. Gentleman's amendment. He seeks to introduce an accurate approach to valuing pensions that came into payment before 6 April 2006, but I would argue that it is both complex and completely unrealistic. Requiring members to obtain or retain the values and dates of all lump sum payments, over a period that may be five, 10 or even more years before April 2006, would be costly and time-consuming.

I hope that the hon. Gentleman does not mind, but we took the liberty of asking the Association of British Insurers and the National Association of Pension Funds for their comments on his amendments. Perhaps that shows the seriousness with which we treated them. The NAPF explained to the Inland Revenue that it was content with the 25:1 factor and that extending the valuation process in the way envisaged would be difficult for scheme administrators.

I could quote various insurance companies and their reactions to the hon. Gentleman's amendments, but I shall quote just one very large insurance company:

"We do not believe this is a practical option. We have no need for records of amounts paid out, other than to meet accounting requirements, which only affect records for the past six years. We would have to depend on the members' records, or their memories, to operate this for a cash sum, which was paid out more than six years ago. Overall, the present proposal of using a fixed factor of 25 is consistent with simplification and also consistent with the use of 20 for crystallising other pensions. The proposed change adds complexity without adding value, and is unworkable for cash sums paid more than six years ago."

Some of the other comments are even stronger, and the general view in the pensions industry is that the suggestion is completely unworkable, although I recognise that the hon. Gentleman has put it forward in good faith as representing an accurate way of valuing pensions.

Government amendments Nos. 138 to 148 were promised in Standing Committee, during the debate on Opposition amendment No. 396. They allow rights to transitionally protected low retirement ages to be preserved in the case of a bulk transfer of rights under a scheme in which a member has a low normal retirement age that is transitionally protected. I commend the Government amendments to the House.

Howard Flight (Conservative, Arundel and South Downs)

Indeed, we welcome the Government amendments. I was grateful that the Minister acknowledged that our proposals for calculation are the correct proposals.

The NAPF made one or two other important suggestions, which the Government have chosen not to accept. The Government should use their own conclusions, and not follow the trade bodies of the pension providers. The Minister commented that she had spoken to those trade bodies and individual pension providers. The issue is what is in the interests of the public at large, not the interests of the industry. I entirely disagree with the comments that she quoted. Taxpayers need to know the sums they have paid or received in all sorts of circumstances. It is ludicrous to pretend that people would not know what tax-free lump sum they have taken. In terms of personal capital, it is one of the biggest events of their lifetime.

There may be people who have more than one, two or three pension funds, but the majority have a limited number of pension funds, so knowing what tax-free lump sums they have taken is not difficult. The Minister is saying, effectively, that the industry cannot be bothered and the existing system is an easy rough and ready. I submit that it is rough justice, which is unfair to the prudent individual and unnecessary.

This is not a matter that we intend to press to a vote, but I ask the Government to continue to think about it in the next year. They are responding, wrongly, to the interests of the industry, rather than to the interests of citizens. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 138, in page 497, line 4, leave out from beginning to end of line 8 and insert—

'(a) the pension scheme is a protected pension scheme, and

(b) the retirement condition is met in relation to the member and the pension scheme.

(1A) A pension scheme is a protected pension scheme if condition A or condition B is met.

(1B) Condition A is met if—

(a) the pension scheme was within any of paragraphs (a) to (e) of paragraph 1(1), and

(b) the entitlement condition is met in relation to the member and the pension scheme.

(1C) The entitlement condition is met in relation to the member and the pension scheme if—'.

No. 139, in page 497, line 16, leave out from beginning to 'and' in line 18 and insert—

'(3) Condition B is met if the member is a member of the pension scheme as a result of a block transfer to it from a pension scheme ("the original pension scheme") in relation to which condition A is met.

(3A) A transfer is a block transfer if—

(a) it involves the transfer in a single transaction of all the sums and assets held for the purposes of, or representing accrued rights under, the arrangements under the pension scheme from which the transfer is made which relate to the member and at least one other member of that pension scheme, and

(b) before the transfer the member was not a member of the pension scheme to which the transfer is made.

(3B) The retirement condition is met in relation to the member and the pension scheme if—

(a) the member becomes entitled to all the pensions payable to the member under arrangements under the pension scheme (to which the member did not have an actual entitlement on or before 5th April 2006) on the same date,'.

No. 140, in page 497, line 22, leave out 'pension scheme' and insert

'protected pension scheme on 5th April 2006 (or, where condition B is met, under the original pension scheme on that date).'.

No. 141, in page 497, line 27, leave out from beginning to end of line 34 and insert—

'(a) the pension scheme is a protected pension scheme, and

(b) the retirement condition is met in relation to the member and the pension scheme.

(1A) A pension scheme is a protected pension scheme if condition A or condition B is met.

(1B) Condition A is met if—

(a) the pension scheme was within paragraph (f) or (g) of paragraph 1(1), and

(b) the entitlement condition is met in relation to the member and the pension scheme.

(1C) The entitlement condition is met in relation to the member and the pension scheme if—'.

No. 142, in page 497, line 40, leave out sub-paragraph (3) and insert—

(3A) "Block transfer" has the same meaning as in paragraph 22(3A).

(3B) The retirement condition is met in relation to the member and the pension scheme if the member becomes entitled to all the pensions payable to the member under arrangements under the pension scheme (to which the member did not have an actual entitlement on or before 5th April 2006) on the same date.'.

No. 143, in page 497, line 43, leave out 'pension scheme' and insert

'protected pension scheme on 5th April 2006 (or, where condition B is met, under the original pension scheme on that date).'.

No. 144, in page 502, line 20, leave out from beginning to end of line 26 and insert—

'(1) If the pension condition is met in relation to an individual and a registered pension scheme which is a protected pension scheme, the provisions of Schedule 29 relating to pension commencement lump sums apply in relation to the individual and the pension scheme with the modifications specified in paragraph 35 (but subject to sub-paragraph (2)).

(2) Those provisions do not apply with those modifications if the lump sum condition and registration condition in paragraph 24 are met.

(3) The pension condition is that the individual becomes entitled to all the pensions payable to the individual under arrangements under the pension scheme (to which the individual did not have an actual entitlement on or before 5th April 2006) on the same date.

(3A) A registered pension scheme is a protected pension scheme if condition A or condition B is met.

(3B) Condition A is met if—

(a) the pension scheme was within any of paragraphs (a) to (e) of paragraph 1(1), and

(b) on 5th April 2006 the lump sum percentage of the individual's uncrystallised rights under the pension scheme exceeded 25%.'.

No. 145, in page 502, line 28, leave out 'relevant pension scheme' and insert

'pension scheme on 5th April 2006'.

No. 146, in page 502, line 36, at end insert—

'(4A) Condition B is met if the individual is a member of the pension scheme as a result of a block transfer to it from a pension scheme ("the original pension scheme") in relation to which condition A is met.

(4B) "Block transfer" has the same meaning as in paragraph 22(3A), but treating the references there to the member as references to the individual.

(4C) Where a pension scheme is a protected pension scheme because condition B is met, Schedule 29 as modified by paragraph 35 applies as if the protected pension scheme were the same pension scheme as the original pension scheme.'.

No. 147, in page 504, line 42, leave out paragraph 34.

No. 148, in page 506, line 3, leave out paragraph 36.

No. 149, in page 510, line 43, at end insert—

'Individuals with pre-commencement entitlement to corresponding relief

52A (1) This paragraph applies where the Board of Inland Revenue allow contributions made by an individual under a pension scheme as deductions under Chapter 2 of Part 5 of ITEPA 2003 for the tax year 2005–06 in accordance with section 355 of that Act (deductions for corresponding payments by non-domiciled employees with foreign employers).

(2) Where the individual makes contributions under the pension scheme for any subsequent tax year, the Board of Inland Revenue may allow the contributions as deductions under Chapter 2 of Part 5 of that Act if, as well as the Board of Inland Revenue being satisfied that the conditions in section 355 of that Act are met, the scheme manager complies with any prescribed benefit crystallisation information requirements imposed on the scheme manager.

(3) Schedule (Non-UK schemes: application of certain charges) applies in relation to the pension scheme and the individual as if allowing the contributions as deductions under Chapter 2 of Part 5 of ITEPA 2003 by virtue of sub-paragraph (2) were the giving of relief by virtue of Schedule (Overseas pension schemes: migrant member relief).

(4) "Prescribed benefit crystallisation information requirements" means requirements imposed by or under regulations made by the Board of Inland Revenue to provide to the Inland Revenue any information relating to events that are benefit crystallisation events in relation to the individual.

(5) The references in sub-paragraphs (2) and (3) to the pension scheme include a pension scheme to which there has been a block transfer from the pension scheme on or after 6th April 2006.

(6) "Block transfer" has the same meaning as in paragraph 22(3A), but treating the references there to the member as references to the individual.'.—[Dawn Primarolo.]

Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988

Alex Salmond (Scottish National Party, Banff and Buchan)

I beg to move amendment No. 13, in page 522, line 9, leave out '6%' and insert '12%'.

Alan Haselhurst (Deputy Speaker, Saffron Walden)

With this it will be convenient to discuss amendment No. 14, in page 523, line 33, leave out '6%' and insert '12%'.

Alex Salmond (Scottish National Party, Banff and Buchan)

I understand that the Economic Secretary will reply to the debate on behalf of the Government. I am interested to note that on amendments relating to oil taxation, the Government seem to abandon their area-marking role and adopt a man-to-man approach, so the Economic Secretary finds himself replying. I welcome that, as it has been productive in a number of discussions in the past and I hope it will be productive this evening. Some people may find this last debate of the Finance Bill detailed, but it is of huge importance to the oil industry and those who work in it.

Schedule 36 contains a measure to give tax relief of 6 per cent. on capital investment to encourage exploration and appraisal drilling in the North sea. That is to be variable by Treasury order. The amendment seeks to raise that initially to 12 per cent., which we think is a much more realistic rate, allowing the welcome tax change to have the impact that everybody wants.

The oil and gas industry is still a vital natural resource industry for Scotland and for the whole country. Only half of the available resources—perhaps much less than half—have thus far been extracted. It is recognised across the industry that the oil and gas industry will need to change to meet the challenge of extracting the other 50 per cent. or more that is available, but for a number of years oil and gas exploration has been slowing down. Unless exploration and appraisal drilling is done today, it is highly unlikely that the enhanced extraction of resources will occur tomorrow.

It is worth looking at the figures for exploration and appraisal drilling. In the last full calendar year, about 40 exploration and appraisal wells were drilled in the North sea. Unfortunately, that is the lowest number since 1999; in contrast, as recently as 1996, 112 such exploration and appraisal wells were drilled. Paradoxically, despite the decline in the number of wells drilled, the exploration success rate has increased substantially. In 2002, it went up to 31 per cent., which, compared with oil provinces internationally, is an encouraging strike rate.

Recently, some significant finds have greatly encouraged us in the belief that large discoveries can still be made in the waters around Scotland. In June 2002, it was estimated that the Buzzard field would produce 1.1 billion barrels—the biggest such discovery for 25 years. More recently, a small independent oil company, Oilexco, said that tests showed that its new Brenda field in the Moray firth could give 150 million barrels or more.

The exploration and appraisal drilling that has been carried out shows some encouraging trends, but the amount of such drilling is far from satisfactory. That greatly concerns me and, I am sure, the Government, as well as the 300,000 people directly or indirectly employed in the industry and the 6,000 companies that work in or produce for it. The oil industry provides about 6 per cent. of total employment in Scotland.

This much is agreed: there is a huge reservoir of oil and gas still to be extracted from the waters around Scotland; the present rate of exploration and appraisal is unsatisfactory; and one of the challenges is to persuade some of the larger companies to relinquish acreage to some of the smaller ones, which are keen to pursue an aggressive drilling and exploration programme—a point discussed last week when the all-party offshore oil and gas industry group met the Minister for Energy, E-Commerce and Postal Services.

I am delighted that some of the most aggressive explorers, Talisman and Apache, have found facilities at Peterhead bay in my constituency, where they want to centre much of their operation. I hope, too, that some of the other small independent companies whose representatives I have shown around Peterhead bay will locate themselves at that excellent facility, which has the strategic advantage of being the nearest to most of the oil and gas fields, so there would be substantial cost advantages for independent companies that want to be based there.

The future offers an exciting perspective. The question for us this evening, however, is whether the Government's initial moves will be substantial enough to bring about the change that we all want to see. My contention is that they will not.

The current taxation system is inherently disadvantageous for new companies and the corporation tax changes in 2002 have compounded that situation. Existing operators share with the Government the risks of exploration, because they can offset those risks against current liabilities, but new players have to cover the full cost without tax relief until the field is on stream. The Government's proposals would counter that, but the question is whether the allowance, which covers both capital expenditure and the losses incurred in the initial phases of exploration and appraisal before the field comes on stream, is adequate to deal with the disadvantages that would be experienced by smaller, new companies coming into the sector without tax shelter.

The 6 per cent. that the Government propose is a risk-free rate, but for new players the average cost of capital for exploration and appraisal is about 17 per cent. and can be as much as 20 to 30 per cent. The increase suggested in our amendment of an initial 12 per cent. against the likely cost of capital to new players is modest and realistic.

Andrew Tyrie (Conservative, Chichester)

The hon. Gentleman has made several interesting allusions to the state of the industry and I do not disagree with those points, but I am not sure how connected they are to the measure that he proposes. As I understand it, the 6 per cent. rate that he wants to alter is a proxy for interest; it is a measure intended to preserve the real value of the tax losses, but he appears to be converting it into some form of tax allowance, which I do not think was ever the intention. Perhaps I have misunderstood his proposal. Could he explain?

Alex Salmond (Scottish National Party, Banff and Buchan)

I am not certain that the hon. Gentleman is as much in command of the subject as he thinks he is. All I am doing is changing the initial allowance, because I think that 12 per cent. is a much more realistic assessment of the cost of capital expenditure to bring about the increase in exploration and appraisal that we want to see.

Andrew Tyrie (Conservative, Chichester)

rose—

Alex Salmond (Scottish National Party, Banff and Buchan)

I have explained that my intention is simply to double the initial allowance to 12 per cent. The hon. Gentleman will have to take me at my word, because I now want to make some international comparisons.

Andrew Tyrie (Conservative, Chichester)

rose—

Alex Salmond (Scottish National Party, Banff and Buchan)

No, the hon. Gentleman must sit down.

The issue of the interest rate is important. It is arguable—indeed, I think it is beyond argument—that it should reflect the relevant cost of capital. That will involve a risk premium, given that exploration is a particularly risky activity. The conceptual basis of my argument is recognised in countries that have moved to resource rent taxes. Typically, an interest rate used for compounding forward tax loss will involve a risk premium and a risk-free element.

I think the Economic Secretary should pay close attention to recent experience in Australia, where the conceptual framework is highly developed. It has a petroleum resource rent tax, a cash-flow tax levelled on pre-corporation tax cash flows at a rate of 40 per cent. Allowances for all expenditures are 100 per cent. on a first-year basis. There is generally a ring fence for the tax, but the compound interest rates for expenditure vary substantially between exploration and appraisal and development.

For exploration and appraisal, which is inherently risky, the rate is 15 per cent. real plus a long-term Government bond rate. For development expenditures, which are inherently less risky, the rate is 5 per cent. real plus long-term Government bond rate. The difference reflects the extra risk, and the higher cost of capital for exploration and appraisal. A further feature is the breach available in the ring fence for exploration and appraisal expenditures. These can be relieved against any—that is, company-wide—PRRT income. The compound interest factor of 15 per cent. plus thus represents the effective compensation to the new player, compared to an established one for exploration and appraisal activities.

I find the Australian example interesting. The Australians have made a concerted and developed attempt to devise an allowance that matches the difference in experience of a new player in the sector, compared with the tax shelters available to an existing player. Notwithstanding Tory-Front Bench scepticism, that is what the amendments are designed to do. I could talk about the Norwegians, who have also made provision for the tax disadvantages experienced by new players, but as I do not think the Norwegian system is as established or as thought through as the Australian one, I shall submit the latter to the Economic Secretary's undoubted interest in these matters.

Last year's Finance Act looked favourably on an argument advanced during the passage of the previous year's Bill, when the issue arose of whether it was possible to ensure more equitable treatment of existing infrastructure and pipelines in the North sea in order to allow new developments, particularly of gas, with the use of that infrastructure. I do not know whether the Treasury has yet had an opportunity to make a proper assessment, but early indications from the tax change are that we may well have achieved the magic bullet of taxation changes: that is, a tax reduction may well be about to increase Government revenue in the medium term. For instance, the entry of the major Statfjord field into St. Fergus strikes me as a direct and early result of that sensible tax change, with other fields perhaps very much in the pipeline.

I hope that the Government will also look favourably on my attempt to suggest that the welcome 6 per cent. on offer is not enough to bring about the change that is desired—that is, to match the real risk to new players with a tax allowance to equalise their position in relation to established players.

It is not enough to persuade the existing major companies to relinquish the vast acreage and the many fallow fields that lie un-drilled or undeveloped in the North sea, although that certainly needs to be done. Given that there is a generation of new companies willing, able and anxious to come into the environment, it is also necessary to give them the opportunity to do so. For that to happen, we must make sure that the tax incentive matches the risk that they will have to bear. Given that we want high-risk activity in the North sea and in the waters around Scotland, that tax incentive, which would not cost the Government a great deal in global terms, could provide a tremendous payout by way of increased revenues in the medium term, and increased jobs and activity in the short term. The Government achieved that virtuous circle through last year's sensible taxation change; hopefully, they are prepared to consider a further such sensible change in future.

John Healey (Labour, Wentworth)

I am very pleased to respond to the hon. Member for Banff and Buchan (Mr. Salmond). He is right: although this is the last, it is certainly not the least of the debates on this Finance Bill. The issue that he raises is indeed important, relating as it does to an industry that is of great importance to the UK economy. I pay tribute to him for championing its interests and consistently coming up with fresh proposals. I am particularly grateful to him for his welcome for the change that we are making through clause 280 and schedule 36.

The Government share the hon. Gentleman's desire to encourage new entrants into the UK continental shelf, so that the recovery of our national oil and gas resources can be maximised wherever doing so is economically viable. The introduction of the exploration expenditure supplement complements the action being taken on other regulatory matters, and it reinforces the Government's aim to encourage new firms to enter the North sea. That policy is showing some signs of success. The response to the Department of Trade and Industry's recent 22nd licensing round has been very encouraging. Twenty of the 68 companies applying for a licence are potential new entrants, which shows that the North sea is still attracting worldwide interest.

As the hon. Gentleman said, the purpose of the EES is to deal with a tax disadvantage that might impact on new entrants wanting to undertake exploration. The tax disadvantage arises because companies new to the North sea might not have the taxable income against which to set their 100 per cent. exploration and appraisal allowances—a point made by the hon. Member for Chichester (Mr. Tyrie). The full economic value of those allowances could be significantly eroded over time if there is no stream of profits against which they can be used in year one. The purpose of the EES is to deal with that tax disadvantage. It compensates for this loss in value by providing an annual uplift of 6 per cent. compound on the pool of unused allowances.

The hon. Gentleman posed the question: why 6 per cent.? Six per cent. is currently judged to be the right rate to compensate for the loss in value of the allowances over time. The rationale is that the rate is consistent with current medium-term high-grade commercial borrowing rates, and with the Government's social time preference rate—in other words, the discount rate applied in evaluating the use of public funds, with an allowance for inflation. The hon. Gentleman argues for a doubling of the rate, but to do so is not currently justified, according to those comparators, without going beyond the purpose of the EES, which is to deal specifically with the tax disadvantage faced by new entrants. A higher rate risks giving new entrant companies an advantage over existing North sea companies with a taxable income.

Andrew Tyrie (Conservative, Chichester)

So far, I agree with everything that the Economic Secretary has said, but will he confirm that the purpose of the existing 6 per cent. rate is to create a level playing field between new entrants and existing operators, and that coming to some other figure—removing the 6 per cent. or doubling it—would create a bias in favour of the new entrants?

John Healey (Labour, Wentworth)

I thought that I had already made that clear. The purpose of the special provision is to compensate for the loss in value of allowances and to put new entrants on a par with other companies that may have year one profits against which to use those allowances. To go further than 6 per cent. would be wrong in principle in relation to the purpose of the clause and would distort the market in favour of new entrants. As I said, that is not the purpose of the measure. However, we have taken the opportunity to ensure that we have the power to amend the rate quickly if the economic factors change, making it right to do so.

Alex Salmond (Scottish National Party, Banff and Buchan)

I do not think that there is any disagreement between the Economic Secretary and me that a 12 per cent. increase would substantially increase the advantage for new entrants, but I am not certain that that view is shared by the Tory Front Benchers. My problem is with the justification for the 6 per cent. rate, so will the Economic Secretary tell us more? It is effectively a risk-free rate, but the average capital cost for new players in respect of exploration and appraisal is at least 17 per cent.—and it can be much higher. Will the Economic Secretary run over again the justification for the 6 per cent. rate, given that informed views—certainly more informed than the views of Tory Front Benchers—would suggest that it is too low?

John Healey (Labour, Wentworth)

As I explained to the House, the 6 per cent. rate is consistent both with medium-term, high-grade commercial borrowing rates and with the Government's own social time preference rate—the discount rate that we use for evaluating the use of public funds, with an allowance for inflation. Just to be absolutely clear, the purpose of the special relief is to compensate for the loss in the value of the capital allowance for companies that do not have profits against which to use it. It is not to compensate for additional risk or to cover the varying capital costs that different companies may have.

The hon. Gentleman made some interesting points about policy changes in Australia. I should be grateful if he would send me the details and I will certainly look into them further. I am aware that a tax incentive for exploration was recently announced in Australia, but the country has a corporation tax rate that does not allow this sector of the industry to have 100 per cent. cover in capital allowances. In reaching an assessment, it is important to take account of the total tax system that applies to the oil and gas industry in Australia.

Alex Salmond (Scottish National Party, Banff and Buchan)

Can the Economic Secretary help me further by explaining what factors the Treasury will take into account, given that the provision is variable by Treasury order? In deciding whether 6 per cent. is the right rate now and whether it should be changed in the future, what factors will influence the Treasury? Unless we show some appreciation of the fact that, because it carries a very high-risk premium, oil exploration is not similar to other forms of capital investment, it seems to me that any future assessment will not be up to the job.

John Healey (Labour, Wentworth)

Our point of difference here is that the hon. Gentleman wants to make this particular relief more generous for wider purposes. His case for doing so, however, goes beyond the purpose of the relief. As I said, it is designed to compensate for the loss of value of the available allowances. The factors that we will take into account are precisely the financial market factors that, as I have already explained, underlie our judgment that 6 per cent. is the right rate now. Those factors do not take account of the economics of the oil industry and its work in the North sea, nor the risks that it faces. I understand why the hon. Gentleman wants me to take them into account, but they fall outside the purpose of the relief in clause 280.

Rob Marris (Labour, Wolverhampton South West)

My hon. Friend the Economic Secretary puts forward the proposition that the relief is somewhat akin to an indexation measure, such as would apply under the RPI or RPIX. However, the hon. Member for Banff and Buchan (Mr. Salmond) wants it to be related to risk. Is not that the point of dispute?

John Healey (Labour, Wentworth)

That may be one way to put it, but one could also explain that the operation of the relief, at 6 per cent. compound interest over six non-consecutive years, means that it could be worth 41 per cent. In other words, £100 of expenditure on investment could become £141 worth of allowable tax relief.

To summarise, the EES rectifies a specific disadvantage due to the way the tax system works in the special situation of the offshore oil and gas companies. By dealing with this issue in this way, we hope to encourage more new entrants into the North sea. This measure will ensure that such companies invest in the UK continental shelf.

We have had a useful debate on this matter, and the hon. Member for Banff and Buchan and I are likely to have more discussions about the Australian experience. Therefore, I hope that he will be prepared to withdraw the amendment.

Alex Salmond (Scottish National Party, Banff and Buchan)

Yes, I look forward to that continuing dialogue. There may be conceptual differences between me and the Economic Secretary on this matter, but I am one of those who represents a constituency with a huge investment of jobs in this sector. The waters around Scotland display some of the welcome trends that the hon. Gentleman has identified, but the vast majority of development remains in the hands of a very few companies. That might be no bad thing if those companies were the best way to develop smaller accumulations. However, there is plenty of evidence that, although smaller companies want to develop accumulations in the North sea, they are unable to get the acreage or potential out of the larger companies' hands.

To be fair, some of the larger companies have made substantial moves in that direction recently, but there remains untapped potential. Many companies want to develop the acreage but are not given the opportunity to do so. I suspect that there is no economic incentive to ensure that that acreage is developed.

One of the difficulties of developing the North sea taxation like Topsy—that is, manipulating and changing it over time—is that that gives a big advantage to companies that have tax shelters and established production in the area. I hope that the measure proposed in the Bill will be enough to redress the balance.

The Government and the Treasury have received vast revenue from the North sea over the past 25 years, and they may well expect a windfall this year. I hope that they will be sufficiently open minded to ensure that the show is kept on the road, so that future revenue streams are guaranteed.

I welcome the suggestion from the Economic Secretary that he and I will continue to talk about Australia and other matters. I hope that I can persuade him that more needs to be done, and that he will keep the matter under review to see how entrants match their hopes to their economic position.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 37 — Stamp duty land tax and stamp duty

Clause 292 — Claims not included in returns

Clause 293 — Assents and appropriations by personal representatives

Clause 294 — Charitable trusts

Schedule 39 — Stamp duty and land tax: application to certain partnership transactions

Clause 299 — Meaning of "promoter"

New Schedule 1 — Overseas pension schemes: migrant member relief

New Schedule 2 — Non-UK schemes: application of certain charges

Schedule 40 — Repeals

Dawn Primarolo (Labour, Bristol South)

I beg to move, That the Bill be now read the Third time.

I wish to thank all the right hon. and hon. Members who participated in the Committee of the whole House and the Standing Committee, and whose contributions produced lively exchanges, constructive debate and some improvement in the content of the Bill.

In March, the Budget set out the Government's determination to take the right steps to meet the challenges and pressures that face the nation now and in the future. This Finance Bill introduces the measures through which we shall take these steps by strengthening stability, supporting enterprise and ensuring fairness. In doing so, modernising the tax system and the protection of tax revenues go hand in hand with greater investment in public services and improvements in efficiency.

Promoting enterprise and productivity have long been key aspects of our economic policymaking, alongside introducing measures that will create a platform of stability for business, and ensuring that the UK keeps pace with the global economy. The Bill takes those objectives forward through some specific measures.

In the past, we have cut corporation tax. The Bill freezes corporation tax rates at their current level, and clauses 38 to 46 will take forward our continuing reform of the corporation tax system. To provide enterprise incentives, clauses 93 and 94 will amend the enterprise investment schemes and the venture capital trust schemes. The Bill confirms the Government's commitment to allow investments in venture capital trusts to secure tax relief of up to £200,000 a year—not at the lower rate of 20p, but at the higher rate of 40p.

Clauses 138 to 139 provide particular reliefs to business. To increase the incentive to invest in research and development, a new definition of research and development tax credits came into effect on 1 April 2004. To assist small business cash flow and enhance funding for new investment, the Bill will increase the first year capital allowance for small business investment in plant and machinery from 40 per cent. to 50 per cent. That increased allowance will be available for 12 months from April 2004.

Promoting enterprise and competition is important, but it must be underpinned by fairness. Our objectives for stable public finances and world-class public services require a tax system that is fair—one in which everyone pays or claims what is due. To protect the revenue for investment in the public services that this country wants, we are determined to tackle tax avoidance and evasion. To do that, we have brought in a number of legislative changes to close loopholes that have been exploited for avoiding tax. Most importantly, through clauses 298 to 311, we have introduced disclosure rules to ensure that we find out about new loopholes earlier and can announce changes in the law to protect the Exchequer and the generality of taxpayers.

Throughout consideration of those proposals, concerns have been raised—they were raised again yesterday, especially by the hon. Member for Arundel and South Downs (Mr. Flight)—about the possible impact of the rules on normal, bespoke tax advice. I repeat my assurances that those rules will not target straightforward tax planning, such as the advice that companies necessarily seek when planning a takeover or merger. The revised draft regulations will ensure that the rules target arrangements that present a significant risk to the Exchequer. Having carefully reconsidered the points made by the hon. Member for Arundel and South Downs, I shall go further by saying that a number of points will be taken forward.

The Revenue has been working with tax advisers and industry representatives during the consultation to refine the rules in two key areas. First, the definition of a promoter will be restricted to ensure that only those at the heart of a scheme are required to disclose. Broadly, that will exclude anyone who is not directly responsible for designing those parts of the scheme that give rise to the tax advantage. Secondly, the final published regulations will contain more narrowly targeted rules that should be relatively easy to apply. In particular, the financial products test will be limited to arrangements where it would be possible for the promoter to obtain a fee attributable to the tax advantage achieved by the scheme, where the tax advantage arises from elements of the arrangements that a promoter might wish to keep confidential or where a promoter is party to a financial product on terms that are significantly different from open market terms.

In explaining that approach to the House, I stress to the hon. Member for Arundel and South Downs and other hon. Members that we are in absolute agreement on the questions that they have asked about filtering out ordinary, ongoing and bespoke tax advice and bespoke planning advice on commercial transactions where the tax arrangements are unremarkable. We will continue to watch such things closely and consider the views of the House on them.

Under clause 19, we will also introduce new requirements to disclose the use of VAT avoidance schemes. The Bill confirms our commitment to tackle complex tax avoidance schemes using trusts. Clause 84 will introduce an income tax charge on pre-owned assets to ensure that people use trusts for legitimate transactions, not to achieve unfair tax avoidance. Together, those and other measures are intended to seek to safeguard fairness in the tax system to ensure that everyone pays their way and that as little as possible is wasted through avoidance and fraud.

The Bill takes forward some of the key steps that we are taking to ensure that the country has the means to meet the challenges of the future. It is however important that individuals can do that as well. That will be delivered and driven by our pension simplification measures, which are the most radical changes to pension tax for a generation and are encompassed in clauses 146 to 278. Simplifying the taxation of pensions is the cornerstone to making pensions easy for everyone to understand, thus enabling everyone to prepare for their future. By replacing the previous rules with a single regime for tax-privileged pension saving, the Government will reduce complexity, cut regulation and introduce more flexibility for those who save or wish to save for retirement. We are introducing a simple system that enables people to plan and save for their retirement. In that way, the Bill renews and reaffirms the Government's role in the UK's pensions partnership.

The Government aim to maintain the UK as a low-tax environment. The Bill enshrines that ambition. It will build on and develop the macro-economic stability that is essential for our future productivity, growth and prosperity. It will support business, while ensuring fairness. It will enable this country to match its new-found economic stability with the confidence to excel in the future. The Budget laid down the measures that will enable the UK to respond to and meet the challenges of the global economy, and the Bill will set them in statute. I commend it to the House.

Howard Flight (Conservative, Arundel and South Downs)

We have not had last year's problem of having a timetable for our proceedings, which resulted in a lack of time for adequate scrutiny, but such was the lack of consultation on some key areas of the Bill and the Government's failure to understand the knock-on effects of their major changes, that we have considered a deluge of amendments and new clauses on Report. The Government's failure to get to grips with several complex aspects of the Bill and their unfair—and, I trust, unintended—effects needs to be addressed, so I was pleased to hear the Paymaster General commenting on their willingness to do so. That will inevitably mean that the Inland Revenue will have to sort out the problems through Revenue guidance later on, but it is wrong and undemocratic for our system to be governed increasingly by Inland Revenue fiat.

The Bill will create more than 600 pages of complex legislation with which businesses and citizens must cope. I described it as "dull" on Second Reading, but perhaps "depressing" would be a better word. It contains nothing positive for the productive economy, and it will do nothing to relieve citizens and businesses from the burdens of big spending, big borrowing, big taxes and the inefficient big government that is failing to deliver promised improvements to public services. It will add to the command and control culture that is inevitably expensive and bears down on our economy's competitiveness. The impact of the Bill will go well beyond the Government's estimates on Revenue staffing and cost, yet the resultant additional tax-take is unlikely to be significant.

At the present stage in the economic cycle, with zero slack capacity, any prudent Chancellor would have tried to increase the savings rate, but the Bill contains no incentives for savers. Contrived outside the Bill itself, individual savings accounts are becoming less attractive to the 15 million ISA savers.

Although there is common support for the measures that will require the reporting of marketed tax avoidance schemes, and notwithstanding the Government's climbdown in response to some of the criticisms from the legal profession, the reporting requirements in the Bill extend well beyond such schemes. The failure to draw a line is likely to result in the Inland Revenue being snowed under by the reporting of regular corporate tax planning arrangements. I repeat that I welcome the Paymaster General's intention, but I am not sure how she will achieve her aim.

The Government have similarly committed overkill with their retrospective charge to income tax on pre-owned assets. They promoted those measures as an attack on past aggressive inheritance tax planning to avoid the gifts with reservations rules. However, as they have chosen to adopt an entirely new catch-all tax with only a limited number of exemptions, the new system goes much further. The new income tax will apply to situations accepted previously by the Revenue as being outside the gifts with reservations rules, and within the statutory gifts with reservations exemptions that the Government introduced. A greater concern is that while the new income tax is technically retroactive, it is in principle retrospective. It changes the tax rules that are applicable to transactions entered into as far back as 18 years ago, which were legal at that time. The Government are effectively introducing a major and unacceptable new doctrine that retrospective legislation is legitimate if there has been tax avoidance.

The Bill also includes the new and complicated 19 per cent. non-corporate distribution tax on small incorporated businesses. The problem that exists is wholly of the Government's making, as we warned at the outset. Those measures, together with clause 86 and the Jones section 660 case, on which the ruling of the special commissioners is awaited, constitute an attack on small manager-owned businesses that will burden them with unnecessary complexities. Clause 86 undermines the basis of independent taxation as set out by the Chancellor at the time of its introduction. It meant that husbands and wives were free to organise their tax affairs to benefit from the new independent taxation rules.

The new simplified tax regime for pension saving turns out not to be so simple after all. Although many of the reforms have been generally welcomed and the increased flexibility was badly needed, the changes were supposed to reduce eight regimes into one, but as we pointed out, in reality there will be six sub-regimes. The transitional arrangements will be highly complicated and retrospective for those who were specifically grandfathered when the original pension cap was introduced in 1989. The most unfair aspect is that the 20:1 pension formula for valuing a final salary scheme pension is significantly more generous than the fixed £1.5 million limit for money purchase pensions.

The Government have remained deaf to the probability that clause 20, which tightens up on VAT group relief, will be a major incentive to banks and other large service organisations to subcontract their back offices overseas.

The Government have failed to convince anyone that the costly and complex strip stamping regime for spirits will work, or that the cost to the industry will be proportionate to the benefit of the strip stamp.

This is a bad Finance Bill with ever more complexity and costs, adding nothing to the productive part of the economy. The overkill on anti-avoidance and the retrospective nature of the pre-owned assets legislation alone are sufficient grounds to vote against it. The once prudent Chancellor has contrived to seek to create a pre-election boom by massive increases in public expenditure and borrowing, at the cost of creating a large structural deficit and an unsustainable increase in personal borrowing, to more than a trillion.

In the forthcoming spending review the Chancellor will not tell us by how much he will increase taxation if Labour were to win another election. He will not be telling us either that when he knows that he should be putting the brakes on out-of-control public expenditure, he cannot do so because he has refused to backtrack on the overbearing and inefficient micro-management big state that he has created. The Government have not only been wasting taxpayers' money by mistake, but they have on purpose developed a command-and-control regime that has bloated the cost of government itself.

The Chancellor knows that he has already lost the confidence of much of the business community. As the recent elections showed, Labour is losing the confidence of the voters.

David Laws (Liberal Democrat, Yeovil)

As the hon. Member for Arundel and South Downs (Mr. Flight) hinted at the beginning of his comments, we have at least this year had a good opportunity to debate all the elements of the Finance Bill, notwithstanding one or two late amendments. That is by contrast with last year. I think that last year we had one extended day for the last stages of the Finance Bill. It is to be welcomed that this year the Government listened to some of the concerns and criticisms that were expressed about the amount of time that we have.

The hon. Member for Arundel and South Downs is also correct to say that this is perhaps one of the less memorable Finance Bills of recent years. When we examine the costings of all the different measures that the Government have put forward in the Bill, we can see nothing of any great size. I leave it to others to decide whether the Chancellor has run out of money to give away this year, or whether he has run out of ideas for new policies.

We have had a good opportunity to debate in detail many of the issues that arise from the Bill, so I want only to pick out some of the salient points in summary, both those where the Government seem to have made some progress and those areas where we have continuing concerns about the Government's policy.

On the simplification of the pensions tax regime, we largely agree that it is an improvement on the previous situation, and we welcome that. We have continuing concerns about duty stamps for spirits, not least because we question whether there is evidence to justify the measure that the Government are bringing forward in terms of its potential cost for the industry. However, we accept that the Economic Secretary has made some important progress in recent weeks behind the scenes with the industry in considering how the Government's policy can be introduced in a way that will reduce the burden on the industry. We hope that those discussions will continue so that a more workable scheme can be developed that will not have the bad effects and the high cost burdens on the industry that the initial proposals in the Bill were to have.

We welcome many of the proposals in the Bill on the issue of tax avoidance. The Paymaster General is right to say that it would be of concern to any Government given the potential leakage of revenue. We have heard not only of large tax avoidance schemes that have taken effect over the past couple of years, but about how effective the industry is in developing new tax avoidance schemes even during consideration of the new Finance Bill. We therefore welcome many of the measures in the Bill, and the Government are sensible to introduce more general anti-avoidance legislation, including the pre-notification requirements for artificial schemes.

We have only two concerns about the Government's proposals on tax avoidance, and they relate to bespoke advice and de minimis limits. The Paymaster General was slightly more constructive about those issues on Third Reading than she was on Report, and I hope that behind the scenes the Revenue will work with the industry to make sure that the proposals are workable and reduce the burden on business and the tax industry if the Government insist on notification of everything that moves. I am pleased, however, that the Paymaster General has softened her position a little. If we are to get to grips with tax avoidance, the Government should not only close loopholes but resist the opportunity to open others that can be exploited. When we discussed charity taxation reliefs, we saw how easy it is, even when there is well meaning and apparently well thought-out Government legislation, to develop artificial schemes and contrivances that can be immensely expensive.

The Government have a responsibility not to introduce complicated new schemes that can be open to abuse. As the hon. Member for Arundel and South Downs said, the Government were warned at the time that their proposals on the zero per cent. rate of corporation tax would open a huge tax loophole, leading to a loss of revenue, which is exactly what has happened. The contrivance of the 19 per cent. rate on non-corporate distributions will impose a big burden on small businesses that lack a sophisticated appreciation of taxation matters, not least because they will find it hard to understand how it affects them. They will have to purchase more complex and costly tax advice, but they should not be put in such a position. I very much hope that after the further review of the corporate tax system which, the Government say, will take place in the next couple of years, a more settled tax regime for small businesses will replace the system of four or five different rates that has been in operation over the past few years.

The Finance Bill is disappointing not so much because of its provisions, some of which are sensible and deal with matters that require reform, but because it is detached from the concerns of ordinary taxpayers around the country, in middle Britain and in middle England. Our debates on issues such as pension tax reform demonstrate, as the hon. Member for Grantham and Stamford (Mr. Davies) said, how far removed we are from the concerns of the average taxpayer on an average income. We discussed how people would be affected by a £1.5 million or £1.8 million pension pot—sums which are way beyond the income of the average taxpayer, who is concerned about the increasingly aggressive nature of the tax system, not least the huge 80 per cent. increase in council tax since 1987; the way in which more and more people are being pulled into the tax net following the failure to index the personal allowance in line with earnings; and the fact that stamp duty on residential property catches most first-time buyers, although it caught only 18 per cent. of them 10 years ago, since when it has not been indexed. The Bill's biggest weakness is its detachment from the tax concerns of average taxpayers, who want a fairer, simpler tax system. Instead, they have had more fiddling and unfairness, so we hope that the Government will learn that lesson when they introduce Finance Bills in future.