Orders of the Day — Finance Bill

House of Commons, 13 June 2005.

[Sylvia Heal in the Chair]

Clause 11 — Donations to charity by individuals

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 36, page 11, line 40, at end insert—

'(h) interactive experiments with an educational purpose.'.

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

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

No. 35, in clause 11, page 12, line 1, leave out 'one year' and insert 'three months'.

No. 1, page 12, line 8, after 'family', insert

'or of that person and an accompanying group of no more than twenty individuals.'.

Mark Francois (Conservative, Rayleigh)

It is a pleasure to open the batting for the Opposition this afternoon on the first clause of the Finance Bill to be considered in Committee of the whole House.

Several changes have taken place at the Treasury since the general election, so with your leave, Mrs. Heal, I shall begin with a few quick courtesies. In his absence, I welcome the new the Chief Secretary to the Treasury, the right hon. Member for Kilmarnock and Loudoun (Mr. Browne), who is now the other Browne—Browne minimus—at the Treasury. I congratulate the hon. Member for Wentworth (John Healey) on his promotion from Economic Secretary to Financial Secretary and wish him luck, but not too much luck, in his new role. Finally, I congratulate the hon. Member for Bury, South (Mr. Lewis) on his joining the Treasury as the new Economic Secretary. He will be my direct opposite number, and I look forward to shadowing him in what I hope will be a constructive spirit.

Amendment No. 35 seeks to reduce the specified period in proposed new subsection 5H from one year to three months. Amendment No. 36 seeks to expand the range of charities that may claim gift aid on their admissions under subsection 5G to include those facilities which have

"interactive experiments with an educational purpose."

In addition, my hon. Friend the Member for Wimbledon (Stephen Hammond) is a new hon. Member, but he has had the gumption to propose his own amendment to the Finance Bill, which augurs well for the future. I look forward to hearing what he has to say, and I will seek to respond to his amendment in my winding-up speech.

On a procedural point, as clause 11 deals with changes to the tax treatment of gift aid in relation to a number of charities, in the interests of transparency, I declare an interest as a member of English Heritage, the Natural Trust and the Essex Wildlife Trust. With specific regard to amendment No. 36, I also declare an interest as a member of the friends of the Royal Air Force Air Defence Radar museum at Neatishead in Norfolk.

The concept of gift aid, which is at the heart of clause 11, was introduced by John Major when he was Chancellor back in 1990. Since then, it has helped to generate billions of pounds of tax-efficient donations to charity. Gift aid has been through a variety of changes since then, which, the Committee will be pleased to hear, I do not propose to apprise in detail now.

This afternoon's debate directly relates to a specific measure in the Finance Act 2000 that had the stated aim of encouraging new donations to charity. To cut a long story short, those changes to section 25 of the Finance Act 1990 permitted charities specifically involved in the conservation of heritage property or the conservation of wildlife to begin to reclaim gift aid on admission charges to their premises. In that context, it is important to note that that outcome was not the Government's stated intention, but a number of charities sought to take advantage of it with the subsequent agreement of the Inland Revenue, which is an important point. Indeed, paragraph 3.12 of the Government's own regulatory impact assessment to accompany the proposed changes to the gift aid regime states:

"Changes to the Gift Aid rules in Finance Act 2000 mean that heritage and conservation charities are acting within the terms of the law by seeking donations that give a right to free day admission. This has become established practice, and guidance produced by the Inland Revenue confirms it is within the terms of the existing Gift Aid legislation."

It is important to establish at the outset that what the Government propose to change has become established practice over the past few years, and that the Inland Revenue fully acknowledges that.

That brings me to the cost of these measures. In the debate on Second Reading, it was notable that when Ministers were pressed for the estimated cost of making the changes—that is, the amount of money that, in their view, the Revenue was losing, and that they wished to make up by amending the gift aid regime—they were noticeably reluctant to give that figure on the Floor of the House. However, if one looks into the detail of the regulatory impact assessment, as I have, it is clear that on several occasions the Government estimate that the amount of revenue in effect forgone by the Treasury is approximately £10 million. All public money is important—I would not deny that—but the Government are bringing in a change that will have a very significant effect on the charities and museums sector, particularly small and independent museums, and they must acknowledge that although there is not a vast amount of public money at stake here, it will necessarily have an important effect on the institutions in question.

Following the Government's decision in December 2001 to grant free admission to 50 or so Government-funded national museums and galleries, many charities that do not receive subsidies took advantage of the gift aid provisions to allow them to continue to compete with neighbouring attractions, entry to which had become free to the viewing public. Thus the situation post-2000, which pertains today, has helped to maintain something of a level playing field between subsidised and unsubsidised charities and museums, even though the Government admit in their RIA that that was not originally their intention. Again, this particularly affects smaller independent museums which are highly reliant on admission fees as a source of their income.

The reasoning behind the Government's proposals was, as they stated as far back as the pre-Budget report 2003, that gift aid had become, in the words of the Paymaster General, "a loophole", and that the facility was therefore to be withdrawn, even though the Inland Revenue had admitted to the museums and charities sector that it was perfectly within its rights in using it. Perhaps not surprisingly, that rapidly led to the Government getting into trouble with the charitable sector. Under a considerable amount of fire, not all of it very charitable, the Government began to back away and encouraged the consultation on the proposed changes. They came back with a modified scheme, which was presaged in pre-Budget report 2004 and is now contained in the Bill.

The proposals do not abolish the ability of charities to claim gift aid on admissions—we concede that—but rather reform it, with conditions and, in fairness, in order to allow additional institutions to qualify to claim gift aid, albeit on the revised basis. Those new conditions are addressed by amendment No. 35. New subsection (5H) sets either of two conditions by which institutions can continue to claim gift aid. In essence, they can do so either by charging an additional 10 per cent. on the admission fee for those people who wish their payment to be reclaimed as gift aid by the institution that they are visiting, or by granting a right of free admission for a year in return for an admission fee being reclaimed for gift aid. However, having contacted a considerable number of institutions over the past week, it is clear that implementing the changes presents several very practical difficulties.

First, there is a problem with the additional 10 per cent. provision. For example, several visitors who do not mind gift-aiding their current admissions fee may, to put it bluntly, be reluctant to do so if they realise that it will subsequently cost them extra to visit the attraction that they have come to see. One can imagine a family group being unwilling to pay, for example, an extra pound for each member simply to help the institution when they have come to visit the attraction itself.

In addition, there is the problem of staff at the ticket desk having to explain the difference to each group of visitors as they attempt to pass through. I presume that the staff would be encouraged by the charity's directors or trustees to try to persuade as many people as possible to sign up. That might sound easy in theory but it could be difficult in practice for the ticketing staff, especially on a hot summer's day, with long queues waiting to get in, perhaps many containing impatient children, who have already pestered their parents senseless.

There is also the additional cost for modified tills and accounting systems, compared with the relative simplicity of the current system, whereby visitors pay their money, fill in a gift aid declaration and go in. The Government's regulatory impact assessment assumes a 70 per cent. take-up of the facility but several institutions that my office contacted in the past week were especially sceptical about the matter.

For example, Mr. Alan Bentley, the director of the Brontë Parsonage museum, points out in a letter:

"I think it is very unlikely that we will be able to continue to use the scheme in the way that we do now as I do not think that many of our visitors will give the extra 10% and the need to allow 12 months entry undermines our membership benefits and so will need careful marketing to our members. Membership of the society is the lifeblood of the organization."

Mr. Keith Merrin, director of Bede's World in Jarrow, makes a similar point in a letter. He states:

"Our main concern about the changes to the scheme are that once again they will disadvantage independent museums such as ours who already exist in an environment that seems unfairly weighted against us. Bede's World does not receive any funding from DCMS nor is it part of the Renaissance in the Regions scheme which benefits many of the large local authority run museums in the region. As a result, the museum is reliant on charging admissions to visitors. The ability to reclaim Gift Aid seems to be one of the few areas of the funding system that favours a museum such as ours."

He goes on to provide some specific criticisms of the proposals. He states:

"We believe that the suggested changes to the scheme will significantly reduce our income from this source for two reasons:

1. The simplicity of the scheme and therefore its popularity with visitors as it stands lies in the fact that taxpayers are being given a very straightforward proposition (that is to pay the same amount as they would have done but make it as a donation). The suggestion that in future they will be asked to pay a further 10% would, I believe, have a detrimental effect on the take-up and therefore our income."

For good measure, he adds:

"The museum already operates a season ticket scheme through our Friends association at a charge roughly double the admission price. As such the suggestion of giving annual membership for the price of a single admission would have a serious impact on this scheme and overall reduce our annual income.

In summary, we do not feel the changes to the scheme as suggested would be of benefit to the museum and would favour a recognition that the scheme as it currently works is in fact of great benefit to museums like ours who in turn provide a huge service to the communities and economy of the country without the need for large amounts of public funding."

That appears to me to be a reasonable presentation of the case.

In case the Economic Secretary has missed the point, Frances Snowden, who is the development assistant at the Abbot Hall art gallery in Kendal, puts it in another way in an e-mail. She states:

"The former option"—

that is, the 10 per cent. option—

"requires that reception staff explain this complex system, and ask if the visitor is willing to provide a donation of 10% greater than the entrance fee. However well presented the case, all signs point to this being entirely unworkable, and the vast majority of visitors will not be willing to pay this premium on the entrance charge. The immediate loss to the Trust of Gift Aid money, based on this year's income, will be £53,000. For comparison, this equates to the trust's entire budgets for exhibitions at both Abbot Hall and Blackwell."

So that we can understand what is at risk, she goes on to say:

"The Education Department of the Trust provides inspiring workshops and free visits for children from all over Cumbria and from North Lancashire. This year, thousands of children have benefited from their work, and the Trust has taken on a new member of staff. Once again, this programme, at the heart of what the Trust aims to do, will be seriously threatened by a drop in expected income."

To contribute to the debate, the industry established the Attractions Gift Aid Liaison Group, the AGALG, and I understand that it has had a dialogue with the Minister over this issue for some time. At the risk of embarrassing him, the reports from the group are that the Minister has conducted the negotiations in a civil manner and has attempted to take on board some of the points that the group has been making. I am not seeking to make an overly partisan point.

I have, however, spoken to the chairman of the group, Mr. Ken Robinson, who was keen to stress that he is not anxious to be involved in partisan politics. He said that the group had reservations about the practical applicability of this option. He sent an e-mail, which reads:

"The assumption has been made in the Regulatory Impact Assessment that a 70 per cent. take-up by donors . . . would mean that there would be no net loss caused by these changes. It is the general opinion of potentially eligible Attractions that this level will not be achieved on the proposed future terms, and would only be possible at many Attractions if additional benefits can be persuasively offered."

Overall, among the institutions which my office has contacted over the past week, there was comparatively little enthusiasm for the additional 10 per cent. option, if I can give it that name.

I move on to the option of free admission for one year. It, too, presents a number of difficulties, to which I have referred in several of the extracts that I have shared with the House. The principal problem is that many charities that qualify use annual admission as an important part of their membership campaigns. Being able to achieve the same benefits simply by visiting the institution once would, in effect, tend to undermine that approach.

Helen Toolan, the museum curator of the Murton Park museums—a group of museums headquartered in York—had the following to say:

"By continuing with Gift Aid in its new guise visitors who participated in the scheme would then be allowed free entry to the museum for the coming year, this is an impossible situation, which would mean the loss of substantial income for the museum that it currently has from its admissions. If Gift Aid were to change, it would mean two things: firstly, smaller museums would not be able to afford to participate in the scheme because of the increased cost to the visitor in admissions and secondly a loss of much needed income that Gift Aid currently provides."

Diane Perkins, the director of Gainsborough's House museum in Sudbury, has the following to say:

"In direct response to (5H) . . . To give the right of admission for the whole year for £3.50 would dramatically affect our income—many people repeat visit during the year to see our changing exhibitions and attend events. It is most unlikely that visitors would choose to give an extra 10 per cent. just so that the charity can reclaim the tax. It would also be very difficult to explain and complicated to administer."

She adds:

"Having been already adversely affected by the change in VAT Cultural Exemption rules in June 2004 which will cost the charity about £10,000 over the next two years, we are dismayed at this second tax change within 10 months. Rather than Government's tax changes helping small charities to exist, they are actually causing considerable financial difficulties, which will result in reduced performance and services to the public through no fault of the organisation."

I think that the director is seeking to make an entirely reasonable point.

Amendment No. 35 seeks to reduce the amount of time for which the charity would have to allow free admission down to three months. This would be better because it would provide some sanction over the current situation, but it would not undermine the attraction of annual membership, which so many small and independent charities have assured us is extremely important to their revenue stream.

That point is also supported by the Association of Independent Museums, which, I believe, has also been involved in dialogue with the Minister. Bill Ferris, AIM's chairman, says:

"Many charity museums have effective and well developed annual memberships (friends) schemes. A reduction to 3 months in the eligibility period would prevent conflict with the existing schemes."

I would therefore ask the Minister, who has already spent considerable time on this matter, to consider seriously amendment No. 35. It allows some modification of the scheme to protect revenue, which we understand that the Revenue was seeking to do all along, but not to the point at which the annual visiting rights included in many memberships packages, on which independent museums rely, are undermined. It is also important to remember that such museums are competing daily with other larger museums, regional or national, which effectively receive considerable subsidies and to which potential visitors can go for free.

In the six months or so during which I have shadowed the Minister, he has normally played a pretty straight bat. Therefore, if he can assure me that the Government will consider the matter again, and come back with something new on Report, I assure him that I will not press the matter further today. If he is unable to offer any concession, however, or even the prospect of a concession on Report, we might have to test the will of the Committee in the Lobby. I have done my best to present that case, and I hope that he will give it a fair hearing on behalf of all the independent museums and charities that are clearly concerned about the matter.

Amendment No. 36 relates to the types of charities and institutions that might in future qualify for gift aid on admissions charges on the revised basis. I should explain to the Minister and the Committee that we have tabled this amendment to try to elicit the Government's thinking on a specific matter, including the reasons why they came up with their list, and I hope that he will appreciate that when he replies. The list of those bodies in subsection (5G) is expanded beyond the original two categories, which I mentioned in my opening remarks, to include: buildings, grounds or other land, plants, animals, works of art—but specifically not performances—artefacts, and property of a scientific nature. We welcome that in principle, but it would be helpful to have some idea of the anticipated cost of the measure, at least in broad terms. In the regulatory impact assessment, the Government gave their anticipated cost of the 10 per cent. provision for charities. We would now like to know what the Government think that widening the list will cost them. The RIA suggested that it would be broadly revenue-neutral, and we would like to know whether the Government hold to that view. As we had no figure on Second Reading, it would be helpful if the Government provided at least some figure in Committee this afternoon.

We would also like some clarification on the status of voluntary donations with regard to clause 11. Our understanding is that the provisions in the Bill will not apply to voluntary donations, and for the avoidance of doubt, we are not seeking to ensure that they do. To take one example, many cathedrals do not charge visitors a formal entrance fee but have a collection box with a notice encouraging visitors to chip in a certain amount. Clearly, that is a voluntary donation, and clarification that the new more complicated rules will not apply to them would be welcome. I am sure that Ministers do not wish to provoke divine wrath with their measures, so perhaps they could reassure all of us on that point.

In addition, some information on the operation of the proposed definitions would be useful, not least to those who operate museums that might qualify. A number of people who might have seen the provisions in the Bill, and the list of supposed new categories, will be wondering whether they might qualify. Perhaps the Minister could comment on how the Government intend to advise museums of their status, one way or the other, and to promulgate information so that potentially qualifying museums might have a chance to find out whether they will be able to take advantage. To give just one specific example—this is why I declared the fourth interest—would military museums, which are not historic buildings in their own right but which display military memorabilia, be covered under the heading of displaying artefacts?

In amendment No. 36, we seek to widen the proposed list further by including

"interactive experiments with an educational purpose".

Our definition of such facilities would be museums that have invested in interactive displays aimed specifically at the education of their visitors rather than being there simply for their amusement. A theme park, for instance, would not qualify on that basis, but a local history museum that had produced an interactive display representing local conditions through the ages would.

It would be helpful to know more of the Government's thinking on all that, and to know how museums that think they might qualify could go about obtaining a definitive decision. The proposals are not currently due to come into force until April 2006, so there is time, but it would help those in the sector who read the report of this debate to have a clearer understanding of where they can go for a workable definition. I look forward to what the Minister has to say. I also look forward to hearing from my hon. Friend the Member for Wimbledon, and indeed from other Members.

During our consultations over the past week or so, we have found some museums and charities that were unaware of the proposed changes, despite the obvious work of the representative groups. That in itself is slightly worrying: there is a risk that some smaller museums whose representatives may not read the Finance Bill with the alacrity of other people in the country will be caught short. As the revenue is important to them, that would be a shame. I hope that the Government will deal with the matter, if they are determined to press ahead.

I ask the Minister to give serious consideration to, in particular, amendment No. 35. It allows the Government to achieve what they want to achieve, in part, but it also hopefully removes the threat to the viability of some smaller independent museums that do not rely on Government or regional subsidy to remain in business, unlike museums that are effectively free at the point of use.

With that genuine plea to the Minister, I shall end my speech. I shall listen carefully to what others have to say.

Stephen Hammond (Conservative, Wimbledon)

I declare an interest, as a member of the Wimbledon Society, which has a small museum.

I wish to speak to the amendment that seeks to extend the definition of who can accompany a donor under gift aid in subsection (5I)(a). Last week on Second Reading I mentioned a number of small museums in my constituency, and also the Wandle industrial museum, which held an exhibition on Saturday. The chairman of its board of trustees is the Reverend Andrew Wakefield. It was somewhat surprising, therefore, to find that the board was sponsoring an exhibition on Nelson, especially as it featured the ménage à trois in which he lived in Merton. [Interruption.] For the benefit of the hon. Member for Rhondda (Chris Bryant), may I say that Nelson lived with Emma, Lady Hamilton, who was married to someone else at the time? It was odd to find a reverend member of the Church sponsoring such an exhibition.

The industrial museum is exactly the sort of small museum covered by the Bill. I asked Mr. Wakefield whether he had had a chance to read the report of last week's Second Reading or had heard anything about the clauses that were being suggested. It seemed that, like those mentioned by my hon. Friend the Member for Rayleigh (Mr. Francois), he had heard nothing, and nor had he had a chance to consider how the provisions might affect the museum.

On Second Reading I commented on the current position. Subsection (5I) explains that "right of admission" means a right of admission

"of the person who makes the gift or of that person and one or more members of his family".

That covers a number of circumstances: a parent taking a child; a parent taking another family member; and a parent taking a family member, plus certain other family members.

However, a parent's taking a group of children to a small exhibition or museum is currently disallowable under the gift aid clause. Given the many different circumstances that can arise, it is sensible to widen the terms of that clause, which is what the amendment seeks to do. The ability to make a donation should surely extend to everyone in the donor's party, and the amendment would remove the anomaly so that the whole party would be covered by the gift aid provision. Inserting "accompanying" would also ensure a link between the principal person and the group itself, instead of a spurious association. I accept that figure of 20 to which the amendment refers is an arbitrary one; none the less, that figure would cover most of the circumstances to which I referred earlier, such as a children's party or a local group or society trying to enter a museum. I hope that the Minister will consider accepting the amendment, which would simply clarify matters and allow a number of perfectly innocent people who wish to be admitted to be covered by the gift aid provisions.

I want to say a little about the amendments moved by my hon. Friend the Member for Rayleigh, which I hope the whole House will welcome and commend. When I spoke to various people after last week's Second Reading, it became clear that the one-year rule will create real problems for those who have established friends' groups for small industrial museums. Such groups often have a right of admission of a year. Unless the provision is amended, it would be rather odd if someone actually wanted to become a friend of a museum, instead of just paying their donation on the way in. Changing the period from one year to three months seems an acceptable idea that would provide valid support for museums.

On Second Reading, I referred to interactive displays. I have a child who regards viewing museum displays as a rather restrictive pastime and who is keen to take advantage of the various interactive hands-on displays. There is no real purpose to confining the current provision to viewing alone. Amendment No. 36 also refers to the "educational purpose", and I hope that anyone who enters a museum would regard doing so as educational. I hope that the Minister will accept the amendment.

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Gentleman clarify what an interactive display or exhibition is? I have my own views—I have seen such displays in museums—but I wonder what his are.

Stephen Hammond (Conservative, Wimbledon)

I can give two practical examples. The museum that I visited on Saturday contains a working scale model of a mill. Children can look at it, move it around and remove and replace its various parts. Another display included various panels that people can touch, with lights indicating different results. Instead of simply viewing the display, they can press buttons and involve themselves in interactive way. As I understand it, the amendment will allow such circumstances to be covered.

Rob Marris (Labour, Wolverhampton South West)

That deals with "interactive", but will the hon. Gentleman say a little more about the second word in the amendment, which is "experiments"? The mill to which he referred may count as an experiment, but his second example, involving flashing lights, did not sound like an experiment.

Stephen Hammond (Conservative, Wimbledon)

The amendment in question is not mine, so perhaps the hon. Gentleman should have sought clarification on that point earlier. I was merely discussing interactive displays.

I hope that the Minister will accept the amendment.

Susan Kramer (Liberal Democrat, Richmond Park)

I shall speak primarily to amendment No. 35, but I shall also say a few words about amendments Nos. 36 and 1. I declare my various interests, which I discovered, once I started writing them down, are more extensive than I had realised. They include English Heritage, the National Trust, the Tate museum and, in my own constituency, Barnes wetlands and Kew gardens, some of which might be beneficiaries of the revised gift aid programme.

I thank the Minister for recognising that many charitable attractions use the provisions on gift aid and admissions not as a loophole, but, with the encouragement of the official guidance of the Inland Revenue, as a justified way to enhance their viability. For many small museums, including the Richmond and Kingston museums, gift aid has played a significant role, especially when local government is frequently cutting funding. With intensified competition from national museums—now free of charge—the difficulties of the smaller museums have worsened, and gift aid provision has proved a lifeline. That is why the proposed changes are of such concern.

I accept the fundamental notion that for gift aid to apply, it is right to ask for a little something extra to be provided, rather than simply having admissions converted into a donation. I accept that in principle, but I am concerned about the provisions that are intended to give effect to it. I have received from Ken Robinson, and from people on the ground, representations saying that the difficulty of explaining the need to put an extra 10 per cent. into the pot so that payment qualifies as a donation is a challenge for many small museums, particularly where the admissions person is a volunteer—someone passionate about the collection, but not necessarily able to sit down and take someone through the complex details of adopting route A or B and explaining the differences between them. That is particularly significant when there is a fairly long queue. From a practical point of view, it provides a challenge particularly for small museums, but also perhaps for the larger ones.

Rob Marris (Labour, Wolverhampton South West)

Is it not already the case that small museums have to explain gift aid provisions? The people paying the entrance fee are taxpayers and have to fill in forms in any case; surely a different form could be given to them to fill in while they were in the long queues that the hon. Member for Rayleigh (Mr. Francois) mentioned. The punters would soon come to understand the situation.

Susan Kramer (Liberal Democrat, Richmond Park)

The hon. Gentleman will know that many taxpayers frequently make donations and often understand the need to fill in forms. In other words, it is a practice with which they are familiar and accept as part of their general routine. It is not associated only with admissions but with all sorts of other things that people happen to do relating to charities. Suddenly finding that a separate set of rules applies as people go through the admissions door at the local museum is a significant additional step. This is simply a matter of practicalities. When five or six people are standing in a row to gain admission to a small museum and another crowd arrives behind them, that can be overwhelming.

If the Minister believes that the clause is efficient and will work effectively, will he agree to monitor it? If we started to see that the provisions were having an impact on small museums that were unable to realise the funding and benefits that both they and the Minister anticipate, could some intervention be made to deal with that problem? I am willing to accept the provision as a starting point, but I ask for it to be watched because the practicalities may prove more difficult than is currently envisaged.

Rob Marris (Labour, Wolverhampton South West)

I am reflecting carefully on what the hon. Lady is saying, but it strikes me that if there is a queue, people can get their heads around what is required while they are in it; and if there is not a queue, it can be explained to them at the ticket desk.

Susan Kramer (Liberal Democrat, Richmond Park)

I suggest that such provisions should be tested out with the experience of time. Hon. Members, who often enjoy discussions, sometimes overestimate the skills of the typical volunteer who helps out over the weekend at the local museum. This could prove to be an intimidating challenge in which people find themselves extensively questioned. If I am wrong, I will be happy for the provision to apply as it is, but I would like to know that the Government are prepared to watch to establish whether I am wrong.

Mark Francois (Conservative, Rayleigh)

I hear what the hon. Member for Wolverhampton, South-West (Rob Marris) says, but does the hon. Member for Richmond Park (Susan Kramer) agree that I have provided several examples from museums and charities that have direct experience, day in and day out, of how practicable some measures are? They are firmly of the view that the suggestion is not practicable. I do not know how many days some Labour Members have spent working as charity volunteers in museums, but I do think that the museums know what they are talking about.

Susan Kramer (Liberal Democrat, Richmond Park)

I thank the hon. Gentleman for saying that, because I believe that those on the ground are usually better than those of us who preach at telling what the realities are.

I support amendment No. 35. I have talked to people from several institutions, and as the hon. Member for Rayleigh (Mr. Francois) has said, the one-year membership is at the core of their funding and of their whole strategy of communicating with and marketing themselves to the community that they seek to serve. That is an important community and an important role.

As I understand it—if I am wrong, I shall be grateful if the Minister corrects me—if the price of a one-year membership exceeds the price of a single admission, charities will lose out substantially if they adopt the programme, unless they can provide some sort of extraordinary differentiation between a one-year membership under the donation and a one-year membership under their current structure. In fact, I cannot see how anybody, even a Member of Parliament—certainly I am struggling with the idea—could try to explain the difference to people applying for membership or coming into the museum or other attraction.

Rob Marris (Labour, Wolverhampton South West)

The hon. Lady may find that extraordinary, but I find her proposition extraordinary. For example, I am a member of the friends of the Grand theatre in Wolverhampton—although that is not a charity in exactly the same sense—and like lots of other people I get additional benefits, besides admission, from my membership. We are talking about charities, so the financial transactions should be viewed not in purely capitalist terms, but in terms of supporting an organisation, its ethos and what it is trying to do. This is not simply a question of admission; for example, people get newsletters from the National Trust and other such organisations.

Susan Kramer (Liberal Democrat, Richmond Park)

We shall have to agree to disagree, because I think that there will be a significant impact on the income of organisations such as the National Trust and English Heritage—an impact that will be a loss to the nation.

Chris Bryant (Labour, Rhondda)

rose—

Susan Kramer (Liberal Democrat, Richmond Park)

I think that we have gone round this subject long enough.

It is entirely appropriate to ask an attraction to offer something more than simple admission to justify gift aid, but it seems unacceptable to set the hurdle much higher than that. The opportunity to differentiate between an annual membership with add-ons and one without is pushing the limits of the system too far, and I suspect it is not what was intended. I ask the Government seriously to consider reducing the period from 12 months to three; indeed, there is an argument for reducing it to one month. Somebody could pay the price of a single admission and then be able to go back again and again over the period of the membership. For museums that change their displays—places that people enjoy going back to—it would be extraordinarily unfair if people could pay the admission charge and go in once while those who paid the same amount categorised as an annual membership could go back 10 or 12 times. For places that people visit only once in a while, that is probably reasonable, but for places that know that people will take advantage and come back over and over again, it strikes me as insane to say that a single visit must cost the same.

Chris Bryant (Labour, Rhondda)

I wonder whether the hon. Lady's argument is accurate. The national museum of Welsh life just outside Cardiff is a fine institution, and it is free now, because the policy of the Welsh Assembly and of this Government has been to try to make all national galleries and museums free. Many people argued that museums would suffer from not getting admission charges, but I go to that museum several times a year—certainly every time friends come to visit—and it probably makes far more money out of me now, because I go four or five times a year. I wonder whether the precise arithmetic is as the hon. Lady would have us believe. Sometimes, because people have free admission across a year, they go to the museum or gallery more often, including the bookshop or coffee shop, and spend more money. If the gallery or museum is not short-sighted, it may end up earning more money rather than less from that.

Susan Kramer (Liberal Democrat, Richmond Park)

That is a risk that most small museums could not take. Museums funded by the Government can perhaps take the risk that visitors would spend money in other ways, because their core funding is essentially secure. However, I am talking about admissions that are essentially core funding for many small charitable institutions. If that is put at risk because annual memberships are no longer possible—because they would cost the same as a single admission—we will threaten the viability of those museums. Many are already under pressure.

The industry has argued its case effectively, with more than one hon. Member, and the Government should consider its point. If the Government are willing to do so, there will be no need to divide the Committee, but if they are not willing to take a second look, we should divide to try to protect that core funding.

John Bercow (Conservative, Buckingham)

Given the hon. Lady's desire that the period of the right of admission should be reduced to three months, which is consistent with the argument of my hon. Friend the Member for Rayleigh (Mr. Francois), or even to one month, does she think that that three-month or one-month period should be at any time during a 12-month period, or is she concerned that it should not be at a period of maximum interest, such as August or another time of extended school holiday?

Susan Kramer (Liberal Democrat, Richmond Park)

I take the hon. Gentleman's point. The one-month period would provide more protection from someone who tried to target their visits on the most interesting season or a time when they were likely to come back on multiple occasions for the price of a single admission. One month would provide better protection than three months.

Mark Francois (Conservative, Rayleigh)

I thank the hon. Lady for her courtesy in giving way again. There is no separate Liberal Democrat amendment on this clause, so can she confirm—for the avoidance of doubt—that if we decide to press amendment No. 35 to a division, if the Government make no concessions, we will enjoy the support of the Liberal Democrats?

Susan Kramer (Liberal Democrat, Richmond Park)

I can confirm that that would be the case—[Interruption.] Well, it is progressive.

Helen Goodman (Labour, Bishop Auckland)

Is the hon. Lady saying that she supports amendment No. 1 about

"an accompanying group of no more than twenty individuals"?

If so, can she explain why that will not mean that top-rate taxpayers collect together basic-rate or non-taxpayers to exploit another loophole?

Susan Kramer (Liberal Democrat, Richmond Park)

Most of the top-rate taxpayers I have met would be unlikely to spend the energy to find sufficient friends and neighbours to visit on that single occasion. I agree with the hon. Member for Wimbledon (Stephen Hammond) that the issue is more likely to be a couple of parents bringing a group of youngsters along for a birthday party or special treat in the holidays. We should do everything we can to get youngsters into our museums and attractions so that they are much more aware of the whole community around them, especially the arts and sciences and our various botanical gardens.

Chris Bryant (Labour, Rhondda)

Surely the point is that the provisions are about financial dependants, and that cannot be extended to any 20 people one may choose to gather and call members of one's family, unless one is able to prove that they are financial dependants. That would drive a coach and horses through the finance legislation.

Susan Kramer (Liberal Democrat, Richmond Park)

My interest is in trying to draw up a provision that will encourage people to bring in youngsters, which frequently means a group of youngsters, wherever possible. If there were something in the provision that did that, I should be entirely satisfied that the clause contained all that I wanted to achieve.

Finally, on amendment No. 36, although I do not pretend to understand the difference between an interactive project and an interactive experiment, we can probably all understand the sense of those words. An interactive approach is being adopted at more and more charitable attractions to engage youngsters. For example, at the Barnes wetlands project in my constituency, and indeed my neighbourhood, an attraction is being set up where youngsters can become engaged through climbing, guessing, touching and drawing to work through issues relating to wetlands, such as climate change and its impact on ecology. Such strategies are being used to draw young people to various attractions. That is important, so there can be nothing disadvantageous in adding the amendment; it can be only advantageous.

Chris Bryant (Labour, Rhondda)

The hon. Lady is making an important point about the variety of places where we might want to encourage such activity. However, I do not understand why the amendment is necessary; none of the examples advanced so far, including the one that she has just given, cannot be met by some other part of subsection (5G), which refers to "grounds, or other land" used

"by a charity in pursuance of its charitable purposes".

The amendment may be a nice thing, but it is completely redundant—a bit like the Lib Dems I suppose.

Susan Kramer (Liberal Democrat, Richmond Park)

The hon. Gentleman gives me the opportunity to say that the direction shown by the amendment is one for which there is an increasing interest and following. I can see no harm in adding those words. There is nothing in their scope of which the hon. Gentleman would not approve and that he could not support. It at least adds clarity, which is helpful on these occasions.

I am not quite sure how one draws these things to a close but I have reached the end of my speech.

Doug Henderson (Labour, Newcastle upon Tyne North)

I have only one short point to make, but first I declare an interest as a member of the National Trust and a proud member of Beamish, which is a marvellous museum in County Durham.

As has already been said, small museums, as well as private and specialist museums, which often have charitable status, have to compete with the state's museums, which are free—although I completely support that. However, that situation affects museums such as Beamish, which is quite a large organisation.

As the Financial Secretary knows, the practice has developed over the past three or four years of paying gift aid with membership subscriptions. The hon. Member for Rayleigh (Mr. Francois) referred to that in his introduction. People standing in the queue eating their ice creams at Beamish, or at the ticket desk, get leaflets about gift aid so they know about it already. When the Government are considering the small print, I urge them to make it clear that we are not worsening the current position but that the measure merely establishes in law rights that are currently applied. I hope that we can mount a campaign on that.

I understand why the Opposition are raising those points, because various museum groups have also raised them, but the important thing is that the Government respond to what is happening and maintain the situation. We must get that message across. I ask the Financial Secretary to be generous in considering some of the suggestions. The suggestion made by the hon. Member for Wimbledon (Stephen Hammond) was a good try, but it would create so many anomalies in our tax legislation that it cannot be a runner.

I do not know whether the period should be 12 months, three months or one month, but I rather suspect that, whatever the provision, it will be theoretical. Museums are ingenious and they can usually find ways of getting round the regulations that we establish. One of the ways of doing that—it is quite legal—is to give an annual member privileges that someone who is a member for a day or three months does not have. For example, an annual member may be able to get the kids in a bit cheaper. There are ways in which the institutions can respond to the points that have been made.

I am not absolutely stuck on the 12-month rule, but I think that it is fairly reasonable. Although the points made by the Opposition sound reasonable, they would not apply to most museums. If one joins the Beamish, it is a 12-month deal. Most people visit once a year, but I recognise that some go more frequently. However, the revenue for gift aid comes from those who go once a year.

I hope that the Minister will be generous in his response and make it clear to museums that there will be no worsening of conditions.

Philip Dunne (Conservative, Ludlow)

I support amendments Nos. 36 and 1. In common with many other Members, I declare an interest as a member of the National Trust—I am a life member—and I am expecting to become a trustee of the Ludlow Town Walls trust. I am also a member of the Hereford Cathedral Perpetual Trust.

I support the remarks of my hon. Friend the Member for Rayleigh (Mr. Francois) on amendment No. 36, but ask the Minister for clarification in relation to one of my interests. That may not be good form, but I shall ask the question anyway because the position is not clear. Under the proposed new paragraphs (e) and (f) to section (5G) of the Finance Act 1990, I wonder whether the world-renowned Mappa Mundi and its associated chained library that reside in Hereford in a purpose-built building constructed by the perpetual trust a few years ago qualify as either "works of art" or "artefacts". If not, I am sure that the trust would establish an interactive educational exhibition to ensure that they qualify if our amendment is accepted. I should point out that the constituency of Ludlow is in the diocese of Hereford, so I am not interfering in neighbouring Members' affairs.

Amendment No. 1, which was tabled by my hon. Friend the Member for Wimbledon (Stephen Hammond), is eminently sensible. The leaders of many of the groups that visit museums pay the admission fees on behalf of the group as a whole. It would be quite wrong if groups could not benefit museums by being able to take advantage of the gift aid provision.I should perhaps also declare that I am a member of Ludlow Civic Society and the Leintwardine history group, both of which organise group visits to areas of historic interest.

Helen Goodman (Labour, Bishop Auckland)

We have heard much about queues in the debate, but how would this amendment stop people—some would be top-rate taxpayers; others would not—going along a queue and saying that they were all part of a group?

Philip Dunne (Conservative, Ludlow)

To answer on behalf of my hon. Friend the Member for Wimbledon, I think that the word "accompany" is useful in assisting the hon. Lady with her point. A group leader pays on behalf of all its members precisely to avoid the need for up to 20 other people to form part of the queue. That is very sensible.

I also wish to refer to the Broseley Conservative Association, because I am particularly familiar with its activities. It runs biannual coach outings to places of historic interest outside the Ludlow constituency and around the country. It is led by the remarkable Mrs. Yvonne Miles, who is a particular favourite of mine as she helped me in my recent campaign. She collects on the coach the subscriptions for her members before they enter a place of interest, and it is precisely to enable people such as Mrs. Miles to maximise the take for the museum or other site that they are visiting that the amendment should be supported.

Chris Bryant (Labour, Rhondda)

It is important for us to consider the amendments in the context of the dramatic expansion of the number of museums and galleries in this country over the past few years and, for that matter, of attendance at museums and galleries. The fact that the sector has increased significantly has partly been a direct result of additional funding from national Government, from the lottery, especially, and from local government, although that element is often forgotten. Most smaller galleries and museums such as those cited by hon. Members today subsist by virtue of the support that they receive from local government. It is a source of pride in my constituency that the Rhondda heritage park museum has received significant support over the years from the local authority. In the near future, I hope that there will be the opportunity to refurbish the museum completely so that it can meet the needs of the 21st century.

Adam Afriyie (Conservative, Windsor)

It is clear from listening to the debate and the contribution that I made last time round that this is quite a complicated area. There are thousands, or perhaps even hundreds of thousands, of charities throughout the UK, many of which are in the Windsor constituency. May I ask the hon. Gentleman—or the Minister, in effect—how much, if any, quantitative research has been undertaken to establish which charities in the mix will be affected the change? We hear lots of words such as "many" and "some of these", and hon. Members have cited specific examples from their constituencies, but is the measure based on quantitative research, and will that be considered during our deliberations?

Chris Bryant (Labour, Rhondda)

The hon. Gentleman is really putting a question to the Minister, not me. As he was speaking, a picture of the Queen paying admission to go into Windsor castle was going through my mind. However, she is not a top-rate taxpayer, so perhaps gift aid donations would not be relevant—I do not know whether she signs the form.

The hon. Gentleman, like all hon. Members, will know that the number of galleries has expanded, so there is now considerable competition for attendance in the gallery sector. One is often better off if there are two or three galleries in an area because they are able to promote the area and many people will choose to visit several galleries in a day, rather than just one at a time.

I urge people who work in the gallery industry to be open to possible changes to the system because that is likely to be in their interests. As I said to the hon. Member for Richmond Park (Susan Kramer), I do not accept the argument that if galleries give free admission for a year, it automatically means that they will mathematically lose the full cost of any visits that might have occurred during that year. It is free for me to go to the National Gallery and the National Portrait Gallery. I can now also go to the Victoria and Albert for free—it used to charge admission, but thanks to this Government it no longer does. The fact that it is free means that I visit it more regularly and thus use the bookshop more, drink more cups of tea and eat more chunks of cake there. Many galleries have found that such auxiliary services are not only a good way of making money, but often an important part of the educational and charitable purposes that they want to pursue.

John Bercow (Conservative, Buckingham)

Will the hon. Gentleman give way?

Chris Bryant (Labour, Rhondda)

I will give way—

John Bercow (Conservative, Buckingham)

rose—

Chris Bryant (Labour, Rhondda)

I have not given way quite yet. I will give way to the hon. Gentleman now.

John Bercow (Conservative, Buckingham)

I am grateful to the hon. Gentleman for determining the precise point at which the giving way takes place. It is always a joy—a titillating delight, no less—to listen to him. However, although obviously he is central to his own world, he is not necessarily central to the world. Further to the inquiry made by my hon. Friend the Member for Windsor (Adam Afriyie), can the hon. Gentleman extrapolate beyond his example and say what evidence he has that what he is advancing, which is perfectly valid in theory, is true in practice? What is the additional spend in cafeterias, bookshops and so on in the examples that he is describing?

Chris Bryant (Labour, Rhondda)

The Victoria and Albert Museum used to describe itself as a great caff with a museum attached. I do not have the precise figures to hand, but the hon. Gentleman is usually a more encyclopaedic resource than I on such matters—I see that with flattery, he does smile.

I was, of course, trying to scrutinise the amendment, and it was in the interests of scrutiny that I made the point about the pure mathematical equation. Free admission to a gallery for a year does not mean that the gallery automatically loses four £3.50s. I would have thought that if a gallery had a database of people who had become members for a year, it would want to use it to entice them back into the museum as often as possible during that year so that they bought books and used other services.

Nigel Dodds (DUP, Belfast North)

I am following the hon. Gentleman's argument with interest. He refers to museums like the Victoria and Albert and other great national museums, but they have the advantage of size, which means that people have to return a number of times to see them in their totality. They also have the advantage of changing exhibitions because they bring in new attractions on a regular basis. Those considerations do not apply to small private museums and galleries.

Chris Bryant (Labour, Rhondda)

I am not sure that the hon. Gentleman is right in his final assertion that smaller museums and galleries do not change their exhibitions. A small gallery often changes what it exhibits because it does not have the space to exhibit all the material it has. Exhibits at the National Portrait Gallery and the National Gallery barely change because nearly everything they own is up on the walls, whereas that is not true for other galleries, such as the Tate. The important point is that we are talking not about national museums, but about museums such as the Rhondda heritage park, which does not receive national Government funding. In fact, it is in competition with Big Pit, another mining museum in south Wales, which receives money directly from the National Assembly and has free entrance. There is a specific need to help such museums and galleries.

Philip Dunne (Conservative, Ludlow)

I have another interest to declare in that I am a director of a bookshop, and I hope that I can help the hon. Gentleman in dealing with his point on national museums. The company that I am involved in operates the concession in the Science museum. When admission fees were abolished, the bookshop's revenue increased, I am delighted to say. In the interests of commercial sensitivity, I shall not reveal by how much it increased for fear of prejudicing our negotiations on renewal. I can assure him, however, that it went up not by a multiple of sales, but by a percentage of sales considerably less than 50 per cent. There is an improvement in the other commercial add-on opportunities for museums, but it is not of the order of magnitude that he suggests.

Chris Bryant (Labour, Rhondda)

I am grateful to the hon. Gentleman for correcting that. I was merely trying to argue against the idea advanced by the hon. Member for Richmond Park, who said that there was a mathematical equation to show the loss of income across the year. Clearly, it is different from that. One thing that we have seen over the past 10 to 15 years is that many museums and galleries have tried to maximise their opportunities.

I was a bit depressed when everyone else declared an interest and I had no museum or gallery of which I was a member and for which I could declare an interest, but I realise that I can now declare one. The only museum that still sells my biography of my hon. Friend the Member for Hampstead and Highgate (Glenda Jackson) is the Theatre museum—

Chris Bryant (Labour, Rhondda)

I take the admonition, Mrs. Heal.

Gordon Banks (Labour, Ochil and South Perthshire)

To pick up on the point made by the hon. Member for Ludlow (Mr. Dunne) about the increased sales in the bookshop, if other services that support that main exhibit increase by the same significant amount, the overall effect is positive.

Chris Bryant (Labour, Rhondda)

Absolutely. I agree wholeheartedly.

My second point is that the other significant expansion over the past few years is in gift aid. The Government should be congratulated on the way in which they seized hold of what was originally a Conservative idea and made it their own. They have expanded the scheme and made it possible not only for people with significant incomes who make significant charitable donations every year to give that bit extra through the tax system, but for many millions of people throughout the country to do the same. It will be beneficial for many museums and galleries that, after their initial hesitation, the Government have now accepted that and are effectively legitimising it.

Turning to amendment No. 36, as I told the hon. Member for Richmond Park, many museums and galleries have excellent interactive exhibits, which harness young people's desire to learn through play, experimentation and problem solving. However, that does not make the amendment a necessary measure, nor is there a mischief in the Bill that it would correct. Every single example instanced by hon. Members is covered by proposed new section (5G), which is satisfied if any charity

"in pursuance of its charitable purposes"

holds buildings, grounds or other land, plants, animals, work of art, artefacts and property of a scientific nature. The Mappa Mundi was mentioned earlier, but the way in which people have tried to exploit it means that it is not usually to be found in the annals of good financial practice, given that the deanery and the cathedral got into trouble financially. The Mappa Mundi is clearly kept in a building. The cathedral is trying to pursue its charitable purposes, and the Mappa Mundi is a work of art or an artefact—in fact, it is probably both—so it would be covered by the clause. There is therefore no need for greater clarity. Indeed, sometimes when we insert too much clarity into a Bill, provisions are narrowed, creating problems for some organisations. I accept that there are many interactive galleries and museums, but they are already covered by the Bill.

Philip Dunne (Conservative, Ludlow)

The Mappa Mundi has featured prominently in our debate. It is a map, and maps are not necessarily categorised as works as art. The chained library primarily contains books, which are not necessarily works of art. It is therefore not clear that the terms "artefacts" and "works of art" are sufficient, which is why I asked the Minister for clarity.

Chris Bryant (Labour, Rhondda)

I am grateful for your admonition, Mrs. Heal.

The Mappa Mundi has been made by man, and is therefore an artefact.

John Bercow (Conservative, Buckingham)

Will the hon. Gentleman give way?

Chris Bryant (Labour, Rhondda)

I was going to move on to the next amendment, but I shall give way to the hon. Member for Buckingham (John Bercow).

John Bercow (Conservative, Buckingham)

We all want the hon. Gentleman to move on, but we also want clarity, if not too much of it.

The hon. Gentleman objected to amendment No. 36 on the grounds that it did not remedy a mischief. His exegesis of the unamended clause is of interest, but it is not conclusive. Does he not accept that it would be helpful if the Minister made it clear that the existing unamended clause is intended to embrace the terms of amendment No. 36? Failing that, we are justified in pursuing a belt-and-braces approach.

Chris Bryant (Labour, Rhondda)

If the hon. Gentleman had not intervened, we would hear the ministerial reply rather sooner. I am grateful to him, however, for taking us round that hermeneutical circle.

As I said earlier, amendment No. 1, which was tabled by the hon. Member for Wimbledon (Stephen Hammond), is problematic. It might be nice for the local Conservative association to gather its fees and present them to a gallery or a museum. They could, however, present that money as a gift aid cheque. In fact, if the association members raised some extra money on the bus, they could be even more generous by filling in a form and providing substantial amounts to the gallery or museum in question. I am not sure whether that is a very good argument in favour of the amendment, but the fundamental point is that it would be difficult to extend the benefits to all the other 20 people throughout the whole year. We should reject the amendment and stick with the Government's proposal, as there should be a degree of financial dependency among the group of people as they are constituted.

Stephen Hammond (Conservative, Wimbledon)

Does the hon. Gentleman object to the principle of amendment No. 1 or the number to which it refers? If he objects to the principle, why does he disagree with the industry's leading practitioners, including the Law Society and its tax law committee?

Chris Bryant (Labour, Rhondda)

It is the principle that I object to, not the number. As the hon. Gentleman said earlier when he confessed the weakness of his own argument, the number is entirely arbitrary; it could be six, 20, 50 or 100, and he has chosen 20. My argument is that there should be a degree of financial dependency, as would be found in a family. That is why we should reject his amendment and stick with what the Government propose.

Rob Marris (Labour, Wolverhampton South West)

I agree with my hon. Friend the Member for Rhondda (Chris Bryant) that there is a question of principle on amendment No. 1. There is also an issue of practicality. The amendment refers to

"an accompanying group of no more than twenty individuals".

The paying person produces a total of 21, but my understanding of proposed new section (5I) to the Finance Act 1990 is that all 21 people, of whatever age—they will often include children—would have the right of admission for a year.

That seems to contradict hon. Members who have argued that one year is too long. On one hand, it is said that one year is too long and people should not have free membership for a year, but we can apparently still pile in 20 people with what is effectively free membership, as it is being characterised, or certainly the right to free admission. Will the hon. Member for Wimbledon (Stephen Hammond) explain that contradiction and tell us whether he supports amendment No. 35?

Stephen Hammond (Conservative, Wimbledon)

As I said earlier, I support amendment No. 35. There is no contradiction at all.

Rob Marris (Labour, Wolverhampton South West)

It is helpful to know that the hon. Gentleman continues to support amendment No. 35, despite my exegesis, as the hon. Member for Buckingham (John Bercow) would call it, on the contradiction.

I have already referred in interventions to amendment No. 36, whose wording is problematic. I shall be interested to hear the Minister's comments, but I think that the word "experiments" is problematic. Museums and similar places have many exhibits that are interactive, but that are not in the nature of experiments. As my hon. Friend the Member for Rhondda sagely pointed out, if the wording is too narrow, institutions could fall foul of it that would not do so if the provisions were left slightly broader. If amendment No. 36 were agreed to, an institution offering interactive exhibits that are not in the nature of experiments would be excluded, even though it might not otherwise have been excluded. I urge caution in that regard.

John Bercow (Conservative, Buckingham)

The hon. Gentleman is a magnificent anorak—he is even more pedantic than I am in such matters. He has made a thought-provoking point, and I put it to him that, although the interactivity of itself might not be experimental, a child's decision and choice to participate in it probably is.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman has made my point for me—it is difficult to interpret tax legislation in terms of who is the user of an exhibit. If he were playing with the machine with flashing lights, it might not be an experiment, but if his son Oliver were playing with such an instrument, it might be an experiment, given the young lad's age.

I shall be interested to hear what the Economic Secretary has to say about amendment No. 35. Some hon. Members have been pessimistic in assessing the effect of the one-year admission rule, which amendment No. 35 would change. The excellent Wolverhampton art gallery, of which I am not a member because it is free, has a tea shop, the kind of facility to which my hon. Friend the Member for Rhondda referred. Lots of people who go to the tea shop just to drink tea end up catching an exhibition. The example is anecdotal, but since the tea shop has been expanded in the past few years, footfall must have increased since the abolition of entry charges to museums.

Many museums in England, Wales and, I suspect, Scotland—this is possibly true in Northern Ireland—are expanding their provision of tea shops because they are experiencing greater footfall with free admissions. Footfall increased following the introduction of the 12-month right of admission in the great public museums and art galleries that have become free under this Government, and footfall might similarly increase in small museums, such as the Gainsborough museum in Sudbury to which the hon. Member for Rayleigh (Mr. Francois) referred.

The 12-month right of admission might allow small museums that already get some repeat business to increase that business and benefit from spin-offs on commercial sales and increased interest in the museum and its offerings. Charities should try to increase footfall to enable more people to enjoy and learn, which is their purpose. If a museum were creative, the 12-month restriction could assist it by allowing it to say to people, "You are now an honorary class 2 member. Come here more often, drink more cups of tea and bring other people with you."

Amendment No. 35 attempts to address a problem that may not exist, whereas the current wording in the Bill could provide small museums and art galleries with an opportunity to increase visitor numbers.

Ivan Lewis (Labour, Bury South)

When I was appointed Minister with responsibility for adult skills in the Department for Education and Skills, many people said that my challenge was to make that post sexy. Having listened to this afternoon's debate, I am not sure whether this challenge exceeds that one.

I thank the hon. Member for Rayleigh (Mr. Francois) for his kind words about my new post. I enjoyed jousting with him on the Higher Education Act 2004 and I am sure that he will shadow me in a reasonably dignified way. [Laughter.] I nearly said that I look forward to the months and years ahead, but I will settle for the months ahead.

This is my maiden Finance Bill speech, which, as I understand it, Mrs. Heal, means no interventions, a polite hearing from hon. Members and a discussion of the wonders of my constituency. Hon. Members' contributions covered an astonishing range of interests. I declare an interest as president of the Manchester City football club in the community scheme, by which admission to the trophy room has been entirely free for the past 29 years.

I congratulate the hon. Member for Wimbledon (Stephen Hammond), because, as one will find if one studies Hansard closely, all the Tory amendments tabled for this debate come from his contribution on Second Reading. On that basis, he could well be yet another Conservative party leadership candidate. Indeed, when he referred to Nelson's ménage à trois, I wondered whether that was a potential solution to the difficulties facing the Tories as they choose their leader.

The hon. Member for Richmond Park (Susan Kramer) made an important contribution. She said—this comment will be very familiar to all hon. Members in relation to the Liberal Democrats—that those on the ground always know best. That depends on which ground it is. The hon. Member for Buckingham (John Bercow) observed from a sedentary position that the Liberals back the Tories, but that would depend on which part of the country we were talking about, as well as which Tories.

My hon. Friend the Member for Rhondda (Chris Bryant) kindly took it upon himself to answer questions on my behalf—at one stage, I thought that he was looking to swap positions with me. I am sure that I can have a word with the Chancellor of the Exchequer to see what we can do, but not just yet; perhaps I could be given a few months in the job.

My hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson) asked how the Government will consider the proposal's impact on charities. To demonstrate how much confidence my advisers have in my ability to handle this debate, I have the answer here. It reads: "The Government has no wish to overburden charities. We are happy to monitor the effect of these changes over time." I hope that that reassures my hon. Friend. He is right to say that, whenever we introduce any new regulations or legislation in this House we must, as a matter of course, review its impact and ensure that it does not make the situation worse.

The hon. Member for Ludlow (Mr. Dunne), who has so many interests that I wonder how he can cope with the burdens of doing this job—he said that he is now the director of a bookshop, as well, and is obviously a very busy man—made a reasonable point about the Mappa Mundi. I was delighted that my hon. Friend the Member for Rhondda—my shadow Minister, so to speak—was able to explain what that is, because I did not have a clue. On a serious note, the hon. Member for Ludlow raised an important issue. I will write to him about it, because I do not want to give him and his constituents a trite answer that may prove to be not entirely accurate.

The hon. Member for Rayleigh made one or two comments that I did not completely agree with. He said that, during his conversations with various stakeholder groups involved in this debate, they described my hon. Friend the Financial Secretary as a reasonable man. I am not sure to whom he has been speaking. He said that they were anxious not to be caught up in party political fighting and read out an e-mail from the person concerned.

On the whole, people have attempted to make a sensible contribution to the debate, bearing it in mind that these issues have an impact in the real world on charitable organisations that are doing an excellent job, as well as on those who wish to patronise them and to contribute significantly to charity. There is complete unity among Members on both sides of the Committee that the voluntary sector is an incredibly important part of the kind of society that we want to encourage. People making contributions to charity is in the finest traditions of this country, and gift aid—I give credit to the former Prime Minister who introduced it when he was Chancellor of the Exchequer—has been a particularly innovative and imaginative way of supporting and encouraging charitable giving. I was slightly bemused when the hon. Member for Rayleigh referred to difficulties with the playing field for publicly funded galleries and museums. There was no problem with a level playing field under the Tory Government because there was no question of free admission to museums and galleries. The Government should be incredibly proud of introducing free admission.

Adam Afriyie (Conservative, Windsor)

Will the Economic Secretary tell us about the research and the facts and figures that he used to analyse the clause's effect on the various museums throughout the country? Instead of the assertions and individual points that have been made today, I should like know what quantitative analysis has been conducted.

Ivan Lewis (Labour, Bury South)

My hon. Friend the Financial Secretary was described as reasonable for the way in which he dealt with the consultations. A significant period of re-evaluating and analysing the provision that we wanted to introduce has taken place to ensure that it did not have unintended consequences. I want to cite some expert and relevant stakeholders. According to my briefing, Sam Mullins is chairman of the Association of Independent Museums, although the hon. Member for Rayleigh had a different person fulfilling that role. Perhaps we need to check. However, Sam Mullins is a world expert on such matters. He said:

"The need to attract an additional donation of 10% will be a challenge. But one advantage is that it gives us the opportunity to communicate our educational and charitable objectives to visitors. We look forward to working with Government to promote public awareness and buy-in to the concept of Gift Aid."

Equally important, Mark Taylor, who, according to my briefing, remains the director of the Museums Association, stated:

"To its credit, the Treasury has listened, and is not only modifying its original plan, but also giving museums an extra year to prepare".

That is a direct answer to the hon. Member for Rayleigh. A significant amount of evidence suggests that we have listened, consulted and taken seriously the concerns that people expressed.

It is important to put clause 11 in context. The exemption of rights of admission as a benefit was first granted in the Finance Act 1989 in relation to charitable deeds of covenant and was applied to gift aid as part of the 2000 reforms. As many hon. Members have said, the exemption applied only to specific heritage and conservation charities.

Some unintended consequences of the changes to gift aid donations have come to light. The clause tries to maintain the original objectives of generating new and additional giving and increase the range of charities that might benefit from the exemption while closing down the unintended consequences. The hon. Member for Rayleigh was fair enough to acknowledge that the consequences of the provision would be to increase the overall number of charities that benefit from the exemptions.

Philip Dunne (Conservative, Ludlow)

Will the Economic Secretary quantify how many charities are likely to be affected positively or negatively by the proposals?

Ivan Lewis (Labour, Bury South)

I cannot do that now, but I shall write to the hon. Gentleman. We will have a comprehensive list of the charities that are known to us but we will not know of every single charity in the country. However, we know from consultation that the scope of the Bill covers a far larger number of charitable organisations than would be supported through sustaining the status quo. Although the hon. Member for Rayleigh tabled amendments on specific aspects, the thrust of the Opposition contribution has been to question the principle of the changes. Without clause 11, the additional charitable organisations would not be in a position to benefit.

Mark Francois (Conservative, Rayleigh)

Before the Economic Secretary writes his letter in response to the reasonable question of my hon. Friend the Member for Ludlow (Mr. Dunne), will he confirm that the Treasury's regulatory impact assessment admits that it does not know how many charities will be affected?

Ivan Lewis (Labour, Bury South)

I just said that. I said that it is impossible to know the exact number of charities that are affected. However, my hon. Friend the reasonable man, who was described as reasonable because of his handling of the consultation, sat down with the stakeholder organisations and assessed the impact. We did not do it simply as a paper exercise or conduct the regulatory impact assessment in an abstract way. We have spoken over a period to the relevant organisations and we have been assured. The scope of legislation will be extended to support a significant additional number of voluntary organisations. I do not have the precise figure to hand but I will endeavour to give the hon. Member for Ludlow as much information as I can.

Greg Knight (Conservative, East Yorkshire)

Many of us are interested in this important point. Rather than merely writing to my hon. Friend the Member for Ludlow (Mr. Dunne), will the Minister place a copy of his letter in the Library so that we can all see his answer?

Ivan Lewis (Labour, Bury South)

I welcome the right hon. Gentleman to the Chamber. Perhaps he has been in the Library reading letters that I have been writing to his colleagues. If it will help, of course I am happy to place in the Library any answer that I give to the hon. Gentleman.

I want to put the matter into context. The clause provides details of property where the right of admission will be disregarded as a benefit where a donor is given a right of admission to view that property. It is an important point that the list is not intended to be exhaustive. It is a guide to the types of property held by a charity where a right of admission to view that property will benefit from the exemption. The rights of admission must meet the other requirements of clause 11 to qualify. When I write to the hon. Member for Ludlow, it is important that we consider the other element in the issue.

It is important also that the clause makes a clear distinction between simple payments to view the property of a charity and donations to a charity demonstrating a commitment and gift beyond the simple admission price. As has been said, to be eligible the donation must be at least 10 per cent. higher than the cost of the equivalent right of admission, or secure unlimited rights of admission for 12 months during all times when the site is open to the public.

The hon. Member for Richmond Park raised the question of the practical implementation of these changes. My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) pointed out that a dialogue has to take place on the implications of the proposals. It is also true that a qualitative dialogue between the charity and the individual visiting that charitable organisation is surely in the interests of that voluntary organisation.

A specific objective of gift aid is to build a sustainable and credible long-term relationship that is meaningful with the donor base. Potentially, for entrepreneurial voluntary organisations, it is a real opportunity to help them go further in terms of their original intentions in the context of the gift aid scheme. We are aware that there are practical implementations to consider. We do not seek to deny that. In the long run, once people have become used to change—we know that change is never easy—the position of charitable organisations that use the clause positively and practically could be enhanced.

It is important that I respond directly to the amendments, which were presented in a reasonable and fair way, but we are not convinced by them. I shall deal first with amendment No. 36. The list of types of property in clause 11 is not exhaustive. Where charities meet the other conditions of the clause, they will be able to use gift aid. I can confirm that the list, in terms of guidelines, will specifically include interactive experiments with an educational purpose. We can allay the fears that have been expressed about that.

Military memorabilia would also be included in the list. As I have said, the list as published is not exhaustive. The two specific examples that have been raised during the debate will be included in it.

Mark Francois (Conservative, Rayleigh)

Effectively, the Minister has said that he has accepted amendment No. 36 in that the guidelines that the Treasury will produce will incorporate that, too. I thank him for that. Can he give the Committee some idea of when those guidelines will be available—at least the month in which they will appear—as those museums and charities that might be affected will want to get their hands on them as soon as possible?

Ivan Lewis (Labour, Bury South)

They will appear as soon as possible, when we can sit down with those affected and make sure that we get the list right. The point is that the list was never intended to be exhaustive.

Amendment No. 35, which would reduce the 12-month period to three months by allowing gift aid to apply when the right of admission is granted for only three months, would diminish the distinction between paying an admission charge and making a gift that generates an ongoing relationship between the donor and the charity—the point that I was making earlier. That undermines an important principle of gift aid, which is about additional giving or additionality. Furthermore, a short period might encourage charities to manipulate the scheme when they think that it is unlikely that visitors will come back within such a three-month period: they could offer a three-month season ticket for a donation equivalent to a single admission and ensure that gift aid applies, rather than asking for a donation that is 10 per cent. more than that admission. We believe that the principles of gift aid are very important, and that the 12-month period is about right for sustaining those principles. It is also important to mention that there is no requirement to offer annual membership for the same price as a single admission. That decision is for the charity, taking account of the relevant circumstances.

Amendment No. 1 relates to the definition of "family". With regard to the contribution from the hon. Member for Wimbledon, one must ask whether a ménage à trois would qualify as part of a definition of the term. The key point about the legislation and guidance is that it is for the charity to determine what constitutes an accompanying family. Therefore, it will be for the charity to determine whether the definition relates to a relatively small number of people or a far more significant number of people. The scenario given on Second Reading by the hon. Member for Wimbledon, I think, raised the issue of what happens when one takes one's children and their friends to visit a museum. Clearly, those friends are not part of one's immediate family. Under the legislation and guidance, which we wish to keep as flexible as possible, it is absolutely clear that it is for the charity to define the term "family". In my view, there is a danger of an unintended consequence if we refer to 20 individuals, as charities might assume that that is the norm or median. As far as I am concerned, it makes sense to leave the provision as it is, whereby the individual charity defines flexibly, in this context, the term "family".

Judy Mallaber (Labour, Amber Valley)

The National Tramway museum in my constituency, on whose behalf I have lobbied on this issue, is pleased with the way in which this matter has been dealt with. While I am happy with what my hon. Friend has just said, can he assure the Committee that we will not suddenly find regulations being put down that narrow the definition and that the provision will not suddenly be interpreted in a more restrictive way by those administering it?

Ivan Lewis (Labour, Bury South)

I understand entirely my hon. Friend's concern, and any regulation or guidance must be consistent with what I have put on record in this debate during the past few minutes. I hope that that reassures her about how the provision will be applied.

Stephen Hammond (Conservative, Wimbledon)

Is the Minister saying that the charity can define "family" to include anyone within a group, but not necessarily a member of the charity? That is, in fact, the thrust of the amendment.

Ivan Lewis (Labour, Bury South)

I did not entirely follow the question. May I ask the hon. Gentleman to intervene again?

Stephen Hammond (Conservative, Wimbledon)

Is the Minister suggesting that a charity can choose to define "family" as a group accompanying the original member? If so, it seems to me that he is accepting the amendment.

Ivan Lewis (Labour, Bury South)

No, I am not accepting the amendment. What I said was that the definition of the term "family" in the legislation and the current guidance, which will not be changed, is basically a matter for the individual charity. We believe that maintaining the status quo is in the best interests of what we are trying to achieve, and that accepting the amendment would lead to a more confusing and ambiguous situation for charitable organisations. Having made those points, I call on the hon. Member for Rayleigh to withdraw amendment No. 36.

Mark Francois (Conservative, Rayleigh)

I think that I can genuinely say that this has been an informative debate and I thank all who have contributed. I noticed that we kept the Officials' Box rather busy, and I think we can all take that as a backhanded compliment.

The Minister admitted in his introductory remarks that he had been a lifelong Manchester City supporter, so his courage is not in doubt, but he also said that he was making his maiden speech in a Finance Bill Committee. Actually, so was I, but I did not ask for quite the same mercy in the form of a lack of interventions. I think the Minister will forgive me if I put that on the record as well.

This issue was dealt with for 18 months by the hon. Member for Wentworth (John Healey), who is now Financial Secretary to the Treasury. I was slightly disappointed that he did not respond to the debate. I take it that the baton was effectively handed to the Economic Secretary in a shuffle of responsibilities. Having heard the debate, I am sure that the Economic Secretary is delighted to have been given this bonne bouche by his more senior colleague.

I listened carefully to the hon. Member for Richmond Park (Susan Kramer). I am grateful for her declaration of support for our amendment No. 35, which I am minded to press. Let me deal first, however, with amendment No. 1. My hon. Friend the Member for Wimbledon (Stephen Hammond) tabled an interesting amendment seeking to widen the qualifying definition in clause 11(5I), and made an interesting case for it. As this year is the 200th anniversary of the battle of Trafalgar, I was intrigued to hear of Lord Nelson's domestic arrangements, which my hon. Friend described at one point as a ménage à trois. Who is to say that debate on the Finance Bill must always be dry? Having heard what the Minister said, I suspect that my hon. Friend will not be minded to press his amendment at this stage. Nevertheless, he has succeeded in raising the issue in Committee and I congratulate him on that.

I also congratulate my hon. Friend the Member for Ludlow (Mr. Dunne), who gave a number of practical examples of how the clause could directly affect his constituency. He also managed to get more interest on the record than I did in my opening remarks, and I congratulate him on that as well. My hon. Friend asked a specific question about how the Mappa Mundi would be affected. I was pleased to hear that the Minister had offered to write to him directly. I hope that my hon. Friend will receive clarification that will be of value to his constituents.

With amendment No. 36, we were partly trying to tease out the Government's thinking, but we also had a serious point to make. Let me say to the hon. Members for Wolverhampton, South-West (Rob Marris) and for Rhondda (Chris Bryant), both of whom spoke, that we drafted the amendment deliberately. We did not say that it would apply only to educative interactive facilities for children, because children do not have a monopoly on being educated. Adults can often be educated too, as the House of Commons proves regularly.

Of course, as a rule of thumb, people under the age of 18 tend not to be taxpayers, so the issue is whether the institution itself can qualify. I am pleased that in his speech the Minister effectively accepted amendment No. 36 by confirming that the guidelines that the Government will issue to clarify this matter will include that category of charity. I thank him for that, but I reiterate the plea on behalf of the whole sector that we have those guidelines as soon as possible. Quite properly, and for all the reasons that we have elucidated this afternoon, many museums and charities throughout the country will want to investigate whether they can qualify. The sooner, therefore, that the Treasury and Her Majesty's Revenue and Customs produce those guidelines in hard copy, so that everybody can read them and take a view, the better.

I also paid particular attention to what the Minister said about amendment No. 35. I appreciate that his very reasonable predecessor has discussed this issue—which, as I said, dates back to December 2003—with the industry for some time. Originally, the Government were going to abolish qualifying institutions' ability to claim gift aid on admission charges. There was such a row that they retreated and came up with a modified position, on which they have also consulted. However, as we have attempted seriously to argue this afternoon, a number of institutions are still genuinely very concerned about how the clause will operate, particularly the provisions concerning the 10 per cent. additional charge and the one-year right of admission. We have tried to reduce that period to three months, so that the Government can protect revenue without charitable sectors—museums—being inappropriately affected to the point where their revenue schemes are under serious threat.

We have made the case and I am sorry to hear that the Minister was not minded to accept it. I suspect that, as a result, this issue will rumble on. The Government have offered to review the situation in 2007, as the regulatory impact assessment points out, so we may yet need to consider how the provision works in practice. I make a final plea to the Minister that between now and consideration on Report in July, he goes back to those who are affected by this provision and considers the issue one last time. However, given that he has offered no concessions this afternoon, we have no option but to test the opinion of the Committee. I therefore wish to press amendment No. 35 to a vote.

Nicholas Winterton (Conservative, Macclesfield)

May I ask the hon. Gentleman what Her Majesty's Opposition intend to do about amendment No. 36? Do they wish to withdraw it?

Mark Francois (Conservative, Rayleigh)

Forgive me, Sir Nicholas—I thank you for that guidance. Because the Government have effectively accepted amendment No. 36 in the revised guidelines, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 35, in page 12, line 1, leave out 'one year' and insert 'three months'— [Mr. Francois.]

Clause 18 — Section 17(3): specific powers

Richard Spring (Conservative, West Suffolk)

I beg to move amendment No. 2, page 17, line 9, at end insert—

'(i) in relation to unit trust schemes and open-ended investment companies mainly invested in interests or rights in or over land, determine the rate of corporation tax for the year 2005 and subsequent financial years to be nil, or the rate at which income tax at the lower rate is charged for year of assessment which begins on 6th April in the financial year concerned.

(j) include provision for unit trust schemes and open-ended investment companies to have different classes of units or shares, and to allow different distributions to be made in respect of such different classes subject always to any rules preventing discrimination between unit holders or shareholders made under section 64(2)(e).'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 3, page 17, line 21, at end insert—

'(f) make special provision for any interest or rights in or over land held by a unit trust scheme or open-ended investment company and may make special provision for withholding tax on distributions from an authorised investment fund, mainly invested in interests or rights over land, and may determine specific circumstances when such tax must be withheld.'.

Richard Spring (Conservative, West Suffolk)

The clause allows for changes to the system of taxing collective investment funds to be undertaken by regulation rather than by an Act. This morning, we had a written ministerial statement saying that the description of those regulations was being placed in the Library. If I said, "Better late than never", it would be an understated verbal act of kindness. It sounds again like a Government, and particularly a Treasury, who have two enduring characteristics—first, obsessive micro-management, and secondly, a lack of attention to detail or simple functional incompetence. All this was in the original Finance Bill and the Treasury has had plenty of time to come up with the details, but it has failed to do so in good time.

Most of the changes in clause 18 are non-controversial, but we need to get to grips with Government thinking on some underlying issues. It may be constructive and informative if I pose Ministers a series of questions, on which I shall expand, to give them the opportunity to respond appropriately. First, can the Government give us a firm timetable as to when the regulations under clause 18 will be introduced, given the massive sum of UK funds under management that will be subject to those rules?

Secondly, can the Government indicate the likely benefit of the proposed changes under the clause? Can they provide a cost-benefit analysis in the light of the uncertainty and the expensive system changes that fund management houses will have to make as a consequence of the changes? Lastly, for equity, open-ended investment company and unit trusts, will the Government indicate the moneys lost by UK pension funds due to the removal of the tax credit on distributions in 1997 and to what extent they blame the reduction in savings in ISA-style vehicles on that tax raid?

On Second Reading last week, the two Liberal Democrat spokesmen went into the rather wild woods of vintage wine and property windfall taxes and clearly indicated that they wanted to examine clause 18 more fully. My hon. Friends and I and, I dare say, Members on the Treasury Bench are somewhat amazed that the Liberal Democrats felt unable, in view of what they said last week, to table any amendments to clause 18. The contrast between us and them says it all.

Rob Marris (Labour, Wolverhampton South West)

Conversely, some of us are somewhat amazed at the number of questions that the hon. Gentleman has just asked that appear to bear no relationship whatever to the amendment. Perhaps he could sketch for the Committee the connection between the general questions he raised about clause 18, which are of course Second Reading or Third Reading matters, and the specific amendment that he is moving.

Richard Spring (Conservative, West Suffolk)

If the hon. Gentleman will be patient, I shall address the amendments specifically.

David Heath (Liberal Democrat, Somerton and Frome)

Perhaps the hon. Gentleman assumes that there will be no stand part debate and that my hon. Friend the Member for Eastleigh (Chris Huhne) will not be able to make exactly the points that the hon. Gentleman accuses us of not making.

Richard Spring (Conservative, West Suffolk)

I very much regret that the Liberal Democrats failed to put down any amendments, and that is that.

There is concern that without our amendment No. 2 the taxation of OEICs and unit trusts would not be parallel. OEIC tax law currently allows separate sub-funds of OEICs to be taxed as though they were separate OEICs. Given that without the amendment the taxation of OEICs and unit trusts would not be parallel, the provision amends the law to enable all authorised unit funds to have separate sub-funds, to be taxed as stand-alone funds, thus fulfilling the original intention when OEICs were introduced.

The UK fund management industry manages about £276 billion, with substantial investments by life insurance companies and pension funds. Many accounts are held in retail funds. When considering the amendments we must be mindful of the sustainability and competitiveness of the industry. The regulations that will be made under clause 18 are likely to cause the fund management industry to make changes in its systems that could be expensive and time-consuming and may outweigh the possible benefits. Simply put, the tax treatment of funds under fund management is crucial in the UK and our financial services industry must have clarity and fair treatment.

I should like to bring to the attention of the Committee the view of the Association of Investment Trust Companies on tax treatment, given that clause 18 seeks to rationalise it. I shall send more details to the Minister, if I may. In the view of the association, the Finance Bill would enhance the ability of authorised unit trusts and OEICs to invest tax efficiently in bonds. There seems to be an anomaly, however. Investment trust companies invest in shares and securities to provide a capital return for their shareholders. They allow investors to gain cost-effective access to a diversified portfolio of shares and securities and expert fund management. There seems to be a problem of equivalence in the tax treatment of AUTs, OEICs, and ITCs. I would be grateful if the Minister could respond to that point. If we change the taxation treatment of income received by investment trusts by reducing the taxation rate from 30 to 20 per cent., there is a need to consider whether we should alter the tax treatment of dividends paid by the investment trust and received by corporate members.

David Heath (Liberal Democrat, Somerton and Frome)

On a point of order, Sir Nicholas. The hon. Gentleman does not appear to be referring to the amendments that stand in his name; he is giving a stand part speech. That makes it very difficult for Members who may wish to catch your eye later to make their points without necessarily repeating points that have already been made.

Nicholas Winterton (Conservative, Macclesfield)

I am satisfied that the hon. Member for West Suffolk (Mr. Spring) is talking in a general way to the amendments that have been selected. If the hon. Member for Somerton and Frome (Mr. Heath) wishes to participate, I will be only too delighted if he catches my eye.

Richard Spring (Conservative, West Suffolk)

Thank you, Sir Nicholas.

If the Government are going to reform the taxation of all collective investment vehicles, what is the point of these regulations that will cause the fund management industry much work to alter its systems?

No tax law has yet been established for a tax regime for collective investment vehicles in property, which is at the heart of the amendments. We understand that the Government have it in mind to establish such a regime by 2006, but the exact timing is still up in the air. There is uncertainty, so we need a clear timetable for action to establish real estate investment trusts.

Clause 18 enables undertakings for elective investments in transferable securities to make distributions gross of withholding tax. That might, therefore, encourage overseas investments. This is of obvious concern to the industry and is at the heart of the amendment. It should be noted that despite several announcements by the Government saying that they will introduce tax legislation to give effect to real estate investment trusts, such legislation is not being introduced in this Bill. This is due to problems involving the current method of taxation of overseas landlords where rents payable to them are subject to a 22 per cent. withholding tax except when the landlord has the prior agreement of the Inland Revenue. The concern is that an REIT will effectively escape such tax when paying a distribution to the overseas landlord. However—this is the point—many other countries have REITs and tax regimes specifically for them.

Amendment No. 3 highlights the problems and would enable legislation to be introduced following suitable consultation. I can only repeat that there is genuine concern that the problem is causing the property fund industry to locate elsewhere than in the United Kingdom. There are now £3 billion worth of listed property trusts in Guernsey that might otherwise be in the United Kingdom. The United States has these; Japan launched them in 2001; France in 2003; Germany is considering the introduction of such a vehicle; and it would be preferable if we could introduce a regime before then.

Companies are effectively developing equivalent structures elsewhere. I understand that a major insurer established such a vehicle in Guernsey, complaining that it would have liked to have the option of establishing it as a UK vehicle. The longer it takes the UK to establish such a vehicle, the lower the tax take will be as more and more vehicles go offshore. A report that appeared in The Times on 10 June talked about REITs and the potential leakage later if the problem is not dealt with. It said:

"The British Property Federation believe that they have shown the government that there will be no net tax leakage, so hence there is no cause for delay."

Essentially, the amendment invites the Government to be more specific than they have been thus far. It therefore proposes allowing REITs to be introduced. It highlights the problem and would enable legislation to be introduced following consultation.

Amendment No. 2 would enable one of the suggested solutions to be that the tax is charged at nil in the REIT with greater tax then due to arise on the investor in the REIT if it is so chargeable to tax. Most investment vehicles have to distribute the majority of their income each year and those distributions are taxable if the recipient is a UK resident. However, under tax treaties, overseas investors may avoid the tax charge altogether. I understand the problems involved in the current method of taxation of overseas landlords where rents payable to them are subject to a 22 per cent. withholding tax, except when there has been prior agreement with the Inland Revenue. However, there remains the concern that an REIT will effectively escape such a tax when paying a distribution to the overseas landlord. The genuine concern is that this issue, which is yet to be resolved, is causing the property fund industry to locate elsewhere than in the United Kingdom.

The head of indirect property investment and strategy at Merrill Lynch Investment Managers warned that if the Government did not get the tax model right, the flow of domestic UK property investment offshore would also accelerate. That point has also been made by the British Property Federation, which said that Britain could not afford to wait on the introduction of REITs. Since France has adopted the US model, it has seen the market capitalisation of 10 established quoted property companies double within 18 months. If we do not act quickly—we need reassurance from the Government on this—we will not be the international REIT centre that we should be. For 20 years, the UK commercial property market has lobbied for the introduction of REITs. The industry does not share the view that there would be tax leakage. Most overseas investors are not paying tax to the UK Government anyway and many invest through offshore structures. Money has been, and regrettably is, flowing to offshore commercial property trusts.

The US is undoubtedly the home of the REIT. Last year, it achieved an extraordinary 30.4 per cent. total return for investors and 22.5 per cent. over five years. The attraction has been the high dividend yield, which in the US is more than 5 per cent. compared with less than 2 per cent. for equities. I say that because in an era of low yields from investments pretty much all the way round the world, it is difficult for those who want investment income to achieve a return. Through the amendment, I ask the Minister to consider what has happened in the US since the establishment of its Act in 1960. Companies that operate as REITs pay no tax on corporate income and, in order to get that tax break, REITs must pay out at least 90 per cent. of every dollar in income to shareholders in the form of a dividend and companies can pass on the tax savings from the dividend deduction to shareholders, making REITs an attractive investment.

In the Government's discussions on this and other tax regimes, we will need to look at this issue very carefully. As I have said, REITs operate in many other countries such as Australia, Hong Kong, Singapore and France. In France, for example, foreign investors, who are always difficult to deal with for any tax authority, do not pay tax on REIT incomes if from abroad. If a 22 per cent. tax rate were introduced, the foreign investor issue would be neutralised except for those who have a particular arrangement with the Revenue, but UK pension funds, which pay no tax, would suffer. We must examine the issue particularly in the light of the competition that we face elsewhere. That is why we have tabled the amendments.

I return to the central point of my argument. We have exceptional expertise in this country in all spheres of investment and we do not want that expertise to be deployed against our economic interests. We really need to move on, and I hope that the Minister will be able to provide some comfort on the issues that I have raised.

Christopher Huhne (Liberal Democrat, Eastleigh)

rose—

Nicholas Winterton (Conservative, Macclesfield)

I call Mr. David Howarth—[Hon. Members: "Chris Huhne."] I apologise to the hon. Member for Eastleigh (Chris Huhne). He is new to this place and some of us who have been here a long time have not yet learned all the names of new Members, for which I apologise to him and the Committee.

Christopher Huhne (Liberal Democrat, Eastleigh)

Your apology was most gracious, Sir Nicholas, although there was no need for it, given the circumstances.

I was slightly surprised by the sideways glances made by the hon. Member for West Suffolk (Mr. Spring) at the Liberal Democrat Benches because they implied that he had these matters under enormous control, yet somehow we did not. I merely draw his attention to the amendment paper. Amendment No. 2, which stands in the hon. Gentleman's name, refers to a provision that is not part of the Bill: a section 64(2)(e). I can only assume that the reference was lifted straight off the hon. Gentleman's word processor from when he was examining the Finance Bill presented before the election and that he has not bothered to check that the provision still forms part of this Bill. I do not think that we Liberal Democrats need to take any lectures from the Conservative Front Bench about attention to detail. We know that the Government's majority in the House is substantial, so I hope that the Minister will be sufficiently open-minded to allow the power of argument to persuade him to revise several provisions. I shall thus spell out several worries that we have about clause 18.

Clause 18 sets out the specific powers that are to be delegated to the Treasury to shape the taxation of open-ended investment companies—so-called OEICs—and authorised unit trusts, or AUTs. The important powers will be able to have a substantial impact on the taxation of those entities. I have three key points to make to the Minister.

First, there is no obligation on the Treasury to be open or transparent when taking such substantial powers. Given the concerns of the industry, there should at least be a commitment to proceed by consultative draft regulations. Even better, the provisions should be subject to a four-year sunset clause to bring them into line with similar provisions in European legislation. The clause is entirely silent about the manner in which the Treasury should proceed, but that is frankly extraordinary given the song and dance that the Treasury rightly made about putting obligations on the European Commission and the European Securities Committee, on which it is represented, when they take decisions about financial services in directives by delegated powers. At the very least, the Treasury should proceed by draft regulations that allow the industry to comment.

I hope that the Minister will assure the Committee that the Treasury will always allow adequate time for consultation. The Treasury was sensible when it insisted that there should be a three-month period for consultation before directives made under delegated powers were adopted at the European level. Laying something before the House for 21 days does not represent a proper consultation by the standards that it has applied to the scrutiny of European legislation.

Secondly, the clause means that there is still the possibility of reintroducing double taxation of a fund designed by the Financial Services Authority as a fund under the qualified investor scheme. The loss of large tax-paying investors' tax advantages could be triggered if investors with more than 10 per cent. of stock liquidated their funds. There are obvious exceptions in the clause for nominees, pension funds and insurers, but there is a serious potential penalty on tax-paying investors in the vehicle, who might find themselves facing a tax liability through no fault of their own.

For example, any investor—institutional, individual or corporate—could liquidate holdings in a QIS fund, leaving other tax-paying investors, such as corporates or individuals, with more than 10 per cent. of the stock because the funds are open-ended, not closed-ended. The money would be drawn from the open-ended fund leaving other investors necessarily with a higher proportion of what remained. That could put off tax-paying investors because they would not be prepared to take the risk of investing in such a vehicle. The economies of scale in pooled funds would be limited and the UK would be made a less attractive base for such funds. I know of no other EU state that has anything like the measure that we are considering, so it represents an open invitation to incorporate such funds not in London or Edinburgh, but in Dublin or Luxembourg, although I am sure that that is not the intention of the Treasury or the Minister.

I understand that there might have been tax-avoidance structures that may have used funds in a way that caused concern in the Treasury, but surely that is not the case for QIS funds because, of course, they have not yet begun. However, the Bill contains no provisions to deal with other uses of funds, such as retail funds, that could have caused the original worry in the Treasury about the possibility of tax avoidance. Furthermore, there is doubt about whether the provisions will catch people. The fund must be required to show that it is managed at arm's length from any investor to ensure that tax-avoidance provisions are effective. The investment function should thus not be influenced by any communication with the investor. That would be more appropriately enforced by a rule from the FSA than by attempting to do so in the way outlined in the clause.

On my third point, I agree with the hon. Member for West Suffolk, so I shall try not to repeat too many of his arguments. The broad principle at stake is tax neutrality. The provisions in clause 18 apply only to open-ended investment companies and authorised unit trusts. They do not apply to the main competitors to those vehicles, namely closed-end funds, or investment trusts as they are more commonly known. One result of the measure would be to widen further the tax advantages enjoyed by OEICs and AUTs compared with investment trust companies, especially when investing in bonds, which would thus distort the market. That would be bad in principle because it would poison fair consumer choice, but it would also be bad in practice because ITCs might be an objectively better vehicle for certain kinds of investments, including bonds, than unit trusts.

For example, I remember in the wake of the Asian financial crisis when there was substantial and persistent selling pressure out of unit trusts that had specialised in the affected countries, which meant that the trusts sold off the most liquid, and often the best, investments to repay their investors. That meant that the less-good investments were left for those who did not get to the door first. There are now specific provisions in the wake of 9/11 to stop a catastrophic run or loss of confidence, but far short of that eventuality, one can experience real problems, especially with investments in emerging markets. By contrast, investment trusts merely see a widening in their price discount to net asset value, which makes them a much safer vehicle when there is high volatility in the asset class, for example in emerging market bonds.

I hope that the Treasury will consider bringing forward a more radical recasting of the tax provisions to put investment trusts, OEICs and AUTs on an equal footing. In general there is a need for the UK to simplify the tax code for all those investment vehicles to ensure that there is a level playing field. I hope that the Minister will assure me that he will consider the matter again.

Richard Spring (Conservative, West Suffolk)

I apologise if I am pre-empting the hon. Gentleman. Will he deal with the subject of REITs, which is at the heart of the amendments, because I would be interested to hear the Liberal Democrats' position on that?

Christopher Huhne (Liberal Democrat, Eastleigh)

Both amendments are sensible and we support them. The hon. Gentleman perhaps knows from my remarks on Second Reading that I think REITs have an important role.

I ask the Minister to address those three points. The first is the proper amount of consultation, which is appropriate given what the Treasury has said in the context of European powers of a parallel nature. The second is ensuring that there is a real QIS fund that is attractive to investors because it does not put tax-paying investors at an unnecessary risk. The third is the wider issue of tax neutrality.

Brooks Newmark (Conservative, Braintree)

I want to touch on the impact that the current tax regime has on real estate investment trusts, which are at the heart of what we are discussing. Notwithstanding the Government's recent announcements on introducing tax legislation that gives effect to REITs, I remain concerned that it has not happened. The problem centres around the tax of overseas landlords. Although I understand that prior agreements can be and have been established with the Inland Revenue, it is the uncertainty that causes me alarm because it may drive our nascent property fund industry to other countries that have more attractive REITs and tax regimes.

There are three or four specific benefits that I want the Minister to consider. As my hon. Friend the Member for West Suffolk (Mr. Spring) said, if we do not address the problem, we will drive the REIT industry to other regimes. The industry has been extremely successful in the United States for well over a decade, but REIT managers who want to come to this country are being driven to Guernsey, Germany and other European countries with attractive tax regimes. In establishing a bone fide REIT industry, we can offer the great benefit of our successful private equity industry. As we have seen in the United States, many private equity firms have successfully established property fund managers, who in turn have established REITs.

REITs can benefit the United Kingdom economy and the Chancellor. Unless we attract people to this country and develop an attractive REIT regime, we will not increase employment in the City, which is the heart of the financial centre of Europe. It is important that we capture our talent and bring in more investors to the real estate industry as a whole and to REITs specifically. If we employ more people in that industry and, again, in REITs specifically, that will increase the tax take in terms of income tax, because more people will be employed, and in terms of the companies that are established. I ask the Minister to think about what we need to do and to consider the amendments so that we establish a successful REITs industry sooner rather than later.

Theresa Villiers (Conservative, Chipping Barnet)

I, too, support the amendments. The key issue is real estate investment trusts, as mentioned by a number of hon. Members. As we heard, the industry and experts have for some time called for the required structures to be introduced. They have emphasised the importance of enabling and facilitating investment in a REIT-type structure. The Government have made positive noises and have said the right things, but, sadly, they simply have not delivered in this area, as in so many others. If we are to be competitive and successful in establishing REITs for our savers and investors, we need a proper tax and regulatory framework to facilitate the new structures. The amendments are designed to give more certainty and to make it easier for REITs to go ahead successfully.

Rob Marris (Labour, Wolverhampton South West)

What does the hon. Lady think would happen to land values in the United Kingdom if we allowed REITs to go ahead?

Theresa Villiers (Conservative, Chipping Barnet)

I do not think that REITs would have a significant impact on land values. It is not easy to predict exactly what would happen, but the amendments would not cause spiralling asset prices and inflation. Indeed, I would not support them if I thought that that would be the consequence. We have to be cautious about new measures that have an impact on the property market and property prices. I am confident that the amendments would make modest changes that would allow REITs to be established with greater ease, but they would not have the inflationary effect that worries the hon. Gentleman.

Rob Marris (Labour, Wolverhampton South West)

It was mentioned that France set up REITs in 2002—I hope the Committee forgives me if I misremember the date. Land values in France in the past three years—this may or may not be coincidental—have increased by something like 50 per cent.

Theresa Villiers (Conservative, Chipping Barnet)

I am not aware of the statistics, but other factors are likely to be in play. I can see no evidence for the existence of a REIT framework facilitating such an increase in land values. Many other factors could have caused that increase. We heard about the great success of REITs in the United States, where they have been used for many years. It does not seem to have a huge problem with spiralling land values.

It is important to provide ease of access to different types of investment. It is a basic investment in economic terms to encourage people to diversify their investments as much as possible. REITs have the benefit of allowing people an easier alternative to equities and are an easier way to buy into a portfolio of property because they do not have to invest everything in a single property. They have a significant value in terms of diversification of people's investments, with the consequent reduction in risk. That is one of their great values and it is why, once a proper tax and regulatory framework is in operation, I would expect REITs to go from strength to strength and to become much more common.

I said that I support some of the Government's statements on REITs, but we need changes to ensure that the tax framework becomes more certain. I hope that they will consider supporting the amendments as a route towards clarifying the tax position on REITs. Uncertainty is one of the greatest vices in terms of investment and the competitiveness of a financial centre. If one discusses tax or regulatory measures with experts down the road in the City of London, they often emphasise that clarity and certainty about the rules is, in a sense, more important than the content of the rules themselves. Uncertain rules or frameworks are one of the best ways to drive away investment, and hence erode our competitive position.

As my hon. Friend the Member for West Suffolk said, people in this country have tremendous expertise in investment and financial services. Indeed, that expertise can be narrowed down to one place—the City. My constituency is on the edge of London, and I have many constituents who work in the City. It is a great economic asset to our country and the continent, and we must ensure that it remains competitive in the important new area of real estate investment trusts. If we do not grapple with the issues, we risk losing out on that new market or growing sector, as other hon. Members have said. It is universally acknowledged that once one loses a market it is almost impossible to regain it.

Brooks Newmark (Conservative, Braintree)

I have been thinking about the question asked by the hon. Member for Wolverhampton, South-West (Rob Marris). I know a little about REITs, although I have never invested in them myself. The hon. Gentleman was concerned about the causal effect of REITs on property prices, but there is no evidence whatsoever of property price inflation caused specifically by REITs. There is enormous price inflation in France and other European countries that do not have REITs, so there is no evidence of cause and effect. It is important to make that point clear.

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

Order. For the benefit of new Members, may I point out that interventions are meant to be quite brief?

Theresa Villiers (Conservative, Chipping Barnet)

I am grateful to my hon. Friend the Member for Braintree (Mr. Newmark) for his well-informed contribution. It would be extremely useful if the Government produced some research and analysis, as we need to consider the issue, and that would assist our assessment of the Bill. I shall conclude on that point, and emphasise the fact that the amendments are simple measures that would create a great deal more tax certainty for a valuable new form of investment. They would encourage investment and savings, and they would offer considerable assistance in ensuring that our global financial centre in the City of London remains as competitive and successful as possible.

Ivan Lewis (Labour, Bury South)

This has been an important and interesting debate. The hon. Member for West Suffolk (Mr. Spring) began in his usual bullish way. He used the phrase "better late than never" and accused the Treasury of functional incompetence. How the Conservative Government would love to have been accused of the relative functional incompetence that the Treasury and my right hon. Friend the Chancellor have displayed under this Government! The lowest inflation, interest rates and unemployment in living memory would not be described by most objective observers as functional incompetence. As for the charge of better late than never, we are consulting industry representatives, as we want to be quite sure before we introduce regulations that we get them right.

The hon. Member for West Suffolk raised a number of perfectly reasonable issues, which I shall try to address one by one. He was understandably concerned about the fact that funds would need to rebuild all their systems from scratch. We do not accept that, as the change is built on to the existing mechanisms operated by funds. It should therefore be a case of adapting the system rather than redesigning it wholesale. He was also concerned about the major cost of system changes and the way in which the funds will benefit from them. The powers that allow us to make regulations are enabling powers, and funds can still elect to make only dividend distributions. The changes allow funds to reduce their administration costs by offering a wider range of investments within an individual fund and to consolidate and streamline the number of funds on offer. That could lead to administrative savings for fund managers, and savings could be passed on to investors through lower fees. Fund managers will save substantial costs by no longer having to comply with the daily bond fund test. The hon. Gentleman raised the benefit for authorised investment funds. We would argue that the proposal is more attractive to investors, because more diverse investments can be offered. There would be a cost saving, and dividends and interest could be issued to reflect the nature of the funds.

I shall try to address hon. Members' concerns about the important issue of real estate investment trusts. The hon. Member for Eastleigh (Chris Huhne) was concerned about the use of secondary legislation. It is important to make it clear that clause 19 requires affirmative procedures to be followed when powers are used for the first time to introduce regulation. In those circumstances, the full detail of the measures will be scrutinised and debated by the House before they come into force. The hon. Gentleman raised the basic charging provision—the rate of tax—which is included in clause 16 and is subject to scrutiny by the House. The proposals provide for the rate of taxation to be applied to open-ended investment companies and would make that subject to primary legislation, rather than regulation. I hope that that addresses the hon. Gentleman's concerns.

The hon. Gentleman also raised the proposal to tax substantial investors in qualified investor schemes on the annual increase in the value of their units which, he said, amounted to a double taxation charge. That is not the case. The substantial investor will calculate a capital gain at a point at which the holding rule is triggered. The gain will then be held over until he disposes of the units. Each year, he will be subject to an income tax charge on any increase in the value of the holdings. The investor will not be subject to a further capital gains tax charge on income that has already been subject to an income tax charge. There is simply no double taxation in those circumstances.

Christopher Huhne (Liberal Democrat, Eastleigh)

The key point is that tax-paying investors may believe that they are investing in a fund that will not lead them to have any tax liability whatsoever but will suddenly find, through the operation of another investor, that they own more than 10 per cent. of the fund, even though they never intended to do so. As a result, through no fault of their own, the liability to which the Minister referred would be triggered. That is not sensible, as tax-paying investors will steer clear of the funds and avoid them. The object of the funds—the sensible pooling of investment for a range of investors—will not be achieved. The Minister has not addressed that point.

Ivan Lewis (Labour, Bury South)

It is reasonable to ask us to make the consequences quite clear. I do not believe that the hon. Gentleman's concern is justified, but to prevent misunderstanding or the risk of misleading people, we must ensure that the regulations make it clear which circumstances apply. We will take note of his concerns when we make them.

The hon. Gentleman said that more fund providers would sell funds in Dublin and Luxembourg, rather than in the UK, because of the rule and the instability of the regulation. The tax regime applicable to funds authorised by the Financial Services Authority will not be changed materially. Capital gains made within the fund remain exempt from corporation tax, and fund-level profits remain subject to corporation tax at the lower rate of income tax—currently 20 per cent. The income tax treatment of investors receiving distributions from both retail funds and qualified investor schemes will not change. Nor will the capital gains treatment of those individuals, unless they, together with their associates, hold a substantial proportion of a QIS. In those cases, any annual increase in the value of their holding will be charged to tax as income each year.

Christopher Huhne (Liberal Democrat, Eastleigh)

I return to the key point: a very substantial group of investors will steer clear of such things. The Minister says that existing tax provisions are not materially affected, but the whole point of setting up the QIS funds is precisely to ensure, on the initiative of the FSA, that there is a vehicle by which one can have sensible pooled investment funds. That is being done precisely to ensure that there is a material change in tax treatment. Saying that a substantial number of investors will be scared off because of the liabilities that they may incur through no action of their own precisely confirms my point: the investments are going to be registered in Dublin and Luxembourg, and not in London.

Ivan Lewis (Labour, Bury South)

I entirely reject the hon. Gentleman's contention. We believe that the United Kingdom remains a location of choice for such activities, for a variety of reasons. We do not believe that his concern about his perception of unintended consequences is legitimate, but I am sure that we will have the opportunity to discuss those matters when we look at the regulations.

I shall address REITs-related issues. Amendments Nos. 2 and 3 cover two different aspects: the taxation of authorised investment funds that invest mainly in property; and the treatment for authorised funds that have different classes of units or shares. On the second issue, amendment No. 2 seeks to insert a provision to allow authorised investment funds to have different classes of shares or units and to make different distributions in respect of them. We do not believe that the amendment is necessary. OEICs can already issue different classes of shares, and as we indicated in the Budget, regulations will be made to enable authorised unit trusts to do exactly the same. The powers taken in clause 17 enable that to happen, and clause 18 also includes a subsection to cover the point.

On the taxation of funds that invest mainly in property, amendment No. 2 seeks to enable regulations to be made that charge an authorised investment fund's property income to tax at either a nil rate of corporation tax or a rate equivalent to the lower rate of income tax. Amendment No. 3 seeks to allow special arrangements for withholding tax to be applied to distributions to investors by authorised investment funds that invest mainly in property. We believe that neither amendment is needed to enable regulations to achieve the outcome that the hon. Member for West Suffolk intends. The powers taken in clause 17(3) allow for the rewrite in regulations of the tax regime governing authorised funds.

Clause 18 was inserted in the Bill to explain how we intend to use those powers. It is simply an illustrative clause, and the industry asked us to include such a clause to reassure the House, in the absence of draft regulations, about how we intend to go about rewriting the current regime. In that respect, the purpose of the clause is to help to explain the proposed changes, not to define them.

I turn to the specifics of the proposed amendments to the treatment of property income. More broadly, partly in response to changes to the regulatory regime for authorised investment funds made by the FSA and the possible introduction of a UK real estate investment trust, the Government are considering whether changes to the taxation of property within authorised investment funds might be appropriate. As hon. Members are aware, that consideration is ongoing, although I appreciate their feeling that the matter is urgent and requires speedy action. It would therefore be premature to provide specific examples of how the taxation of property might be taken forward in this Bill or indeed anywhere until the position for UK REITs has been finalised. At this stage, it is important to talk hon. Members through the thought process and the different stages of the REIT debate.

One feature of the significant consultation exercise is the consensus that a key challenge has emerged in relation to international treaty obligations. I do not think that there is any doubt among hon. Members in all parts of the House that that is a genuine difficulty. It poses a significant challenge with regard to meeting the Government's specific objective of having no overall Exchequer cost. In the most recent Budget, the Government therefore published a further discussion paper that set out our latest thinking on UK REITs and highlighted three challenging and technical tax issues that we felt needed further discussion with the relevant parts of the industry. We made it clear at that stage that the outcome of the consultation would inform our decision on how property should be taxed in authorised unit trusts and open-ended investment companies. Those two issues will be taken forward in parallel.

We have had a number of meetings with industry working groups, particularly of tax specialists, to consider the outstanding issues that have arisen in those discussions about REITs. We have also received a number of written responses, only within the past few days. I reaffirm that, as the Budget discussion paper said, we intend to legislate in 2006, subject to our capacity to find a workable solution to the issues that have been raised. I reaffirm that that is the Government's intention.

Richard Spring (Conservative, West Suffolk)

That issue is at the heart of the amendments, and I simply do not understand the following point. The Minister is engaged in the consultation process, and three specific elements are still to be considered. The Government have promised legislation in 2006, but there are legitimate fears in the industry that action is not being taken rapidly enough and that the Exchequer is losing out in consequence. This process has been going on for many years, and he must draw it to a conclusion. Why have other countries with tax systems comparable to ours managed to deal with the problem, while we have not? That is the question to which I require an answer.

Ivan Lewis (Labour, Bury South)

Before we resolve the question, we must be convinced that there will be a fair regime that does not create distortions and is fair to all taxpayers.

Brooks Newmark (Conservative, Braintree)

While the Minister waits, the message is clear: people are moving to other tax regimes. Today, next month and the month after, more and more real estate investment trusts will be set up elsewhere. He has to ask himself why those other businesses are being set up in other tax regimes. If he waits another year, the Exchequer will lose out.

Ivan Lewis (Labour, Bury South)

It is clearly a point of consensus that we want to resolve the issue as quickly as possible and that that is in the national interest. I think that we also agree, however, that there are complex and difficult issues that have been resolved neither by Members of this House nor by experts. We have been taking expert submissions and advice, and as of today's debate there has been no satisfactory final resolution to ensure that the legislation that we introduce will achieve the objectives that we want from a reform of REITs.

That is the position. I have been open and up front about the process of tackling the REITs issue. We need to make progress as quickly as possible, but the Government are often admonished for rushing through legislation that leads to unintended consequences.

Richard Spring (Conservative, West Suffolk)

Twenty years.

Ivan Lewis (Labour, Bury South)

If it has taken 20 years, the hon. Gentleman's party bears some responsibility; indeed, he is expressing agreement.

We recognise the importance of speed, but we are equally determined to get things right. I do not accept the Opposition's contention that this country is losing out as a consequence of delay. If one examines all the indicators, this country is doing very well. However, the reform of REITs is an integral part of our economic objectives for the near future.

I have explained to the hon. Member for West Suffolk that clause 18 already achieves the amendment's objective, and I therefore hope that he will consider withdrawing the amendment.

Richard Spring (Conservative, West Suffolk)

Incompetence has nothing to do with macro-economic policy—it concerns putting things in the Library. The Minister should understand that that is not the way in which to treat this Committee.

My hon. Friends the Members for Braintree (Mr. Newmark) and for Chipping Barnet (Mrs. Villiers) have discussed the central issue of REITs in some detail. The matter has been under discussion for many years, and I understand that the Government have made a commitment that the reform of REITs should be implemented by 2006. However, the industry is anxious, and people in the financial services industry who are involved with investment have told us that money that should be coming into the United Kingdom is going abroad because of delay, vagueness and the Treasury's inability to do what so many other Governments have done successfully. I will not press the amendment to a vote, but the Minister must understand the legitimate concern of the industry and others in the City that we are missing out. He has not satisfactorily addressed that point, and I hope that he will take our concerns on board and reconsider the need to move on.

On the other issue, I accept the point made by the hon. Member for Eastleigh (Chris Huhne) on tax neutrality. There is also the matter of the different tax treatment of classes, but the point has been made and I hope that the Minister will reflect on it. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 18 ordered to stand part of the Bill.

Mark Francois (Conservative, Rayleigh)

On a point of order, Mrs. Heal. In our earlier debate on clause 11, I cited Mr. Bill Ferris as the chairman of the Association of Independent Museums. In his response, the Minister sought to correct me and said that Mr. Sam Mullins is the chairman of AIM. I have double checked the situation, and AIM recently held its annual general meeting, where those responsibilities were changed and Mr. Ferris became chairman. I have received this e-mail from Mr. Mullins:

"I am now Vice Chairman of AIM and remain Director of London's Transport Museum. We had our AGM in May and our website needs updating".

I hope that the Minister will accept that clarification.

Ivan Lewis (Labour, Bury South)

Further to that point of order, Mrs. Heal. I thank the hon. Gentleman for that clarification. In this case, however, the words of the vice chairman are as important as those of the chairman.

Schedule 8 — Financing of companies etc: transfer pricing and loan relationships

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 10, in page 124, line 23, leave out

'in relation to the financing arrangements'.

Philip Hammond (Conservative, Runnymede and Weybridge)

Schedule 8 is complicated—it deals with the financing of private equity finance companies and the loan relationships that typically underpin them—and we want to explore a number of issues with the Government over the next couple of hours.

Schedule 8 amends the scope and the effect of application of the transfer pricing rules, which are well-established in our tax law to deal with situations in which parties who are not at arm's length might manipulate pricing arrangements. That might involve the pricing of interest rates in relation to loans, the terms of such loans or, at an altogether different level, the price at which goods are transferred between a parent company and a subsidiary or a subsidiary and a parent company, which could, if left unchecked, give rise to considerable distortions in tax charges. Tax experts have told me that transfer pricing is, perhaps unsurprisingly, the most common area of dispute between taxpayers and the Revenue.

Schedule 8 attempts to address an area of transfer pricing that has not hitherto been caught by the snappily titled schedule 28AA to the Income and Corporation Taxes Act 1988. As I said on Second Reading—I am sure that the Financial Secretary knows this—there is a considerable degree of resentment in the private equity venture capital industry at how a change to the arrangements affecting that industry is being badged as anti-avoidance legislation, when the industry has clearly asserted that its practices have hitherto been in pursuance of a model well known to and agreed with the Revenue and the Treasury.

The industry accepts that the Government and the Treasury can determine that it must change its arrangements, which were acceptable in the past, but it would send a positive signal to the industry if the Minister were to acknowledge that schedule 8 is about changing the rules rather than addressing an avoidance mechanism that has been used in the past, which is part of the industry's problem with how those issues are being presented. The Minister should acknowledge that the model used by most of the private equity industry is long-established and has been subject to regular discussions between the industry, the Treasury and the Revenue and that the legislation relating to schedule 8 was amended at the request of the industry, and with the agreement of the Revenue, as recently as the Finance Act 2004.

The Government say that they want to address narrow concerns. The industry's fear is that the Bill is potentially wide-ranging and that it could have significant negative impacts on both the UK private equity and venture capital industry and UK businesses that are financed by private equity or venture capital.

Paragraph 1 of schedule 8 amends the definition in paragraph 4 of schedule 28AA, which defines persons who are deemed to be participating in the management, capital or control of a company. Paragraphs 1(2) and 1(3) of schedule 8 deal with a situation which is not covered by schedule 28AA and which the Government clearly feel needs to be addressed. Schedule 28AA deals with transactions between a parent and a subsidiary and with the situation in which a transaction is between two parties and a third party controls both those two parties, but it does not deal with transactions that fall within what might be deemed the normal private equity financing model, whereby a number of unconnected parties act through a common investment vehicle, none of whom individually has control, as defined in tax legislation, but all of whom have an aligned interest in their relationship with the operating company, and all of whom collectively, were they to act collectively, have control.

Typically, such a structure will involve a limited partnership that is probably not in the United Kingdom. There will be several private equity investors who are partners in that limited partnership, and the partnership will invest in an acquisition vehicle, typically a company, which will then acquire the business ultimately to be financed. That might be a young, dynamic, growing business that seeks an injection of private equity, perhaps to get it to the next stage through a rapid phase of growth to the point where it can go to the public markets. It might be a larger business that has hit troubled times and is crying out for an injection of private capital to allow it to be restructured and its management to be refocused—that needs, as it were, to go into the intensive care ward that private equity funds can often provide. Or it might be a non-core business of a large conglomerate that has been ignored or on to which the focus of its parent has not been properly directed, and where the management are willing and able to take the business forward to ensure that it grows and venture capitalists or private equity investors can see the opportunity to come in behind the management team and allow the business to grow. It is very important, from the point of view of UK plc, to help the most dynamic businesses in our economy to grow and to help established businesses that may not be performing as they should to get themselves turned around. It would be a great shame were the Government inadvertently to introduce legislation that damaged the way in which the private equity venture capital model operates.

Paragraph 1(3) introduces new paragraph 4A into schedule 28AA to try to deal with the problem identified by the Government by creating a wider definition of control. This is fairly complex and tortuous stuff, but I shall try to get it right. A person, P, will be deemed to have control of a company, A, where P and others have "acted together" in relation to financing arrangements for A. That is very legalistic, but I take it to mean that where P has been involved in setting up the private equity funding deal that backs company A, P will be taken to have control of A if it is not a requirement that P has control over A, but if P and the other parties with whom he acted together in setting up the financing arrangements for A, taken together, have control of A—in other words, the rights and powers of each of those investors, when pooled, amount to control—then P will be taken to have control of A, and that will be sufficient to bring the private equity limited partnership transactions within the scope of the existing transfer pricing rules in schedule 28AA. That gives rise to several issues that we will explore later.

We recognise the problem that the Government have identified. Clearly, arms-length pricing of transactions is the proper way to proceed and the proper basis on which to levy tax, and if there is evidence of a serious abuse of arms-length pricing, it is right that anyone continuing such abuse should be brought within the scope of the transfer pricing regime. As I said earlier, where there is a group of parties who are technically unconnected in terms of the existing legislation but who have an absolute identity of interest because they all own the target company, A, it is equally likely that they will have the ability to manipulate the pricing arrangements in their transactions with A, as would be the case were it a single controlling entity.

We entirely accept that, but I must reiterate the point that I made on Second Reading about babies and bathwater. Of course we understand the Government's motivation, but the numbers that they have put forward suggest that relatively modest amounts of tax are at stake. The concern in the industry and more widely is that this measure is very widely targeted and could, if we are not careful, have a very detrimental effect on the industry as a whole, perhaps, ironically, even reducing the overall tax take over a period of time. For us, the point is to try to narrow the focus of any change in the rules to address the mischief that has been correctly identified while ensuring that it does not spill over to have unintended consequences elsewhere.

This group of amendments is intended to avoid a situation whereby the Government, in dealing with what they see as an abuse, inadvertently open up another loophole. Given that a group of investors has been identified as being outside the existing transfer pricing rules, and given that the Government want to bring those investors inside the existing transfer pricing rules, it might be thought that the simple way would be to define them and to say that they too are persons subject to those rules. However, that is not what the paragraph does. It limits the extent to which those parties are brought within the transfer pricing rules to "provision"—that is, something that is done—in relation, to any extent, to financing arrangements for A, which is the company that the investors, one of whom is P, collectively own. It is unusual for me to stand here saying that a provision might be too narrowly drafted, but in this case we are worried that the Bill, by narrowly drafting the extension of the transfer pricing rules to apply only to those matters that relate to any extent to financing arrangements, may not catch everything that it needs to catch. If it identifies people—in this case, an investor group—who should be subject to the transfer pricing rules through having acted together to arrange finance for the company, which is typically the company that does the borrowing, surely all transactions between those persons and the person of whom they are each deemed to have control, not only those that relate to the financing arrangements, should be subject to the transfer pricing rules.

For example, what about management fees that are charged between the parties to such an arrangement? What about consultancy fees or intellectual property licensing fees? All those matters should be of concern if the Government's fundamental anxiety is justified and there is evidence of non-arm's-length pricing between groups of parallel investors who invest in a target company and that company. An obvious avoidance route is open to those parties if the arrangements that the Government are extending are limited to matters that relate only to the financing arrangements.

The identity of interest between the parties creates the motive but, as drafted, the transfer pricing rules cannot be applied to transactions other than those that relate to the financing arrangements because schedule 28AA is amended to include people who have such indirect control only in respect of financing arrangements.

Let me briefly go through the amendments. Amendment No. 10 would simply change the heading in line 23, replacing

"Persons acting together in relation to financing arrangements"

with "Persons acting together".

Amendment No. 8 would delete proposed new paragraph 4A(1)(a), which requires the provision to relate to financing arrangements for A.

Amendments Nos. 38 and 9 would reword proposed new paragraph 4A(1)(c) so that it read: "P and other persons acted together in relation to financing arrangements for A".

Sub-paragraph (2) deals with a position whereby a party has control of both parties to the transaction. Amendment No. 7 would delete (a). Amendment No. 12 would reword (b) and amendments Nos. 13 and 14 would reword (c).

The amendments seek the overall effect of ensuring that all transactions between parties deemed to have control under proposed new paragraph 4A of schedule 28AA would be subject to the transfer pricing rules. Presumably that is the Government's desired outcome. We see no reason for including the potential controlling party in respect of only one sort of transaction. I hope that the Financial Secretary understands what we are trying to achieve. Perhaps one of the weaknesses of the system is that we have to table amendments, to which a Minister has to prepare responses, guessing the arguments behind the amendments.

If the Financial Secretary will not accept the amendments or at least their thrust, he needs to explain how he can prevent the tax planners in the big accountancy and law firms from simply moving to exploit other transactions between the same parties that are now defined as being subject to the transfer pricing rules, thus perpetuating what he clearly perceives to be an abuse.

Amendment No. 17 deals with a small and technical point in proposed new paragraph 4A. Perhaps the Financial Secretary can throw some light on it. Sub-paragraph (2) deals with a party who, with the rest of the investor group, controls a borrower and a lender—in other words, a single party that is deemed to have control of both the borrower and the lender in a loan relationship. The amendment simply questions whether the word "person", which appears in line 9 on page 125, should be changed to "persons". Sub-paragraph (2)(d) reads:

"Q would be taken to have control of both B and the other affected person"—

in the singular—

"if, at any relevant time, there were attributed to Q the rights and powers of each of the other persons mentioned in paragraph (c) above."

That should be straightforward: B is the borrower and the other affected person—in the singular—is clearly the lender. They are the two parties to the transaction as paragraph 1(1)(a) of schedule 28AA defines them. It refers to a provision

"made or imposed between any two persons"

and defines them as the "affected persons".

However, now that we are introducing the concept of limited partnerships as one of the "affected persons" who can be subject to the transfer pricing rules, we are therefore including in those rules an entity that is tax transparent. Including the tax-transparent entity—the private equity funding partnership—in the rules is the purpose of the schedule. I understand that, when a tax-transparent partnership is introduced as the lender, tax law will look through that partnership and consider a loan relationship to be in place between each partner and the borrower. In those circumstances, the language of proposed new paragraph 4A(2)(d) and, indeed, of paragraph 1(1)(a) of schedule 28AA does not quite do the business any more.

The possibility of more than two affected persons—more than one lender for the one borrower who is caught by the transaction—must now be contemplated. If I am wrong, I am sure that the Financial Secretary will explain the reason. We are simply asking whether there could now be "B and other affected persons" in the plural. I am sure that, if that is the case, the Financial Secretary will consider whether some redrafting should take place of proposed new paragraph 4A(2)(d) and paragraph 1(1)(a) of schedule 28AA, where it specifically refers to affected persons being "any two persons" between whom provision is "made or imposed".

Amendment No. 19 again simply probes the Government on their willingness to lay down some rules about what constitutes arm's-length provision in different circumstances. If the Government accepted the amendment or something like it—I say that in all humility because amendment No. 19 is not perfectly drafted and does not do what we want it to do but we hope that it is clear enough for the Government to take its point—it would create a safe harbour for investors who complied with the criteria or parameters that the Treasury set down. That would be helpful and I understand that it is common practice in other jurisdictions.

In amendment No. 19, we propose to introduce new wording at the end of section 28AA—that is the end of the effective provision in the section—to provide that the Treasury may make regulations about, specifically, the minimum income cover in a financing arrangement and the maximum debt equity ratio in respect of a financing arrangement that would be acceptable to the Treasury so that an investor might know that, provided there was compliance with those ratios or criteria, as set down by the Treasury, it would not be deemed to be within the scope of paragraph 4A and thus subject to the transfer pricing rules. The idea is simply that provided that arrangements fall within defined parameters they will not be caught by the provision.

I hope that the Financial Secretary will concede that there is some merit in providing certainty by having these defined safe-harbour provisions. We accept that they would have to be defined to allow for different ratios in different circumstances and in different types of sector. For example, a service industry would clearly need to have different ratios and parameters laid down when compared with a capital-intensive business such as oil and gas production.

In the absence of safe-harbour type provisions, the danger is that nearly all private equity deals will face an additional and unwarranted degree of uncertainty, as it is necessary to consider for the given arrangements in any deal whether the Treasury or the Revenue commissioners are likely to treat them as being at arm's length or not. Who knows? I think that the Government are trying to send soothing signals to the industry that only the most blatant abuses will be targeted, using these provisions. However, I think that the Minister would acknowledge that the Treasury's scope, or that of the Revenue, for focusing its view and challenging arrangements at the margin is considerable within the schedule as drafted. That will inevitably introduce uncertainty.

The Chancellor is fond of reminding us how important stability is to the development and growth of the economy. Anything that tends to undermine certainty and predictability—anything that looks like creating uncertainty, and certainly anything that looks like arbitrary or capricious unravelling of arrangements that have been put in place and agreed to over a long time—is likely, or even certain, to make the UK a less attractive climate for overseas private equity or venture capital investors, and is likely to make it thus commensurately more difficult for UK-based businesses seeking private equity or venture capital funding to obtain that funding.

We are talking about a very competitive area. It is a field in which, currently, the United Kingdom is a very major player. We are second only to the United States in the volume of private equity funded business. The British Venture Capital Association estimates that £127 billion worth of sales generated by businesses in the UK economy are backed by venture capital private equity and that some £23 billion worth of taxes that are payable to the Exchequer flow from these private equity and venture capital backed sectors of our economy.

I am sure that the Financial Secretary would be the first to confirm that the Government do not want to do anything that would destabilise what has proved to be an extremely successful model that has been financing businesses that on average grow faster than the economy as a whole. On average it has created jobs more quickly than the economy as a whole. I hope that the Financial Secretary will be able to respond to the intention behind amendment No. 19, even though I have acknowledged that, as drafted, it does not quite do what we would like it to do.

Amendments Nos. 15 and 39 were attempts to tighten the language of sub-paragraph (7). I do not think that they add a great deal of substance and I do not propose to detain the Committee by speaking to those amendments.

John Healey (Labour, Wentworth)

I pay tribute to the reflective and serious way in which the hon. Member for Runnymede and Weybridge (Mr. Hammond) moved the amendments and introduced a fairly wide range of general remarks on the nature and principle of the provisions. The clause gives effect to schedule 8.

The purpose of the legislation is to make the tax treatment of company finances fair between all companies regardless of their ownership and of their financing structures. The clause gives effect to changes in transfer pricing and loan relationship rules that will provide a more even playing field for business. The legislation should help to ensure that changes in companies' ownership and financing happen for the right reasons—in other words, to deliver real economic benefits rather than just to chase tax advantage. I think that the hon. Gentleman was clear about that.

When applied to a company's financing arrangements, transfer pricing rules limit deductions for interest payments to the amount that the company would be entitled to had it borrowed at arm's length to an independent vendor. The hon. Gentleman said that these transfer pricing rules are well established and, as he said, properly so. However, existing transfer pricing rules apply only if one of the parties to the arrangement has control of the other or if both are under common control.

We became aware that companies and their investors were being advised by some professional advisers to put in place financing and ownership structures specifically designed to get around the rules so as to achieve an unfair tax advantage. The schedule anticipates such problems on a wider scale and seeks to close the loophole. It will ensure that the transfer pricing rules also apply if two or more parties who together control a business act together in relation to its financing arrangements.

In addition, transfer pricing rules are extended to cover financing arrangements put in place after six months before a control relationship between the parties involved. The schedule also tightens loan relationships that regulate deductions for late-paid interest and discounts owed to connected parties.

I was interested that what seemed to drive the amendments was not entirely what was obvious from reading them. What seemed to drive them was the hon. Gentleman's concern that the Bill and the schedule might be too narrowly drawn, or too narrowly focused. The group of amendments generally appear to seek to change the scope of the transactions that are affected by the rules as they apply where persons act together in relation to the financing arrangements of a business.

The hon. Gentleman said that the rules seemed tightly to relate to financial arrangements. The measures relate to transactions related to financing and not only to the financing itself. Where there is abuse—for instance, with related activity perhaps such as consultancy or management fees—HMRC will act to challenge that as well.

Philip Hammond (Conservative, Runnymede and Weybridge)

Is the Financial Secretary saying that, where parties act together in the financing arrangements for a company, any transaction that those parties enter into with that company will be a transaction relating to the financing arrangement? Is that his position?

John Healey (Labour, Wentworth)

The hon. Gentleman is drawing too wide a definition. The provisions of the schedule are for transactions related to the finance arrangements. Rather than the wider span that transfer pricing rules can bite on, this is a narrower focus relating to financial arrangements. The rules will have no tax consequences for transactions made on an arm's length basis, so there is no reason why the scope of the rules should cause any real problems for ordinary commercial transactions.

Philip Hammond (Conservative, Runnymede and Weybridge)

A specific example came to me as the Financial Secretary was answering my intervention. Were the investing group to purchase real estate that was then rented to the target company as its premises, would he regard that transaction as related to the financing arrangements, or would it be too remote, so that a non-arm's length rental would not be caught by the inclusion of such people within the transfer pricing rules?

John Healey (Labour, Wentworth)

No, such a transaction would, in my judgment, be well beyond those related to the financing of the company, and would not therefore fall under this clause and schedule.

Generally, we have tried to limit the scope of the rules to transactions that relate to financing arrangements and to target changes for particular avoidance risks that we have identified, which is the route of the provisions in the schedule. We know that some professional advisers are beginning to advise some clients to structure their affairs in that way. The reason that we are extending the rules is that some of those advisers are promoting ways for companies to get around the existing rules and we want to ensure that that cannot happen in the future.

The other substantive amendment that the hon. Gentleman tabled was what he described as a probing amendment, amendment No. 19. It would create the power to make regulations specifying the criteria that determine whether or not financing arrangements are on an arm's length basis. What constitutes an arm's length financing arrangement depends, as he will appreciate, on all the facts and circumstances relating to the particular provision of finance. He is creating a problem if he believes that that can somehow be determined by a formula set out in regulations. The problem with looking for a formula, particularly one codified in regulations, is that it simply could not take into account the facts and circumstances that are likely to exist in a range of situations. To that extent, the danger is that it would become inflexible.

If we had a standard formula, which I understand to be envisaged under regulations that could be laid under amendment No. 19, it would inevitably be too generous to some and too tight and mean to others. Those who were treated generously would make use of that to avoid the impact of the new rules. The practical effect for some companies of having such a set of rules would be that financing could still be set up on a non-arm's length basis and still stay outside the scope of the transfer pricing rules, which is the purpose of schedule 8 brought in by clause 40. Such companies could therefore continue to obtain tax deductions for excessive interest with impunity, which is precisely what we wish to stop.

Philip Hammond (Conservative, Runnymede and Weybridge)

Is not the other practical effect that, without clear guidelines, people entering into such relationships or transactions will simply not know whether they are deemed arm's length transactions until later, so they will have to price in an additional measure of risk and uncertainty?

John Healey (Labour, Wentworth)

I appreciate the general argument that business prefers certainty and that businesses are looking for guidance. I will come to that in a moment. What I am saying, in direct response to the hon. Gentleman's probing amendment, is that to try to codify that in regulations is likely to introduce, first, an inflexibility into arrangements, and secondly, a formula that will inevitably be too generous and allow the sort of avoidance and arrangements that we are keen to close down under this schedule.

Let me give the hon. Gentleman more reassurance on certainty and guidance. Many existing companies, such as members of groups of companies, must already apply transfer pricing rules to their financing arrangements as a matter of routine, so there is considerable existing guidance on the application of such rules to loans, which is equally relevant to the application of the new rules. That guidance, which is available on Her Majesty's Revenue and Customs website, was comprehensively updated and expanded in 2004. In addition, since the announcement of the new rules on 4 March this year, we have set up and been operating a central hotline, which investors or companies can contact to discuss the implications of the new rules for particular investment deals. As the hon. Gentleman might be aware, details of that hotline are also on the website.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Financial Secretary referred to the existing rules and guidance and said that they will apply equally. Is not he making any concession to the private equity financing model? Is he saying that the same criteria will apply to a private equity finance deal through the traditional private equity finance route as would apply to any other corporate financing?

John Healey (Labour, Wentworth)

No, I am making a more general point that there is plenty of guidance and experience on the operation of such rules and, to that extent, amendment No. 19 is misconceived. I therefore ask the hon. Gentleman to withdraw his amendments.

Theresa Villiers (Conservative, Chipping Barnet)

Transfer pricing is horrendously complex and we have heard that it is one of the most common areas of dispute between companies and the Revenue. Given its complexity, it comes as no surprise that it boasts such an unfortunate statistic.

We must not lose sight of the vital importance of the venture capital industry. We must bear in mind its enormous importance in economic efficiency, not only as an incubator for encouraging small businesses, but in taking over ailing businesses and turning them into profit-making enterprises. We are extremely lucky to have a flourishing and healthy private equity sector in this country—many western nations would give their eye teeth for such a successful sector. It is worth reminding the Committee that it was one of the Chancellor's favourite areas a few years ago. He has stopped talking about it, but he used to like to cite the private equity and venture capital industry as a model to be encouraged. He sought to introduce that model in a range of different areas and I recall him lecturing some of our European partners on the importance of the private equity sector. That makes it doubly important for us to examine these provisions with great care. In this part of the debate, I am reminded very much of some of the issues that we discussed in relation to real estate investment trusts: the Government talk about the importance of enterprise and of creating the right climate to encourage enterprises, yet fail to deliver on the detail.

Of course, like everyone else in the Committee, I agree completely with the overall aim of closing down tax loopholes that enable companies to avoid an excessive amount of tax. I can agree with the spirit of what the Government are trying to do, but as other Conservative Members said, these anti-avoidance provisions are drawn too widely. I therefore appeal to the Government to consider with great care the clarifications and limits proposed in the amendments. I would not say exactly that the Treasury is taking a sledgehammer to the private equity industry, but the proposals as drafted in the Bill are too wide-ranging and would impact negatively on the venture capital industry without commensurate benefit to the Treasury and taxpayer.

Philip Hammond (Conservative, Runnymede and Weybridge)

My hon. Friend talks of people avoiding an excessive amount of tax. Whatever language we may use, does she agree that essentially we are in a competitive position? What matters, surely, is how this jurisdiction stacks up against other jurisdictions, either as a home for private equity and venture capital funds or as a destination for their investments.

Theresa Villiers (Conservative, Chipping Barnet)

Absolutely. One crucial aspect is the role played by the private sector in bringing investment into this country. Accepting a new framework that deterred that could significantly damage our competitiveness and the foreign direct investment of which the Government are so proud.

There is a slight undertone in the Bill suggesting that some of the structures commonly used in the venture capital industry are somehow dodgy because they have a foreign or offshore component. That is a misconception. Not only have those structures been in long-established use with the knowledge of the Revenue—after negotiations with the Revenue—but they are not, in the main, designed to avoid or reduce tax liability. They are simply convenient legal structures to facilitate foreign investment. On that ground alone, the Government are wrong to stigmatise such arrangements. Although it is not stated explicitly, there is an implicit suggestion that the use of special purpose vehicles or offshore holding companies is in some way nefarious. In fact, it has proved to be an efficient way of attracting the foreign direct investment that is so vital to the effective functioning of our economy.

Amendment No. 19, which the Minister discussed at some length, is one of the most important illustrations of a broader point that I have tried to make: that the provisions, while making a degree of sense in some ways, are too widely drawn. The Minister did not accept the need for further clarity and a more precise formula, which is the aim of the amendment. He said that he thought that there would be too much inflexibility, that some circumstances would not be covered properly by a black letter-type formula and that there should be a less prescriptive approach.

We need more certainty and clarity in tax legislation than in other legislation. It is a basic tenet of not just tax law but our constitutional settlement that, if the Government are to deprive citizens of their money, they must ensure that their legislation is very clear indeed. They are under more of a burden to provide clarity and certainty in that area than in any other area of our legal system. The background to that is Parliament's constitutional struggle with the Executive to ensure that citizens were not taxed without due constitutional process and the acceptance of Parliament.

On that ground alone, clarification of this fundamental part of the Bill is vital. How is it to be decided whether a transaction is on an arm's-length basis? I urge the Committee to look carefully at amendment No. 19. I hope that the Minister and the Government will deem it a constructive contribution to ensuring that venture capital funds have a better idea of what the Bill is designed to do and that the Bill does nothing to damage a vital sector: the flourishing investment sector that is so important to the health of our economy, the health of enterprise and the health of business start-ups.

Philip Hammond (Conservative, Runnymede and Weybridge)

I apologise for my hesitation in rising. I had understood through the usual channels that more inspiration had come to the Minister in the last few moments, and that he wanted to share it with the Committee. Apparently, that is not the case. I listened carefully to my hon. Friend the Member for Chipping Barnet (Mrs. Villiers). She made some important points, which reinforced Conservative Members' concerns. I want, however, to concentrate on the Minister's remarks.

The Minister began by saying that the motive for schedule 8 was to create equality between different ownership structures. I take that to mean that the Government wanted to ensure that corporate bidders would not be routinely outbid by private equity bidders because of a structural advantage. I do not think that the Minister was suggesting that the structure had been adopted, or was being abused, specifically to gain a tax advantage. He was, I think, observing that it none the less delivers an advantage to private equity partnerships bidding for a UK company financing opportunity.

My problem with what the Minister said is that he has addressed his perception of inequality between corporate bidders and private equity partnership bidders by levelling down—by burdening private equity partnership bidders with some of the disadvantages that he says corporate bidders currently suffer. Like my hon. Friend the Member for Chipping Barnet, I fear that corporates cannot and will not do all the things that private equity funds and venture capitalists are very good at doing. It would be a terrible shame if, in levelling down to try and create a level playing field, we created a playing field that was level but, for the purposes of some transactions, was under water, and if those transactions were not completed, to the detriment of the economy as a whole.

The Minister said that some transactions had been set up with the use of limited partnerships to exploit the ability to charge or recover higher levels of interest and offset those charges against UK corporation tax liability in the acquiring vehicle. I agree with him that on some occasions transactions have been structured in that way for that purpose, but the point about mainstream private equity funds is that by and large, over the past 12 to 18 months, they have not been set up as a result of some dodgy scheme marketed by a tax planner to avoid taxation or to gain some taxation benefit.

I am no expert, but I understand that the model used by most private equity houses has been established and used for many years. Many private equity investments are made with underlying funds originating in the United States. It is natural and unexceptional for an offshore limited partnership vehicle to be used to channel those funds. I hope that the Minister will acknowledge what I think he came close to acknowledging—that the private equity industry as a whole structured itself in this way not to gain a tax advantage, but because it was the sensible structure for it to have as it grew up, financed primarily—at least initially—with funds from the United States.

On the amendments that seek to include arrangements between the parties other than those relating to the financing arrangements, the Minister did not deal effectively with the question of what would happen in the example that I gave of a property investment made by private equity finance partners. If they are engaged in the abuse that the Minister is talking about, and if their previous scam would have been to lend more money than is reasonable in order to have a larger interest deductible in the UK, it would be perfectly sensible, if proposed new paragraph 4A were then to slap them down, for them to consider as an alternative purchasing the real estate assets that the UK business needs to operate—the factories, offices and warehouses—and renting them to that business at exorbitant rates. Those rents would be deductible and would not be subject to the transfer pricing rules because one of the parties to the transaction would be a limited partnership that is not caught by schedule 28AA, except in so far as proposed new paragraph 4A brings them within the scope of the provision. Indeed, it does so only in relation to transactions connected to the financing arrangements.

I ask the Minister to think about that point. I have to say to him in all modesty that I have not laid awake at night dreaming up new ways of avoiding tax once proposed new paragraph 4A comes into force, but I have talked to people who are involved daily in these matters for a living. The fact that they see scope for avoiding the intended impact of that provision suggests that the Treasury should look at this issue.

I noticed that the Minister did not address what I confess was a fairly long and tortuous argument about whether "person" should be "persons" and about the effect of bringing tax-transparent limited partnerships into the scope of the transfer pricing rules. I do not know why he did not address it—I would expect inspiration to reach him—and if my argument was wrong, I would expect him to enjoy explaining why. We raised the issue not in an aggressive way, but simply in a spirit of inquiring whether the provision's drafting needs to be addressed. I am happy to let the matter pass for now if the Minister has no further comment to make, but perhaps he would be kind enough to write to me explaining why my point is wholly misconceived or, if it is not, what he intends to do about it.

On amendment No. 19, the Minister said that a formula would be too inflexible, but later on he gave the game away rather by saying that a formula would be too generous. What he really means is that a formula would be too generous because, if it is not going to be unreasonably constraining on the taxpayer, it would have to be set in such a way as to give the taxpayer the benefit of the doubt. I understand that point, but my understanding of the Treasury's explanation of the discrepancy between the Government's assessment and the industry's assessment of the revenue raised by these measures—I think that the Minister has already made this point—is that the Government intend that the measures be used in a limited and sensible way to target flagrant abuses, and not to nitpick the fine detail of every arrangement in order to see whether it complies at the margin with the most rigorous test of arm's-length pricing.

If my understanding of the Treasury's explanation is correct, the concern that a formula would be too inflexible is not well founded, because one would expect it to be set a little on the generous side so that arrangements that approximately constitute an objectively assessed arm's-length pricing arrangement could be deemed okay. Only when participants had moved beyond what could be reasonably argued as that position would the formula kick in and cut them off. That seems a fairly sensible way to proceed.

It cannot be in the interest of the taxpayer that every single arrangement be scrutinised in detail to see whether it is entirely compliant. It certainly cannot be in the Revenue's interest to have to examine thousands of transactions in detail to see whether they are entirely compliant with what might be deemed an arm's-length arrangement. Nor can it be in the interest of the economy as a whole to have such uncertainty and the introduction of such a compliance burden. I am little surprised that the Minister is not more favourably inclined toward some form of fixed parameters, particularly given that they exist, operate quite successfully, and are appreciated by taxpayers in other jurisdictions. In fact, they operate elsewhere in the Revenue's guidance, as the Minister has already mentioned.

However, the intention was simply to raise these issues and I am grateful to the Minister for the way in which he has responded to them, although I would be even more grateful if he could respond more fully in due course, perhaps in writing. I do not intend to detain the Committee by pressing the amendment to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 16, in page 125, line 35, at end insert—

'(8) This paragraph shall apply only to a person where that person, or a connected party to that person, owns shares or an interest in shares, in either A or B.'.

Those members of the Committee who have been paying attention will remember that A, in proposed new paragraph 4A(1), and B, in proposed new paragraph 4A(2), are the subject company—the acquired UK company. The amendment's purpose is to limit the class of person who can be deemed, by virtue of that paragraph, to have control—and who can thus be subject to the transfer pricing rules—to those who have a shareholding relationship or an interest in the borrower's shares. I say "the borrower" because we are talking about loan relationships, so A or B will be the borrower in the circumstances envisaged in the schedule.

Even if the Government were to accept the amendment, there would still be serious concerns about banks with private equity investments. Many banks these days either have an interest in a private equity house or have one of their own. Although they operate at arm's length from each other, the private equity division of a bank may find that its corporate debt financing division is lending money to an entity in which it is itself an investor, thus creating a relationship.

We are also concerned about banks that advance mezzanine debt—ironically, a form of debt that is designed to reduce the coupon payable and thus the interest that would be deductible in calculating the borrower's corporation tax charge, but that typically comes with an equity warrant attached for the benefit of the lender, so that the lender forgoes some of the coupon that he would normally have demanded for that class of lending in exchange for an equity kicker if the borrower performs and the equity price rises.

If the amendment were accepted, however, it would at least make it clear that third-party banks in a simple lending relationship could not be caught by the provisions. The Minister is well aware of the considerable concern among the financial community that, as it stands, the provision is not clear cut or plain for all to see. The Treasury says that banks in arm's-length third-party relationships will be caught by the schedule, but that it will be simple to demonstrate the arm's-length pricing. The Treasury's approach is to say that everyone is caught by this pretty much all-embracing provision, but that most of those embraced will be able to wriggle out of the clutches of the Revenue pretty easily. That, we would suggest, is going about it the wrong way and creating an additional compliance burden on businesses and on lenders, while introducing an element of further uncertainty.

It would be perfectly possible to exclude the third-party lenders who are lending at arm's length by writing in the words that are proposed in amendment No. 16, so that a person is made subject to the transfer pricing rules by virtue of new paragraph 4A only if he has an equity interest of some sort in the borrower. The problem is that sub-paragraphs 1(c)and 2(c) define P or Q respectively as a person who "acted together" with others in relation to the "financing arrangements" for the borrower, who is A or B respectively. That definition is bound to catch banks, even where they are involved only in arm's-length third-party lending.

Typically, in putting together a private equity deal the lending bank will have been involved with private equity investors and another department of that bank may or may not have been involved in another capacity, but all that is required for the bank to be caught within the scope of paragraph 4A is that it, together with other persons, acted in relation to the financing arrangements. That, I suggest to the Minister, will embrace all the banks that were involved in putting the finance package together.

The subsequent paragraphs go on to define P or Q as having effective control if his rights and powers over A or B, the target companies, together with the rights and powers of the other persons with whom he has acted, amount to control when they are taken together in aggregate. The problem with that is that P, the bank, may actually have no rights or powers. If control is defined in relation to a person P by the aggregate of the rights and powers that he and all the other persons involved have, and if all the other persons involved have rights and powers but P has no rights and powers at all, P would, bizarrely, under the paragraph 4A still be taken to have all the rights and powers that the other persons have and thus to have control.

If P is a bank and it acts together with private equity investors in arranging finance for a company, it will mean, at its simplest, that equity is coming from the private equity fund and debt from the bank P. In those circumstances, P, the bank, will be deemed to have control by virtue of the private equity investors' rights and powers as shareholders, even though P has none himself. Aggregating means ignoring entirely the stand alone rights and powers of each of the parties.

Banks, we suspect, will recoil at being deemed

"indirectly participating in the management, control or capital"

of the companies to which they are lending on account of the relationship that they had with the private equity house in arranging finance for that company. There will be an increase in compliance burdens because all bank debt will now be theoretically subject to the transfer pricing rules and the company must satisfy itself as to the eligibility of the payments that it is making to the bank for deduction against its corporation tax liabilities. I put it to the Financial Secretary that when this provision was first thought up, it cannot possibly have been the intention to bring into the scope of the transfer pricing provisions arm's-length lending by established third-party banks.

Amendment No. 16 would require a further qualifying characteristic before P or Q could be brought into the transfer pricing net—that there is a shareholding relationship or "an interest in shares". It would exclude all categorically arm's-length straightforward bank lending, except—there is still a flaw in the arrangements—where the bank in question is also involved through another part of its parent company's operations in private equity financing. The Government have said that they do not intend to catch third-party bank debt and their expectations of revenue from these measures underpin the position that is set out, but the industry's concern is that the scope could be much wider.

Will the Financial Secretary address the need to exclude third-party bank debt in line with the amendment? In responding to the amendment, will he go further and deal with the practical problems that arise from the complexity of modern banks' business? They are often in many different businesses, including equity investment, senior debt lending, mezzanine financing and so forth. Will he also address concerns that go, frankly, beyond the scope of the amendment—about the position of banks that are involved in mezzanine funding where equity warrants are attached to the debt instruments, and about banks involved in equity funding where they are providing a complex package of funding for a company, almost as an alternative to private equity funding?

I would be most grateful if the Minister could address those concerns. Will he confirm first, that he recognises the problem, and secondly, that he has some means of dealing with it?

Stephen Hammond (Conservative, Wimbledon)

As a mere equity investor and equity analyst, I have followed the discussion with some difficulty, but it seems to me that private equity funds and venture capital funds are always typically structured by way of limited partnerships. The partners are effectively unrelated and the lending arrangements are traditionally third party.

If I understand my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) correctly, amendment No. 16 is designed to deal with some particular concerns. The first is that there are a number of changes in the legislation being badged as anti-avoidance measures, although they seem to be based on a model that the private equity industry has traditionally agreed with the Revenue. Secondly, unless the amendment is accepted, it seems that there will be additional uncertainty for the industry, and the current wording will catch a wider range of transactions than initially envisaged.

As has been said by others, the venture capital and private equity industry has been hugely beneficial, and if the tax framework is altered in the way suggested, it could become less attractive for inward investors.

The Revenue's concerns seem to be that in some cases borrowing and interest charged have been excessive, and could accrue relief beyond a reasonable commercial return. The new rules seem designed to catch a wider range of transactions than initially envisaged by the phrase "acting together". The rules seem to place a higher compliance burden on banking and finance operations. There are many relationships in which a private equity division of a bank has an arm's-length relationship with its corporate lending side, and there are many cases illustrating the fact that a lending bank can be involved with private equity investors, and another arm of the bank could also be involved.

If all bank debt is to be subject to transfer pricing rules, there will be an even greater growth of the compliance industry. As I understand it, the amendment is intended to limit the provision to situations in which the lender has an equity interest in the underlying business, so we should seek to address only a limited number of arrangements—those in which the borrowing company obtains a benefit from the investor in paying a higher borrowing charge, by reducing the borrowing company's tax bill.

That practice does not happen widely, so it is important that we should not change or damage the tax treatment specifically created to assist the private equity and venture capital industry. The previous regime was created so that that industry would know what its limitations and rules were, and the change to the rules in the Bill would have an impact on that. The Government's aim seems to be to stop interest accruing on shareholder funds to owner-managed companies where interest is not paid—meaning that there would be an excessive benefit.

The amendment is designed to regularise and clarify the rules to ensure that properly structured private equity and venture capital arrangements long agreed with the Treasury would not be caught by measures branded as anti-avoidance. By tightening the legislation as my hon. Friend suggests, greater certainty would be granted to the industry. My hon. Friend the Member for Chipping Barnet (Mrs. Villiers) was concerned about the competitive threat to the industry and to Britain as an attractive location for inward investment, and as a basis for private equity and venture capital houses. I hope that the Government will accept the amendment.

Philip Dunne (Conservative, Ludlow)

I support the amendment moved by my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond), and echo some of the comments that have already been made by my hon. Friends about the importance of the private equity industry to the economy. I should—probably to the amusement of the Minister—declare another interest, in that I am the director of a venture capital trust that is quoted on the stock exchange. It is a very domestic business—in contrast to the issues that the Bill is trying to reach, which involve primarily offshore relationships.

In this country we have the most effective and substantial private equity industry outside the United States, and each of the funds that raise capital in this country does so on a global basis, with which I am familiar, ranging from the United States to Japan, and including Canada and most of continental Europe. Most of those investments are structured through vehicles not designed primarily to evade tax at the underlying corporate investment level. They are efficient structures, designed to allow funds from around the world to come together and support investments made by the fund managers. We should not therefore try to introduce a level of complexity that would drive such transactions into more tortuous structures.

Secondly, increasingly sophisticated measures are being introduced to support companies that have been taken private. I refer not only to mezzanine finance, as referred to by my hon. Friend the Member for Runnymede and Weybridge, but to high-technology companies, some of which are offered distribution agreements by other companies. Some of the insurance companies are involved in providing insurance products, so other financial arrangements may become involved within the transactions, and they might inadvertently get caught by the legislation.

Many of the lenders may not necessarily be banks. In the case of mezzanine finance, for example, they are often banks provided with an equity kicker, which would be caught by the suggested arrangements, but some mezzanine finance is now provided by insurance companies without an equity kicker, through a loan-note structure with a high interest rate, which would not be caught by our amendment because there is not an equity relationship.

The whole picture of private equity in this country is increasingly sophisticated, and by drawing the provisions as the Government have, I fear that they may impose unnecessary and undue burdens on our very successful investment management industry. For that reason, I support the amendment.

John Healey (Labour, Wentworth)

I hesitated a little before speaking, because I noticed the activity of the Opposition Whip among the Back Benchers earlier, so I wondered whether there were any more Back Benchers with a sudden interest in the particularly narrow provision that we are considering under the schedule. The hon. Member for Wimbledon (Stephen Hammond) and the hon. Member for Ludlow (Mr. Dunne) made a series of points wider than the narrow provisions covered by Amendment No. 16, which might have been more suited to a stand part debate. They paid tribute to the successful venture capital industry in this country, so no doubt they will welcome many of the policies that we have put in place since 1997 to help that—regional venture capital funds, booster venture capital trusts, the enterprise investment scheme, and the 10 per cent. cut in capital gains tax on business assets held for more than two years.

As I have said, amendment No. 16 is narrowly drawn, to narrow the scope of the parties affected by the new transfer pricing rules. As the hon. Member for Runnymede and Weybridge said, to limit the class of persons within the scope of the new rules, the amendment would restrict the extension of the new rules to parties with an interest in the shares of the company involved. However, the chance for interests to act together to set up abusive financing transactions is not limited to such parties, so narrowing the scope of the new rules in that way would risk opening new loopholes. The new rules have no tax consequences for transactions made on an arm's length basis, so there is no reason why their scope should cause any real problems for ordinary commercial transactions.

The hon. Gentleman was particularly concerned about banks and third-party bank lending. Let me confirm clearly for him that where banks act together in relation to the financing of a business with other persons who control a company, the new rules apply. However, if the bank lends on an arm's-length basis, the tax position will not change. Indeed, businesses should not expect to obtain deductions for costs of debt finance over and above the arm's length amount.

The position with regard to the hon. Gentleman's concern about mezzanine finance with equity warrants is similar. That can be provided, and often is, on an arm's-length basis. There is no reason, as far as I can see, why that should give rise to particular difficulties in applying the new rules, so long as it is provided on an arm's-length basis. A couple of hon. Gentlemen, including the hon. Member for Runnymede and Weybridge, talked about the complex nature of banks' activity and the imposition of these rules. Where banks are just providing an ordinary loan on an arm's-length basis, the work undertaken in the normal course of that lending should be sufficient to demonstrate that. Therefore, the provisions of the schedule are not an additional compliance burden with significant costs for banks, about which the hon. Member for Wimbledon was concerned.

The reason why we are extending these rules—

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Financial Secretary talk about the situation in which a bank's corporate lending department is lending and its private equity division is investing? As my hon. Friend the Member for Wimbledon (Stephen Hammond) pointed out, that is not uncommon these days. As the Financial Secretary will know, such matters are dealt with at arm's length in the large banks. What would be the position then?

John Healey (Labour, Wentworth)

The principle is clear and well established. When lending is done on an at arm's-length basis, the rules do not apply. We are extending the rules in the schedule because some professional advisers are now promoting ways for companies to work around the existing rules and we need to ensure that that will not happen again. I hope that the hon. Gentleman will withdraw the amendments.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Financial Secretary just said that when lending was on an at arm's-length basis, the rules will not apply, but I think that he meant to say that they would apply but would not have any tax effect, which has been the thrust of his argument. I have listened with interest to my hon. Friends the Members for Wimbledon and for Ludlow (Mr. Dunne) and I am sorry that the Financial Secretary found it necessary to make a churlish remark about the interventions from Opposition Back Benchers. I note for the record that we have not been entertained by any such interventions from Labour Members or, indeed, from the Liberal Democrats who some weeks ago were asking incredulous electors to consider them a potential real opposition. They have not managed to muster their forces to demonstrate that tonight.

The Financial Secretary understands our concerns. We all accept that no tax consequences will arise for arm's-length transactions that are caught within the scope of the rules, but we find it bizarre to introduce a new regime that will catch hundreds, perhaps thousands, of innocent transactions, placing the burden on the taxpayer to demonstrate that he should not suffer a tax disadvantage. A compliance burden will be placed on business. Why do we find that extraordinary? Because it would be very simple to exclude that group of arm's-length corporate bank lenders from the scope of the rules. The amendment that we have tabled may not be perfect, but I have not heard the Financial Secretary criticise it from a technical point of view. It would remove a significant compliance burden from a large number of transactions and businesses, and he has not demonstrated, to my satisfaction, why it would not be a good idea to introduce such a provision. Therefore, I ask my hon. Friends to support the amendment in the Lobby.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 18, in page 125, line 45, leave out from beginning to end of line 23 on page 126.

Schedule 28 AA of the Income and Corporation Taxes Act 1988 provides that where an interest payment is disallowed or reduced under the transfer pricing rules, thus increasing the tax payable by one party to the transaction, a corresponding adjustment is available to the other party. That is a sensible measure, which avoids double taxation occurring where part of a transaction has been disallowed under the transfer pricing rules.

Sub-paragraph (5) of paragraph 1 inserts a new sub-paragraph (4A) in paragraph 6—not to be confused with the paragraph 4A that we were debating earlier; for some reason everything in schedule 8 relates to a paragraph 4A. The new sub-paragraph (4A) excludes the entitlement to a corresponding adjustment where two conditions are met: first, that the provision subject to the transfer pricing rules is subject to them only as a result of the paragraph 4A introduced by sub-paragraph (3) in paragraph 1; and, secondly, that a guarantee is provided in relation to the security issued by the debtor by a person who has a participatory relationship with the debtor. That participatory relationship is defined so as to include the subsidiaries of the debtor.

If A is one of the private equity investor group defined by sub-paragraph (4A) of schedule 28AA as participating in the management, control or capital of B—the acquisition vehicle—and B is both the acquisition vehicle and the debt issuer, it would be perfectly normal in those circumstances for B's obligations as a debt issuer to be guaranteed by its operating subsidiary. To put that in practical terms, the companies generating the cash flow will, typically, guarantee the debt obligations being taken on by the holding company in the form of a raft of cross-guarantees between companies in the group.

The transaction is subject to transfer pricing rules because of the sub-paragraph (4A) to be inserted in schedule 28AA. So, B's interest charge may be reduced or disallowed for corporation tax purposes but, because of sub-paragraph (5), the lender is not entitled to reciprocal treatment, thus reducing its interest receivable for corporation tax purposes.

Why is that? The question does not arise because we are being a little slow on the uptake. No one, including the body of expert opinion in the City, which considers these matters very closely, is sure of the answer. What is the relevance of the guarantee? Why does the existence of the guarantee relationship between a subsidiary and its holding company invalidate the right to claim a corresponding adjustment in the corporation tax return of the lender where a corporation tax deduction has been disallowed or reduced in the hands of the borrower? What is the abuse that the Government imagine they are addressing by the inclusion of sub-paragraph (5)?

In many cases in which straightforward bank debt is involved, there will be no disallowable interest because the transaction will clearly be at arm's length. However, to rehearse the argument that we had on the last group of amendments, what about banks with an equity participation in the target company? What about banks that have a private equity division or those that have provided an integrated financing package for the company, including equity and debt as an alternative to a conventional private equity investment? On the face of it, those banks will not be able to secure a corresponding adjustment.

For example, when the lending that takes place is not senior debt lending but mezzanine lending—high coupon lending that takes a subordinate security to the senior debt—the correct pricing of that arrangement may not be so clear-cut for it to qualify as an arm's length transaction. I am not talking about a situation in which an equity kicker is attached to the mezzanine funding, but about one in which there is relatively high coupon debt with a subordinate security interest.

It is not clear to us what the mischief is and what the relevance of the guarantee is, but it is clear that the provision must be wrong in principle. The existing provision that allows for an offsetting adjustment on the other side of the transaction when any adjustment is made is a neat and simple double-entry type solution to what could otherwise be a serious injustice. It is clear that, in the absence of an entitlement to an offsetting adjustment, these arrangements could give rise to a double tax charge where a partial or total disallowance of interest is made and both parties are within the charge to UK corporation tax.The provision potentially puts UK taxpayers at a disadvantage compared with non-UK taxpayers who will often be able to achieve a corresponding adjustment through a double tax treaty adjustment.

The amendment probes the Government on their attitude to the problem by seeking to delete sub-paragraph (5) in its entirety. I have to say to the Financial Secretary that I have seldom been in receipt of such unanimously perplexed sets of briefing notes from different qualified external advisers. I am sure that he will have seen some of the briefings and noted the genuine perplexity of specialist practitioners in this sector about what the Government are seeking to address, the perceived mischief and the relevance of granting an intra-group cross-guarantee.

I hope that the Financial Secretary will be able to explain all these things, and we will listen carefully to what he says. I assure him that the expert bodies that have expressed mystification will also look closely at what he says to see just how the provisions are intended to work. Are they really intended to apply to group cross-guarantees? Why are they intended to apply to them; what do they seek to address; and how will they work in practice? We will listen carefully to his reply before deciding how we should proceed.

John Healey (Labour, Wentworth)

The hon. Member for Runnymede and Weybridge (Mr. Hammond) is right that amendment No. 18 would remove the restriction preventing compensating adjustments from being claimed in relation to guaranteed loans. It is our view that that would open up the scope for the compensating adjustment mechanism to be abused.

When compensating adjustments were introduced in the Finance Act 2004, their purpose was to ensure that if transactions between members of a group of companies were affected by transfer pricing rules, the position in the group could be balanced out. The compensating adjustments are intended for enterprises such as groups that must apply transfer pricing to different parts of the enterprise. We deliberately limited the scope of the adjustments in 2004 so that they could not be used by third-party lenders. If a company is denied a tax deduction for interest on a guaranteed third-party loan under existing transfer pricing rules, the third party is thus not allowed to claim a compensating adjustment.

The restriction on compensating adjustments in the schedule ensures that that policy is maintained under the new rules. If, for example, an independent lender was able to claim a compensating adjustment, the effect would be to enable the lender to receive interest tax free. A lender should expect to pay tax on the interest received on a loan, whatever the tax treatment of the borrower, so it would be wrong for a lender to receive such a tax benefit.

The hon. Gentleman asked about a loan guarantor's ineligibility to claim the compensating adjustment under the new rules. Our worry is that the adjustments could be abused if they were made available to loan guarantors under the new rules. In many cases, the loan guarantor will have a control relationship with the borrower and will thus be able to claim a compensating adjustment under existing rules.

The hon. Gentleman was also concerned that without compensating adjustments, there could be the risk of a double tax charge. Guarantees enable a third party, which is often, although not exclusively, a bank, to lend more than a borrower can borrow on an arm's-length basis. The tax treatment of the lender's income should not be affected by the tax treatment of the borrower in such circumstances. The purpose of compensating adjustments was to ensure that an enterprise did not suffer double taxation because it was structured as several entities, such as a group of companies. The rules of the compensating adjustments for which the Finance Act 2004 provided continue to achieve that.

The approach to compensating adjustments under the new rules is consistent with the policy that underlies the rules under the Finance Act 2004. Those rules did not extend compensating adjustments to a third-party lender, even if the borrower had to make a transfer pricing adjustment in respect of interest on the loan. The schedule is consistent with the 2004 rules, and we are in discussion with the British Bankers Association and others. We are worried that the amendment would narrow the scope of the provision and create the opportunity for precisely the abuse that we are trying to avoid, so, on that basis, I hope that the hon. Gentleman will withdraw it.

Philip Hammond (Conservative, Runnymede and Weybridge)

The key point in the Minister's response was his last—namely, that discussions are ongoing. Until then, he had closed his mind to the problem as I presented it and had attempted to convince us that there was nothing to address other than that the entire financial world had suffered a bout of collective incapacity in being able to understand what the Government are about. The fact that he is in discussions gives us some cause to hope that the problem will be resolved to the satisfaction of all parties concerned.

We are not here to champion the cause of tax avoiders—that does no one any good—and we recognise that every Government have a duty and necessity to try to close down tax avoidance routes as they open up, as they surely always will. It is a constant battle—a bit like painting the Forth bridge. However, we are concerned that they should get the balance right between protecting revenue on the one hand and using heavy-handed legislation and regulation that will have a negative impact on business on the other. The Minister will agree that no one among the body of official representatives of the financial sector or any other sector would defend tax avoidance. All such bodies agree with the principle of needing to close tax avoidance loopholes, but they want to ensure that it is done in a way that does not inflict collateral damage on other parts of the economy, industry or business.

Ideally, such measures should involve proper consultation with the affected parties and their official trade bodies to find a way forward that not only works—the Government clearly think they have something that works—but is well understood by business so that there is clarity and certainty. I understand that in relation to tax avoidance there is often a temptation to legislate first and consult afterwards. Perhaps discussions are ongoing as a result of the delay that has occurred this year in implementing those parts of the original Finance Bill that are now in this Bill.

I hope that the Minister is committed to finding an agreed solution to the perceived problem in the financial community so that his undoubtedly correct objective is achieved without creating negative fallout or, if he can resolve that problem, without creating the perception of the possibility of negative fallout, which would be equally damaging to business.

I hope that by the time we discuss the Bill on Report, the Minister will be able to tell us that his discussions have come to a fruitful conclusion. In view of what he said, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 26, in page 126, line 23, at end insert—

'( ) Paragraph 5D shall be amended as follows—Leave out subparagraphs (1) to (6) and replace with—

"(1) Small enterprise means an enterprise that has no more than 50 staff, and either an annual turnover in the preceding accounting period or a net asset value at the end of the preceding accounting period of less than £7 million.

(2) Medium enterprise means an enterprise that has no more than 250 staff, and either an annual turnover in the preceding accounting period of less than £35 million or a net asset value at the end of the preceding accounting period of less than £30 million.

(3) "Annual turnover" and "net asset value" shall be defined in accordance with generally accepted accounting practice.

(4) The number of staff shall be determined on the basis that staff that are not full time should be counted at the appropriate fraction.".'.

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

With this it will be convenient to discuss the following amendments: No. 21, in page 127, line 5, leave out from 'time' to end of line 7.

No. 24, in page 127, line 7, after 'the', insert

'accounting period immediately preceding the'.

No. 22, in page 127, line 16, leave out from 'satisfied' to end of line 18.

No. 25, in page 127, line 18, after 'the', insert

'accounting period immediately preceding the'.

No. 23, in page 127, line 23, leave out from '1988' to end of line 25.

No. 28, in page 128, line 5, after 'the', insert 'immediately preceding accounting'.

No. 29, in page 128, line 17, after 'the', insert 'immediately preceding accounting'.

Mark Field (Conservative, Cities of London and Westminster)

The amendments relate to definitional elements of small and medium-sized businesses. They deal with the proposed Government change to schedule 9 of the Finance Act 1996 which makes an exception if the debtor company is a small or medium-sized enterprise.

It is sensible to break up the amendments into three separate groups, starting with amendments Nos. 21, 22 and 23, which would disapply the exception. In schedule 8, the exclusion in paragraphs 2(3) and 3(6) of small and medium-sized enterprises from the latest interest rules in paragraph 2 of schedule 9 of the 1996 Act presumably acknowledges the fact that the private equity market provides valid support to start-up businesses as well as ailing companies that might otherwise fail. If that is the correct rationale—I am sure that the Minister will confirm that it is—do those rules produce satisfactory results? In our opinion, the definition of small and medium-sized enterprises derives from the annexe to the European Commission's recommendation in May 2003. The application of that definition to private equities is complex, but in determining which enterprises are being measured we must consider private equity funds and all the investee groups that they control or over which they have significant influence.

Those issues of control and significant influence are at the heart of our concern. The practical implication is that many private equity-backed groups are unlikely to fall within the definition of an SME, regardless of the size of the individual investment. We understand that that is not the Treasury's intention, but I should be grateful for the Minister's guidance. In addition, as the definition of a medium-sized company is relatively low, it will not assist the majority of ailing companies, which will be considered large for these purposes. Any unfavourable treatment of such companies would have a significant impact on the available funding and hence the prospects of those companies. I hope that the Minister can explain in detail why the Government have sought that criterion and whether, on balance, they accept that the size of the debtor company should not be a factor in their anti-avoidance proposals.

Amendment No. 26 seeks to allow businesses, whether SMEs or otherwise, to plan carefully. It would prevent their qualification under the provisions from hinging on the vagaries of the currency markets. As the Minister is aware, the definitional thresholds for small and medium sized enterprises are based on euros in the Finance Act 1996, as amended.

Adam Afriyie (Conservative, Windsor)

My background is in business. There are many small and medium-sized businesses in the UK, including investment banking companies, private equity firms and so on. In business, one wants certainty. Throughout the ups and downs of the business cycle and currency fluctuations one needs certainty about the nature of one's business and the nature of the legislation and the way in which it affects one's company. I am glad that the Opposition have raised the issue of definition, because if the size of a business is based on euros, rather than sterling, that is a profoundly unstable way for businesses to try—

Mark Field (Conservative, Cities of London and Westminster)

Thank you for your indulgence, Sir Michael. I thank my hon. Friend the Member for Windsor (Adam Afriyie), who took the words out of my mouth. I shall, however, come on to the point that he was making in a moment.

As I was pointing out, our proposal would calculate the threshold with reference to sterling. I noted the amusement on the face of the Economic Secretary when mention of the word "euros" brought one of my colleagues to his feet. Many more would have done so, had they been here to play a part in our debate. [Interruption.] That is right—where are they all when one needs them? Doubtless, the proposal would appeal as a matter of principle to some of my hon. Friends who are not here today. I stress, however, that there is no Eurosceptic agenda, although the events of the past week may mean that we are all Eurosceptics now. We all recognise that in the relatively calm currency waters of the past three or four years there have been periods of turbulence that would create unacceptable uncertainty for the most susceptible businesses. That is very much the point that my hon. Friend was making.

I accept that all thresholds are to some extent arbitrary, but at least if currency risk is eliminated from the equation, a company can expand at a controlled rate from year to year and thereby qualify or stand outside the provisions. It is important to remember that small and medium-sized enterprises are often the very businesses that have least exposure to the foreign currency market, so they might find the idea of couching their definition in euros least relevant. Furthermore, such companies are least able to afford uncertainty and are without the internal back-up that would be needed to monitor the currency markets and act accordingly if they were getting near the thresholds. I hope that the Financial Secretary will be able to give us some guidance about why euros are being used, especially at a time when this country has little prospect of joining the single European currency, which may not have been the case when the initial definition was put in place.

Amendments Nos. 24, 25, 28 and 29 seek simply to promote commercial certainty. The Government's current rules for the relevant accounting period mean that a business may discover that it is not an SME after the relevant period has come to an end. Surely, that cannot be a sensible way to proceed. I accept that we are talking not about an enormous mass of businesses, but about a small number of companies that are getting near the threshold. Inevitably, there are always concerns about thresholds. In relation to certainty, surely it is better to adopt our proposal to refer to the previous accounting period rather than the current one. Let me give as an example a company that is not only worried about the vagaries of the currency market, but potentially reluctant to acquire new business that might take it above the threshold unknowingly in the last few months of its financial year. We always have to keep an eye on the collateral impact of any such proposals.

In conclusion, three factors are at stake. First, there is the question whether the base is in euros or sterling. Secondly, on the notion of a current year valuation, we propose returning to levels in the near past, for certainty's sake. Finally, we query whether an SME is an appropriate part of the entire criterion. I hope that we can have a sensible discussion on these matters. I know that we will discuss another set of amendments that propose to do something slightly different at a later stage, but I hope that the Financial Secretary will give us at least some guidance about re-adopting a provision in the Finance Act 1996, which is now nine years old.

Adam Afriyie (Conservative, Windsor)

My apologies, Sir Michael, for making an incorrect intervention earlier. I am beginning to find my feet, and when I hear the words "currency" and "euros", my blood boils and off I go.

I speak as a former business man. There are many businesses of all different sizes throughout the country, and a significant minority will be affected. What one craves in business is a sense of certainty. There are enough uncertainties in day-to-day trading and business decisions to keep one occupied and cause concern for the future, without the added uncertainty of currency fluctuations, which will also be used in a retrospective fashion in defining a company's size. I ask the Financial Secretary to take a look at the definitions and to anchor the definition of a company's size in sterling, which British companies can be certain of month to month and quarter to quarter, rather than make it subject to financial fluctuations. Indeed, given the current uncertainty surrounding the euro, I wonder whether such uncertainties and fluctuations will grow in months and years to come.

If one's company's size is defined by the current accounting period, one is left in uncertainty, because one never knows how the current trading period will be considered in the future. We are against retrospective legislation, which creates stress and uncertainties in the business environment and for individuals. If the Financial Secretary were to examine historical accounting periods, I am sure that the business community, and especially those involved in the relevant section of the industry, would be pleased.

John Healey (Labour, Wentworth)

I shall try to explain why we have drafted schedule 8 in this way and, by extension, why the Opposition amendments are unacceptable.

Amendment No. 26 is the key amendment. It changes the definition of an SME for the purposes of the exemption from the transfer-pricing rules in the Finance Act 2004. The same definition is also used in the new loan relationship party rules introduced by schedule 8. The exemption removes most SMEs from the requirement to apply transfer-pricing rules, including the relevant documentation requirements.

The definition is used in existing legislation, and it is a standard European Commission definition that is used for many purposes, including for tax purposes. One of its features is that it groups an enterprise with other enterprises with which it is linked. That means that a company with a small turnover or a small number of employees that is a member of a group of companies with a large turnover or a large work force is not treated as a small enterprise and does not qualify for the exemption, which is the result that we want to achieve. Amendment No. 26 does not include any such grouping rule, which is a serious flaw that would allow a small UK subsidiary company within a giant multinational group to benefit from the exemption from transfer pricing rules, which would not be appropriate.

The hon. Member for Cities of London and Westminster (Mr. Field) asked whether small companies controlled by private equity limited partnerships are eligible for the SME exemption. The principle is consistent, and I hope that it is clear: a business controlled by a private equity limited partnership will be treated in the same way as a business controlled by a company or by an individual, and the SME exemption will operate in exactly the same way as it does under existing transfer pricing rules, using a standard European definition to determine whether a company qualifies as a small enterprise or as a medium-sized enterprise. I must tell the hon. Members for Cities of London and Westminster and for Windsor (Adam Afriyie) that that definition is calibrated in euros and that it will continue to be calibrated in euros, although it makes the blood of the hon. Member for Windsor boil.

The hon. Member for Cities of London and Westminster also asked what happens when debtors are no longer small or medium-sized enterprises. In that case, such enterprises lose their exemption from late-paid interest or discount rules. The exemption exists to encourage funding in SMEs, which are the businesses that are most likely to grow and to create jobs. The Government put a great deal of policy attention and support behind those businesses, often with the support of the Opposition. When such businesses are no longer SMEs, however, it is difficult to justify the continuation of that protection at the taxpayer's expense. Those are the key reasons why I ask the hon. Member for Cities of London and Westminster to withdraw the amendment.

Mark Field (Conservative, Cities of London and Westminster)

Again, I thank my hon. Friend the Member for Windsor (Adam Afriyie) for his brief contribution. He added some interesting observations about likely fluctuations in the currency market that applied to part of the amendment.

The Minister rightly notes that amendment No. 26 is at the crux of the concerns that we have tried to address. As he says, the exemption of SMEs from a requirement to apply transfer pricing should not be applied across the board where there is an issue of international control. Equally, it is fair to say that in some small subsidiaries of large international groups the issue of control may not be entirely straightforward. We could not necessarily deal with that in an amendment, but it will perhaps be explored in future years, as clearly much of the work that relates to the venture capital industry in various Finance Acts will be subject to continual change as that market matures.

We are concerned, for the reasons that we have set out, about the notion of the standard definition as produced by the European Commission. I accept, from the Minister's perspective, that there has to be some sort of threshold and that there are rightly tax treatments that make life easier for SMEs but perhaps not for all companies. None the less, it is a somewhat stark distinction, and the uncertainty that we have identified will need to be examined in future years.

There has been significant lobbying by the venture capital industry, which has expressed certain concerns, but we have had a chance to articulate them during the debate. On the basis of the replies that we have had, I hope that we will be able to return to this in due course, particularly if it is found that there are ongoing problems in the venture capital and private equity industries, which are so important to this country, and that the Minister will be open-minded about that. With that in mind, I am happy at this juncture to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 20, in page 126, line 25, leave out paragraph 2.

Mark Field (Conservative, Cities of London and Westminster)

Amendment No. 20 would render the entire previous debate redundant, as it seeks not to make any amendments at all to schedule 9 of the Finance Act 1996. It might have been easier had we had that debate initially.

Sufficient complications still surround collective investment schemes and plague the venture capital industry. We accept that changes to their tax treatment have largely come about as a result of fierce lobbying by those involved in the industry and many of those are to be welcomed. However, there is a strong view in the marketplace that some of the proposals concerning transfer pricing and loan relationships may reduce the number of private equity deals being done in the UK. As my hon. Friends the Members for Runnymede and Weybridge (Mr. Hammond) and for Chipping Barnet (Mrs. Villiers) said during the debate on the whole issue of transfer pricing, innovation, flexibility and commercial certainty must be the imperatives, and we fear that the Treasury's real motivation is to increase tax take to overcome an increasingly unmanageable black hole in finances.

As ever, it is the unintended consequences that we must ward against. In particular, the proposal to collect an increased share of tax, sooner rather than later, on a crude interest may reduce the volume of private equity deals in the UK. Ultimately, as is the difficulty with all such matters, we will not know the truth until it is too late. However, we are also convinced that there is a fear that the proposal will reduce the UK tax take and we need to remember that the venture capital industry does not invest only in tremendously successful industries and that its returns are by no means always the sure thing of tabloid legend. Indeed, private equity plays an important and full part in resuscitating—or at least attempting to resuscitate—ailing businesses. There is a genuine sense of foreboding that the plans might inadvertently boost the rate of business failures in the UK.

We support the current arrangement whereby tax is deductible from interest payments that are payable when the private equity investor sells the investment on. Such schemes will typically last four or five years. Some last for a shorter time but, as a rule of thumb, four or five years is a useful benchmark. The tax deductions for the interest charge arise when it accrues in the accounts, not when such interest is paid. It is clear from the Government's proposals that they regard that as something of a loophole, notwithstanding the established agreement between the venture capital industry and the Inland Revenue, which was brokered as recently as the Finance Act 2004. It covers a wider range of investment vehicles, which could lend to borrowers, and the borrower could still obtain a tax deduction for late paid interest.

Our concern is that the risk will have an adverse impact on the pricing of many private equity transactions, to the potential detriment of UK business. As the Financial Secretary understands, the private equity business is still, even by British standards, a fledgling business, but is emerging strongly in many other parts of the world. Ten years ago, Australia had no private equity business to speak of but is now a significant competitor.

It is very much a global market and we fear that the Government's proposal would restrict the borrowing company to claiming group relief against the profits of only a single year—the final year of the scheme. That may cause difficulties. If the interest deductions are all delayed until the interest is paid rather than eked out over the period of a scheme, there will be only one substantial tax deduction. Clearly, there is then a risk that the aggregate interest would be more than the overall profit in that final year.

We must always remember that the profitability of any company may be cyclical for a host of reasons for the duration of the scheme. Those reasons may go to the heart of the nature of the business. Perhaps the business is growing and looking to grow more, thus having less of a profit in the final year under venture capitalists. Profitability may also be cyclical simply for general economic reasons. If total interest exceeds profits in the final year, the borrowing company runs the risk of some its accrued interest payments having zero economic value, even when there can be no reasonable suggestion of the scheme having been created deliberately or artificially to avoid tax.

In practice, the excess interest deduction may prove hard to use and undermine the profitability of the proposed scheme. Our difficulty is that, if the profitability of a proposed scheme is undermined, in a global market for private equity, more deals will leave these shores. The probable result of that is a lower tax take. Nothing would be worse than trying to ensure a bigger slice of a much smaller cake. I appreciate that that is the perennial problem of Treasuries through the years.

The other amendments in the group are all consequential. I hope that the Financial Secretary will provide at least some guidance about our proposals and whether there is any way in which we can try to ensure that some of the more negative consequences to which I referred are put to bed.

John Healey (Labour, Wentworth)

The hon. Gentleman is right to say that the private equity business is strong in the UK. Indeed, it is second only to that of the United States, but it is competing increasingly in a global market. We are clearly concerned about its health in the UK because it is an important part of funding, especially for many of our small and rapidly growing companies. However, I believe that some of the wider and dramatic impacts that some hon. Members claim that the schedule will have are hugely overstated.

To set the scene for discussion of the amendments, it is important that the Committee remember that the loan relationship rules, which are the corporation tax rules that tax interest paid and received by companies, operate by reference not to the interest paid or received in cash but to the amounts of interest shown as accrued in the company accounts. It has always been necessary, as I think the hon. Gentleman will well know, to have special rules to deal with cases where a company is deducting interest in its accounts in respect of loans from connected parties where there is a potential for the manipulation of lending and borrowing to shelter company profits from UK tax.

At the same time, it has always been recognised that such rules could bite harshly on smaller companies and on start-ups, particularly where there are close relationships with a relatively few venture capital providers. It is common for a lender in those circumstances also to take a small equity stake.

Adam Afriyie (Conservative, Windsor)

Earlier today, I asked for quantitative evidence of some of the items that are being discussed. I ask for a rough idea of how many businesses will be affected by the measures contained in the provisions that we are discussing.

John Healey (Labour, Wentworth)

I do not want to return to clause 11, which was being discussed when the hon. Gentleman asked his question. I do not know whether he will find my answer satisfactory. The principal purpose of clause 14 and schedule 8 is to anticipate the development of new avoidance arrangements. This is the answer to the hon. Member for Cities of London and Westminster (Mr. Field). By the scored amount in the current year for the revenue gain of the whole schedule, we are talking of only £5 million. Knowing what professional advisers are beginning to advise their clients, the point is to anticipate potential avoidance arrangements. Therefore, it is impossible to give the precise answer that hon. Members might wish for.

The loan relationship connected party rules have included exemptions to protect venture capital investment in company start-ups and in early stage expansion. The changes made in the Finance Act 2004 clarified how the exemption applied in the case of certain sorts of foreign venture capital providers but did not otherwise affect the scope of the exemption. However, it has become clear that the exemption can be used not only for venture capital investments in start-ups and in growth companies but also to facilitate private equity investment in management buy-outs of large, long-established and profitable companies, and not only the ailing companies that the hon. Member for Cities of London and Westminster was concerned about.

Amendments Nos. 20 and 27 would therefore undo the very purpose of the changes that we are introducing. They would mean that the exemption was not targeted on the growth companies and the start-ups for which it is intended. The benefits of the venture capital exemption would continue to be available for all private equity deals, management buy-outs and mature low-risk businesses with a steady and well-established cash flow, and would certainly be less risky than the growth businesses that we want to encourage.

The amendments would also allow the other avoidance opportunities that are closed down by paragraphs (2) and (3). I hope that on that basis the hon. Gentleman will consider withdrawing his amendments.

Mark Field (Conservative, Cities of London and Westminster)

The Minister will be glad to know that the Opposition will withdraw the amendments. In part, they were probing amendments. It was important to have some discussion about whether small and medium-sized enterprise distinctions should be made at all within the context of the Minister's proposals.

We are rightly proud of the strength that the UK has in our private equity business. It is particularly important that that is maintained, not least given the strength of the two great economic superpowers of the future—China and India—and our links with those countries. Inevitably, there will be a significant role for a number of joint ventures. Much venture capital will find its way in various different guises either in the UK or beyond that. It is therefore important that the pre-eminence of our private equity business is seen to be maintained.

Clearly, the Opposition are being lobbied, just as the Government are lobbied, and, inevitably, the Armageddon and appalling outcomes that are sometimes presented can be exaggerated. Equally, my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) rightly articulated one of the Opposition's concerns when she referred to the notion of such overseas arrangements being somehow nefarious and having complicated structures, which is an inevitable part of that sort of transaction.

I have some understanding that the Treasury wishes, as the Minister rightly puts it, to anticipate new avoidance arrangements. Inevitably, the best tax lawyers and tax structurers are likely to be one or two steps ahead of the game, so it is legitimate for the Revenue and the Treasury to try to have such an understanding. Certainly, it surprised me when the Minister said that the proposed revenue gain was as little as £5 million, which is very much small fry. None the less, one hopes that, if there is to be a genuine move towards anticipation of new avoidance arrangements, there will also be a recognition that it is wrong—we will no doubt discuss this in greater detail in Committee in the next two weeks—for any of this legislation to be retrospective or retroactive. If there is to be a policy from the Treasury to anticipate avoidance arrangements, surely it is part and parcel of that, and fair game, to ensure that retroactivity and retrospection is kept to an absolute minimum—nil from the Opposition's perspective.

We have had a reasonably amicable, albeit shortish debate on this matter. Again, the Liberal Democrats—the real opposition—have not sought to make any contribution, which is a matter of some surprise. Silence is golden—or perhaps orange.

We shall not press the matter to a vote. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the schedule be the Eighth schedule to the Bill.

Philip Hammond (Conservative, Runnymede and Weybridge)

This has been an interesting debate, if a little lopsided in its geometry around the schedule. I suppose that we can forgive Liberal Democrat Members—no doubt, over the next year or so, they will get their act—

Philip Hammond (Conservative, Runnymede and Weybridge)

I am certain that you will guide me, Sir Michael, if I seem to be falling into that trap.

We are discussing an extension of the transfer pricing rules to cover loan relationships and the capture of a group of people who were not hitherto caught by schedule 28AA, which the Government clearly feel is a necessary measure, and which, in its current drafting, the venture capital and private equity industry sees as an attack on an established model that has operated within parameters agreed with the Inland Revenue over a not inconsiderable period. As I said earlier, a degree of concern exists about the way in which some of these measures have been badged as anti-avoidance.

When a change is announced by the Government to a treatment that was agreed in 1998, and which has been constantly reviewed by the industry and the Treasury since then, it is bound to lead to some concerns. I want to quote from a letter that the British Venture Capital Association sent to the Chancellor on 23 May. It wrote:

"The apparent change in policy by the Inland Revenue over the agreement we reached in 1998 about the application of transfer pricing to private equity limited partnerships is particularly unfortunate, not least because of the level of distrust this move has now introduced to the relationship between the industry and the Inland Revenue."

This is a widely drafted provision, extending existing transfer pricing rules and restricting a deduction that has been available for accrued interest and discount. It will affect the pricing of transactions.

A subject of concern that covers the whole schedule, including parts that have not been addressed in detail today, is the way in which it catches banks. We have certainly had that discussion, but I suggest to the Financial Secretary that in some circumstances the schedule could also catch corporate joint ventures, through what is effectively the disapplication of the 40:40 rules in paragraph 4 of schedule 28AA to the Income and Corporation Taxes Act 1988. The Minister spoke of seeking to level the playing field between partnerships and corporations. That measure will disadvantage corporate JVs and bring them—perhaps unintentionally—within the scope of the schedule.

Many private equity funds have for many years been structured as multiple parallel partnerships, for very good commercial reasons. Private equity houses will typically seek to ensure that in any fund that is investing, they have an appropriate identity of interest between investors in that fund. It might be done on a geographical basis: German investors might be collated in a fund that might then have a bias towards investing in German concerns. Ethical investment funds in the United States particularly, but increasingly in this country, have restrictions—for obvious reasons—on the types of investment that they are willing to make. Indeed, Sharia investment funds have such restrictions. It makes perfect sense for a fund to be structured as multiple parallel partnerships to try to ensure that investors can be grouped in an appropriate way—and, overarchingly, in a way that matches different classes of investors' appetite for risk with the opportunities that are available. Many of the investors in private equity concerns are quite risk-averse organisations, pension funds being the obvious example. As I hope we have established this evening, it is not the case that multiple partnership structures are all or mostly tax-driven. That is not to deny that some funds are using those structures to generate tax saving, as Conservative Members have clearly recognised.

This is a important industry for the United Kingdom. Private equity-backed companies generate £187 billion worth of sales and £23 billion of taxes every year. The industry in Britain is second only to that in the United States. It brings a huge dynamism to the economy, whether it backs growing businesses—the kind we all want to expand so that they can become larger, eventually perhaps going to the public markets for capital—or whether mature, sometimes ailing, businesses need the support of new capital funds and the close attention that private equity houses can often provide.

The breaking of that 1998 consensus between the Revenue and the industry without prior consultation and with retrospective effect—I shall have something to say about the retrospective effect and the timing of implementation provisions in proposed new sub-paragraph (4) in a moment—has in itself seriously damaged the UK's attractiveness as a location for private equity and venture capital houses, and, indeed, its attractiveness as a destination for investments by those funds, wherever they are based.

Of course, although the Government have approached this as a tax-avoidance loophole-closing measure, some of the loopholes are rather small—more like the eyes of needles, to judge by what the Minister was saying earlier. The real danger is that the end result could be less tax, through less private equity investment and less business generated in this country, and more business failures and job losses as companies that might have been rescued and turned around by private equity funds are left to their fate. There is no doubt that uncertainty will be created in straightforward and established transactions. Mezzanine debt, with or without equity warrants attached—which, ironically, is intended to reduce the tax-reducing interest chargeable—could now become a less attractive instrument because of the doubt surrounding its treatment.

One issue that has not been touched on so far this evening is the relative attractiveness and complexity of shareholder debt financing, which is an important part of the private equity deal. Typically, private equity houses are burdened with large funds—if one can imagine such a thing—that they need to invest. Such funds often exceed their capacity to make equity investments, and a standard technique that they employ is to provide part of the debt financing required in the package as shareholder debt financing.

Until now, most people felt it reasonably easy to price shareholder debt financing. However, such financing will now be brought within the transfer pricing rules through the application of proposed new paragraph 4A, and such people will be required to show that the debt has been priced at arm's length. That will be much more difficult than might be thought, because most comparable transactions that would form the basis for demonstrating to the Revenue that the pricing of an arrangement is arm's length will be caught within the new rules. Therefore, no clear and substantial body of shareholder debt financing will exist that falls outside proposed new paragraph 4A. That in itself will create uncertainty and it will undoubtedly make shareholder debt financing a less attractive instrument.

As we have already heard this evening, there is doubt surrounding the status of leading banks where another division of the same bank might be involved as an equity investor in the private equity house. There are also concerns about the workability of the small and medium-sized enterprise exception at paragraphs 2(3) and 3(6). As my hon. Friend the Member for Cities of London and Westminster (Mr. Field) set out clearly, there is a real fear that, despite the best intentions of Her Majesty's Revenue and Customs, very few private equity groups will in fact qualify as SMEs and thus gain exemption from the schedule's timing of interest provisions. We still do not understand the need to eliminate double counting provisions, as provided for in sub-paragraph (5), but we accept that the Minister is engaged in an ongoing voyage of discovery in this regard. We hope to hear from him in due course.

The changes to the rules on the timing of interest payments where there is a loan relationship is a specific problem for the private equity model. It presents the very real possibility of deductions becoming available only at the exit point, typically after four or five years when the private equity investor exits. There is a real danger that the accrued interest deductions will, by that stage, be so large as to be incapable of being used up in year, and thus are likely to become unrelievable because there will not be sufficient non-trading income in the vehicle to offset the loss during the year. Trapped losses will be delivered, which is bound to have an effect on the pricing of a private equity deal, and they will not have been priced into the deals that have already been done.

The Revenue says that about £20 million is at stake in respect of changes to the rules on the timing of interest deductions. The industry, as the Financial Secretary knows, believes that as much as £1 billion of loss deduction is at stake, so there is a huge gap between what the industry perceives and what the Government perceive. It is a shame that there appears to have been no opportunity for the two sides to get together in order to understand each other's point of view or for the Government to create some reassurance. There is a very uncertain position and genuine concern within the industry that the deductions will be disallowed on a much greater scale than envisaged by the Government.

I hope that the Financial Secretary will respond to this short debate, as I would like to put this question to him. Given that the interest deduction is allowed only when arm's-length terms are in place, is there any need for special treatment of shareholder debt? I see no such need, and we have already asserted that paragraphs (2) and (3) have no necessary place in the armoury that the Government are seeking to create. They already have the weapons to deal with shareholder debt that is not priced at arm's length. The other point that arises from the changes made in those paragraphs, I am told by the experts, is that we are likely to see zero coupon notes disappearing as a financing mechanism as a result of the difficulty of showing that they have been priced at arm's length.

All that is interfering with a private equity funding model that works; that has been shown to work over a number of years; that has delivered for the UK economy by financing hundreds, perhaps thousands, of businesses throughout the country, as well as fuelling a vibrant sector of the financial economy itself; and that has been agreed on and run for many years with the full understanding and acquiescence of the Inland Revenue. The Government are taking an extremely dangerous step in unravelling that long-agreed model.

It is not clear why persons caught by the extension of the rules in paragraph 2(2)(b), (c) and (d) are not subjected to the benefit of the grandfathering provisions in paragraph 4(3). That sub-paragraph provides a grandfathering provision for many of the caught transactions, but it excludes those falling within the scope of schedule 28AA under those sub-paragraphs of paragraph 2. Interest on loans made by such persons—those who are not entitled to the benefit of the grandfathering provisions—will be subject to the late interest rules from 4 March 2005, not 1 April 2007. It is not clear to us why that sub-class of investor should be disadvantaged in that way.

There is also confusion about the wording of paragraph 4(3)(b). The debtor relationships to which transitional provisions apply are those entered into before 4 March 2005 and

"not varied after that date".

That seems fairly straightforward—but the line goes on to say:

"or not varied until after that date".

I do not pretend to the Committee for a moment that we have dreamed up this query ourselves, but I can tell the Financial Secretary that some of the sharpest minds in the specialist tax advisory sector do not know whether the two phrases in the line

"not varied after that date, or not varied until after that date"

together effectively embrace everything, as would appear on a plain English reading of the text, or whether they are intended to mean something else. Can he tell us whether those two phrases together cover all existing loan relationships? Is that the intention, and if so, could it be stated a little more clearly? I am sure that the industry would be pleased if it could.

There is an issue of retrospection with all the provisions in the schedule. Deals in the sector are typically done on the basis of cash-flow projections, which will have been built by factoring in an interest deduction, and assuming that a lower rate of corporation tax would be payable in the early years. As the Minister will know, when we consider the discounted cash flow of a business forward, the exact time when the deduction comes and the cash hit is taken is very significant. Moving it forward from the fourth or fifth year to the current year, by not allowing the deduction to be taken until exit, is potentially very significant—and that has been done without warning or consultation. The impact will fall on private equity businesses. Their liability to pay the interest will not change, but they will not get the corporation tax deduction that they have factored into their cash-flow projections. They will have to make the interest payment provided for by contract, and also make a corporation tax cash payment that in their business model and their cash flow forward they will have assumed would not have to be made at that time.

Has the Treasury really looked at the case for a permanent exclusion of all pre-March 2005 debt, so that there will not be that element of retrospection and transactions that have already been priced and contracted for, where a loan relationship already exists, will be allowed to run their natural course? In the case of a private equity financing, that would typically be only four or five years; most private equity financiers would be unhappy if they were not out by the end of five years.

That brings me to another important point—a very different point, but germane to the Government's assessment of the overall impact of the schedule. I am thinking about the joined-up government approach, and about considering not just what the measure will do for the Treasury's revenues and what it will do to the industry, but its relationship with other Government policies and initiatives.

Schedule 8 will have an impact on the private finance initiative. The financing of PFI deals tends to be structured in a similar way to private equity deals. There are good commercial reasons why PFI deals are structured in that way, and they are known by, and have been structured to benefit, the public sector. The PFI industry is aware that clause 40 and schedule 8 are intended for the private equity industry, but there is a concern—I am sure that the Treasury is aware of it—that a blanket application of the new rules would prejudice providers of PFI and push up the cost to the public sector. I know that Labour Back Benchers are deeply concerned about that possibility.

A particular concern is that it is rare that profits are extracted from PFI contracts by investors without being subject to UK tax in their hands. The removal of a corresponding adjustment in the proposed legislation at paragraph (1)(5) will affect investors in PFI contracts that are caught by the new legislation, given that the investors in PFI contracts are nearly always subject to UK corporation tax. That will make PFI deals less attractive as an investment and will potentially make existing PFI contracts loss-making, which would hardly send the message that the Government would want to the industry as a whole, given the central role that PFI plays in their financing strategy and in enabling them to maintain their desired levels of public investment without breaching the Chancellor's sustainable investment rules.

As all members of the Committee will be aware, PFI contracts tend to run for much longer terms than private equity deals, so any change of the rules in respect of existing deals—unwelcome as it will be to private equity financiers—will wash out within four or five years maximum, because that is the maximum length of time that private equity investors expect to be in an investment. However, any application of the new rules to PFI would affect those contracts disproportionately, as the impact would be felt for a much longer period—10, 20 and 25 years are not atypical—and the net present value effect of rule changes that impact on the cash return over 20 years would be significant, as the Financial Secretary will be the first to grasp.

In addition to the impact on existing contracts and in the absence of certainty about how PFI contracts will be caught in a net that was, admittedly, cast for a different purpose—to deal with private equity financing—new PFI contracts will surely be priced by providers on the assumption that these rules will apply. Such a move could make PFI more expensive for the public sector at a time when the pressure is on to try to make PFI deals less expensive. Indeed, given the general interest rate climate, one could probably expect that PFI deals would become generally less expensive, if not for these changes, which I might characterise as a potential own goal.

It is imperative that the Government—perhaps the Financial Secretary will do so in his response—confirm that the new rules are not intended to affect PFI contracts. Existing rules can be used to deal with perceived abuses—for example, the Revenue's response already delivered to the proposed refinancing of older PFI contracts, which would be perfectly sensible commercial transactions. Applying the new rules would have an adverse impact on the public sector via higher costs and by making PFI less attractive as an investment, hence reducing competition for PFI projects and increasing the cost to the public sector.

Throughout our consideration of the schedule and our amendments, we have tried to narrow the Government's focus and to get back to the intended core purpose. Indeed, we should like to get the Government to state exactly what target they are trying to hit, so that people fretting needlessly that they will be inadvertently caught hear a clear message from a qualified Government spokesman that it is not the Government's intention to allow them inadvertently to be damaged by measures proposed for a quite different purpose. For example, banks lending mezzanine finance need reassurance that they, or the companies to which they have lent, will not be involved in complex discussions with the Revenue that might lead to a loss of deductibility of interest, which in turn could lead to a reduction in the viability of the business in which the bank has invested and thus a reduction in the security against which the bank thought it was investing.

Widespread concern has been expressed in the industry about the lack of consultation. There is widespread concern, too, about the way that the measures were badged as anti-avoidance provisions, implying that people in the industry who pride themselves on having stuck to a model agreed with the Revenue have in fact been doing something untoward.

I shall quote again from the letter to the Chancellor from the chief executive of the British Venture Capital Association of 23 May, two days before the Bill was published. He says:

"These proposals, if given effect, would seriously damage this industry and in our judgement could well be a deterrent to private equity to continue to increase its investment in the UK. This cannot be an outcome you either intended or would welcome."

I certainly hope that it is not the outcome the Government intended, but with all that well-informed warning floating around, of which the Treasury is well aware, the Opposition must insist that the Government reconsider the matter and address the concerns that are being expressed.

There will be deferment until 2007 in several areas as a result of paragraph 4, so the need may not be as pressing as the Government have suggested—the abuse at which the rule changes is aimed is not as widespread as the Treasury may fear. The real impact of the sudden introduction of that new regime will be on deals in progress, under discussion or being negotiated when it is announced. Uncertainty as to the need for review of those arrangements and uncertainty as to what will be deemed to constitute an arm's-length consideration in proposals currently being negotiated will inevitably lead to private equity deals currently under negotiation being priced up to reflect that uncertainty. That is bound to be bad for business.

I suggest to the Financial Secretary that the sensible thing would be to leave the schedule out of the Bill—not to abandon it nor to give up on the intention behind it. In his press release, he has already signalled that 2 March will be his start date so that is clearly on the record for everybody to see. By pulling the schedule from the Bill, the Financial Secretary would have an opportunity to reconsider both the principle behind the measures being introduced and the detailed drafting. He would have an opportunity properly to consult the industry and users of private equity finance. He would have an opportunity to undertake a proper study of the likely impact of these measures and he could come back in next year's Finance Bill and present us with a much more tightly drafted proposal to tighten up schedule 28AA to the Income and Corporation Taxes Act 1988 and schedule 9 to the Finance Act 1996. I am sure that the Committee would be delighted to give a fair wind to that.

Many concerns from many responsible and reputable sources have been voiced through us tonight. If the Financial Secretary does not want to listen to our concerns, he must at least be cognisant of the need to listen to the concerns of those responsible and reputable observers in the business world, the City and elsewhere. I know that they have been briefing him as they have been briefing us.

Little will be lost by leaving the schedule out for another year. Even at this late stage, I urge the Financial Secretary to take that opportunity.

John Healey (Labour, Wentworth)

We have had an extensive debate on the schedule, and the hon. Gentleman has made an extensive speech. I shall try not to retread old ground.

Either deliberately or unwittingly, the hon. Gentleman has conflated the application of existing transfer pricing rules with the extension of those rules to specific areas in the clause. The transfer pricing rules are established; they are essential; they are accepted; and they protect huge amounts of revenue to the public purse. They have been in existence for more than 50 years, and they have applied to partnerships for years. The Bill extends the rules to specified areas to which they do not currently apply. The changes apply only from 4 March 2005, which is when the changes were announced. The clause and the schedule do not apply retrospectively.

The hon. Gentleman talks about the venture capital industry being badged as an avoidance industry. Let me make it clear again that the Bill and the schedule are about the extension of transfer pricing rules. In fact, the letter that he quoted from the British Venture Capital Association makes it clear that its argument is about the application of existing transfer pricing rules.

There is a process for settling all disputes about the application or operation of tax rules. Her Majesty's Revenue and Customs applies and manages the operation of the tax system, and taxpayers have a right to contest the way that it does that. The legal system will settle matters of fact. There is a dispute about the enforcement of the existing rules, but it is not relevant to the Bill, which is about the extension, not the application, of transfer pricing rules. It is about their extension to syndicates in which companies are owned by more than one equity partnership, which means that they are, at the moment, able to get tax deductions beyond the rules. It is about heading off the fragmentation of ownership to get around those rules and dealing with what we now see as advice from professional advisers about how to do just that.

We are not in any way suggesting in the Bill that all private equity finance is somehow based on tax avoidance, but we are aware of professional advisers promoting opportunities for structuring ownership and financing of companies to get around existing rules. The purpose of the schedule and the clause that enables it is to protect likely future revenue loss. The hon. Gentleman therefore needs to understand that any suggestion that the cost to the private equity industry will be £1 billion or more is hugely wide of the mark. That could be the case only if the rules disallowed all the interest costs arising from private equity deals, and the rules will not do that. Companies will still be able to obtain tax deductions for interest on debt finance up to the arm's-length amount, and we have had a detailed discussion about that.

The hon. Gentleman mentioned the private finance initiative for the first time today. Let me make it clear that no changes are being made to the existing transfer pricing rules that apply to many PFI deals. We do not expect the changes to have any effect on PFI funding and there is no evidence of any impact on PFI deals since the changes were announced in March. The changes close loopholes to prevent companies from restructuring to get around the existing rules. They do not alter the way in which the existing rules apply to companies involved in PFI deals or other companies. The hon. Gentleman might like to know that HMRC has had discussions with PFI representatives, who I understand have been reassured. However, I am happy to hear of any further concerns that they may have.

In summary, the purpose of the changes is to make the tax treatment of company finances fair for all companies, regardless of their ownership or financing structures. The changes introduced by the schedule will ensure that there is a coherent and consistent set of tax rules for companies with different ownership structures, including, albeit not exclusively, companies controlled by private equity investors. The new rules are in line with those of our major competitors, such as Germany and the USA. They will sustain the UK's position as an attractive location for international investment, and I commend the schedule to the Committee.

Question put, That the schedule be the Eighth schedule to the Bill:—

The Committee proceeded to a Division.

Clause 43 — Implementation of the amended Parent/Subsidiary Directive

Richard Spring (Conservative, West Suffolk)

The clause amends the European Commission parent/subsidiary directive and is purely technical. It provides for profits distributed by an EU subsidiary to its parent to be exempt from withholding tax. The Verkooijen case at the European Court of Justice involved a Dutch taxpayer winning the argument that dividends from a Belgian company should be taxed in the same manner as dividends from Dutch companies. The current UK tax regime exempts UK dividends but taxes overseas dividends, and the ECJ would almost certainly view it as discriminatory. Will the Financial Secretary consider whether that change in the legislation is irrelevant, because the main legislation to which it relates will be struck out under ECJ principles?

John Healey (Labour, Wentworth)

Clause 43 makes a minor technical change to the rules on double taxation relief to ensure consistency between those rules and the recently amended EU parent-subsidiary directive. [Interruption.]

John Healey (Labour, Wentworth)

We announced our intention to make that minor change on 31 January, when we published the draft of what is now clause 43. Since that date, neither the Government nor HM Revenue and Customs have received a single representation or query on the provisions, which is unsurprising because the provisions will make little difference in practice. If the hon. Gentleman is concerned—nobody else appears to be—I will be happy to write to him. Any companies affected by the change can only benefit from it, and it will provide business with a degree of certainty to ensure that there is consistency between the UK's double taxation relief rules and the amended parent-subsidiary directive.

Richard Spring (Conservative, West Suffolk)

We must know more about the importance of the ECJ to the application of UK law, because examples now exist in case law. I accept that clause 43 makes a technical change, but I ask the Financial Secretary to examine the subject and to let me know his view.

Question put and agreed to.

Clause 43 ordered to stand part of the Bill.

Clause 44 — Territories with a lower level of taxation: reduction of amount of local tax

Richard Spring (Conservative, West Suffolk)

I beg to move amendment No. 4, in page 35, line 37, at end insert—

'(1A) In subsection (1), omit "outside the United Kingdom" and insert "outside the European Union".'.

Richard Spring (Conservative, West Suffolk)

Amendment No. 1 focuses on the fact that certain cases in the ECJ mean that various provisions of UK tax law may be overridden. Up to £20 billion is estimated to be at stake for this country in relation to ECJ cases, and we want to know what provision the Government have made for that in their accounts.

Amendment No. 2 relates to the anti-avoidance measure in clause 44, which is part of the controlled foreign companies anti-tax haven rules.

Richard Spring (Conservative, West Suffolk)

The measure is partially retrospective. [Hon. Members: "Which amendment?"] I am discussing amendment No. 5. The anti-avoidance measure in clause 44 applies to accounting periods beginning on or after 2 December 2004, and it catches income and profits arising after 1 January 2005 for most groups. The 2 December date has been included to prevent the implementation of certain avoidance structures, but clause 44 is widely drafted and may catch certain transactions because of general differences between tax regimes on when they tax specific items of income and expenditure. We want to tighten the definition because the controlled foreign company tests—the CFC tests—are applied annually. Proposed new subsection (1A) requires the adjustment to be made in respect of that particular accounting period, and it does not take into account the fact that the very same income or expenditure may fall into the charge to tax in a later period.

CFC rules apply where an overseas subsidiary of a UK company is subject to a 25 per cent. lower rate of tax than the UK charge and does not meet any of the exemptions from the CFC rules. A tax rate 25 per cent. lower than the UK tax rate is determined by computing the taxable profits of the CFC under UK tax law principles. At the heart of this issue is the fact that the clause prevents tax planning whereby income that is not taxed in the UK is taxed overseas to inflate artificially the rate of overseas tax to get above the limit. These structures normally work so that the post-tax profit stays the same, increases or reduces marginally, while the pre-tax profits and tax charge overseas are increased by roughly the same amount.

The amendment would limit the effect of the clause. Many items are taxed in the UK in a different accounting period from that in which they would be taxed in an overseas jurisdiction. For example, unrealised loss on a bond would not be tax deductible until it became a realised loss in territories such as Belgium, the Netherlands or the Channel Islands, but would be deductible in determining the comparable UK tax bill on those profits. These rules would impact on tax deductions for capital allowances and tax depreciation. It should be noted that that will cause a problem, as virtually all other major countries give tax relief for capital expenditure over a shorter period than does the United Kingdom.

There are other areas where the timing of tax treatment differs between countries. With certain exceptions, interest on bank loans in the UK is deductible when it accrues. Typically, in the UK interest income is taxed when accrued and elsewhere it is taxed when received, as in Ireland and Poland. Amounts due to be paid for genuine services to connected parties are often taxed or tax deductible when paid. For example, Estonia does not tax profits until they are distributed. For income taxable in the overseas calculation in the period, but in the UK in an earlier or later period, the Bill as drafted would mean that the overseas tax bill was deemed to be reduced by the local tax suffered on that income when seeking to determine whether the overseas tax charge was 25 per cent. lower than the corresponding UK charge. If the overseas tax charge was less, the quantum of UK tax that would then be levied on the direct UK parent would be increased, hence increasing the UK tax levied on that UK parent without there being a corresponding adjustment in the period when the position reversed.

Knitting that together, it is possible that the European Court of Justice may rule that the CFC rules cannot be used to impose a tax charge on UK companies based on the profits of subsidiaries located elsewhere in the European Union—[Interruption.]

Richard Spring (Conservative, West Suffolk)

Cadbury Schweppes, for example, is taking the test case for the group litigation order on this point. I hope that the Minister will make some reference to that, as the implications for the Government and the Revenue seem on the face of it to be very serious indeed.

Under the current trend in corporation tax, companies paying tax at the standard rate in certain EU countries—including Ireland, Poland, Slovakia, Estonia, Latvia and Lithuania—could, subject to the ECJ, be CFCs. I should also mention the general global trend in falling corporation tax rates. Denmark and the Netherlands recently made announcements that will cause their corporation tax rate to fall below the UK rate, which is now running at 30 per cent. That is hugely different from countries such as Latvia, Lithuania and others, where it is down to percentages in the middle teens. Virtually all the countries of the European Union are bringing down their overall corporation tax rates.

The implications for the Bill are serious. How much tax is at stake on the Cadbury Schweppes and ECJ cases? Given that, in most cases, the tax has been paid by the taxpayer to the Inland Revenue, what is the estimated refund of tax and accompanying interest? How do the Government propose to fund that additional black hole?

Those points are important because they relate to the competitiveness and sustainability of our businesses in the UK. Increasingly, our corporation tax rate and other tax burdens make us less and less competitive. They are now being subjected to challenges elsewhere. The implications make it necessary for the Committee to hear from the Financial Secretary, in view of our amendments, how the Government answer those points.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

Amendment No. 4 gives us an opportunity to raise the general issue of the benefits of fiscal competition. As I understand it, the amendment would at least facilitate some tax competition in the European Union, and I am therefore glad to support it in the name of my party.

I believe that a general premise behind Government policy is that all tax competition is harmful. I contest that, because it can have a beneficial effect as a catalyst for economic growth. When used judiciously, it can increase social and economic cohesion in the European Union by supporting economic development in less favoured nations and regions. I understand what inspires the Government's approach—it could be described as financial protectionism to protect the tax revenue base. However, in view of the Government's wider policy of promoting economic reform and development in the European Union, it is important to qualify the approach with some understanding of the benefits of tax competition.

Plenty of evidence shows that tax competition works. Lord Desai has produced an extensive paper, which shows the evidential basis for fiscal competition, including US companies' profit rates across a wide range of tax jurisdictions. Let us consider Ireland, which was the sick man of Europe 20 years ago. It cut corporation tax from 50 per cent. to the current 12.5 per cent., as well as capital gains tax. Consequently, in the late 1990s and the early part of this century, it achieved incredible rates of economic growth, averaging approximately 10 per cent.

There is therefore a role for fiscal competition, and I do not believe that we should close that off to the European Union, especially new member states, which are cutting corporation tax. Poland is cutting corporation tax from 27 per cent. to 19 per cent. Hungary is cutting it to 16 per cent. Latvia, the Czech Republic and Slovakia are also following that route. Surely the Government should encourage a judicious use of fiscal competition on the part of less favoured nations and regions in the European Union. For example, the Basque country uses such a facility. Within Spain, corporation tax is devolved in the case of the Basque country and Navarre. We would like that policy to be adopted in Wales and Scotland. I know that the Northern Irish parties also support that.

John Bercow (Conservative, Buckingham)

The case for tax competition is indeed compelling. However, let me put it politely and in a spirit of good will to the hon. Gentleman that one does not need to refer to Lord Desai to be persuaded of the cogency of that argument. The thesis in support of capitalist competition has been argued persuasively and for a long time by the Conservative and Unionist party.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

Does the Conservative and Unionist party support our proposal to devolve corporation tax, so that we can reduce the tax in Northern Ireland, Scotland and Wales?

John Bercow (Conservative, Buckingham)

I put it to the hon. Gentleman that there is one important difference between his party and mine. His party believes in the break-up of the United Kingdom and my party believes in its retention.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

I am grateful for that form of protectionism, Sir Michael. I think that I will draw my comments to a crescendo. I thank you, Sir Michael, for your support.

It would be interesting if the Minister could give us a little more information about the committee of tax experts that the Government have said they will institute in response to a number of cases—not only the Cadbury-Schweppes case—that are before the European Court of Justice. The likelihood is that the Government will lose the case and that the legislation on controlled foreign companies will be struck down by the court. What are the terms of reference for the committee that the Government will institute as part of its presidency? Obviously there can be wide-ranging implications for Government policy.

John Healey (Labour, Wentworth)

More than 20 countries have adopted controlled foreign company legislation, including nine European Union member states. The CFC rules stop UK companies avoiding UK tax by diverting profits to low-taxed foreign subsidiaries. Some groups have artificially provided their subsidiaries with certain types of income. Others have arranged for subsidiaries to have an apparently high rate of tax to be repaid to a different group member. Thus the company appears to have paid a high level of tax when in reality it has done no such thing. All such devices are designed to distort the application of the lower-level-of-taxation test. The clause amends the operation of the test to prevent artificial distortions. It contains a timing rule to prevent CFCs from manipulating their accounting periods to defer the application of this legislation.

The hon. Member for West Suffolk (Mr. Spring) raised the case of Cadbury Schweppes. We do not believe that the operation of our CFC rules breaches the European treaty. As in other aspects of the corporation tax system, we will strongly defend our system against challenges under EU law. I trust that we would have support from the Opposition for so doing.

The Cadbury Schweppes case has not yet even been heard by the European Court of Justice. It is pointless to speculate now about the outcome or the potential costs.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

Is there not a preliminary opinion by the Advocate-General that the CFC rules breach the treaty and the legislation?

John Healey (Labour, Wentworth)

The hon. Gentleman follows these matters closely enough to know that the Advocate-General's opinion is not always followed by the European Court of Justice. It is the judgment of the court that counts. The court cannot come to its view or its verdict until it has heard the case, which it has not yet done. I was interested to hear the hon. Member for Carmarthen, East and Dinefwr (Adam Price) make common cause with the Conservatives. Anyway, he asked a specific question, the answer to which is that in response to a specific request by Germany that the impact of ECJ decisions on member states' finances is discussed by ECOFIN, the ECOFIN meeting on 7 June agreed that our presidency in the latter part of this year should host an informal high-level discussion among member states, and we are happy to do that. I cannot agree with either of the amendments tabled by the hon. Gentleman—one would lead to the CFC rules becoming inoperable, while the other would allow the precise manipulation of the rules that we are seeking to counter to continue. I urge my hon. Friends to resist the amendments if they are put to the vote.

Richard Spring (Conservative, West Suffolk)

I am afraid that I do not follow what the Minister is saying. He says that the CFC rules would be inoperable, and that that is why he has rejected the amendment—

Steve Pound (Labour, Ealing North)

I think.

Richard Spring (Conservative, West Suffolk)

The hon. Gentleman says, "I think". Perhaps he would like to explain the rules. The hon. Gentleman has no answer, and apparently neither does the Minister. Will he explain in what way the amendment is inoperable in terms of CFC rules?

Clearly, the Minister will not give us an answer. Perhaps that is symptomatic of much of what has gone on. I was very interested in the comments of the hon. Member for Carmarthen, East and Dinefwr (Adam Price) about tax harmonisation and the culture prevailing in the European Union. I accept what the Minister said about the CFC rules being there to avoid tax by securing profits in low-tax countries, which I understand, and he reassured us that that does not breach European treaties. We shall see what happens with the Cadbury Schweppes case, which is very important.

Obviously, the amendments are probing, and although the result of our probing has not been wholly satisfactory, I hope that the Minister will consider our points. We are in new territory, in a sense, with European Court of Justice rulings, and with the tax implications of the ever-lower corporate tax burdens in other parts of the European Union and not in our country.

Question put and negatived.

Clause 44 ordered to stand part of the Bill

Clause 69 — Abolition of statutory adjudicator for national savings and investments

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 37, in page 58, line 38, at end insert—

'(1A) After the coming into force of this section, any dispute of the nature referred to in subsection (1) shall be dealt with under the compulsory jurisdiction rules within the meaning and operation of section 226 of the Financial Services and Markets Act 2000 (c. 8) (compulsory jurisdiction of the financial ombudsman service).'.

The Government's intention in clause 69 is to abolish the bespoke complaints service for National Savings and Investments, the so-called statutory adjudicator, and to transfer the responsibility to the voluntary jurisdiction of the Financial Ombudsman Service. In essence, our amendment would alter that to the compulsory jurisdiction of the ombudsman under the auspices of the Financial Services and Markets Act 2000. Although clause 69 is one of the shortest clauses in the Bill, that is an important change nevertheless.

As a body, National Savings and Investments accounts for a considerable amount of public savings outside of property and the pensions sector. According to the latest estimate from National Savings and Investments, which I obtained today to get the most up-to-date figure possible, it currently has some £68.7 billion under management. That includes a variety of products, of which some of the best known to Members of the House and the public would be premium bonds, national savings certificates and income bonds. A rough breakdown is as follows: £26.8 billion is currently invested with National Savings and Investments in premium bonds, which is a very considerable amount of money; £17.1 billion is invested in national savings certificates; and some £7.6 billion is invested in income bonds. Moreover, given the nature of National Savings and Investments business, the vast bulk is held by private individuals rather than by financial institutions, pension funds or banks. [Interruption.] The Minister says from a sedentary position that that is what worries him. I think that in some ways the change in regulation worries us too.

Several million people hold these products, so the change potentially affects a considerable number of the constituents of every Member. It is right and proper for those people to be given an adequate level of protection for their money, not least because they are effectively lending it to the Government. The Government undoubtedly need that money. Given the present fiscal position, it seems likely that the Treasury will become even more reliant on National Savings and Investments over the next few years, not least as a device with which to seek to ameliorate the effects of the Chancellor's burgeoning black hole in the public finances. A host of independent economic commentators—[Interruption.] Ah, Labour Members have woken up. The Organisation for Economic Co-operation and Development, the International Monetary Fund, the National Institute of Economic and Social Research and the ITEM Club all agree that the Chancellor now has a structural deficit of between £8 billion and £12 billion in the public finances. Furthermore, the situation is deteriorating rather than improving.

The Chancellor increasingly needs the money provided by National Savings and Investments because the projections for the deficit have increased by some £6 billion since the last Budget alone. He is now projected to run an overall Budget deficit of some £34 billion this year. Over the next five years combined, that amounts to a massive £168 billion of expenditure over revenue, even if we do not include all the off-balance sheet debt of which we heard earlier this evening.

The Government are therefore likely to look increasingly at National Savings and Investments to try and help shore up the public finances, which all the economic commentators agree are in trouble. Let me give just one example of what National Savings and Investments is trying to do. The limit on premium bonds that can be held by a single individual has been increased from £20,000 to £30,000 to encourage extra purchases, although the odds on winning the £1 million jackpot have been reduced. Over the last three years, the amounts invested in premium bonds have increased fairly significantly. In May 2003, £20.9 billion was invested in them; today, the figure is £26.8 billion. That is a significant increase over three years, given that the product has been running for decades. The drive for extra investment by National Savings and Investments on behalf of the Government is clearly already well under way. I think we can agree on that beyond peradventure.

The current National Savings and Investments literature also makes a virtue of having an independent complaints procedure as part of the sales pitch. I have here a copy of the booklet produced by the Government to try and market these products to the public. I went to considerable lengths to obtain a copy: I picked it up from the post office in Central Lobby on Friday. Under the heading "Our commitment to you", the booklet says:

"National Savings and Investments subscribes to the Banking Code and has a formal complaints procedure with an independent arbitration scheme."

That point is part of the marketing test in the booklet. It is not tucked away in 8-point type at the end under the "Terms and conditions" heading. It is not part of the small print; it is part of the sales pitch itself. So the Government have been relying on—playing on—the fact that they have an independent arbitration scheme to help sell these products to members of the public, including those who might frequent the post office in Central Lobby, even though the changes in the regulation of these products will be introduced in less than three months from today.

There is also the related issue of double standards. Via the Financial Services Authority, the Government have sought to foist compulsory compliance rules on a whole plethora of financial institutions, to the point where it has led to quite a falling out behind the scenes between the Prime Minister and the Chancellor. So there is absolutely nothing new there, but it is a bit rich that the Government want compulsory regulation for just about everyone else—including most building societies, banks and investment product providers—yet when it comes to people who are effectively lending money to them, suddenly, a weaker voluntary code will do nicely. Where is the level playing field in all this?

The Government's consultation document on the proposed change included a key sentence, which states that moving responsibility for adjudication from the statutory adjudicator to the Financial Ombudsman Service

"would first require some modifications to the rules concerning FOS's voluntary jurisdiction, which are made by FOS and approved by"

the Financial Services Authority. That being the case, perhaps the Minister will have more to say tonight specifically about those revisions and exactly what they will include, so that all Members of this House, and all members of the public who want to continue to invest in National Savings and Investments, can hear exactly how those changes are likely to be implemented. [Interruption.] As I speak, inspiration is arriving from afar. I am pleased to see that the Minister will be suitably briefed, even if he was not before he arrived.

As Ministers know, we Conservatives have commented on the sometimes heavy-handed nature of the FSA.

David Taylor (Labour, North West Leicestershire)

Unless I have missed something, the thrust of the Opposition's criticism of the Government's financial strategy in the past 12 to 18 months has been that the savings ratio has been declining. Now that it is starting to climb again, the Opposition are criticising that as well. Where is the logic in that?

Mark Francois (Conservative, Rayleigh)

I congratulate the hon. Gentleman on participating in this debate. We have been waiting for hours for a Labour Back Bencher to make a contribution. Now that one has finally put his head above the parapet, I must congratulate him on reinforcing the Government—after almost five hours of absence of comment from their own Back Benchers. I am not absolutely sure that the savings ratio is recovering in the way that the hon. Gentleman—

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

Order. This is not strictly relevant to the amendment that we are discussing. Perhaps I might suggest that the hon. Gentleman avoid straying too far from it.

Mark Francois (Conservative, Rayleigh)

I thank you for that guidance, Mrs. Heal, and I will of course abide by it. The hon. Gentleman's contribution was the only one from the Labour Back Benches in five hours, and I confess to having been tempted to respond to it; nevertheless, I shall not be so foolish as to argue with the Chair. Perhaps the hon. Gentleman and I can discuss this issue some other time.

If our constituents lend their hard-earned money to privately run banks or building societies, they have some protection from compulsory jurisdiction under the auspices of the FOS, but if they lend to the Government instead, that protection is only voluntary. How is that equitable? Why are Ministers always so willing to encourage tighter regulation—except, of course, when that regulation might apply to them, when suddenly they are in favour of a lighter touch?

Unless Ministers are going to announce this evening that compulsory jurisdiction in these areas is suddenly to become voluntary across the board—I very much doubt whether they will—it is for them to justify the anomaly whereby a potentially lesser standard of protection is acceptable for our constituents, who are effectively lending to them. That makes it all the more important to have effective protection for individual savers against a financially avaricious Government such as the present one. If Ministers cannot justify the position clearly and to the satisfaction of the House and the country, I urge them to accept amendment No. 37 in order to remove the anomaly once and for all.

Brooks Newmark (Conservative, Braintree)

The abolition of a dedicated complaints service for national savings and its placing under the voluntary jurisdiction of a financial ombudsman causes me great concern for two reasons. First and foremost, I am concerned about consumer protection and public confidence. Many investors in national savings are, in effect, widows and orphans—in other words, the most vulnerable investors in our community—yet the Government propose to get rid of a dedicated specialist complaints handler in exchange for some form of ombudsman who, in my opinion, does not have the same teeth. The Government are thereby diminishing public trust in a very important area of investments with the investor community.

Secondly, it once again looks like—and I believe that I am quoting my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond)—another case of the Government saying "do as I say, but not as I do". On one hand, through the auspices of the Financial Services Authority, the Government foist petty compulsory rules on everyone else, but on the other hand, they try to have a weaker voluntary code of conduct for themselves. I would suggest to the Minister that the Government should set the same standards of probity and the same code of conduct for themselves as they expect from everyone else in the investment industry. I therefore support the amendment.

Susan Kramer (Liberal Democrat, Richmond Park)

The Minister is well aware that consumer advocacy agencies have been very pleased with the transfer of National Savings and Investments from the specialist adjudicator to the Financial Ombudsman Service, because there is a tradition at the FOS of accessibility and low-cost remedies for complaints. However, there is concern among the same community—I hope that the Minister will give us some reassurance about it—that, because of pressure from various parts of the financial services industry, new hurdles will be placed in the way of those seeking redress from the financial ombudsman in the form of greater opportunities for appeal by institutions against whom complaints had been upheld. Can the Minister give us an assurance about that matter, which is entirely material to consideration of the elimination of the special adjudicator and the transfer of National Savings and Investments under clause 69?

Will the Minister also clarify why the transfer is only to the voluntary jurisdiction of the Financial Ombudsman Service? I understand that National Savings and Investments has said that it will regard the provision as a binding commitment, but under those circumstances, it is extraordinary—and perception matters—that the same compulsory rules that would apply to virtually any other party over which the FOS is to have jurisdiction do not apply in this instance. Why has a voluntary structure been chosen in this case?

Ivan Lewis (Labour, Bury South)

We have had a fascinating debate, which we started at about 3.30 this afternoon. Having already acknowledged that I failed to make adult skills sexy, I am certainly going to struggle to make Finance Bills sexy.

I note that the hon. Member for Rayleigh (Mr. Francois) was struggling to get his piece of paper out of the filing system, so a bit of vocational education would really do him some good. He was talking about the black hole; I think that the Conservative party has been talking about a black hole in the economy since 2 May 1997. That reminds me of one or two of my activists, who accused me of being a class traitor at about 1 am on 6 May 1997.

If Conservative Members wish to continue with their fantasy about a black hole, I simply say to them that we have the lowest inflation, the lowest interest rates and the lowest unemployment in living memory. As the deliberations on the Bill have continued, an important part of the debate has been about the fact that the first priority is stability. That is what business and the City want more than anything else: economic stability.

In the debate about the future of the Conservative party, one of the—[Interruption.] This is linked to the issue of—

Ivan Lewis (Labour, Bury South)

Thank you, Mrs. Heal.

In any debate about the black hole in the economy, it is interesting to see how certain Members who sit in a particular place are now talking about the essential need to advocate a combination of social justice and economic success. Where did that philosophy and that value base come from? It is interesting to see that it is now Conservative Members who are saying that that is the only way in which they can become a credible Opposition again, let alone a credible Government.

This has been an historic debate, because my hon. Friend the Member for North-West Leicestershire (David Taylor) insisted on intervening to make a loyalist point on behalf of the Government. That in itself is an important—

Ivan Lewis (Labour, Bury South)

Thank you, Mrs. Heal. I always bow to the Chair—especially when you are in it, if you do not mind my saying so. [Hon. Members: "Get on with it."] I shall move straight on to the amendment. To respond to the debate appropriately, however, it is only right that I should refer to the contribution by the hon. Member for Braintree (Mr. Newmark); he is entitled to a response from me. I just want to tell him that the word is "ombudsman", not "umbudsman", as he pronounced it. If he looks at the piece of paper that the Whips wrote out for him, he will see that the word is spelt with an o, not a u. Clearly he could not read their writing as easily as he would have liked.

The amendment attempts to transfer responsibility for the resolution of disputes against National Savings and Investments to the compulsory rather than the voluntary jurisdiction of the Financial Ombudsman Service. In response to what the hon. Member for Richmond Park (Susan Kramer) said, I shall spell out why that cannot be done. National Savings and Investments is not currently eligible to enter under the compulsory jurisdiction because it is not regulated by the Financial Services Authority. It could not join the compulsory jurisdiction alongside FSA regulated bodies without substantial amendments to both the Financial Services and Markets Act 2000 and subordinate legislation. This is beyond the scope of the Finance Bill.

Furthermore, National Savings and Investments cannot be directly FSA regulated under its current business model, because as the Government's retail debt financing arm, it does not hold liabilities and does not have the capital adequacy requirements of privately owned financial institutions, both of which are necessary conditions for being FSA regulated.

Under the voluntary jurisdiction of the FOS, customer complaints against National Savings and Investments will be handled in the same way as under compulsory jurisdiction—that is a direct response to a question that I have been asked. This will deliver greater simplicity for customers, who will have access to the same dispute resolution process in the case of complaints against National Savings and Investments as with those against other financial service providers.

To give a further guarantee to hon. Members, it is important to say that National Savings and Investments is committed to voluntary jurisdiction, and that that commitment will be embodied in its framework document, which publicly states the aims of the agency, how it is managed and its relationship with Government, to ensure that it is bound not to unsubscribe at any time. A further guarantee is the fact that the rules of the voluntary jurisdiction scheme put conditions on participants withdrawing from that scheme. The transfer is being implemented so as to ensure that National Savings and Investments customers have continuous right of recourse to a single dispute resolution scheme.

I hope that Opposition Members will now understand that the amendment is not feasible, practical or possible in the context of the Bill.

Mark Francois (Conservative, Rayleigh)

Having opened for the Opposition on clause 11 at 3.30 pm, I am pleased to be the alpha and omega of this debate by winding up the debate this evening. I stress again that, despite the fact that we have had a little frivolity in the Chamber, which is no bad thing at this hour, the matter is actually very important. We are discussing some £69 billion of funds under management, and the saving products in question are held by millions of Britons. For many of them, they represent a large proportion of whatever savings they have, other than their property, if they own it. So we have sought to ensure tonight that those Britons are adequately protected as this change goes through.

I commend my hon. Friend the Member for Braintree (Mr. Newmark) on taking the trouble to speak on this amendment—[Interruption.] Well, it would have been nice if we had had some Labour Back Benchers who had thought the same. It is to my hon. Friend's credit that, as a new Member, he can tell his constituents that he was here until well past 10 pm to speak on their behalf.

I also thank the hon. Member for Richmond Park (Susan Kramer) for making a contribution to the debate. We have had several debates in which the Liberal Democrats have kept their powder very dry—arid, in fact—but the hon. Lady finally decided to chip in. I am glad that she took the trouble to do so. It was, however, unusual not to see a single amendment from the Liberal Democrats all day. We hope that they will work a little harder in Committee.

It is possible to make the changes that we suggest. This is an important matter of public protection and we have set out why, given the Government's fiscal position, it is important that the public can be reassured on it. We have placed our views on the record and they have been heard by the House. I am sure that the debate will continue, but for the moment I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 69 ordered to stand part of the Bill.

Bill (clauses 11, 18, 40, 43, 44 and 69 and Schedule 8) reported, without amendment; to lie upon the Table.