Finance Bill

Public Bill Committee, 21 June 2005.

Standing Committee B

(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8)

Nicholas Winterton (Conservative, Macclesfield)

First, let me welcome hon. Members on both sides of the Committee to the first sitting of the Finance Bill 2005. I wish to express a particularly warm welcome to new Members. This will be their first Standing Committee and I hope that it will be an enjoyable and pleasant experience. Looking around the Room, I am completely convinced that our sittings will be orderly and constructive and that interventions from the Chair will be extremely rare.

I have an understanding of people's comfort and, although I am an Englishman of the traditional sort, if members of the Committee wish to take off their jackets and hang them on the back of their chair, they may do so, because we are in for a very warm day. I call the Paymaster General to move the sittings motion.

Dawn Primarolo (Labour, Bristol South)

I beg to move,

That, during the proceedings on the Finance Bill (except Clauses 11, 18, 40, 43, 44 and 69 and Schedule 8), the Committee do meet at half-past Ten o'clock and half-past Four o'clock on Tuesdays and quarter-past Nine o'clock and Two o'clock on Thursdays when the House is sitting.

On behalf of the Committee, I extend a warm welcome to you, Sir Nicholas, and to your co-Chairman, Mr. Cook, as you assume your responsibilities at the commencement of our proceedings. You and Mr. Cook are knowledgeable and experienced Chairmen and you have both served on Finance Bill Committees in the past. We all welcome your expertise and have no doubt that you will ensure that our deliberations are thorough, yet to the point.

I also extend a warm welcome to the hon. Member for Runnymede and Weybridge (Mr. Hammond), who will lead for the Opposition in Committee, and to the members of his team, the hon. Members for Cities of London and Westminster (Mr. Field), for West Suffolk (Mr. Spring) and for Rayleigh (Mr. Francois), and their hon. Friends who will support them.

I look forward to the opportunity to debate the Bill with the hon. Member for Eastleigh (Chris Huhne) and his Liberal Democrat colleagues, the hon. Members for Richmond Park (Susan Kramer) and for Bristol, West (Stephen Williams). I believe that this is their first Finance Bill and I have no doubt that they will find it an enjoyable experience.

I am joined today and will be supported throughout the debates by my hon. Friends, the Financial Secretary and the Economic Secretary to the Treasury. I know that they join me in welcoming my hon. Friends to the Committee. Although we will be discussing the Bill for only a few weeks—perhaps we are fortunate to be discussing a Bill that has fewer clauses than usual—I am reassured that they will give due diligence to our duty of examining the legislation. I look forward to our debates.

Philip Hammond (Conservative, Runnymede and Weybridge)

I echo your words of welcome, Sir Nicholas. I am sure that members of the Committee will have an enjoyable and worthwhile time scrutinising what are, in fact, some complicated measures. I congratulate the Paymaster General: I served as a Back Bencher on a Standing Committee that discussed Finance Bill in 1998 and the right hon. Lady was the Paymaster General at that time, so I think that I can say without fear of contradiction that she is by far the most experienced member of the Committee, having been involved in nine Finance Bills since the Labour party came into office.

I am sure that our Committee proceedings will be good and I, too, welcome all new Members. It is good to see so many new Members on a Committee considering a Finance Bill. Finance Bills are traditionally regarded by the Whips as a great proving ground. Sadly, this Finance Bill—the second of 2005—is stripped of some of the sex appeal that usually accompanies such Bills; we are left with the hard work, but I do not see anyone in the Room who will be at all daunted by that.

On the sittings motion, the Opposition are a little dismayed, not only on our own behalf but on behalf of all Committee members, by the way in which the Thursday sittings are to pan out. I fully accept that that is a consequence of the change to the sitting hours of the House, but sitting for just over an hour on Thursday mornings seems a rather strange way to manage a Committee. Also, sitting for four hours on a Thursday afternoon—a necessary consequence if we are to get our five hours of deliberation—especially on a hot day in June, is probably not conducive to the best possible scrutiny of the Bill. I wonder whether you could feed back those concerns through the Liaison Committee, Sir Nicholas.

I do not know whether these matters were considered when the 10.30 am start on Thursday was discussed, but clearly the logical thing to do would be to start the Committee proceedings much earlier, so that the Committee can rise at 10.25 am having considered the Bill for a sensible period on Thursday morning. That said, we accept that the sittings motion is probably as good as we can achieve, although we would have preferred an 8.55 start on Thursday mornings. That would have given us a little more time to consider matters before we adjourned for lunch.

Nicholas Winterton (Conservative, Macclesfield)

The hon. Gentleman posed one or two questions that are really for the Chairman. First, I was wrong when I said that this was the Finance Bill 2005, and others have been wrong when they called it the second Finance Bill this year. I have been advised that it is, in fact, the third Finance Bill, the first having been withdrawn. That is a point of accuracy.

Secondly, what time the Committee starts its deliberations on Thursday is not really a matter for the Chairman, or even for the Liaison Committee; it is a matter for the Government, the House and the Chairmen's Panel. I assure the hon. Gentleman that the Chairman's Panel will spend some time considering Thursday sittings. However, the Committee needs to take account of not only Members of Parliament, but those who serve the Committee, such as the Clerks. A great of work goes into preparing a sitting of a Bill. Clerks might get away late the evening before but still have to be in extremely early to marshal amendments and do all the appropriate work to ensure that things are in order and can proceed satisfactorily when the Committee sits. None the less, the Opposition spokesman's views have indeed been heard.

Question put and agreed to.

Nicholas Winterton (Conservative, Macclesfield)

Before we proceed to the first amendment—[Interruption.] No, I say to my Clerk that we will come on to that in a moment. I have some preliminary announcements relating to the Bill.

First, copies of the Ways and Means and money resolutions agreed by the House, on which the Bill is founded, are available in the Committee Room.

Secondly, in view of the resolutions of the House relating to the declaration of interest, right hon. and hon. Members are required to declare relevant interests when they table amendments, as well as when they speak to them. Copies of the rules are available from the Clerk.

Thirdly, as usual because of the quantity of paperwork on the Bill, boxes are available to store papers between sittings. Members who make use of that facility should note that the filing cabinet that contains the boxes will be locked when the Committee is not sitting.

Fourthly, I draw attention to the fact that adequate notice must be given of amendments; that issue has already raised its head, just before the Committee sat. Neither I nor my co-Chairman will, as a rule, call any starred amendments, including those that may be reached during an afternoon sitting.

Finally, as I always do at the beginning of a sitting, I request that Members switch off all mobile phones. I remind Members that it is not permissible to use electronic devices. I hope that Members on both sides take account of all those notices.

Resolved,

That the Order in which proceedings in Standing Committee on the Finance Bill are to be taken shall be Clauses 1 to 6, Schedule 1, Clauses 7 to 10, Clause 12, Schedule 2, Clauses 13 to 17, Clauses 19 to 24, Schedule 3, Clauses 25 to 34, Schedule 4, Clause 35, Schedule 5, Clauses 36 and 37, Schedule 6, Clauses 38 and 39, Schedule 7, Clauses 41 and 42, Schedule 9, Clauses 45 to 49, Schedule 10, Clauses 50 to 68, new Clauses, new Schedules, Clause 70, Schedule 11 and Clauses 71 and 72.—[Dawn Primarolo.]

Clause 1 - Goods subject to warehousing regime: place of acquisition or supply

Richard Spring (Conservative, West Suffolk)

I beg to move amendment No. 60, in clause 1, page 1, line 7, at end add—

'(1B) The circumstances which may be prescribed in subsection (1A) shall be limited to those where goods are sold by taxable persons to non-registered persons within the United Kingdom.'.

I hope that the Paymaster General will find this minor amendment quite helpful. The regulations could be interpreted as being unnecessarily wide and the amendment would merely to compel them to be limited to the tax planning that the clause intends to prevent and any derivations of that planning that may follow the proposed regulations.

Dawn Primarolo (Labour, Bristol South)

The VAT-free trading of goods within a customs warehouse is a valuable trade facilitation measure that is enjoyed by hundreds of UK businesses. Unfortunately, it has been subject to an abuse by a small number of traders. Therefore, new section 18(1A) of the Value Added Tax Act 1994 will provide Her Majesty's Revenue and Customs with the power to specify circumstances in which the relief from VAT afforded to transactions in a customs warehouse will not apply.

I understand the intention behind the amendment: the hon. Gentleman is trying to protect the overwhelming majority of businesses that benefit from the relief as intended. However, the amendment is not necessary because they are already protected. The Government recognise the value of section 18(1) of the 1994 Act and what it provides. They have no wish to limit its availability, except in cases where the relief is being abused. The relief will continue to be available to compliant taxpayers.

The problem with the amendment as drafted is that it would allow those few taxpayers to circumvent the clause. All that any taxpayer would need to do to abuse the relief is use a business that trades wholly in a warehouse. Such a business is not a taxable person within the meaning of the 1994 Act by virtue of section 18(1). Any supplies made by such a person would not therefore be caught by the proposed amendment. To catch such cases is the specific purpose of the measure.

I considered this issue carefully because of the importance of the warehouse arrangements in the clause. Responsible and compliant taxpayers should not be affected in any way, but it is necessary to ensure that we catch the taxpayers who are trying to get around the rules. A reasonably large amount of money—£25 million—is involved. Perhaps the hon. Member for West Suffolk will be satisfied and withdraw his amendment if I say that I share his concern that the compliant taxpayer should not face additional challenges; however, I do not believe that they will do so under the clause. I am more than happy to give an assurance, as I do on all anti-avoidance measures, to keep the issue under careful review.

The Government proposals are based on schemes that we have seen and challenges that have been made. I assure the hon. Gentleman that, unfortunately, his amendment would enable a taxpayer to circumvent our intention. I hope that, having probed the Government's intention, the hon. Gentleman will agree to withdraw his amendment. If he does not, I shall ask my hon. Friends to oppose it.

Richard Spring (Conservative, West Suffolk)

I am grateful to the Paymaster General for her reassurances. I think that the definition is too wide, but I accept her assurance that she will keep the matter under review. I do not wish to press the issue any further and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 1 ordered to stand part of the Bill.

Clause 2 - Cars: determination of consideration for fuel supplied for private use

John Healey (Labour, Wentworth)

Sir Nicholas, I welcome you and your co-Chairman. Based on my experience of other Committees, let me say that I appreciate to the firm and fair way in which you conduct proceedings. I look forward to serving under your chairmanship and that of Mr. Cook.

Clause 2 is modest and straightforward. It is designed to provide the flexibility for the VAT fuel scale charge system to be amended to include a charge based on a vehicle's carbon dioxide emissions. The fuel scale charge system is a business facilitation measure that offers a simplified method of taxing the private use of a fuel when a vehicle is used for both business and private purposes. Without such a system, taxpayers would have to keep a full record of mileage driven in order to apportion the tax charge between private and business motoring. Taxpayers can choose to operate the normal rules and keep such detailed mileage records if they wish, but, unsurprisingly, most businesses choose to apply the fuel scale charge.

In broad terms, the system provides the taxpayer with a figure for the average fuel expenditure on private mileage, the calculation of which is based on private motoring data. Business tax payers use that figure to calculate an output VAT charge to account for their private mileage. The current charge is based on a combination of engine size and type of fuel. Clause 2 gives the flexibility to reform the charge to one based on CO?2? emissions, which would align the VAT fuel scale charge with the Government's other reforms to transport taxation in order to support our environmental objectives on climate change and air quality and to encourage a switch to less polluting cars through tax incentives and other measures.

The proposal is entirely consistent with the action that we have taken since 1997 and with our reforms to vehicle excise duty in 2001, to company car tax in 2002 and to the direct tax system for fuel scale charges in 2003. Let me clear: our objective in making the change is purely environmental, no more, no less. It is not intended as a revenue-raising measure. Any change to a CO?2? basis for the VAT fuel scale charge will be revenue neutral overall.

As members of the Committee would expect, Her Majesty's Revenue and Customs has already been discussing with business the proposed change to basing the fuel scale charge on emissions. We have heard useful views in those discussions and the informal consultation, which we will continue before publishing any regulations to make the reforms that are provided for in clause 2. It is sensible to align the VAT system more closely with the direct tax fuel scale charge. It is sensible that businesses account for direct tax and VAT on fuel where possible on a consistent basis. It is obviously sensible that the industry has the opportunity to discuss the details of any scheme.

The flexibility contained in the clause acknowledges the need to secure a derogation from the European Commission before we can introduce such a scheme. It also offers the opportunity for HMRC to design an effective scheme, following detailed discussions with the industry. I commend the clause to the Committee.

Richard Spring (Conservative, West Suffolk)

I apologise to you, Sir Nicholas. It was remiss of me not to add my congratulations. I remember that when you were accorded a knighthood, I said that you were well on your way to becoming recognised as a living national treasure.

John Healey (Labour, Wentworth)

There is no VAT relief on being a living national treasure. [Laughter.]

Nicholas Winterton (Conservative, Macclesfield)

I thank the hon. Gentlemen very much. They need not go on.

Richard Spring (Conservative, West Suffolk)

I thank the Financial Secretary for his explanation, and I am pleased that he has discussed the change with and consulted the business community. As he indicated, the clause paves the way for fuel scale charges—the notional VAT charge for fuel made available by employers to employees for private use—to be based on CO?2? emissions rather than engine capacity. It will penalise less efficient cars. It appears sensible to us, as it aligns the VAT bandings closely to those used for benefit in kind taxation.

However, will the Financial Secretary comment on what implication, if any, he thinks the measure will have for the Government's pursuit of a road pricing scheme?

John Healey (Labour, Wentworth)

None whatsoever.

Stephen Williams (Liberal Democrat, Bristol West)

Sir Nicholas, as this is the first time I have taken part in a Standing Committee, forgive me if I do not do things in the right way. We are not sure when to bob up or catch your eye. I have not known you long enough to be sure that you are a national treasure, but you and your wife were very kind to me in the Tea Room on my first day, when I was a bit lost, and I thank you for that.

I have a question to ask the Financial Secretary. It makes sense to us to align the direct tax treatment of an employee and an employer in respect of a benefit in kind. That treatment was introduced a few years ago. I wonder, however, what studies the Treasury has commissioned of whether the environmental objectives of that move have been met—whether the fleet purchasing decisions of fleet managers have been in any way affected by the changes to direct taxation, or whether the preferences of the company car users have been affected. Such a study would enable us to see whether tax changes that are intended to have environmental benefits actually have that effect.

Mark Field (Conservative, Cities of London and Westminster)

Although we do not wish to engage in a fully fledged debate on road charging, I support the comments made by my hon. Friend the Member for West Suffolk. The Financial Secretary assures us that the proposals will have a degree of revenue neutrality, on the basis that there will be some additional income because of additional CO?2? emissions. Can he give us some indication of which vehicles will therefore save money and, as a result, reduce Treasury income?

It would be worth while if the Financial Secretary were to comment, at least briefly, on the broader range of policies. He justified the change on the basis of consistency—the golden thread that has run through the Government's thinking on tax matters over the past six or seven years. There has been new thinking on road pricing; which affects many folk in my London constituency, and it is important that people are brought along with such thinking. If the measure is regarded simply as a revenue raiser—I am sure that the Financial Secretary would not suggest that it is that and that alone—it will have little public support. It is important that the Financial Secretary considers which aspects of good environmental behaviour will save taxpayers money, as well as which aspects of behaviour will be penalised.

John Healey (Labour, Wentworth)

I welcome the welcome that both Opposition spokesmen have given to the principle of the clause and their endorsement of it as a sensible policy that moves things in the right direction.

I welcome the hon. Member for Bristol, West to the Committee. It is clear from his biography that he brings to it significant professional experience of tax affairs, which he gained before being elected to Parliament. I look forward to hearing his contributions to our debates. I say to him that we are careful to monitor the impact of changes we introduce, particularly when they reform the basis of the taxation system, and that for substantial changes we usually put in place a significant process of evaluation.

I think that the hon. Gentleman and other Committee members will appreciate that the long-term impact of the sort of changes that have been touched on this morning might take some time to become clear. However, the Inland Revenue's initial evaluation of the company car tax reforms that was published alongside the Budget in 2004 shows that, as far as we can trace and quantify, the tax has had two significant effects, both of which are environmentally beneficial. It has led to a reduction both in the amount of business mileage that is driven and in the carbon dioxide emissions of the company car fleet. Both were key purposes of the reforms. We will monitor the impact of the reform as part and parcel of our evaluation of such tax changes.

In response to the hon. Member for Cities of London and Westminster I say again, clearly and emphatically, that the measure is not designed as a revenue raiser. He asked which vehicles will produce a tax saving for their drivers or for the businesses that have them as part of their fleet. That will depend on the precise details of the design of the scheme, which we are currently discussing with the industry. If he looks at the structure and design of the scheme that we have put in place for VED—or, indeed, for the company car tax—he will see that it is scaled in a way that gives incentives and signals to encourage people to drive more fuel efficient and less polluting cars. We want the same design for this scheme.

I fear that I would stray beyond the terms of clause 2 were I to get into an exposition of road pricing, but perhaps I can answer the hon. Gentleman's question in the following way. Clause 2 is a further reform that is consistent with and moves in a similar direction to the reforms we made to vehicle excise duty in 2001, company car tax in 2002, and the direct tax fuel scale charge in 2003. Our aim in the detailed design of this scheme and the reforms that we have already put in place is consistency in this part of the tax system—consistency in terms of the signals given to businesses and company car drivers, the incentives that have an impact on behaviour where we can put those in place, and the way in which businesses administer the schemes that we establish.

Clause 2 ordered to stand part of the Bill.

Clause 3 - Credit for, or repayment of, overstated or overpaid VAT

Richard Spring (Conservative, West Suffolk)

I beg to move amendment No. 61, in clause 3, page 5, line 8, leave out 'relevant date' and insert

'last day of the month next following the end of the next prescribed accounting period'.

The amendment seeks to tie the rules in the normal three-year time limit for VAT in respect of claims and assessments: that is, three years from the day that the relevant VAT return should be submitted, being a month after the end of the accounting period. At present the clause runs for three years after the period ends.

Dawn Primarolo (Labour, Bristol South)

The clause provides for the extension of the defence of unjust enrichment by the Revenue and Customs to all claims for VAT credit where the tax has been overcharged and over-accounted for in error. Under the existing law, the defence is available only where claims are made for repayment of VAT that was overpaid but was not due. Inevitably, the time limit for such claims begins to run from the date the tax is overpaid, whereas the time limit for correcting errors for the Revenue and Customs to assess in respect of under-declared VAT runs from the end of the prescribed accounting period in which the error occurred.

Where VAT has been charged in error, clause 3 marks a shift from claims being made for repayment of overpaid VAT to claims being made for a credit of VAT that has wrongly been accounted for. The clause aims to ensure that there is consistency and simplicity for the taxpayer as to when the three-year time limit runs from. Having broken the link with payments, it is sensible for the three-year period to run from the end of the prescribed accounting period in which the accounting error was made. Accordingly, that is what the clause does.

Unfortunately, the amendment fails to define from which prescribed accounting period the three years should run and fails to take account of the existing three-year limitation period on the correction of errors and the three-year limitation period that the Revenue and Customs has for assessing under-declared tax. The amendment is therefore not justified. I understand how difficult it is to draft amendments to the Finance Bill. I think that the hon. Gentleman was looking for consistency by ensuring that the same rule applied and that the three years started at the same point. Unfortunately, the amendment cannot be justified because it does not do that. It makes sense for all statutory means of error correction to be subject to the same time limit, and that is what the clause does.

I reassure the hon. Gentleman that businesses will know clearly about the time period; it will be the same period from the same starting point, and that is wholly justified where we are ensuring that the defence of unjust enrichment is covering all areas and time periods.

I hope that the hon. Gentleman will accept that this is a probing amendment and will withdraw it. If he feels unable to do so, I will regrettably have to ask my hon. Friends to oppose it.

Nicholas Winterton (Conservative, Macclesfield)

Before I call on the hon. Member for West Suffolk to respond, I should say that every Committee member will have spotted that I failed to turn over the page while reading out the amendment being debated. I apologise to the Committee.

Richard Spring (Conservative, West Suffolk)

The Paymaster General was correct to say that we were trying to establish some consistency. As she will accept, the VAT rules are complicated and bureaucratic; we were simply trying to get some order into the issue. I accept her point about the distinction, and the assurances that she has given. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 3 ordered to stand part of the Bill.

Clauses 4 and 5 ordered to stand part of the Bill.

Clause 6 - Disclosure of value added tax avoidance schemes

Richard Spring (Conservative, West Suffolk)

This measure extends the scope of the disclosure regime to situations in which the VAT advantage does not affect the taxpayer's VAT return—for example, because the VAT relates to exempt supplies and the scheme is intended to reduce the amount of irrecoverable VAT that is effectively a straight cost to the business. The definition is also extended to cover a reduction in the amount of VAT incurred by non-taxable persons. That will bring offshore arrangements that were not previously caught by it within the scope of the disclosure regime. That, of course, will mean an increased compliance burden for affected taxpayers.

It is interesting that the VAT disclosure regime is continuing to request the disclosure of schemes, but no action is being taken to introduce any anti-avoidance legislation in response. That may be because there is no possibility of amending UK legislation within the European Union directive or because Her Majesty's Customs and Excise is awaiting the outcome of certain European Court of Justice cases to determine whether it has sufficient grounds to introduce anti-avoidance legislation. I should like some clarification on that point, the theme of which will consistently run through our proceedings.

One of the more contentious issues arising from the redefinition of a tax advantage is that under the existing rules only taxable persons are required to notify a scheme when a tax advantage arises. Therefore, the onus is placed on the supplier to notify HMRC when a recipient of the tax advantage is not registered for VAT. That may not be possible if transactions pass through several third party companies before the end recipient benefits. Again, additional burdens are placed on legitimate businesses.

There is a lack of Government activity on disclosed VAT avoidance schemes. At HMRC's large business forum in May, it indicated that it had received details of more than 700 VAT avoidance schemes. The Government have not sought to close down any of those in this or the previous Finance Bill. On Second Reading of the Finance Bill, the Paymaster General cast doubt on that number of 700, which had been raised by my hon. Friend the Member for Runnymede and Weybridge. Yet the statistic is there for all to see in an Inland Revenue presentation on the Inland Revenue website: 729 VAT schemes have been disclosed.

In the same large business forum, HMRC debated the tax gap—that is, the tax not collected due to non-compliance, defined to include tax avoidance. The Government's apparent inaction appears to be fuelling the tax gap. It is possible that concerns about EU law are once again preventing the Government from closing down some of the VAT avoidance schemes. If the Government are not going to use the VAT disclosure scheme to close down avoidance, should not those rules be reduced, to remove, at least, the compliance burden on business and enable HMRC to concentrate on more fulfilling matters?

I ask one final question. Why are the Government not using the information gathered under the 700-plus schemes to take action to shut down the tax gap?

Dawn Primarolo (Labour, Bristol South)

Let me explain clause 6 as it relates to schedule 1 in terms of the two principles. I will then respond to the questions raised by the hon. Gentleman. If we are to take clause 6 and schedule 1 as one debate, perhaps I should wait until other Members have spoken. Alternatively, would you like me to respond now, Sir Nicholas?

Nicholas Winterton (Conservative, Macclesfield)

They are down for separate debate. I was aware that the hon. Member for West Suffolk was probably straying marginally into schedule 1, but at this early stage of the Bill's consideration I was using the Chairman's discretion.

Susan Kramer (Liberal Democrat, Richmond Park)

I thank you for your indulgence, Sir Nicholas.

We have also had conversations with a number of parties who are concerned that they expend a huge amount of time and effort complying with these particular rules and regulations and produce information that seems to go into a pot somewhere and never results in any action by HMRC. They appreciate that HMRC has been willing to meet and to talk, but is this not a good example of where consultation in much greater depth in advance would have avoided this process of businesses constantly filing and providing information that appears to be of no particular relevance or use to HMRC?

Nicholas Winterton (Conservative, Macclesfield)

Order. It is clear that Members are going to involve schedule 1 in this debate on clause 6. I am quite happy to have a wide-ranging debate on the clause and to include matters involved in schedule 1, but I shall put the question on schedule 1 formally without debate, if that is agreeable to the Committee.

Susan Kramer (Liberal Democrat, Richmond Park)

My apologies, Sir Nicholas.

My question to the Minister is simple. Given that much work has gone into providing information that appears to go nowhere, would it not be wise at this point to simply set aside many of the new provisions that are being proposed until such time as HMRC and the Government have an idea of what they want to do with the information that is gathered? Reducing the burden on business gives far more credibility to the entire process of regulation. This would be a good opportunity to start taking that message in a practical way to the business community.

Dawn Primarolo (Labour, Bristol South)

Let me deal first with clause 6 and schedule 1. I will then respond to the more general point about the operation of the disclosure rules and the submissions to HMRC in answering the points made by the hon. Members for Richmond Park and for West Suffolk.

Clause 6 and schedule 1 provide for two additional disclosure rules, which follow on from the introduction of the disclosure rules in the Finance Act 2004. The hon. Members for Richmond Park and for West Suffolk were not present at that debate, but fortunately I was. The Committee's view at that stage, and indeed Parliament's view and that of tax administrations around the world, involved concern about an increasing tax gap—the non-collection of taxes, particularly as a result of avoidance. In a number of Finance Bills we have acted, as did the previous Government, to reduce that loss.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I shall come to the hon. Gentleman's question of what we are doing with the information, but may I first answer the points already put to me? I will then be more than happy to give way to him. It is important that the Committee is focused on what is in the Bill, what we are doing, and how that interacts with the laws previously passed by Parliament. I will try to set that out.

The first change is to extend the definition of tax advantage to include circumstances in which the scheme is intended to reduce irrecoverable VAT—and a number of avoidance schemes are intended to do that. Those schemes are artificial and provide the business concerned with an unfair competitive advantage over compliant taxpayers. The disclosure rules identify where legislation or changes are particularly required.

The second change in clause 6 and schedule 1 is a simplification measure. It provides that a business will not have to disclose a listed scheme if it had previously notified the authorities of the use of the scheme as a hallmark scheme. That ensures that when the Treasury designates new schemes, businesses will not have to notify us of use of a scheme if they have already done so. That is important. So, the clause and schedule 1 build on and strengthen the disclosure provisions introduced by the Government in 2004.

The disclosure regime is a key part of the Government's strategy to tackle avoidance and ensure fairness. I seem to recollect that the principle was accepted by this Committee and the House. Other illustrious Committees of this House, including the Public Accounts Committee and the Select Committee on the Treasury, have also been pressing the Government very hard to deal with avoidance. The disclosure regime provides Her Majesty's Revenue and Customs with better information, which allows for a faster and more targeted response to abuse of the tax system.

I shall give way to the hon. Member for Runnymede and Weybridge before I move on to what we are doing with the information that we have.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful to the hon. Lady, and look forward to hearing about what she is doing with the information. She said, when I first sought to intervene on her, that the Government had acted to recover the loss from such tax avoidance. Can she give some suggestion of the amount of VAT recovered as a result of VAT anti-avoidance legislation? To what extent have the Government succeeded in closing the VAT gap?

Dawn Primarolo (Labour, Bristol South)

I am happy to send the hon. Gentleman the annual accounts of the Department; if he looks at them—and, indeed, at the recent considerations of the PAC from before the election—he will see the substantial effect that such legislation is having. None the less, it is important to ask what we are doing with the information. The Committee must understand that disclosure is not the only method available to the tax authorities pursuing those trying to avoid tax. It is an additional tool that was added to those that could already be used.

The rules are working, and I shall explain how. The hon. Member for West Suffolk is quite right: the quantity and quality of the disclosures that have arisen from the measures are as we expected. In fact, almost 800 disclosures about VAT have been received since the rules were introduced. For VAT, the main value of providing information is to inform compliance, which is going on regardless. It is to inform how we use our risk assessments and to enforce compliance. All information received is risk-assessed and prioritised. Further, hallmarks provide an early warning of new schemes and, together with listed schemes, provide information about who has used these schemes.

One of the discussions that features in every Finance Bill and every debate on the Floor of the House, is that of anti-avoidance measures and the need to get the information to ensure that they are appropriately targeted. It was a problem for the previous Government as well. It is very much the sort of debate that we were having in earlier discussions on clauses: whether it was targeted correctly, and whether it was getting to the non-compliant taxpayers without causing difficulties for compliance.

Hon. Members should not believe that disclosure automatically means legislation. Disclosure means that we can respond to the avoidance in a number of ways, of which legislation is one.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

If I may finish the point and tell the hon. Gentleman what the others are, then I shall be happy to give way.

The other ways for HMRC to assess the tax due are to do an assessment, and to litigate against those schemes that they do not believe will work under existing law. Some of the disclosures are challengeable under existing law, and that is the correct way to proceed. The Government have legislated to close some schemes. For example, the ones that came into force on 1 August 2004, to address the listed scheme 6—that is the group's third party supplier. The disclosure provisions ensure that HMRC has the intelligence to ascertain whether the scheme, or similar schemes, may be in use. This is about them being marketed and used, not necessarily to bring forward legislation.

The suggestion that the information is not being acted upon because there is not legislation is erroneous. HMRC can use assessment and litigation, and where a situation needs to be addressed in law we bring forward changes to Finance Bills. That is entirely appropriate given the powers that we already have.

HMRC is currently investigating the returns of businesses that have notified the use of these schemes under disclosure provision, and is using assessment for due tax as the solution. Assessments are expected to prove effective in combating schemes and recovering the lost yield to the Exchequer. The simple proposition is that if businesses can have it demonstrated to them that their scheme does not work under current law, they will not continue to use them.

Philip Hammond (Conservative, Runnymede and Weybridge)

I hear what the Paymaster General says, and I understand it. She must recognise, however, that the same arguments apply to direct taxes. The Revenue has the scope to raise assessments on businesses, yet there is a marked asymmetry in the Government's reaction to disclosure of direct tax avoidance schemes and their reaction to disclosure of VAT avoidance schemes. There is a raft of measures in this Bill dealing with the disclosed direct tax avoidance schemes. There is nothing dealing with the disclosed VAT avoidance schemes.

Can the Paymaster General tell the Committee what the Department's estimate of the tax loss from the 800—she says—disclosed avoidance schemes is, so that we can get some idea of the scale of that loss as against the scale of what it expects to recover from shutting down disclosed avoidance schemes for direct taxes, the estimate for which we have in the Red Book?

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman has to understand the difference between VAT and corporation tax. One is historical, one is real time. He puts it as the ''tax loss from 800 schemes''. If the Department is notified and is raising assessments for tax to be paid, and if the Government are pursuing litigation, that tax is not lost. The difference between VAT and corporation tax, and therefore the difference between the disclosure approaches, exists in order to prevent the loss before it occurs. What we are trying to address is the nature of the assessments of VAT and the time period over which it is paid—real time, as opposed to the historical information that we receive when we are dealing with corporation tax.

Stephen Hammond (Conservative, Wimbledon)

You spoke about the responses of the Government to disclosures under the 2004 VAT avoidance schemes. You also spoke about assessment litigation and bringing forward new legislation. You said that—

Nicholas Winterton (Conservative, Macclesfield)

Order. I did not say anything; the Paymaster General did.

Stephen Hammond (Conservative, Wimbledon)

I am sorry, Sir Nicholas. The Paymaster General stated several times that the Government would use assessment to combat certain schemes. She also said that 800 schemes had now been disclosed. I wonder how many of those 800 schemes have been tackled by assessment. The Paymaster General also spoke about the tax gap—the amount not collected through non-compliance, which included avoidance. However, she has not yet answered the point made by my hon. Friend the Member for West Suffolk about whether there is any impediment to UK legislation because of the rulings of the ECJ. Can she answer those two points?

Dawn Primarolo (Labour, Bristol South)

To be clear, I understand the hon. Gentleman to be suggesting that the disclosure rules breach, or would be in conflict with, ECJ rules.

The first thing to be said about the disclosure rules is that taxpayers know what they are doing when they decide to use these schemes. The point of disclosure is to provide the information to the Department when those schemes are being used, so that it can use assessment.

Assessment means that we disagree with what the taxpayer says, and that the tax is raised and paid. If the disagreement moves on to litigation—I should point out that we are talking here about rules that were introduced very recently—that can take some time to pass through the courts, and it can go beyond that. As the hon. Gentleman knows, there are a number of cases before the ECJ, and we will have to wait and see what the ruling is on them.

Let me explain the purpose of the disclosure rules that are in the Bill and those that the House passed last year. They are about providing the information so that the tax authorities can respond by challenging when things are not within the law—or their interpretation of it—which will be assessment litigation if things come to that, and they are also about introducing legislation where that is considered necessary. Having become aware of certain schemes, we have now listed them as declarable—when using them, the taxpayer must inform. That is an entirely appropriate way to proceed. The hon. Gentleman and his friends have to address the following question: what are the appropriate tools for the tax authorities, acting on behalf of the vast majority of compliant taxpayers? What should be our response to the few taxpayers—although there are not many of them, they can cause much expense—who continue to use our legislation in ways that it cannot or should not be used? Disclosure is about giving us the information to respond to that.

As I said to the hon. Gentleman, these rules were introduced in 2004 legislation, and they became operable at the beginning of the current year. They are the correct way to proceed. If the hon. Gentleman disagrees, he needs to explain how we can ensure that we have the information to tackle the schemes that are considered abusive, without introducing for every single taxpayer submissions to the tax authorities of a kind that I think all Committee members would object to.

Stephen Hammond (Conservative, Wimbledon)

I understand what the right hon. Lady said, but earlier she made the case that a number of the 800 or so schemes had been covered by assessment and listing as disclosable. I am trying to get some measure of how many of those schemes are covered, because I am still not clear about that.

Dawn Primarolo (Labour, Bristol South)

That is what happens if hon. Members intervene on the Minister, thereby stopping her before the point has been made.

I do not have the figure showing how many schemes we have raised assessments against, but I am happy to write to Committee members to let them know—although I will not be able to tell them clearly. I think that the hon. Gentleman wants to know that we have moved to deal with the question of assessment, so that the circle of assessment and litigation, which is the next step, and the rules are operating together.

Stephen Hammond (Conservative, Wimbledon)

I am grateful for the right hon. Lady's offer to write to the Committee. That was my point. However, she would not have come to that point, so my intervention was probably correct.

Dawn Primarolo (Labour, Bristol South)

When a Minister is still on her feet and takes an intervention it normally indicates that there is something more to be said.

Opposition Members still have not yet addressed the central point: how do the tax authorities receive the information that they need from those taxpayers who would seek to use avoidance in advance of that happening, and thereby make it clear that avoidance does not work and ensure that the tax is paid? That is a defence for the Revenue and is preventing the loss of greater amounts of revenue.

To give a complete picture of the procedure, I circulated information to the Committee advising it that the changes are made in regulations, which are dealt with by affirmative resolution, so hon. Members, in this Committee and the House will have an opportunity to consider the proposals when the regulations are laid.

Richard Spring (Conservative, West Suffolk)

Of course we understand the importance of closing down VAT avoidance structures, but it is important to deal with a thread that runs through the whole issue. Perhaps the Minister will deal with the point that I was trying to make, which is about an assessment by the Government of the impact of EU law in closing down the VAT avoidance structures, given the pattern in the ECJ. That is of profound importance in terms of the impact on domestic legislation and practice.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman asks me to speculate on decisions that have not been made and say how they might impact on domestic law. I cannot do that. I have to ensure—as do my hon. Friends the Financial Secretary and the Economic Secretary—that provisions in the Finance Bill allow the appropriate balance, which is a proportionate and reasonable one, in order to get the information that the tax authorities need to ensure that the tax system, as currently agreed by Parliament, operates correctly. Disclosure provides that for us. If the hon. Gentleman wishes to raise a debate on the ECJ, he is welcome to do so, but that is not pertinent to the clause.

Philip Hammond (Conservative, Runnymede and Weybridge)

Moving to a different point, although I might have misunderstood it, we are to extend the scope of the disclosure rules to include schemes operated by people who are not VAT registered, which is an innovation. I understand that the person responsible for making the disclosure will, of necessity, be the VAT-registered supplier who supplies the non-registered person who is gaining the advantage. Can the Paymaster General confirm that that is correct and tell us what she will do to avoid a situation in which a supplier might have an obligation to disclose, but is not in possession of all the pertinent facts to make a full disclosure? Will that VAT-registered supplier find himself vulnerable to prosecution because he is not in possession of the information from his customer that HMRC wants to have?

Dawn Primarolo (Labour, Bristol South)

I cannot envisage those circumstances arising. The purpose of disclosure is to ensure that the VAT due to the UK tax authorities through the everyday use of the VAT system is provided for. In those circumstances, the advice on which I must always act is that the disclosure rules work and provide the safeguards that are required to ensure that the authorities have the information to decide whether they raise an assessment or pursue matters through litigation.

Philip Hammond (Conservative, Runnymede and Weybridge)

Can the Paymaster General confirm that when a scheme is operated by a non-registered person with the intention of reducing irrecoverable VAT—the point to which she referred earlier—the registered person who supplies that person will have the obligation to make the disclosure?

Dawn Primarolo (Labour, Bristol South)

Yes. The hon. Gentleman must understand that there has to be a party to the transaction and that that party is someone who is registered for VAT. The measure is about the interaction of the advantage that the person seeks to achieve. The rules provide for that. If the system has been artificially manipulated, there will be a loss of revenue.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am seeking an assurance that VAT-registered suppliers will not be in a position of non-compliance with the disclosure rules because their customer is doing something dodgy with the supply. In the example under discussion, their customer is an exempt person who is not registered for VAT.

Dawn Primarolo (Labour, Bristol South)

In order to take part in the scheme, that person would have to be a knowing and willing participant in it, so it would not be possible for the person not to know what was going on. It is the nature of the scheme to interact. Under the rules, it is not conceivable that the registered traders who would be caught could be knowing and willing participants in the scheme to reduce their VAT liability.

Question put and agreed to.

Clause 6 ordered to stand part of the Bill.

Schedule 1 agreed to.

Clause 7 - Charge to income tax on lump sum

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 64, in clause 7, page 8, line 9, after '(5)', insert 'below'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to take amendment No. 65, in clause 7, page 8, line 30, leave out from beginning to end of line 34.

Philip Hammond (Conservative, Runnymede and Weybridge)

These two small amendments would clarify measures that we believe have been poorly drafted. Amendment No. 64 deals with line 9 of the clause, which states:

''For the purposes of the Tax Acts (including subsection (5)), a social security pension lump sum . . . is to be treated'',

and so on. On first reading of the clause, I and others whom I have consulted were not clear to which subsection (5) reference was being made. Looking at it more closely, it is clear that the sentence is intended to mean that

''For the purposes of the Tax Acts . . . a social security pension lump sum''

will be defined in the way set out in subsection (2) for all purposes, including the purposes of subsection (5). So, the ''subsection (5)'' referred to is not a subsection (5) in the ''Tax Acts'', which is a plural concept, but subsection (5) of clause 7. The amendment would simply insert the word ''below'' to make it perfectly clear—well, clearer—that the wording refers to subsection (5) below.

When I looked at the clause again this morning, it occurred to me that the wording would perhaps be even clearer if it read: ''For the purposes of the Tax Acts, including for the purposes of subsection (5) below, a social security pension lump sum'' and so on. The amendment is simply intended to clarify the not-very-clear drafting, and to make it plain that all subsection (2) does is refer the definition of

''social security pension lump sum''

to subsection (5).

Amendment No. 65 raises another small but important point. The inclusion of subsections (6) to (8) is, dare I say, revolutionary. Is the idea that at the end of every clause there will be a series of subsections telling us what future sections will do? That would be like watching a television serial in which, at the end of the week's episode, there is a series of clips showing what is coming in future. Subsections (6) to (8) do not seem remotely necessary. As far as I am aware, those provisions do not accord with precedent, and if we applied the principle consistently it would massively bulk out the volume of legislation with which we have to deal—which is already, frankly, too large—and bring yet more pages of tax statutes into force. I can see no reason for the subsections, and I am rather concerned about this architectural innovation.

Rob Marris (Labour, Wolverhampton South West)

Does the hon. Gentleman not think that his amendments are somewhat contradictory? First he says that the Bill is too long and that he wants to take out subsections (6) to (8) under amendment No. 65, then he says that it is too short and so tables amendment No. 64.

Philip Hammond (Conservative, Runnymede and Weybridge)

Not at all; it is absolutely essential that legislation be clear. Where there are references to subsections, it needs to state clearly of what they are subsections. Much of the Bill amends other legislation and, particularly in the schedules, the references are often to clauses, subsections and paragraphs not in this Bill, but in existing Acts of Parliament.

If the principle apparently observed in subsections (6) to (8) were consistently applied, it would be burdensome. Logically, clause 1 would have subsections (1) to (71) setting out what every clause did, and so on. Only clause 72 would be spared the need to set out what future clauses did. I can see no reason for subsections (6) to (8). I have never seen such provisions in a Bill before, as far as I am aware, and I would like to understand why it is necessary to spell out what future clauses will do in an initiating clause.

Nicholas Winterton (Conservative, Macclesfield)

Order. Because there is a problem with the sound, I have been asked to suspend the sitting.

Sitting suspended.

On resuming—

Nicholas Winterton (Conservative, Macclesfield)

The suspension is now at an end. We were let down by technology, but hopefully it has been put right. I hope that none of the valuable words uttered in the debate have been missed. I think that the hon. Member for Runnymede and Weybridge had just resumed his seat and I was about to rise to my feet to propose the amendment.

I welcome to the Committee the Economic Secretary to the Treasury.

Ivan Lewis (Labour, Bury South)

Thank you very much, Sir Nicholas.

I am delighted that the nation was not denied the opportunity to have the preceding hour of deliberations recorded—it would have been extremely disappointed.

I must also apologise, Sir Nicholas, for inadvertently stripping you of your knighthood during the debate on the Floor of the House. To do that to a living national treasure would surely be unforgivable.

David Ruffley (Conservative, Bury St Edmunds)

Resign!

Ivan Lewis (Labour, Bury South)

That call normally comes from the Benches behind me.

The previous time I appeared in a Committee such as this was during the consideration of the Higher Education Bill. I sat there for three weeks alongside the then Minister for Lifelong Learning, Further and Higher Education, my right hon. Friend the Member for Kingston upon Hull, West and Hessle (Alan Johnson), and after three and a half weeks I got to speak on a clause. He subsequently became the Secretary of State for Work and Pensions and is now the Secretary of State for Trade and Industry. If my right hon. Friend the Paymaster General and my hon. Friend the Financial Secretary stick with me, I am sure that they will have a bright career ahead of them.

I shall quickly say something about the purpose of the clause, which provides for the taxation of a social security pension lump sum. It is also important to say that the rules in clauses 7 to 10 ensure that pensioners are not put into a higher tax bracket and do not lose any of their age-related income tax allowances as a direct result of taking the lump sum.

Turning to the amendments proposed by the Conservatives, I understand the concern of the hon. Member for Runnymede and Weybridge, but amendments Nos. 64 and 65 are genuinely unnecessary. The insertion of the word ''below'' by amendment No. 64 would add nothing to the clause. The reference to subsection (5) of the same clause is perfectly clear without the additional word proposed in the amendment. As my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) pointed out, amendment No. 64 contrasts with No. 65, which seeks to remove subsections written in a particular way—in the tax law rewrite style. There are already three Acts that demonstrate that approach and are designed specifically to signpost later clauses, thereby increasing understanding of how the four clauses sit together.

It would be a retrograde step to remove something that is designed to make legislation far more fit for purpose, understandable and clear, so that stakeholders and others can understand how it is put together. I ask the hon. Member for Runnymede and Weybridge to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

Clearly, there are some things to die in a ditch for, but this is not on my list. I find the Minister's explanation somewhat baffling. The phraseology in subsection (2) is not at all clear, and as for the idea of signposting what is in subsequent clauses, that concept has not even been consistently applied throughout the Bill. We are all in favour of trying to get clarity in the Bill, but later I shall raise, for example, the definition of ''Tax Acts'', which is integral to an understanding of clause 7 but is not defined in the Bill.

Although I hear what the Minister says, I suspect that we shall have to agree to differ about the best approach to architecture and achieving clarity. 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. 66, in clause 7, page 8, line 34, at end add—

'(9) In this section ''total income'' shall mean total income after deduction of the relevant personal allowance mentioned in section 257 ICTA 1988'.

This is a more substantive issue, although it is a matter of clarification. The clause introduces the concept of total income, which is not defined in the Bill, unless I have missed the definition. It might seem obvious what a person's total income is, but for the purposes of this clause, and in order to give effect to what the Government have announced on several occasions and clearly intend to do, ''total income'' must mean total income after the deduction of all applicable personal allowances.

The intention is clearly to use an individual's top rate of tax as the rate that should be applied to the lump sum. Somebody aged 66 whose income is £7,500 would have a top rate of tax of 10 per cent., because their taxable income would be £410 after the personal allowance. The £410 is comfortably within the lower 10 per cent. tax bracket currently of £2,090. The question for the Minister is whether the Bill makes that clear. Total income, we understand, is defined in section 835(1) of the Income and Corporation Taxes Act 1988 as the income from ''all sources''. From that, under section 257 of that Act, the taxpayer is entitled to deduct his personal allowances. The Act goes on to present a mechanism for charging tax at the various rates.

The Minister will have seen the briefing by the Law Society on the issue. It thinks that the problem is that the clause has been based on the terminology used in the 1988 Act and because of the way sections 257 and 835 taken together work, it is possible that the definition of ''total income'' could be misconstrued to mean what it would mean to you or I, Sir Nicholas: the individual's total income. The Government's intention in this case is clearly that we must have a definition of ''total income'', which is to be income taken after the deduction of the appropriate personal allowances.

Rob Marris (Labour, Wolverhampton South West)

I am aware of the briefing by the Law Society, of which I am a member. The Chartered Institute of Taxation has also raised concerns. In the amendment, the hon. Gentleman suggests a definition of ''total income'' that seems to be contradictory to the definition of ''total income'' contained in section 835 of the 1988 Act. Therefore, were his amendment to be agreed to, there might be contradictory definitions in legislation. That would not be helpful.

Philip Hammond (Conservative, Runnymede and Weybridge)

The hon. Gentleman may well be right. I do not claim any great pride in authorship of the amendment. I also confide that I strongly suspect that it will not be agreed to. My purpose in tabling it was to obtain a clear, on the record, statement from the Economic Secretary to the effect that in calculating the total income of an individual for the purposes of the clause, all personal allowances will be deducted from total income from all sources before applying the formula in subsection (5) to determine the rate at which the lump sum is taxable.

Of course, we could seek greater clarity in the Bill, but I know that the words ''greater clarity'' and ''Finance Bill'' do not necessarily go together comfortably. It seems that a number of the definitions that are being used are to be found elsewhere in tax legislation. If we could get an unambiguous statement on the record from the Minister about how the measure will work, that would be satisfactory.

It is my understanding that the Revenue has privately made it clear that the intention was that the applicable rate of tax would be ascertained by examining the individual's total income after the deduction of personal allowances. That was clearly the intention. We now need someone of the Minister's exalted status—with the benefit of a working Hansard recording mechanism—to place that on the record for posterity.

Stephen Williams (Liberal Democrat, Bristol West)

If this amendment were to be pressed to a Division, we would be pleased to support it in the interests of clarity in the Bill. The hon. Gentleman just mentioned that Finance Bill clarity is important. That is particularly important when we are dealing with a group of people—pensioners, in this case—who might not be expected to be au fait with the intricacies of the Finance Bill. Moreover, we are dealing with the state pension rather than any other sources of income, and the sort of people whose only source of income is the state pension might not be expected to follow exactly what finance legislation says.

This provision was trailed in two pre-Budget reports—those of 2003 and 2004. The 2004 report states:

''Tax will be applied to the lump sum at the marginal rate and it will not affect any age related allowance due.''

That is a clear statement of intent as to what the legislation that is to follow should actually do; I think that that is the purpose of the annual statements that we get from the Chancellor in November of each year. It is a shame that the legislation, now that it has been brought forward, does not make that absolutely clear.

I could cite several examples of the current legislation possibly leading to people being taxed at a higher marginal rate than their real marginal rate because the Bill's current definition of total income is insufficient to protect them. However, I will not discuss those examples, because they have been circulated to Committee members. Will the Economic Secretary make it clear that the intention is that the lump sum and the interest on it will be taxed at the individual's marginal rate after their personal allowance—and probably in this case after their age-related personal allowance?

I have a further point on that, which I am surprised that the Conservatives did not mention in the general election.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am surprised that the Liberal Democrats did not bother to table any amendments, if they are so concerned about these issues.

Stephen Williams (Liberal Democrat, Bristol West)

Well, we are pleased to speak to the hon. Gentleman's amendment, and we are thankful to him for tabling it.

The point in question was also made on the Floor of the House. Relevant professional institutes—and, perhaps, firms of accountants—have circulated briefing papers to all of us, and we are all in the same position: we are making statements and tabling amendments that others have put to us. I think that the hon. Gentleman has had an advantage in that they were probably put to him before they were put to us. Therefore, it is a bit ungracious to the three new members of this Committee, who have only recently received those briefings, to say what he just said.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the hon. Gentleman give way?

Nicholas Winterton (Conservative, Macclesfield)

Order. Is the intervention relevant to the debate?

Philip Hammond (Conservative, Runnymede and Weybridge)

Of course, Sir Nicholas, and I would expect you to terminate it, were it not. I just thought it would be helpful to the Committee, and that it would be of particular benefit to new members of it, if I were to place it on the record that organisations such as the Law Society that circulate their comments and proposed amendments to all Committee members, including Ministers, do so without fear or favour, and that thus using their amendments as the basis of what one does in Committee is sometimes not terribly helpful. I assure the hon. Gentleman that although I quoted from the Law Society brief, that was not the primary source of the amendments that we have tabled.

Stephen Williams (Liberal Democrat, Bristol West)

I am happy to take that assertion. However, my earlier point remains valid: the three Liberal Democrat Committee members are entirely new to this process, whereas I understand that some Conservative Committee members were involved at an earlier stage of the Finance Bill's progress, when some of these amendments may have been suggested, so they have an advantage over us.

However, I want to conclude the point I was about to make. It was about the married couple's allowance as well as age-related allowances, and as the Conservative party has said that the tax system does not value marriage, I am surprised that its amendment does not include this clarification. There will be some circumstances in which someone who is retiring has a spouse who is still able to receive the married couple's allowance. I should be grateful if the Economic Secretary would make it clear that this legislation will not disturb the married couple's allowance, as well as the age-related allowance.

Finally, what guidance will be given to pensioners to enable them to understand the tax implications of taking that lump sum, and how the interest that will accrue over the period for which they defer their pension will be calculated?

Ivan Lewis (Labour, Bury South)

As a Minister, I get some pleasure from seeing the Opposition parties fight like ferrets in a sack. It is extraordinary that at this stage of a Finance Bill the two Opposition parties should turn on each other, and we Labour Committee members are sad to see that.

On a serious note, I am pleased, in response to the shadow Chief Secretary's request, to clarify the issue on the record. Total income is a statutory expression that draws together all sources of income that are taxable and from which certain deductions, including personal allowances, are then available. That net amount of income is then charged to income tax at the appropriate rates. I am happy to confirm that the rate of tax applied to the lump sum, commonly known as the marginal rate, is the one that applies to total income less all statutory deductions and personal allowances that can be deducted.

The hon. Member for Bristol, West said that he would be pleased to support the shadow Chief Secretary if he decided to put the amendment to a vote; that would have caused a Division. Earlier, the hon. Member for Bristol, West was described as a tax expert. It is important, therefore, to place on the record not only a clarification of the position from the Government's point of view, but the consequences of the Opposition's amendments, particularly in relation to the advice that tax experts may give in such circumstances. The consequences of the amendment—tabled by the shadow Chief Secretary of the new, compassionate Conservative party and supported by the hon. Member for Bristol, West in his capacity as a tax expert—would be to exclude the blind person's tax allowance and disadvantage visually impaired taxpayers.

Brooks Newmark (Conservative, Braintree)

Unless I am reading the amendment wrongly—if I am, I am sure that the Minister will correct me—the amendment mentions the ''relevant personal allowance''. If a person were hearing impaired or visually impaired, that would come under the relevant personal allowance.

Ivan Lewis (Labour, Bury South)

That is simply not the case. The amendment would exclude the blind person's tax allowance, which comes under section 265 of ICTA. Given that we have reassured the hon. Member for Runnymede and Weybridge on one point, and that no member of this Committee would want to exclude visually impaired people from the allowance, I urge the Opposition to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

On the one hand, I am grateful to the Economic Secretary for reading that clarification into the record; that needed to be done, because the Government got their drafting wrong in the first place. On the other hand, I am disappointed that he should attempt to cover up the sloppy nature of the drafting of this provision by attacking the drafting of the amendment. We shall say regularly throughout these proceedings—the Paymaster General has already said so herself—that drafting amendments to Finance Bills is not easy. If we have got it wrong, we accept responsibility, but the point that we were clearly intending to raise was that clarity was required. The Economic Secretary has delivered that clarity.

As the Economic Secretary knows, there was never any intention to exclude blind or aurally impaired persons' allowances or any other such allowances. Having looked at the Law Society brief, which refers to sections 257 and 835 of ICTA, I suspect that the hon. Member for Wolverhampton, South-West made a rather more telling point against my amendment than the Minister did from his brief.

Rob Marris (Labour, Wolverhampton South West)

Oh no.

Philip Hammond (Conservative, Runnymede and Weybridge)

Those of us who know the hon. Gentleman and have enjoyed sparring with him in Standing Committees will know that he is an ambitious man; he will not thank me for that praise, but it is well deserved. The Committee will benefit from the application of his legal mind to our proceedings.

I am grateful to the Economic Secretary for clarifying the matter and removing any scintilla of doubt, and so, too, will be many groups outside the House dealing with pensioners and pensioner issues. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Philip Hammond (Conservative, Runnymede and Weybridge)

I should like to speak briefly, because while others—certainly the Minister and the hon. Member for Bristol, West—have spoken on the overall purpose of the clause, I deliberately did not touch on it.

Of course, we entirely accept the logic and purpose of clause 7. If we are to have a regime that encourages people to defer a part of their pension so that they can work a little longer, it is important that they should not be disadvantaged through the tax system when they do so. The Government have proposed a perfectly sensible way of ensuring that.

Whether we like it or not, many people assume that the state pension is not taxable; I am sure that the Ministers are aware of that. We all know that it is taxable, but a great number of people believe that it is not, because they do not pay tax on it. Thus it may come as a bit of a shock to some people to realise that the lump sum will—quite properly—be taxable. There is an education issue here, and the Economic Secretary might want to say something to the Committee about what the Government intend to do to make sure that potential deferees of pensions have all the necessary information to understand the net-of-tax ramifications of the various options open to them.

It is unfortunate but inevitable that some people hearing about the lump-sum proposal will be confused about the interaction with the tax-free lump sums available to people with funded personal pensions; the term ''tax-free lump sum'' has a certain currency in everyday usage. There will inevitably be some who are confused about the notion of the lump sum, and who will believe that it is a tax-free lump sum in their hand. That is something else that Ministers need to make sure is quite clear.

My next point is perhaps slightly beyond the Economic Secretary's remit, but I am sure that he has background briefings on the subject. We are talking not just about marginal tax bands and the rate of tax that will be applied to the lump sum in the period of receipt. As a result of the means-tested regime of support for pensioners that the Government introduced, many pensioners are in receipt of means-tested benefits. This is slightly wide of the Minister's remit, but can he confirm whether the same principles will apply to withdrawal of means-tested benefits, so that no one will suffer a loss of means-tested benefits in a year simply because their income spikes in that year through the receipt of a deferred pension lump sum?

Rob Marris (Labour, Wolverhampton South West)

I think that that very point is dealt with in note 12 to clause 7 in the explanatory notes.

Philip Hammond (Conservative, Runnymede and Weybridge)

That is very helpful—and, I have to say, that might be the first time that the explanatory notes to the Bill have been helpful. If the answer is in the explanatory notes, the Minister will not have to wait for advice before he answers. Since he will probably be getting to his feet rather more quickly than I can look up the relevant part of the explanatory notes, I will leave the question to him if the hon. Member for Wolverhampton, South-West does not mind.

The regime that the Government have announced for allowing deferment of pension into a lump sum is an all-or-nothing regime. It is a question of deciding to continue to work for a number of years and to defer the pension until one stops working, or a point in the future. It does not seem to me that the legislation before us envisages or encompasses the possibility of allowing partial deferment of a pension. This is not something that the Government have announced any intention of doing.

In keeping with the general thrust of Government policy, which is that retirement should be seen as a flexible option, not an all-or-nothing approach that cuts in at a fixed point in time, I wonder whether the Minister can tell us whether there is sufficient flexibility built into this legislation to cope with future changes to the lump sum regime, allowing a pensioner to defer part of their pension into a lump sum. For example, that could facilitate a pensioner's decision to continue in part-time work for three or four years beyond the age of 65, receiving a partial pension while deferring the balance of the pension into a lesser lump sum.

Would the legislation before us be an adequate framework for dealing with a partial deferment? Probably not, because the trigger point for assessment on the lump sum, which comes in clause 8, is specified as the day on which the first benefit payment date falls. Clearly, if a person was receiving half a pension and deferring the other half into a lump sum, the trigger for the assessment on the lump sum—which is not to be paid for some years—would currently be the day on which the first benefit payment day falls, by virtue of clause 8(2). What discussions have been held between the Treasury and the Department for Work and Pensions about the possibility of this regime becoming more flexible, and has thought been given to how this part of the Bill might accommodate that?

Ivan Lewis (Labour, Bury South)

Other hon. Members have made this point. It is important that we communicate and promote these changes clearly, and that people understand both the implications and the benefits. That is something that we will be looking at with our colleagues in the Department for Work and Pensions.

This is a complex area. We know that people sometimes find these issues very difficult and therefore our capacity to explain them, and promote the benefit of people making the choice that we are giving them under this legislation, will be a very important issue. If we simply create the legislation and seek to incentivise such choices without explaining the potential benefits to people, we will undoubtedly underperform in terms of our intentions. We will look at an innovative and imaginative approach to the way that we get messages across in this area.

The hon. Member for Runnymede and Weybridge asked whether the principles would apply in the same way to people on means-tested benefits. I can reassure him that those principles will apply in a consistent way, and that people on those benefits will not end up being disadvantaged; in fact, quite the contrary. That is very important.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister has said something important. I was seeking an assurance of neutrality, and he has said that they will not be disadvantaged—

''in fact, quite the contrary.''

Can he explain that?

Ivan Lewis (Labour, Bury South)

Essentially, the contention was that people on means-tested benefits might be disadvantaged by this legislation. I am saying that they will not be disadvantaged. I am giving a neutral response to the hon. Gentleman's worries. He asked whether the principles would apply. I have reassured him that they will.

The hon. Gentleman referred to partial deferment. The Bill is introducing a choice for people in the form of a lump sum, and that is a step forward. At this stage, however, we do not want to rule out for ever the possibility of looking at partial deferment, but it is more appropriate to consider the impact of the Bill and how it influences people's behaviour. Having evaluated such matters over a reasonable time, we can then reach an informed judgment about whether partial deferment would be a good idea and whether it would be consistent with our ambitions and objectives.

The hon. Gentleman has made a fair point. We have already discussed trying to communicate to people the consequences of the policy. In many ways, that could cause further confusion and it could be ambiguous. It is important that we establish the principle and make sure that as many people as possible are clear about the option being available to them before we make further changes. However, we shall keep the question of partial deferral under review.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful to the Economic Secretary for what he said. One of the ways in which to reduce the burden of Bills passing through the House would be to futureproof legislation. If it were contemplated that there might be a desire in the future to extend the scheme to allow partial deferment, would it not have been sensible to draft the Bill's provisions in such a way that they could accommodate without further amendment a partial deferment regime? It would not have been that difficult; it would have just needed a different trigger for the taxable charge to apply. I am a little disappointed that the hon. Gentleman clearly recognises that the matter may come up for discussion in future, yet the draftsmen have not seen fit to provide for it in the body of the Bill now under discussion.

I have a further question for the Economic Secretary. We tabled an amendment that has been grouped with clause 71, which will be debated some time later, or perhaps not at all, about the definition of the term ''Tax Acts'' in line 9 of this clause. The term has a well-established definition under the Income and Corporation Taxes Act 1988 but, unless I have slipped up somewhere—the hon. Member for Wolverhampton, South-West will be on his feet in a microsecond, if I have—it is not defined under the Bill. Is there a mystical mechanism by which definitions from ICTA are automatically imported into the Bill? Are we to read ICTA definitions that apply to the Bill without making specific reference to them, especially under clause 71 on ''Interpretation'' where we would have expected them to be? It is important that we understand to which Acts the term ''Tax Acts'' refers in line 9 of the clause. I understand that ICTA—

Nicholas Winterton (Conservative, Macclesfield)

Order. I hope that the hon. Gentleman is not seeking to include in his remarks matters relating to amendment No. 67, which we shall reach later, because I should be loth to call it a day.

Philip Hammond (Conservative, Runnymede and Weybridge)

Depending on the Economic Secretary's response, that may indeed be appropriate. However, since we have discussed clarity of legislation, wording and whether the architecture of ''referring forward'' under subsections (6), (7) and (8) was appropriate, it would be good if he could explain how the definition is imported into the Bill. I think that the issue will arise throughout the Bill. Depending on his response, you might well decide that we have had that discussion, Sir Nicholas.

Ivan Lewis (Labour, Bury South)

Sir Nicholas, it may be helpful to you and to the Committee to respond directly to the hon. Gentleman's point; it might defer some of the agony that we would face later if we did not make things clear at this stage. ''Tax Acts'' covers all tax Acts, which is covered by the definitions. I hope that makes it clearer. These issues are covered by the definitions. That deals with the hon. Gentleman's point.

The hon. Gentleman expressed disappointment that this legislation did not create a vehicle whereby at a later stage we could adopt his suggestion of deferred partial payment. Conservative Members frequently say that one problem is that there is not sufficient opportunity to scrutinise changes that the Government seek to make. By doing things this way, and not jumping to create a vehicle that would allow us to go for deferral, in a future Finance Bill, if we were minded to adopt his proposed reform, we would be able to have full and proper scrutiny of that change of policy. It would not be appropriate in this Bill to jump from where we are to where he suggests we ought to be in the future.

Mark Field (Conservative, Cities of London and Westminster)

Although I understand the Minister's comments, and that the watchwords are innovation and imagination, equally there is a need for flexibility. That is what we are getting at. We cannot foresee everything and there is no doubt that this area will be fast-moving. There are ideas of deferred payments and the interlinking, as my hon. Friend the Member for Runnymede and Weybridge rightly said, between the Treasury and the Department for Work and Pensions. We will see that debated in the next couple of weeks in the Bill relating to land registration, which again covers issues that are in a state of flux. Does the Minister not understand our concern that flexibility is needed as well as innovation and imagination?

Ivan Lewis (Labour, Bury South)

I am always up for flexibility as well as innovation and imagination, but I am not prepared to endorse an approach that might lead to unintended consequences before we test this policy out and ensure that it influences people to make decisions in a way that we believe is consistent with their best interests.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Economic Secretary's point is a good one. We certainly would not want the primary legislation dealing with deferment of pensions to allow the Government scope to make endless changes to it. It is quite proper that if a partial deferment regime is to be introduced, it should be considered properly in the House.

This Finance Bill simply deals with consequential changes to the way the tax system works, to accommodate a policy announcement that has been made by another Department and dealt with in different legislation. All I am suggesting to the Minister is that it might have been a good idea—if the consequential legislation was drafted widely enough—to use wording to such effect that any changes made to the principal legislation at a later date would not make it necessary to revise the consequential legislation as well.

Ivan Lewis (Labour, Bury South)

Before we consider the consequences, let us remember that if we were to adopt deferment of pensions as a policy, it would first have to be in a pensions Bill. Things could be the wrong way round. To give even an indication in this Bill that that was somehow a decision that the Government have made, when it is not, would send out signals to individuals, financial advisers and others that could turn out to be exceptionally misleading.

I have said to the hon. Gentleman that we are not ruling out for ever the option of partial deferment. It is worth considering, but we must ensure that the changes we make are introduced in an integrated and sensible way, allowing people to make the right choices. We believe that a modern pensions policy would enable them to do so.

Rob Marris (Labour, Wolverhampton South West)

Does the Minister agree that the premise put forward by the hon. Member for Runnymede and Weybridge—namely, that there has been a policy announcement by Government to allow partial deferral—was wrong? He referred to it as a policy, but I am not aware that any such policy has been announced.

Ivan Lewis (Labour, Bury South)

As ever, I thank my hon. Friend for spotting that; the Opposition are not in a position to announce Government policy, and will not be for many years to come.

To stick to the point, I acknowledge and recognise that the hon. Member for Runnymede and Weybridge made a perfectly reasonable point about partial deferment, but I made it absolutely clear that that is not Government policy at this stage, as we believe that it may—only may—lead to confusion, ambiguity and unintended consequences. I feel strongly that it would be inappropriate at this stage to suggest that that is Government policy by putting it in this Finance Bill. The provision has not even yet formed part of any pensions Bill, which, in the circumstances, would be the place where we would ordinarily start with such a measure. On that basis, I ask the hon. Gentleman to allow the Committee to make progress.

Question put and agreed to.

Clause 7 ordered to stand part of the Bill.

Clause 8 - Meaning of ''applicable year of assessment'' in section 7

Ivan Lewis (Labour, Bury South)

The clause deals with the rules for deciding in which year the tax charge will occur. That year is referred to as the ''applicable year of assessment''. It may be useful to the Committee if I place on record the implications of the clause. In the majority of cases, the applicable year of assessment is the tax year in which the person becomes entitled to their social security pension, and it is based on the first day that a state pension is payable, as established by the Department for Work and Pensions.

The clause also provides rules for establishing the applicable year of assessment in specified circumstances. Crucially—the hon. Member for Cities of London and Westminster will approve of this—it provides flexibility by allowing people to take the lump sum in the year following what would be the normal year of assessment. That will help people who choose this option for the year following their retirement. That will become possible once the Secretary of State for Work and Pensions lays the necessary regulations enabling that choice; I understand that that will happen later this year. The provision may mean that a lower rate of tax is paid than would have been the case if a person had been assessed in the year of retirement. In this way, the tax rules are not a disincentive to taking the lump sum.

The clause also establishes the applicable year of assessment in cases where a person dies before taking a lump sum. There are rules that provide for cases in which the surviving spouse inherits the right to the lump sum, and also cases in which it is paid to the person's estate. This flexible approach to taking the lump sum underpins a real choice on taking retirement benefits, and I commend the clause to the Committee.

Philip Hammond (Conservative, Runnymede and Weybridge)

I welcome the Economic Secretary's remarks, and I welcome the flexibility given to the taxpayer to defer assessment by a year; that is a sensible measure. We all know what we are trying to do under this clause. The problem, as is so often the case with tax, is that it is easy to announce in one sentence what the Government want to achieve—namely that no one should pay a higher rate of tax than they otherwise would have paid simply because they got a lump sum payment. However, it is much more difficult to translate that into reams of written words that give effect to the measure.

I do not wish to rehearse an argument that we have already had, but as the Economic Secretary said, the applicable year of assessment is the year of assessment in which the first benefit payment day falls. Without necessarily making the case for keeping open the options for partial deferment—although that would be a beneficial outcome of what I am about to suggest—one is compelled to ask why the year of assessment is not the year in which the lump sum is paid. That year, or indeed the following year by election, would seem to be the more obvious year of assessment. Why do we have this rather tortuous mechanism under which the year of assessment is the year in which the pension is paid, not the one in which the lump sum is paid, or when the first benefit payment date for the pension falls, rather than the day on which the lump sum is paid? That gives rise to a concern about clause 8(8), which says:

''For the purposes of determining the applicable year of assessment, it does not matter when the lump sum is actually paid'',

and also a concern about clause 7(1). I should be pleased if the Economic Secretary would rule out the possibility that someone could be assessed to tax in a period of assessment on a lump sum that they had not received, and that a pensioner could find that they were presented with an assessment to tax in respect of what could be four or five years' deferred pension—quite a lot of money—that they had not received: a tax bill which they therefore had no way of paying. Such a situation could arise, for example, if somebody opted to defer their pension for four years and at the end of the four-year period the ''first benefit payment day'' fell in that period. That person would, on that day, become liable to pay the tax on the lump sum, but what if the Department for Work and Pensions could not find them? What if they had moved home or disappeared?

We know that the Treasury has difficulty tracing people and paying them the right amounts of money. It is not inconceivable, as any hon. Member will recognise—and even a brand new Member will have had enough post so far to recognise—that people do not always get the payments that they are meant to get from the Government when they are meant to get them. Is it not possible that elderly and vulnerable people may suddenly be presented with a bill for a tax liability that they cannot pay, because they have not had the lump sum in question, which is presumably accruing interest due to HMRC? That is a problem.

Rob Marris (Labour, Wolverhampton South West)

I draw the hon. Gentleman's attention to explanatory note 11 on clause 7, which says that there will be a PAYE deduction by the DWP on these lump sums, so it would not be the case that an elderly person—to use his suggestion—will be presented with a tax bill that they could not pay; it will be done by PAYE.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am not an expert on the PAYE system, although the hon. Gentleman may be, but the fact that tax is subject to PAYE deduction does not exempt the taxpayer from liability to pay an amount if, in error, it is not deducted or if something goes wrong with the PAYE system. I should have thought that the liability attaches primarily to the taxpayer and there is an obligation on the employer to deduct the PAYE amount.

I was going to ask some questions about this provision for PAYE pension deduction under clause 10, because I suspect that the Minister will tell us that this is a narrow class of all lump sum payments. However, we will find out about that in due course.

I also have a question about subsection (4), which the Minister has explained. Anyone who penetrated the identity of P and S on reading the Bill will have concluded correctly that they are married people, or those treated as married for the purposes of the pensions legislation, and P stands to inherit the lump sum following S's death. Can the Minister explain why the logic of allowing the year of assessment by election to be postponed by a year to avoid a spike is not extended to the widow or widower of S following S's death? Why is there not the same provision under subsection (4), allowing an election for postponement by one year?

Ivan Lewis (Labour, Bury South)

The hon. Gentleman raises some important issues, to which I shall try to respond one by one. He made comments about the delay; that follows the basis on which the state pension is taxed. For example, the delay could be necessary to determine the amount of the final entitlement.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Economic Secretary makes my point for me. I am suggesting that it would be more logical, and fairer, if the lump sum were taxable when it was paid. If there were a delay—because the DWP computer had broken down, or something like that—the tax charge would arise when the payment was made. The Government propose that the charge should arise on the ''first benefit payment day''. Why?

Ivan Lewis (Labour, Bury South)

The reason is that we are anxious that this approach should be consistent with how we currently tax state pensions; any departure from that would lead to undesirable consequences.

The hon. Gentleman also wanted clarification on whether a demand for payment of tax under self-assessment could be made before a lump sum was even paid. The answer is no. The DWP's position is that there would be reason for such a delay only if there were a doubt about the pensioner's contribution records. The DWP might have to make inquiries about entitlement to fairly small elements of the lump sum. In such a situation, apparently, the DWP often makes an initial payment, comprising the amount that is not in dispute. I hope that that helps the hon. Gentleman.

PAYE regulations will be made to enable the DWP to deduct tax through PAYE on the basis of a declaration by the pensioner of the appropriate rate. The tax will be deducted at the same time as the lump sum is paid.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Economic Secretary address the specific situation of the lump sum payment being delayed for any reason? Following on from the point made by the hon. Member for Wolverhampton, South-West, would it be the case that because a PAYE regime was in existence, the taxpayer would not become liable for the tax on entitlement to the lump sum on the ''first benefit payment day'' as the Bill suggests? Are we saying that there would be no liability on the taxpayer and that the matter would be entirely taken care of by the PAYE system that the DWP will operate?

Ivan Lewis (Labour, Bury South)

The hon. Gentleman went on to ask about a delay in payment, and raised another point about whether a pensioner would become liable for tax before being able to pay. The response is that the only reason for such a delay would be when there was a doubt about the pensioner's contribution record. The tax would be deducted at the same time as the lump sum was paid. The DWP processes already take account of situations in which such things happen, and the changes proposed in the Bill do not have a material impact on that.

Philip Hammond (Conservative, Runnymede and Weybridge)

I agree with the Economic Secretary: the tax will be deducted at the moment when the lump sum is paid. We all agree on that; the problem is that the liability will not arise at the moment when the lump sum is paid. For some reason best known to themselves, the draftsmen decided that the liability should arise in

''the year of assessment in which the first benefit payment day falls''.

Therefore, if a person received their first benefit payment—their first pension instalment—on, let us say, 4 April, but received their lump sum payment some two, three or four months later, perhaps for all the good reasons that have been set out, although the PAYE tax may be deducted by the DWP when the payment is made, the liability has arisen in the year of assessment in which the first pension payment day falls. Is that not correct?

Ivan Lewis (Labour, Bury South)

I shall try again to articulate the way the system works, and if the hon. Gentleman is not satisfied with what I have to say, I will have to write to him to provide further clarification.

The hon. Gentleman keeps on referring to a delay. As I have said, the only reason for such a delay is where there is a doubt as to the pensioner's contribution record. In those circumstances, the DWP might have to make inquiries around entitlement for fairly small elements of the lump sum. It is my understanding that in those circumstances the DWP makes an initial payment comprising the amount that is not in dispute. PAYE regulations will be made to enable the DWP to deduct tax through PAYE on the basis of a declaration by a pensioner as to the appropriate rate at which to deduct tax. The tax will be deducted at the same time that the lump sum is paid. I think that that is a pretty clear response to the hon. Gentleman's point.

Mark Field (Conservative, Cities of London and Westminster)

My hon. Friend has set out an obvious practical example, and it would be helpful if the Economic Secretary were to explain what is likely to happen. What will be the procedure? Is it likely that a cheque will be sent out for a lump sum? Will the Department investigate in advance to ensure that the cheque is sent to the right place, particularly if there is a delay of three or four months, as put forward in my hon. Friend's intelligent example? Our concern is that a potentially significant interest payment will be due to a beneficiary if there is a delay between their cheque being sent out, and therefore being out of the Department's hands, and their receiving it and paying it into their bank account.

Ivan Lewis (Labour, Bury South)

I shall try to provide a clearer definition of what is meant by a PAYE payment date. That is triggered by the actual payment itself, rather than by when the entitlement occurs. That has been part of the confusion; the actual payment triggers the PAYE payment date, not when the entitlement occurs.

Philip Hammond (Conservative, Runnymede and Weybridge)

Let us try to resolve this once and for all. I think the problem would be solved, and we would not be having this discussion, if the Bill were to state that the liability arises when the payment is made. That would be consistent with the PAYE legislation. I think that that is contained in section 683 of the Income Tax (Earnings and Pensions) Act 2003, which the Minister is now quoting and which says that the PAYE deduction falls to be made when the payment is made.

I am simply asking the Minister to confirm that there is no circumstance in which a person who has not received their lump sum payment could have a liability for payment of tax which is therefore accruing interest. For example, if a person who is due a lump sum payment has moved and cannot be traced and the Department cannot pay them the cheque because it cannot find them, in the interim period does a liability for tax arise, and is interest therefore accruing on that liability?

Ivan Lewis (Labour, Bury South)

I shall try again. In terms of the situation that the hon. Gentleman has described, in no circumstances would that happen. I have tried to say that throughout the debate; there are no circumstances in which that would happen. I hope that reassures him.

Rob Marris (Labour, Wolverhampton South West)

Perhaps I can, through my hon. Friend the Economic Secretary, reassure the Committee. We are, in a sense, on clause 7, Sir Nicholas.

The hon. Member for Runnymede and Weybridge raised an interesting point. By way of an analogy, I suggest that he is mistaking a position where you have VAT at the nil rate, versus VAT exemption. There is a difference. Per clause 7(1), a charge—indefinite article—arises, but in clause 7(5)(a), for example, it quite recognises that that charge could be nil. Therefore, the concerns that the hon. Gentleman is raising would not hold water.

Ivan Lewis (Labour, Bury South)

Perhaps we should draw this to a conclusion. The hon. Member for Runnymede and Weybridge asked me earlier what happens if we cannot find the person concerned. If we cannot find them, there is no tax due. I should have thought that was pretty self-explanatory. If we cannot find the person concerned, how can we actually pay them to then tax them? I give way one last time.

Philip Hammond (Conservative, Runnymede and Weybridge)

That is precisely the question that we are asking.

Dawn Primarolo (Labour, Bristol South)

He has told you that six times.

Philip Hammond (Conservative, Runnymede and Weybridge)

He has not. If the liability to tax arose on payment of the lump sum, I would totally agree with the Economic Secretary. My concern is that it appears, from the face of the Bill, that the applicable year of assessment is the year in which the first benefit payment day falls. So if a benefit payment day occurs in a year of assessment, liability to tax on the lump sum arises at that moment. That is my interpretation.

If the Economic Secretary is able to tell me clearly that that is wrong, and that in no circumstances could a person have a liability to tax on a lump sum until they have received it, we shall be perfectly satisfied. My only remaining question for him would be, why on earth is that not the definition in the Bill—that receipt of the lump sum is the trigger for payment of the tax?

Ivan Lewis (Labour, Bury South)

In no circumstances.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.

Clauses 9 to 10 ordered to stand part of the Bill.

Clause 12 - Employee securities: anti-avoidance

Mark Field (Conservative, Cities of London and Westminster)

We have amendments to clause 12 under schedule 2.

Nicholas Winterton (Conservative, Macclesfield)

I have to tell you that that comes under schedule 2. Do you wish to speak to stand part?

Mark Field (Conservative, Cities of London and Westminster)

As you will see, Sir Nicholas, clause 12 introduces schedule 2. If we can have a stand part debate in relation to schedule 2 at the end of the consideration of our amendments, I should be grateful. I hope that, with leave, you will allow us to do that.

Nicholas Winterton (Conservative, Macclesfield)

That depends on how it goes. If I believe that adequate debate has taken place on all parts of schedule 2, I would not allow time for a stand part debate. I cannot make that decision, however, until I see how the debate on schedule 2 has taken place. I say to the hon. Gentleman that clause 12 merely introduces schedule 2. The Committee must trust me on this matter.

Dawn Primarolo (Labour, Bristol South)

On a point of order, Sir Nicholas, I wish to make a couple of opening remarks before we start the debate on the amendments. Would it be in order for me to do that at the beginning of schedule 2, or should I do it on clause 12?

Nicholas Winterton (Conservative, Macclesfield)

I should have thought that it would perhaps be sensible for general remarks to be made under clause 12 stand part.

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

Dawn Primarolo (Labour, Bristol South)

Thank you for your guidance, Sir Nicholas. I want to make a few opening remarks on clause 12, as it introduces schedule 2. I wanted to start by making it clear that the targets with regard to the arrangements are where a minority of individuals remain intent on devising ever more complex—

It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

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

Standing Committee B

(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8) - Clause 12 - Employee securities: anti-avoidance

Dawn Primarolo (Labour, Bristol South)

It is not my intention to stray into the important debates on amendments to schedule 2, but there has been some discussion about the scope of the proposal on employment-related securities in clause 12 and schedule 2, about which I spoke briefly to the hon. Member for Runnymede and Weybridge (Mr. Hammond). These arrangements are devised to deal with the minority of cases where there are complex, contrived arrangements to avoid paying income tax and national insurance on employment rewards. The Government have made clear their intention to close that activity down permanently.

There has been some debate about whether small businesses are caught by the provisions, so I am grateful to have the opportunity to offer small businesses some reassurance.

A change being made to chapter 4 of the Income Tax (Earnings and Pensions) Act 2003 will remove, where avoidance is involved, the provision that automatically exempts benefits received in connection with securities from a full income tax and national insurance charge, if income tax has been paid elsewhere. I am aware, from representations made directly to me and my Department, that professionals have expressed concern about the possible scope of the change. I want to make it clear that this change does not bring all benefits derived from securities into a tax and national insurance charge. A reference to benefits in the context of the schedule means the employment reward—the passing of value to an employee in return for the employee's labour. Where investors are carrying out their normal investment transaction, this charge will not affect them.

The purpose test introduced in section 447 of the 2003 Act has been carefully designed to target complex, contrived avoidance arrangements that are used mainly to disguise cash bonuses. If taxpayers use contrived arrangements to get round anti-avoidance legislation—to avoid paying the proper amount of tax and national insurance—they cannot expect to be excluded from the charge. However, it will be absolutely clear from what I say about the purpose test that this measure will not affect the taxation of those small businesses that do not use contrived schemes to disguise remuneration to avoid tax and national insurance.

There is no connection between the changes proposed in this clause and schedule to tackle contrived avoidance schemes and last December's discussion paper on the taxation of small business, which focuses on the strategic issues relating to the taxation and treatment of the legal forms used by small businesses. Taxation of small businesses is a live issue that is being considered as part of our ongoing discussions with small businesses and their advisers. The provisions before the Committee today are not intended to address those points. Any proposals coming out of the discussion paper and further consideration will be brought before the House in the normal way.

I am grateful to you, Sir Nicholas, for allowing me to spell that out. There has been some confusion, and many inquiries have been made about that point. I was asked to explain the purpose of clause 12 and schedule 2 at the beginning of the debate on them. Clause 12 and schedule 2 contain important and necessary measures, which I should address on a point-by-point basis in our discussions on the amendments to the schedule.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Paymaster General is being extremely helpful. Will she confirm that what she is saying is that, with the exception of companies that fall within the scope of Inland Revenue 32, there is no intention to limit the ability to take profits in dividends within a business and to impute remuneration that is of another kind where profits are being taken as dividends?

Dawn Primarolo (Labour, Bristol South)

I was trying to be as clear as possible. Unless a scheme falls within the category of schemes contrived specifically to avoid income tax and national insurance on employment remuneration for an employee, it is not within the scope of clause 12 or schedule 2. There are matters to be discussed, but that will take a long time. I know that this topic has caused a great deal of interest, and I thought it would be helpful to provide to the Committee at the beginning of our deliberations as clear an idea as possible of the precise, narrow and targeted aim of schedule 2 and clause 12, and thereby to put to rest concerns that have been generated in some quarters.

Nicholas Winterton (Conservative, Macclesfield)

I have to make it clear that the Paymaster General was speaking in general terms to clause 12, but I felt it was worth her while doing so before we reached the nitty-gritty contained in the amendments to schedule 2.

Question put and agreed to.

Clause 12 ordered to stand part of the Bill.

Schedule 2 - Employee securities: anti-avoidance

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 1, in schedule 2, page 63, line 13, after 'is', insert

'entered into as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions and is'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 2, in schedule 2, page 63, line 22, at end insert—

'(d) any contract of insurance offered by a company whose business includes the business of selling insurance policies where the contract is offered on substantially the same terms in the ordinary course of that insurance business.''.'.

No. 3, in schedule 2, page 63, line 36, leave out from beginning to end of line 3 on page 64 and insert—

'(8) This paragraph has effect on and after 2nd December 2004 and applies in relation to rights under contracts of insurance acquired on or after that date.'.

Mark Field (Conservative, Cities of London and Westminster)

If we took at face value the Paymaster General's warm words it would be pointless having the debate that I suspect we shall have over the next hour or so. I accept that this is a complex area and that the Treasury has received many representations on it. The anti-avoidance proposals are set out in detail in schedule 2, which deals with employment remuneration. However, for our part, it is difficult to avoid the conclusion that many of the anti-avoidance proposals are driven by an increasingly desperate Treasury desire to fill its revenue black hole without regard to the damaging effect that it will have on the development of start-up ventures, and, indeed, of some bona fide remuneration schemes.

I am amused that there is such amusement coming from you, Sir Nicholas. I suspect it has nothing to do with what I have said—at least I hope that that is the case.

Nicholas Winterton (Conservative, Macclesfield)

No, it was something I said that caused a certain flutter of the eyelids. I leave it on record that I find what has been said in no way offensive.

Mark Field (Conservative, Cities of London and Westminster)

Notwithstanding the Paymaster General's warm words of a few moments ago, I believe that where these proposals do most damage is in the inadvertent bias against smaller companies and entrepreneurs, who will perhaps be unable to take the necessary complex accounting advice in setting up their employment security schemes. There is therefore a risk that they will come under the banner of being ''contrived''.

The arbitrary, uncertain and subjective nature of many of the proposals in schedule 2 betrays the sense that the all-important determination of whether a scheme is subject to capital gains tax, and therefore a 10 per cent. charge, or income tax, with a 41 per cent. charge, hinges on the random outcome of which tax office or officer is dealing with the file.

We have learned that the Inland Revenue, as part of its clearance process, has in the past given smaller companies assistance in determining pay-as-you-earn liabilities and consideration on sale, but we understand that this may soon be discontinued. I hope that the Paymaster General will provide guidance on that.

We would like assurances that in analysing the operation of the schedule proper attention will be paid to the entrepreneurial set ups that the much-vaunted capital gains tax regime was supposed to benefit most. We fear that these small operations have most to lose from the arbitrary element, which places the taxpayer at the whim of the Inland Revenue inspector, who can decide whether moneys earned, and therefore liable for tax charge, are considered as remuneration or as a return on investment.

We need to stress that, without falling foul of the Treasury's accusation of contrivance, it is inevitable that many smaller businesses will, from day one, structure themselves so as to have an exit strategy in sight. That is not wilful tax avoidance but the practical reality of commercial life. I ran a small business for seven years before I entered Parliament, and I remember that at the end of each tax year, when we went to see our accountant, we would consider the pot of moneys left in the company and determine whether we should take it out as some sort of dividend. We considered those issues—issues of, at one level, tax avoidance—fundamentally and from first principles. I do not think that those discussions with our accountant were contrivance in any way. None the less, I suspect that they would run the risk of falling foul of a clear definition, unless we are assured to the contrary by the Minister. If we are not, those schemes would no longer be seen as providing proper dividends, but would be subject immediately to the rather higher charge of income tax.

It seems that the Government remain determined to close tax planning, rather than just tax contrivance, which reduces the PAYE and national insurance charge paid on salaries. Most measures have in the past been aimed at bonus payment structures, most visibly those implemented by large investment banks. No one on the Opposition Benches will defend the payment in wine, gold or in other ways that was clearly an abuse of the system.

We are concerned that the impact may well cover securities issued by employee-controlled companies. There are concerns that there will be fewer fiscal incentives to reward employees in much smaller operations in ways that align their interests with employers. That simply cannot be the intention of what is being proposed under the schedule.

Most of the structures being closed are being shut down following the introduction of the disclosure of tax avoidance schemes legislation. A main cause of these changes is the result of the Government having made capital gains tax treatment for individuals so much more attractive than income tax receipts by introducing the business asset taper relief in 1998.

I come to the specifics of the first three amendments, Nos. 1 to 3, which relate to insurance contracts. On amendment No. 1, the Government claim that the measures relating to insurance contracts in paragraph 2 of schedule 2 are needed to counteract wilful tax avoidance. If that is so, it should not be objectionable to have a motive test—in other words, one that would look at the main purpose. It would have to be shown that the main purpose was the avoidance of taxation, and that is set out in our first amendment.

These amendments seek to ensure that the new rules do not apply to contracts issued by insurance companies, who sell such contracts in the normal course of their business to the general public—that is set out in amendment No. 2—or to existing insurance contracts that were in place on 2 December last year. That is our third amendment.

The definition of securities in part 7 of the Income Tax (Earnings and Pensions) Act is widened to include certain instruments to prevent the Bill from being used to pay tax-free bonuses. They include rights under certain insurance contracts as well as redeemable shares, to which we shall return.

The schedule already introduces a purposive test under paragraph 4(3). Accordingly, there seems little reason why the Government should object to the insertion of a main purpose test for insurance contracts. Naturally, the main problem with a main purpose test is the element of subjectivity. Inevitably, that leads to a potential for uncertainty, about which I am sure the Paymaster General will wax lyrical—at least, until the time comes to deal with paragraph 4(3).

The purpose of amendment No. 2 is to exclude from the definition of employment-related securities contracts of insurance that are provided to employees by their employers, when those employers are insurance companies and provide contracts on the same terms to members of the public. As the Paymaster General will be aware, part 7 of the Income Tax (Earnings and Pensions) Act contains charges that relate to employment-related securities to charge to income tax gains from securities that are awarded to employees by reason of their employment. Employment-related securities include such items as shares and loan stock. We are worried—a concern that has been reiterated by the insurance business—that tax is being avoided by entering into similar arrangements with insurance contracts. We believe that there should be an additional exemption to protect employees from being offered insurance contracts by their employers, when those employers would offer those contracts to the public on the same terms.

We tabled amendment No. 3 to prevent an unanticipated national insurance and PAYE liability for employers. As the Paymaster General is aware, the restricted securities regime came into place just more than two years ago on 16 April 2003. Under that regime, charges to income tax under PAYE and national insurance can arise when restrictions cease to apply to securities or when restricted securities are disposed of. Securities were not restricted by reason only, although they could be redeemed on payment of an amount. From last December—the reason why we set the date in the amendment—the exemption for redeemable securities is to be removed for securities that were issued before that date as well as on or after it. Our worry is that that is likely to lead inadvertently to a national insurance and PAYE liability for employers. The Association of British Insurers has been in touch with the Treasury about the issue and I hope that it will take account of what the association said. I should like the Paymaster General to give us some guidance on such matters and I look forward to hearing her comments.

Dawn Primarolo (Labour, Bristol South)

I thought it important when responding to this first set of amendments this afternoon to attempt to make it crystal clear to the Committee the target of the arrangements under schedule 2. We are discussing employment-related income, of which some £1½ billion to £2 billion are paid to a small number of highly paid people in certain industries per year. I will not take long to explain matters, but I shall cite a few examples with dates. Systematically, over a long time, contrived schemes have been developed to ensure that those individuals do not pay national insurance and income tax on that employment-related income.

I defy any member of the Committee to parade before us higher rate taxpayers who do not understand that their employment-related income is subject to income tax and national insurance. Given the comments of the hon. Gentleman about small business, I shall give the Committee an example of an avoidance scheme. This is what happens. The employer pays the cash bonus into a bank and gets gilt futures in return, which he gives to the employee with a minor forfeitable condition. The employee transfers them to a special-purpose company that he already owns—let us call it Newco—in exchange for partly paid shares at a high premium, on call, equal to the amount of the bonus, plus a loan equal to the amount of the bonus. The employee then sells his shares in Newco to another, unrelated company—let us call it Purchaser—for their market value, which is very little as the gilt futures are matched with debt and the huge outstanding call on partly paid shares.

Newco then calls on Purchaser to pay out the partly paid shares so that it can repay the loan to the employee. Purchaser is now worth the market value of the gilt futures. Newco then becomes unlimited to increase its distributable reserves, which are then distributed in specie so that the gilt futures end back with Purchaser. Purchaser refunds money to the bank by way of the gilt futures, and that completes the circle. In that way, the individual receives his bonus without paying tax or national insurance.

Forgive me for saying this, but that is a highly complex contrivance—[Interruption.] I am glad to hear that Committee members are struggling with it. The purpose of that highly complex contrivance is to get round the payment of tax and national insurance.

This challenge started quite a long time ago. In 1995, the then Conservative Minister announced measures to stop a national insurance dodge that operated by paying employees tradeable assets. One year, a scheme was closed down in which an employee was given an interest in platinum sponge—I had to find out what that was; I am sure I still do not know. If all the platinum sponge had been in the employee's possession, and he had hung on to it, there would have been a commercial problem because it would not have been available. In fact, it seems never to have left either Schiphol airport or Jersey. There were also payments in fine wines—the list goes on.

Let us be clear: successive Governments of both main parties have attempted regularly to make it clear that the payment of employment-related bonuses is subject to income tax and national insurance. That seems a perfectly reasonable proposition—everybody else pays tax and national insurance on their income. I want to break the link, once and for all: sometimes, hon. Members seek to advance the idea that small businesses carrying out innocent activities and striving against the odds will be caught by the provisions. The provisions specifically target the disclosed schemes of which the Government have been made aware.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I shall answer a couple more points. I shall be happy to give way after I start answering the amendments.

In moving the amendments, the hon. Member for Cities of London and Westminster (Mr. Field) talked about small-scale entrepreneurs. I say to him that the provisions are clearly targeted, as we shall see when we move through the amendments. Their purpose is to counter highly complex and contrived arrangements that aim to avoid tax and national insurance. Merely choosing one structure or form of share reward over another will not have any effect. Similarly, having an exit strategy will not be within the scope of the provisions. We are dealing specifically with the annual payment of bonuses that make us, as taxpayers, suffer from the reluctance of others to pay the tax and national insurance that they should.

I am happy to give the hon. Gentleman the assurance he sought regarding employee share schemes and share option plans: they will not be affected. We continue to believe that they make an important contribution to the Government's productivity agenda. The Bill only targets contrived and highly artificial arrangements.

After the announcement accompanying the pre-Budget report, David Cohen, a partner in Norton Rose company and chairman of the UK Share Plan Lawyers Group, said:

''This measure can only be welcomed by all those who believe in the value of genuine employee share ownership.''

Philip Hammond (Conservative, Runnymede and Weybridge)

The right hon. Lady makes a persuasive case. No Conservative Member would defend highly contrived arrangements. Our concern is that well meaning legislation that is designed to shut down one problem might inadvertently inflict collateral damage. This is the point my hon. Friend the Member for Cities of London and Westminster was aiming at.

As the Paymaster General was speaking, it occurred to me that she was talking about large bonuses paid to very high earners in contrived circumstances. Has the Treasury considered a de minimis threshold for the provision, so that it would be clear that we were only talking about cases in which substantial amounts of money were involved?

Dawn Primarolo (Labour, Bristol South)

It would be an interesting tax authority that sanctioned some tax avoidance schemes and not others, or a loss to the Exchequer as long as it was less than a certain amount. No, we had not considered a de minimis threshold. The prevention of avoidance and contrived schemes presents challenges to the tax authorities and to Finance Bill Committees considering what are always complex reactions to complex arrangements. Such measures are continually debated in connection with Finance Bills. As we consider schedule 2, the hon. Gentleman will see that the purpose test is extremely tightly targeted. I will come back to the points raised by the amendments, and other points the hon. Gentleman made, but his hon. Friend wants me to give way.

Brooks Newmark (Conservative, Braintree)

I feel that I should declare some sort of interest in that I have been involved in the venture capital industry for 12 years—although I hasten to add I have never invested in rhodium sponge or platinum sponge, which are used for catalytic converters. I do understand that.

One point that my hon. Friend the Member for Cities of London and Westminster has been trying to get across, particularly in relation to tax planning, is that when somebody is investing in a business it is important to ensure that the interests of employees—particularly key employees—are aligned with those of the investors or the owners of the business One thing that the Government should consider is the way in which those individuals are compensated through options or warrants: they should be viewed as co-owners of the business. My concern with the wording that I have seen is that such compensation will be captured as a form of earning that would involve PAYE and so on.

The Government have gone a long way with measures such as taper relief, which was an excellent incentive for entrepreneurs to set up businesses. I congratulate Ministers on that—

Nicholas Winterton (Conservative, Macclesfield)

Order. This intervention is becoming a bit of a speech.

Brooks Newmark (Conservative, Braintree)

I am sorry, Sir Nicholas. My question to the Paymaster General is simply to ask her, when considering share option schemes, to align the rules with employees' ownership of those businesses, and not to capture that as some form of income. I am sorry for labouring the point.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman makes an important point about the protection of sanctioned, good and well used schemes, many of which are tax assisted, offered in the UK to assist companies in involving their employees in the profitability and growth of the company by the allocation of shares. That matter is not dealt with in the schedule, however. Although such schemes are important to the Government's productivity agenda, they are not disturbed by schedule 2. We are aiming specifically at employment-related income bonuses, which by no stretch of the imagination come in any of the categories identified by the hon. Members for Braintree (Mr. Newmark) or for Cities of London and Westminster.

The hon. Member for Runnymede and Weybridge spoke of the importance of not inflicting collateral damage; however, the amendments inflict collateral damage on the proposals in the schedule. I shall explain why. Not only are the amendments unnecessary, but they would lead to a significant loss of revenue. Unless he pushes me, I will spare the blushes of the hon. Member for Cities of London and Westminster by not telling him exactly how much we estimate we might not be able to collect.

Amendment No. 1 appears to be an attempt to restrict insurance contracts classed as securities to those used for avoidance. Although I am sure it is not the Opposition's intention, it would, by removing exclusions provided in the Bill, also catch contracts that we are satisfied pose no risk.

Amendment No. 2 is unnecessary. The changes that we propose will ensure that the rules apply only to value passed through insurance contracts by way of employment reward—that is, the payment of an employment reward. When an insurance contract is offered to employees on exactly the same terms as to a member of the public, there should be no passing of employment reward. Employees in those circumstances will not be affected by the changes. Unfortunately, the amendment would create a safe harbour for those who provide insurance contract avoidance schemes as their main business. It would therefore provide a route through the legislation and lead to a loss.

Amendment No. 3 reflects concerns about insurance contracts entered into before the measures were announced. The only arrangements that Her Majesty's Customs and Revenue has seen that involve the use of insurance contracts to deliver employment reward were designed to avoid tax and national insurance. We can find no other examples. That speaks volumes. Only value passed to the employee on contracts made after 2 December 2004 is caught. In my view, it is both fair and proportionate that income tax and national insurance be paid on such value. If the hon. Member for Cities of London and Westminster chooses to press the amendment to a Division, I shall ask my hon. Friends to oppose it.

I have dealt with employers offering share-based incentives, with the date and with value passing through. The one remaining point for me to answer is the hon. Gentleman's argument that tax inspectors would somehow decide on a whim to use the legislation to challenge owner-managers. I have said that the approach to compliance in the area of employment products avoidance is being carefully managed. The schedule will ensure that the finite inspector resources are carefully focused through central direction and control and are supported by clear risk-based guidance on highly contrived and complex arrangements. Owner-managers of small businesses who are not using such contrived, complex arrangements will not be targeted for their efforts.

I have made as clear as I can the target, the reason and the mechanism. I hope that I have allayed the hon. Gentleman's concerns. The amendments are fatally flawed and if he feels unable to withdraw them I will ask my hon. Friends to oppose them.

Mark Field (Conservative, Cities of London and Westminster)

To paraphrase a discussion that took place this morning, I will be a hedger rather than a ditcher. Much as I should like to be a ditcher in relation to the insurance industry, I shall not press the amendment to a vote I take some comfort in what the right hon. Lady has said.

The Paymaster General was guilty of some contrivance in her example, which was an almost ludicrously exaggerated case of a contrived means of bonus payments being harboured for the purposes of an investment bank.

Dawn Primarolo (Labour, Bristol South)

I hope that when the hon. Gentleman uses the word ''exaggerated'' he is referring to the exaggerated attempts of those who designed that real, functioning scheme. I merely told him about it. Perhaps it will instruct him of the lengths to which a few very well paid people will go in order not to pay their tax and national insurance.

Mark Field (Conservative, Cities of London and Westminster)

Sir Nicholas, you will be glad to know that contrivance is a two-way street. If the Minister is telling us that only companies that could be subject to the provision would be investment banks with equally contrived schemes, I would be entirely satisfied and there would be little point in debating the matter further. However, the Paymaster General will understand that we are trying to tease out the grey area. The example she gave is clearly from that grey area and was contrived wholly as a way of avoiding tax, but I suspect that that loophole was filled in some years ago with previous bits of legislation. It is not an example that anyone can be proud of it.

The reality is, of course, that smaller companies are not able to take complex tax advice and are often set up with an exit route in mind. In my experience, many entrepreneurs and small business men are, from the outset, looking to sell within three, five, seven or ten years; on that basis, they consider structuring their business in such a way as to minimise tax. There is concern that that would be deemed contrivance. Clearly, on one level it is contrivance in the ordinary use of the word, but it is obviously not contrivance along the lines of the investment banking example that the Minister quoted.

Dawn Primarolo (Labour, Bristol South)

Would the hon. Gentleman concede that that course is still open if a business is planning an exit strategy and is using efficiently all the reliefs available to it through the legislative process that is clearly laid down? Is he seriously suggesting that businesses should use contrived schemes to avoid tax and national insurance in designing an exit strategy? Surely that is different. That is the point I am making. It is an important line not to cross.

Mark Field (Conservative, Cities of London and Westminster)

It is indeed, however, we need a clear idea of exactly where that line falls. That is the core of the concerns expressed in this group of amendments and others. More clarity is needed. That is the main concern that has been voiced time and again from the various bodies that we have spoken to. The hon. Member for Bristol, West (Stephen Williams) will be happy to know that we have been in touch with a number of professional bodies—and I hope that I will not be speaking entirely verbatim from their notes at a later stage.

There is a great concern about the lack of clarity. Smaller businesses will suffer most from the risk that the measure will be applied in an arbitrary fashion. Large organisations will be in a position to take detailed advice to ensure that whatever programmes they set up are unlikely to fall foul of even the most senior Inland Revenue inspectors. Smaller businesses may find that a relatively innocuous—indeed, uncontrived—scheme falls foul of the regulations.

Dawn Primarolo (Labour, Bristol South)

I direct the hon. Gentleman to my statement to the House on 2 December 2004, which has been widely publicised and which ensures that there are no grey areas. It is absolutely clear in laying down the principles and what is expected. It should not be said that there is a grey area and that people will not understand. How can people not understand that if they receive employment-related income, it is subject to income tax and national insurance?

Mark Field (Conservative, Cities of London and Westminster)

I am grateful that we have had at least some comfort in that regard.

Brooks Newmark (Conservative, Braintree)

The Paymaster General makes an excellent point on contrivance and gave an excellent example of a riskless transaction. I followed what you said verbatim and whoever gave that example to you, it was an excellent one. However, my hon. Friend's point is that entrepreneurs who tax plan do so with risk capital, and it is risk capital that he is trying to discuss. The unintended consequences of your legislation might draw true entrepreneurs and people who take risks with their capital into it. I ask you to address that concern.

Nicholas Winterton (Conservative, Macclesfield)

Before I call the hon. Member for Cities of London and Westminster, I must say that as much as occasionally I would like it to be, it is not my legislation. It is the Government's legislation.

Brooks Newmark (Conservative, Braintree)

I am sorry, Sir Nicholas.

Mark Field (Conservative, Cities of London and Westminster)

I hope that my hon. Friend the Member for Braintree will make further contributions in the correct form during the course of these debates. Without any further ado, 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. 4, in schedule 2, page 64, line 19, leave out from 'acquired' to end of line 24 and insert 'after that date.'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 5, in schedule 2, page 64, line 25, leave out paragraphs 5 and 6.

No. 6, in schedule 2, page 65, line 1, leave out paragraph 7.

No. 7, in schedule 2, page 65, line 9, at end insert—

'431C Procedure for clearance in advance

Section 431B shall not apply so as to treat an election as having been made for the purposes of section 431 if, before the issue of securities is made, the Board have, on the application of either the employer or the employee notified either the employer or the employee that the Board are satisfied that the issue of the securities is for bona fide commercial reasons and will not form part of any such arrangements as are referred to in section 431B.''.'.

Mark Field (Conservative, Cities of London and Westminster)

We now turn our attention to a series of amendments relating to the category of restricted securities. The first pair of amendments, Nos. 4 and 5, would defer the time when the new legislation comes into operation. Many companies issue redeemable shares for commercial purposes and have done so for many years. Redeemable shares are advantageous in that they can be repurchased and cancelled by the company with minimum formality, as the Paymaster General is aware. The retrospective changes to make them restricted securities will seem unfair to many employers and employees.

Employers currently have an obligation to pay PAYE and national insurance contributions but are likely to face difficulties in recovering them when a tax charge arises. That might be because, for example, the employer does not have contractual right to recover either PAYE or national insurance contributions from an employee. A particular difficulty arises in relation to former employees, some of whom may have moved away and be uncontactable.

The retrospective nature of the change means that employees have now lost the opportunity under ITEPA to make a section 431 restricted securities election in respect of the shares. If that opportunity existed at the time of acquisition, many employees would, as they currently do, make that election. As was the case when the 2003 Act was introduced, we believe that the Bill should allow a late section 431 election to be made following the changes. Any PAYE or national insurance contributions to the general employment remuneration tax would then be paid in the year in which the legislation received Royal Assent without any further interest.

As paragraph 4(4) is currently drafted, it would appear that chapter 2 could be interpreted to apply to redeemable securities acquired before and after 16 April 2003, the normal cut-off date to which chapter 2 applies. I hope that the Paymaster General can give us some assurances on that, and will either say that this is intentional or clarify the situation.

Paragraph 7 causes an election to be made at the time that the securities are issued. The result of leaving out that paragraph will be that the impact of taxing an employee at the time that the securities are issued will be similar to that of the US system, which has led to some perverse outcomes.

The Government need to recognise that companies may wish to issue securities with restrictions for valid commercial reasons. There will not be an issue of contrivance in that, as we have discussed, but that might be dependent on the quality of service as a ratchet to highly incentivise management, and continued employment is not necessarily a condition that could cause a security to be a restricted security.

I know that there was a discussion about the large international investment banks during the last debate on the previous group of amendments, but for many privately owned companies there is a great problem of valuing securities that are subject to a restriction at the time of issue.

There is also the risk that restrictions may never be lifted—for example, if they are based on profit targets that are not met. That will leave the employee with a charge to tax on income that they never got. Similarly, if the securities were to decrease in value, there is a risk that an employee will be taxed ''as income'' and pay tax, but then suffer a potentially large capital loss on the subsequent fall in value—a loss that the vast majority of ordinary taxpayers would not be able to obtain value for, given that they already have an £8,000 annual exemption from capital gains.

There is no mechanism in the Bill to deal with the potentially ruinous effect on employees of a precipitate fall in the share price, leading to a capital loss and a disproportionately high income tax liability, rather than capital tax liability. Therefore, amendment No. 6 seeks to limit the application of the new clauses to those circumstances where tax avoidance is intended, and to make it possible for taxpayers to obtain advance tax clearance so that they have the comfort of knowing that the Inland Revenue will not examine such transactions retrospectively—and, hopefully, for practices, to provide clarity on the operations of these provisions.

In our view, general anti-avoidance rules only work when we have a transparent and general clearance procedure via the Inland Revenue. Commercial certainty demands that the Inland Revenue should be in a position to give detailed and accurate guidance to each class of taxpayer, corporate or otherwise, likely to be affected by a proposed change. That does not appear to have happened, which is why we have tabled our amendments.

I turn to amendment No. 6. If the main purpose test is satisfied, proposed new section 431B of the Income Tax (Earnings and Pensions) Act 2003 deems that a restricted securities election is made. The main purpose test applies in relation to the avoidance of tax, which is defined as income tax and corporation tax, as well as national insurance. It is possible to see circumstances in which the main purpose test could catch situations—for example, where an employer structures a share plan with a view to obtaining a corporation tax deduction. I hope that we will get some guidance and satisfaction from the Paymaster General on this, because the deeming of a section 431 election could adversely affect innocent employees who had received no, or marginal, tax benefit.

A number of examples have been given by some of the relevant professional associations, and I would like to highlight one of them. An employer has previously issued redeemable shares to employees. The employee will now automatically fall within the restricted securities legislation, and so be subject to income tax on a chargeable event, but the employer will not be entitled to a tax deduction under schedule 23 of the Finance Act 2003. To take advantage of the symmetry introduced under schedule 23 between the employee's tax position and the employer's tax position, the employer issues non-redeemable shares. Does that now fail the main purpose test? Surely the main purpose of the arrangement would be to incentivise employees. However, the use of non-redeemable shares in that instance would clearly be to obtain a tax advantage, to give the employer the symmetry to which I referred. If that were to fail the main purpose test, it would mean that the employee would then be potentially liable to tax on the acquisition of the shares, which he or she would not otherwise have been. We believe that an exemption should be made in such a situation or an assurance be given by the Paymaster General for the record.

One of the hallmarks of the Bill has been the uncertainty posed for businesses in their planning by the retrospectivity of so many provisions, and that applies in particular to several complex issues under schedule 2. That may have been unintentional, so it is all the more important that we can deal with such matters in Committee. The Government will argue that their provisions are not retrospective. However, certainty is key. People and businesses need to be able to plan in a stable environment. Changing the basis on which a transaction is organised will make it harder to plan.

Several companies and employees could end up having to pay additional PAYE and NICs unexpectedly due to the change being made under the Bill. If taxation legislation is to change, it should be effected by a change of policy going forward. That is acceptable as long as the transactions that were undertaken in the past are protected. Such grandfathering procedure is seen as the norm. It is all too easy to be discouraged by measures being labelled as ''tax avoidance'' measures and it is easy to point a finger of blame at large investment banks with visible tax avoidance plans, as the Paymaster General has done in the debate. We fear that that would sell the pass on certainty and the stability that is provided by the rule of law.

Our amendments would make the Bill prospective, not retrospective. In detailed comments that were submitted to the Inland Revenue as recently as 18 March, the Chartered Institute of Taxation expressed concern that the Bill would be retrospective. The measure is billed as having effect from 2 December last year, but the way in which the Bill is drafted shows that the measure will apply to all employment-related securities even if acquired before the date of the announcement.

The definition of securities under part 7 of the Income Tax (Earnings and Pensions) Act is widened under section 424 of the Act to include certain instruments to prevent it from being used to pay tax-free bonuses. Among the instruments are redeemable shares. That is done by taking redeemable shares that were previously exempt out of exemption under paragraph 4(2) of schedule 2. We understand that such action is controversial, given that there are many occasions when redeemable shares are not used for the purposes of tax avoidance and what it amounts to is a blanket ban. The question to probe is why redeemable shares should not be subject to the same motive test as the conditions that are set out.

The phrase ''something has been done'' is extremely broad language. It has been much criticised by not only the Chartered Institute of Taxation, but others. It seems to be taxation by feel. The measure is going down the road of arbitrary taxation. For example, is the decision not to declare a dividend in any one year something that has been done with the effect of increasing the value of the securities in question? I can understand that many of the bond securities regulations proposed are based on a worry that, all too often, the tax tail is wagging the dog. We run the risk of falling into that precise trap and too many corporate decisions will be made that will hinge on whether activity can be defined as ''something being done''. We hope that this new term will be clarified in the frequently asked questions and the guidance, but to go back to an earlier point, that means that too many tax inspectors will be guided by the questions and answers drawn up by policy officers. In our view, it is inherently undesirable to have a system governed by Government guidance, which can change without warning and carries little weight in court.

There is a real problem with uncertainty under this schedule, and I will be interested to hear what the Paymaster General has to say to pacify the concerns that we are addressing, which were raised by a number of interest groups. Setting boundaries by administrative guidance, rather than by law, is less than ideal at the best of times. We believe that the provision also potentially opens the door to the imposition of double taxation.

I shall summarise our objections, which give rise to all four of the amendments in this grouping. Section 422 of the ITEPA introduces the restricted securities regime. Where employment-related securities, subject to restrictions, are required, income tax and national insurance charges can arise on the removal of the restrictions or on the disposal of those securities. The charge is linked, in broad terms, to the proportion in which the amount paid, or treated as paid for the restricted security, is less than the value of the security, had it not been restricted. This proportion on a later chargeable event is subject to income tax and national insurance. The purpose of the provision is to prevent the value of securities being depressed on acquisition, thus reducing the initial tax charge on the acquisition at an undervalue of securities obtained by reason of employment, and the restrictions being lifted subsequently without a charge arising.

The provisions reduce the analysis of whether a profit from a share derives from employment to a numerical test based entirely on valuations. The lower the value by virtue of the restrictions, the greater the income tax charge. The taxpayer can, under section 431, elect that, in valuing the securities for the purpose of the initial acquisition, all or some of those restrictions be ignored. That increases the acquisition value for tax purposes, increasing the initial tax charge. It thus reduces the proportion subject to charge at a later event. We believe that the taxpayer should have that choice of election. It may be that the chances of a chargeable event arising are small. For example, the individual may hold shares subject to restrictions, and it may be that he or she is unlikely to dispose of his or her shares, and it may be unlikely that the restrictions will be removed. Therefore the election may not be made.

Before 2 December last year, the taxpayer could be certain of his or her position. The numerical and value-based formula would indicate a likely tax charge. Now, if there is avoidance, no such certainty exists; we fear that the taxpayer may face an unanticipated up-front tax charge on the value of the securities. It is all the more important that the taxpayer can receive tax clearance in those circumstances. The provision has been introduced to prevent avoidance, and that is fine, but now there really must be clarity for all taxpayers.

I am sorry, Sir Nicholas; we have gone into some detail on this rather complex and technical subject, but I hope that I have been able to articulate my relatively straightforward concerns about the sheer uncertainty of the system and the concern that there will be taxation by feel. It is of key importance, particularly when we are trying to incentivise employees, that there should be certainty. I hope that we can have a meaningful debate on these amendments; they are key, and go to the core of many of our concerns about schedule 2.

Dawn Primarolo (Labour, Bristol South)

I shall respond to the points made by the hon. Gentleman. He spoke about uncertainty and retrospection, the question of redeemable shares for commercial purposes and of restricted securities. It is interesting when listening to such debates to find out what Members are really talking about. With respect, the hon. Gentleman was talking about his fears, but they have nothing to do with the schedule and its clearly articulated intended results.

At the heart of the debate is the question whether taxpayers are fully knowledgeable about the schemes that they enter into and aware of what their purpose is. I shall deal first with the question of uncertainty and the purpose test. To those who say that the purpose test introduced uncertainty, I must tell them that the reverse is the case. I do not know how we can make it clearer, whether in statements to Parliament, during the Committee stage of a Finance Bill or in legislation, that those who enter into such contrived schemes know exactly what they are doing. They intend to avoid income tax and national insurance on employment rewards.

The hon. Gentleman brings other issues into the debate—about how businesses function and about rewarding employees—but they are not relevant, and it is important to strip the argument back to the pertinent facts. Those who comply with their tax obligations will expect to pay the proper amount of income tax and national insurance on their employment rewards. On that subject, people can find certainty by reading the statement that I made at the pre-Budget report and considering it in the context in which it was made—which is that successive Governments over a considerable time have had to legislate in order to deal with the avoidance of income tax and national insurance on remuneration. At every point, when one scheme closes another opens. In the intervening period, the honest taxpayer who has discharged his obligations loses because such revenue is not collected.

I have made it clear that the Government are determined to ensure that all employers and employees will pay the proper amount of tax and national insurance on the rewards of employment. I have said that it is only right that everyone who should pay tax and national insurance does so, and that they should pay their fair share when it is due. The Exchequer is entitled to certainty on behalf of the taxpayer—certainty that taxpayers will pay their fair share—and, similarly, taxpayers who contribute their fair share have a right to expect others to do so. That is the central point of the schedule.

On the question of retrospection, it is the practice of the Government, as it was of the previous Government—it is standard practice—to make anti-avoidance legislation effective from the day it is announced. The hon. Gentleman is wrong: the Government are not imposing a tax charge that could not have been anticipated by those affected. As I said in the statement that I made alongside the pre-Budget report on 2 December 2004, our objective is permanently to close those intricate arrangements that are designed to avoid income tax and national insurance on the rewards from employment. Those who make future attempts to frustrate this intention despite those warnings will now be well aware that legislation will be introduced to combat such avoidance.

The hon. Gentleman asked about income tax and national insurance liability with regard to redeemable shares for commercial purposes and when the change in the treatment of restricted securities will apply. Liability to income tax and national insurance will not arise unexpectedly even if a redeemable security has been acquired before 2 December 2004. If further value is passed to the employee on or after that date—for example, when a restriction is lifted—I see no reason why tax and national insurance would be unexpected, given the statement and the specific technical and draft clauses made available at that date.

It is difficult when theoretical examples are given. My officials have not been able to find a case in which redeemable shares were used for a commercial reason and in which tax liability would have been wrong or unexpected if a later event passed value to an employee. On the other hand, my officials have evidence that redeemable shares were being used for avoidance schemes in which the initial value was artificially depressed and a later increase in value was claimed outside the legislation. I am sure that no Committee member would want to let what is, in reality, employment remuneration arising on or after 2 December 2004 escape taxation, and we do not intend to do that.

The many difficulties that the hon. Gentleman raised and suggested that others had raised with him about redeemable securities seem more academic than real. My officials have requested the production of examples of commercial damage, but none has yet been forthcoming. The department has clearly informed them on that.

Taken together, the group of amendments would considerably weaken the anti-avoidance provisions. The hon. Gentleman has got the message that I am determined that schedule 2 and the arrangements should be in place. The amendments appear to stem, as the hon. Gentleman said, from concerns that employees who acquired securities before 2 December 2004 as part of an avoidance scheme will not have provided for the tax and national insurance that the provisions now impose. I have covered that point.

Amendment No. 4 reflects that misplaced concern by excluding redeemable shares and securities, used in avoidance schemes, acquired before 2 December 2004. As I have just demonstrated to the hon. Gentleman with examples and background, there is no real concern to be raised on the issue. If avoiders choose to carry out the arrangements that he suggests, I think it proportionate and fair that there should be a liability to income tax and national insurance. Those affected by the change will know exactly where they stand, because of the technical note as well as the statement.

Schemes disclosed to officials were manipulating the rules that govern certain disposals of securities. By removing the anti-avoidance purpose tests to be applied to the disposals, amendment No. 5 opens the door to avoiders again. New section 431B ensures that securities used for avoidance cannot benefit from a reduced or deferred charge by imposing a full tax and national insurance charge when the employee acquires securities. By removing new section 431B, amendment No. 6 would allow the avoider to profit unfairly from the avoidance.

Amendment No. 7 appears intended to limit a charge on acquisition when there is avoidance by introducing an advance clearance procedure to be operated by HMRC. I see no reason for the amendment. It is fundamentally flawed because amendment No. 6 would have removed the upfront charge to which amendment No. 7 would relate, and because it would allow either party to a transaction to seek and obtain clearance without the knowledge or consent of the other.

My pre-Budget report statement made it clear where the line is drawn. Employers and employees using share remuneration schemes should expect to pay income tax and national insurance on the full value of the employment reward at the time it passes to the employee. Those who do so have nothing to fear from these changes and should have no need for a clearance procedure. What the hon. Gentleman is asking for is a clearance procedure, regrettably, for those who are trying to get round the legislation. I say as gently as I can that I am not about to concede that point.

I that the hon. Gentleman will want to reflect on my comments. He can return to the issue at a later stage, but at this stage it might be wise for him to withdraw his amendments. If he chooses not to do so, however, I ask my hon. Friends to vote against them.

Nicholas Winterton (Conservative, Macclesfield)

I do not know whether you are going to respond to those blandishments, Mr. Field.

Mark Field (Conservative, Cities of London and Westminster)

I naturally respond to blandishments from both sides of the Committee, Sir Nicholas. I am glad that I am being treated gently. Perhaps I will be treated more roughly later on—here is hoping.

We do not support anyone who does not wish to comply with their tax obligations. It is felt that the clearance scheme would be made redundant if we all knew that there was an entirely level playing field. Clearly, companies will employ securities experts for to discover exactly where the edge of the law is, and whether their scheme is within or outside it.

The nature of this debate—and perhaps I have been as guilty as the Paymaster General—has almost been of two parallel lines, one of which suggests that Conservative Members are in favour of every investment bank ensuring that it can minimise tax for its employees. That is not the case. We have to recognise that these issues are not black and white. There are shades of grey, which we must debate as far as we can.

I am sure that the Paymaster General did not intend to suggest that employee benefits advisers try to buck the system and ensure that less tax is paid. Inevitably, there will be structuring of transactions, particularly transactions with an international element. Tax-efficient vehicles will inevitably be created for such transactions.

We are still concerned about the lack of certainty, and I fear that the Paymaster General has not satisfied us about retrospection. The mere announcement of a policy will not be enough. We have tried powerfully to make the case that certain categories of employees might lose out because of backdating. I accept that every announcement and every Budget will lead to more pressure being brought to bear to try to find schemes that avoid tax and are structured in such a way that income is seen to be subject to capital gains rather than employment taxes.

We are now four hours or so into the consideration of the Bill. The time has probably come when we should put some of these matters of principle to the vote. I therefore ask that we do so in relation to amendments Nos. 4, 5, 6 and 7.

Nicholas Winterton (Conservative, Macclesfield)

I note what the hon. Gentlemen says, but normally I would permit a vote only on the lead amendment.

Mark Field (Conservative, Cities of London and Westminster)

We will do that.

Nicholas Winterton (Conservative, Macclesfield)

I am grateful to for that guidance.

Question put, That the amendment be made:—

The Committee divided: Ayes 6, Noes 15.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 8, in schedule 2, page 65, leave out lines 27 to 40 and insert—

'(3) Where subsection (1) does not apply by virtue of subsection (2) the market value of the employment-related securities is to be determined in each case as if they were immediately and fully convertible.'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 9, in schedule 2, page 66, line 16, at end insert—

'(3B) (a) This subsection applies where subsection (2) of section 437 of this Act applies. (b) If on a chargeable event the amounts charged under the provisions referred to in section 437(1) because of the application of subsection (2) of section 437 and the amounts computed under this section (the ''original amounts'') exceed the amounts that would have been charged under section 437(1) and under this section had section 437(2) not applied, the associated person shall be charged on the lower of such amounts and any amounts overpaid shall be refunded, provided that if, on a later chargeable event, such amounts do not exceed the original amounts, the original amounts shall be due on the dates on which such sums were due and payable as if this provision had not applied.'.

Mark Field (Conservative, Cities of London and Westminster)

I am glad that we had a close run battle on the last vote. This group of amendments deals with convertible securities. In summary we want to ensure that taxpayers who receive convertible are not ultimately taxed on a greater value than the true value.

The purpose of the convertible securities regime is to charge—to tax—convertible securities, but the basis of the regime is that the initial acquisition of convertible securities acquired by reason of employment should be charged on the assumption that they were not convertible. On conversion, therefore, it is effectively the value of the conversion right that is charged, and the market value of the securities into which the securities are converted is deducted from the market value of those securities before conversion, ignoring any conversion right. Also deducted is any consideration that might be paid for the conversion. It is to be treated as income and not capital in the first place.

The regime has been used in the past, as the Paymaster General will be aware, for avoidance purposes. Accordingly a provision is to be introduced under which, if avoidance motives are present, the right to convert will not be ignored, but instead the convertible securities will be assumed to be immediately convertible. That will inevitably lead to a higher tax charge on the acquisition of those securities. However, we believe that it will be wrong for taxpayers to lose out if the notional calculation values prove to be above the conversion value ultimately, when any conversion takes place.

The proposal for an amount to be repaid to the associated person may perhaps be argued to be objectionable, as the provision applies in the case of tax avoidance. However, we believe that by the time conversion occurs the purpose of the provision will have been served. The main purpose of the amendments is to clarify the proposed changes to section 437 of the Income Tax (Earnings and Pensions) Act and to amend the charge under section 440.

We accept that the method is somewhat cumbersome, but it is surely better than the present method of creating taxable income gain, followed by an unutilisable capital loss. Section 437 taxes the securities as though they had the market value that they would have had if they were not convertible. That is turned off if the convertible factor is intended for tax avoidance. Securities must be taxed as though they were immediately and fully convertible.

I hope that we have made that case fairly clear. It was brought to us by a number of the professional bodies that are concerned about the regime for convertible securities. We look forward to hearing what the Paymaster General says about the amendment and about those aspects of convertible securities, as set out in the schedule.

Dawn Primarolo (Labour, Bristol South)

I would not want to suggest for one minute that the Conservatives are siding with avoiders. I accept entirely that the purpose of the amendment is to probe the Government and to seek clarity, wherever possible, of our intention and how the legislation will operate. I have tried to give such clarity in laying out the objectives. Although I am speaking to the schedule, I say that because of the frustration to which the challenge we face gives rise, given the repeated actions by this Government and the previous Government to close a great deal of avoidance in a small area.

I will not be able to give the hon. Gentleman any comfort on this group of amendments. It is difficult to phrase amendments to the Finance Bill, but these amendments add complexity and, unfortunately, are in danger of rewarding avoidance.

Amendment No. 8 has the admirable intention of replacing 11 lines of text with three. Unfortunately, the shorter wording will not work as intended. It could give rise to ambiguity and open the door to avoiders. The rules must cater for a variety of ways in which convertible securities can be used, in order to counteract avoidance schemes effectively. The rules are based on the notification schemes that are already in place.

Amendment No. 9 is intended to allow those who have sought to avoid, using convertible securities, to pay the same tax as they would have paid if they had not used the avoidance scheme. I am not prepared to guarantee that avoiders using highly contrived arrangements will enjoy the same tax treatment as that given to genuine convertible securities. The avoiders have only themselves to blame if the consequence of attempting the avoidance in the first place is that they leave themselves liable to income tax and national insurance, and are unable to gain access to arrangements that would have otherwise been available had they arranged their affairs properly.

Otherwise, the situation would be unfair on taxpayers who arrange their affairs according to the legislation. The hon. Gentleman is asking, in effect, for those who get caught out on avoidance to be able to say, ''Okay, we'll do it properly—now will you give us the relief?'' The answer is no. To paraphrase the eminent Lord Greene, those who play with fire should not complain when they get their fingers burnt. Perhaps it is best not to play with fire, but to follow the legislation. I hope that the hon. Gentleman will not want to pursue his amendments. This is a fundamental point, and if he should do so I will ask my hon. Friends to oppose them. Avoiders have a clear choice. They can comply with the legislation, but if they do not, there are consequences. They cannot say, ''Well, we tried not to comply'' and when it does not work say, ''Can we pretend that we did it the right way?'' That is not acceptable.

Mark Field (Conservative, Cities of London and Westminster)

It has been an interesting, albeit brief, debate on the issue. On the related matter of debt relief to third world countries, I would have a lot of sympathy with the Paymaster General's comments. I have doubts about these matters for the same reason: the issue of moral hazard, about which a very forceful argument was made. That is why she does not want those trying to avoid tax, as she would put it—perhaps I would say those who organise their affairs in a way that is unwound by the Inland Revenue—to have a second bite of the cherry and to benefit in the way that she mentioned. There is an issue of moral hazard and that argument has been made relatively powerfully.

I am sorry that in our attempts to précis the lead amendment by reducing it from 11 to three lines we decided to leave out the wrong eight lines.

Dawn Primarolo (Labour, Bristol South)

Better luck next time.

Mark Field (Conservative, Cities of London and Westminster)

Such is life, unfortunately.

I beg to ask to leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 10, in schedule 2, page 67, line 12, at end insert—

'(3) Subsections (1) and (2) shall not apply if the loan is repaid, in which case within one month after the repayment has been notified to the Inland Revenue any tax and national insurance paid shall be repaid.'.

I am always worried when I read through my notes, which are written a few days before, and I start by referring to the straightforward purpose of the amendment. I hope that in articulating the amendment, the purpose will seem straightforward.

Our idea is to avoid what we would regard as a potential disproportionate tax charge for employees who receive loans from employers. Section 446S contains the provisions on loans to employees, which were set out two years ago when the regime was put in place. Those provisions provide for a tax charge equivalent to the benefit of the loans and the benefit of the interest if it is interest-free. There is a charge if the loan is released or written off, and the charges cease if a loan is repaid. That provision was introduced initially 30 years ago.

New section 446UA would, if enacted, provide that if a loan is made where one of the main purposes is the avoidance of income tax or national insurance, the employee would be charged to tax on the value of the loan. Although there is an immediate income tax charge where previously a notional loan would have arisen, now the loan remains so that the employee remains liable to repay it. That raises the concern that, save any relieving provisions, it risks creating a high marginal tax rate for employees, with additional national insurance due for employers as well.

I hope that we have made a straightforward case on the amendment. We simply wish to avoid the potential for a disproportionate tax charge for employees who receive loans from employers that end up falling foul of the provisions.

Dawn Primarolo (Labour, Bristol South)

Schedule 2 makes a change to section 446 of part 7 of the ITEPA to block a loophole that was being used to disguise remuneration as an instrument that purported to be taxable as a loan rather than employment income. The new section 446UA will apply only if a loan is provided to an employee via employment-related securities that form part of an avoidance arrangement. Under the new section, the employee will be charged to tax on the full value of the securities or acquisition. If in attempting to avoid full tax and national insurance, the promoter or user of an avoidance scheme has employed an unusual form of payment that has its own tax consequences, facing those consequences is part of the price that they must pay for indulging in avoidance activities.

To accept the amendment would be to condone—inadvertently, perhaps—avoidance activities. Those who are concerned about the application of the new section need take only one simple action: do not use avoidance arrangements. That has been my consistent attitude: I have explained clearly to Opposition Members the Government's determination to attempt to deal with this issue. If the hon. Gentleman wishes to press his amendment to a Division, I will ask my hon. Friends to oppose it.

Stephen Williams (Liberal Democrat, Bristol West)

I would like the Paymaster General to clarify something she just said because, unless I misheard her, I think she made an important statement about tax planning or tax avoidance. She said that the price that someone should pay if they go down that route is, effectively, to have to pay their tax twice, which is what this amendment seeks to avoid. Surely, the point of legislation should be to make people pay the tax that would be due if they were to follow the route the Government wish them to follow under the legislation, rather than to pay tax twice? Will she clarify her position on that?

Dawn Primarolo (Labour, Bristol South)

Yes. We touched on that point in our discussion of the previous group of amendments. I made it clear that it would be wrong to allow avoiders who had been caught to say, ''Actually, we would like to do it legitimately, and by the way can we have access to the reliefs?'' They should have thought about that before they engaged in the activity, and in the sure knowledge of what that activity was. If there is more than one charge as a disguised remuneration passes through its convoluted arrangements, so be it. Those who play with fire cannot complain if they get burned. How can the hon. Gentleman justify a situation in which someone is found to have been engaged in an avoidance scheme, and instead of charging them tax and national insurance, which is what should happen, we say, ''Okay, we will pretend you didn't do it and give you the reliefs''? Before they enter into those arrangements, they must clearly understand the consequences; otherwise, it is simply not fair on taxpayers who comply with the law.

Mark Field (Conservative, Cities of London and Westminster)

The Paymaster General's view is, ''Woe betide any taxpayer who dares to try to avoid tax; the risk of double-charge will be there.''

Dawn Primarolo (Labour, Bristol South)

With the greatest respect, that is incorrect, and it is an unfair comment. We are talking about between £1½ billion and £2 billion in bonuses that are paid to high-earning people who have consistently since the middle period of the previous Government tried not to pay tax and national insurance on employment-related income. That is the only group of people we are talking about, and I think that all Committee members would agree that that employment-related income should be subject to income tax and national insurance. As it is that narrow group that we are talking about, I think that the hon. Gentleman's comments are unfair.

Edward Balls (Labour, Normanton)

My right hon. Friend should not let them off the hook.

Mark Field (Conservative, Cities of London and Westminster)

I am not let off the hook at the best of times, I am sure.

Let me explain our concern about this clause. We are referring to loans, rather than highbrow, highly contrived, employment-related schemes along the lines that the Paymaster General set out earlier. We do not condone avoidance of a crass nature—or any nature.

Edward Balls (Labour, Normanton)

What avoidance do you mean?

Mark Field (Conservative, Cities of London and Westminster)

Avoidance and evasion are two quite separate things. Legal avoidance is part and parcel of the tax system. One of the reasons we have ever-larger Finance Bills on a year-by-year basis is that we try to foresee ever more possibilities for avoidance. We have a concern in relation to loans: it is often employees who will suffer most if, having received what they thought was a loan on a preferential basis, they suddenly find that it falls foul of the legislation. However, it is not something we are going to die in a ditch for and I am happy to ask leave to withdraw the amendment. But if there is to be serious consideration in the future, representations related to injustices would have to be made to ensure that employees innocently taking up a loan, who then discovered that they had a large tax burden, would not be considered to be the evil tax avoiders towards which much of the Bill is geared. On that basis, 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. 11, in schedule 2, page 67, line 38, at end insert—

'(5) Where subsection (4) applies, then the taxable amount determined in accordance with subsection (2) shall be reduced, where otherwise an amount may be subject to tax more than once, to such an amount to ensure that no part of the benefit is subject to tax more than once.''.'.

I hope that the debate will be even shorter than the last one. The amendment was tabled to avoid the potential for a double charge. We appeal to the Minister's good heart for a belt-and-braces provision in this highly technical sphere on the risk of a double charge to tax. Under this Bill, certain amounts may be taxed more than once, hence our proposal to add this little subsection to take account of that possibility.

Dawn Primarolo (Labour, Bristol South)

Let me try again to make it absolutely clear that the changes in chapter 4 are carefully designed to deal with the contrived arrangements that use employment-related securities to deliver what is in reality a bonus—a reward for employment—but without paying the appropriate tax and national insurance. Commonly, these complex avoidance schemes extract the bonuses in the legal form of a dividend which is subject to a lower rate of tax and no national insurance. The changes that the Government propose would mean that the bonus is subject to income tax and national insurance as an employment reward, but also because the avoidance scheme features remain liable to income tax as a dividend. That will provide a large disincentive to engage in avoidance; accepting the amendment would negate the purpose of the change and there would be no detriment at all.

As I said—I keep trying to focus on these highly complex schemes—if the promoters or users employ other forms of payment that have their own tax consequences they must accept those consequences. I am happy to reassure those who do not use avoidance schemes to avoid tax or national insurance that they will not be at risk of charge to income tax and national insurance under more than one heading, which is entirely appropriate. But I cannot concede the hon. Gentleman's point with regard to those who then still want to access those reliefs. It is fair that tax and national insurance contributions should be paid at the same rate on earnings whether they are paid using cash or employment-related securities. It is a complex arrangement that involves the use of unusual forms of payment, which would have their own tax consequences elsewhere as a result of the changes. The hon. Gentleman has not answered the question, ''Well, why should the avoider be allowed access?'', so if he does not want to withdraw the amendment, I shall ask my hon. Friends to oppose it.

Mark Field (Conservative, Cities of London and Westminster)

I think that I have received as much satisfaction as I am likely to receive from the Minister on the matter, so I beg to ask leave to withdraw the amendment.

Nicholas Winterton (Conservative, Macclesfield)

One of the best speeches.

Amendment, by leave, withdrawn.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 12, in schedule 2, page 67, line 42, at beginning insert—

'(1) After section 447 ITEPA 2003 insert—

''447A (1) Section 447 shall not apply where the employee shows that the benefit arose from an ordinary investment transaction.

(2) An 'ordinary investment transaction' means any transaction in securities regularly traded on an EEA exchange (being a market which appears on the list drawn up by an EEA State pursuant to Article 16 of EU Council Directive No 93122/EEC on investment services in the securities field) and any transaction in securities not so regularly traded where the following circumstances are present:

(a) the securities were acquired for an amount (or the acquirer is charged to income tax on all or part of such amount under Chapter 1 of part 3) which was not less than their market value (as determined for the purposes of the Taxation of Chargeable Gains Act 1992), provided that in the information a purchaser may require there shall be included (if this would not otherwise be the case) any known or reasonably projected returns on the securities and any value the securities might acquire through the conversion or alteration of rights of those or other securities, always having regard to the possibility or otherwise of such conversion or alteration occurring;

(b) other than the provisions in the constitution of the body issuing the securities, giving the holder the right to transfer if a majority decide to transfer their securities, there are no arrangements which give the holder a right to transfer his securities;

(c) at the date of the acquistion there is no certainty that the holder of the securities will necessarily recover the amount invested in the securities, and there is not at any time any guarantee or indemnity from any third party of the amount invested in the securities or any income therefrom; and

(d) the securities are securities acquired in a trading company or the holding company of a trading group (as defined in Schedule A1 of the Taxation of Chargeable Gains Act 1992).

(3) Where in pursuance of this subsection a person furnishes to the Board particulars of a transaction relating to employment-related securities acquired or to be acquired by him or of any benefit anticipated or received by him in relation to any employment-related securities which may give rise to a charge under section 447, the following shall apply:—

(a) if the Board are of the opinion that the particulars, or any further information furnished in pursuance of this paragraph, are not sufficient for the purposes of this section, they shall within 30 days of the receipt notify to that person what further information they require for tax purposes and unless that information is furnished to the Board within 30 days from the notification, or such further time as the Board may allow, they shall not be required to proceed further under this subsection;

(b) subject to paragraph (a) above, the Board shall within 30 days of the receipt of the particulars, or where that paragraph has effect, of all further information required, notify that person whether or not they are satisfied that the circumstances of the aquisition were or will be such, or that the circumstances giving rise to the receipt of any benefits were or will be such that any benefits anticipated or received ought not to be subject to the charge to income tax contained in section 447(1).

(c) if the particulars, and any further information given under subsection 447A(4) with respect to any acquistion and benefit are not such as to make full and accurate disclosure of all facts and considerations which are material to be known to the Board, any notification given by the Board under this section shall be void.

(d) if the Board notify the person that they are satisfied that the circumstances of the acquistion or receipt of benefits are such that any benefits anticipated or received ought not to be subject to the charge to income tax contained in section 447(1), section 447 shall not apply to that person in relation to those benefits.

(e) if the Board notify the person that they are not so satisfied, the person may within 30 days of such notification appeal to the Special Commissions against such decision. Save for a notification by the Board referred to under paragraph (d), in no event shall the giving of a notification under this section prevent section 447 applying to a person in relation to any benefits received.''.'.

Obviously, telling good jokes runs in the family, Sir Nicholas.

We hope that the amendment would provide the taxpayer with some certainty by excluding ordinary investments from the scope of the provision. It would introduce a clearance procedure, which we believe to be of key importance. Given our earlier discussions and the replies that we have received from the Paymaster General, I am slightly intrigued to know, on what basis does she think that there should ever be a clearance procedure? If it is her view that the only people who would wish to adopt such a procedure are those who are engaging themselves in tax avoidance, the argument becomes circular. Presumably, there would be no benefit in having a clearance procedure.

However, we are keen on the amendment. We consider that paragraph 18 widens substantially the scope of the already wide benefits provision under section 447 of ITEPA. That was derived from a provision that was introduced in 1988. It was known originally as the ''special benefits provision'', the purpose of which was to charge to income tax benefits derived from shares that might be connected to employment, such as a deeply discounted rights issue on shares that are held by employees. The provision was widened in 2003 to cover benefits by virtue of the ownership of employment-related securities and has been deployed to charge to tax circumstances that, despite the breadth of chapters 2, 3, 3A and 3B of part 7, may fall beyond the scope of that which the Inland Revenue considers ought to be taxed. For example, there are ratchet arrangements whereby value passes into an employee's shares or shares decrease in value. The application of the provision to such circumstances has been subject to some doubt. We worry that the revised wording is much wider than before. Indeed, it is so wide that it appears to render redundant in many respects provisions that relate to restricted or convertible securities and capital gains tax for employment-related securities.

The Law Society has prepared an example in its documentation. When articulating such examples, we can give an idea of what we are trying to achieve. Let us consider a business angel who, at some point in the past, has put money into a company and takes, say, 20 per cent. of the share capital. He also becomes a director and protects his interest by agreeing that his shares have class rights, and that his dividend and return of capital rights cannot be taken away from him unless he agrees. A decade or so down the line, the person sells the shares. The exemption under section 449 of ITEPA does not apply, so he has to be asked whether he has received a benefit in connection with employment-related securities. The phrase appears to be of such width as to cover the receipts gained from the sale in the example as well as receipts gained by reason of ownership.

If it is for ordinary taxpayers, the breadth of the provision needs to be controlled in two ways. Surely there should be some sort of clearance procedure, particularly in this relatively fast changing area, and especially for those who have held shares for a considerable time. We believe also that there needs to be an exemption from the charge for ordinary investments when the securities concerned are employment-related.

We understand that the Revenue is extremely reluctant to incorporate clearance procedures in legislation, but given the background of self-assessment explained earlier, it would appear to be a reasonable step in the face of such legislation.

In summary, we seek through amendment No. 12 to provide safe havens for the taxpayer, but particularly those taxpayers who are entrepreneurs, people who could play an important role in developing from scratch those businesses that had struggled earlier or are still at the fledgling stage. We are not after safe havens for all taxpayers, but for a specific class for whom ordinary transactions might otherwise be caught by the provision. It surely is not the Treasury's intention that the taxpayer in the example should be subject to the sort of punitive charge that would otherwise be put in place. I hope that the Paymaster General has some thoughts on the matter, or at least some guidance more generally on the clearance procedure.

Dawn Primarolo (Labour, Bristol South)

The amendment has two legs. First, as the hon. Gentleman said, it seeks to provide a safe haven to ordinary investors from the scope of the revised chapter 4 provisions. Ordinary investors undertake transactions with an investment purpose. Those transactions should not deliver employment reward to an employee. The amendment is unnecessary; and in the complexity of its wording it could create legislative opportunities for people to exploit future avoidance schemes.

I reiterate what I said to the hon. Gentleman earlier, when I made it clear that the change does not bring a tax and national insurance charge on all benefits derived from securities. Benefit in the context of schedule 2 means employment reward, or the passing of value to the employee in return for the employee's labour. When investors are carrying out their normal investment transactions, the change will not affect them. Frankly, that statement clearly covers the point that the hon. Gentleman makes in the example.

The second leg of the amendment introduces a clearance procedure for benefits received in relation to employment-related securities. I answer briefly, because I have said it a number of times already. A clearance procedure is not necessary. The statement of 2 December 2004, which was made alongside the pre-Budget report, made it clear that in the area of employment rewards, people can find certainty by considering the statement in the context in which it was made, which is that legislation by successive Governments over a number of years deals with the avoidance of income tax and national insurance on remuneration in that narrow area.

Clearance is not necessary. All the information is in the public domain; it is for each taxpayer to comply with it. This is not the time for a debate on whether clearance should exist or about its purpose, but clearance is not necessary in this case because the statements are clear. The taxpayer should be clear about our intentions from the Bill. I therefore ask the hon. Gentleman to consider withdrawing the amendment. If he wishes to press it to a Division, I shall ask my hon. Friends to oppose it.

Mark Field (Conservative, Cities of London and Westminster)

The Paymaster General will be relieved to know—probably no less relieved than I am, looking at the somewhat depleted state of our Benches—that I will be happy to withdraw this particular amendment.

However, there is a worthwhile discussion to be had at some point on the whole issue of the clearance procedure. The Paymaster General may well be right when she says that here and now are neither the place nor the time for that particular discussion. I am glad we have had a chance, however, to at least put some of these concerns on the record. Insofar as the business angel appears and potentially might lose out, I hope that the words of the Paymaster General will have gone some way to ensure that any loss is minimised. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the second schedule to the Bill.

Mark Field (Conservative, Cities of London and Westminster)

With your indulgence, Sir Nicholas, we have a brief stand part debate on schedule 2. I wish to open it with a side discussion, perhaps even a discussion on the clearance procedure. This might be that appropriate moment.

Above all, however, Conservative Members are keen to know what this Government's policy on equity-based remuneration is. We have had a clear statement—dare I say it, five or six times over—from the Paymaster General, in forceful terms, that the policy of the Government is clearly to stamp down hard on tax avoidance and any antics by investment banks to deprive the taxpayer and the Revenue at large of many hundreds of millions of pounds on an annual basis. We wish to have some idea of where the equity-based remuneration policy is.

Do the Government wish to encourage the giving of greater incentives to staff together with the Chancellor's much-lauded 10 per cent. tax on capital gains for individuals? All Conservative Members would support that. I personally was someone who benefited in part—but not from 10 per cent.; it was 20 per cent. when I sold my business within a few months of entering this place four years ago. None the less, we are concerned; if tax and national insurance contributions are all taxed in the way that has been suggested, what would be the purpose of the 10 per cent. tax on capital gains if it is to become increasingly restricted?

There is a particular concern that, whereas the capital gains benefits work very well for entrepreneurs, many employees would potentially find themselves falling foul of much of this tax avoidance. What forms of tax planning do the Government accept as valid for companies who wish to incentivise their employees by giving them a long-term equity stake in the business, especially those who work for organisations that are not quoted companies, such as mutuals and partnerships? Do the Government want prescribed share option schemes to be the only valid mechanism by which companies can so incentivise their employees? That is what the current tax law, which is becoming increasingly narrowly focused, is saying.

I will not try your indulgence any further, Sir Nicholas. I hope that we can at least engage in a brief discussion, although I accept that we have had quite a detailed discussion on a number of specific issues in schedule 2 during the course of the debates on the amendments.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman has struggled hard on this, and I take my hat off to him. It is a very complex area, but I would like, in my own small way, to try and simplify it for him. I draw his and the Committee's attention to the explanatory notes to this schedule, paragraphs 61 and 62. If you will indulge me, Sir Nicholas, it is not a long quote, but I will read it. It is to do with:

''Part 7 of the Income Tax (Earnings and Pensions) Act 2003 . . . which was amended by the Finance Act 2003 to make the regime fairer, provides the income tax rules in cases where securities, interests in securities or securities options are acquired in connection with employment . . . The amendments made by the Finance Act''—

it says 2003, but it may mean 2005—

''are designed to ensure that all of the value received by way of remuneration in the form of shares or other securities is subject to income tax and NICs at an appropriate time.''

That is the crux of it.

The hon. Member for Cities of London and Westminster, when he was speaking to this stand part debate, talks about companies incentivising their employees and so on. There are different ways to incentivise an employee; a good way—the first way—is to pay him. I am not ruling out others, but I start with that one. That is the way most people earn their living. They are not self-employed: they are employees. They do not have share options or shares in the company or partnership for which they work; they get paid. On that pay, they are charged pay-as-you-earn contributions, income tax and national insurance contributions. Why should an employer pay an employee? Because it incentivises them to work, leaving aside the arguments about the minimum wage.

I understand that an employer—here we get on to the schedule, Sir Nicholas—may wish to bind the employee more to the company by giving him or her a practical sense of ownership, in the literal sense, and by giving them some shares in that company, or options on shares. It is often options on shares for the richer, but not always; some low-paid people get options on shares. That is an incentive for that employee to work. Every hon. Member would agree that such incentives can be helpful for a company.

If a company chooses to incentivise its employees in that way, both the company and the employee should recognise that there is a price to be paid. There is, potentially, tax and national insurance to be paid. That goes back to what my right hon. Friend the Paymaster General said: in many, but not all, of these cases it is difficult to concede that the employee does not recognise that they are getting something from the boss to incentivise them to work. That something has pound signs attached to it, although it may be a share certificate rather than something that they can trade in at the grocery store or whatever. Most employees expect that when they get something from their employer with pound signs attached to it, they have to pay some tax on it. It really is as simple as that.

Although there are very complex schemes that some companies go into to incentivise their employees, to me—and I am a solicitor by background, not an accountant—it comes down to pay for work, and we expect to pay tax on pay for work. I remember when I was employed, before I became a partner in a law firm, we had company cars. Without being big-headed, I have to say that I was probably the only employee who bothered to understand the company car tax regime—what a surprise. My fellow employees used to come to me and say, ''If I get a car with this specific cubic capacity, what will the tax be?'' And then we would get on to the tax on fuel benefit in kind, and how much private use would be allowed, and a fuel card could only be obtained from the employer and so on. All those employees took as their starting point the fact that there was a price to be paid, although they did not know all the finer points of it. The price to be paid is called tax; they all knew that. People know that.

The amendments seek to undercut the thrust of schedule 2, which is to clamp down on artificial manoeuvres—tax avoidance manoeuvres—where those engaged in them know that there is tax to be paid, and are trying to get around it. I laud the Government's attempts.

Brooks Newmark (Conservative, Braintree)

I do not want to get too philosophical, but as a student of Marx, I should say that Marx talked about the alienation of the worker from capital. The amendments try to address that; we are trying to encourage workers to buy into the companies of which they are becoming part and parcel. The hon. Gentleman discusses the importance of paying employees fairly and so on to incentivise them, and I totally agree with that; but part of being in the 21st century is accepting that capitalism, fortunately or unfortunately, is what makes the world work. Historically, evidence shows that part of the incentive scheme, in order to incentivise employees and improve companies so that they move forward and make profits, is to give employees shares. The hon. Gentleman seems to believe that becoming a stakeholder, which the Chancellor has tried to encourage as well as the Prime Minister—they have both said that we are all part of a stakeholder society—and which I agree with—[Interruption.] It is an intervention; I apologise again. Would not the hon. Gentleman agree that part and parcel of improving companies' profitability is encouraging employees to become shareholders of those companies and rewarding them accordingly?

Rob Marris (Labour, Wolverhampton South West)

I do not think that I said to the Committee. I would not tell the hon. Gentleman that I am against share ownership schemes. I am fairly sure, looking at the record, that I did not say that. I said that most employees, albeit in many cases in an inchoate fashion, know that there is a price to be paid, and that price is tax. The hon. Gentleman tempts me to comment on Marx—I crave your indulgence, Sir Nicholas—but he should be wary of doing so. He seems to be advancing the proposal that it is a good idea that employees have shares, but if he reads Marx carefully, he will be aware of the theory of the declining rate of profit, whereby the employees will get less and less on those shares, so it might not be such a good idea for capitalists like him—but I digress.

I have been at pains to make the point that the thrust of the Conservative party's amendments seems to be: ''Yes, we're against tax avoidance and platinum sponges, or whatever we call the things for the catalytic converters, but really let's try to get a few back in through these amendments.'' That is what it looks like to me. There is a price to be paid and that price is tax. Schedule 2 seeks to address that, I think it does so well and I urge hon. Members to vote in favour of it.

Dawn Primarolo (Labour, Bristol South)

Let me respond the points made by the hon. Member for Cities of London and Westminster and my hon. Friend the Member for Wolverhampton, South-West. The Government have consistently supported employee share ownership, which is why we have company share option plans, share incentive plans, save as you earn and enterprise tax incentives, which are all tax advantage schemes designed to assist employees. The schedule shows that the Government are not prepared to allow those tax advantages to be accessed through the back door of avoidance; they are in place and will remain there, they are not affected by the schedule, except that they are protected in that they will be used as they should be and the avoidance will be dealt with. I commend the schedule to the Committee.

Question put and agreed to.

Schedule 2 agreed to.

Clause 13 ordered to stand part of the Bill.

Clause 14 - Income tax deduction for payments to organisations

Mark Field (Conservative, Cities of London and Westminster)

Sir Nicholas, clause 13 might have been lucky for you, but I am afraid that clause 14 will not be so lucky.

I should like to say a few words on clause 13 first, if I may. We welcome the Government's commitment to consulting the scientific research organisation industry on the manner in which the regulations are dealt with and we endorse the need for some clarification in statute.

Clauses 14 and 15 are designed to ensure that payments by the taxpayer to such organisations as are prescribed in clause 13 shall be tax deductible for income tax and corporation tax purposes. I have two questions on which I should be grateful for an answer from the Economic Secretary. First, why cannot the particular form of scientific research organisation be determined in this Finance Bill, notwithstanding the process of public consultation that is being undertaken? Secondly, what representations have the Government received that have persuaded them to amend the terms of the Income Tax (Trading and Other Income) Act 2005 so soon after it has been enacted? I appreciate that there is sometimes schizophrenic activity on the part of the Treasury, but it seems incredibly quick to have enacted a piece of legislation only a few months ago and now to seek to amend its terms in this way.

Ivan Lewis (Labour, Bury South)

To respond directly to the hon. Gentleman's argument, there is consensus on the desirability of incentivising investment in science. This part of the Bill is designed to align the rules with our tax credits with which we are incentivising that investment.

The hon. Gentleman asked for a definition of scientific research organisations. I understand that there are only nine SROs in the country. Historically, the Department of Trade and Industry has been responsible for them and we do not believe that it would be possible or desirable to be prescriptive about their definition at this stage in their development. Because the number of those organisations is relatively small, so we are anxious to consult them in some detail to ensure that we get the regulations absolutely right. We therefore did not think that it was appropriate in the Bill to be prescriptive in our definition.

Mr. Field rose—

Ivan Lewis (Labour, Bury South)

I shall give way to the hon. Gentleman so that he can remind me of the other point that he was making.

Mark Field (Conservative, Cities of London and Westminster)

In fact, I was grappling with my papers and am only glad that I did not pass them to the Clerk. The other question that I sought to ask in a characteristically articulate way was about the representations that the Government had received that had persuaded them that the terms of the 2005 Act should so quickly be revised.

Ivan Lewis (Labour, Bury South)

I was just testing the hon. Gentleman. It is a consequential amendment to ensure that the position of contributors will not be unchanged. There would be an inconsistency if we did not make the change at this stage and individuals and corporate donors to SROs would be left in an invidious position. So in changing the rules to benefit the organisations, it is entirely right that we clarify and simply the rules that apply to individuals and companies that receive tax deductions as a consequence of their donations to those organisations.

Question put and agreed to.

Clause 14 ordered to stand part of the Bill.

Clause 15 ordered to stand part of the Bill.

Clause 16 - Open-ended investment companies

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 13, in clause 16, page 14, line 39, at end insert—

'(4) In relation to an open-ended investment company mainly invested in interests or rights over land, the rate of corporation tax for the year 2005 and subsequent financial years may be determined under Regulations made under section 18 of this Act to be nil.'.

Chapter 3 relates to authorised investment funds. As the Committee knows, we discussed these matters in some detail on the Floor of the House, at least in relation to clause 18, which had several other aspects that cover the debates relevant to clause 16. I tabled the amendment because it deals with an area that was not discussed in such great detail.

Overall, the funds industry does not want to alter many of the clauses, but it would prefer that the proposed changes be made by primary legislation and not by statutory instrument. The Association of British Insurers has expressed several principled concerns in its representations to the Government. The ABI is concerned that the Government propose to extend significantly the power that allows them to alter critical areas of the taxation of life insurance companies by regulation rather than by primary legislation. It has expressed strong reservations about the proposals. As a general point of principle, the Conservative party accepts the ABI's view that it is inappropriate for changes to such a significant element of the tax regime for life insurance to be made simply by regulation. The worry is that the clause allows changes to be made without proper consultation or parliamentary scrutiny, and could result in badly thought through and unfair proposals becoming law. We strongly believe that significant changes to tax legislation should be made only by means of primary legislation.

The Government intend using their proposed regulation-making powers to address what they see as flaws within the current system. Again, the ABI accepts that the legislation needs to be reviewed. However, we believe that such a review should be part of a wider review of corporation tax reform in relation to the taxation of life insurance companies—we understand that that is scheduled for some time next year—rather than as a quick fix within the Bill. Without repeating the debate on schedule 2, there are also concerns that aspects of the Bill will have retrospective effect.

Amendment No. 13 addresses some of the issues that we discussed on the Floor of the House on 13 June. It should be noted that, despite several announcements by the Government on introducing tax legislation to give effect to real estate investment trusts, such legislation has not been introduced in this Finance Bill. That is due to problems involving the current method of taxation of overseas landlords, where rents paid to them are subject to a 22 per cent. withholding tax, except where the landlord has the prior agreement of the Inland Revenue. The concern is that REITs will, in effect, escape such a tax on paying distribution to an overseas landlord. However, many other countries have REITs and tax regimes for them. There is a genuine concern that the delay is causing the property fund industry to locate in countries other than the UK.

I am sure that the Minister will have thoughts on a solution. We have tried to highlight the problem that prevents such legislation being introduced following suitable consultation. The reason why the European Union has tried to impose a different regime is that the UK proposals are likely to be ruled illegal under EU law by the European Court of Justice. Our amendment enables one of the suggested solutions to be that 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.

Clause 16 on open-ended investment companies effectively transfers into statute the statutory instrument laid when OEICs could first be established under UK law. That should mean that OEICs will be taxed in the same manner as unit trusts: in other words, on income at 20 per cent., rather than in the manner applicable to other companies.

I hope that the Minister will be able to give some guidance on the Government's thoughts on clause 16. We could, I know, repeat much of the earlier debate, but many of the concerns that were set out on the Floor of the House on 13 June remain entirely relevant. There is grave concern within the insurance industry that much of the legislation in clauses 16 to 23 is being rushed through the House at a time when a little more sober reflection, given the timetabling of other amendments, would have made a certain amount of sense. I hope that the Economic Secretary has some thoughts on the matter.

Christopher Huhne (Liberal Democrat, Eastleigh)

There is a problem with both the amendment and the clause, and I should like to give the Economic Secretary an opportunity to address it. The Treasury's long-standing position is that there should be tax neutrality between different investment vehicles. The provisions apply only to OEICs and authorised unit trusts. I mentioned on Second Reading that they do not apply to the main competition to those vehicles, namely closed-end funds or investment trusts. One result will be to widen further the tax advantages enjoyed by OEICs and AUTs compared with ITCs, particularly when investing in bonds. I should like the Economic Secretary to take this opportunity to explain why the Treasury has not addressed that issue in making these changes. Perhaps it is due to the lack of consideration that the hon. Member for Cities of London and Westminster has just described.

Ivan Lewis (Labour, Bury South)

The hon. Member for Cities of London and Westminster asked: why now? Why are we rewriting the regime in this Finance Bill? It is important that we do because we must respond to recent regulatory changes for authorised investment funds. In the circumstances, it makes sense to rationalise the existing regime at the same time.

The Financial Services Authority updated the rules governing authorised investment funds in April 2004. In subsequent consultations to ensure that tax does not hinder the wider investment strategies now permitted by the FSA, a number of respondents mentioned the difficulties of dealing with two separate bodies of legislation—one in primary and the other in secondary legislation. In response to those concerns, the details of the rules applicable to both AUTs and OEICs will in future be in regulations. That will also allow a quicker and easier response to any future changes introduced by the regulator.

It is important not to go over old ground in the REIT debate. We had a long debate on the Floor of the House about REITs. We made clear our intention, if we are able to resolve the technical problems, to introduce proposals in the Finance Bill of 2006. It would be entirely wrong to bring forward now proposals on REITs that we were not happy with and that might lead to an unsatisfactory outcome. We are actively working with stakeholders and specialists to ensure that the proposals that we make on REITs are appropriate. If we introduced measures that ended in unintended and undesirable consequences, we would be subjecting ourselves to considerable and justified criticism.

I accept that it is important that we get the REIT issues resolved, but it is also important that we recognise that serious outstanding obstacles have to be tacked. That is accepted by the experts in the field.

Richard Spring (Conservative, West Suffolk)

The Minister should examine the experience of other countries. The huge obstacles that Ministers keep referring to have been dealt with by other countries, including other European Union countries and others. Business is being lost to this country. Here we are dealing with legislation to prevent the Exchequer losing money through avoidance, which is one thing, but a problem has been created through delay, which is impossible to understand. As has been publicly stated, business has been taken abroad, because of the Government's unwillingness or incapability to act.

Ivan Lewis (Labour, Bury South)

It is extraordinary to hear the hon. Gentleman referring to the EU and other EU countries as though we should follow their model. That has not been the position of the Conservative party on any issue that I can recall.

It is important that we get the reforms to the REIT regime right and that they are consistent with our objectives, which are that the reform must be at no overall cost to the Exchequer and that we continue to collect a fair share of tax from the property sector. We cannot apologise for those objectives. They are entirely proper. I accept the importance of making progress, but we must ensure that we get the provisions right.

The hon. Member for Eastleigh (Chris Huhne) asked specifically why the reforms are not being extended at this time to investment trust companies; I think that that was the specific example he gave. He will acknowledge that they are not authorised investment funds and, although they offer an alternative to investors wishing to obtain a wider exposure to the market than just investing in a single share, they are not regulated by the FSA for consumer protection or for eligible investment strategies, as retail collective investment schemes are. The difference between investment trust companies and authorised investment funds therefore consists of more than just the ability to make an interest distribution. Wider issues need to be considered before contemplating any change to the tax rules concerning distributions to investors.

We have put out a consultation document relatively recently on the way that investment trust companies are regulated. We want to study the results of that consultation carefully before we make any final decisions. The Chancellor made it clear in the last Budget that the Government recognise the potential benefits of simplifying and modernising the taxation of pooled investment; that includes investment trust companies. We continue to invite views on whether radical reform, similar to what is happening in relation to pensions, is viable.

The rest of the debate is in Hansard.