Finance Bill

Public Bill Committee, 30 June 2005.

Standing Committee B

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

Frank Cook (Labour, Stockton North)

In compliance with my opening remarks last week, which I was told were very precise, I am prepared to accept hon. Members divesting themselves of their upper and outer garments. However, having read the report in Hansard of what I said, I got the awful impression that I sounded as though I was making it compulsory. It is not. It is voluntary. Members can please themselves.

Ivan Lewis (Labour, Bury South)

On a point of order, Mr. Cook. I welcome you to the Chair this morning and thank you for your common-sense decision about the state of our clothing during the rest of our proceedings. I wish to correct the record of our sitting on Tuesday afternoon when we were discussing clause 41. The hon. Member for Rayleigh (Mr. Francois) asked me specifically about guidance on the single farm payment scheme. At the time, I inadvertently thought that the guidance had not been issued. In fact, it had been issued so it is only appropriate to place on the record the fact that it was issued on 24 June and can be found on Her Majesty's Revenue and Customs website. I hope that that information is helpful to members of the Committee. In order to be even more helpful to the hon. Gentleman, I have brought a copy of the guidance for him so that he can read it in great detail.

Mark Francois (Conservative, Rayleigh)

I thank the Minister for making the record unambiguous. The guidance is important and I am pleased that it is now in the public domain.

Frank Cook (Labour, Stockton North)

That was a helpful and friendly way in which to start our proceedings. [Interruption.] I hope that that was not the sound of a pager. If it was, I hope that it is now switched to silent.

We were due to discuss amendment No. 104, but it seems that no hon. Member is ready to move it, so we shall move to the next amendment, which was scheduled for discussion at the same time. I want all hon. Members to realise that we are starting today's proceedings with amendment No. 105, with which it will be convenient to discuss amendment No. 106.

Schedule 9 - Insurance companies etc

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 105, in schedule 9, page 131, line 1, leave out from beginning to end of line 12.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss amendment No. 106, in schedule 9, page 131, line 5, at end insert—

'(3A) Where the Treasury by order amend any of the provisions indicated in subsection (3)(a), (b) or (c), such that an amount which has not been recognised in regulatory surplus and without the regulations would not have been treated as attributable to basic life assurance and general annuity business, has been treated as fully attributable to basic life assurance and general annuity business, and treated for the purposes of section 89 of the Finance Act 1989 within the shareholders' share of the relevant profits (Amount (''C'')) then on a subsequent transfer of shareholders' excess assets, the company shall be entitled when computing the Case I profits, defined in section 89(7) of the Finance Act 1989, to deduct an amount equal to the amounts (''C'') that in any accounting period following the introduction of the order, have not been recognised in regulatory surplus, that have been treated as fully attributable to basic life assurance and general annuity business, and have been treated for the purposes of section 89 of the Finance Act 1989 within the shareholders' share of the relevant profits, and for which no corresponding deduction has already been claimed.

(3B) Where the Treasury by order amend any of the provisions indicated in subsection 3(a) (b) or (c), such that an amount which has not been recognised in regulatory surplus and without the regulations would not have been treated as attributable to basic life assurance and general annuity business, has been treated as fully attributable to basic life assurance and general annuity business, and treated for the purposes of section 89 of the Finance Act 1989 within the policyholders' share of the relevant profits (Amount (''D'')), then on a subsequent transfer of shareholders' excess assets, the company shall be entitled when computing the Case I profits, defined in section 89(7) of the Finance Act 1989, to deduct an amount equal to the sum of amounts (''D'') multiplied by the lower rate of tax, and then divided by the mainstream rate of corporation tax, that have not been recognised in regulatory surplus, that have been treated as fully attributable to basic life assurance and general annuity business, and have been treated for the purposes of section 89 of the Finance Act 1989 within the shareholders' share of the relevant profits for which no corresponding deduction has already been claimed.

(3C) For the purposes of subsections (3A) and (3B), ''shareholders' excess assets'' means—

(a) the amount of assets shown in a non-participating fund of the company attributed to the interests of the shareholders of the company as a result of a reattribution exercise, less

(b) the amount of assets used to provide support to the with-profits fund of the same company.'.

Mark Field (Conservative, Cities of London and Westminster)

Thank you so much for allowing us to move on to amendment No. 105, Mr. Cook. I am somewhat disappointed, however, because I have some notes on amendment No. 104 that I want to touch on, not least because the two amendments are similar. Having stopped in mid-sentence on Tuesday afternoon, the hon. Member for Eastleigh (Chris Huhne), the spokesman for the Liberal Democrats, is not here to continue his remarks. [Interruption.] My hon. Friend the Member for West Suffolk (Mr. Spring) suggested from a sedentary position that the hon. Gentleman might be sorting out his tax credits. It is good to see that some of the greatest brains in the Liberal Democrat party are well organised in such matters, even if it is only for their own affairs rather than elsewhere.

I turn now to business. Time is tight both this morning and this afternoon if we are to get through the remainder of the Bill by 6 o'clock this evening. Amendments Nos. 105 and 106 would affect insurance companies. The Government's plans are set out in schedule 9, which is associated with clause 42. It will come as no surprise to the Economic Secretary to hear that we have had substantial assistance on this highly technical subject from the Association of British Insurers. Although we are not the mouthpiece of any lobbying group, the ABI has expressed legitimate concerns that we feel should be put on record and debated.

As ever, we are keen to tease out from the Government the precise scope of the proposed changes, because it is clear that, in determining the likely outcome and economic effect of the proposed changes, interpretation will be the key. We Opposition Members also worry that the attractions of saving may be undermined at a time when there is a need for higher levels of private saving and more responsibility on such matters.

As the Minister will be aware, the ABI represents some 400 UK insurers. About 95 per cent. of UK business is handled by ABI members; that amounts to some 20 per cent. of investments in the London stock market. As I know from my constituency, insurance may seem to be based in London EC3; however, it must be said that the term covers savings, pensions and health, life, motor and household insurance, and insurance is a large-scale employer in many of our constituencies.

We accept that the insurance industries should pay a fair level of tax, however ''fair'' is to be defined, but the concern has been expressed that a number of proposals in the Bill are unfair to the industry and—to the extent that that will have an impact on policyholders—likely to be unfair to customers, too. That will reduce the attractions of saving, as I said. Our underlying concern is that Government policy on the taxation of life insurers is by no means coherent. The industry acknowledges that a review of key elements of life tax legislation should be undertaken, with a view to introducing measures in the Finance Bill of 2006, at the earliest. But despite that acknowledgment, there are still some ad hoc changes proposed in the schedule that may have wider commercial effects and raise wider issues.

In its representations, the ABI welcomed the Government's agreement to the introduction of a two-year sunset clause under proposed clause 431A of the Income and Corporation Taxes Act 1988, and to that extent I am confident in what the Government have tried to achieve.

Amendments Nos. 105 and 106 are alternatives. Paragraph 3 of the schedule inserts new section 431A into the 1988 Act, and it introduces a power allowing the Government to alter matters of critical importance to the taxation of life insurance by regulation, rather than through primary legislation. That issue was brought up on Tuesday afternoon. In particular, our concern is that the power allows the Government to change the basis on which income and gains are apportioned between different types of business, and between shareholders and policyholders. It also allows them to change the rates of tax that are sufferable.

It must be noted that there are no limits to what the Treasury can include in the secondary legislation. That potentially gives far too much power to the Inland Revenue and too little protection to the taxpayer. Also, the draft regulations contain no sunset clause to limit the duration of the powers. Those rules will need to be reviewed in next year's Finance Bill in nine months' time. We seek an explanation from the Government on whether the proposed changes should be introduced by statutory instrument and whether limitations should be placed on what is in such an SI.

It is incontrovertible that the lack of parliamentary scrutiny or consultation is likely to result in badly thought-out or inequitable proposals becoming law. It is in no one's interests for that to happen, and for the law to be overturned in a matter of months at the next opportunity, which would be under a subsequent Finance Bill.

It is essential that the Government explain some of their reasoning. In particular, why do they believe that it is appropriate for such matters to be dealt with in secondary legislation? How will the Economic Secretary ensure proper scrutiny of Inland Revenue written legislation, and why are the Government introducing legislation that will affect the first quarterly instalment in this tax year after that instalment has already been paid? Surely, if the law needs to be changed, that should be done at the beginning of the 2006 accounting period, or even at the start of the 2007 one, if it is to be delayed until it has had full consideration in next year's Finance Bill. It could be brought into being with the other apportioned rules, which apply for a life assurance company.

Amendment No. 106 has been tabled in case amendment No. 105 is not agreed to. Amendment No. 105 would delete most of new section 431A. Amendment No. 106 is an alternative that could be put in place. It seeks to prevent the Inland Revenue and Her Majesty's Treasury being given powers that they can use to levy a charge on excess assets held within a with profits fund. That was touched on in some detail on Tuesday afternoon's sitting and I do not want to go into torturous detail about it now. However, it seems to us that the intention of the proposed statutory instrument was to levy a 30 per cent. tax charge on investment return on those assets. Such a charge would have mostly fallen on with profits fund policyholders and on shareholder ''profits'' that were far from being realised.

As the hon. Member for Eastleigh pointed out, the latest draft regulations—of 17 June—restrict the charge to what are described as ''excess assets''. The term ''excess'' refers to assets that, after obtaining regulatory approval and paying sufficient compensation to the with profits policyholders, have been extracted from the with profits fund, but remain held in the long-term fund, which is normally called attributed estate or attributed orphan estate.

Investment income and gains on that sort of fund under existing rules still benefit partly from the exemption of tax on investment return for pension business, and would normally be taxed at 20 per cent. rather than 30 per cent. It is important to stress—the lobbying that we received supported this point—that the attributed estate is often used to provide crucial capital support to a life assurance company's long-term fund. There are restrictions about how much of it can be taken into shareholder funds.

This area of taxation is extremely complex. The life assurance industry and tax advisers remain concerned about the lack of knowledge and debate of the ABI's or taxpayers' commercial concerns They have not managed to get this issue addressed. Things would not be like for like in the way in which the excess assets are dealt with from one company to another. There is potential for a punitive taxation effect.

We have had a chance to put these matters on the record. We have debated amendment No. 104, which was a similar amendment, during Tuesday afternoon. I hope that, on that basis, the Minister will at least be able to give us some guidance about what he intends to do.

We also have a concern about the double charge that can arise following implementation of the statutory instrument. Much of this will arise in relation to amendment No. 107, which we will discuss later. Therefore, I will not make too much of this point at the moment, but I hope that the Minister will have some words that will allow us to assuage the concerns of which we have been made aware.

Christopher Huhne (Liberal Democrat, Eastleigh)

First, may I apologise to the Chair for being late for these proceedings and for not being able to resume exactly where I left off when the hon. Member for Normanton (Ed Balls) was kind enough to—

Philip Hammond (Conservative, Runnymede and Weybridge)

On a point of order, Mr. Cook. Is it in order for the hon. Member for Eastleigh to show the discourtesy that he has shown to the Committee by ending one sitting in mid-sentence, not arriving to continue it at the beginning of the following sitting and then seeking to resume a speech on an amendment that has now been lost?

Frank Cook (Labour, Stockton North)

The amendment has not been put yet. As I understand it—I was not in the Chair at the time—the hon. Member for Eastleigh was stopped by the Committee deciding to end its proceedings at that point. The Committee went away, and the situation is unfortunate. We do not know the reason for his arriving late, but he arrived after the similar amendment was moved by a member of the Opposition. I do not see anything that transgresses ''Erskine May'' or any other Standing Order of the House. We are debating amendment No. 105 and not amendment No. 104. I remind the Committee that the question on amendment No. 104 has never been proposed.

Christopher Huhne (Liberal Democrat, Eastleigh)

On a point of order, Mr. Cook. Again, I apologise for being late. May I ask your advice? I should be pleased to continue my remarks on amendment No. 105, as its effect is exactly the same as that of amendment No. 104. Will you advise me on whether that would be appropriate? Would you prefer me to do otherwise?

Frank Cook (Labour, Stockton North)

The Chair's preference has nothing to do with it. It will be eminently sensible for you to continue doing what I thought you were going to do anyway. Let us get on.

Christopher Huhne (Liberal Democrat, Eastleigh)

Mr. Cook, your common sense is extraordinary. Thank you very much.

Frank Cook (Labour, Stockton North)

My common sense is renowned.

Christopher Huhne (Liberal Democrat, Eastleigh)

Who could possibly disagree?

To sum up the remarks that I was making on Tuesday evening, I should say that this is a temporary grab for revenue by the Treasury from one sector of financial services—life insurers—and that it is self-evidently no more than opportunistic. It will be interesting to hear Ministers' justifications, given the changes in the tax base that they have introduced in the draft regulations over a short period.

There is no evidence of any avoidance that could have sparked such a sortie into one particular part of the corporate undergrowth. As I have said, the basis of the charge has changed fundamentally. The HMRC has recognised that it is only temporary by binding itself with a sunset clause and a commitment to a new substantive basis for sorting out the potential tax base—namely, those assets held by life insurers that are surplus to what is needed to meet their commitments to their policyholders. The new basis of the charge will take about £35 million from a handful of companies and will stop others from reaching sensible commercial judgments, approved by a court scheme, to apportion assets between policyholders and shareholders, because that would crystallise a large tax charge.

Moreover, as the hon. Member for Cities of London and Westminster (Mr. Field) has just pointed out in another context, such matters are to be determined by Treasury orders, rather than by primary legislation. In our view, that is a very poor basis for such a fundamental tax change.

At the close of proceedings on Tuesday, the hon. Member for Normanton intervened and asked me a number of questions. I hope, Mr. Cook, that you will allow me to make some response to those, as his intervention was not ruled out of order. As I understand it—like the hon. Member for Normanton, I am a newly elected Member, so please correct me if I am wrong, Mr. Cook—we in the Opposition are not allowed to bring forward proposals for alternative means of raising revenue. Those have to be proposed by a Minister of the Crown and accompanied by a Ways and Means resolution. That is unfortunate. The hon. Members to my right, for example, have spent a number of hours in Committee proposing tax cuts without the intellectual necessity of imagining from where they might raise the revenue instead. However, those appear to be the rules.

Philip Hammond (Conservative, Runnymede and Weybridge)

The hon. Gentleman may not have paid attention to what his party was doing in the last Parliament. When I was a local government spokesman listening to the drivel about local income tax that his party was producing, I do not remember it being shy about proposing alternative ways of raising revenue in that sphere.

Christopher Huhne (Liberal Democrat, Eastleigh)

The hon. Gentleman knows the strict proposals as far as tabling new amendments or clauses to the Finance Bill are concerned. However, Liberal Democrat Members have made an exceptional effort to provide Ministers with an extremely good idea.

With the help of the Clerk, the hon. Member for Normanton will find a new clause. Unfortunately, under the rules we are not able to debate it, but it would have the effect of saving very substantial amounts of money for the Treasury by closing a loophole that was opened up by last year's Finance Act. That loophole is self-invested personal pensions, which under the new rules make it possible to invest in directly held residential property, for example, and in personal chattels. That will be an extremely expensive new measure, and it will come into effect from the beginning of the next financial year.

The hon. Member for Normanton will find that it is possible to make significant amendments to the current proposals, and I hope that he will press for those with the Chancellor of the Exchequer, given his substantial influence in the Treasury building on the other side of the road. For example, I hope that he considers the amendment under discussion—and amendment No. 104—and ponders the potential revenue implications of £35 million. In contrast, the Government would make extraordinary savings if they were to adopt this modest measure.

Edward Balls (Labour, Normanton)

The intervention that I made was simply to ask whether the Liberal Democrats were still committed to a new top rate of tax in order to cover the loss of revenue that their proposals would cause.

Frank Cook (Labour, Stockton North)

Order. This exchange is very entertaining and quite interesting, but it bears little relevance to amendment No. 105, which is the topic under discussion. I am happy for a bridge to be built between comments made in the current sitting and those made in our last sitting on Tuesday, but we have spent enough time doing so, and we should move on with the issue at hand. Can we discuss amendment No. 105, please?

Christopher Huhne (Liberal Democrat, Eastleigh)

Absolutely, and it is precisely the question of how one would pay for amendment No. 105 that makes my point relevant. I am hoping to give some idea of the scale of the proposed reduction in insurance companies' taxation in comparison with the total of the Government's proposed measures by pointing out that revenue to the Consolidated Fund would be reduced by about £35 million. That cost to the Exchequer would be only a small fraction of the at least £500 million per year, building up to even more than that in later years, that the Treasury will lose in tax revenue if it persists with the revision of the rules on self-invested personal pensions. These calculations are directly relevant to the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am struggling to understand the hon. Gentleman's logic. As I understand it, amendment No. 105 seeks to remove an order-making power. There are good reasons of principle—which I am glad to learn that the Liberal Democrats share with the official Opposition—for resisting the wide extension of order-making powers. However, the hon. Gentleman cannot tell us what the revenue consequences are of an enabling provision that would give the Treasury the power to make orders. He can speculate, but he cannot put a price on an order-making power.

Christopher Huhne (Liberal Democrat, Eastleigh)

I am grateful for the hon. Gentleman's intervention. I regret that he has not been brought into the confidence of advisers to the extent of being made aware of the draft regulations tabled by HMRC in this respect. If he had been, he would be able to put a figure on the likely consequences of these enabling measures. That figure is as I have suggested. The calculations of the relative consequences of this amendment—and of the amendment that we tabled, which we are unable to discuss thanks to the rules—are £35 million as against £500 million. The £500 million calculation is based on estimates by a City firm whose business is market research. The Treasury should be worried about that.

It is sensible for me to put my remarks about this on the record, because I believe that the Treasury will return with an amendment to a Finance Bill—if not this one, perhaps the one for next year or the year after—when the full scale of the reliefs under self-investment personal pensions becomes clear and a reality. Does the Minister not think that it would be better to withdraw these proposals, and to return with new and carefully worked out proposals for life insurance on which there has been sensible consultation for the Finance Bill in 2006?

Ivan Lewis (Labour, Bury South)

That was one of the most extraordinary Committee performances. The hon. Gentleman turned up late—perhaps for very good reasons. He then claimed that the Liberal Democrats were unable to come forward with revenue proposals. Those of us who have campaigned against them for years will find that extraordinary, reflecting on the ''Focus'' leaflets that make promise after promise to spend more and more money.

Christopher Huhne (Liberal Democrat, Eastleigh)

I think that if the hon. Gentleman were to consult the Clerk he would find that the clause that we have tabled is not selected for discussion. That is what I was referring to, so the points that I was making stand.

Ivan Lewis (Labour, Bury South)

I have not even come to that bit yet. That is related to the contribution by my hon. Friend the Member for Normanton, not the point that I was just making, and not your statements, Mr. Cook, which are full of common sense as I have already said once this morning. The hon. Member for Eastleigh said that Members of the House in opposition were not able to come forward with revenue proposals. That is misleading.

The Liberal Democrats said immediately after the election that the revenue and spending proposals with which they had gone to the people had suddenly been scrapped and they would have a comprehensive review. No doubt they will advance revenue proposals at some point during this Parliament, all of which will equally lack credibility.

Philip Hammond (Conservative, Runnymede and Weybridge)

Has the Economic Secretary noticed a pattern emerging with regard to the hon. Member for Eastleigh? He is unable to speak to amendment No. 104 because he arrived too late this morning and he is unable to debate his new clause because he tabled it too late for consideration.

Christopher Huhne (Liberal Democrat, Eastleigh)

If I may—

Frank Cook (Labour, Stockton North)

Order. You may, when I allow.

We have had quite enough meandering around amendments that have not been proposed and new clauses that cannot be moved. There was no question but that the new clause would be disallowed, because it arrived too late. It is out of order and not debateable—game, set and match. Now may we let it rest there, please? We have spent far too much time already on something that was inadmissible to the Committee in the first place.

Ivan Lewis (Labour, Bury South)

Thank you, Mr. Cook. However, it would be a great discourtesy to the Chairman and Committee members not to point out that the question of SIPPs, which the Liberal Democrats have continually sought to raise in this Committee, was the subject of a press release issued to The Independent on 29 June. The only issue that the Liberal Democrats want to bring up in this Committee on any clause or amendment is a question that they were unable to debate because they did not submit it in the proper fashion.

Christopher Huhne (Liberal Democrat, Eastleigh)

The hon. Gentleman knows perfectly well, as you pointed out, Mr. Cook, that the reason why the new clause cannot be debated is nothing to do with the reason he has given—it is to do with the procedures of the House, which apparently date back to Irish Members being obstructive. I do not know why those procedures are as they are, since the Irish Members left the House in 1921, but that is the history and I regret the fact. Perhaps the Minister would prefer to bring forward some proposals to the Modernisation Committee allowing Opposition Members to table tax-raising measures.

Ivan Lewis (Labour, Bury South)

In the context of relationships within the European Union, I hope that the hon. Gentleman was not launching an attack on our colleagues and good friends the Irish. I am sure that the record will show his contribution to this debate.

Let me put the schedule in context. The hon. Member for Cities of London and Westminster rightly said that this is a complex, challenging area. He was clearly well briefed by the industry for his contribution. Life insurance is a complicated business, as the hon. Gentleman said, and is often made more so by the transactions that some companies engage in with a view to reducing their tax liabilities. Legislation dealing with the taxation of the business can be correspondingly complex.

Before I respond directly to the points made on the amendments, it is important that I describe what this part of the schedule is intended to do. The objective is to improve the way that income and gains of life insurance companies are apportioned between the different types of business that they carry on. Basic life assurance and pension business are the main two types. Apportionment rules are necessary, because the different types of business are taxed at different rates. There is no factual way of matching most of a life company's assets to a particular type of business. As Conservative Members have acknowledged, the current apportionment rules have weaknesses, particularly when a life company has significantly more assets than it needs to meet its obligations to policyholders. The current rules allow incoming gains on those excess assets to be apportioned to exempt business, or for there to be special rates of tax appropriate to incoming gains that will be used to pay policyholder benefits.

The Conservatives have clearly accepted that there is scope for tax avoidance when genuinely surplus funds are allowed to roll up at a lower rate of deduction and potentially be transferred out for the benefit of the shareholder at a later date. The hon. Member for Runnymede and Weybridge (Mr. Hammond) accepted that on Second Reading.

Philip Hammond (Conservative, Runnymede and Weybridge)

I have just consulted my hon. Friend the Member for Cities of London and Westminster and should be grateful if the Minister clarified whether the measure will include mutual insurers, which have no shareholders. Will insurers that have no shareholders be in the bizarre situation of being taxed at the appropriate shareholder rate on the income arising from those funds?

Ivan Lewis (Labour, Bury South)

I shall return to that issue a little later.

Mark Field (Conservative, Cities of London and Westminster)

I see that I am not the only one well briefed down here.

Ivan Lewis (Labour, Bury South)

I am pleased that the Conservatives support the measure, but the Liberal Democrats do not even accept that this is a fundamental issue. Recent changes to the regulatory return that every life company makes to the Financial Services Authority make it easier to identify excess assets, so we have an opportunity at this stage to improve the apportionment rules.

Christopher Huhne (Liberal Democrat, Eastleigh)

Will the Minister clarify that the draft regulations tabled by HMRC do not use the FSA-defined basis of excess assets, because that is in a different neck of the woods for life insurers, and that in fact the basis will have to be defined in the orders?

Ivan Lewis (Labour, Bury South)

I confirm that the basis will have to be defined in the orders.

The measure was first announced in the pre-Budget report 2004, when draft regulations were initially published. At that point, the Government accepted that the industry was not happy with the measure as announced in the pre-Budget report—it felt that it would have a much wider effect than intended—or with the proposal to make such a major change at the time by regulation.

The industry was particularly concerned about the short time allowed for consultation on the regulations, which is a very important part of the debate on these amendments. The context is that the industry and the Government have had an ongoing dialogue in an attempt to reach a satisfactory agreement and conclusion. In the context of those negotiations, that consultation and that debate, significant agreement has been reached between the industry and the Government on a practical and realistic way forward. Given the discussions between the industry and the Government, it is slightly surprising that in Committee we should find that the industry is in a sense encouraging the Opposition to challenge an agreement that it made with the Government. There has genuinely been a listening process and a two-way dialogue.

Christopher Huhne (Liberal Democrat, Eastleigh)

I should be grateful if the Minister explained why the Treasury is coming forward with measures that are time-limited and temporary. If the discussions with the industry have been as he suggests, why is it not more appropriate for the measures to be brought forward as substantive changes in primary legislation in a properly discussed Finance Bill next year, as we have been arguing? Why the rush?

Ivan Lewis (Labour, Bury South)

I shall come to that in the next part of my contribution. If the hon. Gentleman wants to intervene again, I am sure that he will find an opportunity to do so.

The regulations published in draft at the time of the PBR, to which I have already referred, were not made and a process of consultation has happened. The Government have accepted the principle that the changes should be made in primary legislation, but it was realised early on that it was not possible to complete the process in time for the current Finance Bill. Industry representatives themselves, as I have said, have accepted that it is preferable for any changes effective for 2005 to be made by regulation. That is the only practical way of doing it.

The regulation-making power, as hon. Members are aware, is for one year only. We inserted a sunset clause, as requested by the industry. Any longer-term measure will require primary legislation. The hon. Member for Eastleigh has poured scorn on the concept of using a sunset clause, but I shall quote from an Association of British Insurers press release to demonstrate why that is not consistent with what the industry has said. Commenting on the proposed legislation regarding the taxation of surplus assets of life funds immediately after the publication of the Finance Bill, Peter Vipond, ABI director of tax and regulation, said:

''we are pleased that the Government intends to accept our call for a sunset clause.''

The following is a quote from a debate in the Committee of the whole House:

''Even better, the provisions should be subject to a four-year sunset clause to bring them into line with similar provisions in European legislation'',—[Official Report, 13 Jun 2005; Vol. 435, c. 60.]

and this quote comes from Second Reading:

''In all European financial services legislation since the Lamfalussy report, the European Liberal Democrats have proposed—with the support of all the other parties represented in this place a sunset clause on delegated powers.''—[Official Report, 7 June 2005; Vol. 434, c. 1153.]

Both of these quotations are from the hon. Member for Eastleigh.

Christopher Huhne (Liberal Democrat, Eastleigh)

Will the hon. Gentleman give way?

Ivan Lewis (Labour, Bury South)

No.

Chris Huhne rose—

Frank Cook (Labour, Stockton North)

Order. This may be due to newness to protocol, but when an hon. Member is seeking to intervene on another who has the floor, and that hon. Member chooses to continue, it is customary for the intervening Member to resume his or her seat. Let us try to foster that practice.

Ivan Lewis (Labour, Bury South)

As a former Education Minister, I hope our primary school-age children are learning that principle.

Christopher Huhne (Liberal Democrat, Eastleigh)

Will the hon. Gentleman give way?

Ivan Lewis (Labour, Bury South)

No. I will give way in a minute.

Finally, I have quotation from the hon. Member for North Norfolk (Norman Lamb):

''The flow of new regulation has subsided somewhat, and it is worth noting that my hon. Friend the Member for Eastleigh—until now a Member of the European Parliament—pioneered the use of sunset clauses in provisions under the financial services action plan.''—[Official Report, 19 May 2005; Vol. 434, c. 372.]

So the hon. Member for Eastleigh has associated himself proudly throughout his political career with the appropriate use of sunset clauses, but is coming to this Committee and implying that somehow they are inappropriate. I shall leave it for Committee members to judge the consistency of that position.

Christopher Huhne (Liberal Democrat, Eastleigh)

Will the Minister confirm that when he said that the sunset clause in the Bill was for one year only, he was overlooking the potential for the Treasury to extend it by a further year if it decided to do so?

The ways in which sunset clauses are used are legion. It is sensible to introduce a sunset clause as a matter of generality—covering four years in the case of European legislation—to provide a discipline on the body that has the power to use delegated legislation. However, it is not sensible in this circumstance to introduce a sunset clause rather than discuss the measures as properly proposed pieces of primary legislation. The sunset clause is just a figleaf to hide ministerial embarrassment at the fact that they have not got agreement with the industry and therefore have not brought forward substantive proposals.

Frank Cook (Labour, Stockton North)

Order. It would seem that another brief seminar in protocol is needed. There is a difference between an intervention and a speech. The latest intervention was definitely becoming a speech. In future, Mr. Huhne, please make short points. You will have the opportunity to respond before the vote, if there is to be one. Let us have brief interventions, please.

Ivan Lewis (Labour, Bury South)

The hon. Gentleman's association of figleaf with embarrassment is a matter for him, but I doubt whether we shall make great progress on the debate because he is coming from an entirely different place.

To respond to the hon. Gentleman's original comment on the FSA returns, it was our intention to base the new measure on the changes to the FSA returns. However, the industry has put forward arguments on why the measures in the FSA return may not necessarily be appropriate for tax purposes, and has demonstrated that they might bite harshly in some cases. We are willing to reflect again on the genuine issues that the industry has raised and respond accordingly if we can reach agreement.

The hon. Gentleman said that much of the comment has been about the effect on with profit funds. On Tuesday, he was not accurate when he implied that the December proposals would not affect the non-profit funds. The proposals clearly identified excess assets on non-profit funds that had been identified in a reattribution exercise, so the hon. Gentleman was wrong to assume that the proposals represent a U-turn. Contrary to what he said on Tuesday, it is now apparent that the with profit funds do not as a rule have clearly identifiable excess assets. However, I can assure the Committee that, should that position change at any stage, we will take action about the holding of excess assets in with profit funds if that were to lead to unfair consequences. That last point might not reassure Aviva, the company to which the hon. Gentleman referred, which is about to embark on a reattribution exercise, but at least it knows that it might be affected whether or not it goes ahead.

It is important to emphasise that there will continue to be consultation with the industry to produce a solution for 2005 that will be introduced by regulation. As has been mentioned, I have written to the Committee with a fuller description of HMRC's current thinking and the proposed regulations. It involves looking at those companies that have specifically earmarked assets as shareholders' assets held in non-profit funds that are available for distribution to shareholders, when appropriate.

The hon. Member for Eastleigh suggested on Tuesday that the measure is unfair because it picks on those companies that have been through a court-approved reattribution exercise, but the draft regulations described in my letter make it clear that there does not have to be a court order or a formal agreement with the regulator. What there has to be is some action by a company that parks excess assets where policyholders will not receive the benefit of them. If a company does that, it is not in a good position to say that the income should be taxed at the rate that applies to income that does go to policyholders. After that, there will be continuing consultation on an appropriate longer-term solution to several other problems with apportionments to make them fairer.

I assure the hon. Gentleman that any changes would be effected by way of primary legislation in a future Finance Bill. The concept of whether the sunset clause could be extended for a second year is extremely important. At the moment, it is our explicit intention to bring forward primary legislation under the Finance Bill 2006. We hope that we will be able to do that. The Government have demonstrated that they have listened thoroughly and responded to the industry's worries. Any measure that increases tax liabilities will never be embraced enthusiastically by the industry, but I hope that it will at least recognise that we have demonstrated a willingness to be flexible.

The hon. Member for Cities of London and Westminster is worried about double charging, which was the basis of amendment No. 106. I shall explain to him why his concern is groundless. It is likely that the amendment was drafted before the industry had chance to consider closely the draft regulations that HMRC circulated to it and which I have described in my letter. Hon. Members will see from that information that there can be no double charging. The main reason is that the counter-action proposed for 2005 is limited to non-profit funds. In non-profit funds, there is not the same deferral of the recognition of profits from value increases that there are in with profit funds. Both realised and unrealised profits on assets will be brought into account in the period that they arise. That is the key point. Therefore, there is no subsequent transfer; the amendments refer to that, but the concept of subsequent transfer is not relevant.

However, if, despite my putting this assurance on the record, the industry continues to believe, after studying the content of the letter, that there is scope for double charging with regard to the draft regulations, I would welcome it continuing to discuss its concerns with HMRC officials. If it can demonstrate at any point that there is a serious risk of double charging, that will be taken into account in the regulations.

I hope that I have gone some way towards allaying hon. Members' concerns. The regulations will take into account appropriately the worries the industry has expressed to us both previously and during the course of the Committee's deliberations.

Rob Marris (Labour, Wolverhampton South West)

I crave your indulgence, Mr. Cook. The schedule runs to 13 pages, and, in a sense, I wish to address it as if this was a stand part debate, although I will focus on the specific set of provisions under discussion. I want to say something about excess assets, which my hon. Friend the Economic Secretary referred to.

Explanatory note 111 to schedule 9 states:

''The apportionment rules have tended to apportion some of the income and gains on these assets''—

that is, excess assets—

''to the policyholders' parts of the life company's business where they have been exempted from corporation tax as referable to pension business''.

I realise that the current HMRC proposals have not been finalised because consultation is still ongoing, but what will be the likely effect on the pensions industry?

Ivan Lewis (Labour, Bury South)

I can assure my hon. Friend that we have seriously considered that point throughout the consultation and our deliberations. It is one of the reasons why the process has taken so long; we want to get that absolutely right. I can place on the record the assurance that we believe that there will be no adverse effect on the pensions industry. That is one of the reasons why we believe that, having had this long period of consultation and negotiation, we must get to the stage where we make it clear that the Government are going to proceed in this way. If we continue to defer and put things off, the industry will, understandably, not take us seriously.

Mark Field (Conservative, Cities of London and Westminster)

I hope that the Economic Secretary can provide an answer to the following question about mutual companies. Given that mutual insurers have no shareholders, will they be subject to shareholder-type tax?

Ivan Lewis (Labour, Bury South)

I am happy to deal with that issue. I apologise for not having directly done so earlier, although I thought I referred to it in one of my comments on the remarks of the hon. Member for Eastleigh. The only conceivable effect on a mutual company will be in certain specified and identifiable circumstances: if it has acquired business from a company that is not mutual, and if that other company has carried out the reattribution exercise, the effect on a mutual company in that position will be to ensure that the income from the excess assets will not be attributed to pension business. Any excess assets held by a mutual in that way will not be taxed at the 30 per cent. rate applying to shareholders' income.

Mark Field (Conservative, Cities of London and Westminster)

Let me sum up this fractious debate. I thank all the Members who have taken part in it, including the hon. Member for Wolverhampton, South-West (Rob Marris), who was, as ever, armed with a copy of the explanatory notes. I remind him that we intend to conclude our proceedings at six o'clock tonight, rather than at six o'clock tomorrow night. I am sure that his Whip will have words with him later.

Rob Marris (Labour, Wolverhampton South West)

They already have.

Mark Field (Conservative, Cities of London and Westminster)

The debate has been worth while, but I think that the Economic Secretary was indulging in a little wishful thinking when he said that industry representatives have accepted that the matter has to be addressed by regulation this year. The alternative brought up by all parties is that we delay doing anything until we have looked into the matter properly under the Finance Bill 2006. Notwithstanding the Minister's tentative reassurances, we believe that it is inappropriate to introduce any amendments to current law without the full and proper consultation to which we referred.

For many of the companies affected, the changes constitute a new and potentially significant tax-raising measure. Indeed, our understanding is that the new temporary powers are being introduced largely with the aim of raising a specific amount of revenue set out earlier this year in the Red Book. If the regulation-making powers in paragraph 3 are used in that way, they could amount to retrospective tax-raising legislation, and that would be unfair on the companies affected.

We still have deep concerns about proposals that we think are conceptually flawed. The case for taxing differentially such supposed excess assets has not been made properly. In particular, we understand that the proposals take no account of the sometimes severe constraints imposed, rightly, by the FSA on the transfer of any assets out of the life funds, regardless of whether the assets in question have been earmarked for shareholders. Those constraints exist to ensure the protection of policyholders—that is not open to dispute—but any additional tax burden will inevitably reduce that protection.

The proposals also appear to represent a change to one of the fundamental bases of life company taxation and to create real potential for double taxation. We will come back to the subject briefly in debate on amendment No. 107. However, I was reassured that the Minister will continue to have dialogue with life insurance companies. I hope that, if there is real evidence of double charging, there will be an opportunity for compensation, or at least a proper debate on the matter.

On balance, we believe there are some important issues of principle at stake under amendments Nos. 105 and 106, and we would like to press the lead amendment to a Division.

Christopher Huhne (Liberal Democrat, Eastleigh)

I am not sure whether I am allowed to make a couple of general points in response to the Minister. I am certainly grateful for his clarifications, but the reality is that his remarks do not change the fundamental point that we on the Liberal Democrat Benches made, which is that normally it would be proper procedure to bring forward substantive measures in primary legislation.

Frank Cook (Labour, Stockton North)

Order. The hon. Gentleman has already touched on that ground. He had ample opportunity to explore and expose the issue, and indeed he did so. There is no advantage to the Committee in revisiting the subject.

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 12.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 107, in schedule 9, page 132, line 38, at end insert

'plus any taxable amount computed in accordance with Section 444AB of this Act'.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss amendment No. 108, in schedule 9, page 133, line 8, at end insert—

'(2BA) The relevant proportion of the excess determined in accordance with subsection (2A) that relates to long-term business that is not life assurance business shall not be included within the excess referred to in subsection (2B)(a) above.'.

Mark Field (Conservative, Cities of London and Westminster)

We can probably deal with these amendments rather more swiftly than we did amendments Nos. 105 and 106, although I notice that the hon. Member for Wolverhampton, South-West has explanatory notes in his grasp, so that might be wishful thinking.

I take on board the broad comments made by the Economic Secretary towards the end of the previous debate. On double charging, I am reassured that if there is seen to be a major issue in the industry, particularly given that there is likely to be a rather larger overhaul in the Finance Bill 2006, it will be taken into account. I envisage that we will make representations, if necessary.

The idea of amendment No. 107 is to prevent a double charge. We believe that existing anti-avoidance rules tax the transferor where the transferor retains assets on the transfer of long-term business. Owing to the manner in which the regulatory returns work, they will not have been recognised as regulatory and hence will be a taxable surplus.

Paragraph 7 seeks to deny a loss where more liabilities than assets are transferred to the transferee on a part VII transfer. Where a charge arises, we are concerned that it could be duplicated. Typically, the assets transferred when assets are retained in the transferral will be less than the liabilities transferred. The amendment tries to ensure that there will be no double charging.

Paragraph 7 seeks to prevent tax planning where, on the transfer of insurance business from one company to another, a tax loss arises in the transferee owing to their being a deficit of assets in the long-term fund in comparison with the quantity of insurance liabilities transferred. The idea of amendment No. 108 is to prevent a charge applying where the deficit relates to permanent health assurance business, which is taxed separately from life assurance, and where no tax deduction should arise from the planning that the legislation seeks to prevent.

I hope that the Economic Secretary will give us certain assurances. I do not expect him to go over the ground that he covered earlier. It would be useful if he could put it on the record that in the event of specific, unforeseen concerns and a risk of double charging, the Treasury will look sympathetically and urgently. It should ensure that there is no sense of grievance in the insurance industry.

Ivan Lewis (Labour, Bury South)

Amendment No. 107 is misconceived. On amendment No. 108, I have some sympathy with the points that the hon. Gentleman raised, although the amendment does not help to address the issues in a way that would be acceptable. I will explain why in a moment.

I want to explain why amendment No. 107 is misconceived. Section 444AB is about the assets retained by the company losing its business. If such a company had £1,000 of assets and £900 of liabilities, and it retained £100 of the assets, there would be a charge under that section on £100, if all the other conditions of the section are met.

For the paragraph 7 rules to apply, as I have explained, there has to be an excess of the liabilities over the assets transferred to the recipient. That is the key point. So, in relation to the example that I gave, there might be a transfer of £900 of liabilities and only £750 of assets. That would mean that £150 of assets of the transferor had been retained or, more likely, gone somewhere else. They could not have been part of the section 444AB amount, because we are not talking about the same assets. In this example, the total assets not reaching the recipient would £250 and the amounts taxed would add up to £250 minus the £100 on the company losing the business and £150 on the company receiving it. I use that example to demonstrate why concerns about double charging are not relevant or appropriate, and I hope that that reassures the hon. Gentleman.

Amendment No. 108 seeks to refine the new charge in section 444AC. First, the new charge is likely to arise only rarely, if at all. Transfers of businesses with more liabilities than assets have been made to secure a tax advantage. Once the tax advantage is gone, such transfers are likely to be no longer relevant and to cease.

Any attempt to apportion the charge between different types of a life company's business involves a large element of approximation; that is another key point. In the interests of simplicity, we have sought not to deal separately with the small amount—it is less than 2 per cent. of the industry as a whole—of non-life business carried on by life companies. The hon. Gentleman's amendment attempts to deal separately with that tiny amount of non-life business, but it does not do the job properly. It takes an amount away from the life profits without adding it to the non-life profits. In that sense, the amendment is flawed and cannot be accepted, although the hon. Gentleman has raised a legitimate point.

Even if that flaw were corrected, it is not obvious that the result would lead to an improvement on the approach proposed under the Bill. Because of the different way in which different types of business are taxed, the result will be, most likely—but not definitely—to the disadvantage of more companies than it benefits. On that basis, I hope that the hon. Gentleman will consider withdrawing the amendment.

Mark Field (Conservative, Cities of London and Westminster)

Our intention, obviously, is not to make any companies worse off under amendment No. 108. We have had a reasonable debate and have put some important issues on the record. I certainly gave a wry smile when I heard about the Treasury's passion for doing things in the interests of simplicity; I had not imagined that that was the Treasury's watchword in respect of much of its work over the past eight years. However, we accept that, as couched, amendment No. 108 is probably not sufficient for the job. I hope that if the Minister is made aware of particular concerns about double charging, he will consider the matter sympathetically next year. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Frank Cook (Labour, Stockton North)

The next amendment on the list is No. 110 to schedule 9.

Mark Field (Conservative, Cities of London and Westminster)

I seek your guidance, Mr. Cook. Rather than duplicating much of the discussion on amendment No. 110 when we come to discuss amendment No. 109, perhaps it would be helpful if we grouped them together. That would, I hope, save the Committee's time and not try its patience.

Frank Cook (Labour, Stockton North)

If that is the Committee's wish, I am content.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 110, in schedule 9, page 135, line 21, at end insert—

'Taxation of structural investments of long-term funds of insurance companies

8 (1) After section 83(2) of the Finance Act 1989 insert—

''(2AA) But subsection (2A) does not require to be taken into account as receipts of a period of account any increase or decrease in value of subsidiary undertakings, nor shall any distribution from a subsidiary undertaking, resident in the United Kingdom, be taken into account in subsection (2A).''.'.

Frank Cook (Labour, Stockton North)

With this it will be convenient to take amendment No. 109, in schedule 9, page 135, line 22, leave out from beginning to end of line 25 on page 136.

Mark Field (Conservative, Cities of London and Westminster)

The poor Economic Secretary was wondering what would happen, and whether he would have to read the same notes twice, or amalgamate them. I knew that I would have your approval, Mr. Cook, on that basis that the arrangement would save time. We will get down to business.

Amendment No. 109 would leave out the Government's proposed insertion of new section 444ACA into the Income and Corporation Taxes Act 1988. In its place, we seek to insert amendment No. 110, which should have the same effect of closing down the tax planning that the Government, reasonably, wish to prevent. However, we want to avoid the unwarranted tax charge in what are regarded as innocent transactions, and to remove a taxation anomaly in the life assurance tax laws. In short, we believe that the amendments represent a far more straightforward way of moving in the direction that the Government have in mind.

The Economic Secretary will be aware that life assurance companies have two types of investment as subsidiaries held from their long-term funds: other insurance companies, and companies that are holding investment assets, such as property or bonds. Section 83(2) of the Finance Act 1989 currently taxes, in the parent life assurance company, any increase or decrease in the regulatory value of the subsidiary. That has certain unintended consequences, namely that life assurance groups have sought to obtain substantial tax deductions for the write-down in solvency value of such subsidiaries acquired intra-group when there is no equivalent commercial loss. That is normally because the certificate may be held in a long-term fund for a short period prior to a subsequent transaction—for example, because the subsidiary business will shortly be transferred to its parent.

Another unintended consequence is that there is potential for double taxation, as income and gains in the subsidiary are taxed and the resulting increase in value or dividend from the subsidiary would be taxed again, also at 30 per cent., in the parent life assurance company, which would mean an effective tax charge on such income of 51 per cent.—30 per cent. plus 30 per cent. on 100 per cent. minus 30 per cent. tax.

The quantum of the tax charge that arises from someone undertaking the planning will not equal the deduction that the Government wish to prevent, as one is based on fair value and the other on admissible or regulatory value, and the two are not the same.

We hope that our amendment will remove the double tax anomaly and prevent the structured transactions designed, owing to the difficult wording of section 83(2) of the Finance Act 1989. We hope that we can secure some assurances from Ministers that paragraph (8) does not go any further than closing down the abuse at which it is aimed.

The industry's concern with the existing wording is that shares in the transferor may generally be held in the transferee's long-term fund, to facilitate the part VII business transfer that is contemplated. Given that part VII transfers of businesses, other than those already heavily into run-off, are estimated to cost approximately £10 million in time and costs, not to mention the major drain on management time, no company will wish to undertake such a transfer solely for tax planning purposes. The costs in management and other time are colossal and it will not be used entirely as a tax planning vehicle.

Among the other concerns of the industry, it feels that as part of that transfer there is bound to be a fall in value in the shares of the transferor, as it is effectively reducing its surplus assets by way of a distribution. The rules require that an amount equal to that reduction in fair value is taken into account as a receipt under section 83(2) of the 1989 Act. That section brings into the charge to tax investment the return for life assurance computations, which, as the Minister will know, is calculated by a determination of the shareholder profit to be taxed at 30 per cent., and the taxable profits that shareholders make on writing pensions, overseas, individual savings account and life reassurance business.

The deemed receipt is aimed at negating tax planning. We accept that that is a desirable and acceptable objective by obtaining a tax deduction for the write-down in value of the subsidiary, which does not match an economic loss. The Association of British Insurers has also indicated that it recognises and agrees with the general principle that there should be an anti-avoidance measure in that instance. However, there is a concern—although much will depend on interpretation—that that section is too far cast and would potentially cover a number of transactions and a number of classes of transaction that are not immediately envisaged.

The concern is that where more assets than liabilities are transferred, as should be the case for a solvent insurance company, there will be a reduction in the fair value of the transferor and a charge in the transferee equal to that fair value reduction. That could cause problems, because if an asset is already held in the long-term fund, any write-down prior to 2003 was probably not taken into account and the amount of any write-down would not be determined by reference to fair value, but by reference to regulatory admissible value.

There is technical flaw in the clause. The amount of any tax deduction obtained in the transferee for a write-down is unlikely to equal the fair value adjustment which will be taxed on the transferee.

I have covered quite a lot of ground. The ABI has been in touch with the Minister in relation to this matter. In summary, its concern is that the clause provides that where there is an excess of assets over liabilities in a business transfer any subsequent trading loss arising in the transferee should be reduced by the amount of the new capital introduced. The Government believe that that should apply even where the reason for the loss has no connection with the transfer, which will, in effect, treat any loss made after the business transfer as if it were artificially created for avoidance purposes. That is not a sensible way forward.

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

Adjourned till this day at Two o'clock.

Standing Committee B

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

Frank Cook (Labour, Stockton North)

I remind the Committee that with this we are also taking amendment No. 109, in schedule 9, page 135, line 22, leave out from beginning to end of line 25 on page 136.

Mark Field (Conservative, Cities of London and Westminster)

As I was saying, before I was so rudely interrupted—

Frank Cook (Labour, Stockton North)

Order. You were interrupted in accordance with the timetable that the Committee agreed; there was nothing rude about it.

Mark Field (Conservative, Cities of London and Westminster)

Mr. Cook, the rudeness to which I was referring was your health, of course. As I was about to say before the moment of interruption arrived, may I now ask the Economic Secretary to respond to my comments on amendments Nos. 109 and 110?

Ivan Lewis (Labour, Bury South)

I would never be rude to you, Mr. Cook; as you said yourself, you are a man of legendary common sense and modesty.

Frank Cook (Labour, Stockton North)

Talk to amendment No. 110, please.

Ivan Lewis (Labour, Bury South)

Okay, Mr. Cook.

It is appropriate that amendments Nos. 109 and 110 are grouped, because the hon. Member for Cities of London and Westminster (Mr. Field) asked for that. I will address amendment No. 109 first.

As the hon. Gentleman explained, paragraph 8 adds a new section—section 444ACA—to the Income and Corporation Taxes Act 1988. It is designed to stop avoidance where business is transferred from one life assurance company to another. Paragraph 8 deals with situations in which company A—the company taking on the business—already owns some or all of the shares of company B, the company that transfers the business. In most cases, the transfer will cause the value of the shares in company B to fall. Under current tax rules, company A gets a tax deduction for that fall in value from either current or future profits. However, it is important to remember that that has happened only because company B transferred the business to company A, so the value of the business has now moved to company A. Therefore, company A has not really suffered a loss in value; the loss on the shares in company B is balanced by an increase in the value of its other assets. If we do not make the proposed change, companies such as company A will, in effect, get tax relief for the cost of acquiring business, and that is not an allowable tax deduction in any other circumstances. New section 444ACA stops that by adding an amount equivalent to the loss of the trading profits of company A for tax purposes. This is not a new idea. There are provisions in the capital gains tax code for denying deductions when that happens, and provisions that stop banks, share dealers—and, indeed, non-life assurance companies—getting relief for such losses. This change brings life assurance companies into line.

The hon. Gentleman suggested that there was scope for double charging. I can assure him that that is not the case. However, I accept that the new section might have the effect of bringing in an immediate increase in tax profits, even though the transfer of business might reduce profits over a period of years. That happens because companies often defer the recognition of gains and losses by valuing their assets at lower than market value for the purpose of calculating their surplus in their regulatory returns. That treatment is normally followed for tax purposes. Where a company adopts that approach, it is impossible to identify any individual gain or loss in a particular year's overall profits. In those circumstances, the only practical approach for the legislation to adopt is to bring in the additional amount at the time of the transfer of business. That may seem a little harsh in some cases, but there is no easy way of identifying which cases or how harsh. Having said that, I will ask Her Majesty's Revenue and Customs officials to discuss further with the industry the possibility of mitigating this effect in some cases. One way of doing that might be to spread the additional profits. I say to the hon. Gentleman that I cannot undertake to do anything under this Bill, but if a workable relieving measure can be found I shall look at the possibility of applying it back to December 2004 if that is reasonable. I am sure that all members of the Committee will agree that that is a benign, perhaps acceptable type of retrospection, which I hope that Opposition Members will not oppose.

The hon. Gentleman queried the use of fair value as the test for deciding the loss, if the company has written down the value of the assets to comply with the Financial Services Authority rules. I see no difference between that case and one in which the subsidiary, company B—if he can remember the example that I cited—was recently acquired for full market value. In both cases, an amount of cash equal to the value of the business of company B would have been received by company A and that represents the extraction of future profits which, but for paragraph 8, would go untapped.

The hon. Gentleman said that the business transfers under paragraph 7 are expensive and are not only carried out for tax avoidance. I agree that most paragraph 7 transfers are done for bona fide commercial reasons. They are used when industry consolidates, they are used for group restructuring and they are used in demutualisations. However, because there is a genuine commercial reason for the transfer, it does not mean that it cannot be structured in such a way that tax avoidance is a major consequence of the transfer. The fact that the Government have had to legislate repeatedly on such matters in 2003, 2004 and again this year demonstrates that that is a real issue.

Amendment No. 110 would remove from the investment return that is brought into account when computing a life assurance company's profits any part of the amount that relates to what the amendment calls ''subsidiary undertakings''. Now that the hon. Gentleman has explained the amendment, I begin to see why he considers that it would stop the avoidance that paragraph 8 is trying to stop. It would deny relief for losses on the shares of subsidiaries. However, the amendment suffers from a major difficulty. It does not explain how the loss in value of a subsidiary is to be carved out from an indistinguishable whole. That is exactly the problem that we had when drafting paragraph 8 and it is why, as I said, it can have the effect of bringing in profits too early.

The amendment does not just apply in cases when there is a transfer of businesses. It stops losses on subsidiaries in cases when there is no avoidance. That is not all that the amendment would do. It would go further than paragraph 8 in stopping losses. The Opposition have decided to do more and have tried to exempt from tax income and increases in value of subsidiary companies. It is difficult to justify the giving of a general exemption to shares in subsidiary undertakings and not to any other shares. If the shares of subsidiaries are held in the company's long-term insurance fund, there must be a presumption that they are held there because the income and gains from them provide benefits for policyholders. It is right that income, gains and losses are recognised and taxed at the appropriate rate.

It may be that, if a company could show that its subsidiaries were not somehow contributing to the life assurance business, there would be a case for carving them out. I hope that the hon. Gentleman accepts that the amendment makes no attempt to distinguish between subsidiaries that themselves carry on insurance business and those that simply hold a portfolio of investments as a convenient vehicle. I hope that he will agree that no subsidiaries of that latter sort should be given preferential treatment.

There are several other reasons why the amendment is flawed. I accept that that is a strong way in which to describe it, but the amendment would not work. It does not define subsidiary undertaking nor does it explain how the increase or decrease in value is to be carved out from an indistinguishable whole. It also seeks to discriminate in favour of UK-resident subsidiaries. I wonder whether the companies involved are the same companies that would be going to the European Court of Justice to protest about that sort of discrimination and to have it declared unlawful.

Having said that, I understand that issues about subsidiaries generally have been raised constantly in discussions with HMRC officials. I know that they would be happy to continue to discuss the issue in the context of the ongoing discussions on reform and simplification of the life assurance tax code more generally. I suggest to the industry that it pursues those discussions. On that basis, I ask the hon. Gentleman to consider withdrawing the amendment.

Mark Field (Conservative, Cities of London and Westminster)

I confess that I am comforted by some of the Economic Secretary's words on amendment No. 109, although I have to say that we Conservative Committee members are slightly cynical, given that the Minister bemoans the fact that the Treasury has had repeatedly to legislate in this area. Might not that suggest that the Government have not listened to representations, from my party and others, that have been made during past Finance Bills?

I accept that this area is complex and that, as the Minister rightly says, there will be an opportunity to consider the issue again if urgent action needs to be taken as a result of the potential difficulties that life assurance companies will face. The nature of the regulation on them, it has to be accepted, is slightly different from that applying to any other company. Although I appreciate that the idea is to link that with the general capital gains tax, the nature of the assurance and life insurance business is such that all too often the importance of maintaining reserves means that the transfer is not normal—whether from A to B, from C to D or whatever other letters may have been in the Minister's examples.

I accept what the Minister said about amendment No. 110. Given how it is couched, our amendment would potentially be open to abuse and go well beyond the subsidiary relationships that we had in mind. I am comforted in part that the Minister will take on board some of the concerns that we raised. With that in mind, 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. 111, in schedule 9, page 138, line 19, leave out from beginning to end of line 7 on page 140.

How appropriate, Mr. Cook, that we come to a full Nelson—number 111—on the 200th anniversary of the battle of Trafalgar. [Laughter.] Well, we have to find some sort of connection, so let us celebrate this amendment.

I fear that we shall not keep the Committee too long on this amendment. The commercial situation to which amendment No. 111 relates is that life insurance companies are required to prepare detailed regulatory returns for the Financial Services Authority. Tax charges are based on the amounts shown in those returns, rather than on statutory accounts as is the case with other businesses. In paragraph 13 of schedule 9, there are various amendments to the Finance Act 1989, many of which we discussed earlier.

Currently, in apportioning investment return between categories of business for the purpose of computing taxable profits from writing certain categories of insurance business, section 83A provides that the apportionment between those categories must be considered separately in the context of the investment return brought into account in each form 40 revenue account, which is included in the FSA return.

The apportionment rules that apply are different depending on whether the business recorded in the form 40 includes any with profits business. It is proposed that the rules be changed so that the only form 40s recognised for that purpose are any prepared in respect of with profits business. A notional form 40 will then be deemed to exist, covering the balance of the long-term business and the apportionment rules applied accordingly. That would require that when, for regulatory purposes, a life insurer produces separate form 40s for different non-profit businesses, those should be consolidated into a single form 40 for apportioning the investment return between those different categories of business.

We understand that the proposal has been introduced without sufficient consultation or consideration having been given to its effects. We have been lobbied by the Association of British Insurers, which is concerned that a number of its members may have to pay additional tax this tax year as a result of this change, without having been in any position to mitigate that loss.

The association made the point that, under this system and the anomalies of the bases in tax law by which life assurers attribute investment return to separate classes of insurance policies, in some cases more than 100 per cent. of investment returns will be taxed. That is true, although it was also true beforehand. It is a legitimate point that legislation that materially impacts on a company's taxable profits should, realistically, be enacted prior to the year's commencing, rather than confirmed in its final form more than halfway through the year, and after the date of the first instalment.

I appreciate that some of those issues, particularly those relating to timing, are a function of the fact that there will be a later Finance Act this year. Nevertheless, there is a concern about consultation. Do the Government feel that there has been sufficient consultation? Even if they are satisfied in that regard, do they feel that it would be more sensible to commence the provision in the financial year 2006–07?

Ivan Lewis (Labour, Bury South)

Before dealing with the effect of the amendment, I should like to explain what paragraph 13 does. Like paragraph 3 about inherited estates and the sunset clause—the subject of amendments Nos. 105 and 106, which hon. Members may recall debating this morning—paragraph 13 deals with apportionments of life company income and gains. The aspect that we are concerned with is how many separate apportionments have to be made to allocate investment returns to those categories of business, such as pension business, that are taxed on the basis of their operating profits.

Where a company divides its accounts into separate funds or sub-funds, it can, if certain conditions in tax law are met, carry out separate apportionments for each sub-fund, rather than make a single apportionment for the business as a whole. That can make quite a difference to the end result. I have to tell the hon. Gentleman that, unfortunately, some companies have manipulated their fund structures purely for tax purposes, and others have benefited excessively from fund structures created for other reasons. We are amending the rules to restrict the separate funds that can be the subject of separate apportionments. In essence, there will be a separate apportionment for each with profits sub-fund and one for everything else. That will produce a fairer outcome for all and remove the incentive to create non-profit sub-funds solely for tax purposes.

We expect this change to yield about £30 million a year. I must say that I suspect that the amendment is motivated by the concerns of one company that thinks that the changes will have a far more serious effect on it than the Red Book figures suggest. Of course, it would not be appropriate for me to comment on the affairs of an individual company—indeed, the hon. Gentleman did not do so—but I can say that the Red Book figures are based on the effect of the change compared with what HMRC believes to be the correct interpretation of the previous rule.

Paragraph 13 is vital if we are to stop a few companies getting an advantage as a result of having complex and, in many cases, unnecessary sub-fund structures. I ask the hon. Gentleman to withdraw the amendment on that basis. In response to his legitimate question about whether we have consulted adequately and sufficiently on the issues, I believe that we have. Some think that the measures will seriously disadvantage them, but if, consciously or otherwise, they are behaving in such a way as to avoid their tax responsibilities, it is up to us to put these measures on the statute book as soon as we can. In that context, I ask the hon. Gentleman to withdraw the amendment.

Mark Field (Conservative, Cities of London and Westminster)

We have had debates on tax planning and avoidance on a number of occasions. We Opposition Members do not want to be seen as the avoider's friend, but it is fundamental that companies should not be expected to manage their tax affairs in such a way as to pay as much tax as possible into the Exchequer's funds. We certainly support legitimate tax planning. We did not think that there was a deliberate sense of trying to avoid taxation.

The notion of having different funds, and the rather complicated area in which life assurance companies need to work, means that such companies are likely to have various different structures in place. There is a concern among Opposition Members that all too often the Treasury assumes that there should be a standard structure, and that if there are different structures in place, that can only point the finger at what it regards as contrived tax planning and therefore tax avoidance. That is somewhat misguided; this is a complicated area. In the same way as we have received representations, specific representations have been made to the Treasury. In so far as particular companies suffer greatly, we will revert to this issue in future years. It is quite clear that these matters come up annually in Finance Bill after Finance Bill. That should be borne in mind. We have had a chance to air these matters publicly, and that has been useful. 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. 112, in schedule 9, page 141, line 22, at end insert—

'(2A) Section 76 of ICTA 1988 is amended as follows—

(2B) In subsection (11) after paragraph (a) insert—

''(aa) receipts of the company chargeable under Case VI of Schedule D by virtue of section 85(1) above,

(ab) income of the company treated as referable to basic life assurance and general annuity business by section 441B(2) of the Taxes Act 1988 (treatment of UK land),

(ac) amounts treated as accruing to the company and charged to tax under Case VI of Schedule D by virtue of section 442A of that Act (taxation of investment return where risk reinsured), and''

(2C) Section 89 of the Finance Act 1989 is amended as follows—

(2D) Replace subsection (1B) with—

''For the purposes of this section the BLAGAB profits of a company for an accounting period are the aggregate of—

(a) income and chargeable gains referable in accordance with section 432A of the Taxes Act 1988 to the company's basic life assurance and general annuity business insert,

(b) receipts of the company chargeable under Case VI of Schedule D by virtue of section 85(1) above,

(c) income of the company treated as referable to basic life assurance and general annuity business by section 441B(2) of the Taxes Act 1988 (treatment of UK land),

(d) amounts treated as accruing to the company and charged to tax under Case VI of Schedule D by virtue of section 442A of that Act (taxation of investment return where risk reinsured).

reduced by the aggregate of—

(e) any non-trading deficit on the company's loan relationships,

(f) expenses of management falling to be deducted under section 76 of the Taxes Act 1988, and

(g) charges on income,

so far as referable to the company's basic life assurance and general annuity business.''.'.

The amendment looks considerably more tortuous than it is. It follows the rule of thumb that the longest amendment often has the simplest of motives, and that is the case with this one.

The amendment makes logical changes to paragraph 16 to ensure that the changes caused by paragraph 15 filter into all the relevant legislation where there is a need to determine the quantum of profits arising under a computation for basic life assurance and general annuity business, combined with the pension business case computation against the trading profits if the life assurance business were taxed in the same way as any other company.

I will give two examples in relation to that. Section 76 of the Income and Corporation Taxes Act 1988 involves limiting the deduction for management expenses in a life assurance company where the shareholder profits in the company exceed the overall profits. Section 89(1A) of that Act seeks to determine what proportion of taxable profits are taxed as policyholder profits—in other words, at 20 per cent.—or as shareholder profits, where the 30 per cent. rate applies.

The amendment is relatively straightforward. Perhaps the Economic Secretary thinks that it is a belt-and-braces amendment and that the problems that we have foreseen are not as large as we are making them out to be. I am interested to hear his comments.

Ivan Lewis (Labour, Bury South)

I am delighted to say to the hon. Gentleman and to the Opposition that we agree entirely with their objectives on this matter. That is a major revelation on a hot Thursday afternoon. There are flaws in the way that the amendment is worded, but I guarantee that the effect of it will be in the regulations that are issued by HMRC about apportionment. We debated that in relation to amendments Nos. 105 and 106. While I cannot agree to the amendment's wording, its objective will be incorporated in the regulations. On that basis, I ask the hon. Gentleman to withdraw the amendment.

Mark Field (Conservative, Cities of London and Westminster)

There is no luck in this game is there? That happens on the very last amendment that I am speaking to on this Bill. Perhaps I should take up a few other amendments if I am to have such good fortune in the Economic Secretary's eyes. Given the great assurances that he has made on the amendment, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 9 agreed to.

Clause 45 - Lloyd's underwriters: assessment

Mark Francois (Conservative, Rayleigh)

This is not the first time that I have spoken in this Committee, but it is the first time that I have done so under your chairmanship, Mr. Cook. I take this opportunity to welcome you to the Chair.

The clause is relatively non-controversial. It has the effect of amending the administrative arrangements by which tax is collected from the Lloyd's names. It permits the tabling of regulations. Some draft notes on the proposed new regulations were helpfully circulated to the Committee by the Economic Secretary on 22 June. The only question arising from that is that the draft note circulated to the Committee states that the regulations will be laid in future and the Government are intending to consult Lloyd's over their implementation of them, which I am sure Lloyd's will welcome. When does the Economic Secretary anticipate that that consultation period is likely to begin?

Ivan Lewis (Labour, Bury South)

It will begin immediately. Lloyd's is, as the hon. Gentleman said, very happy and sees the measure as a logical step forward. I think that I put a little bit more pressure on my officials than they wanted me to, because the note says ''Before December''. But I shall stick with ''immediately'', because Lloyd's has welcomed the proposals and wants to get on with it in the same way that we want to ensure that the measures are implemented. We will get on with the consultation immediately.

Mark Francois (Conservative, Rayleigh)

I thank the Minister for that reply, which will be of comfort to the Committee if not his private secretary.

Clause 45 ordered to stand part of the Bill.

Clause 46 - Energy Act 2004 and Health Protection Agency Act 2004

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 91, in clause 46, page 38, line 44, at end add

'or

(c) the pension rights and entitlements of former employees of UKAEA who are members of pension schemes that were, or are, run by UKAEA.'.

The amendment seeks to safeguard the pension rights of United Kingdom Atomic Energy Authority employees. The clause is a tidying-up exercise following decisions contained in the Health Protection Agency Act 2004 and the Energy Act 2004. The Health Protection Agency Act 2004 created the new Health Protection Agency, which among other things absorbed the old National Radiological Protection Board, which will cease to exist in its current form. The clause removes certain exemptions that applied to the old NRPB.

Under the Energy Act 2004 the role of the UKAEA is also scheduled to alter and certain exemptions from income and corporation tax on its investment income are also being removed as a result of that. However, the two situations are slightly different, because UKAEA will continue with an altered remit, while the NRPB per se will cease to exist. There could be implications for the pension schemes of UKAEA employees and pensioners.

Mark Francois (Conservative, Rayleigh)

I apologise in advance to the hon. Member for Wolverhampton, South-West (Rob Marris) for having the temerity to quote from the explanatory notes.

Rob Marris (Labour, Wolverhampton South West)

He is stealing my script!

Mark Francois (Conservative, Rayleigh)

I fear that the hon. Gentleman's copyright may be in danger.

The explanatory notes acknowledge the possibility that there could be implications and seek to provide some reassurance in the following terms:

''This also affects in principle pension schemes run by the Authority but in practice there is no effect because the schemes are still subject to the normal rules for pension schemes.''

That may be so, but given the general concern surrounding what has happened to pensions in the United Kingdom over the past few years, amendment No. 91 would provide extra security to UKAEA pensioners and employees by placing in the Bill the requirement that their pension entitlement should not suffer as a result of the changes, rather than tucking it away as a comment in the explanatory notes, which are not formally part of the Bill. We are seeking to upgrade the protection from the explanatory notes to the Bill.

I have here the latest edition of the UKAEA glossy newsletter, ''UKAEA Today'', which I believe has been circulated to a number of Members of Parliament including me. It talks at some length about the future development of the company but unfortunately says little about its staff and—having read it carefully—nothing about their pensions.

We would like the Government to agree to the amendment to provide some extra security, but if they are not minded to do so at this stage—and they may not be—perhaps the Minister would provide some firm assurances that will be of comfort to the employees and pensioners of UKAEA.

Rob Marris (Labour, Wolverhampton South West)

Reading the hon. Gentleman's amendment and listening to what he says, I can understand his point. However, is he sure that his amendment would cover situations in which pension entitlements get better? The thrust of his speech is that there is a risk of adverse change, but is there a risk of beneficial change being excluded under the amendment?

Mark Francois (Conservative, Rayleigh)

The hon. Gentleman asks a fair question, but I am sure that he and the other Committee members can see the principle of what we are attempting to do. We simply seek some reassurance from the Government that pensioners will not suffer. If, on the contrary, at some point in the future they do better, that is well and good from their point of view, but we want to know that they will be adequately protected.

Ivan Lewis (Labour, Bury South)

It is reassuring and touching that the Conservative party is on the side of pension holders, given some of the mis-selling scandals that happened when they were in government, when there was a lack of an appropriate regulatory framework. Having said that, Mr. Cook, you will be delighted to learn that I shall not say any more on that. Instead, I say to the hon. Gentleman that he raises a valid point about the need to reassure people by placing certain things on the record, and I shall try to do so.

The clause itself operates on the tax treatment of the pension schemes only. The rights or entitlements of individuals are not affected. The exemption for the specific pension schemes was introduced many years ago, and circumstances have changed since then. The relevant point is that specific provisions granting exemptions for the UKAEA-run pension schemes that we now seek to remove are no longer necessary to provide exemption. Either the exemptions being removed do not, and will not, apply in practice to a particular pension scheme, or exemption will otherwise be provided by the general rules for pension schemes. The removal of the exemptions from the pension schemes was discussed with UKAEA and no objection was raised. Therefore, the amendment is neither relevant nor necessary. The sentiment behind it is understandable, and I hope that we have placed on record the reassurances that the hon. Gentleman sought. On that basis, I ask him to withdraw the amendment.

Mark Francois (Conservative, Rayleigh)

I thank the Economic Secretary for not wandering off the subject, and for not going into the whole concept of mis-selling, so I will reciprocate by not talking about the £5 billion a year that the Chancellor has taken out of people's pensions.

I have listened carefully to the Economic Secretary's comments. He provided some qualified reassurance. I have no doubt that his speech will be printed in the next edition of ''UKAEA Today'' and will be read with alacrity by all its employees. The Economic Secretary entirely understood what we were trying to do, as did the hon. Member for Wolverhampton, South-West. In principle, the Economic Secretary has provided us with reassurance for those employees and pensioners, and I am sure that they will be grateful. Having achieved my aim, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 46 ordered to stand part of the Bill.

Clause 47 - E-conveyancing

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 92, in clause 47, page 39, line 11, after ''regulations'', insert

'laid in draft at least 90 days before such regulations would otherwise come into effect'.

We now move on to part 3, which deals with stamp taxes, and in particular stamp duty land tax. The two biggest headline matters in relation to stamp duty land tax, the increase in the basic threshold to £120,000 and the abolition of disadvantaged areas relief, were dealt with in the previous Finance Bill, which was passed during the pre-election wash-up period, so I shall resist the temptation to go over those matters again. Part 3 of this Bill deals with the remaining measures in relation to stamp duty land tax. However, some important proposals dealing with a very broadly drafted power of HMRC—not least in schedule 10—still have to be discussed.

Amendment No. 92 deals with the proposed regulations for e-conveyancing, on which I shall focus specifically as I address the amendments. In the clause stand part debate, I should like to raise some concerns, of which I have given the Minister private—albeit brief—notice, following a number of representations made to us indicating that the new electronic systems for recording and processing this type of information in relation to stamp duty land tax are not working well at present. I hope, Mr. Cook, that you see how I am trying to divide the two for the sake of clarity.

I turn to amendment No. 92. The stamp duty land tax regime, which replaced the well established stamp duty system, was introduced in late 2003. Clause 47 further amends the new stamp duty land tax regime to take account of the e-revolution by modifying the scheme to allow for the developing trend of e-conveyancing for property purchases. The Government have stated that they will produce regulations setting out in detail how this new system is designed to operate. Amendment No. 92 seeks to ensure that the regulations are available in draft format at least 90 days before they are due to come into force.

We tabled the amendment partly because the stamp duty land tax regime is generally agreed to be very much more complicated than the scheme that it replaced. Perfectly understandably, those who are likely to be affected want something of a lead-in period when they have had sight of the new regulations, so that they can adjust to the new arrangements before they go live. To be fair to the Government, they have acknowledged that problem. Recently, the Economic Secretary wrote to Committee members on this point. I quote from his letter of 16 June:

''It is likely that e-conveyancing and e-registration processes will involve a single set of information, including information relating to stamp duty land tax, being delivered in electronic form to a central core. Thus the regulations will, for example, need to provide that delivery of stamp duty land tax information to the central core counts as valid delivery of a stamp duty land tax return.''

The Minister provided some partial reassurance on the timings for the new regulations, which are the specific topic of the amendment. In that same letter, he wrote:

''The regulations will not be made until the processes for e-conveyancing and e-registration have been developed. This may not be for some time. There will be full consultation with conveyancing practitioners and others before the regulations are made.''

In terms of adjusting to the new system, that may be of some comfort to those working in this field, particularly as it states that they will be fully consulted before the regulations come into force. We acknowledge that. However, the letter states that that may not happen ''for some time''. To try to reduce uncertainty, will the Minister say anything further about the anticipated timings? When, roughly, does he expect the draft regulations to come out? How long in principle is the consultation exercise intended to last before the regulations go live? What is his target date for their coming fully into effect? Having asked the Economic Secretary those specific questions, I look forward to what I hope will be some clear answers.

Rob Marris (Labour, Wolverhampton South West)

I declare an interest as a member of the Law Society, although it has probably been 20 years since I did any conveyancing. I have heard comments and sometimes complaints from the Wolverhampton Law Society about difficulties with what I think is called SDLT form 1, which, as I remember, has to be provided within 30 days of a transaction involving the transfer of a title of land to ensure that the stamp duty land tax is paid. I believe that within 56 days of the transfer of a title of land, the application has to be made to the district land registry for registration. Like the hon. Gentleman, I should like some reassurance that the profession will have adequate notice of any regulations that may be made under clause 47(2). It is very important to consult with bodies, as the Government and Treasury always do, but I have to tell my hon. Friend the Minister that although consulting with the Law Society of England and Wales is important, such consultation does not necessarily reach the average solicitor, licensed conveyancer or conveyancing clerk in a solicitor's office. Some helpful lead time would be of great assistance to the profession.

Ivan Lewis (Labour, Bury South)

The hon. Member for Runnymede and Weybridge (Mr. Hammond) said from a sedentary position that draft regulations have become the bane of our collective lives. I suspect that he is right, because when his party was in government it did not produce any draft regulations alongside the Finance Bill; perhaps we could learn some lessons from that approach. However, this is a far more transparent and open Government, as Opposition Members will be glad to concur.

My point to my hon. Friend the Member for Wolverhampton, South-West and the hon. Member for Rayleigh (Mr. Francois) is that it is absolutely guaranteed that there will be proper and appropriate consultation on the regulations. If we do not have the understanding and support of the profession, the system will not work. It is therefore very much in our interest to consult properly over a reasonable period, and to seek agreement. Now that I have placed that assurance on the record, I hope that the hon. Member for Rayleigh will withdraw the amendment.

Mark Francois (Conservative, Rayleigh)

I hear what the Minister says about what, in principle, will happen, but I was asking whether he could at least provide us with some indicative dates. I do not expect him to give us the precise day, but I was hoping that he would at least say in which months the process might get going. It would be helpful if he did that before concluding.

Ivan Lewis (Labour, Bury South)

I am not going to say ''immediately'' on this occasion, because I am in enough difficulty as it is for having said that in respect of a previous amendment. The key is to get the regulations right, and to ensure that they are not bounced on the profession. We must take the profession with us, so we will ensure that the regulations are brought in over a reasonable period in full consultation with the profession. As long as the profession understands that and is engaged in the consultation, it does not need me to give some artificial date that may turn out not to be doable. A date may turn out not to be doable not because of the Treasury, but because of the profession's approach.

Once again, I ask the hon. Gentleman to withdraw the amendment, as I have genuinely tried to respond to his concerns. Then we can have a brief debate on the other issue that he raised, which was to do with systems.

Mark Francois (Conservative, Rayleigh)

I have heard what the Minister has to say. I assure the hon. Member for Wolverhampton, South-West that I am not trying to get him into trouble with his Whip—well, no more trouble than he is in already. It was interesting that, from his own practical experience and that of ex-colleagues in the profession, he was able to amplify on the fact that there are genuine operating problems out there. I am grateful for his honesty in doing so.

In all fairness to the Minister, he has listened to us on this matter. He has assured us that the profession will be fully consulted, and we welcome that. At the risk of being churlish, I still think that it would have been nice to have had some slightly more indicative dates. Nevertheless, he has given a pretty solid commitment that people will be consulted. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Mark Francois (Conservative, Rayleigh)

I should like to bring to the Minister's attention a number of problems concerning the electronic systems for dealing with the administration of stamp duty land tax. The summary of clause 47 in—dare I mention them—the explanatory notes says that the clause

''gives HM Revenue and Customs power to make regulations to facilitate the integration of the stamp duty land tax process into electronic conveyancing initiatives.''

However, the practical problems of administering SDLT are complicated by the comparative complexity of the tax itself, a point highlighted by the president of the Law Society in a letter to the Chancellor of the Exchequer dated 28 February 2005. The president opened the letter by saying:

''It is now over a year since the new tax Stamp Duty Land Tax . . . was introduced. However, instead of SDLT being seamlessly assimilated into the tax system, the opposite has occurred and increasing numbers of practical, legal and technical problems continue to be discovered. This is not satisfactory to taxpayers and their advisers who need the modernised stamp duty to be simple, certain and fair.''

There is a particular problem arising from the switch to electronic scanning of SDLT returns, because the scanners apparently have trouble accurately recognising the information on the forms, especially figures. On a tax return, it could be argued that that is a drawback. About a third of the submitted returns are rejected by the computer system and that often leads to the Department's computers raising fines or requisitions—as they are known—for £100 for failing to submit an accurate return on time, even though the documentation has been properly completed and forwarded in good time, but not properly scanned. Mr. Nally said of the practice:

''In circumstances where requisitions have been raised because the IR scanner has been unable to accurately read a postcode or if there is a typographical error the raising of a penalty of £100 is unfair. Where there has been no loss to the exchequer penalties are unnecessarily harsh.''

In fairness, I should say that HMRC has established a telephone inquiry line to help solicitors and their clients to deal with problems when completing their returns. However, there have been reports of severe problems in getting through to the call centre because the lines are constantly engaged and there are insufficient trained advisers to man them at the other end. The president of the Law Society was cutting about that and said:

''Because of the issues referred to above both solicitors and their clients are trying to obtain help through the enquiry lines but these are constantly engaged. Waiting times of up to 40 minutes have been reported. No business or individual taxpayer can afford to spend that amount of time especially in circumstances where all requisite information has been supplied.''

That complaint was corroborated by the Chartered Institute of Taxation, which in correspondence with HMRC has also highlighted the weaknesses in the electronic systems used for administering the tax. In a comparatively recent letter—it is dated 20 May—to HMRC officials Lakshmi Narain, the chairman of the Chartered Institute of Taxation's corporate tax sub-committee, stated:

''we would also draw attention to the fact that practitioners are reporting significant problems when trying to file land transaction returns electronically, and we understand that Stamp Taxes are experiencing difficulties in scanning paper returns into their computer.''

It is beyond doubt that there is a practical problem that needs to be dealt with. By the sound of it, legal practitioners and their clients are pretty displeased with the way in which the system is operating at present. Will the Minister explain how the problems will be addressed? For example, will the scanners be upgraded or reprogrammed to make them more robust and able to record accurately the information on tax returns? Is the matter of inappropriate requisitions being looked at to stop practitioners being fined for something that is not really their fault? There are parallels with other taxes at present, when the Revenue has agreed publicly that, if it was its fault, it will not try to claw back money. That principle could be well applied in the circumstances to which I have referred. I am sure that the Paymaster General can provide the Economic Secretary with appropriate advice if he needs it.

In addition, given the complexity of stamp duty land tax—a complexity of the Government's creation; it was their brain child, after all—are more specially trained advisers being posted to man the associated telephone helpline and thus reduce the delay for callers? In short, what are the Government doing to rectify the obvious shortcomings in the electronic and telephone elements of the stamp duty land tax system, even before their proposed new arrangements are brought in? We have received quite a few representations on the matter. There is a genuine operating problem and it would be useful if the Minister gave us an idea of how the practical difficulties will be sorted out.

Rob Marris (Labour, Wolverhampton South West)

I have to endorse some of the hon. Gentleman's comments. Will my hon. Friend the Economic Secretary give us an assurance that he and his officials will at least look into the matter? Some hiccups—to say the least—in the system's operation have been reported to me by the Wolverhampton Law Society.

Ivan Lewis (Labour, Bury South)

I thank the hon. Member for Rayleigh for giving me advance notice of his contribution. We take these issues seriously and do not dismiss them as unreasonable concerns. However, more factors are involved than our systems not working to maximum effect. The hon. Gentleman is unaware, or chose not to mention, that the deputy chairman of the board of HMRC recently met with the president of the Law Society to discuss the problems. It was a very productive meeting.

Initially, there were problems with call centre waiting times—they were unacceptable. As I understand it, however, the average waiting time is now less than five minutes. If that figure is accurate, it represents pretty good going by any standard.

It is important that we are clear about the responsibilities that the professionals submitting the forms have to fulfil, as well as about our responsibility to put the systems right. Let me take a moment to explain why problems occur. In many cases, returned forms are rejected because they are incomplete or incorrect. The scanning technology that we use makes it important that forms completed by hand are accurate. It seems reasonable to expect them to be completed accurately, particularly as they are coming from reasonably well qualified and, I assume, reasonably well paid lawyers. However, as an alternative, I urge practitioners to use the online or CD-ROM versions of the return forms, because the rejection rate of those forms is very low. That is an important point. We also issue all practitioners with regular newsletters—more newsletters—that give guidance on completion of the forms, and there is comprehensive guidance on the HMRC website.

Issues have been raised and we intend to take them seriously—we are already doing so—but I hope that the profession will take account of the fact that we need it to fulfil its responsibilities in an appropriate way if some of the systems failures are not to continue. In recognising that, I bring my comments to a close.

Mark Francois (Conservative, Rayleigh)

I thank the Economic Secretary for what he said. Judging by the tone of his answer, he acknowledges that there were practical difficulties, so we were right to have raised them. I have listened carefully to his replies. For instance, he talked about filing electronically. If people fill in their return online, it goes straight to the receiving computer and so does not need to be scanned. That is a practical way of getting round the problem of the scanner, but, in my humble opinion, it would be better if the scanner worked properly in the first place. Nevertheless, we have heard what the Economic Secretary had to say.

I would like to drive home one other point, which relates to requisitions. I would like reassurance that they will be double checked, to ensure that where something is HMRC's responsibility because of a technical problem, requisitions will not be raised against people. The form could be manually double-checked and everything could be seen to be in order. That process should be undertaken before the requisitions go out, so that the computer does not automatically fine people for something that is the scanner's fault. Will he provide reassurance on that?

Ivan Lewis (Labour, Bury South)

I am happy to provide the hon. Gentleman with that reassurance. Penalties are not levied when we receive a return on time, but HMRC raises a requisition. I hope that that reassures him.

Question put and agreed to.

Clause 47 ordered to stand part of the Bill.

Clause 48 - Disclosure of information contained in land transaction returns

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 93, in clause 48, page 40, line 15, after '1988', insert 'and'.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss amendment No. 94, in clause 48, page 40, line 19, leave out from '1977' to end of line 21.

Mark Francois (Conservative, Rayleigh)

Thank you for your understanding earlier, Mr. Cook.

The amendments seek, in effect, to remove subsection (1)(d) of new section 78A, which as it is drafted provides a broad power for the passing on of information disclosed in land transaction returns. Clause 48 enables information on stamp duty land tax returns to be made available to the persons determined by Ministers by regulations—principally the Valuation Office Agency in Great Britain and its equivalent in Northern Ireland. However, new section 78A(1)(d) expands the definition considerably to include the potential use of such information:

''by such other persons or for such other purposes as the Treasury may by regulations prescribe.''

The explanatory notes on the clause say:

''The Inland Revenue was, and HM Revenue and Customs is, under a duty of confidentiality as regards information in its possession relating to the affairs of individual taxpayers. It follows that disclosure of such information is not permitted without statutory authority.''

So far, so good. It is nice to have that reassurance, but I am concerned that, in effect, the clause confers that statutory authority to pass such information to anyone whom Ministers deem fit to have it for whatever purpose they deem necessary at the time. That is an extremely broad definition that our amendment would rescind by returning to the narrower definition in the rest of the subsection.

On a related point about timing, subsection (5) points out that the powers under the clause may

''come into force on such a day as the Treasury may by order appoint.''

That could happen very quickly if the Treasury so chooses. However, the Economic Secretary's letter to the Committee of 16 June says:

''The Treasury have no plans at present to exercise this power.''

That letter then provides partial reassurance by promising full consultation with practitioners and other interested parties before any such changes are made, and holds out the potential for publication of a regulatory impact assessment in such circumstances. That is all well and good as far as it goes, but it still prompts the question why Ministers are so keen to bring in such a broad power to pass on taxpayer information given their present claim that they are reluctant to use it.

Perhaps the Minister could provide further information in his reply as to what is really behind all this to persuade we on the Opposition Benches not to press the amendments to a vote. As things currently stand, we are genuinely concerned by the brevity of the subsection.

Stephen Williams (Liberal Democrat, Bristol West)

Just for novelty I thought that I would say something.

We share the misgivings of the Conservative Opposition and wish to probe the Government's intention behind the insertion of new section 78A(1)(d) into the Finance Act 2003. I think the hon. Member for Cities of London and Westminster made a passing reference to Trafalgar earlier this afternoon. Of course, Nelson's fleet was partially financed by an innovation of William Pitt called income tax, which was so unpopular with our predecessors that they insisted that no official of the Crown should be privy to every source of an individual taxpayer's income. That is largely why we have the schedule system of income tax that is to this day remains relevant in corporation tax. However, it looks like the subsection sweeps away the important principle that information should be provided by a taxpayer to the Government for a defined and narrow purpose, and for that purpose only.

It is a puzzle why new section 78A(1)(a), (b) and (c) narrowly define which officials of the Valuation Office Agency should be allowed to have this information, and why the Government feel it necessary to add a broad scope under paragraph (d) for information to be provided to all other persons whom the Treasury may prescribe. We already know that many taxpayers and citizens are sceptical of official forms that they have to fill in for the Government. For example, people are often reluctant to give full details on census returns because they are suspicious of the use that government will make of it. The clause is another example of that. As the hon. Member for Rayleigh said, it appears to give the Government very wide powers to use information for whatever future purpose they might determine.

Mark Francois (Conservative, Rayleigh)

I am following the hon. Gentleman's argument, and it seems to me that he is broadly in agreement with us. As a member of the blue fleet, may I ask him as a member of the yellow fleet whether, if we were to press the clause to a Division, he would combine with us to assault the red fleet?

Stephen Williams (Liberal Democrat, Bristol West)

Yes, I suppose we would, and with all guns blazing. If we were to liven up proceedings thus, it would help to keep us going. However, in proposed new section 78A, I would like the Minister to explain why, following the narrowly defined powers in subsection (1)(a), (b) and (c), paragraph (d) provides such wide powers. Why do the Government need such a broad definition of that power?

Ivan Lewis (Labour, Bury South)

I welcome the Liberal Democrats to the Committee. If they had been leading us in the battle of Trafalgar, we would never have stood a chance of winning because they would not have turned up.

Reassurance is required for the points made by hon. Members and I will endeavour to supply it. I appreciate that there is concern that the clause gives powers that are too wide ranging. On the timing issue, I assure Members that we feel that it is important to consult thoroughly, and we will do so; we have no intention of rushing this legislation through.

The purpose of clause 48 is to preserve the existing situation whereby information on land transaction returns can be used by the Valuation Office Agency in Great Britain and the Valuation and Lands Agency in Northern Ireland for various purposes, including keeping valuation lists for council tax and rating purposes up to date. There is nothing new about provisions permitting the disclosure of such information; they have existed since 1931. However, we recognise that over time—you may be able to confirm this, Mr. Cook—the information requirements of the VOA and the VLA might change, and it is in the interests of all property owners and tenants that the two agencies continue to have access to high-quality information.

The clause includes a power to vary by regulation the persons to whom information may be disclosed and the purposes to which information may be put. For example, legislation currently permits information to be disclosed in the context of an appeal against a council tax valuation, but only in England and Wales. It might be appropriate to permit disclosure in the context of an appeal in Scotland, or an appeal against a business rates valuation. The use to which the VLA in Northern Ireland can put the information is restricted, as, unlike the VOA, it is not part of HMRC. It might be appropriate to extend the permissible uses, so that the VLA can provide a better valuation service to Government Departments in Northern Ireland.

I appreciate the concerns of the hon. Members for Bristol, West (Stephen Williams) and for Rayleigh about the disclosure of taxpayers' confidential information. However, much information about property transactions—for example, about purchase prices in Great Britain—is already in the public domain. It certainly is not our intention to allow the disclosure of information that is only of interest to HMRC; I hope that that reassures hon. Members. I can also assure the Committee that any regulations will not permit the disclosure outside HMRC and the valuation agencies of any personal information about the parties to the transaction, such as names, addresses, telephone numbers or tax references, nor will they permit disclosure outside HMRC and the valuation agencies of information about the amount of stamp duty land tax paid or payable or about any relief from that tax that has been claimed.

I hope that I have been able to reassure hon. Members, and that the hon. Member for Rayleigh will withdraw the amendment.

Mark Francois (Conservative, Rayleigh)

I have listened carefully to what the Economic Secretary has said, but I am not entirely convinced. The amendment does not stop information being passed on to the respective valuation office; it just stops it being passed on much more broadly by ministerial fiat, by virtue of regulations that we do not have in front of us now. There is no suggestion that if our amendment were agreed to that the valuation officers would not be able to do their job: they will, and we are not trying to impede that process. We are trying to ensure that Ministers do not slip into the Bill a much broader and more wide-ranging power that is indicative of a trend that runs throughout the Bill.

A point made in earlier sittings by my hon. Friend the Member for Runnymede and Weybridge was that there is a trend for the Government to legislate broadly—giving themselves Henry VIII powers in certain clauses—but to provide some reassurance on the record when such matters are debated. Our preferred method would be to draw the legislation tightly in the first place so that those reassurances are not required.

I have listened to the Economic Secretary, but he has not convinced me so I give him notice that we on the Conservative Benches intend to engage the enemy more closely and will press this matter to a vote.

Stephen Williams (Liberal Democrat, Bristol West)

Following on from what the hon. Gentleman said, the Economic Secretary gave good reasons for paragraphs (a), (b) and (c), but he did not address the need for paragraph (d). I should like him to return to that.

He said that since 1931 the stamp duty office has been able to pass to the valuation office details of house prices. I did not know that but it may be true. However, it could not pass on to income tax inspectors, for instance, somebody's purchase price for a house, whereas under the power in the Bill it seems that all departments of the Inland Revenue could be privy to information about people's purchasing power as they buy property. That could lead to an investigation against somebody's self-assessment income tax return, whereas at the moment the Inland Revenue would not be privy to that information.

Will the Minister address the question that the hon. Member for Runnymede and Weybridge and I asked him? Why do we need the broad powers in paragraph (d), rather than in paragraphs (a), (b) and (c)?

Ivan Lewis (Labour, Bury South)

As far as I am aware the purchase price of a property is already in the public domain at the Land Registry, so I am not sure what the hon. Gentleman is getting at. In the interests of all Committee members, and since the hon. Member for Rayleigh wants to engage the enemy, Mr. Cook, let's get engaged. [Laughter.]

Frank Cook (Labour, Stockton North)

There are some quite astonishing questions coming up in this Committee.

Question put, That the amendment be made.

The Committee divided: Ayes 8, Noes 12.

Schedule 10 - Stamp duty land tax: miscellaneous amendments

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 95, in schedule 10, page 145, line 7, after 'effect', insert

', (but not so as to make the vendor in relation to the earliest previous transaction the vendor for the purposes of paragraph 5(2)(a))'.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss the following amendments: No. 96, in schedule 10, page 145, line 13, at end insert

'and relief has not been withdrawn by virtue of paragraphs 3 or 9 on or before the change of control in the purchaser to which this paragraph applies,'.

No. 97, in schedule 10, page 145, line 42, at end insert—

'(6) Where—

(a) there is a change of control of the purchaser; and

(b) the same circumstances that give rise to a change of control of the purchaser in relation to the relevant transaction may also give rise to a change of control of the vendor; and

(c) paragraph 4A(1) could apply in relation to an earlier transaction on which group relief has been obtained and not withdrawn (''the prior transaction'') in relation to which the vendor (under the relevant transaction) was the purchaser (under the prior transaction);

paragraphs 3 and 4 shall only apply to the prior transaction if and to the extent that the market value of the property the subject of the prior transaction, exceeds the market value of the property the subject of the relevant transaction''.'.

Mark Francois (Conservative, Rayleigh)

I congratulate the Economic Secretary on winning that brief naval engagement. The only drawback is that he will now have to be shot.

We have a number of amendments relating to the schedule to consider. I should give notice that part of the schedule is potentially controversial. Amendment No. 95 is a probing amendment, which deals with the issue of potential secondary liabilities as outlined in part 1 of the schedule, and deals with group relief from stamp duty land tax. The amendment concentrates on what happens when property is transferred between companies within a group, for instance as a result of a corporate reorganisation. Those transactions are usually given so-called group relief from payment of stamp duty land tax on the general rule that the transferred property then remains in the group for at least three years.

In essence, the Government's proposal in part 1 relates to a situation where a property is transferred from company A to company B within a group, is then subsequently transferred from company B to company C, again within the group, and Company C then leaves the group within the three-year period. That makes company C potentially liable for repaying the group relief, which had been given at the time of the internal transfer. I am sure that you follow all that, Mr. Cook.

The new clawback provision in new section 4A also appears to open a potential secondary liability for company A if company C fails to pay the stamp duty land tax. Our concern is that, as drafted, new section 4A(1) opens such secondary liability too far back down the chain, to A, even though A might not have been involved in the subsequent transaction between B and C. That is achieved by deeming A in the example just given to be the vendor for the relevant transaction previously having taken place further up the chain. The purpose of the amendment is to ascertain whether that was the Government's original intention. If it was, what is their rationale for the measure? Do they genuinely believe that there have been a number of attempted avoidance schemes on the basis that we are discussing? Are they using this part of the schedule to plug a loophole? We are interested to know the rationale underlying the proposal and to know about any evidence that they can give the Committee in order to substantiate what they seek to do. I look forward to hearing the Economic Secretary's reply.

Ivan Lewis (Labour, Bury South)

I am wondering whether those As, Bs and Cs were the same ones that I was referring to earlier. I am not quite sure, but I will do my best to respond in detail to the hon. Gentleman's reasonable points.

It would be useful if I started by explaining why we feel there is a need for these measures. Stamp duty land tax was introduced in 2003. One of the main drivers was to provide fairness between taxpayers. Residential purchasers and small businesses have never had any choice over whether to pay stamp duty. By contrast, stamp duty was effectively a voluntary tax for many commercial purchasers and lessees. Thus, as part of the process of modernising stamp duty, the Government were determined to build in an effective anti-avoidance regime. The legislation implementing stamp duty land tax thus contained a number of anti-avoidance measures.

However, we quickly became aware of new schemes and so further anti-avoidance measures were contained in the Finance Act 2004. The hon. Member for Rayleigh alluded to that. The past year has seen the emergence of yet more schemes, some of which are of great complexity. He mentioned one or two of those. Although we have no wish to further complicate the legislation, we remain determined to attack avoidance and ensure that all taxpayers pay their fair share.

In direct answer to the hon. Gentleman's question, I should emphasise that all the measures introduced under the schedule are in response to actual schemes about which Her Majesty's Revenue and Customs have been made aware. None are in response to hypothetical schemes. I hope that that gives further reassurance.

Before I turn to amendments Nos. 95 to 97, I shall quote from an article written by Robert Kent, tax partner at Freshfields Bruckhaus Deringer, in response to a question about making stamp duty land tax savings on future transactions. The article was published on 20 May and commented on the original proposals included in the Budget earlier this year, most of which are retained in this Bill. He wrote:

''In this year's Budget, the Chancellor closed almost all the loopholes used to avoid Stamp Duty on commercial property transactions.''

In many ways, that is a ringing testament to the Government's efforts to provide an equitable regime for all by closing loopholes to ensure a fair contribution. That is why the Committee should support the measures.

Amendments Nos. 95 to 97 affect paragraph 6, which extends the circumstances in which stamp duty land tax group relief can be clawed back. The Government's intention has been clear ever since the clawback provisions were introduced in 2002. If group relief is claimed, and the transferee company leaves the group within three years, the relief should be clawed back. In the absence of such a provision, groups would be free to wrap a property in a company and sell the shares shortly afterwards without incurring any liability for stamp duty land tax.

Although the Government's intention was clear, schemes aimed at frustrating it began to emerge almost as soon as the clawback provisions were published. The schemes work by interposing within the group transfers that have no commercial purpose but that stop the eventual clawback of group relief. Hence the need for paragraph 6, which in effect causes the transfers to be disregarded, and which means that it is the relationship between the earliest transferor and the ultimate transferee in a three-year period that is considered. If, at the end of that period, those two companies are no longer in the same group, then unless stamp duty land tax has been paid on one of the intermediate transactions, the relief is clawed back.

Amendment No. 95 does not affect the circumstances in which group relief is clawed back, but it does affect which companies are liable to pay the tax. At present, once group relief is withdrawn, the tax can be recovered from the company that originally claimed it, connected companies, or the transferor company. That reflects the fact that if payment has been made for the property the transferor company may still be in possession of the money, whereas the transferee may have been liquidated.

As a result of the changes made by paragraph 6, there will be a right of recovery against the earliest transferor in the three-year period before the ultimate transferee leaves the group. Amendment No. 95 would remove that right of recovery, as I am sure the hon. Member for Rayleigh now understands and accepts.

It is worth pointing out that, where there are successive transfers, the earliest transferor may be the only company carrying on a genuine business, with the other companies being inserted for tax reasons and being quickly eliminated. It therefore seems entirely right that HMRC should be able to recover tax from that company. Hon. Members should bear in mind that in most cases paragraph 6 will only affect contrived avoidance schemes.

Amendment No. 96 would prevent paragraph 6 from applying where there had been a previous clawback of group relief, reconstruction relief or acquisition relief. The hon. Gentleman suggests that that would avoid a double clawback of group relief. I should say, first, that the possibility of a double or multiple clawback exists under the current legislation; it is not created by this measure. However, both under current legislation and in this measure, it is generally possible to arrange matters so that there is no multiple clawback.

Indeed, amendment No. 96 would create new avoidance opportunities, since any previous clawback would prevent paragraph 6 from ever applying, even if the tax related to only part of the property or to a derived interest such as a lease. Although I have some sympathy with the hon. Gentleman's desire to avoid a multiple clawback, the Government have to ensure that we do not create new avoidance opportunities. I feel unable, therefore, to agree to the amendment.

Amendment No. 97 is also aimed at preventing multiple clawbacks. It seems that it is intended to apply when the ultimate transferee leaves the group at the same time as an intermediate transferee. In that situation, the ultimate transferee would still suffer a clawback, but the intermediate transferee would suffer one only if not all the property had been transferred to the ultimate transferee.

Although that is an ingenious idea, it would be very difficult for such a provision to work in practice. It would also be difficult to know exactly when the amendment applied, as it refers to circumstances that may—I emphasise, may—give rise to a change of control. How would one know what circumstances may give rise to a change of control? The best way to ensure that multiple clawbacks do not occur, as under existing legislation, is to keep the number of successive transfers and changes of control to a minimum.

As with all new legislation, we shall keep the provisions under review, and I shall consider any representations made if, for example, multiple clawbacks were somehow to become a common occurrence. Having said all that and tried to respond in detail to the hon. Gentleman's amendments, I hope that he will withdraw them.

Mark Francois (Conservative, Rayleigh)

I thank the Economic Secretary for his kind compliment about Conservative ingenuity—that was good of him. I am grateful for his reassurances on multiple clawbacks. He will understand that we were seeking to tease out the Government's thinking on a theoretical possibility. We have succeeded in doing that, and I am grateful for what he had to say.

Amendment No. 95 was our principal amendment. You will recall, Mr. Cook, that we wanted to know whether the Government were legislating on the basis of real attempted avoidance schemes. The Minister stated categorically that this measure has been brought in as a result of schemes that the Government judge to have been genuine attempts at avoidance and that the Treasury is, in effect, seeking to plug a loophole. I am prepared to take the Economic Secretary at his word. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 98, in schedule 10, page 146, line 6, leave out

'that does not consist wholly or mainly of dealing in chargeable interests'.

The amendment deals with the qualifications for acquisition relief. It is a probing amendment that seeks to clarify situations in which companies—potentially including certain joint venture companies—may continue to qualify for acquisition relief in property transactions. Paragraph 8 of schedule 10, which deals with reconstruction and acquisition reliefs, seeks to limit situations in which companies may continue to qualify for acquisition relief on certain transactions. Specifically, the proposed new sub-paragraph (5A) seeks to exclude from such relief those companies carrying on a trade that consists

''wholly or mainly of dealing in chargeable interests.''

That is legalistic language; in practice, it means that this could not only relate to removing relief from property investment companies—we believe that that is what the Government originally intended to do, and we followed their thinking—but have the practical effect of removing the relief from active property developers who are not only trading in land per se, but seeking to develop property, potentially including specially created joint venture vehicles such as those established to facilitate the redevelopment of a housing estate. There is some controversy about that, so we seek to clarify the issue.

I cite Mr. Sean Finn, a partner in the international tax group Lovells. He wrote an article that appeared on the Legal Week website on 9 June 2005. It commented on this provision in the following terms:

''The 2005 rules will require that, for the relief to apply, the relevant undertaking must have as its main activity the carrying on of a trade which does not consist wholly or mainly of dealing in land or interests in land. This measure will greatly reduce the availability of this relief for property transactions.''

As that could have implications for future housing development, will the Minister say what discussions the Treasury has had about it with the Office of the Deputy Prime Minister? One thing that we certainly know about the Deputy Prime Minister is that he is interesting in housing, even if I do not always agree with his philosophy on that issue. Where exactly does the line to which paragraph 8 is intended to apply fall? Where should it be drawn between property investment companies and active property developers and special purpose development vehicles?

Amendment No. 98 would delete the final words of proposed sub-paragraph (5A), so that active property developers and joint ventures might continue to enjoy acquisition relief. Some finely balanced schemes might conceivably have an important bearing on whether or not the scheme can proceed.

However, the amendment would not prevent the amended paragraph 8 from still being applicable to property investment companies, which, as I say, is what we believe the Government originally intended. We want to tease out the Government's thinking and to understand their rationale for the precise wording that they have chosen to employ under that part of the schedule. It looks as though it has been deliberately crafted. We want to understand where they think the line should fall and how precisely the measure should operate in practice. I genuinely look forward to hearing what the Minister has to say.

Ivan Lewis (Labour, Bury South)

The hon. Gentleman seeks to tease out my thinking, but five minutes ago he wanted to shoot me. He has changed his position somewhat in that short time, but I shall deal seriously with the issues that he raised. Acquisition relief is a partial relief from stamp duty land tax. It allows a person to buy a business that has property assets at a lower SDLT charge than buying the assets themselves would incur. The charge is at ½ per cent. rather than the usual 4 per cent. The rationale for that is that a 4 per cent. duty would raise a barrier to the purchase of businesses.

Paragraph 8 of schedule 10 restricts the availability of acquisition relief so that the definition of the undertaking must be a trade, not an investment business, and must not be a property-dealing trade. The amendment would remove the restriction on the definition of trade, allowing acquisition of property transferred as part of a property-dealing trade to be taxed at ½ per cent. rather than 4 per cent. It would therefore make the clause ineffective as it would be relatively easy to show a trade of dealing in property when the actual motive is the holding of property for investment purposes.

We do not consider that it is right in that context that acquisition relief, which is an extremely generous relief, should be available when property ownership, or dealing in property, is the main business of the company. It should be available only when the ownership of property is ancillary to the main business of the company, such as, for example, when a retail business owns a chain of shops or when a business is carried on from a factory.

I understand that there have been worries that the concept of dealing in chargeable interests is uncertain, a point made by the hon. Gentleman. It is unclear, for example, whether a property developer or house builder will be caught. While it is ultimately a question of fact what trade a company is carrying on, I can reassure the Committee that property developers and house builders who derive most of their profits from their work, rather than from buying and selling would not be caught by the measure. Companies that want reassurance about that in relation to their specific trade can approach HMRC to seek clarification.

Mark Francois (Conservative, Rayleigh)

I am grateful to the Economic Secretary for providing exactly the sort of clarification I asked for. For the avoidance of doubt and to make sure that I have understood him correctly, I believe that the active word in his response seemed to be ''most'', and, providing that the companies concerned can demonstrate that most of their profit—not turnover—is derived from their work, they will be all right. Did I understand the hon. Gentleman correctly?

Ivan Lewis (Labour, Bury South)

It is kind of the hon. Gentleman to both ask a question and give the answer; he is always helpful. Yes, I can assure him that it is the profit; he is right in that respect. Any company that genuinely seeks reassurance on this specific point in relation to the trade issue should approach HMRC. In light of my comments, I hope that the hon. Gentleman feels able to withdraw the amendment.

Mark Francois (Conservative, Rayleigh)

I certainly do. We have probed to get a clear answer from the Economic Secretary and he has given a workable definition that will allow people in the industry some certainty when they attempt to plan. I also heard him say that the Revenue would invite those with any uncertainty about the matter to enter into discussions with it. As the Economic Secretary has been more than fair, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 99, in schedule 10, page 147, line 34, at beginning insert ''Subject to sub-paragraph (5)''.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss amendment No. 100, in schedule 10, page 147, line 41, at end add—

'(5) Sub-paragraph (2) shall not apply where the grant to or by a nominee is associated with, incidental to or preparatory to, a transaction involving a securitisation company within the meaning of Section 83(2) of the Finance Act 2005.'.

Mark Francois (Conservative, Rayleigh)

These are two technical amendments that focus on how the schedule will apply to certain transactions involved in securitisations. In order to make progress, I shall leave what I say at that; the amendments are very technical, so I shall simply sit down and await the Economic Secretary's reply.

Ivan Lewis (Labour, Bury South)

If the Committee had conducted its business on the basis that if amendments are very technical, they are not spoken to by those who move them, we would not have been here for the past two weeks. However, I thank the hon. Gentleman for being so honest, because my officials said to me when we discussed the amendments that they did not have a clue about what they were getting at and could not be of any assistance to me. Obviously they too thought that the amendments were very technical. However, I will try to address what we think are the amendment's substantive points.

Perhaps my hon. Friend the Member for Wolverhampton, South-West—no, I should not encourage him—[Laughter.] ''Think before you engage your mouth,'' as my dad used to say to me.

Paragraph 11 applies where a lease is granted to or by a nominee. The normal rule is that transactions with nominees are ignored for stamp duty land tax purposes. That reflects the intention that stamp duty land tax should be charged when beneficial ownership changes, not when someone puts their own property into the name of a nominee—please will the hon. Member for Rayleigh pay attention? Paragraph 11 disapplies that rule where the transaction is the grant of a lease. The reason for that is to counter avoidance schemes where the grant of a lease to or by a nominee is followed by the assignment of the lease to a third party. Normally, there is a charge on the rental element of a lease when it is granted. However, if transactions with nominees are ignored, that charge will not occur. That will enable leases to be granted without any charge on the rental element. Paragraph 11 therefore provides that where the transaction is the grant of a lease, the fact that a nominee is involved is ignored; in other words, there is the same charge that there would be if there were no nominee arrangements. That ensures that there will be the normal charge on the rental element. In many cases, there is a relief such as group relief, which will prevent a charge to tax from arising at all.

The amendment would prevent paragraph 11 applying where the grant of the lease is connected with a transaction involving a securitisation company. Securitisation companies are special purpose vehicles involved in structures where securities are issued in the market and those securities are backed by a charge on assets held by the company. Members may be aware from announcements made as part of the 2005 Budget that the tax and accounting treatment of securitisation companies is a complex matter. My officials are engaged in discussions with practitioners about these issues, which resulted in provisions in the Finance Act 2005. My officials have not come across any examples of securitisation transactions that involve the use of nominees and leases and the issue has not been raised in discussions, which is one of the reasons why we were unclear about the purpose of the amendments. That suggests that the use of nominees and leases would be unusual, and that nominees and leases might not form part of a normal commercial securitisation. Because of that, it would be wrong at this stage to grant a specific exemption from an anti-avoidance provision. The better way to proceed is for those who have an interest in the tax and the accounting treatment of securitisations to raise that issue in discussions with my officials so that any specific tax measures can be set in wider context.

Having demystified those complex issues for all Committee members, I hope that the hon. Member for Rayleigh will consider withdrawing the amendment.

Mark Francois (Conservative, Rayleigh)

The Minister is right. This is a complex matter, because it applies not only to property law and leasing, but to trust law as well, and it gets rather complicated in cross-cutting. The Minister's understanding of the matter is similar to mine—[Laughter.] On that basis I am delighted to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 101, in schedule 10, page 149, line 23, leave out paragraph 15.

As drafted, paragraph 15 relates to the taxation of payments in certain contingent transactions, principally those related to leases on land where the eventual price for the transaction may depend on a variable, such as whether planning permission is eventually granted on the plot of land being transferred and where an estimate of the value of that transaction—usually referred to in such cases as the relevant transaction—has had to be included for the purpose of calculating the stamp duty land tax to be paid on the deal or transaction in question. So in a sense people have to guess.

The paragraph currently appears to mean, first, that if the contingency is not subsequently met—for example, if the contingency was that planning permission would be granted and it turned out that although the land had been leased it was not granted—the value is affected accordingly; and, secondly, an amount is repaid where a deposit or loan relating to that transaction and the repayment does not cause the stamp duty land tax subsequently to be reduced in relation to the repaid amount. In other words, the party that paid the estimated amount of stamp duty land tax on the relevant transaction does not get a refund if the estimate is eventually proved to have been too high. Can the Minister explain the Government's rationale behind that?

Ivan Lewis (Labour, Bury South)

Schedule 10 deals with cases where the purchase price of a property is dressed up as a loan or deposit on the grant of a lease. We have seen examples of such avoidance on time share and similar arrangements where a long lease is granted at a low rent and what is really the purchase price is described as a loan or deposit repayable when the lease comes to an end. When the lease comes to an end—normally because the lessee moves out and a new one moves in—the deposit is repaid. The general rule for other purchases of property is that people pay stamp duty land tax when they acquire property and that is the end of the matter: there is no question of a refund of tax when they sell the property, even if they do so a very short time after purchasing it. There is no reason why the rules should be different just because the transaction is structured as a long lease.

Hon. Members will be aware of the concern, which was expressed when this measure was first announced, that genuine deposits as security for rents, such as those that the hon. Gentleman is concerned about, would be caught. Following representations we modified the provision so that genuine rent deposits will not be caught: the only ones that will be caught are the so-called deposits that are out of all proportion to rent and therefore are really in the nature of a premium.

The amendment would delete paragraph 15, which provides that where a deposit or loan that is caught by the measure is repaid there is no repayment of stamp duty land tax. As I said a moment ago, there is no reason why people who move out of property should be refunded tax just because they structure that transaction in a particular way. On that basis I ask the hon. Gentleman to withdraw his amendment.

Mark Francois (Conservative, Rayleigh)

The Minister has given us some reassurance and he has clarified for the Committee exactly how the measure is designed to work in practice. He gave one or two qualifications in his explanation, which will be of value to those who take close interest in such matters. On that basis, I am happy to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 146, in schedule 10, page 151, line 1, leave out paragraph 19.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss the following amendments: No. 102, in schedule 10, page 151, line 9, after 'duty', insert

'stamp duty reserve tax and stamp duty land tax.'.

No. 147, in schedule 10, page 151, line 9, leave out

'income tax, corporation tax, capital gains tax or tax under this Part'.

No. 103, in schedule 10, page 151, line 9, leave out

'corporation tax, capital gains tax or tax under this Part'.

Mark Francois (Conservative, Rayleigh)

The amendments would delete or amend paragraph 19, which deals with group relief avoidance arrangements, and which forms the most controversial part of the whole schedule, and thus of part 3 of the Bill itself.

The principal complaint about paragraph 19 is that it is very broadly drafted. It seeks to withdraw group relief on transactions that are not

''effected for bona fide . . . reasons'',

but without seeking to define what those reasons are. Moreover, the paragraph also pertains to any such arrangements relating to alleged avoidance of not just stamp duty land tax but income tax, corporation tax and capital gains tax. Thus there is potential liability for four different taxes in one paragraph. The real danger is that the paragraph is so broadly drafted that it might catch transactions that are perfectly normal in the course of business. Such transactions might then be adjudged non-bona fide by HMRC and an important relief may be suddenly threatened as a result. The Chartered Institute of Taxation, in its briefing note on the paragraph, states:

''This appears to be a catch-all provision that will catch innocent transactions as well as objectionable ones.''

The practical effect of the paragraph's essentially scattergun approach could be to make UK companies extremely defensive about property transactions, for example when considering a potential reorganisation that would make good commercial sense.

It is worth making the point that, as the pace of global business seems to be accelerating all the time, it is more and more frequent for companies—and not just large ones—to want to reorganise in order to remain as lean and fit as possible. That is a challenge with which British business is grappling day in, day out, and the danger of the measure is that it could make that process more difficult in cases where, for very good commercial reasons, it absolutely has to take place. That point was made by the Confederation of British Industry in its briefing note on the paragraph. It said:

''This provision has been introduced without real explanation as to why it is required in addition to the wide range of other measures which already restrict the availability of SDLT group relief, and claw back the relief within a three year period. Some of these measures are being strengthened in this Finance Bill, but it is not clear why additional tests are required.''

For good measure, the Law Society chipped in. Its briefing note on paragraphs 19 and 20, which most members of the Committee will have seen, says that the test in paragraph 19

''will create uncertainty, difficulties for certain commercial transactions (e.g. on balance sheet securitisations), and costs associated with due diligence. Reliance should be on the clawback provisions introduced by the Bill to counteract perceived avoidance transactions, rather than the motive test.''

As I shall come on to say, there is a motive test inherent in the paragraph.

The British Property Federation has made similar representations. Its briefing note on the issue points out that

''The BPF is concerned that the measure could cause major uncertainty in a number of situations where a group reorganisation is being undertaken and properties are being moved as part of this. The risk of a 4 per cent. charge on transfers may constrain groups from undertaking transactions that would otherwise make sense to them from a commercial point of view.''

Moreover, the BPF quite reasonably goes on to emphasise that HMRC already has a broad armoury of measures to prevent avoidance in this field, including the fact that intra-group transfers are already subject to safeguards from the Revenue's point of view. The BPF lists those, first citing

''anti-avoidance provisions relating to the definition of a 75 per cent. corporate group (imported from the corresponding corporation tax provisions)''.

Secondly, the BPF mentions

''restrictions on the availability of relief if there are arrangements (at the time of the transfer) to de-group the transferee or for financing the transaction from outside the group''.

Thirdly, it states,

''clawback of the relief within three years if the transferee is de-grouped (and this Finance Bill further extends the circumstances under which a clawback charge is made)''.

We discussed that in relation to earlier groups of amendments. Fourthly, the BPF states that there is also

''a rule substituting market value for actual consideration (if greater) for transfers to connected companies''.

Given all that, the BPF states:

''With this array of anti-avoidance provisions in place, it is difficult to understand why Paragraph 19 is also necessary. The measure is disproportionate and should be dropped.''

We then come to the issue of motive tests, which we have debated several times in this Committee over the past two weeks. Paragraph 19 also creates what is in effect a motive test, not least by claiming that whatever transactions are under consideration must have been undertaken for ''bona fide commercial reasons''. The difficulty with motive tests of that type, particularly when they are applied across four taxes rather than just one, is that they introduce considerable uncertainty for companies about their likely tax position. Thus, they can act as a hindrance to efficient economic activity.

There is also a potential effect on real estate investment trusts. There is a practical point about how such transactions could affect the long-awaited development of REITs, which we have touched on. REITs could potentially be inhibited by the provisions in paragraph 19. Companies that seek to reorganise their holdings to enable them to become REITs—the Government have told us that they hope to get the process properly under way in a year's time, so we are not talking about a distant theoretical possibility—could find themselves being caught by the provisions in paragraph 19. That could obviate part of the advantage of creating REITs in the first place. In that sense, given what the Government said they want to do on REITs, paragraph 19 could be self-defeating. That has also been emphasised by the CBI in its briefing note, which said:

''A particular concern is that this may create difficulties for the new UK REIT vehicles to be introduced next year. Companies wishing to reorganise their holdings to enable them to become REITs may find it difficult to argue they are not transferring properties in order to gain REIT status and thus exemption from tax.''

Even though we do not have the REIT legislation until next year, that is a pretty powerful point, and I would like to hear what the Economic Secretary has to say about it.

The Government have suffered enough criticism over their delay in the introduction of REITs in the United Kingdom. Most comparable developed countries around the world already have something similar; many have had the systems up and running for years. Bearing in mind that we have waited so long for them, it makes little sense to undermine, potentially, such a long-awaited development with a poorly drafted paragraph 19.

For good measure, and just in case Ministers have not fully got the point, the CBI ended its note with the following suggestion:

''This is a provision which could cause disproportionate commercial constraints for companies seeking to organise their affairs in an efficient manner, and so undermine the competitiveness of the UK as a place to do business. The CBI therefore calls for it to be withdrawn.''

That is a powerful case and we wait to hear why the Minister believes that this wide-ranging power still needs to be passed into law.

Amendments Nos. 102 and 103 represent the next stage down from the complete deletion of paragraph 19, in that they seek to retain its provisions but limit them to stamp duty land tax and stamp duty reserve tax, thus allowing the Government to achieve part of what they set out to do but on a narrower front pertaining only to stamp taxes, rather than the other three taxes as well. The British Property Federation has argued:

''It is considered that there are already many and varied safeguards within the provisions of the other taxes to prevent abuse and that accordingly, the motive test should be confined to''

stamp duty land tax. Although we Conservatives would still have some concerns even about the breadth of the surviving measure, in some respects it represents a compromise whereby the even wider measures involving the other taxes are dropped. I hope that the Minister might, at a minimum, say something positive about the alternative amendments.

I shall add one further point. On a previous group of amendments a Minister quoted with great alacrity, and with a smile on his face, a learned lawyer in this field who said that the Government had already legislated well to close most of the loopholes in this area. If that is so, and the Government believe it, why do they need paragraph 19 now?

Ivan Lewis (Labour, Bury South)

Let me say on behalf of my hon. Friend the Member for West Bromwich, East (Mr. Watson), who cannot speak on these occasions, that the pager message does not apply to hon. Friends participating in the Committee. We cannot leave before 6 o'clock, alas!

I shall set the provision in context before turning to the amendments. In the past few years HMRC has seen a continuing stream of schemes aimed at avoiding liability to stamp duty and, since 2003, specifically liability to stamp duty land tax. It is no exaggeration to say that, for some practitioners, advising on stamp duty avoidance is one of the major parts of their work. By contrast, most residential purchasers have no option but to pay stamp duty land tax. Countering stamp duty avoidance was one of the main drivers for the introduction of stamp duty land tax in 2003. As part of the introduction of that tax a number of avoidance opportunities were blocked. Following that, however, more avoidance schemes came to light and those were countered again in the Finance Act 2004. In the years since then, HMRC has seen even more schemes, which are blocked by measures in the earlier part of the schedule, but there is no reason to suppose that practitioners have been idle since the relevant measures were published and we expect that new schemes are being developed at this very moment.

There comes a time when any Government must say that enough is enough. I remember that being an effective strategy leading up to the 1997 general election. In relation to avoidance using group relief, the time has now come. It is time to ensure that group relief is restricted to proper commercial transactions where tax avoidance is not the, or a, main purpose. I recognise that this measure has caused genuine concern among those who are not engaged in tax avoidance, on the grounds that it will stop legitimate commercial transactions. I can reassure the Committee that we do not accept that that will be the effect of the measure, which will only stop claims to group relief where tax avoidance is the, or a, main purpose. The fact that a transaction gives rise to a tax benefit does not mean that avoidance is the main purpose.

I was asked earlier for the definition of the term ''bona fide''. Successive Governments have used that term and most Committee members, and practitioners, understand its meaning to be ''genuine'', which is a pretty straightforward understanding.

The fact that a transaction gives rise to a tax benefit does not mean that avoidance is its main purpose. To take a specific example, a group may transfer a property into a special purpose vehicle so that after three years, the shares in that vehicle can be sold free of stamp duty and land tax. That is not tax avoidance, because the legislation specifically permits such transactions. On the other hand, if the property were transferred into the special purpose vehicle as part of arrangements whereby the property could leave the group in less than three years, that might be tax avoidance because it would go against the intention of Parliament.

Having given that example, I move on to the amendments. Amendment No. 146 would delete paragraph 19.

Brooks Newmark (Conservative, Braintree)

I thank the Minister for that excellent example. I appreciate that he is not here to give tax advice. However, I am curious about how the Minister would address the issue raised by my hon. Friend the Member for Rayleigh: companies wishing to reorganise their holdings to enable them to become REITs may find it difficult to argue that they are not transferring properties to gain REIT status and thus exemption from tax.

Ivan Lewis (Labour, Bury South)

I shall address the REITs question later. It is an important issue.

As I said, amendment No. 146 would delete paragraph 19. I hope that I have given enough reasons as to why that provision is reasonable and proportionate, and that there is therefore nothing to add on that amendment.

Mark Francois (Conservative, Rayleigh)

I have listened to what the Minister said, but I am not sure that he has addressed the point. If the provision is as innocuous as he says, why are the Chartered Institute of Taxation, the Law Society, the British Property Federation and the CBI all dead against it?

Ivan Lewis (Labour, Bury South)

I cannot speak for any one of those organisations, or for them as a collection of organisations. All I can say is that we have considered the reservations, objections and concerns that have been articulated by interest groups. Having considered those seriously, we have come to the conclusion that the measures are necessary and in some ways overdue, and that there has been clear evidence of organisations and individuals seeking to get round Parliament's intentions and avoid appropriate responsibility.

If the hon. Gentleman insists on pressing the matter to a Division, we shall have to engage on an enemy-by-enemy basis. However, we have not taken this decision lightly; it has come after a great deal of consideration and with a sensitivity about not wanting to catch practitioners or companies that are behaving in a genuine way. We do not seek to do that.

Amendments Nos. 102 and 103 would restrict the definition of tax by leaving out capital gains tax and corporation tax. However, it seems from amendment No. 147 that the Opposition now want to go further and leave out income tax as well. In other words, the hon. Gentleman is arguing that it is quite acceptable for group relief—a generous relief from stamp duty land tax—to be available when a transaction forms part of a scheme to avoid income tax, capital gains tax or corporation tax, or all three taxes.

Surely the hon. Gentleman accepts that the Government cannot condone tax avoidance by allowing stamp duty land tax group relief on avoidance transactions. I do not believe that that would be acceptable to any member of this Committee. Again, the amendments may be prompted—I am sure that they are—by concerns that the measure in its current form will cause uncertainty and stop legitimate commercial transactions. I do not believe that that will be so. I do not know whether the hon. Gentleman is aware of it, but the example that has been cited is when property is transferred within a group to match chargeable gains with allowable losses or to match rental income with losses from rented property. For many years, we have accepted that that is not tax avoidance, provided that both gains and losses arise from genuine economic activity and have not been artificially contrived.

I can give another example of securitisation. In a simple terms, a securitisation is a structure whereby securities are issued in the market and backed by a charge on assets held by the company. As the Government made clear when announcing this year's Budget, we are keen to encourage securitisation and to work with the industry on the complex tax and accounting issues involved. Members of the Committee will be aware of the provisions in section 83 of the Finance Act 2005, which were aimed specifically to assist those involved in securitisation. It has been suggested that the measure would stop or substantially increase the cost of securitisation but we do not accept that that would be the case. Obviously, a normal commercial securitisation does not have tax avoidance as its main purpose or one of its main purposes. The types of transaction typically undertaken by the companies affected by section 83 do not have tax avoidance as their main purpose. The types of transaction that my officials are discussing with the agency do not have tax avoidance as their purpose.

I do not see any reason why normal commercial securitisations should be affected by the measure. In the end, taxpayers and their advisers know when they are engaged specifically in tax avoidance. They know whether they are obtaining a relief in a manner that is contemplated by Parliament or whether they are seeking to abuse legislation. Only those who make use of tax avoidance schemes need concern themselves with any aspect of the measure.

The hon. Member for Rayleigh referred to REITs. The proposition is that passing the measure would make more difficult the ultimate decisions that the Government are committed to making on REITs. Obviously, we have taken that view seriously. We have considered matters, and we genuinely do not believe it would be appropriate to integrate the decision that we will have to make about REITs in due course with measures at this time, and nor do we accept, having considered matters carefully, that adopting the measures will make it difficult to achieve the right outcome in the best interests of British industry on the whole REIT issue. Given my reassurances, I hope that the hon. Gentleman will seriously consider withdrawing the amendment.

Mark Francois (Conservative, Rayleigh)

I have listened carefully, and the Committee will have realised that such a matter is controversial. We tabled various amendments to provide different options that we might press to a Division. To continue the naval analogies that my hon. Friend the Member for Cities of London and Westminster began this afternoon, we loaded several cannons in order to decide which one to fire. In all sincerity, I did not find the Minister's explanation entirely convincing. It was particularly unconvincing in respect of REITs because there has been a tremendous delay in the REITs process and all the hon. Gentleman did was to provide me with an generally worded assurance.

Brooks Newmark (Conservative, Braintree)

Waffle.

Mark Francois (Conservative, Rayleigh)

My hon. Friend uses strong language, but the Minister's explanation was not entirely clear and comprehensive.

Paragraph 19 of the schedule still amounts to a general anti-avoidance provision, in all but name. It is unjustifiably broad in scope, which is why a range of organisations including the Chartered Institute of Taxation, the British Property Federation and the Confederation of British Industry have called for it to be withdrawn. Among people who will have to deal with the measure, there is consensus that the Government have gone too far. The Committee should take notice of that, because it has important implications for the future viability of British business, particularly—to return to my original example—where companies are forced to reorganise because of changing commercial circumstances. We in Parliament often talk about the global economy and global competition, and this is a case where global competition really hits home. British business must be able to react to it. The measure could constrain that ability to react, so there is real danger in it.

I listened to the Government's arguments. I show no personal disrespect for the Economic Secretary, but he speaks for Her Majesty's Government, and they have completely failed to convince, so I wish to press the amendment to a Division.

Ivan Lewis (Labour, Bury South)

The hon. Gentleman says that he does not wish to show any disrespect, having accused me of speaking waffle; that is a curious oxymoron.

I shall respond very quickly. Organisations and individuals who are not seeking to engage in avoidance have nothing to fear from the measures. Frankly, we have no sympathy whatever with organisations that have engaged, that continue to engage and that will in future engage in avoidance measures. That is why I think that the measures are proportionate and appropriate. I think that the Committee will have to divide.

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 12.

Clause 50 - Power to extend exceptions relating to recognised exchanges

Mark Francois (Conservative, Rayleigh)

The Committee will be relieved to hear that clause 50 is the last of the clauses dealing with stamp duty taxes. It is less controversial than the schedule 10 provisions that we have just debated. It provides for regulation-making powers in relation to the EU directive on markets in financial instruments directive.

The clause permits the extension of stamp duty and stamp duty reserve tax exemptions to sales of stock to intermediaries and for repurchases and stock lending to members of specified multilateral trading facilities. Those are defined in the associated draft regulations that were helpfully circulated among Committee members by the Economic Secretary on 20 June. Those regulations confirmed that the markets so defined would be the alternative investment market, Ofex and POSIT.

The Economic Secretary's letter confirms that the regulations are due to come into effect as soon as the Bill receives Royal Assent, which will probably be some time next month. So, I just ask the Minister what, if any, is the anticipated revenue effect of extending the exemptions, and what that is likely to be in the current financial year? Have the Government any estimate?

Question put and agreed to.

Clause 50 ordered to stand part of the Bill.

Clause 51 - Chargeable gains

Richard Spring (Conservative, West Suffolk)

I beg to move amendment No. 148, in clause 51, page 42, line 12, after 'State', insert 'and'.

Frank Cook (Labour, Stockton North)

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

No. 149, in clause 51, page 42, leave out lines 13 and 14.

No. 150, in clause 51, page 43, leave out line 18.

No. 151, in clause 51, page 43, leave out line 45.

No. 152, in clause 52, page 44, leave out line 21.

No. 153, in clause 53, page 45, leave out line 20.

No. 154, in clause 54, page 46, leave out line 34.

No. 156, in clause 55, page 48, leave out line 2.

Richard Spring (Conservative, West Suffolk)

I do not believe that the amendments are controversial, although they are somewhat technical in nature and are a tidying-up exercise. I beg your indulgence, Mr. Cook, to talk for a few minutes about the background to the proposals, in order to give the flavour of the amendments. I also want to outline what clauses 51 to 65 are all about.

The measures have been introduced to bring the European company, the Societas Europaea, into UK tax law and to facilitate corporate reorganisations involving SEs. They follow the publication of an Inland Revenue technical note of January 2005 and subsequent consultation on the clauses. The SEs shall effectively be subject, if UK tax resident, to the same tax law as other UK companies.

Based on recent European Court of Justice cases, some of the provisions, such as those that apply a tax regime where assets are transferred out of the UK different from that where they are transferred out of the EU, might be ruled illegal by the ECJ, often following action from the European Commission, which seeks to create a common corporation tax system across the EU.

There is professional disagreement about that , but arguably, instead of creating new tax legislation, the rules could have been fitted into existing UK reliefs. There are a number of areas where the rules could greater assist cross-border mergers, not least where there are no provisions to transfer tax losses to an SE on such a merger.

Representations were made on the consultative document, but the extra provision we are discussing was the only change that addressed any of the issues raised in the latest Finance Bill, that of 2005. Some of the issues raised in representations related to specific technical areas, but the major point of concern that has not been addressed in this Finance Bill relates, once again, to a continuing theme of our deliberations—the compatibility of the legislation with the EC Treaty.

Notwithstanding the fact that there is no requirement under the EU tax mergers directive for such transactions to be carried out on a tax neutral basis, we consider that the requirement to retain a permanent establishment in the relevant member state to ensure that the transactions are tax neutral might well be contrary to articles 43 and 48 of the EC Treaty, which relate to freedom of establishment. It might discourage an SE from undertaking those transactions that involve transferring its registered office between member states. We therefore consider that the additional clauses should have been drafted accordingly.

I will now discuss the amendments. At present, the reliefs in clauses 51 to 65 are intended to work in that they allow tax reliefs to apply when companies from separate member states merge. For example, when a German bank and an Italian bank merge into an SE, the merger of their London branches—permanent establishments, in the technical term—should be covered by the tax reliefs. However, the lines we propose to delete mean that mergers of two German banks into an SE, for instance, would not be exempt under the SE rules proposed in the Bill. That appears to be anomalous, albeit close to what the EU mergers directive requests. It is also likely to be contrary to EU law for the reasons already visited several times in the Committee.

Amendment No.148 is a paving amendment for the next one. Amendment No. 149 seeks to ensure that where an SE is formed by the merger of two companies, both resident within one member state and both of which have UK permanent establishments, there is no charge to tax on capital gain assets held by those UK permanent establishments and transferred to the SE; for example, there is no taxable disposal of their UK business premises when the two UK permanent establishments are merged. It allows more flexibility for EU companies to merge into an SE, without incurring an unnecessary UK tax charge.

It should be noted that there are a number of EU-resident companies that have UK premises that might perform such mergers; for example, a large proportion of those EU-resident companies are German, due to Germany's strength in the financial sector and German companies' involvement in the City of London. We also consider that this amendment and the following ones tie in with what the Chancellor said recently about making the EU rules for business more flexible.

Amendment No. 150 would remove a line that is unnecessary, as the conditions of proposed new section 140F(1)(d) to the Taxation of Chargeable Gains Act 1992 refer to a UK company merging into a non-UK company. Two existing UK companies cannot merge into each other, because there is no provision to do so under company law. Proposed new section 140F cannot apply if merging companies are not all resident in the same state anyway, and would have no purpose.

Amendment No. 151 addresses a situation where the SE issues shares to the shareholders of the merging companies as compensation for agreeing to the merger; typically, their shares in the pre-merger companies would then be cancelled. Such a merger under the relevant EU directive should qualify for such a relief, and there is no reason why UK shareholders should be denied the roll-over relief for shares in the SE just because the merging companies are based in the same member state. It should be remembered that two UK-resident companies are unlikely to undertake this because of the requirement that SEs must have worker representation on their boards.

Amendment No. 152 is similar to the previous amendments. It is intended to ensure that, where an SE is formed by the merger of two companies both of which are resident in one member state and both of which have UK permanent establishments, there is no charge to tax on intangible assets that are held by those UK permanent establishments and transferred to the SE—for example, there is no taxable disposal of their UK customer lists when the two UK permanent establishments are merged.

Amendment No. 153 is also similar to the previous amendments. The line it seeks to leave out is unnecessary, as the clause cannot apply—by virtue of proposed new section 87A(l)(d), which relates to the situation where a UK company transfers assets to a company that is not resident in the UK—when the merging companies are resident in the same member state.

Similarly, amendment No. 154 seeks to ensure that where an SE is formed by the merger of two companies both of which are resident in one member state and both of which have UK permanent establishments, there is no charge to tax on loan relationships held by those UK permanent establishments that are transferred to the SE; for example, there is no taxable disposal of their loans to UK customers, when the two UK permanent establishments are merged.

Amendment No. 156 is on a similar theme. It is designed to ensure that where an SE is formed by the merger of two companies both of which are resident in one member state and both of which have UK permanent establishments, there is no charge to tax on financial derivatives held by those UK permanent establishments that are transferred to the SE; for example, there is no taxable disposal of their interest rate swaps on their UK borrowings when the two UK permanent establishments are merged.

Brooks Newmark (Conservative, Braintree)

Will the Minister clarify one point? Why do the Government allow transactions under these provisions to benefit from the formal and legally binding advance clearance system established in clause 51, in respect of whether there was a main purpose of tax avoidance in using the provisions, while refusing to extend such a mechanism, despite taxpayers' desire for this, for the new tax arbitrage regime? Can the Minister reconcile that with the Paymaster General's comment last week, when she was asked to introduce a pre-clearance mechanism in respect of arbitrage rules? She said:

''By adopting an informal process, which works well for other anti-avoidance measures, companies are provided with the flexible system that they want, under which they will not feel obliged or pressured to seek formal clearance in every case, with all the costly bureaucracy and fees that go with ensuring that their approach is agreed. Instead, they need only ask for assistance when they are uncertain of the operation or application of the rules . . . If there is a statutory regime for clearance where even schemes that do not need it, because they are perfectly straightforward and no dispute is involved, go into that system and resources are consumed, the choice is a longer delay or not to do something else in the tax system.''—[Official Report, 23 June 2005; Vol. 435, c. 149–150]

John Healey (Labour, Wentworth)

This group of amendments relates to clauses that introduce provisions relating to the new European company created by regulation EC/2157/2001, known as the European company statute.

I shall discuss the amendments rather in the way that the hon. Member for West Suffolk (Mr. Spring) did, because such a discussion opens a wider debate. The amendments cover clauses 51 to 55. It may help the Committee if I take a few moments to explain the background. That will, however, mean that I will have little or nothing to say by way of explanation on some of the other clauses.

The ECS, the European company statute, came into effect on 8 October 2004. It creates a legal framework for a new form of company: the European company—the ''Societas Europaea''—or SE. I am told that that is a Latin name, although my ability to decline Latin stopped after I said ''Bellum, bellum, bellum''—just to pick up the earlier military analogy.

The ECS regulation sets out the company law framework for SEs and the accompanying directive specifies that the employee involvement arrangements that apply to an SE mean that neither the regulation nor the employee involvement directive mention tax. The ECS permits the formation of an SE by various mechanisms, including a merger between two or more companies in different member states into an SE. The Department of Trade and Industry has issued the regulations enabling the formation of SEs, including formation by merger, in UK company law. For most UK tax purposes an SE based in the UK will be treated like a UK plc and will fit into the existing corporation tax regime and the other regimes relating to UK companies. That, in short, is the answer to the question by the hon. Member for Braintree (Mr. Newmark).

The issue for direct tax relates to the formation of SEs by cross-border merger in a prescribed form. Such a transaction was not previously possible in UK company law. Tax rules also have to take account of tax-specific EU legislation—the mergers directive—which I think the hon. Member for West Suffolk mentioned. The broad effect of the mergers directive is that the formation of an SE by merger should be tax neutral. The purpose of clauses 51 to 65 is to amend the UK chargeable gains, intangible assets, loan relationships and derivative contracts regimes broadly to ensure tax neutrality in the event of a merger to form an SE.

The amendments would affect clauses 51 to 55, which stipulate that the provisions apply only where three conditions are met. First, an SE is formed by the merger of two or more companies in accordance with the articles of the European company statute. Secondly, each company is resident in a member state. Thirdly, the merging companies are not all resident in the same member state.

Amendment No. 148 and a number of the others in the group seek to remove that third requirement. The removal of the requirement that not all companies involved in the merger should be resident in the same member state, would not be, as the hon. Gentleman suggested, simply a tidying-up exercise, but contrary to the purpose of the legislation and to EU law.

First, the ECS can apply only to mergers involving companies from more than one member state. Secondly, the mergers directive requires that the tax neutrality provided for in the directive can apply only to transactions involving companies from more than one member state. Furthermore, the directive requires, in effect, that those companies should be tax resident in different states. It is important to make those legal requirements clear to companies.

Finally, the hon. Gentleman raised a question about compatibility with treaties. The Government are confident that the provisions do not contravene the EU treaty. They are consistent with the ECS and the merger directive and ensure that a UK company's decision to merge with a company in another member state to form an SE is neither disadvantaged nor driven by tax considerations.

I hope that, on that basis, the hon. Gentleman will not press the amendments to a Division. If he does, I shall have to ask my hon. Friends to resist them.

Richard Spring (Conservative, West Suffolk)

I reassure the Minister that, as I indicated at the start, I do not propose to press the amendments any further. I am reassured by the fact that he believes that what is before us is compatible with EU law inasmuch as it may in future be tested. The simple point of the amendments was to create more flexibility but nevertheless, in our judgment and that of professionals outside, not be inconsistent with the EU legislation that created those SEs.

This matter is highly technical and we shall endeavour to listen carefully to those who have given us the advice that forms the basis of the amendments. If there is still disagreement on the issue, I hope that the Minister will permit me to correspond with him about it. I do not wish to detain the Committee further, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 51 ordered to stand part of the Bill.

Clauses 52 and 53 ordered to stand part of the Bill.

Clause 54 - Loan relationships

Richard Spring (Conservative, West Suffolk)

I beg to move amendment No. 155, in clause 54, page 47, line 28, at end add

'and section 138 of TCGA 1992 (clearance in advance) shall apply to this sub-paragraph as it applies to section 137 of that Act (with any necessary modifications).'.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss amendment No. 158, in clause 55, page 48, line 39, at end add

'and section 138 of TCGA 1992 (clearance in advance) shall apply to this sub-paragraph as it applies to section 137 of that Act (with any necessary modifications).'.

Richard Spring (Conservative, West Suffolk)

Clause 54 seeks to extend to loan relationship issues the clearance regime that applies to the SE legislation in respect of capital gains tax issues. The clause does not apply if a main purpose of the SE's formation by merger was the avoidance of tax. The amendment seeks to use the existing mechanism on capital gains to obtain clearance that the merger does not have a main purpose of tax avoidance.

I turn to amendment No. 158. Clause 55 seeks to extend to derivatives the clearance regime that applies to the SE legislation in respect of capital gains tax issues. Again, the clause does not apply if a main purpose of the formation of the SE by merger was the avoidance of tax, so the amendment seeks to use the existing mechanism in relation to capital gains to obtain clearance that the merger does not have a main purpose of tax avoidance.

I would be grateful if the Minister clarified his view of the clause.

John Healey (Labour, Wentworth)

I am not entirely sure that I understood what the hon. Gentleman is asking me to clarify. However, I have two or three points to make that he might find helpful and, if he will bear with me, in doing so I might cover the matter that he was concerned about.

Clauses 54 and 55, as the hon. Gentleman suggested, will broadly ensure that the formation of an SE by merger should, as far as the UK loan relationship and derivative contracts regime is concerned, be tax neutral. In extending the provisions of the loan relationship and derivative contracts regime to give companies that certainty, there is a need, as I am sure the Committee recognises, to ensure that the provisions are not taken advantage of for the purposes of avoiding tax.

New paragraph 12B(5) in this clause and new paragraph 30B(5) in clause 55 contain an anti-avoidance rule. New paragraph 12B(6) in this clause and new paragraph 30B(6) in clause 55 both state that the provisions of sub-paragraphs (5) will not have an effect

''if before the merger Her Majesty's Revenue and Customs have on the application of the merging companies notified them that Her Majesty's Revenue and Customs are satisfied''

that the transaction

''is effected bona fide commercial reasons, and does not form part''

of an arrangement to avoid tax.

I hope that the hon. Member for Braintree appreciates that both new sub-paragraphs (6) aim to make it clear that HMRC is fully prepared to give pre-transaction clearance to any company or companies that are considering merging to form an SE. However, there is no existing statutory clearance procedure within the loan relationship and derivative contracts regime under which that can be given. The procedures will therefore have to be made clear in guidance. I hope that the hon. Member for West Suffolk is satisfied with that explanation.

Richard Spring (Conservative, West Suffolk)

Yes, I am. I was seeking clarity on the clearance procedures and I am satisfied by the Minister's explanation of what will happen. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 54 ordered to stand part of the Bill.

Clause 55 - Derivative contracts

Richard Spring (Conservative, West Suffolk)

I beg to move amendment No. 157, in clause 55, page 48, line 29, after 'a', insert

'formation of an SE by'.

The amendment was drafted to ensure consistency with new paragraph 12B(5) of schedule 9 to the Finance Act 1996, which is inserted by clause 54. Will the Minister comment on the proposal? It is a tidying-up exercise to make the provision clearer and to bring consistency to the Bill.

John Healey (Labour, Wentworth)

The hon. Gentleman is trying to ensure clarity in the Bill. However, the heading that immediately proceeds new section 30B, ''Formation of SE by merger'', already forewarns the reader that the new clause applies only in those circumstances. While I concede that both the intention and the effect of the amendment is designed to be constructive, it is not really necessary and I hope that the hon. Gentleman withdraws it.

Richard Spring (Conservative, West Suffolk)

I thank the Minister for his explanation. Our wording would have made the provision more clear, but I accept his underlying point. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 55 ordered to stand part of the Bill.

Clause 56 - Capital allowances

Richard Spring (Conservative, West Suffolk)

I beg to move amendment No. 159, in clause 56, page 49, line 5, leave out ' a qualifying' and insert 'an'

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss the following: Government amendments Nos. 144 and 145.

Amendment No. 160, in clause 56, page 49, leave out lines 17 and 18.

Richard Spring (Conservative, West Suffolk)

The clause inserts new section 561A into the Capital Allowances Act 2001 to ensure that there is no clawback of capital allowances on the transfer of assets which occurs during the formation of an SE by merger—that is, where there is not a deemed disposal of market value of the fixed assets transferred to the SE during the merger so as to cause a balancing charge or allowance. As drafted, the provision applies only to capital allowance assets that fall within the scope of the Taxation of Chargeable Gains Act 1992, whereas some assets, such as chattels, are assets in respect of which capital allowances can be claimed but are not within the scope of that Act. Furthermore, it will not apply if the formation of an SE by merger falls within the usual relief under UK tax law for reorganisations of section 139 of the 1992 Act. We see no policy reason for that.

The Government amendments essentially cover the point that I am trying to make. I merely seek a further explanation from the Minister to clarify the point.

John Healey (Labour, Wentworth)

I do not think that I need to explain the purpose of the clause. Both the Opposition and the Government amendments would extend the provision to a limited number of assets in areas that qualify for capital allowances but are outside the scope defined in the clause. To that extent I recognise clearly the constructive spirit in which the hon. Gentleman tabled the amendment. However, as I will explain briefly, both amendments have collateral consequences that are wider than I think he intended. For that reason I encourage him to consider accepting the Government amendments rather than press the formula in his amendments.

By removing the word ''qualifying'' under amendment No. 159, the scope of the clause would be widened to the extent where all assets eligible for capital allowances that are transferred as a result of a merger would be free of a capital allowances balancing charge. The relief would, in particular, be extended to assets to which the mergers directive may not apply, so it would be possible for companies to avoid a charge where one would be appropriate, for example, where the asset was no longer within the scope of UK tax after the merger. That could happen where the merged SE was in another member state and the assets transferred were no longer used for the purposes of a business in the UK.

Article 4(1) of the mergers directive provides that tax neutrality is only to apply to those assets that remain effectively connected to a permanent establishment in the transferring country. Consequently, the Government wish to restrict the scope of the clause only to those assets that remain effectively connected with a UK branch or permanent establishment.

On the other hand, although Government amendments Nos. 144 and 145 deal with the same problem of limited areas outside the scope of the original clauses, they do so in a way that does not require the removal of the terms ''qualifying assets'', thus avoiding the problem that I have outlined. I hope that the hon. Gentleman will accept them.

Richard Spring (Conservative, West Suffolk)

I did say that as currently drafted clause 56 only applies to capital allowance assets that are in the capital gains tax rules, which would have excluded most moveable plant and machinery and would therefore have been absurd. However, amendment No. 145 deals with that.

New subsection (3) rightly remedies the provision to cover all capital allowance assets and new subsections (4) and (5) seek to ensure that the subsection applies only where the assets remain in the charge to UK tax. That is a sensible condition, albeit one that may, regrettably—or may not—be challenged in due course under EU law. However, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 144, in clause 56, page 49, line 7, after ''applies'', insert

'(or would apply but for section 140E(1)(d)).'.

No. 145, in clause 56, page 49, leave out lines 17 and 18 and insert—

'(3) For the purposes of subsection (1) an asset is a ''qualifying asset'' if—

(a) it is transferred to the SE as part of the merger forming it, and

(b) subsections (4) and (5) are satisfied in respect of it.

(4) This subsection is satisfied in respect of an asset if—

(a) the transferor is resident in the United Kingdom at the time of the transfer, or

(b) the asset is an asset of a permanent establishment in the United Kingdom of the transferor.

(5) This subsection is satisfied in respect of an asset if—

(a) the transferee SE is resident in the United Kingdom on formation, or

(b) the asset is an asset of a permanent establishment in the United Kingdom of the transferee SE on its formation.''.'.—[John Healey.]

Clause 56, as amended, ordered to stand part of the Bill.

Clauses 57 to 64 ordered to stand part of the Bill.

Clause 65 - Restrictions on set-off of pre-entry losses

Richard Spring (Conservative, West Suffolk)

I beg to move amendment No. 161, in clause 65, page 54, line 11, leave out

'resident in the United Kingdom'.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss the following amendments: No. 162, in clause 65, page 54, line 19, leave out from ''the'' to end of line 24 and insert

'most recent relevant event in relation to the company from which the asset was so transferred;''.'.

No. 163, in clause 65, page 54, line 28, leave out subsections (4) and (5).

Richard Spring (Conservative, West Suffolk)

These are probing amendments and I would be grateful if the Minister commented on them. They emerged from Law Society representations. I do not wish to detain the Committee long, but I want to set out some of the ideas that have been put to us. If some reassurance can be given, that will be valuable.

Amendment No. 161 relates to the pre-entry loss rules that prevent capital gains tax groups buying in capital losses from other capital gains tax groups. There is no need for the requirement for the SE to be resident in the UK as there is already a requirement that the relevant assets are within the charge to corporation tax on capital gains; for instance, if the SE is not UK resident, there must be a UK taxable branch that is a permanent establishment of that SE. That introduces more flexibility into the SE rules.

Amendment No. 162 relates to the pre-entry loss rules in the Taxation of Chargeable Gains Act 1992. The pre-entry loss rules work to prevent the purchase of capital losses from outside the capital gains tax group to shelter future capital gains. The relevant event determines when the asset became pre-entry. The amendment seeks to ensure that these rules are not triggered on formation of an SE by merger, which will allow greater flexibility and ensure that where there is a merger, which requires a particular structure by way of the definition of merger in the Council directives relating to SE and mergers of publicly limited companies, the formation of the SE does not cause any existing pre-entry losses to lose their restricted pre-entry nature on the SE merger.

The clause has the same effect, provided that the company transferring the asset to the SE does not cease to exist as part of the process of forming the SE by merger. However, the requirements to form an SE by merger under the relevant EU company law regulations mean that the clause should not open such a door, as no publicly limited company is going to spend the money, make the public announcements and tie themselves into an SE and the issues involving worker representation on the board, in order to get around a small part of the capital gains tax rules that the Government have suggested they intend to overhaul radically, if not abolish, when they legislate for their major reform of corporate taxation.

Amendment No. 163 simply continues to address that issue in terms of the definition of groups related to this category.

I would be grateful if the Minister could give some reassurance to those who have raised with us concerns about these matters.

John Healey (Labour, Wentworth)

The clause adapts the special anti-avoidance rules in schedule 7A of the Taxation of Chargeable Gains Act 1992. Without the changes, companies might be able to use the formation of an SE by merger as a means of tax avoidance. In addition, there would also be a disparity and an inconsistency of treatment compared with wholly domestic mergers.

The hon. Gentleman asked me to indicate why we feel the amendments are either deficient or not acceptable. Amendment No. 161 seeks to remove the restriction of the clause solely to those SEs that are resident in the UK. If accepted, that would mean that in theory the legislation was capable of applying to any SE wherever resident. That is beyond the competence of the UK Government. Consequently, while I understand that the amendment is well intentioned, it is technically deficient.

Amendment No. 162 is, again, undoubtedly well intentioned, but its adoption would create ambiguity as to the meaning of the ''most recent relevant event''. That is because our existing legislation relating to relevant events does not cater for the situation where an SE is formed by merger and it is not the company which joins a new group. Instead, the effect of the merger might be that assets are transferred to the new UK-based SE. If the amendment were accepted, there would be a gap and businesses might be uncertain about whether the desired continuity would apply to mergers to form UK SEs.

Finally, amendment No. 163 seeks to remove subsections (4) and (5) from Clause 65. It would have the unfortunate effect of removing the anti-avoidance protection that is in the clause. It would also result in more favourable treatment for the formation of SEs by merger compared with wholly domestic mergers. I am sure that that is not the hon. Gentleman's intention. On that basis, I hope that he will not press the amendment to a Division.

Richard Spring (Conservative, West Suffolk)

I thank the Minister for his explanation. Undoubtedly it will be read avidly by those who wish to pursue this matter. I hope that his answers will satisfy them. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 65 ordered to stand part of the Bill.

Clause 66 - Vehicle excise duty: late renewal supplements

Mark Francois (Conservative, Rayleigh)

We are approaching the final lap and moving on to part 5. We dealt with clause 69 on the Floor of the House, so we need trouble ourselves no longer with that. That leaves us with three relatively non-controversial clauses in part 5. I shall comment on them only briefly.

Clause 66 relates to vehicle excise duty and varies the powers by which the Government can exercise sanctions against those who renew their VED late. I have a few questions for the Minister. We have received a representation from Mr. Paul Watters, the head of road and transport policy at the AA Motoring Trust. He stated:

''The AA Motoring Trust regards the 1 million or so uninsured, untaxed, wrongly registered users of vehicles a serious problem that must not be allowed to grow. That is why these initiatives are being taken. However, our support is conditional on the basis that DVLA modernises (and is given sufficient resources to modernise by government). We are pleased that DVLA has delivered customer service improvements for example, the new electronic road tax renewal system now coming on stream. It is a pity that some of the (close on) £1 billion so far raised in the sale of cherished number plates was not given back to DVLA to invest by Treasury.''

So, I offer that suggestion to the Minister.

Why is the clause amending measures that were passed as recently as in the Finance Act 2002? The clause is slightly confusingly drafted. What is the rationale behind the proposed change? We should know that, not least because the DVLA's business plan for 2005–06 has hardly anything to say about the change, which presumably would have been important to it. Given our theme of the afternoon, what steps have the Government and the DVLA taken to ensure that its computers can cope with the changes?

John Healey (Labour, Wentworth)

The question of the proceeds from the sale of personalised number plates is rather far removed from the provisions of the clause. If the AA Motoring Trust genuinely regards the number of untaxed, unlicensed and uninsured vehicles on our roads as a problem that needs to be tackled—I am sure that it does—it will support the clause's strengthening of the continuous registration scheme.

The hon. Gentleman asked me why the provision was needed so soon after the Finance Act 2002. I shall be frank with him: at the time, it appeared to us that the Vehicle Excise and Registration Act 1994 would enable DVLA officials to act for the Secretary of State in processing court action. We found that that was not the case. The clause is designed to rectify the matter, and I hope that it will receive the hon. Gentleman's support.

Question put and agreed to.

Clause 66 ordered to stand part of the Bill.

Clause 67 - Reorganisation of water and sewerage services in Northern Ireland

Mark Francois (Conservative, Rayleigh)

We now switch subjects completely. As I understand it, the state effectively still runs the water and sewerage services in Northern Ireland. Water rates are not levied separately but included in local taxation, which in Northern Ireland is still a variant of the old rating system, rather than the council tax that operates in England. In future, water rates are to be run and levied by a newly established company under the auspices of the Department for Regional Development in Northern Ireland.

The clause permits the relevant assets to be transferred to the company on a tax-neutral basis, with details of the transfer to be confirmed in subsequent regulations. The hon. Member for North Antrim (Rev. Ian Paisley) had something to say about that on Second Reading, but I shall not repeat it, not least because I cannot do the accent. The subject is obviously a matter of some concern to people in the Province.

The Paymaster General wrote to Committee members on 24 June to provide detail about what the regulations will cover, and we thank her for that courtesy. The Opposition are not opposed to the creation of the company or to the separating out of the water rates charge in line with the situation in much of the rest of the UK. However, as there are no Northern Ireland Members assigned to the Committee, I shall briefly press the Paymaster General on a few points.

The Paymaster General's letter mentioned that subsequent legislation would give effect to the reorganisation. It said:

''The regulations required to deal with the tax consequences of the reorganisation of the Water Service will be determined by how the reorganisation is structured and the nature of the property, rights and liabilities transferred from the Water Service. The tax regulations will be made after the detail of the legislation dealing with the reorganisation is known.''

That seems the logical sequence of events. I appreciate that the legislation required is unlikely to be a Treasury Bill, but does the Paymaster General have any idea of when it will be forthcoming and when the tax regulations can be expected to follow? Finally—this is an important question, if only to exclude some of the possibilities—how, if at all, will the process be affected if a compromise is reached in Northern Ireland and some form of devolved Government restored?

Dawn Primarolo (Labour, Bristol South)

None of the hon. Gentleman's questions are relevant to the clause. It simply provides that if, following consultation in Northern Ireland, the decision is taken to transfer to a wholly owned Government company, the transfer of the assets will be dealt with in the same way as transfers to new companies that are wholly owned by a Department. The legislation, the consultation and therefore the change is a matter for the Northern Ireland Office. The legislation, as requested by that Department, makes sure that if a wholly owned Department company is created, there are no tax consequences, which is normal practice.

Mark Francois (Conservative, Rayleigh)

I thank the Paymaster General for that explanation. As we have no Northern Ireland Ministers or Members in this Committee, it was an important point of principle that the clause should not be allowed to go by without some comment. I am sorry if she does not agree; we will have to agree to differ.

Question put and agreed to.

Clause 67 ordered to stand part of the Bill.

Clause 68 - EU Mutual Assistance Directive: notifications

Mark Francois (Conservative, Rayleigh)

We switch again, from Northern Ireland to clause 68 on the EU mutual assistance directive, which was first introduced in 1977 and essentially permits the Inland Revenue or Customs—now HMRC—to deliver documents to taxpayers on behalf of other EU revenue authorities in return for reciprocation by other EU member countries on a similar basis.

The directive has been amended over the years to increase its scope—for example, to cover VAT, insurance premium taxes and certain customs duties and to take account of new countries joining the EU. Although I am often wary of the plethora of directives emanating from Brussels, many bilateral tax treaties, including those relating to EU and non-EU countries, already have exchange of information provisions.

I confirm that we Conservatives will not be calling for a nationwide referendum on the clause, and the Paymaster General can stand down the yes campaign. Is she confident, however, that there nothing in the new clause would affect the normal confidentiality arrangements that apply to UK citizens who may receive documentation by this method, bearing in mind that confidentiality has cropped up a number of times in our proceedings over the past two weeks?

Dawn Primarolo (Labour, Bristol South)

I can confirm that the original legislation was introduced in 1977. There were changes in the 1980s, followed by more changes in 2000, but the most substantial changes occurred during the period of the Conservative Government. This provision is the last piece and completes the change.

I assure the hon. Gentleman that confidentiality enshrined in legislation that has gone through this House in the formation of HMRC is in no way undermined or compromised. The process is conducted within the terms of the directive under strict confidentiality rules.

Question put and agreed to.

Clause 68 ordered to stand part of the Bill.

New clause 1 - ADVANCE CLEARANCE

New Clause 3 - Treasury consent

Philip Hammond (Conservative, Runnymede and Weybridge)

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

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss amendment No. 57, in schedule 11, page 155, line 27, at end insert—

'Income and Corporation Taxes Act 1988

Section 765 Section 765A Section 766 Section 767'.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am delighted to return to the fray and I see that you share my view, Mr. Cook. New clause 3 would take out of effect sections 765, 765A, and 767 of the Income and Corporation Taxes Act 1988. Section 765 requires UK groups to write to HM Treasury and seek specific permission to subscribe to shares or debentures in overseas companies and to write for specific permission to sell shares or debentures in overseas companies. HM Treasury has issued general consents so that, if particular patterns of facts apply in any case, groups can treat themselves as having a deemed consent.

When a specific consent is required, usually for the sales of shares in an overseas subsidiary or a group reorganisation of an overseas sub-group, it is a criminal offence not to have obtained specific Treasury consent beforehand. For large multinationals that might have significant numbers of overseas subsidiaries, that causes considerable administrative burden backing the movements of the overseas entities that they ultimately control.

Section 765A of ICTA removes the Treasury consent conditions for transactions between companies in different member states of the EU. It was a provision that was inserted to make the original section 765 compliant with EU law. Although it removes those companies from the scope of section 765, it still has a notification requirement so there is still a compliance burden on companies. Section 766 of ICTA 1988 determines the offences and penalties for failing to comply with sections 765 and 765A so logically, if we are removing sections 765 and 765A, we need to remove section 766. Section 767 deals with interpretation and commencement.

The sections are an anachronism—a hangover from the pre-1979 world of foreign exchange controls. The Treasury consents were originally part of the foreign exchange control structure but were maintained when the rest of the foreign exchange control regime was scrapped to serve as an early warning system for the Inland Revenue in respect of particular types of tax planning and, to some extent, to act as a deterrent to those types of tax planning. That was a legitimate objective at the time. Now, the sections impose an additional compliance burden on companies and slow down the progress of commercial transactions. It causes great worry in the business world that, almost uniquely, the sections provide for criminal penalties, rather than civil penalties, for failure to comply with what are essentially reporting requirements, which is reminiscent of the original framework of exchange control legislation where provisions originate.

We drafted the new clause because we believe that those pieces of anachronistic legislation no longer have a purpose in relation to exchange control—the exchange control regime having been swept away—or in relation to advance warning of tax avoidance. There has been a considerable number of changes, some of which we have discussed in this Committee and not the least of which is the disclosure regime in the Finance Act 2004 that requires people who are developing and promoting tax avoidance schemes involving financial instruments to report them to the Revenue. The Revenue therefore has its early warning system in place through much more modern legislation.

Schedule 7 to the Bill contains measures such as the tax arbitrage rules that enable the Revenue to issue a notice and the substantial shareholdings exemption, which, although not creating a notification process, exempt gains on the sale of shares of trading companies and hence create a situation in which there is no tax to pay and thus no tax avoidance to worry about. We have made the point consistently in this Committee that when new compliance burdens—new legislation—is created, we need to clean the stable as we go. We cannot keep piling one more burden on top of another. I suggest to the Paymaster General that when the Bill is enacted, there will be sufficient procedures in place to negate the type of tax planning for which specific Treasury consent acted as an early warning system. If such procedures did not eliminate those areas of tax planning, they would at least, when combined with the Finance Bill 2004, provide all the armoury of early warning devices that the Treasury and Inland Revenue reasonably need to have proper advance warning of any tax planning schemes.

In the light of the present regime, the Treasury consent rules are wholly unnecessary and unnecessarily burdensome to business and can safely be eliminated without any risk to the Revenue. We seek to reduce unnecessary bureaucracy and make a tiny counterbalancing reduction in the volume of the UK statute book as this Bill is enacted.

Dawn Primarolo (Labour, Bristol South)

I shall respond first to a few points that the hon. Gentleman made when moving the new clause, then respond on the detail of the clause.

By way of background, I remind the hon. Gentleman that section 765 was never only about exchange controls. The then Conservative Government realised that and concluded that it should be retained following their abolition of exchange controls in 1979. The section was introduced to counter tax avoidance; it has done that successfully and should not be repealed, as it protects a great deal of revenue.

I am familiar with those in the corporate sector who do not like Treasury consents. I have had the benefit, as the hon. Gentleman may have done, of discussing with such people what they think about the consents. The same people probably spoke to the hon. Gentleman and me about the arbitrage regime—they did not like that either. The hon. Gentleman is praying the arbitrage regime in aid now, but when we discussed it previously, he sought to emasculate it so that it did not do its job.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Paymaster General is right, but we have to deal with the Bill as it is progressing. Our arguments were defeated during the discussion of the arbitrage clauses: she now has her arbitrage provisions as she originally presented them. What we are probing is whether the Treasury consent rules remain necessary in the light of the success that the hon. Lady has enjoyed.

Dawn Primarolo (Labour, Bristol South)

It would be presumptuous of me to assume at this stage that the arbitrage provisions have gone through. Returning to the matter of Treasury consents, I suppose that the hon. Gentleman is saying that the Government must be consistent throughout the Bill in advancing our arguments but the Opposition does not have to be.

The hon. Gentleman talked about criminal penalties being disproportionate, which is an important point. Criminal sanctions are not unprecedented; there are examples elsewhere. In relation to section 765, Treasury consents do not stand out as the only ones.

In responding to the general thrust of the hon. Gentleman's argument, I have to say that the Government cannot accept the new clause at this time as to do so would open up opportunities for tax avoidance, but he makes a very fair point. Section 765 came into being when tax avoidance was tackled very differently from the way that the Government now prefer. As the hon. Gentleman said, it can create difficulties for companies but even companies and their advisers agree that the section is effective in deterring aggressive tax avoidance and how it is administered.

The hon. Gentleman was right to say that there is an overlap between section 765 and some of the provisions in the Bill, especially in clauses 24 to 31. I have already touched on avoidance schemes and arbitrage. As I explained when we debated those provisions, sometimes there is an overlap between different anti-avoidance rules. That is commonplace, and it helps to ensure that avoidance schemes do not manage to get through unintended gaps between the rules.

More fundamentally, not all tax avoidance involves arbitrage. Section 765 provides the Exchequer with protection against tax avoidance in circumstances where clauses 24 to 31 do not, therefore section 765 remains an important defence against avoidance. It is too early to assess the impact of the introduction of the provisions on avoidance through arbitrage and other provisions. However, the Government will closely monitor the interaction over the coming months. If anti-avoidance legislation ever rendered section 765 redundant, the Government would reconsider the matter.

I can go further and confirm to the hon. Gentleman that the Government will consider section 765 in the context of work on the wider international context of the corporation tax system and, more specifically, in the current review of powers of the merged Department or HMRC, which has already been announced and is up and running. With the advisory committee, it is the appropriate body to advise the Government—I will share that with the House—and to ensure that we have appropriate coverage for anti-avoidance. However, the power was created in a different era, as the hon. Gentleman said at the beginning of his speech, and it is right and proper that it should be under the spotlight now.

Philip Hammond (Conservative, Runnymede and Weybridge)

The right hon. Lady is making an interesting and constructive speech in response to our proposals. Can she give us an idea of the time scale for the review? It will, of course, be an ongoing review, but it would be helpful if she gave some reassurance to those who are concerned about the measures continuing.

Dawn Primarolo (Labour, Bristol South)

I can certainly do that. However, I do not know whether consideration of section 765 will be concluded; that will depend on how the consultation goes. When the Bill for the merger to create HMRC was confirmed on the Floor of the House and in Committee, it was said that we hoped that the first sets of recommendations would be available for the 2006 Finance Bill—that is on the record, although I cannot give a specific Hansard reference—but I cannot give an assurance that one of them will be about section 765.

The hon. Gentleman is right that such a review, which examines powers and what is appropriate and what should be done, will not be conducted in one year and appear in a single Finance Bill. As the Revenue and Customs merge, it will be important to make sure that everything is considered. I am afraid that the case is not made now for the abolition of the provision, but I accept some of his detailed points on how the provision operates and I hope that, given that it is under consideration within the wider review on corporate tax reforms, he will withdraw his new clause at this stage, and await the consultation.

Philip Hammond (Conservative, Runnymede and Weybridge)

That is probably the nearest I have managed to get to getting a friendly word so far in the Committee, and I thank the right hon. Lady for her response.

People who have talked to us about section 765 feel that the case for abolition is made. The right hon. Lady has expressed the more cautious view that she wants to be certain that there are no gaps between the other anti-avoidance measures that will be in place when the Bill receives Royal Assent and the regime operated under section 765. She has made a very reasonable case, and I think that the people with concerns about the continuing operation of section 765 will be reassured to know that the Government will take a pragmatic approach and that they are not simply looking to layer new legislation on top of old.

Therefore, I will take the right hon. Lady at her word and hope that by the time that the Finance Bill 2006 arrives, she might have something to offer by way of a Government amendment—and if she does not, perhaps we can try again with new clause 3, and repeat our discussion on it with the benefit of the experience that practitioners will have acquired of operating the provisions of this second piece of finance legislation for 2005.

Motion and clause, by leave, withdrawn.

Clause 70 ordered to stand part of the Bill.

Schedule 11 agreed to.

Clauses 71 and 72 ordered to stand part of the Bill.

Question proposed, That the Chairman do report the Bill (except clauses 11, 18, 40, 43, 44 and 69 and schedule 8), as amended, to the House.

Dawn Primarolo (Labour, Bristol South)

Before we conclude, I want to put on the record my thanks to you, Mr. Cook, and your co-Chairman, Sir Nicholas Winterton, for the excellent way in which both of you have chaired the sittings and assisted the Committee in scrutinising the Bill in a businesslike but, none the less, precise fashion. I also thank the Clerks, the Hansard writers and the Doorkeepers for their assured touch in making the business of the Committee run smoothly and for assisting us.

I congratulate the hon. Member for Runnymede and Weybridge and his team on completing at least the Committee stage of the Finance Bill and the hon. Member for Eastleigh (Chris Huhne) and his team for sitting so patiently through almost the entire proceedings. I thank my hon. Friends the Financial Secretary and the Economic Secretary for their excellent assistance.

Finally, I thank all my hon. Friends for all the hard work that they have done during the Committee. I am eternally grateful for their support and assistance in ensuring a proper discussion of the Government's Bill in Committee. I look forward to the remaining stages of the Bill.

Philip Hammond (Conservative, Runnymede and Weybridge)

I endorse the Paymaster General's remarks, Mr. Cook. Both you and Sir Nicholas sat tirelessly through what must sometimes have been complex and tedious debates. We are grateful to you for your deft touch throughout.

On behalf of the Opposition, I especially thank the Clerks. The right hon. Lady thanked them for their work in serving the Committee, but Opposition Members depend especially heavily on the support of the Clerks in the attempt to match the enormous firepower of the Treasury. It is a bit like a small ships parade dealing with the might of the aircraft carrier Charles de Gaulle, but we have done our best. With the help of the Clerks, we somehow muddled through.

I also thank all types of House staff who have served the Committee so well. Finally I should like to thank the Paymaster General and the Government Front-Bench team, as well as the hon. Member for Wolverhampton, South-West for his helpfulness during the Committee.

Christopher Huhne (Liberal Democrat, Eastleigh)

On behalf of myself and my colleagues may I also join in the sentiments expressed by the Paymaster General? I particularly agree with the hon. Member for Runnymede and Weybridge, and I should like to express our thanks to the Clerk and to his staff for the assistance that has been offered to us, even though it has not always been tremendously pleasant to discover some of the arcane procedures of the Committee and what we are and are not allowed to discuss. Before I mention self-investment pension plans or the enormous revenue that the Treasury is forgoing as a result of being unable to take on board our new clause, I should like to thank you, Mr. Cook, and the Clerk.

Mark Francois (Conservative, Rayleigh)

I wish to place on the record my personal thanks to my very good old friend from college days, Mr. Michael Halcrow, who was very kind in taking me through the complexities of stamp duty land tax,

Question put and agreed to.

Bill (except clauses 11, 18, 40, 43, 44 and 69 and schedule 8), as amended, to be reported.

Committee rose at twenty-three minutes past Five o'clock.