Orders of the Day — Finance Bill

House of Commons, 6 July 2005.

New Clause 1 — Inheritance Tax

Philip Hammond (Conservative, Runnymede and Weybridge)

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

Michael Martin (Speaker, Glasgow North East)

With this, it will be convenient to take new clause 8—Inheritance Tax (No. 2)—

'The Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004 (S.I., 2004, No. 2543) are amended, in Regulation 6, line 4, by omitting "must" and inserting "may".'.

Philip Hammond (Conservative, Runnymede and Weybridge)

New clauses 1 and 8 take a slightly different approach to a problem while delivering, in essence, the same outcome. I shall explain during the course of my remarks why we have chosen to table two different solutions to the problem that we have identified.

New clause 8 amends the Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004—a snappily named little piece of secondary legislation—that was made with respect to section 256 of the Inheritance Tax Act 1984. It is designed to amend the provision by omitting "must" and inserting "may", thus making the delivery of a return permissive. New clause 1 adopts a rather more radical approach by disapplying regulations 6 to 10, dispensing with the requirement for returns altogether.

The regulations that the new clauses amend make provision in relation to the delivery of accounts and other information for inheritance tax purposes. As is often the case, the 2004 regulations were presented as a deregulatory measure—and to some extent they are. Prior to the 2004 regulations—[Interruption.] Judging by the noises off, Mr. Speaker, I suspect that we have a result from Singapore. Before those regulations, estates just below the inheritance tax value were required to deliver a full account to the Revenue.

Dawn Primarolo (Labour, Bristol South)

On a point of order, Mr. Speaker. Please forgive me for interrupting the hon. Gentleman, but I am sure that he would like to know that the successful bid for the Olympics is London. [Hon. Members: "Hooray!"] I should like to take the opportunity, on behalf of the House and the country, to thank all those involved in the preparation and delivery of a fantastic bid. I am sure that all of us look forward to welcoming the Olympics to London, to ensuring that this country represents itself and the Olympic spirit to the very best of our ability, and that it makes us proud.

Philip Hammond (Conservative, Runnymede and Weybridge)

Further to that point of order, Mr. Speaker. May I associate the Opposition with the right hon. Lady's remarks and pay tribute to everybody who has worked so hard to ensure that this bid was successful? I pay tribute in particular to my noble Friend the Lord Coe—[Hon. Members: "Hear, hear."]—who has done so much to ensure that the bid was successful, and who has worked tirelessly with members of all parties and with members of the Government.

Michael Martin (Speaker, Glasgow North East)

Order. I hate to put a dampener on any celebrations and I am personally delighted, but I cannot take any more points of order on this matter. There will be an opportunity for the appropriate Minister to come before the House and for us to discuss the matter fully. Standing Orders tell me that we must get on with the business in hand.

Philip Hammond (Conservative, Runnymede and Weybridge)

Thank you, Mr. Speaker. The challenge that the House now faces is how to make the Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulation 2004 seem remotely interesting. But we will do our best.

The regulations that the new clauses seek to amend make provision for the delivery of accounts and other information for inheritance tax purposes. As I have said, the 2004 regulations were presented as deregulatory, and to some extent they are. Before their introduction, estates that were just below the inheritance tax value were required to deliver a full "account" to the Revenue, and were known as "excepted estates". Regulation 3 provides that a person is no longer required to submit an account under the terms of section 216 of the Inheritance Tax Act 1984 if the property is an excepted estate. This is in fact a perfectly sensible measure, reducing the compliance burden on some 30,000 estates valued between £240,000 and £275,000 every year.

However, what was billed as a relieving measure is not so in practice. As so often with this Government, the deregulating instinct has been swamped by the regulating instinct of bureaucracy, and what regulation 3 gives, regulation 4, I am afraid, takes away—in spades. The 2004 regulations provide that all estates below the inheritance tax threshold, and which are valued at more than £5,000, are now classed as excepted estates. Regulation 6 provides that

"a person who by virtue of these regulations is not required to deliver to the Board an account under section 216 of the 1984 Act . . . must produce the information specified in paragraph (2) to the Board in such form as the Board may prescribe."

In other words, the Government have scrapped the requirement to return an account for 30,000 excepted estates on form IHT200, but they have introduced a new requirement for some 300,000 estates per year. All those 300,000 estates are worth less than the IHT threshold and have no tax to pay, and all of them had no requirement whatsoever to make a return of any kind until the 2004 regulations were introduced. A requirement has now been introduced for those estates to make a return

"in such form as the Board may prescribe".

The prescribed form is in fact form IHT205.

I have a copy of form IHT205 in front of me. It is a four-page document in the typical style of a tax return. It is laden with complicated and intrusive questions—so much so that there are 23 pages of accompanying guidance notes and 16 pages of annexes. The information required by the form includes details on the deceased's occupation and that of surviving relatives; gifts given by the deceased over the past seven years; overseas assets; pensions; cash, including money in banks, building societies and national savings; value of household and personal goods; stocks and shares quoted on the stock exchange; stocks and shares not quoted on the stock exchange; insurance policies, including bonuses and mortgage-protection policies; money owed to the deceased; residences; partnerships and business interests; debts of the deceased; and funeral expenses.

That is just what a grieving relative needs! We should remember that this requirement applies to estates below the inheritance tax threshold—to so-called excepted estates. It would be quite interesting to know what the Treasury understands by the term "excepted". In case anyone is tempted not to treat this intrusion with the seriousness it deserves, the document warns that there may be

"financial Penalties if the answers to the questions or figures given are wrong".

So before one completes the form, one must make "full enquiries" as to the value of the deceased's household and personal goods. Estimates are explicitly unacceptable. Gathering this information could take a bereaved relative weeks or even months, and cause quite unnecessary stress at a time of personal grief.

Given the form's complexity and jargon-laden language, and given the difficulty that most lay people will have in distinguishing between the different classes of assets and liabilities that they are required to record in different parts of the form, many—if not most—relatives will seek the help of a solicitor in completing it. However, they will have no choice but to assemble the bulk of that information themselves, as a solicitor would be unable to aggregate it for them. Based on last year's figures, an extra 246,872 estates now have to file a return. Based on an average solicitor's hourly rate, and assuming approximately one hour's-worth only of work and correspondence, this provision will cost the average estate between £150 and £250. That equates to between £37 million and £62 million in legal bills alone each year, and for what? This is not a return of inheritance tax due; it is a regime that applies exclusively to estates below the inheritance tax threshold.

This is a massive and intrusive fishing expedition that involves trawling, collecting and storing information—in minute detail—on those who are supposed to be outside this particular tax net and free of the hassle of compliance. It turns on its head the previously accepted position that the details of an estate below the IHT threshold were not a matter for the Revenue.

New clause 1 removes the regulations requiring reporting of excepted estates on form IHT205 altogether, thus relieving 300,000 bereaved families each year of this insensitive and unnecessary burden. New clause 8 seeks to achieve the same objective by a slightly different route. It leaves the provisions in regulations 6 to 10 in force, but makes compliance with them optional by omitting "must" from line 4 of regulation 6 and inserting "may". Giving taxpayers "permission" to make a return to the Revenue might seem a curious approach, but we are told that in some cases, professional executors, with a view to their own potential liability, might wish to have the comfort of having made a return on IHT205, thus enjoying the Revenue's confirmation—if a notice has not been issued within a certain period under the regulations—that no tax is indeed payable.

So new clause 8 leaves the provision force for the benefit of those professional executors who wish to use it, while removing the element of compulsion for the rest of us. We have no difficulty with a solution to this problem that allows those professionals who want to make use of the provisions to continue to do so. Our purpose today is to ensure that this burden is not imposed on ordinary bereaved families who are seeking to act as executors for the will of a deceased person.

It is our contention that people who are dealing with modest estates—of as little as £7,000 to £10,000, and thus way below the inheritance tax threshold—should not be subjected to this additional burden at a time of bereavement or have to waste time and money completing a form whose only point is to feed the seemingly insatiable desire of the big brother state for information on every aspect of our lives.

The measure is an example of a hugely insensitive invasion of privacy. It is an expensive and heavy-handed exercise that will burden some 300,000 estates every year and achieve nothing of practical value except the storing of huge amounts of personal information on everyone leaving an estate in excess of £5,000. All that is concealed behind what turns out to be a paltry relief for a mere 30,000 estates at the very top end of the exception band.

I hope that the Paymaster General will pledge today that she will end this bureaucratic nonsense, either by accepting the new clauses or by making a definitive promise to introduce something that would have the same effect.

Susan Kramer (Liberal Democrat, Richmond Park)

Today, the Liberal Democrats and the Conservatives are speaking out together on inheritance tax. That must be an event almost as momentous as London's success in winning the Olympic bid. As a former London mayoral candidate, I welcome that success on my party's behalf.

The new clauses address a matter that exercises us very much. The Bill breaks a principle, referred to in the past by my hon. Friend the Member for Bristol, West (Stephen Williams), that the Revenue should not go on fishing expeditions and seek by intrusive means information that does not apply directly to its ability to levy tax. The new clauses would remove the information requirement in relation to people who the Government do not believe should be subject to inheritance tax. The Bill would require them to fill out extensive forms at a time of great bereavement to prove that no tax should be paid.

The Revenue's fishing expedition will expose almost no evidence of tax avoidance. The Chancellor has said with great pride on many occasions that only about 6 per cent. of the estates left after people die in this country are liable to inheritance tax. The vast majority are not liable, and I am sure that all parties share common cause that that should remain the case. The intrusive search for detailed information required by the Bill is therefore unacceptable.

The concept of "excepted estates" applies to estates worth £275,000 or less, or to transfers to a spouse. That should be the appropriate benchmark, and we therefore associate ourselves with the new clauses.

Philip Dunne (Conservative, Ludlow)

I hope that the House will excuse the pun, but I have grave concerns about proposals to increase the powers of the nanny state. Her Majesty's Revenue and Customs has all-seeing powers over British taxpayers from the cradle to the grave, and now in the afterlife as well.

I support new clauses 1 and 8 as a way to restore sanity to families and professionals who have to deal with the immediate effects of the afterlife and sort out estates after people die. That is a very distressing time, and the Government's introduction last year of statutory instrument No. 2543—the Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004—made it immeasurably more distressing. As my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) said, that order extended the requirement to file inheritance tax return form IT205—which he illustrated so eloquently—on all estates worth more than £5,000. Essentially, that requirement applies to every estate that requires probate.

That is a huge extension of bureaucratic form filling. Previously, one could file a nil return for inheritance tax unless one was within £30,000 of the inheritance tax threshold. Now the form will have to be filed in respect of all estates of over £5,000, and very detailed information on the value of assets will be sought. That information will include details of household and personal goods, and so will require the valuation of the furniture and jewellery, for instance, in an estate. All of that information has to be provided after a full inquiry has been made.

Philip Hammond (Conservative, Runnymede and Weybridge)

I hope that my hon. Friend will forgive me for correcting him, but there was no requirement under the previous regime to file a nil return. People were required simply to swear a declaration that no tax was due.

Philip Dunne (Conservative, Ludlow)

I am grateful for that correction, and my hon. Friend is right to say that it was possible for solicitors to swear an affidavit, although they could choose to file a nil return.

The requirement would be reasonable if there was a good prospect that additional revenue would be raised, but my hon. Friend has noted already that most estates will be below the threshold and so will not qualify. As a result, the proposal has no revenue-raising potential.

What is the point of the proposed exhaustive form filling? How many people will be affected? My hon. Friend has given some statistics, but I have some other data that might help Labour Members understand the implications of what is being proposed. About 535,000 people die each year. I learned that statistic in a debate on fallen livestock, when the subject of human death was touched on. Only 35,000 estates pay inheritance tax, so it does not take great mathematical skill to work out that, if all estates were to be affected by probate, a very significant number of people will be affected.

Presumably, a not insignificant number of forms will land in the HMRC's offices, and will need to be checked. Some errors might be detected where there is a possibility that an estate goes over the threshold, but it is most likely that the forms will sit and gather dust after being collected. Therefore, many people in the bureaucracy will do very depressing work to no purpose.

Stephen Hammond (Conservative, Wimbledon)

My hon. Friend mentions bureaucracy, but is not the problem even worse than he sets out? In Committee, the Paymaster General talked several times about the need for anti-avoidance measures and the need to close the tax gap. Would not the money spent on this fishing exercise be better spent on other measures that would close the tax gap?

Philip Dunne (Conservative, Ludlow)

My hon. Friend makes a good point. The HMRC work force is being reduced, so we should look carefully at the tasks that people there are asked to undertake. I hope that the Minister will consider that point.

There is a wider point in respect of the extension of the inheritance tax net. House price inflation means that more and more people in my constituency are falling into its clutches, with estate values reaching the duty threshold despite the increase introduced in the Budget earlier this year. The Land Registry reports that the average price of properties sold in the south Shropshire district in the first quarter of the year was £208,000. In the Bridgnorth district, the average was £214,600. In the same period, the average price of detached houses—that includes most of the village properties in my largely rural constituency—was £264,000 in south Shropshire and more than £307,000 in the Bridgnorth district council area. As a result, the average houseowner in my constituency is likely to be caught by the inheritance tax threshold.

Inheritance tax was originally intended to be a tax for the wealthy. It is increasingly hitting the average householder across the country. That is certainly the case in the Ludlow constituency. It is time that we looked at the tax as a whole, and stopped tinkering with extending it at the edges.

My final point has to do with the direction in which the Government are heading in respect of inheritance tax, which is in stark contrast to the direction that our major economic competitors are taking. I was in Washington DC last month and I discovered that legislation is passing through Congress and they are debating whether the American equivalent of inheritance tax—they call it death tax, rather starkly—should be scrapped or substantially reduced. If our major competitors are planning to scrap inheritance tax, we should think carefully about whether it is appropriate for us to extend the net. Instead, we should perhaps accept the increasingly competitive nature of the global economy in which we all live and consider scrapping inheritance tax.

Dawn Primarolo (Labour, Bristol South)

It is important to put on the record a few points before responding to the debate. Unfortunately, some of the contributions that we have heard show that hon. Members have failed to appreciate how the system worked under the rules that were in place and how it will work under the rules before us. The hon. Member for Ludlow (Mr. Dunne) mentioned nil returns, and I shall come back to the issue of excepted estates. We are talking not about the entire inheritance tax system but about a special procedure for very small estates that will remove them from the normal procedure. For some 30,000 estates, it will be necessary to fill in only a very short form instead of the full form, over which—incidentally—the Conservative Government were happy to preside for years and years.

The approach taken in last year's Finance Bill, which was accepted by the House, was for the smaller estates to be subject to the excepted estates procedure. One does not have to be a genius to work out that it is simpler if only a short form needs to be filled out—only four pages, of which the first page and a bit is simple and straightforward stuff such as name and address, followed by yes/no questions and an estimate of the value of the estate, to ensure that it is within the limits of the excepted estates procedure—instead of the full inheritance tax procedure. It is difficult to see why the Opposition have a problem with that.

Nil returns are not needed, because such estates do not require probate. I shall return to that when I address the issue of the Court Service, which is also part of the new procedure and further deregulates the process. All that is being asked of people is to indicate whether they have properly calculated the size of the estate to ensure that it comes under the smaller estates procedure.

Stephen Hesford (Labour, Wirral West)

I apologise to the House for not being in my place for the contribution by the hon. Member for Runnymede and Weybridge (Mr. Hammond), although I did hear the contribution by the hon. Member for Ludlow (Mr. Dunne). Based on what he said, does my right hon. Friend agree that the Opposition are really sniping at the fairness agenda? He gave the game away that the Tories' aim is to do away with inheritance tax.

Dawn Primarolo (Labour, Bristol South)

To be fair to the hon. Member for Runnymede and Weybridge (Mr. Hammond), he did not say that he wanted to abolish inheritance tax, but it has been a feature of such debates in the past that Opposition Members have advocated that approach. The fairness that they are attacking is the fairness that says that whether an individual does their own return through the excepted estates procedure or a solicitor does a return on behalf of someone, the information required is the same and they are treated equally.

The Opposition also argue that the Government should enable taxpayers to represent themselves and not force them to have recourse to professional advice if that is not necessary. I suspect that the role of solicitors, and what they will be required to do, is at the heart of the Opposition's objection, rather than the information that has to be provided by the taxpayer.

Brooks Newmark (Conservative, Braintree)

The thrust of the argument made by my hon. Friend the Member for Ludlow (Mr. Dunne) was the form-filling culture—something that the Government pledged to change and reduce. Why will people be required to fill in forms for estates with a net worth of £5,000, which is a huge difference from the inheritance tax threshold of £275,000? Those forms will also require more and more bureaucrats to assess them.

Dawn Primarolo (Labour, Bristol South)

I hope that when I explain how the process works now, the hon. Gentleman will realise that that question is based on a basic misunderstanding of what is required under the inheritance tax system. I am sure that he would accept that it is not unreasonable for any Government to require people to go through certain steps to ensure that the estate with which they are dealing should go through the excepted estates procedure, rather than the full inheritance tax procedure. That is all that is happening.

I find it odd that the Conservatives did not struggle with this point last year, because all these procedures were in last year's Finance Bill—[Interruption.] I appreciate that the hon. Gentleman is a new Member, but his Front-Bench colleagues are not. There has been wide discussion of the issue and none of the suggestions made have caused any difficulties. Indeed, the connection with the Court Service is a further deregulatory measure that has helped enormously.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

No, because I wish to reply to the points made by the hon. Member for Richmond Park (Susan Kramer). The hon. Gentleman can reply at the end of the debate.

The hon. Lady suggested that the proposals were fishing trips, but that is not the case. It is careless talk to accuse the tax authorities of that when they are simply requiring people to answer questions to ascertain whether an estate comes under the excepted estates procedure. People had to fill in forms before, so it is not as if that is new. The issue is the length of the forms and the information that is collected. We are talking about small estates, which have always, as I said when I began my remarks, had to show the Revenue that they were entitled to use the excepted estates procedure. Applicants without a solicitor filled in a form that was much like the present form, so it is not true to suggest that there are additional burdens.

Philip Hammond (Conservative, Runnymede and Weybridge)

rose—

Dawn Primarolo (Labour, Bristol South)

No, I shall not give way to the hon. Gentleman at this point.

New clauses 1 and 8 would both amend the 2004 regulations, known as the excepted estates regulations, which are subject to that procedure. The hon. Member for Runnymede and Weybridge said that the new clauses offered two different solutions. They are interesting solutions. One of his new clauses completely abolishes the procedure and the other gives the Inland Revenue discretion to decide when the procedure would work. As the hon. Member for Richmond Park was so concerned about fishing trips, I should, on her behalf, be a bit worried about supporting new clauses that allowed the Inland Revenue, or Her Majesty's Revenue and Customs, to decide in such cases.

New clause 1 removes the current obligation on executors applying for probate to give details to the Court Service about the deceased person, their assets and values, when using the excepted estates procedure, whereas new clause 8 is apparently designed to give HMRC discretion over which details have to be given in such cases. I would have thought that either solution was rather undesirable. The aim in either case—

Philip Hammond (Conservative, Runnymede and Weybridge)

rose—

Dawn Primarolo (Labour, Bristol South)

The aim in either case seems to be—

Philip Hammond (Conservative, Runnymede and Weybridge)

On a point of order, Mr. Speaker. I am sorry to have to raise this on a point of order, but the right hon. Lady will not give way to me. She has, I fear, inadvertently misled the House by saying that new clause 8 would provide that the Inland Revenue has the option of requiring a return to be made. In fact, it gives the taxpayer the option of making a return if he chooses to do so, and I should be grateful if she could confirm that that is the case.

Michael Martin (Speaker, Glasgow North East)

That is not a point of order. The hon. Gentleman knows that he will have an opportunity to reply to the Paymaster General and he can then put the record straight, if he so wishes.

Dawn Primarolo (Labour, Bristol South)

Thank you, Mr. Speaker. What the hon. Member for Runnymede and Weybridge thinks his new clause may do and what I am advised by my officials that it will do, on which basis I advise the House, is always a matter for debate when amendments are proposed, but I shall repeat what I have said.

New clause 8 is apparently designed to give HMRC discretion over which details have to be given in those cases. The aim of both new clauses seems to be to reverse or modify the changes that the Government made last year, and to go back to the previous system whereby personal applicants—those not represented by a solicitor—had to fill in forms about the estate, whereas legally represented estates did not have to do so.

The House may find it helpful if I provide some details about the administrative arrangements for such estates. The excepted estates procedure is a streamlined process for estates that are relatively small and relatively simple. If the estate qualifies, the executors are allowed to fill in a simple form and get probate immediately. Delivery of the form to the Court Service also satisfies their inheritance tax obligations, so they need have no direct contact with HMRC—so how having no direct contact with HMRC empowers HMRC to go on a fishing trip beggars belief. Executors otherwise have to fill in a much more comprehensive form and send it to HMRC before they can get probate. The process thus provides links with probate, which ensures that it would be speedy for small estates, and relates exactly to the point that the hon. Gentleman made about the importance of speed in such cases.

The excepted estates procedure has always been restricted to estates that satisfy tests of size and complexity as set out in HMRC regulations. I think that we would all agree that eligibility should be limited in that way, as there is always a risk that large estates might slip through untaxed. We are getting the balance right by ensuring that there is speed for excepted estates, especially at probate, and that there is one point of delivery to the Court Service, with the ability to monitor the proper use of that process through HMRC.

The questions for this afternoon relate to how executors should establish that they qualify for the excepted estates procedure and what they have to tell HMRC about their workings. Before I move on to the detail of the changes that the Government made last year, it may help the House if I briefly describe the probate and IHT reporting system as it stood before the changes made in 2004.

Estates fell into three broad categories for reporting purposes. If the estate was worth more than £240,000, a full IHT return was required—not the short form in use at present. If the estate was worth less than £240,000 and the executor was a personal applicant, they had to fill in a short form very much like the one in use now. If the estate was worth less than £240,000 but a solicitor was acting for the executor, the executor simply had to swear an oath that the estate was worth £X,000 to demonstrate that it qualified for the excepted estates procedure. Under the old rules many executors had to fill in a full IHT return even though the estate paid no tax. The Government changed the rules last year primarily to bring most of those cases—about 30,000—into the excepted estates procedure, thereby reducing their compliance costs whether or not they were represented by solicitors. We moved them from the more complicated system to the excepted estates procedure. However, extending that procedure to bring in many more cases, many of them much bigger than those that were previously clearly eligible, increases the risk of non-compliance; so in striking the right balance, the Government took the opportunity to streamline the detailed procedure, improve co-ordination between HMRC and the Court Service, and update IHT protection against non-compliance.

As part of that process, the Government unified the two existing procedures for executors using the excepted estates procedure, so that they all now fill in the same short form whether or not they are advised by a solicitor. As I said, the form contains the minimum number of questions needed to show that the estate is entitled to use the excepted estates procedure and to allow HMRC to make a risk assessment.

The new clauses seem intended to reverse all those changes, so that some or all executors would be entitled to claim access to the excepted estates procedure without giving even basic information about the facts that would justify their using it. The Government's view is that that is misconceived. To qualify for the excepted estates procedure, executors have always been required to know the total value of the estate and key points about what it contains, and solicitors will always have to establish those basic facts.

The form that executors must now fill in only sets out systematically the questions that solicitors have been asking their clients already, before putting them through the excepted estates procedure. They are already collecting such information to satisfy themselves that their clients could use the excepted estates procedure. To be fair to solicitors, the overwhelmingly majority of them clearly took those obligations seriously. However, there have been indications that there were issues on different occasions, but none has been demonstrated with the new procedure.

To sum up, the uniformity that the Government built into the system in 2004 strikes the right balance. It is deregulatory. It unifies processes. It treats people equally. It ensures that the returns give the pertinent information only and are not excessive. It is fair to all taxpayers and to the Exchequer. It encourages executors to apply the same accuracy when completing the short form as they have done when filling out the full IHT return. On that basis, I suggest that hon. Members have no grounds to pursue the issue of fairness. I hope that, having heard the explanation of last year's changes and what they are achieving in the system, the hon. Gentleman will consider withdrawing the motion, but if he feels unable to do so, I will urge my hon. Friends to oppose the new clause.

Philip Hammond (Conservative, Runnymede and Weybridge)

I can assure the right hon. Lady that I feel unable to do any such thing, having heard no such thing.

Let me deal with a couple of specific points. The right hon. Lady suggested that it was bizarre that such issues were being raised now and asked why they had not been raised in greater depth during the consideration of the Finance Act 2004. She will have information to hand, but I understand that form IHT205 and the guidance notes for completing it were published only in November 2004, after the Finance Act 2004 had completed its passage. On the basis of what we have seen published, what we have seen in practice and what practitioners and, indeed, non-professional executors are reporting, we have sought to raise the issue today.

The right hon. Lady told the House that new clause 8 would give the Revenue the option to require a return. In response to my attempt at a point of order, Mr. Speaker advised me that I should address this question in my closing remarks. Perhaps the best thing that I can do is to read out the opening paragraph of regulation 6 of the Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004, as it would be amended by new clause 8, and let the House decide whether or not she is correct. Paragraph (1) would say:

"Subject to paragraph (3), a person who by virtue of these Regulations is not required to deliver to the Board an account under section 216 of the 1984 Act of the property comprised in an excepted estate, may produce the information specified in paragraph (2) to the Board in such form as the Board may prescribe."

That does not suggest any doubt at all to me that the option lies with the taxpayer, not with the Revenue.

The right hon. Lady has confused the question of the change to treatment for what were approximately 30,000 excepted estates under the old rules—those estates that fell just below the inheritance tax threshold of between £240,000 and £275,000. I acknowledged quite readily in my opening remarks that the compliance burden on those estates has been reduced, by allowing them to complete the shorter—everything in terms of Inland Revenue forms is relative—form, IHT205, rather than the full return form, which is IHT200.

The right hon. Lady has deliberately ignored the fact that the definition of an excepted estate has been widened to include all estates above £5,000, which require probate. The practical effect is that, while 30,000 estates will enjoy a reduction in the compliance burden, some 270,000 estates, according to the most recent year's figures, will suffer an increase in the burden by having to make a return using IHT200.

Contrary to what the right hon. Lady says, the minimum number of questions required is not set out. I have already listed the questions that must be answered: details of the deceased's occupation and surviving relatives; gifts that the deceased has made; pensions; assets overseas; cash, including money in the bank, building society and national savings; value of household and personal goods; quoted and unquoted stocks and shares; insurance policies; bonuses; mortgage protection policies; money owed to the person who has died; residences; partnerships and business interests; debts of the deceased; and funeral expenses. That is not the minimum information required.

We understand the need for a return of information for estates that are just below the margin, but in broadening the scope of excepted estates under the 2004 regulations to include all estates that require probate which are below the inheritance tax threshold, the right hon. Lady has, deliberately or otherwise, swept into the net hundreds of thousands of very small estates and created a huge new burden, however she seeks to dress it up today.

By interchanging the old definition of an excepted estate, which refers only to the 30,000 estates just below the IHT threshold, and the new definition, which includes some 300,000 estates that require probate and are below the IHT threshold, the right hon. Lady has effectively thrown up smoke around the debate, but she has not answered the challenge that we have put to her.

The right hon. Lady says that all that is being asked is that people make a return to show they have done the calculation. Of course people must do the calculation before asserting that an estate is not chargeable to tax—a prudent person would always expect to do so—but sadly, for many small estates people will not have to spend very long computing whether the estate is worth £275,000; the question will be whether the estate is worth £10,000 or £12,000. In those cases, the imposition of completing such a form is an unnecessary and onerous burden at what will be a very difficult time for bereaved families dealing with these matters. I intend to ask my hon. Friends to support the new clause in the Division Lobby.

New Clause 4 — Tax Law Commission

Mark Field (Conservative, Cities of London and Westminster)

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

As Paul McCartney and John Lennon might have said, we are now reaching the end of the long and winding road of this second Finance Bill of the year.

John Healey (Labour, Wentworth)

When was it No. 1?

Mark Field (Conservative, Cities of London and Westminster)

The song was No. 1 in the US in 1970, but that is another matter.

This complex and highly technical Bill is once more before the whole House, but the sparsely occupied Chamber means that it would be stretching credulity to suggest that Parliament is actively considering each and every aspect of the Bill. That is not to say that there has not already been careful consideration during the lengthyish Committee sittings. Our debate was sometimes heated, and on occasions that had little to do with the generally clement summer weather.

Her Majesty's Opposition have benefited from comprehensive briefings from an array of interested parties, including the Law Society, the Association of British Insurers and the Chartered Institute of Taxation. They have all provided us with useful ammunition with which to put forward our case as gamely as possible, given the circumstances.

As I said, we are considering the second Finance Bill to come before Parliament this year. The intervening general election provided us all with a welcome respite from endless Committee sittings and gave the Government an opportunity—a relatively small one, admittedly—to make minor amendments to their original proposals. I understand that tax practitioners have breathed a collective sigh of relief, not because of the apparently mouth-watering prospect of a second Finance Bill in a year, but because of their satisfaction that this year the Chancellor of the Exchequer has spared the tax practitioner fraternity from a Finance Bill such as that of 2004, which weighed in at a record-breaking 637 pages.

New clause 4 stems from concerns that have been widely expressed about the growing complexity of our tax laws. The amount of legislation grows greater and faster and let us be in no doubt that that is true of not only primary legislation, but the plethora of statutory instruments that appear with breathtaking frequency throughout the year. We hope to establish a tax law commission that would mirror the Law Commission and review and modernise UK tax legislation.

As the Minister will be aware, I am a relative newcomer to Front-Bench Treasury affairs and I have had something of a baptism of fire. This highly technical Finance Bill and the Regulation of Financial Services (Land Transactions) Bill have certainly kept me busy over the past month. I have no complaints about that, but in addition to grinding through legislation line by line, I have seen an ever-greater amount of guidance material, such as statements of practice, tax bulletins, concessions and frequently asked questions.

It is perhaps ironic that, in moving new clause 4, I need first and foremost to acknowledge the tremendous assistance that I have received from the indefatigable John Whiting, the tax partner with PricewaterhouseCoopers and past president of the Chartered Institute of Taxation. Without his help, I fear that even this new clause might never have seen the light of day. Although I do not detect too many tears at that prospect from either the Government Front Bench or, dare I say, their nearest and dearest in the civil service, it is important to put many concerns on the record during the course of what I suspect will be a brief debate.

A great deal of the seemingly exponential growth of the raw material that makes up our tax laws is clearly due to the increasing complexity of life and business. However, at the same time the tax authorities doubtless argue that they need continually to endeavour to plug what would otherwise be loopholes that could be exploited by tax planners and avoiders alike. A commission for taxation along the lines that we have set out would solve four main problems.

First, the commission would address complexity. UK taxation is meant to work along fairly simple principles: all employment income is subject to pay-as-you-earn and national insurance contributions; companies are taxed on their accounting profits at 30 per cent. after certain adjustments, or less if they have profits of less than £1.5 million in any year; stamp duty land tax is at 4 per cent. on property sales; and VAT on the supply of goods and services is generally levied at 17.5 per cent. How difficult should it be to enact tax law on the basis of those straightforward and simple principles? One needs only to witness the flat tax regimes of most Baltic states to realise that it should be relatively straightforward.

Edward Balls (Labour, Normanton)

Was the hon. Gentleman on the trip?

Mark Field (Conservative, Cities of London and Westminster)

I hasten to add that I was not on the trip, although I am sure that one could be arranged at some time in the future. I am glad that the Chancellor is not in the Chamber to hear me say that.

The UK Government have created a great collection of legislation that makes this country's tax regime one of the most cumbersome in the world.

Stephen Hesford (Labour, Wirral West)

Subsection (2) of new clause 4 outlines the purpose of the putative tax law commission, but I cannot see anything about tax avoidance. Does the hon. Gentleman think that any review of the tax laws should take account of tax avoidance?

Mark Field (Conservative, Cities of London and Westminster)

I was rather hoping that the hon. Gentleman might have been the chairman of the all-party group on Estonia or something. Let me answer his point seriously. There is little doubt that much of what has been discussed during the consideration of the Bill—and previous Finance Bills, I suspect—has related to tax avoidance and ways in which we can try to find a balance between legitimate tax planning and contrived tax avoidance. The new clause would create an independent tax commission—that is important—and tax avoidance would be dealt with head on by the Treasury.

Edward Balls (Labour, Normanton)

I hesitate to ask whether the new clause is an excuse for further trips to Estonia to build broader support for possible flat tax proposals. However, putting that to one side, do we not already have a tax law rewrite project? My memory is that that project, chaired by Lord Howe of Aberavon, would regularly send voluminous reports to the Government for consideration and that many of them would be taken into account when drawing up Finance Bills. Is the hon. Gentleman saying that the current tax law rewrite project is not doing a satisfactory job, or that he would like his commission to go beyond the remit of that project and start making policy, rather than just trying to simplify tax legislation and make it more effective?

Mark Field (Conservative, Cities of London and Westminster)

The hon. Gentleman makes an entirely legitimate point. I shall address specific aspects of the tax law rewrite project later because it has not achieved quite as much as we might have hoped.

Someone needs to stand back and realise that when UK legislation on direct tax is bursting out of some four volumes of statute, something must be inherently wrong with the approach on writing and reforming tax legislation. It is worth noting several facts, such as the sheer number of personal tax returns that are filed incorrectly or late. A National Audit Office report last year said that such returns accounted for some 29 per cent. of all PAYE codings. The last consolidation Act on tax goes back 17 years to 1988. Government Members make a meagre contribution to Committee debates on Finance Bills, which makes it difficult to suggest that there has been full consultation on such matters.

Since 1997, the Government have introduced major new taxation policies on intangibles, share schemes and other employee-owned securities—they have done that several times—stamp duty land tax, the climate change levy, tonnage tax, IR35, transfer pricing, windfall taxes, derivatives, VAT grouping, international financial reporting standards, double tax relief, general insurance and substantial shareholdings. They have changed the date of payment of tax and introduced new policies on the taxation of pensions and enterprise investment schemes. Therefore, complexity is key to our concern and we hope that a tax law commission would rectify that.

Secondly, the constant change has led to a lack of certainty. It is hard for business to plan when the UK insists on a near constant rewriting of its tax law. We should also note that the UK is in almost isolation from other highly developed economies in not have a binding advanced clearance regime. That was discussed in detail in Committee and I do not wish to reopen the debate, but it is a concern.

Without necessarily opening the door for contrived tax avoidance schemes, the element of certainty that comes with an advanced clearance scheme should be reimposed in tax legislation. That would enable the tax treatment of, for example, an innovative new banking product to be pre-determined, not just to give customers certainty, but to ensure that customers—whether they are smaller individuals or large institutions—have confidence. It would enable us to ensure that the two major financial centres in the UK—the City of London and Edinburgh—do not lose business in what is an increasingly globalised financial world.

I also hope that the scheme would enable groups to confirm the tax treatment for transaction planning and the treatment of debt borrowing, for example. Despite having a mountain of tax legislation, there is no procedure to get pre-transaction rulings. That often means that UK businesses and customers are encumbered with a tax risk in their balance sheet and in their operations that their overseas competitors do not have.

Thirdly, there is the relative ease of unintended tax planning opportunities, which Ministers might simply regard as the creation of contrived tax avoidance schemes. A simpler system makes it harder to avoid tax. The Government's insistence—some of this is a carry-through from tax law passed by the last Conservative Administration, notably the financial instruments and loan relationship legislation—on writing complex prescriptive legislation has meant that they have been an effective creator of tax loopholes.

Let us take the stamp duty land tax. Schedule 10 deals with legislation that was introduced as recently as 2003. Much of the Finance Act 2002 of only three years was dedicated to removing tax planning that followed on from the problem of too many specific rules in loan relationship and derivative legislation. I accept that much of that is highly complex, but by the same token that complexity has to a large extent opened the door to more tax planning opportunities. Intangibles legislation has been changed twice since 2002, following the clampdown on avoidance. Insurance company rules written as recently as 2003 were changed in 2004—as Ministers will know, because I mentioned it in Committee only last week—to deal with avoidance-related matters.

Fourthly, there is the lack of transparency. Transparency is of key importance in any taxation system. A complex system inevitably becomes an opaque system for anyone other than those who are experts in the field. How can taxpayers predict and financially plan how much tax they pay when much of it is hidden and the system is in a constant state of flux? While the basic corporation tax rate is 30 per cent., our corporation tax yield is comparatively high. As a result, the Institute for Fiscal Studies feels the need to publish journal articles entitled "Why has UK corporation tax raised so much revenue?" As Ministers will be aware, this year alone we are expecting a substantial increase of 28 per cent. in corporation tax additional receipts. Much of that relates to a widened tax base, accelerating the time when the tax gets paid, which acts almost as a windfall tax in the year of change, and also to the long time over which UK companies get tax deductions for capital expenditure on plant and machinery as well as intangibles.

There is also considerable confusion, which is increased by schedule 2, about what is a securities issue by way of salary taxable at up to 40 per cent. We had long debates about employment securities matters in Committee. We have to ask, what are the securities owned by an employee in its employer by way of investment that will be taxable at as little as 10 per cent.? The Government have rightly been proud of some of their changes to encourage entrepreneurism, such as the idea that capital gains tax can be as little as 10 per cent. once various considerations are taken into account. I applaud them for those sensible changes. However, they give with one hand and take with the other. Many changes have not worked as well. There is a tendency to define a large amount of capital gains as income so that it qualifies for higher tax rates.

We lack a mechanism for taking stock of our tax code—for testing rigorously whether it is ready and fit for purpose. There is no attempt to modernise or to get rid of the unnecessary, thereby showing that some parts could be dealt with more simply and might even be more effective. Although I accept that the Government took on board some of our concerns and those of the insurance industry, we rarely have sunset clauses to lay down either an expiry date for a new rule or at least a time when the usefulness, or otherwise, of the rule would have to be reviewed.

Regulatory impact assessments can be supplied with clauses, but when are they reviewed to see if their estimates hold true? That is partly down to the Opposition's scrutiny—I accept some blame—but we all have busy lives and the world and the tax bandwagon move on. We need to determine whether any new law represents value for administrative money. One of the ideas is that a tax law commission would alert itself to many of those concerns.

As the hon. Member for Normanton (Ed Balls) said, there is the tax law rewrite project. It is doing some good work, but it is purely a rewriting of the law rather than an assessment at the outset of whether a particular type of legislation will best achieve an intended result. It does not attempt to change the rules in any way. If odd points that seem otiose are found, or pointers suggest that things could be improved, they are logged, but they must be dealt with through the general Finance Bill process.

The Law Commission has as its aim, in simple terms, the review and modernisation of the general law of the UK. It does not believe that its writ runs to tax law. We should at least ascertain what benefits would accrue by having such a body to deal with tax law, and that is the underlying aim of the new clause. It would not impose a tax law commission, suggest ways in which such a body should be set up and run, or set out in detail its remit. All that would be premature. The aim is to review whether such a body would be advantageous. If the report established by the new clause suggested that it would be, Parliament would commission the next steps, which would presumably include how it might be staffed and controlled and its constitutional position. We have a template of the Law Commission, and I assume that the new body would be of a similar nature.

It is worth noting that the tax law review committee published a report in March 2003, with the exciting title of "Making Tax Law". The working party, under the chairmanship of Sir Alan Budd, examined the parliamentary process for the enactment of tax legislation.

Mark Tami (Labour, Alyn and Deeside)

It passes the simplicity test.

Mark Field (Conservative, Cities of London and Westminster)

Yes, the title passes the simplicity and certainty test. Of that there can be no doubt.

The working party's report would be germane to the report mentioned in the new clause. Also, the Chartered Institute of Taxation has proposed the idea of a tax practice committee, which would, in concept, have three main functions: first, the oversight of the consultative process for new tax laws to ensure that new laws are properly consulted on, subject to anti-avoidance constraints; secondly, the proposing of sections of existing tax law in need of review; and thirdly, oversight of the tax law rewrite project.

The tax practice committee is envisaged as being a group that is drawn from all those involved with the taxation process—the professions, business, tax authorities and, hopefully, academia. As part of the review, commentators have called for the House of Lords to be given a greater role in the scrutiny of Finance Bills. I appreciate that that is a controversial idea—it was last tried 95 years ago—but it is an interesting proposal. For historical reasons, the House of Commons has had sole charge of money Bills since the Budget of 1909–10, but a second revising Chamber would have a part to play in improving the way in which tax law is maintained. We hope that that change could take place during the course of this Parliament.

It would be wrong to ignore the role that the other place could play. It has plenty of expertise, which would be useful in the consideration of tax changes, as one or two Ministers have realised in previous debates. The Lords cannot currently alter a money Bill and I am not seeking to go down that path. It was intriguing, however, to see the establishment last year of a Sub-Committee to look at administrative aspects of the Finance Bill. Its remit may be narrow, but we may wish to build on that. I accept the sovereignty of the Commons in matters of taxation. [Interruption.] I do not have much choice, I am afraid. It is time, however, to look again at the way in which tax law is put together and how we operate under the paramount rule of the Commons in this area.

Edward Balls (Labour, Normanton)

I am trying to understand the nature of the hon. Gentleman's proposal. In the case of the Bank of England, we decided that independence was the right thing. In the end, with the support of Opposition Members—it took a little time—we decided that it was right to hand over the power to take month-by-month interest rate decisions to a group of independent experts. There is a material difference, however, between making monetary policy decisions with a single instrument and a single target and tax policy decisions. The hon. Gentleman is proposing to move tax policy decision making away from the House of Commons and elected Members of Parliament and instead asking independent experts to make policy decisions about tax. Is he proposing that Parliament should give up power in that way, not merely to unelected Members of the other place but to entirely unelected individuals?

Mark Field (Conservative, Cities of London and Westminster)

The hon. Gentleman has misunderstood what we are trying to achieve. We think that establishing such a commission is a sensible way forward, given the sheer amount of taxation legislation and the fact that little of it is regularly reviewed. That does not mean that policy matters would be in the hands of that body. Its remit would be determined once it has been set up. No one would suggest that law policy should be made by the Law Commission. It makes recommendations about changes in the law and assists the Commons and another place to initiate debates. The Law Commission influences the agenda on an independent basis, and I envisage a tax law commission operating in the same way. However, there is a great distance between that proposition and the proposition that policy decisions should be made by such a commission.

I understand the concerns that have been set out, but I hope that the broad proposals that I have tried to set out will lead to a debate on the matter. Whatever route is eventually taken, the new clause aims to highlight the need for a mechanism for a proper review of our tax law.

Christopher Huhne (Liberal Democrat, Eastleigh)

I support the proposal for a tax law commission. If we had some weighing scales and put the current tax statutes on them we would find that there has been an increase of almost 50 per cent. since the influence of the hon. Member for Normanton (Ed Balls) began to be felt in the Treasury in 1997. I cannot believe that he thinks that the increase has had the desired effect. I accept that there is a tax law rewrite project, which has the desirable goal of helping to simplify matters, but the Liberal Democrats do not want policy to be determined by anyone other than elected Members of the House of Commons. However, the great ship of tax statute has become so barnacled that a short spell in dry dock with a good amount of scrubbing and cleaning is thoroughly desirable. The attempt to simplify, modernise, review and improve tax statute is an experiment that is worth trying. The Liberal Democrats therefore support the proposal. I hope that Government Members who are aware of the extent of tax statutes will do the same.

Edward Balls (Labour, Normanton)

I noted the hon. Gentleman's seeming agreement about the commission with the members of the Opposition party—

Richard Spring (Conservative, West Suffolk)

The Conservative party.

Edward Balls (Labour, Normanton)

I was trying to work out whether I could say that or not—the learning experience is hard. Does the hon. Gentleman also agree with the Conservative proposals on expanding the role of the House of Lords to scrutinise and interfere with tax policy?

Christopher Huhne (Liberal Democrat, Eastleigh)

The hon. Gentleman will know that our proposals for changing the role of the House of Lords go rather further, and start with a directly elected Chamber. I hope that he will have the opportunity to support them at some point. However, in a second-best world, the proposal to establish a tax law commission is a useful attempt to deal with the simplification of tax statutes. The Liberal Democrats usually sign up to campaigns such as Quash a Quango, so the hon. Gentleman might find it ironic that we are recommending the establishment of a quasi-autonomous non-governmental organisation.

Helen Goodman (Labour, Bishop Auckland)

Has any consideration been given to the appointments system for the future tax law commission?

Christopher Huhne (Liberal Democrat, Eastleigh)

The hon. Lady will see that the new clause would give the Treasury the opportunity to present details of the way in which the commission would work. I can see that the Paymaster General is warming to that excellent idea.

The hon. Member for Cities of London and Westminster (Mr. Field) was clearly attempting to spin things out to allow time for the hon. Member for Runnymede and Weybridge (Mr. Hammond) to return from lunch and introduce the next item on the agenda, but it is not necessarily right for me to participate in that game. We have dealt with the main objections to the new clause and the Liberal Democrats will support it.

Theresa Villiers (Conservative, Chipping Barnet)

I appeal to the House to support new clause 4 for common-sense reasons. We have an excellent Law Commission, but there is no rational explanation for having a commission that examines all laws except tax law. Why is tax law so different that the Law Commission's excellent record should not be applied to it? Can the Government explain what is so distinctive about tax as to justify that gap, when the rest of the law is covered by the process of review, rationalisation and simplification undertaken extremely well by the Law Commission?

As we have heard, one of the main advantages of setting up a tax law commission is that it could assist in the simplification of our tax law. The increasing complexity of tax is one of the major weaknesses in the Government's economic policy. I admit that it is not an issue that people are talking about on Barnet high street, but the complexity of our tax system is now doing significant damage to our economy.

The Chancellor has tended to use the tax system far too much for micro-management, to try to pick winners in terms of economic growth, and for social engineering. This has increased the complexity of the system exponentially since his stewardship of the economy began in 1997. That complexity has been compounded by the need to correct previous legislation, and by the Chancellor's attempts to hide the number of tax increases that he has chosen to inflict on the British public.

Stephen Hesford (Labour, Wirral West)

I am following closely what the hon. Lady is saying, but as the hon. Member for Cities of London and Westminster (Mr. Field) said, the tax law commission, if it came into existence, would not deal with policy. Does she agree that it therefore would not deal with her suggestions about social engineering and the like, even if the House accepted that as a proposition, because that is policy, not tidying up.

Theresa Villiers (Conservative, Chipping Barnet)

It is always difficult to draw a clear line between technical changes and policy, but the commission would make recommendations, they would be debated in the House and we would decide whether we wanted to go in that policy direction or not. It is as simple as that. The commission would make recommendations to simplify the system.

The tax system of any modern economy will be complex, but ours has reached heights of Byzantine complexity. The Finance Act 2004 holds the record for being the longest, with 328 sections and 42 schedules. The standard textbook on tax law hits the bookshops as a behemoth of about 11,000 pages. We need to address the problem urgently for a number of reasons, the first of which is lack of transparency, which my hon. Friend the Member for Cities of London and Westminster spoke about.

Complexity is such that the tax system is incomprehensible to the vast majority of ordinary people, and fairly unintelligible even to the most numerate of taxpayers. That is damaging for our democracy. People should be entitled to understand with clarity how much they are taxed, why they are being taxed and on what they are being taxed. Complexity also increases costs for taxpayers: it is costly for them to get the professional advice that they need to complete their tax returns and the paperwork needed to ensure that they are paying the correct amount of tax. The taxpayer suffers a double hit, because the public purse is put under pressure by the need to employ more civil servants and bureaucrats to tackle the complexity of the system.

Ministers will no doubt say that detail and the dense text of our tax law is needed to give certainty. In fact, complexity can lead to less certainty as people find it increasingly difficult to understand the tax system. That is made worse by the Government's refusal to accept any form of pre-authorisation scheme, as urged on them by the Opposition. Furthermore, complexity can produce more opportunities for aggressive and artificial avoidance mechanisms. The more complex the system, the more places there are to hide. That leads to more complex anti-avoidance provisions, producing a vicious circle of complexity.

A complex, opaque and uncertain tax system deters foreign investment and drives jobs offshore in a globalised economy. A simplified, rational, coherent tax system is a magnet for jobs and employment, so our competitiveness is under threat from a tax system that is overly complex. Lastly, tax simplification will enhance our democracy.

Edward Balls (Labour, Normanton)

I agree wholeheartedly with the hon. Lady's desire for greater scrutiny, understanding and public debate about tax matters. I commend to her membership of the Standing Committee that considered the Finance Bill. All members of the Committee and people in the Public Gallery had the opportunity to understand and scrutinise in a transparent way tax policy decision-making, which was most illuminating. The hon. Lady said in answer to my hon. Friend the Member for Wirral, West (Stephen Hesford) that it was impossible to distinguish clearly between technical aspects of tax policy discussion or cleaning up, and policy decisions. Given her point about democracy, does she accept that because of that ambiguity, if we were to accept the proposal for a commission, it would mean that scrutiny of policy decisions would move from the House to the commission?

Theresa Villiers (Conservative, Chipping Barnet)

No, I do not accept that at all. I repeat my response to the other intervention on the matter: the House remains sovereign on tax matters. Whether there is a tax commission or not, we are the sovereign body. We can accept the commission's advice or reject it. I believe that simplification will enhance democracy because it will make our scrutiny process much easier and much more effective.

In a recent paper for the Centre for Policy Studies, the distinguished tax lawyer David Martin described our tax law as "obscure and ramshackle". The Institute of Chartered Accountants described our tax system as "spiralling out of control". The complexity of the system is making it increasingly difficult to ensure effective, democratic scrutiny. As I said, every citizen is entitled to understand why they are being taxed, on what they are being taxed and how that tax is calculated. Our amendment will bring a little closer the day when that is true. That is why I commend it to the House.

Stephen Williams (Liberal Democrat, Bristol West)

I had not intended to speak, but I shall contribute briefly to the debate. Among the Members present, I probably have the unique experience, having spent the past 15 years in the profession, of seeing Finance Bills from the other side of the fence, and for the past month or so of seeing how the Finance Bill is put into practice as a legislator.

With every Finance Bill that is published, various institutes have to publish commentaries. My own institute, the Chartered Institute of Taxation, will shortly send, with a large thud through my letterbox at home, a commentary on the present Finance Bill when it is enacted. The Treasury publishes its explanatory notes, and we all miss the presence of the hon. Member for Wolverhampton, South-West (Rob Marris) to point out aspects of the notes to us. Many other bodies and individuals will offer expert commentaries on the Bill.

Earlier speakers referred to the remit of the tax law rewrite committee that has been established for some time. As I understand it, the committee's original remit was to render into plain English the existing body of tax law. If the committee came across inconsistencies in the English while it was doing that, it would point them out, but its remit was not to rewrite the meaning of that tax law.

From what the hon. Member for Normanton (Ed Balls) was suggesting, this proposal is quite different. In no way does it conflict with the work of the tax law rewrite committee. There is a need for some standing commission to examine tax law as it accumulates with every Finance Bill—this year there have been three, in total—to make sure that the legislation that we have in place works for a modern 21st century economy.

Pat McFadden (Labour, Wolverhampton South East)

In the absence of my hon. Friend the Member for Wolverhampton, South-West (Rob Marris), perhaps as his neighbour I could take up the baton. There seems to be a parallel discussion taking place—on one side about complexity and on the other side about a commission. The new clause calls for proposals for review, modernisation and improvement, as well as simplification. Surely with such a remit, we would be establishing a system with two masters, which would lead to more complexity, rather than less. What is it about the establishment of a commission that will deal with the parallel discussion about the complexity of a system?

Stephen Williams (Liberal Democrat, Bristol West)

I am sure that this House is very jealous of its privileges and would always be the master, as the hon. Gentleman puts it, of tax legislation. We already receive representations from many outside bodies. It has been abundantly clear to me as I have witnessed the Bill's progress through the House, including in Committee, that Treasury Front Benchers, prestigious though they must be in matters of tax law, rely heavily on the Box for their advice. Conservative Front Benchers rely heavily on professional advice, as the hon. Member for Cities of London and Westminster (Mr. Field) acknowledged. I felt sorry for my hon. Friend the Member for Eastleigh (Chris Huhne), because the hon. Member for Cities of London and Westminster read out the briefings so well that my hon. Friend had little left to say. We should recognise that we already rely on many people from outside who contribute to the formulation of our tax law. As politicians, we are all generalists and amateurs, and we need as much help and clarification as we can get from outside bodies and experts to improve the quality of legislation on the statute book.

John Healey (Labour, Wentworth)

We have had a good debate on the new clause. I particularly welcome the contributions by my hon. Friends who served on the Standing Committee and have come back for more this afternoon.

The hon. Member for Cities of London and Westminster (Mr. Field) introduced his new clause with such a wide-ranging speech that I thought that we had suddenly moved on to the Third Reading debate. He sparked an interesting succession of points about the role of the second Chamber, if any, in finance legislation. He said that that chamber has extensive experience; it does indeed, and it is based on extensive interests. However, I utterly reject the proposition that a non-elected chamber should have a role in any tax matters, tax scrutiny or tax policy decisions. That would overturn a centuries-old principle of this House. The hon. Member for Cities of London and Westminster should be aware, in making sometimes fairly light comments, that the financial privilege of the Commons dates back to the 17th century.

Christopher Huhne (Liberal Democrat, Eastleigh)

The Minister may be aware that as new clause 4 makes no mention of the other House having any overview of tax legislation, this is a tremendous red herring. Only the extraordinary forbearance of Madam Deputy Speaker has allowed us to trespass so far off the beaten track. I hope that he agrees that a tax law commission has nothing to do with the powers of the House of Lords.

John Healey (Labour, Wentworth)

I am not sure that the hon. Gentleman is following the debate as well as he has followed the written advice that the professional bodies supplied for it. I am responding to the points that were raised during a fairly wide-ranging debate.

The hon. Member for Cities of London and Westminster asserted that tax matters should be determined only by Members of this House, but that directly contradicts the new clause and the sentiments that underpin it.

The hon. Member for Chipping Barnet (Mrs. Villiers) made an interesting contribution to the debate and spoke very fluently for a new Member. She expressed concern about the competitiveness of the British economy and tried to harness that to an argument in support of the new clause. She may not be aware that independent surveys consistently show that the UK has among the lowest administrative burdens for business in the world. This year, the World Bank published a survey that showed the UK to be top of the league of major countries in terms of regulatory quality.

I turn specifically to the simplification of the tax system, which is a regular subject of debate in this House and elsewhere and has been recurrent theme in our proceedings on the Bill in Standing Committee and at other stages. Most people want a tax system that is simple but also certain, efficient, competitive and fair. Certainty is particularly vital when it comes to matters of, and decisions about, tax. The Government want a tax system that contributes towards a stable economy, helps to raise productivity, increases employment opportunities for everyone, and helps us to build a fairer society. We need to strike a balance between all those things while ensuring that the system remains manageable.

That said, we are always keen to simplify where we can, where that can be done consistently with our other policy—not technical—objectives for the tax system. That can be particularly difficult when maintaining tax yield is of central importance—as it is for any Government—because anti-avoidance measures may always also be needed. Many of the complexities in the Bill, which other Finance Bills have had to include, are a direct result of the complexity of the schemes that the tax planning industry suggests to its clients as ways of avoiding the tax that their clients should be paying.

The hon. Member for Cities of London and Westminster dwelled on the work of the tax law rewrite project, which, despite his somewhat lukewarm description, is a very substantial piece of work: it has rewritten income tax Acts. It has drawn high praise from the professional bodies that brief the hon. Gentleman and his colleagues on the Bill, and from employers' organisations such as the CBI. Its benefits are clear: less time needed to get to grips with legislation and fewer errors caused by misunderstandings of legislation; fewer issues on which time needs to be spent obtaining specialist advice; fewer queries about interpretation; and fewer disputes with Her Majesty's Revenue and Customs about the meaning of legislation. In due course, better legislation can lead to better taxpayer guidance.

The project has produced three Acts and rewritten the pay-as-you-earn regulations. Its work continues and further legislation is in prospect. The next Bill will comprise the third and final Bill on income tax, and the following Bill will cover a large part of the corporation tax system. As the hon. Member for Cities of London and Westminster recognised, it is a project that has consistently had all-party support. It was set up under the right hon. and learned Member for Rushcliffe (Mr. Clarke) when he served as Chancellor, and has been ably chaired by Lord Howe of Aberavon. The project makes the law clearer and easier to use. That may not be regarded as simplification in its fullest sense by all parties, but the law should be simple to understand and practical to comply with, and that is precisely the impact of the project's work.

In addition, we have made many substantive improvements and simplifications to the tax system. I will not prolong the debate significantly by listing them.

Let me be clear that the Government recognise that complexity can bring additional costs and burdens on taxpayers. We are committed to a tax system that keeps the burden of regulatory requirements to a minimum, and we take every possible opportunity to reduce that burden, particularly on small businesses. That is why the new HMRC has a specific remit from the Chancellor to reduce the tax system's administrative burden on small firms.

The hon. Member for Cities of London and Westminster said that regulatory impact assessments were never followed up and that the Government never reverted to them to check their accuracy or the cost that a specific measure had imposed in practice. My right hon. Friend the Paymaster General and I gave evidence to the Treasury Committee when it examined those issues last year. When it considered tax compliance cost, we set out the RIAs' post-implementation reviews, which it was keen to study. They have been conducted in consultation with outside interests and subjected to external scrutiny. I hope that the hon. Gentleman will reflect on his earlier comments when he reads those reports.The merger of the Inland Revenue and Customs and Excise gives us the opportunity and scope to build further on the work that we have already completed.

The hon. Gentleman knows that any Government maintain a constant and continuous review of the tax system. For us, that includes the objectives of modernisation, improvement and simplification of tax, as well as the reduction of administrative burdens. The process benefits from regular and effective consultation with all the interested parties. There is therefore no gap, as the hon. Member for Chipping Barnet argued, in the system.

New clause 4 would trigger a further review process, conducted by a new commission. That would add little, and would duplicate something that is probably the task of Government. It is unnecessary and inappropriate to franchise out that task to a separate body.

The Government are already simplifying the tax system and we have set out our objectives for the tax system. We report regularly on progress against those objectives and consult widely across the spectrum on a range of issues. It is the fundamental job of Government to do that, and we are held to account for it. I hope that the hon. Gentleman will not press the new clause to a vote. If he does, I shall have to ask my hon. Friends to reject it.

Mark Field (Conservative, Cities of London and Westminster)

I suspect that consideration of clause 4 always brings out a certain sensitivity in Labour Members. However, I thank the Financial Secretary for his considered reply.

As ever, my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) made an excellent contribution based on her great experience as a Member of the European Parliament. She rightly stressed the uncertainty and complexity that has crept into domestic tax law. Let us be honest: that has not happened only in the past eight years; the problem goes back many years. However, as I said earlier, there has been no consolidation measure since 1988.

I thank the hon. Member for Eastleigh (Chris Huhne) for his support. I must make a small confession about his somewhat belated entry into the House. I first voted in the 1983 general election when I lived in my home town of Reading. The constituency was Reading, East and the SDP/Alliance candidate was none other than the hon. Gentleman. Four years later, when I was at university in Oxford, in the constituency of Oxford, West and Abingdon, the hon. Gentleman was also the candidate. I hope that he will not move to the Cities of London and Westminster because that would make it a hat trick.

I thank the hon. Member for Bristol, West (Stephen Williams) for his brief contribution, despite his exposure of the fact that not all the thoughts that I expressed were entirely mine.

I accept the Financial Secretary's comments about the second Chamber. My remarks were slightly obiter dicta. I simply tried to speak a little about modernising the House of Lords and part of the contribution that it could make. I did not suggest that it could do fundamentally more than perhaps consider aspects of financial and tax legislation. However, I accept that many of the concerns that we have expressed go back beyond 1910. I know from my role as Member of Parliament for the City of London about the privileges that exist to this day in the City. In this place, they relate to financial power having moved away from only one side of Parliament.

I accept that complexity is a two-way street. Inevitably, accountants, tax advisers, lawyers and so on have a large vested interest. However, the Financial Secretary rushed too quickly over my earlier point that the obscurity and complexity of many new laws and regulations on tax encourage avoidance.

Conservative Members believe that it is high time for a review, although I accept the good nature of earlier comments. I therefore believe that we should vote on the new clause.

New Clause 5 — Inheritance Tax: Mitigation of Double Charges

Philip Hammond (Conservative, Runnymede and Weybridge)

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

New clause 5 addresses an anomaly—indeed, I might call it an injustice—that is estimated to affect about 30,00 people, and which we believe was not intended to arise. We recognise that there may be ways of achieving the relief that the new clause seeks other than amendment of the underlying primary legislation, but this is the route that we have chosen. I hope that I shall be able to secure a commitment from the Paymaster General, if not to accept the new clause as drafted, at least to provide relief from the double charge that I shall describe by whatever means the Revenue finds most appropriate, so that those 30,000 people can get on with their lives with some certainty about their position in relation to inheritance tax.

If I might indulge in a little background history, the House will recall the closing of an inheritance tax avoidance scheme involving pre-owned assets in the 2004 Finance Act. The scheme, used by many families, essentially involved disposing of the family home while retaining the right to live in it. It relied on the creation of two trusts to avoid the rule that would make a transfer ineffective for inheritance tax purposes where an interest—the right to continue living in the house—was retained when the gift was made.

Under the scheme, the house, rather than being given away, was sold to a trust—let us call it trust one—at an arm's length price in exchange for an IOU. Because that was an arm's-length market price transaction, it had no inheritance tax implications—the individual had simply swapped assets in the form of a house for an IOU. Then came the clever bit—the IOU was gifted to a second trust for the benefit of the donor's children, that being a trust in which the donor had no interest. Thus the gift of the IOU to the second trust became a potentially exempt transfer—if the donor survived seven years from the date of the gift, no inheritance tax would be payable. Of course, the gift of the house to the children's trust would also be a potentially exempt transfer, and if the donor survived seven years, no inheritance tax would be payable, but only if the donor retained no interest in the house. If the donor wanted to live in the house, that route would not work for inheritance tax purposes, and the use of the double trust device allowed the potentially exempt transfer benefit to be obtained while retaining a lifetime interest in the house for occupation.

Let us be clear: that was a convoluted, although legal, piece of tax planning, prompted by the ever-widening net of inheritance tax. That tax was originally intended to capture the estates of the wealthy on death. The threshold has been allowed to reduce in real terms in relation to the value of the principal assets that make up modest estates—people' houses—to the extent that in my constituency and, I am sure, in many other parts of the country, an estate comprised solely of a three-bedroomed former council house will be caught by what has become the greatest stealth tax of all, a tax which, until recently, ordinary people did not have to bother themselves about.

Charles Walker (Conservative, Broxbourne)

Does my hon. Friend agree that the tax at the current threshold penalises most people living in the east and south-east who might be on moderate incomes and have moderate homes? Does he believe that the original intention of the tax when introduced was to hit such people?

Philip Hammond (Conservative, Runnymede and Weybridge)

My hon. Friend makes two very good points. Clearly, it was not the intention of inheritance tax when introduced to hit the estates of modestly-off people—it was a tax at death on the estates of the wealthy, and was originally conceived as a tax on land. Its scope is now far wider than was originally intended, and it has become one of the great stealth taxes, largely because of the rapid increase in house prices.

My hon. Friend makes another excellent point: its incidence is not evenly distributed across the country because of the historic disparity in the rise in house prices and the level of house prices. People on average incomes in parts of the south-east, London and eastern England are likely to be caught by the tax, and people on average earnings in other parts of the country are much less likely to be caught by it, because of the less rapid escalation in the value of their housing assets. That is another aspect of the unfairness of using fiscal drag as a way of expanding the scope of a tax.

John Gummer (Conservative, Suffolk Coastal)

Does my hon. Friend therefore agree that, when the Government tried to block what it was perfectly reasonable to block, it was not acceptable that they did it retrospectively and then pretended that it was not retrospective? Its retrospectiveness lay in the fact that people who had done what was perfectly legal and what had been shown in the courts to be legal were then told that it would have to be undone, in circumstances that, by their nature, would be wholly different from the circumstances in which they had made the decision in the first place. Had they known that that was going to happen, they would not have made the same decision. That was blatant retrospectiveness.

Philip Hammond (Conservative, Runnymede and Weybridge)

My right hon. Friend is right. Those of my hon. Friends who have had the opportunity of serving on the Finance Bill Committee, and those who served on previous Finance Bills, will know that the Paymaster General will make a great case for the distinction between retrospectivity and retroactivity. She will say that the measure was not retrospective, although it was retroactive. I am afraid that the effect on the taxpayer is exactly the same.

In the Finance Act 2005, the Government called time on this particular scheme, not by attacking inheritance tax planning directly but by levying an income tax charge on the value of the benefit from the retained interest in the house sold at arm's length to the first trust. That caused considerable anguish and anger because of the retroactive nature of the legislation—imposing a new tax on a series of difficult-to-reverse transactions, some of which had been in place for nearly two decades when the measure was introduced. There was a large-scale gnashing of teeth at the time. Now that the dust has settled, most taxpayers accept that the game is up, and that the schemes that they have expensively set up have failed for the purpose that they set them up, and that those schemes should now be dismantled. That is what most taxpayers confronted with this new income tax charge want to do. Therein lies the problem that we seek to address with new clause 5.

The Government action under the Finance Act 2004 was devastatingly effective. It completely removed the economic benefit of the schemes, and the Government's objective would be achieved by the dismantling of the schemes. Unfortunately, in doing so, the taxpayer is subject to a huge risk of a double taxation charge. The Government have provided a protected exit route from such schemes. Regulations under the Finance Act 1986 provide some protection against double charging, and regulations that were made earlier this year, under schedule 15 to the Finance Act 2005—a measure targeted to deal with a problem that had already been recognised—provide for those who have set up such a scheme to avoid the income tax charge by making an election, which essentially makes the whole establishment of the double trust transparent for inheritance tax purposes. The trusts therefore remain in place, but the house, notwithstanding its sale, is treated as a chargeable asset, and the relief is given on the lesser in value of either the house or the debt due from the children's trust on death. No double charge to tax would therefore arise.

That is a de facto unwinding of the situation from an economic, not a legal, standpoint. It has been an effective way out of the mess for many ordinary middle-income families, leaving them bruised by the expense and stress of setting up and then unravelling the scheme but otherwise intact, while protecting the Exchequer at the same time by ensuring that the same inheritance tax is payable as would have arisen in the absence of the scheme.

There are good reasons, however, why the election route under regulation 6 of the snappily named Charge to Income Tax by Reference to Enjoyment of Property Previously Owned Regulations 2005 is not an appropriate route for most people. First, the ownership of the property is left unchanged—the economics of the scheme are addressed but ownership is not, so that while the house will be charged to inheritance tax in the donor's estate, the debt, which has been gifted to the children's trust, remains in existence and will eventually give rise to a tax charge on the children who are the beneficiaries of the children's trust.

Secondly, most people not unnaturally feel that, if they have come out with their hands up, unravelled the arrangements that they have made and accepted that they will remain liable to inheritance tax on their house—the asset originally intended to be protected—there should not then remain in existence what is effectively a debt due from them to the children's trust that they have established.

Thirdly, and perhaps most importantly, for technical reasons, an election under regulation 6 by a married couple will give rise to an inheritance tax charge on the first death rather than, as is normally the case with a married couple, on the second death. That does not alter the total inheritance tax due on the house, but it can cause serious cash-flow problems for the surviving spouse, and may possibly even require the sale of the house on the first death.

That cannot—at least, I hope it cannot—have been the Government's intention. Given the problems that I have outlined, the obvious route for such people is to unwind the scheme rather than take advantage of the right to make an election under regulation 6. Unwinding the scheme would involve the trustees of the children's trust advancing the debt to the beneficiaries and the beneficiaries then releasing or writing off the debt due to them, so the position would revert to what it had been before. Mr. and Mrs. A would no longer hold the house subject to a debt but would be fully liable to inheritance tax on its value, while escaping the income tax charged on pre-owned assets.

The difficulty is that, if either Mr. or Mrs. A, or both of them, die within seven years of the original gift of the debt to the children's trust, they face two lots of inheritance tax, one on the failed potentially exempt transfer represented by the gift of the debt and one on their share of the full value of the house. Two inheritance tax charges will be made on what is essentially the same economic value.

Before this year's regulations were made, that problem also arose if people made an election under the Inheritance Tax (Double Charges Relief) Regulations 1987. However, regulation 6 of the 2005 regulations now relieves from a double taxation charge the estates of people who die within seven years of the original gift of the debt having made the election under regulation 7.

Unfortunately, the same treatment does not extend to people who unwind arrangements completely. Our purpose is to seek a commitment to close that unintended trap—at least, I hope it was unintended—for unwary people seeking to comply with the changed rules by unravelling the schemes that they set up before the Finance Act 2004.

New clause 5 seeks to amend the underlying primary legislation—the Finance Act 1986, under which the original relief was available—to address the circumstances that I have identified, by inserting new section 104A. In practice, that would extend to people who die within seven years of unwinding a scheme by writing off or releasing the debt, the same relief as applies to those making an election. It would do that by requiring two separate calculations of the tax due—in respect of the debt and in respect of the house—and requiring the lower valuation to be reduced to nil, and the higher amount to be payable. Essentially, that is the same procedure as required under regulation 6 of the 2005 regulations for people who have made an election.

Subsection (2)(d) of proposed new subsection 104A, providing that the double taxation relief would be available only if the release of the debt was being made other than for full-value consideration, would ensure that the new clause could not become a tax avoidance mechanism in itself. The relief would operate whoever released the debt. In the example that I have used, it would be the children who were the beneficiaries under the children's trust. The debt would have to be advanced to the beneficiaries, because only they could readily give a discharge of the debt from the settlor. The trustees cannot write off the debt, because to do so would confer a benefit on the settlor, who would have been excluded by the terms of the original trust deed when it was set up for the original purpose.

For whatever reason—I suspect it is largely because of the pressure of the growing net of inheritance tax—ordinary people have been lured into complex tax planning by the iniquitous tax drift that has turned IHT into the biggest stealth tax. Retroactive legislation has been imposed on them, and most of them have now accepted that the schemes into which they entered are ineffective, and they want to unwind them, thus giving effect to the Government's intentions. However, they find that they cannot do so without incurring a real risk of double taxation which, even without taking into account the costs of setting up and dismantling the scheme, would leave them significantly worse off.

We must not forget that, as my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer) said, those schemes were perfectly legal tax planning when they were set up. Indeed, they remain so, although they have been economically neutered. Ordinary people seeking to comply with the changed rules should not be penalised by modest estates being put at risk of a potential 80 per cent. tax charge on the surplus value of the estate over the IHT threshold if both the debt and the house are charged to IHT.

Even with the proposal for relief that we suggest in new clause 5, there would still be considerable downside risk for the taxpayer seeking to unwind such a scheme. First, a beneficiary of the children's trust will suffer inheritance tax if he dies within seven years of the debt being written off. Secondly the position for married couples who leave their property to each other on the first death, within seven years of the original gift, will remain unsatisfactory. For example, if Mr. A dies within seven years of the original gift of the debt, the potentially exempt transfer will become chargeable, even with double charge relief. On Mrs. A's death later, the full value of the house would become chargeable, so in effect, Mr. A's share will be taxed twice.

Perhaps that will be sufficient to satisfy the Paymaster General's well-known penchant for putting into the tax system deterrents to legal tax planning. However, even with those remaining penalties, new clause 5 would greatly improve the position of the group of taxpayers who seek to unwind schemes and get on with the rest of their lives. I therefore appeal to her sense of compassion. Many thousands of people, the vast majority of whom will never have indulged in any form of serious planning before, and the vast majority of whom will have no wish to go near any form of tax planning ever again, have been caught in this trap.

Geoffrey Clifton-Brown (Conservative, Cotswold)

My hon. Friend is putting across a highly technical case very cogently. Does he agree that, because of the way in which the Government have treated inheritance tax, and the fiscal drag, some people who have bought their own council houses will now come within the IHT net? There is nothing wrong with arranging one's affairs to minimise tax payable—and that is basically all that those people were doing. They should be allowed to unravel those schemes without having to pay a huge amount of double taxation, which is effectively a fine on taxpayers for arranging their affairs so as to pay the minimum amount of tax.

Philip Hammond (Conservative, Runnymede and Weybridge)

My hon. Friend is certainly right on the first count: as I said earlier, a modest three-bedroomed former council house in my constituency will certainly take an estate within the scope of inheritance tax. On his second point, there is a constant debate about the line between acceptable tax planning and unacceptable tax avoidance. That line is not clear or easily defined and those who have been involved with this Finance Bill accept that there are some difficult decisions to be made. In one sense my hon. Friend's comments are incontrovertible: people who have held up their hands and acknowledged that the game is up, and seek to unwind the schemes that they have set up in order to comply with the intention of the legislation, should not now be subject to an excessive penalty wholly disproportionate to the mischief in which they are alleged to have engaged.

I think that that is wholly unintentional, because earlier this year the Government took steps to ensure that people who made elections were not subjected to a double tax charge. I have to believe that it is the Government's intention that people should be able to unravel and escape from these schemes without facing the double tax charge. I hope that the Paymaster General will be able to confirm that this afternoon.

Geoffrey Clifton-Brown (Conservative, Cotswold)

Is my hon. Friend aware of the old tax maxim that tax evasion is totally illegal, while tax avoidance is perfectly legal?

Philip Hammond (Conservative, Runnymede and Weybridge)

I would prefer to say that tax planning is perfectly legal. As our tax code has developed, the more convoluted forms of avoidance, while not illegal, are certainly subject to action by the Revenue. We have acknowledged during the Bill's passage that there is a constant game of cat and mouse. The Paymaster General expressed the view in Committee that she did not want to have to engage in a constant game of cat and mouse, but that, I fear, is the lot of Paymasters General, who are constantly pursuing a moving goal. Tax planning will move on and the Government and the Revenue will seek to close down the more convoluted and artificial tax-avoidance schemes. That is their right. The concern on this side of the House has always been about the degree of retroactivity in seeking to close down such convoluted tax-avoidance opportunities.

I hope that the Paymaster General will be able to say something positive to this group of 50,000-odd people who simply want to get on with the rest of their lives, having recognised that what they did in the past was unwise and has certainly not delivered any benefit. Indeed, many families have been put through enormous stress, and we are not talking about wealthy individuals with complex affairs. Many are just ordinary families. Those people are now fearful of taking any action until the Revenue confirms that there will be no double tax charge. The longer the delay in releasing the debt and unwinding the scheme, the more income tax will have to be paid on the deemed charge equal to the value of the rent of the property that they continue to live in.

In fairness to those ordinary families, I hope that the Paymaster General will be able to accept new clause 5. If not, I hope that she will at least confirm unequivocally at the Dispatch Box today that the Government will either amend the regulations or take appropriate alternative steps to allow those schemes to be quickly and effectively unwound so that there is an alternative route for those people for whom election under regulation 6 is not an appropriate exit. They should be able to unwind their schemes without undergoing the huge potential costs that the current regime imposes on them.

John Gummer (Conservative, Suffolk Coastal)

First, I would like to declare a disinterest in the sense that I have never created such a trust or been a beneficiary of one, so I believe that I can be perfectly objective about the subject. Secondly, I acknowledge that I have taken part in debates on these matters before and disagreed with the Paymaster General on her definition of retrospection. I retain that belief, but I took from that debate her genuine intention to ensure that people who had perfectly reasonably entered into a perfectly proper legal undertaking would be able at least to disengage themselves from it. Although that did not overcome the problem that they would not have made the initial decision all those many years back had they been told that the terms of the agreement would be subject to retrospection, it did at least solve the problem of retrospection in the sense that, previously, they were punished for finding themselves in their current circumstances. I agree with my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) that, since then, the Paymaster General has shown herself willing to try to maintain her position.

I want to refer to three main points. First, it does not seem to me to be in any sense unpleasant to seek to allow one's children to live in the house in which they have been brought up, whereas I think that there is something wrong with a taxation system that does not view that as a natural activity. I believe that in most cases, if not all, people will already have paid tax on the money that they have invested in their houses. It is not as though they are perpetuating a non-taxable value: they have paid tax, spent money on the house and brought up their families in it. I have no difficulty in saying that there is nothing dishonourable whatever—indeed, I think that it is very honourable—in people wanting to allow their children to continue to live in that house.

Secondly, we should accept that the increase in house prices has meant that many who live in houses that are now caught by inheritance tax do so in circumstances in which they are not themselves very wealthy. They are capital rich, but may not be that well off in current terms. The children who are to inherit the house often find, for the same reason, that it is the only chance that they will ever have to live in a house of their own. They may be financially involved in the house already and may have continued to live in the house with the objective of allowing their children, in turn, to live in it. It is neither wicked nor a mark of extreme wealth to seek to achieve such a sensible end. Indeed, it is often a mark of someone who has used his taxed income properly. That becomes even more important when people do not get any mortgage relief—tax relief on the mortgage costs that people have to pay.

Thirdly, many would say that a sensible tax regime would exclude the family house in any case. I personally take the Belgian view in believing that there should be no inheritance tax at all. I believe that it is the wrong way of taxing and that there are many preferable ways of doing so. I would replace it with something different, which is not at all unreasonable. It is clearly an attractive option because Belgium attracts a large number of French people to live under its tax system. For many people, the ability to hand on what they have earned to their children is much of the reason for earning it in the first place. It is a dangerous thing for a society that does not encourage such continuity and that sort of enterprise.

Geoffrey Clifton-Brown (Conservative, Cotswold)

My right hon. Friend is making a cogent contribution. Does he agree that many people nowadays have to work way beyond the retirement age in order to pay the mortgage on a very expensive house purely in order to pass it on to their children? If the fiscal drag that comes from the inheritance tax system continues, people may be thwarted in that aim and may well choose not to work for so long past their retirement age.

John Gummer (Conservative, Suffolk Coastal)

My hon. Friend makes an important point, but I do not want to follow too far down that particular road for this reason: I am not justifying my position on inheritance by virtue of the fact that high house prices have made what is inherently wrong more obviously wrong. I want to argue something much more fundamental, which is that a society that wants to encourage stability and enterprise is a society in which the ability of families to hand on money and a home is a crucial component of that stability.

Those who believe in a property-owning democracy should not believe in a one-generation society. Those of us for whom the family is the most important element in our lives—who support marriage, want the state of marriage to be important, and want married couples to work together, so that their children can inherit from them—should be encouraged, not discouraged.

Charles Walker (Conservative, Broxbourne)

My right hon. Friend has got to the nub of the problem. We, as Conservatives, believe that the family is the most important thing in people's lives, whereas Labour believes that it is the state.

John Gummer (Conservative, Suffolk Coastal)

That is not only true but self-evident. I do not wish to go down that line, but I do notice that whenever one talks about the importance of the family, of stability, of passing on what one generation has worked hard for, not a grimace but an expression of laughter appears on the faces of particular Labour Members. They laugh because they do not really understand what it is that has kept the nation stable over the generations, and which also motivates most people.

Anyone of my age who asks their friends why they are still working will discover that they are doing so because they believe that it is contributing to the continuity of their family and to the well-being of the children and grandchildren whom they care about. A state that does not take that into account is very mistaken.

This issue is important in the context of the new clause, and for two fundamental reasons. First, let us consider a situation in which someone has sought properly and in reasonable terms to make their affairs as least taxable as is proper within the regime, but who then finds that although they have done nothing illegal—indeed, the courts supported their action—they are penalised according to the vague view that everybody ought to pay as much tax as they possibly can, rather than as little as they are legally liable to pay. Such a situation undermines people's respect for the tax system. Asking people to find new ways in which to make themselves taxable does not constitute a proper tax system.

A proper tax system recognises that although people have to pay the tax for which they are liable—they might choose to vote for a party that reduces tax—they should have no reason at all to fear that if they arrange their affairs so that, perfectly properly and legally, they pay less tax than if they had arranged them otherwise, they will be penalised, including retrospectively. I do not want to discuss retrospectivity, but I should point out that I realise that the Paymaster General, whose definition of retrospectivity is wrong in both dictionary and moral terms, does not want to turn retrospectivity into a punishment in this regard.

I turn to the second and equally important issue. If people feel that they are no longer being treated fairly by the tax system, those who have always been law abiding will be less so. The fairness of a system is crucial to widespread support for it, and to objections against those who break the law. I offer a direct comparison. It is much easier to get the sympathy of one's neighbours if one drives a motor car at 32 mph in a 30 mph limit in the middle of the night than if one drives over the drink limit. The reason why is that everybody recognises—indeed, there has been a very good bipartisan campaign—that drinking and driving is dangerous and unacceptable socially. Therefore, peer pressure is very strong and properly so, particularly and noticeably among young people. If one breaks the speed limit in the circumstance that I described, people tend to feel, "Well, it was the middle of the night and nobody was around." Such an act is certainly illegal, and of course the law has to be obeyed and applied. But my point is that once there is a feeling of unfairness, the social and peer pressures reduce.

I want a tax system that is so clear, obvious and open that people believe that—whether or not they like the tax, the Government or the Paymaster General—they ought to pay it. That seems to me to be right. If they want that system changed, they should find, through the democratic system, somebody who is prepared to change it. The Paymaster General has presided over such a complication of the tax system that ordinary people with limited resources must now take legal and tax advice in a way that they never had to before.

I have said what I am about to say before, and I will go on saying it. I hope that the Paymaster General will accept it, as it is not a personal comment, but she has been in the Treasury team for a long time. Under the tax system that we now have, ordinary people who own a house that has risen in value and who earn income from more that one source need technical advice that their predecessors in history never needed. The right hon. Lady must put that and some other problems right. Above all, she must try to make things simpler. That would be very good for the nation, but very bad for accountants.

One of the lesser purposes of this House is to make life difficult for accountants. If she can do that with this measure—and at the same time ensure that lawyers also have less work—I should be very pleased.

Dawn Primarolo (Labour, Bristol South)

In debates such as this, it is important to bear in mind the specifics of the matter in question. That is preferable to taking a trip down the highways and byways of the individual views held by hon. Members. Today, we are discussing the tax system, and I want to respond to the points raised by the hon. Member for Runnymede and Weybridge (Mr. Hammond) in respect of new clause 5.

Before I do so, however, I want to put something on record. I know that the hon. Member for Runnymede and Weybridge knows this, but I want to make sure that other hon. Members are also aware of the situation. New clause 5 refers to a specific action that the Government took to close double trust avoidance arrangements.

Those arrangements are very complicated, and people do not fall into them in error. Double trusts are expensive to set up, and they benefit people who want to remove £500,000 or more from inheritance tax liability, under rules that have been in place for a very long time. The arrangements apply to houses, but also to works of art, furniture and an amazing range of items. In this rather simplified presentation, however, I shall use houses as my example.

Under the double trust arrangement, people would give their house to a trust. The trust then owns the house but the deal is a paper transaction only and so no money changes hands. The trust pays with what is, in effect, an IOU, but that IOU cannot be kept by the house's original owners. Therefore, it is put into another, unconnected, trust. The original owner has neither the property nor the income from it, but is able to continue living in it, even though it has been removed entirely from the inheritance tax regime.

The Government took various steps to change the arrangements. The classic way to deal with an anti-avoidance arrangement—to which some Opposition Members object—is to introduce complex legislation targeted specifically on removing the possibility of avoidance. This time, however, the Government decided to take a different route and say that people could elect out of existing arrangements. The hon. Member for Runnymede and Weybridge spoke about unwinding, and I shall return to that later, but the Government's approach meant that people did not have to unwind arrangements that they had entered into.

As a result, people could claim, "Fair cop. We shouldn't have tax planned. We didn't mean to do it or for it to carry on into the future. We understand the point that the Government is making." If they did that, people only had to tell the Government that the double trust scheme had been cancelled. By electing out in that way, people could get back to where they should be in the inheritance tax system. That is all that we are discussing.

The hon. Gentleman gave a long explanation of various possibilities. Sometimes such trusts are set up for children, and complications arise about the age of the children and whether they can be beneficiaries. The hon. Gentleman made a point about the sequence of events, but the lesson is that anybody who is foolish enough to go in for complicated tax planning must understand how the rest of the tax system might impinge on that planning.

The hon. Gentleman raised the issue of the IOU in the second trust, depending on who died first and the age of the children, and the possibility that the spouse may be subject to charges if the IHT charge comes in earlier than expected. That point has been raised with us before, and officials at HMRC are currently discussing that point with advisers. My approach to the points that the hon. Gentleman made—and, therefore, the approach that the officials will take—is that I am not prepared to sanction further exemptions from what are very clear rules. The rules contain a clear exit—the election—but as the hon. Gentleman suggested, we have been prepared to remove double charges. When specific examples—not individual cases—have been provided that can be encompassed in the regulations and have the benefit of removing unintended consequences, I am prepared to consider them and I have asked my officials to do so.

When we consulted on the proposals, they were not greeted favourably by the tax planning industry, but that is no surprise. It was busy selling schemes that we wanted to prevent it from selling. I did not expect industry representatives to beat a track to my door to say, "Thank you, Minister. We're really pleased you did that." My officials asked the industry whether we needed to consider transitional arrangements while schemes were unwound—to address the points that the hon. Gentleman made about the possibility of an unfair double charge. At that point, the industry claimed that unwinding was impossible, because the schemes were so complicated.

Therefore, we came up with the simple proposition that the taxpayer could elect out of the scheme by a simple declaration to the tax officials that the scheme would no longer operate. The schemes did not have to be unwound and taxpayers did not have to pay for them to be unwound or pay to take advice on their unwinding. The taxpayers could sign a piece of paper, send it to HMRC and it was done. I thought that that was a good, simple way to solve the problem. However, this year, people are coming back to us and saying, "Hmm, we think we'd like to unwind. Can you give us general powers to unwind schemes?" My answer is no, for the following reasons.

Call me a cynic, but I have a horrible feeling that the sudden desire to unwind is prompted by the discovery of a way to replan. I also think that election is a good and fair answer for all taxpayers.My understanding of the main thrust of the points made by the hon. Member for Runnymede and Weybridge is that he has been briefed that there could be unintended circumstances where double or unfair taxation may arise, and the desire to avoid that is his only motivation for the new clause. It is not because he wants to return to tax planning—to go back to go. However, the regulation-making power, which the House found somewhat controversial, allows the Government to do that. There are some valid cases, one of which the hon. Gentleman put today and which my officials are taking forward. The power to make regulations remains available so that HMRC can consider using it further, if advisers who favour the unwinding route can make a detailed case that it is designed specifically to reach one end—fairness to the taxpayer—and not to open up other possibilities. That can be achieved through decent dialogue between HMRC and advisers who are concerned about the issue. That is where we are.

The hon. Gentleman does not need his new clause because the regulating powers provided enable the House to respond to detailed cases. As the arbiter on whether the regulations are made, I set a reasonably simple and straightforward test, which is the intent of the House: those who say they need such powers have to make the case for the powers and the regulations, and must demonstrate exactly which unfairness we need to address. If they can do that, and if they are open with HMRC, I shall certainly be prepared to give from the Dispatch Box the undertaking that the hon. Gentleman seeks and bring forward the exact details of precisely what is needed to address the perceived injustice. It will then be considered. But I will not give him an undertaking from the Dispatch Box that a general request for power to unwind—wherever that might take taxpayers and tax planners—would be granted, because it will not.

I hope that the hon. Gentleman will see that powers exist and that opportunities for change are in the hands of taxpayers and their advisers, and the people who are advising him. If those advisers provide the details, they will be considered and if necessary regulations will be changed to ensure that the perceived unfairness does not occur. On that basis, I hope that he will not push the new clause to a vote, but if he decides to do so, regrettably, I shall ask my hon. Friends to oppose it.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am disappointed that the Paymaster General has chosen to paint as bad people those who use trusts that were perfectly legal tax-planning devices when they were set up. As I said earlier, those people have come out with their hands up; they have accepted that the trusts did not work and they now want to exit from the system.

The Paymaster General's remarks did not address the fact that the Government have already acted to offer relief to many of those people. We cannot have a situation where some of the people who set up trusts are bad people and do not deserve relief, while others are good people who can elect to escape from at least the economic effects of the arrangements that have been put in place.

The Paymaster General reiterated my words in using the phrase "unintended consequences". I have not clearly understood from her remarks that those in this group of approximately 30,000 people, for whom it is not appropriate to use the route of an election, are the products—[Interruption.] The Paymaster General asks why it is not appropriate. I have given the two most important reasons: first, the possible impact on beneficiaries of children's trust if they die within seven years; and, secondly, the advancing to the time of the first death of the charge to inheritance tax when the taxpayers involved are a couple who make an election for a property that they hold jointly. That would have the disastrous consequence of causing inheritance tax to become payable by the widow or widower of the deceased at the time of the first death—a huge cash-flow problem that would almost certainly involve the forced sale of the house. That is why I am advised that the election process is simply not appropriate for certain groups of people.

As the Paymaster General has spotted, I did not invent the new clause and the arguments that support it. We have been advised by the Chartered Institute of Taxation and the Society of Trust and Estate Practitioners, as the Paymaster General has. The arguments that I have used have already been made in detail both to the Paymaster General—

Dawn Primarolo (Labour, Bristol South)

indicated dissent.

Philip Hammond (Conservative, Runnymede and Weybridge)

Well, those arguments have been made both to the Paymaster General and to senior Revenue officials. If she is not able to say something more specific about the relief that we seek for that group of people, I have to believe that the relief that she is thinking of may be very much narrower that the one that I have been seeking.

I am pleased to hear that HMRC is discussing these matters with advisers—I assume that that means with practitioners and those in the wider world outside—but the Paymaster General's commitment to addressing the full extent of the problem that I have outlined seems to be a bit less than 100 per cent. Indeed, if I have not misinterpreted her too much, she has tried to blame the whole thing on the tax advisers by suggesting that they did not identify the problems that would arise in unravelling such arrangements, so that the measures that the Government have put in place for elections have not addressed the situation in which all those people find themselves.

Although I understand very well the Paymaster General's view on tax planning—I have had four weeks in which to study her view on people who engage in tax planning—I do not think it helpful to adopt the tone that she adopted about the tax advisory industry and people who engage in what is, when they engage in it, perfectly legal tax planning, thereby taking advantage of the taxpayer's age-old right to arrange his affairs within the law to minimise his tax until such time as the Government change the law. That is the game of cat and mouse in which Paymasters General since time immemorial have been engaged.

I do not believe from the information that I have received that it is at all fair to characterise the approach that is being made—principally by lawyers, who are being consulted on ways to unwind such arrangements and get people out of the mess that they are in—as stimulated by having spotted an opportunity to undertake some alternative planning. If I may say so, perhaps seven years in post has made the Paymaster General a tad too cynical about those in the world outside.

Geoffrey Clifton-Brown (Conservative, Cotswold)

The Paymaster General may have misunderstood the import of what she is doing in such elections. I understand that some form of court order will be required to break such trusts. That is the only way a trust can be broken. Therefore while she may have mitigated the tax problems, she has not dealt with the future problem of double taxation—the fine—if a second death occurs after the trust is in place.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am sure that my hon. Friend is right to suggest that a court order might be required to break a trust, but I cannot comment on that. My understanding is that the new clause would provide an effective route which, in substance, would reverse the transactions and create precisely the situation that would have existed had the arrangement not been entered into in the first place. That is to say, the settlor would be liable for inheritance tax on the value of the house, but there would be no tax liability on the now cancelled debt. I should say that things would not be quite as they would have been before, because the settlor would still be disadvantaged in the ways that I outlined earlier. There would be an element of penalty that perhaps would satisfy the Paymaster General's general view that people should be deterred from engaging in tax planning by finding it expensive to exit from retrospective taxation arrangements once they are imposed.

The Paymaster General did not give a time scale for the relief that she will possibly be able to introduce, and the time scale is extremely important. We are talking in many cases not about very wealthy people, but about people living on quite limited incomes who will now be required to meet an income tax charge until they have unwound these schemes.

The Paymaster General did not attack the new clause itself, and it was drafted by a senior legal professional. Although I accept her intention to look at the matter further, I shall ask my hon. Friends to vote to indicate the strength of feeling that exists in the House and outside and to help to stiffen the Government's resolve as they take the matter forward.

New Clause 7 — Road Fuel Regulator

Stewart Hosie (Scottish National Party, Dundee East)

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

We are seeking to amend the Hydrocarbon Oil Duties Act 1979 with the new clause, which, I am pleased to say, has the support of the Road Haulage Association as well as members of the Scottish National party, Plaid Cymru, the Democratic Unionist party, the Ulster Unionist party and the Social Democratic and Labour party. It is designed to deal with oil prices that are exceptionally high for various reasons and with exceptionally high pump prices for road fuel. It has no impact at all on expected revenue, because the mechanism would apply only when oil prices and revenues are above the Chancellor's forecast range or when the fuel price at the pump increases by more than 3p over a six-month period. As it applies only when fuel prices are abnormally high, it has no implications for the environmental benefits sought by the ongoing managed increase in duties.

There is widespread recognition of the pain suffered by the road haulage industry. Bankruptcies in that sector are twice the average of other industry sectors. Hauliers' average running costs are 52p a mile—some right hon. and hon. Members will remember when petrol and diesel cost 52p a gallon. Competition from hauliers in Europe, driven by lower fuel prices elsewhere, have led to a massive reduction in the percentage share of cross-channel freight delivered and carried by UK hauliers. The industry and, indeed, domestic car users pay some of the highest fuel prices in Europe, driven by some of the highest taxes on fuel in Europe of 69 to 74 per cent.

That is bad enough, but the biggest problem is the inability of businesses in particular to plan properly while fuel prices rocket. Unlike spikes in the past, those prices have stayed high for a long period. Our proposals for a road fuel regulator in proposed subsection (1C) respond to prolonged increases in the price of fuel at the pumps. If there were a rise in petrol and diesel of 3p a litre or more in any six-month period—according to my calculations, there have been three occasions since 2000 when that has happened to four-star petrol—our proposal would take the edge off the increases and minimise the impact on businesses and consumers. To give a little background, the first prolonged spike above 3p a litre for a six-month period occurred between January and July 2000. The price remained high and, if our proposal were operating, the regulator would have remained in force until December 2000. When the second spike occurred between September 2002 and March 2003 the regulator would have remained in place for one month until April 2003. The final spike in four-star prices occurred between April and October 2004, and the regulator would remain in place until the present time. We propose that the Chancellor be required to reinvest the additional revenue that he receives from VAT on the higher pump price to lower the duty on fuel in such circumstances.

As an illustration, the Automobile Association has done its own calculation based on unleaded fuel. It estimates that some six months ago the average price of the fuel was 80p.

Charles Walker (Conservative, Broxbourne)

Does the hon. Gentleman accept that if we are to reduce greenhouse gas emissions, as we all want to do, fuel prices will have to increase over time, perhaps quite rapidly, and that tax is one way of achieving that increase to reduce usage?

Stewart Hosie (Scottish National Party, Dundee East)

I thought I had covered that earlier. If we use duty or tax—a price mechanism—as a disincentive for car use, that is a managed increase. I am referring to the prolonged spiking—the unexpected increases for which businesses in particular cannot plan—over and above the normal increases in duty that may or may not be applied as an incentive to reduce vehicle use. I hope that helps.

As I said, the AA, using its own estimates on unleaded petrol, indicated that some six months ago the price of a litre was about 80p. This month it is about 86p. If our road fuel regulator were in place now, that would trigger a cut in fuel duty of 1.2p, which would be paid for by the increased take in VAT over the past six months. It would take away some of the pain—some of the spike—for consumers and road hauliers at no real cost to the Treasury, as the revenue that it gained was unexpected in the first instance. Such a move would have lowered pump prices from the near-record highs that we see today and moderated them at the level that existed around mid-April.

As the AA Motoring Trust pointed out, the price reduction would put just under £1 million a day back into the pockets of consumers, into the bottom line of businesses and presumably into the tills of the shops and other small businesses on which many of our communities depend and on which the Chancellor depends for his tax take.

I shall quote further from the AA. Because of the 6p increase that it estimates over the past six months,

"individual motorists have seen the monthly cost of petrol for a typical privately owned car rise from £87.43 in January to £94.02 in May. In households with two cars this represents a £13.18 hit on family expenditure each month"—

that is, over and above anything that one would have expected. That is not good news for the small businesses in all our constituencies or for the Government, who rely on our collective spending power to keep their economy going.

The second element of the road fuel regulator would ensure that freezes on fuel duty are not left to the whim of the Chancellor, but are instead automatically triggered by world oil prices which are in excess of a forecast that we would have the Chancellor make in each Budget.

Helen Goodman (Labour, Bishop Auckland)

I am slightly puzzled by subsection (1B), which states:

"The Chancellor of the Exchequer shall publish a forecast based on the expected direction of international oil prices."

That already happens. I have found six references to the oil price forecast in the financial statement and Budget report. It is one of the forecasts that is independently audited by the National Audit Office, and it reads directly through to the forecasts for North sea revenues and for hydrocarbon fuel duties, so I do not understand why the hon. Gentleman is proposing a new obligation to make a forecast.

Stewart Hosie (Scottish National Party, Dundee East)

We consider it important that a ranged forecast be made in order to allow the trigger mechanism for the fuel price regulator to kick in, so we thought it was important—we spoke to the Clerks about this when we drafted the new clause—that that was laid down in the new clause because it was referred to specifically by a subsequent clause. I hope that helps the hon. Lady. I must move on.

The second element of the road tax regulator would ensure that freezes on fuel duty were not left to the Chancellor, but were triggered automatically. In his Budget this year the Chancellor announced an increase in fuel duty of 1.22p in September, equivalent by coincidence to the reduction that would have happened had the fuel tax regulator been in place. Although we are delighted that that has been frozen for the time being, it should not be at the whim of Government, but should be triggered automatically by high prices in the world oil market.

Hon. Members will remember the saga from last year when the Treasury repeatedly deferred its proposed duty rise from the 2004 Budget. Motorists and hauliers were given no certainty. The decision to freeze or not to freeze seemed to be based on nothing more than the Chancellor's moods, or perhaps his political sensitivity to too-high fuel price rises. The haulage industry would much prefer certainty and an automatic trigger to what has become known as the Chancellor's choice.

Under subsection (1D) of the new clause, if oil prices rose above the forecast levels by the Chancellor in his Budget report, there would be an automatic freeze in fuel duties. In today's circumstances, that would put some £20 million a month back into the pockets of constituents and local businesses, including haulage businesses, but would not affect the forecast revenue for the Government, as it would kick in only after the forecast was breached upwards.

Helen Goodman (Labour, Bishop Auckland)

The oil price is particularly volatile, so how, at the time it goes up, would we make a judgment as to whether it is a spike or a structural change? That is a significant flaw in the proposals.

Stewart Hosie (Scottish National Party, Dundee East)

The volatility is precisely the point. To avoid Governments having to scurry about freezing duty levels, the process should be automatic depending on the circumstances. I am happy to concede that there will have to be a facility to take cognisance of whether the price rise is a prolonged spike or a structural change. I accept that our new clause is not perfect, but I hope that the Government will take on board its principle. I also hope that the hon. Lady takes that answer in the spirit in which it is intended.

Helen Goodman (Labour, Bishop Auckland)

Is the hon. Gentleman suggesting a mechanism rather like the commodity agreements in international markets in the 1980s whereby when prices go up the duty is cut and when they go down there is a symmetrical arrangement the other way round?

Stewart Hosie (Scottish National Party, Dundee East)

We are suggesting that when prices rise, that pays for a reduction in fuel duty, but when world oil prices rise there is a freeze on any duty rises that are planned, to help to ameliorate some of the worst consequences of such rises. It is not our intention to deny the Government any money by changing when the price goes down.

So far this year, Brent crude has touched $60 a barrel and is averaging well over $50 a barrel. In three months, the Exchequer has made almost £1 billion more than expected, and we judge that there is plenty of room in the coffers for this limited measure to give assistance to hard-pressed hauliers and motorists. It has support from the haulage industry and from several parties in the House. It is a sensible response to a genuine problem for road users, especially those who have no option but to travel to make their living or whose livelihood is in transport and haulage.

Charles Walker (Conservative, Broxbourne)

Is not the hon. Gentleman particularly concerned about the impact that fuel increases have on rural communities and people who have to use their cars to travel long distances just to go about their everyday lives?

Stewart Hosie (Scottish National Party, Dundee East)

The hon. Gentleman must have seen my summing-up. It is no surprise that Members who back the new clause represent, by and large, rural and semi-rural constituencies. However, not only rural areas in Scotland, Wales, Northern Ireland and large parts of England are at stake. Every single product we buy in any shop or store is, to some extent, carried by hauliers by road. The implications for the industry and for the prices that we all pay for everything are affected by high fuel prices at the pump and high oil duties.

The new clause is a sensible response to a genuine problem. The first element would reinvest VAT revenues to lower fuel duties, should the price at the pump stay high for a prolonged period. The second would freeze oil duties on the basis of market conditions, not the Chancellor's whim.

Some may argue that higher fuel costs will take motorists off the road, but as I suggested earlier, the new clause would not minimise or negate any planned or managed duty rises for the purpose of environmental benefits, because it simply provides for removing or ameliorating the worst effects of spiking, prolonged spiking and high world oil prices.

I ask all hon. Members who are considering voting against the new clause—the empty Labour Benches suggest that Labour Members are in their offices—to remember the businesses and consumers in much of Scotland, Wales, Northern Ireland and large parts of England that need a haulier to get their goods to market. I ask everyone to think of hauliers whose margins are already tight, to consider transport businesses that are offshoring and going out of business, and to think of the families and consumers who do not have the option of a regular bus, train or tube service to get to work or perform the most basic task, even getting to school.

The new clause is a sensible amendment to moderate high oil prices and to mitigate prolonged rises in the price at the pump. We need a road fuel regulator to benefit the people who put us all here a few short weeks ago. I ask the Government to consider seriously at least the principle of the new clause. I hope that it can gain as much support throughout the House as it deserves.

Mark Francois (Conservative, Rayleigh)

I wish to respond to new clause 7 on behalf of the official Opposition. The hon. Member for Dundee, East (Stewart Hosie) introduced it succinctly. In essence, the new clause tries to establish a device for reacting to increases in the price of oil and for reducing duty automatically when certain conditions, which the amendment specifies, occur. It is an important subject for the Treasury and for taxpayers, including hauliers and motorists generally.

Duty on hydrocarbon oils raised slightly less than £23 billion in the financial year 2003–04, representing roughly 5 per cent. of total Government tax revenues in that year. According to the Library, the UK has the second highest pump price for unleaded petrol in the European Union after the Netherlands, and the highest pump price for diesel, which is clearly especially important for hauliers. The UK also has the highest taxation on petrol in the EU, with approximately 70 per cent. of the pump price of unleaded petrol being accounted for by a combination of taxes and duties.In addition, there have been further increases in world oil prices in recent months. Oil was trading last week at more than $59 a barrel. When I checked this morning, Brent light contracts for August had opened at just over $58 a barrel. Given that VAT is part of the final price for petrol and diesel, that has brought in additional revenue to the Treasury.

In the light of that position, the Government issued a written ministerial statement only yesterday afternoon, in which they confirmed that, following sustained pressure from G8 Finance Ministers, the Organisation of Petroleum Exporting Countries is committed to increasing production quotas by up to 1 million barrels a day by September 2005. Nevertheless, the Government are abandoning their planned inflation increase in the price of main fuel duties, including petrol, which was scheduled to come into effect on 1 September this year. That was probably a fair decision. Given the current oil price, it would not have been right to proceed with a further increase at this time.

The House has to decide whether, given yesterday's decisions, it would be appropriate to accept new clause 7 as well. To decide, we must examine the elements of the new clause. We have no major objection in principle to the suggestion in proposed subsection (1B) that the Chancellor should include an annual projection of estimated trends in oil prices as part of his Budget statement. Oil is a major fuel for the world's economy and fluctuations in its price have implications beyond simply the price of road fuels, extending to air travel and important sectors of manufacturing industry.

As was rightly pointed out by Labour Members earlier, the Red Book already contains a number of assumptions about future oil prices, so the Treasury has told us something of its expectations. I presume that those who tabled the new clause wanted to formalise that projection: perhaps they thought that the Chancellor could make it one of the headline projections in his statement, along with those on growth and borrowing. As I said, however, the Treasury already puts some of the information in the public domain.

Subsection (1C) proposes a mechanism whereby if the price of nominated fuels rises by more than 3p a litre over six months, the Government will scale down the increase in duty by an amount equivalent to the extra VAT that is payable on the increase. The new clause does not really make it clear how the calculation would be made or how the arrangement would operate. Would the six-month average be a rolling average, for example? The wording seems to imply that, but we would like clarification.

Subsection (1C) also does not make it clear how long the discount would last. Would the period between the 3p trigger and the coming into effect of the attendant regulations be very brief, or could the regulations be retrospective over the entire six months if necessary?The new clause says that the Chancellor must produce regulations, but it is not specific about the timing. Moreover, a brief spike in the oil price lasting for, say, a fortnight could theoretically affect the average sufficiently to trigger the mechanism. A fair amount of work and administration could be required for what constitutes a relatively small price reduction.

There is also the practical question of how people would be reimbursed, if they were reimbursed at all, for duty that they had already paid at the pump earlier in the six-month period, before the trigger kicked in. Or would the refund go to the oil companies, but not to the motorists or hauliers?

Nadine Dorries (Conservative, Mid Bedfordshire)

In my rural constituency, I represent many market gardeners, farmers and road hauliers who must battle adverse weather conditions as well as adverse pump prices. The new clause seems to involve a great deal of uncertainty, whereas what those people need is more certainty.

Mark Francois (Conservative, Rayleigh)

One or two road hauliers are active in my county of Essex and there are a number of farmers in my constituency. I think that we understand the spirit of what has been attempted in the new clause, but we are here to make law, and the law that we make must be operable. Part of the problem with subsection (1C) is that it is almost too complicated for its own good.

Nigel Dodds (DUP, Belfast North)

The hon. Gentleman has drawn attention to difficulties in the specific terms of the new clause, but what is his party's view on the general principle—what the hon. Member for Dundee, East (Stewart Hosie) suggested was the spirit of the proposal?

Mark Francois (Conservative, Rayleigh)

I shall make our position fairly clear towards the end of my speech. I understand the hon. Gentleman's question, but I hope that he can be patient. Incidentally, we find it interesting that the new clause was tabled both by parties that are fierce defenders of the Union and by parties that are not so keen on it.

Subsection (1D) contains a potentially more powerful measure. It proposes that whenever international oil prices rise above the level estimated in the Budget—the formalised estimate proposed in subsection (1B)—indexed duty increases should be frozen until prices return to the forecast level. There are practical problems with that as well. First, there is the technical but nevertheless important question of how international oil prices will be defined for the operation of the clause. Will the definition depend on Brent light, West Texas intermediate, Dubai or some other representative basket of oil prices? If one is putting into law a trigger that affects the payment of duty, it is important to be clear on exactly the circumstances under which that duty would operate. I do not mean to steal the Financial Secretary's thunder, but I would not be surprised, as he is a Treasury Minister, if he had a similar view of those matters.

Alex Salmond (Scottish National Party, Banff and Buchan)

Will the hon. Gentleman give way?

Mark Francois (Conservative, Rayleigh)

In a moment.

Moreover, the adoption of new clause 7 as drafted—again, assuming that there is a formalised statement by the Chancellor—would provide an obvious incentive for a Chancellor to err on the side of caution in his supposed annual forecast of the likely oil price, no doubt mindful of seeking to protect revenue against the potential kicking-in of subsection (1D) over the course of the year in question. In theory, if the Chancellor must project for 12 months, he could reasonably be expected to make a conservative estimate of what that figure could be, because if subsection (1D) kicked in, the effect on the overall figures in the Red Book could be substantial.

Alex Salmond (Scottish National Party, Banff and Buchan)

The hon. Gentleman made what he described as an important point about which crude would be the benchmark. He has already pointed out, however, that the Treasury makes a forecast of oil prices. Did his researches carry him as far as knowing on which crude that forecast is currently based?

Mark Francois (Conservative, Rayleigh)

The hon. Gentleman's party was among those that put forward the amendment and it is not my duty to explain his amendment to him, but his party's duty to explain it to the House. If I might say so, it could have done a better job of it.

Alex Salmond (Scottish National Party, Banff and Buchan)

Will the hon. Gentleman give way?

Mark Francois (Conservative, Rayleigh)

No.

We can see what the minor parties have been trying to achieve, but the mechanism, especially in subsection (1C), appears to be complicated in its potential implementation. We accept that high fuel prices pose a genuine problem—I am trying to answer the question of the hon. Member for Belfast, North (Mr. Dodds)—and that that is in large part because of the substantial proportion of duty that the United Kingdom pays, which is the highest in the EU.

Brooks Newmark (Conservative, Braintree)

While I very much agree with the hon. Member for Dundee, East (Stewart Hosie) that we all have tremendous sympathy with road hauliers, of whom I have several in my constituency, all of us have motorists in our constituency. A bigger concern to motorists might be the Sustainable Development Commission with its plan to raise vehicle excise duties from £165 to £900 to £1,500 for the average family car. Strangely, that was not published until after the general election. Does my hon. Friend agree that that is a much bigger concern?

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

Order. A bigger concern that might be, but I am afraid that it is wide of the new clause that we are discussing.

Mark Francois (Conservative, Rayleigh)

I do not mean to challenge you for one moment, Madam Deputy Speaker, but it is always nice to see a fellow Essex Member of Parliament chipping in to these debates.

We can see what the minor parties were seeking to achieve, and we acknowledge that high fuel prices pose a particular problem, which is caused mainly by the high level of duty.

Helen Goodman (Labour, Bishop Auckland)

Did the hon. Gentleman hear the thoughtful speech by his right hon. Friend the Member for West Dorset (Mr. Letwin) last week on climate change, in which he suggested that in order for political parties to stop using fuel prices and other issues as a political football, such decisions should be neutralised by the setting up of an independent authority? What the hon. Gentleman is saying this afternoon does not seem wholly consistent with what his right hon. Friend was saying last week.

Mark Francois (Conservative, Rayleigh)

You have already chided the House, Madam Deputy Speaker, for straying slightly wide of the mark. Mindful of that, I think that I can say that the hon. Lady will be aware that there is a lively debate in the environmental community about climate change, nuclear power and other issues. As I hope she will appreciate, I am attempting to focus on the specific point about the value of duty and on exactly what is proposed in the new clause.

To summarise, we can see what the minor parties were trying to do, and we appreciate that there is a real issue with the level of duty, but the mechanism in the new clause, especially in subsection (1C), appears to be very complicated to implement. We therefore believe on balance that, unless there were a sudden massive external shock, rather than building the specific mechanism in the new clause it would be more appropriate to continue to monitor the oil price closely and take decisions on duty as part of the budgetary process in the normal way, as the Government did with their announcement yesterday. On that basis, we are unlikely to be able to support the amendment if it is pressed.

Christopher Huhne (Liberal Democrat, Eastleigh)

We approach the new clause with much sympathy with its objectives, but like the hon. Member for Rayleigh (Mr. Francois), we are somewhat sceptical about the practicalities. The proposals seem principally motivated by a certain playing to the public gallery, not least because the new clause calls for the publication of something that, to my certain knowledge, has been a regular part of every Red Book for many years. I must point out to the hon. Member for Dundee, East (Stewart Hosie) that he will find a fairly extensive discussion of the Chancellor's forecast in paragraph C49 on page 252 of the Red Book—and, indeed, a prediction by the Chancellor:

"Oil prices are expected to average $40.6 a barrel in 2005, in line with the average of independent forecasts."

That is, of course, an assumption audited by the National Audit Office.

Alex Salmond (Scottish National Party, Banff and Buchan)

Yes, but it is not a statutory obligation, and if we are proposing a statutory new clause to do something we cannot leave it to the discretion of the Chancellor whether he does or does not publish a forecast. Does the hon. Gentleman now understand why the requirement has to be in the new clause?

Christopher Huhne (Liberal Democrat, Eastleigh)

I am grateful for that clarification, but it would be very odd if the new clause required the Chancellor to do something if it were not implicit that he is already doing it, and the forecast is already there. I am not sure that we need the belt-and-braces approach that the hon. Gentleman suggests.

Alex Salmond (Scottish National Party, Banff and Buchan)

I am sure that the hon. Gentleman is not presuming to know more about the drafting of new clauses than is available to all Members through the excellent expertise of the Clerks of the House. Or does he think that he knows more than them?

Christopher Huhne (Liberal Democrat, Eastleigh)

I am sure that I would defer to the Clerks in that matter—but I come back to the point that nowhere in the presentation by the hon. Member for Dundee, East or in what was said by the hon. Member for Banff and Buchan (Mr. Salmond) has there been any awareness that the information is regularly published; certainly, neither of them drew attention to the fact in much detail.

Mark Francois (Conservative, Rayleigh)

I would like to put on the record the fact that, as the hon. Member for Banff and Buchan (Mr. Salmond), with all his experience, will be well aware, we are lucky enough to have excellent Clerks in this place and they will always provide advice, including technical advice, on amendments. However, the responsibility for the amendment finally tabled is that of the Members who table it, not that of the Clerks. I hope that the hon. Gentleman will remember that.

Christopher Huhne (Liberal Democrat, Eastleigh)

I am grateful to the hon. Gentleman for making that point, as I am a new Member and certainly would not want to get the wrong side of the Clerks; in my experience, they have been extremely helpful with our drafting.

The more fundamental point that I wanted to make concerned not the forecast but the fact, which I think gives a hint of the populist nature of the new clause, that no mechanism is proposed for unwinding—

Charles Walker (Conservative, Broxbourne)

I hold no brief for the Scottish National party, but it was a bit unfair to call its new clause opportunistic. The road haulage industry is in crisis. Not only do our hauliers have to contend with very high fuel prices, but they are being priced off European roads. There is also a massive driver shortage because the thresholds and costs of becoming a heavy goods vehicle or large goods vehicle driver has increased dramatically over the past three years. I believe that the industry's concerns are genuine.

Christopher Huhne (Liberal Democrat, Eastleigh)

I thank the hon. Gentleman for that intervention, but I did not say opportunistic—I said populist, and I was about to explain why. The hon. Member for Bishop Auckland (Helen Goodman) earlier questioned whether the new clause was designed as a proposal to smooth particular changes in world oil markets. If so, it seems to me that it would be intellectually reputable and, perhaps with rather more detailed work on the drafting, it might command a substantial measure of support in the House. However, the reality is that the proposal operates only in one direction.

The question of whether we are dealing with a substantial secular change in the trend rather than a cyclical spike was asked earlier, but it was not answered and it really must be addressed. As I said, Liberal Democrat Members are sympathetic to the objectives, particularly in view of the problems of rural areas and of road hauliers. I am sure that the hon. Member for Banff and Buchan, with his expertise as an economist in the financial sector, will warm to another important objective—macro-economic stability. I remember, as will he, the period between 1979 and 1981 when there was an oil price spike. The Conservative Government of the day substantially aggravated matters on the inflationary front and through the reduction of effective demand by doubling value added tax, thereby creating a far worse shock to the economy than was visited by the increase in oil prices itself. That shows the need for a wider debate.

As I say, I am sympathetic to the objectives and would not be at all surprised if Labour Members were, too, particularly on account of macro-economic stability. We must remember that, broadly speaking, the UK is in net balance on its oil account, so there is not the same need for a terms of trade change as there would be if we were a substantial net importer of oil. For all those reasons, I am sympathetic to the new clause, but I think that the practical issues remain substantial. It would be sensible to see how the proposal unwinds as well as the plus point of taking an increase off a particular spike.

My party is deeply concerned—as, I hope, is the Scottish National party, particularly in a week when the G8 leaders are meeting at Gleneagles—about the prospect of global warming and the need to maintain pressure over time for a gradual shift, which must not be too extreme, towards fuels and means of propulsion that do not have substantially damaging effects on the environment.

Michael Weir (Scottish National Party, Angus)

What the hon. Gentleman says about global warming is fine, but can he tell us the time scale? I represent a large rural constituency that, apart from one rail link on the coast, does not have any transport other than road. My constituents rely on rural transport, and rural businesses—whether coming in or out of the area—are suffering because of high fuel prices. If something is not done to help them now, they will not be here in 10 years time.

Christopher Huhne (Liberal Democrat, Eastleigh)

As I have said, I am completely sympathetic to the problems of road hauliers and other motorists in present circumstances. My party has set out various proposals for alleviating that difficulty, but I am dealing now with the specifics of the new clause and I have to say that, for the reasons that I have set out as a matter of principle and that the hon. Member for Rayleigh has provided as a matter of practicality, it will not deliver the objectives that we may well hold in common. I fear, therefore, that we cannot support new clause 7 because it has not been thought through in such a way as to deliver the objectives that we agree are necessary.

I am conscious of the need to move on, so I shall sum up by saying that if, in further conversations with the hon. Member for Banff and Buchan and his party, we can develop a proposal that would smooth matters and preserve the pressure to deal with the overwhelming problem of global warming, we should do so. However, I am afraid that this new clause does not do that.

Alex Salmond (Scottish National Party, Banff and Buchan)

I am amazed by some of the contributions that we have just heard. I should say to the other Opposition parties that it is normal to allow the Financial Secretary to point out the defects in amendments and new clauses. That is what Ministers do, and they do it, incidentally, in response to Conservative and Liberal Democrat amendments. What is less clear is why the Conservative and Liberal Democrat spokespeople should spend their time on this matter, rather than confronting the essence of the issue. Perhaps the time spent in opposition has made them long to be on the Treasury Bench and, as a result, they have to take on some of the arguments that the Treasury put forward, rather than looking at the issue that concerns our constituents.

The Opposition's job is to make proposals in an effort to represent their constituents. The job of Opposition and constituency Members is to look for problems in our constituencies, and to try to do something about them. I should point out to the Conservative Front-Bench spokesman in particular that although my colleagues in the Democratic Unionist party and I do not agree on the future constitutional make-up of the United Kingdom, we do agree on the issue of serving our constituents. We are well aware that many of our constituents in Scotland and Northern Ireland have similar problems—as, indeed, they do in Wales and in many rural parts of England. I should point out to all Members of this House that in tabling and discussing amendments, it would be rather better to concentrate on their constituents' interests, instead of trying to make foolish debating points.

None of us is entirely clear whether the Conservatives are, in principle, in favour of our proposal, but it did not seem that way to judge by some of their Back Benchers' interventions. I am worried about the practical question of whether the principle behind the proposal also bothers them; more clarification on that point might be useful. Incidentally, the answer to the question that I asked the hon. Member for Rayleigh (Mr. Francois) is Brent "light". I do not think it a hugely significant problem to set a marker crude. Many of us have known about these matters for years, and it is as well before making pernickety points to be fully familiar with the subject that one is trying to debate.

Charles Walker (Conservative, Broxbourne)

I simply wanted to point out that I have some sympathy with the hon. Gentleman's concern for the haulage industry, of which I have had some experience in the past 10 years.

Alex Salmond (Scottish National Party, Banff and Buchan)

I am prepared to exempt the hon. Gentleman entirely from my strictures. In fact, I was about to move on to a joint target of ours on the Liberal Democrat Front Bench.

To be accused of playing to the gallery by a political party that has specialised in putting the "moan" into sanctimony is absolutely extraordinary; as if the Liberal Democrats do not play to a political gallery! The only difference between the Scottish National Party and other parties supporting this new clause and the Liberal Democrats is that they play to different political galleries simultaneously in various parts of the country. So I advise them to try to found their opposition on something a bit more substantial than accusing their political opponents of playing to a political gallery.

Christopher Huhne (Liberal Democrat, Eastleigh)

Will the hon. Gentleman therefore describe how the proposed arrangements in the new clause would be unwound? What would happen if the price went in the other direction?

Alex Salmond (Scottish National Party, Banff and Buchan)

The new clause is about windfall gains and VAT. If the price is dropping, there are no windfall gains, so the new clause is not triggered. It is a one-way, modulating, smoothing clause.

I forsake the Liberal Democrats in order to take on a trite point from Labour Members about whether a forecast already exists in the Red Book. Yes, we know that there is a forecast—I have been debating it for many years with successive Chancellors of the Exchequer. But if a statutory mechanism is proposed, that forecast has to be in statute. If the Chancellor decided for some reason not to make the forecast, the rest of the provision would fall as a result. That is a reasonably obvious point. I know that the hon. Member for Eastleigh (Chris Huhne) is new to the House. If he ever makes a proposal similar to this one, he will find that he will also have to put the dependent mechanism into statute.

As has been said, the UK has the highest fuel taxes in Europe, especially for derv. For a variety of technical reasons to do with refineries, the price of derv is rising faster than the price of petrol in the oil market. The situation is very serious.

My hon. Friend the Member for Angus (Mr. Weir) said that his constituency has one rail line. Mine has none: there is not one metre of railway in Banff and Buchan, so there is no alternative to road haulage for the transport of goods to market. The high price of derv is very serious because it means that the percentage of goods being moved by UK hauliers is falling like a stone, as they cannot compete with their counterparts in other European countries. As my hon. Friend the Member for Dundee, East (Stewart Hosie) said, the number of bankruptcies in the haulage and transport industries is rising exponentially.

I have here a graph that explains the reality, and why the Scottish Nationalist, Plaid Cymru, Democratic Unionist and Ulster Unionist parties support this new clause. The highest fuel prices in this so-called "united" kingdom obtain in Northern Ireland, the highlands and islands of Scotland, rural Wales and parts of rural England. That is why we are pleading with the Government that something must be done.

The new clause is about windfall gains. The Red Book forecast an oil price of $40 a barrel. It estimated oil revenues from corporation tax and petroleum revenue tax at about $6 billion. The average price of Brent light so far this year has been $55 a barrel. The House of Commons Library puts the windfall gain for the Chancellor at £5 billion, if the price rise is maintained throughout the financial year.

The Chancellor has decided to forgo an increase in the fuel duty, at a cost of about £200 million. The additional mechanism suggested in the new clause would cost another £200 million, and be offset by the increase in VAT revenues. This new clause would have a modulating or smoothing effect. It asks the Treasury to give back a tiny proportion of its windfall gains from high oil prices to help hard-pressed people in our constituencies.

I have known the Financial Secretary for some years; he is one of the Government's more successful and able Ministers, and he has a lively and inventive mind.

John Bercow (Conservative, Buckingham)

That may ruin him.

Alex Salmond (Scottish National Party, Banff and Buchan)

I hope that my high praise does not cast a pall over the Financial Secretary's political prospects. He carries out his role well, but it must be depressing for him always to be asked to display his formidable intellectual powers defending various tax-raising mechanisms. That is what he has done over most of his illustrious political career, but the new clause gives him an opportunity to put his subtlety, inventiveness and powers of persuasion to another use.

Our proposal offers a mechanism for which I know the Financial Secretary has been searching. The proposed modulator or smoothing-out mechanism would enable him to use a tiny proportion of the Treasury's windfall gains to help hard-pressed business and constituents in this country's rural areas.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

It is always a pleasure, and sometimes a challenge, to follow my hon. Friend the Member for Banff and Buchan (Mr. Salmond). The hon. Member for Rayleigh (Mr. Francois) referred to political co-operation across the islands and across differences of opinion on the constitutional future. Certainly, my constituents—farmers, hauliers and others—would be interested in the unholy alliance that is developing between the Front Benchers of the three main UK parties. The minority parties are proud to stand up for the interests of their constituents on this matter because of the crisis facing the haulage sector, which is of vital strategic importance in my area of Wales and in the constituencies of my hon. Friends.

The haulage industry had another disappointment yesterday with the announcement that we would not have the distance-based road tax scheme that it has been promised and that would have helped to overcome some of the competitive disadvantages that the sector faces in competition with foreign hauliers. We need action on behalf of the haulage industry, because it is going to the wall in west Wales and parts of Scotland, Northern Ireland and, indeed, England.

As we have heard, west Wales and the highlands and islands of Scotland have some of the highest petrol and diesel prices in Europe. In many areas, £1 a litre will soon be the norm, and we do not have the derogations from duty that are practised in some EU states. That is why we need some protection, and all that we are asking for in the new clause is a cap to provide some protection from the volatility of the international markets. Or will we allow the international oil markets to decide the fate of hauliers and other key sectors in our constituencies? That is not acceptable.

I read the Financial Secretary's comments yesterday that the delay in the increase in fuel duty was caused by short-term volatility, but that is exactly what he said two years ago. When does short-term volatility become a constant feature of oil prices? That volatility has many causes—the increase in demand from China and problems of supply. There is an interesting debate about peak oil, and some are pessimistic and others optimistic about the oil reserves. The new oil reserves peaked in 1960, so discovery of oil reserves has declined. Volatility will be a long-term feature of the oil market and prices.

Oil now costs some $60 a barrel, which is three times the $20 a barrel average of the past two decades. Some people talk of the possibility of a cold winter in the northern hemisphere pushing it up to $70 or $80 a barrel. Will we provide no protection for consumers and businesses in our markets? We need a smoothing mechanism, as the hon. Member for Eastleigh (Chris Huhne) suggested, so that instead of disruption and chaos we have a managed target price, set by the Chancellor. We should not allow a windfall tax to put onerous pressure on businesses and customers.

The issue will not go away. Non-OPEC oil production will peak at some time in the next 10 years and then most of the world's oil reserves will be controlled by a small number of countries whose Governments are unstable and corrupt—I obviously do not mean Scotland. As we shift from a hydrocarbon economy to a new energy economy, we need to create a mechanism to manage that transition. We need a managed approach to our current reliance on oil, and the new clause presents a possible way forward.

The Government need to act now. Instead of having a series of announcements about delays, let us have a regulated approach that will provide fairness, transparency and justice for consumers and businesses across the UK.

Alan Reid (Liberal Democrat, Argyll and Bute)

High oil prices are clearly causing a serious problem in rural areas, especially in the islands where the price of petrol at the pumps is horrendous. Unfortunately, however, I do not think that the new clause will tackle the problem. When the hon. Member for Dundee, East (Stewart Hosie) proposed it, he admitted that it was less than perfect. I think that was SNP speak for "It won't actually work"—[Interruption.] The hon. Member for Banff and Buchan (Mr. Salmond) asks what is our alternative? It would be to move away from taxes on fuel to a system of road pricing, with higher charges for urban motorways and very small charges for rural roads, especially in the islands, but I suspect, Madam Deputy Speaker, that if I started to explain our future transport policy, you would quickly rule me out of order and ask me to concentrate on the new clause.

Alex Salmond (Scottish National Party, Banff and Buchan)

I must have missed that amendment during our proceedings on the Finance Bill. If that is the Liberal Democrat proposal, it should have appeared as an amendment to a suitable clause in the Bill. We could then have had great fun asking a variety of questions about its technical aspects. If the hon. Gentleman believes that there are fewer technical aspects in what he has just described than in our new clause, I look forward to that debate with great interest.

Alan Reid (Liberal Democrat, Argyll and Bute)

rose—

Christopher Huhne (Liberal Democrat, Eastleigh)

May I intervene on a point which, unfortunately, I had to learn the hard way? The hon. Member for Banff and Buchan (Mr. Salmond) may not yet have spent enough time in the Standing Committee on the Finance Bill, or in any other part of the debate on the Bill, to learn that, for reasons that have been lost in the mists of time, it is the procedure of the House that if one produces an amendment that raises revenue as opposed to reducing it, it is not selectable for debate, as I found out. So, I advertise the fact that we proposed a nice pert little amendment designed to close a loophole that Treasury Ministers opened up in the Finance Act 2004—

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

Order. That is really rather a lengthy intervention and I suggest that we return to the new clause under discussion.

Alan Reid (Liberal Democrat, Argyll and Bute)

I thank my hon. Friend the Member for Eastleigh (Chris Huhne) for his useful intervention.

The new clause has three subsections. As has already been pointed out, the Chancellor of the Exchequer already carries out the provisions under (1B). In relation to (1D), this year, the Chancellor sensibly decided not to implement further plans to increase fuel duty. That simply leaves (1C), which is—

Stewart Hosie (Scottish National Party, Dundee East)

The argument was that there should be an automatic trigger and that any freeze should not be on the whim of the Chancellor. Is the hon. Gentleman happy that decisions to freeze duty levels are at the whim of a politician, rather than triggered automatically to meet specific circumstances?

Alan Reid (Liberal Democrat, Argyll and Bute)

The problem is that the hon. Gentleman has tried to word the new clause so that it covers all circumstances, but he has failed. The new clause is unworkable. It would be much more sensible to have flexibility, so that the Chancellor can act, I hope sensibly—[Interruption.] If it were a Liberal Democrat Chancellor, he would act sensibly. Scottish National party Members are trying to use wording that will cover every possible eventuality, which is difficult, and they have failed.

Alex Salmond (Scottish National Party, Banff and Buchan)

If the Chancellor, in his infinite wisdom, had decided to raise duty, where would the hon. Gentleman's argument lie? Would he tell people to vote Liberal Democrat at the next election?

Alan Reid (Liberal Democrat, Argyll and Bute)

I support the Chancellor's decision not to increase fuel duty.

Under proposed new subsection (1C), if oil prices were to rise, we would have to wait for six months, during which people would pay the higher rate of duty. Under the new clause, a small cut would be made in fuel duty; but, of course, that cut could not be refunded retrospectively to the motorists who had paid the higher rate of fuel duty. We know that oil prices fluctuate. Oil prices could rise rapidly, thus triggering the six-month wait to cut fuel duty, but oil prices could then fall and motorists would pay the lower rate of fuel duty until the next Budget, thereby causing a loss of revenue to the Exchequer.

The new clause is simply impractical, as the hon. Member for Dundee, East admitted in moving the motion. We clearly have a serious problem. In the short term, the answer is for the Chancellor to act sensibly and not to increase fuel duty. In the long term, the answer is to move to a system of road pricing, with higher prices for urban roads and motorways and lower prices for rural roads.

Michael Weir (Scottish National Party, Angus)

I am astonished at the contributions from Tory and Liberal Members. I am sure that the electors of Argyll will be very interested to read the speech made by the hon. Member for Argyll and Bute (Mr. Reid). The hon. Member for Eastleigh (Chris Huhne) says that he would have tabled an amendment if it had not been for the rules of the House. That just goes to show that the SNP and our colleagues are much more ingenious in finding a way forward than Liberal Members. Our proposal may be less than perfect, but theirs is less than visible.

Christopher Huhne (Liberal Democrat, Eastleigh)

The hon. Gentleman has missed the point that his proposal involves a substantial cut in Government revenues with no symmetrical obligation in other circumstances where it would be unwound. He has not specified the circumstances in which that would occur. If he tried to do so, the amendment would probably be ruled out of order and not selected for debate.

Michael Weir (Scottish National Party, Angus)

As usual, the hon. Gentleman disguises Liberal inactivity with some weird justification for not doing anything. The new clause is a real attempt to do something for our rural communities. I represent a largely rural constituency and the hon. Member for Broxbourne (Mr. Walker) made the twin point about green issues and saving rural communities. The crux of the matter is that those issues must be balanced. The problem with using fuel price for green reasons is that it is a blunt instrument—a one-size-fits-all policy that does not cover rural areas in the way that it can perhaps cover urban areas. Our rural communities and businesses are suffering now—they cannot wait for 10 or 15 years until we work out the environmental consequences. We must do something now.

Charles Walker (Conservative, Broxbourne)

Does the hon. Gentleman agree that the Liberal Democrats' desire to introduce road pricing as a means to resolve this issue is at least 15 to 20 years away, according to the Government, so it will not address the current problems that he alludes to?

Michael Weir (Scottish National Party, Angus)

The hon. Gentleman is being optimistic, since the Liberals opposed such a policy in Edinburgh, and I understand that the Conservatives oppose the extension to the congestion charge in London as well. I would be surprised if congestion charging—

Sylvia Heal (Deputy Speaker, Halesowen and Rowley Regis)

Order. Congestion charges are far wide of the new clause, to which the hon. Gentleman should address his comments.

Michael Weir (Scottish National Party, Angus)

I take your strictures, Madam Deputy Speaker. The Liberals are playing to the gallery in Edinburgh, as usual, but we are trying to do something for rural businesses.

Alan Reid (Liberal Democrat, Argyll and Bute)

Will the hon. Gentleman give way?

Michael Weir (Scottish National Party, Angus)

No, I have given way enough.

I made the point in an earlier intervention that we are dealing with rural businesses and economies. In my constituency, there are many hauliers which transport goods in and out of the area. As I said earlier, there is one rail line that goes up the coast. Theoretically, we could get goods to Arbroath or Montrose by rail, but we must still use the roads to get them from there to all the other communities in the constituency. There is no rail line up Glen Esk, Glen Isla or any of the other glens of Angus. They were all "Beeching-ed" many years ago by previous Governments. Road transport is necessary to get goods in, and the price of everything that comes into my constituency is affected by the price of fuel.

Crucially, the price of everything that goes out of my constituency is also affected by the price of fuel. Manufacturing and other industries in Angus need to transport their goods to market and transport is one of their biggest costs. That is also true of industries in Northern Ireland, Wales and many parts of England. Something needs to be done to deal with the cost to industry in rural areas or we will see a leakage of those industries from rural areas to the conurbations.

One problem is that hauliers have entered into long-term contracts with major producers—many of them are food producers in my constituency—so that the goods can be hauled to market or, as is more appropriate in many cases, to the central distribution warehouses for the major supermarkets. The hauliers have to set a price for a considerable period ahead. When they do not know what the price of fuel will be next week, never mind next year, it is difficult to set a contract price for the long term. Some of them have managed to set a sliding scale in the contracts because of the good will of their customers, but the effect is slight because no one can give away too big a change in margins.

The whole point behind the fuel duty regulator as proposed by my hon. Friend the Member for Dundee, East (Stewart Hosie) is that it would provide certainty over a period. Businesses could plan ahead and know what the fuel price would be for a set period. We would not face the sudden spikes that are so dangerous to the haulage industry and others in my constituency.

Alan Reid (Liberal Democrat, Argyll and Bute)

The hon. Gentleman says that hauliers want certainty but, under proposed new subsection (1C), anything could happen for the first six months.

Michael Weir (Scottish National Party, Angus)

The whole point is to smooth the price increases. The hon. Gentleman obviously does not understand the proposal, but there is no proposal from the Liberals. This is the only proposal before us that does something now. I should have thought that he would have been interested in doing something for the rural areas of Scotland and Argyll. My hon. Friend the Member for Na h-Eileanan an Iar (Mr. MacNeil) tells me that fuel now costs £1 a litre in the Western Isles. What does that do to industry? The situation must be the same in Argyll, and I am surprised that the hon. Gentleman is not supporting us. Perhaps I should not be, knowing the Liberals.

The new clause is a genuine attempt to try to have some certainty for the foreseeable future and to let businesses flourish by letting them know what their costs will be. If we do not accept this or something similar, more and more businesses will go under and they will not only be haulage businesses. Many other businesses in rural areas will be affected. There have already been closures in these areas, as firms concentrate their factories near the centres of population. All of us could give examples of small firms in our constituencies that have fallen victim as employers concentrate their activities near the major markets or the bigger cities.

Angus MacNeil (Scottish National Party, Na h-Eileanan an Iar)

Perhaps not in Argyll.

Michael Weir (Scottish National Party, Angus)

I am sure that there are some in Argyll, but the hon. Member for Argyll and Bute will keep quiet about them.

I ask Members to support the new clause. It is a real attempt to do something about a serious problem that particularly afflicts rural areas throughout the United Kingdom. It has already been said that the Democratic Unionists, the Scottish National party, Plaid Cymru and all the other Northern Ireland parties have come together on this issue, because it seriously affects us. Possibly the only thing that we agree on is the fact that our rural communities are suffering.

John Healey (Labour, Wentworth)

We have had an interesting debate. [Interruption.] The hon. Member for Rayleigh (Mr. Francois) tells me to summarise it.

I congratulate the hon. Member for Dundee, East (Stewart Hosie) on initiating the debate and welcome his involvement in Finance Bill proceedings in moving the new clause. We can certainly find a place for him on the Standing Committee considering next year's Bill if he feels that he is developing an appetite for our debates.

As the hon. Gentleman listed the small Opposition parties that support the new clause, he included the Road Haulage Association. I know that the association has been interested in such a mechanism for some time and I have regular discussions with Roger King, so I know about the pressures that the industry faces. Indeed, I discussed our decision on the lorry road user charge with him last night.

The hon. Member for Carmarthen, East and Dinefwr (Adam Price) was wrong to say that hauliers will not get a distance-based road charge. We announced yesterday that our plans for lorry road charging will be taken forward as part of the Government's overall work on national road pricing so that we can work towards a single, comprehensive and cost-effective system. The haulage industry has contributed to the process and has worked closely with us, especially on technology and some of the tests that we have run. We have examined the experience of introducing similar systems in other European countries, which has led to us being stronger in our conviction that a distance-based charge represents the right approach and that such a system would be workable.

Susan Kramer (Liberal Democrat, Richmond Park)

Does the Minister accept that the road haulage industry was banking on the scheme being in place by about 2008 so that charges could be evened up? The fact that the scheme has disappeared, and that the industry has been told that it will have to wait until 2020 before it can have any hope of alleviation, drives many of the passions expressed today.

John Healey (Labour, Wentworth)

The hon. Lady has only just joined our debate on new clause 7. Leaders such as Roger King and Richard Tuner of the Freight Transport Association have taken a constructive approach. Although they have been critical at times, they have supported the principle behind the approach that we are taking and will continue to take. However, it is a tribute to the two of them that all the members of their associations have not always taken the same view.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

The Financial Secretary says that those people have taken a constructive approach, but Richard Turner, the chief executive of the FTA, was quoted this morning as saying that the Government's decision was reprehensible and broke faith with what the industry had been told over the past five years.

John Healey (Labour, Wentworth)

We announced yesterday that we remain convinced that a distance-based charge is the right way ahead, but it makes no sense to develop a system only for lorries when it is clear that the debate on national road pricing has moved on significantly since the last election. We thus announced that we would incorporate work on a lorry road user charge in our work on a national road pricing system.

The hon. Member for Rayleigh reminded the House that I announced yesterday that the Government will not go ahead with the planned inflation-only increase of 1.22 p per litre on road fuel duty on 1 September, which will also apply to duties on rebated oils, biofuels and road fuel gases. We will review the position again at the time of the pre-Budget report. I welcome the fact that he described the decision as fair, although that did not seem to be the view of all his colleagues. The hon. Member for Broxbourne (Mr. Walker) advocated higher fuel duty and prices to discourage demand and reduce emissions from road traffic, which was his concern.

While we are on hon. Members' views on taxation, I tell the hon. Member for Braintree (Mr. Newmark) that the Sustainable Development Commission has a valuable role of advising the Government. However, just so he is clear, I should point out that it is the Chancellor, not the commission, who makes policy and decisions on tax.

Charles Walker (Conservative, Broxbourne)

I would hate the Minister and my constituents to think that I advocate higher taxes. I suggested that there were two sides to every argument. I know that the Scottish National party is keen to reduce greenhouse gas emissions, and I said that that was not consistent with its desire to cap the taxation on fuel.

John Healey (Labour, Wentworth)

No doubt the hon. Gentleman's hon. Friends and his constituents will read the Official Report tomorrow and see what he said earlier.

The decision that I announced yesterday was not based on the Chancellor's whim, as the hon. Member for Dundee, East suggested. Following sustained pressure from G8 Finance Ministers, OPEC is committed to increasing quotas by up to 1 million barrels a day by September. In the short term, however, uncertainty and the risk of price volatility remain high, especially so with oil trading last week at above $59 a barrel. By the time of the pre-Budget report, it is likely that there will be more clarity about OPEC and non-OPEC supply, levels of global demand for oil and the level of crude and product stocks ahead of the peak winter demand. I hope that hon. Members on both sides of the House accept that it is in no one's interests to have fuel prices higher than expected or higher than they need to be.

The best way to deal with high international prices is not by imposing complex mechanisms that respond to what may prove to be temporary fluctuations in prices, but through the efforts that we are making to support producing and consuming nations to promote greater market transparency and to improve the investment climate in the international oil sector, which will help to bring about more stable oil prices at levels that are more conducive to sustainable economic growth.

Alex Salmond (Scottish National Party, Banff and Buchan)

Has the Treasury examined the idea of having a regulator or governor as part of the process of smoothing out the fluctuations?

John Healey (Labour, Wentworth)

We have, not least because the Scottish National party tried to table similar amendments to other Finance Bills. When such amendments are proposed, we consider the policy proposals and make our analysis of those.

The hon. Member for Eastleigh (Chris Huhne) mentioned sustainable economic growth. He said that, from an intellectual perspective, he was sympathetic to the approach in the new clause and was interested in the proposal, in the interests of greater economic stability, if it helped to smooth oil prices. We both got the clear answer to that when the hon. Member for Banff and Buchan (Mr. Salmond) said that it is a "one-way clause." My assessment of it is the same as that of the hon. Member for Eastleigh, in that it would not have that smoothing and stabilising effect.

If the new clause were accepted, it would introduce mechanisms that could lead to duty reductions when pump prices rose significantly in a six-month period and it would freeze duty increases when international oil markets were high. The effect of the pump price-related proposed new subsection (1C) on the price that the average motorist pays for a litre of fuel would be small. If the price of petrol rose at the pumps from 85p a litre to 88p a litre—a rise of 3p—the new clause would reduce the duty rate for petrol by just 0.525p a litre, not, as the hon. Member for Dundee, East argued, by a value roughly equivalent to the freeze that I announced of 1.22p a litre. Yesterday's announcement to postpone further the planned inflation increase in the fuel duty rate would do more now, which the hon. Member for Angus (Mr. Weir) advocated, than the new clause.

The mechanism is unnecessarily complex. It would do nothing to bring stability to the market in the UK. Indeed, it is unlikely that consumers would see all the benefit—modest though it is—of its operation. Despite being the Minister, and not an Opposition spokesman, I shall not dwell on the technical deficiencies of the drafting of the provision.

A second mechanism, whereby higher international oil market prices would trigger a freeze in duty increases, would result in expensive changes to road fuel duty and VAT systems both for people who have to account for the tax that they are due to pay and for the Government trying to collect it. The burden is likely to be heaviest for people who are minor oil users and dealers. Finally, the new clause is based on the misconception that high fuel prices lead to higher overall VAT receipts. That is not necessarily the case. If people have to spend more on one commodity they tend to spend less on others, and the overall level of VAT receipts usually remains relatively unchanged. The hon. Member for Dundee, East may be interested in the latest assessment by our analysts, who estimate that a 5p a litre increase in pump prices will result in higher VAT receipts of about £290 million in the current year. The resulting reduction in demand, however, will lead to lower duty revenue of about £500 million. High oil prices—I have debated this point with the hon. Member for Banff and Buchan a number of times—have a complex impact on public finances, economic activity and Government expenditure commitments. Windfall gains do not, as he claims, necessarily come to the Treasury as a result of rising oil prices.

Alex Salmond (Scottish National Party, Banff and Buchan)

As I have told the Financial Secretary before, if the Treasury truly believed that argument, it would reduce duty to increase the VAT take. Are those the same Treasury analysts who forecast oil revenues this year of £6 billion, and is he confident that that is an accurate forecast?

John Healey (Labour, Wentworth)

There has been slight confusion in the debate. Earlier, Members were discussing forecasts of the oil price. The Government publish an assumption about the oil price in the Budget and in the pre-Budget report. In the Budget, it was $40.6 a barrel. That assumption is based on the average of the independent forecasts—it is not our forecast. We publish it, because we need an assumption for the purposes of public finance planning. The hon. Gentleman must wait until the pre-Budget report. He has been in the House long enough to know that we make our revenue forecasts twice a year in the Budget and in the pre-Budget report.

In claiming that the new clause will bring benefits for business, the hon. Member for Dundee, East may have overlooked the fact that many businesses, particularly the 1.8 million VAT-registered businesses, can reclaim the VAT incurred when they buy fuel for business journeys. The level of VAT that they pay at the pumps has little or no effect on their overall balance sheet. For those reasons, we believe that the best way of dealing with high oil prices is to work with oil-producing countries and through the G8 Finance Ministers to stabilise the volatility in the oil market and to improve its functioning rather than simply focus on short-term changes to levels of duty by introducing a road fuel regulator, as proposed in the new clause.

I hope that the hon. Gentleman accepts that we have had a useful debate and, on that basis, does not believe that he has to press his new clause to a vote. If he does so, however, I will urge my hon. Friends to resist it.

Stewart Hosie (Scottish National Party, Dundee East)

I thank the Financial Secretary for his reasoned and reasonable response. His point about reclaiming VAT is quite correct, but a large part of the tax taken on any increase in fuel at the pump is duty, so his argument holds water only to a certain extent. I was intrigued by his suggestion that the published forecast was an average of all the independent forecasts, not a Government one. He may be aware that in economic forecasting all 41 of the independent forecasters are suggesting a growth rate less than that suggested by the Government, but the Government have not downgraded their forecast as they have done for oil.

John Healey (Labour, Wentworth)

The hon. Gentleman will be aware that the Treasury's recent record of forecasting on economic conditions and growth is a good deal better than that of the independent forecasters.

Stewart Hosie (Scottish National Party, Dundee East)

It would be churlish not to recognise that.

The Financial Secretary recognised the difficulties faced by the Road Haulage Association, and I welcome that.

The hon. Member for Rayleigh (Mr. Francois) said, rightly, that the UK had the second highest pump price for petrol, the highest price for diesel and the highest level of combined tax. On the questions that he asked—yes, it would be a rolling six-month average before the trigger kicked in. The discount would take effect until the average petrol price again reduced to within the trigger level, which is 3p above—I will explain this in more detail later. Trust me. The discount stays in place until the petrol price falls below the trigger level again.

The duty trigger—the world oil price—was mentioned by a number of hon. Members. We had left that at the discretion of the Chancellor. Brent Light sounds like a rather good oil type on which to base the trigger, but that would be at the Chancellor's discretion, as would the forecast range. There was a suggestion that the forecast range might be quite conservative. I would have thought it might be quite liberal, to avoid the trigger and the discount kicking in.

That brings me to the Liberals. They were sympathetic to the proposal and the objective. It was marvellous. The hand-wringing and inaction were utterly predictable. I can hardly wait to see the local newsletters in Argyll and Bute when they explain this one away in the Oban Times.

My hon. Friend the Member for Banff and Buchan (Mr. Salmond) outlined the working of the proposal and explained how the windfall gains would be used to smooth out, as I said a number of times in my speech, the spikes and the prolonged spikes that occur in the fuel price. I want to make it clear that this is a one-way smoothing out to mitigate against the worst circumstances that result from prolonged spiking. It is not to penalise people at the bottom end when prices go down. It is to smooth out at the top end and to allow businesses, in particular, proper financial planning. It is intended to take away at least some of the pain produced by prolonged rises in oil prices and pump prices.

A number of serious points were made in the debate. I considered for a moment the Financial Secretary's invitation to me not to press the motion further. We consider the matter to be serious. The new clause had the support of five parties in the House, covering if not large numbers of the electorate, then large geographical parts of the UK. It is a serious matter in Northern Ireland, in Wales, in Scotland and in large parts of England, so I decline the Financial Secretary's invitation not to press the motion to a vote.

New Clause 9 — Real Estate Investment Trusts

Richard Spring (Conservative, West Suffolk)

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

New clause 9 would compel the Government to introduce tax legislation to facilitate the introduction of real estate investment trusts as a collective investment vehicle for property in the United Kingdom. The Government have been good at announcing the introduction of REITs, but have so far failed to deliver the goods. As a result, investment has gone offshore.

It should be noted that despite several announcements by the Government of tax legislation to give effect to REITs, such legislation does not appear in the Bill. That is due to problems involving the current method of taxation of overseas landlords, whereby rents payable to them are subject to a 22 per cent. withholding tax except when the landlord has the prior agreement of the Inland Revenue. The worry is that a REIT will effectively escape such a tax when paying a distribution to the overseas landlord. However, many other countries have REITs and have appropriate tax regimes for them.

There is genuine concern that the current position is causing the property fund industry to locate elsewhere. There are now £3 billion-worth of listed property trusts in Guernsey that might otherwise be in the United Kingdom: that has been confirmed by Merrill Lynch investment managers. The quoted property investment trust market has increased from approximately £0.3 billion in 1998 to nearly £3 billion now, going from effectively 0 per cent. to 10 per cent. of UK listed real estate by market value. However, the market value of onshore trusts has remained nearly constant. Virtually all quoted property has gone offshore.

In the United States, REITs are a commonly held investment vehicle. Japan launched them in 2001, France in 2003, and Germany is considering introducing them. It would be preferable if we could introduce a regime before Germany. Companies are effectively developing equivalent structures elsewhere. A major insurer established such a vehicle in Guernsey, complaining that it would have liked at least to have the option of making it a UK vehicle.

In the US, REITs now own no less than $220 billion worth of real estate, of which $35 billion is residential. They have to distribute 90 per cent. of their income, and tend to have far greater and more consistent dividend yields than conventional shares. Given the ageing profile of the British population, that will be important, as pension funds have more retirees than future pensioners making contributions, and seek to move from having assets with potential growth to having income-producing assets.

REITs tend to have different cycles from the bond and equity markets. They therefore make for prudent investment by individuals, pension funds and life assurance companies wishing to reduce risk by maintaining a diversified portfolio. REITs also tend to trade at near asset value, whereas current UK property groups tend to trade at a discount to net asset value, often of between 10 and 15 per cent.

The longer it takes the UK to establish such a vehicle, the lower the tax take will be as more and more vehicles go offshore, and the bigger will be the loss to the UK economy. Perhaps one of the Government's concerns about REITs is that they produce high levels of income, and might be unwelcome competition for the other forms of income-producing investment that investors could consider: for example, the increasing amount of Government debt that the Treasury issues to finance the Exchequer.

If we turn to the history of REITs, the Budget of 2003 included announcements to improve the flexibility and efficiency of the commercial property market. The pre-Budget report of 2003 announced the consultation paper to be produced in the Budget of 2004, following on from the Budget of 2003. In the Budget of 2004, a consultation document was launched promoting more flexible investment in property, and seeking views on how a new property investment fund—a UK version of the successful US REITs—might be structured to meet the Government's objectives of further enhancing the liquidity of property investment, providing greater access to retail investors and encouraging expansion in the private rented sector. Of course, we have now come to the Budget of 2005.

Accountants and actuaries often identify as one of the characteristics of the Government that Treasury announcements are made without adequate supporting information on which they can make judgments, and often express anxiety publicly about the impact of Treasury announcements that are made without the supporting detail, given all the pressures that result on business and business decisions. It is curious that we have the reverse situation here—the Government have made four announcements about REITs, but no specific date for introducing such vehicles has been brought forward.

The British Property Federation is of the view that there will be no net tax leakage for implementing a REIT regime. The US experience is that REITs pay significant taxes other than corporate tax, such as business rates, stamp duty land tax and VAT, before any shareholder-level taxes. US REITs are widely held, and it should be noted that the US has rules to prevent overseas owners from controlling REITs to avoid US tax. As I shall indicate, Canadian research shows that such vehicles should produce a slight increase in tax yields in the longer term. We are therefore concerned by the Chancellor's reluctance to bear the possible short-term fall in tax revenues—the determining reason why the Government refuse to introduce REIT legislation—which is further discouraging capital investment from the United Kingdom.

The US plans to get around concerns about US owners abusing the rules by having concentration limits. Withholding taxes, which were 30 per cent., generally had the habit of blocking and deterring foreign investment that would otherwise be welcome. In the late 1990s, the US Treasury reduced the high withholding taxes on REIT dividends. That applied to all newly negotiated treaties in which withholding taxes were lowered for investments below a certain threshold, typically to 15 per cent. As a consequence, the level of overseas investment in US REITs substantially increased.

It should also be noted that external investors in UK property normally shelter their 22 per cent. tax charge under the current overseas landlord regime, typically by gearing up their investments. A 15 per cent. withholding tax rate would probably levy more tax than the 22 per cent. as the withholding could not be reduced by an overseas investor gearing up to buy shares in the REIT, especially given that REITs have tended to produce considerable income.

The Canadian Institute of Retail Funds and Canadian Institute of Public and Private Real Estate Companies also undertook a very detailed and scientific study of similar issues around withholding taxes for REITs. It concluded that there would be an immediate reduction in tax yields, being the corporation tax forgone on dividends and capital gains, net of the tax collected through withholding. When taking into account that most of the value would generally be deferred to tax residents who would pay tax on their REIT shares and dividends, however, the result was a net increase in tax yields. Overall, therefore, the REIT vehicle would result, at best estimate, in a small increase in tax yields in the long term.

On a wholly dispassionate point, it is difficult for people to retain a satisfactory return on their investments in dividend terms because interest rates throughout the world today are very low, and in many instances lower than in this country. Individuals go into REITs as a form of investment to capture yield. For example, the US experience shows that the average REIT yield in dividend terms is 5.13 per cent., whereas the Standard and Poor 500 stock index yield is 1.8 per cent. It is difficult for people to get a satisfactory return, and this is certainly one way of doing it.

6 pm

The National Association of Real Estate Investment Trusts in the United States recommends the following, based on the US experience, all of which we could reasonably include in UK tax law. The first recommendation is not to have a quoted requirement for REITs; the second is to permit gearing to reduce the level of withholding tax and distributions payable by REITs, with the sensible suggestion that we should have "safe harbour" levels for effectively tax-deductible debt—a principle worth considering throughout UK tax law.

Geoffrey Clifton-Brown (Conservative, Cotswold)

Will my hon. Friend not also press the Government on the following fact? If there were a greater market in commercial property—undoubtedly there would be a more flexible market if REITs were introduced—the Government would also gain more in tax through increased business activity generated thereby, because leases would be granted more flexibly.

Richard Spring (Conservative, West Suffolk)

I entirely agree. Indeed, in submissions made to the Treasury by the British Property Federation, those exact points have been spelled out.

We are fortunate in this country to have a hugely successful and internationally recognised financial services industry, with a skills and knowledge base that is incomparably successful by international standards. We can be grateful that it exists, because as we all recognise, our manufacturing capabilities do not match our success in the financial services industry—and REITs represent an area of investment that the investment community wants to see on the statute book.

The Government have accepted in principle that this is the right thing to do, but for reasons that are difficult to understand, they have been unable to come to a firm conclusion. I simply say to the Paymaster General that there is no substantive disagreement on the principle, but we must accept that at this stage we need to fix a date for the introduction of REITs. That is exactly what the new clause is all about, and I hope that the Minister's response will clarify how we can move the process forward as rapidly as possible.

Rob Marris (Labour, Wolverhampton South West)

I have three questions to ask the hon. Gentleman. As background, he cited the figures and the research from Canada, but as the House will know, Canada is 32 times the size of the United Kingdom and has twice as much house building per capita per annum as this country does. What evidence does he have of the effect that REITs would have on house prices in this country, the availability of houses for home owners to buy, and the levels of rents, both commercial and domestic?

Susan Kramer (Liberal Democrat, Richmond Park)

Despite the comments of the hon. Member for Wolverhampton, South-West (Rob Marris), REITs are a largely non-controversial issue; indeed, there is consensus across the House that they are a desirable instrument. For the ordinary consumer—the retail investor—REITs are important because they are easy low-cost mechanisms for entering and exiting the property market. They would allow people to diversify their investment portfolios, which is what we want, to enable people to manage risk better within their investments.

For the Government, there is a desire to achieve a closer alignment between the taxation of direct and indirect property investments. I fully recognise that there are issues that the Government must tackle—such as definition, legal issues, issues of withholding and foreign investors, and the ring-fencing of ownership and management versus the actual activities that take place on property. Surely, as we look around the globe, not least at Australia and the USA, there are plenty of examples of how all those issues have been tackled. The new clause is, from the perspective of the Liberal Democrats, essentially a wake-up call. It is about saying to the Government that they should please get a spur into Treasury officials, of whom we see so many in and out of the Box day after day, and get something sorted so that REITs can be made properly available to people in the UK.

Ivan Lewis (Labour, Bury South)

May I first welcome the new attachment of the Opposition parties to the concept of REITs? It was, in fact, this Government who introduced the potential benefits of a REIT system and we never heard any proposal to that effect from Opposition parties.

New clause 9 follows a simple pattern. Opposition Members have said that they want to focus the Government's mind on making more rapid progress in solving the problems associated with REITs. The problem with the new clause is that it invites the Government to introduce regulations before 31 October, irrespective of whether, before that date, we have resolved all the difficulties and concerns that hon. Members have accepted as authentic and legitimate. How can a particular date be specified for a set of proposals when there is no way of being certain that it is possible to resolve the outstanding problems relating to them? Doing so would be entirely irresponsible.

What we have said throughout is that it is our objective and desire, if we can resolve the problems, to introduce proposals for the next Finance Bill—and that remains our position, but we cannot guarantee it. If, in the course of our discussion and consideration of the issues, it continues to become apparent that the principles necessary to underpin a REIT scheme cannot be secured, we will have to take that into account before taking any final decisions. The message about the need to make rapid progress on REITs is, frankly, one that the Opposition have no need to keep telling the Government.

Edward Balls (Labour, Normanton)

I fully accept the Minister's point that REITs were originally a Treasury proposal rather than one suggested by Opposition Front Benchers. Given the earlier comments of Conservative Front-Bench Members about the importance of having simplicity and stability in the tax system, does my hon. Friend find it rather strange to hear them arguing that we should rush ahead with legislation before we have had enough time to sort out the technical details? Surely it is in the interests of stability and transparency that we get the legislation right before we put proposals before the House.

Ivan Lewis (Labour, Bury South)

I entirely agree with my hon. Friend that consistency is not a trademark of the Opposition, as we have seen throughout our debate on the Finance Bill. Conservative Members are telling interested parties outside that they are aware of the importance of REITs, but the Government have already made that clear on several occasions. We have also placed on the record, in the context of the Budget and the Finance Bill, our belief in the importance of REITs and the fact that we support them in principle. We have also acknowledged that, if at all possible, we need to make speedy progress with them.

As I have said, the problem with the new clause is that it confines the necessary debate, discussions and consideration of the genuine difficulties that we face in reaching a decision to a period before the end of October this year. It is easy for the Opposition to propose such amendments, but it would be entirely irresponsible for the Government to accept a time scale that we have no way of being absolutely certain of meeting.

There is no need for Opposition Members to continue to reiterate that we all support the concept of REITs in principle. Nor is there any need for those Members to tell us that it needs to be done as quickly as possible. We differ in that we are not prepared to compromise on the fundamental principles that we have outlined time and again. We have talked about the desirability of REITs, but also about some of the genuine obstacles and barriers to achieving them.

I say to those who have a genuine interest in putting a sensible and credible REITs framework in place that the credible thing to do is to work with the Treasury and the Government to ensure that the obstacles and difficulties are resolved. If that happens, we can put REITs on the statute book very quickly. On that basis, I ask the hon. Member for West Suffolk (Mr. Spring) to withdraw the motion.

Richard Spring (Conservative, West Suffolk)

It is a real joy to have the presence of the hon. Member for Wolverhampton, South-West (Rob Marris). Something was lacking in our proceedings until, as I came to the Dispatch Box, there he was; the whole atmosphere in the Chamber suddenly lifted. I am delighted to see him, but I should point out that his questions could more appropriately have been put to his own Front Benchers, who have had a number of years in which to resolve these issues. I cited the experience of the United States in respect of residential, rather than commercial, investment, and gave the hon. Gentleman the relevant figures. So the experience of the United States has been specified and spelled out, and I dare say that it might be comparable in this country.

I should point out to the Economic Secretary that he doth protest too much. The idea seems to be that our suggestion is appalling, irresponsible and gratuitously offensive. The argument is that we are suggesting that this process, about which we have heard in three successive Budgets, should suddenly become terribly quick, and that it is quite wrong to deal with it rapidly. The Government have had a number of years in which to consider this issue. There have been representations from the investment community—[Interruption.] I thank the Economic Secretary for that sedentary intervention. I am not sure whether I heard him correctly, but he seemed to suggest that he wants us to participate in this process. We would be more than delighted to do so, and so would the investment community. Perhaps we could then persuade him to reach some form of conclusion.

The idea is that 31 October is in some way a blood-curdling date, but all that the inclusion of such a date is designed to do, as the Economic Secretary well knows, is to bring this issue to a rapid conclusion. As he will know from the industry, because this issue has not been resolved, money is going offshore instead of coming into this country. However, it has been resolved perfectly satisfactorily in a number of foreign jurisdictions. I should point out that it is not a case of officials doing an outstanding job and the Treasury being at fault; it is Ministers themselves who are procrastinating and who cannot get their act together. [Interruption.] The same point applies to the hon. Member for Normanton (Ed Balls).

We have tabled this new clause in order to raise this issue yet again. I am afraid that those out there who are watching this particular Government performance will be extremely disappointed by the Economic Secretary's response. We do not wish to press the matter any further, other than to make the perfectly valid point that it should be brought to a proper conclusion. I hope that it will be dealt with very rapidly, and that we can stop the endless procrastination that is so damaging for our businesses. That said, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

Clause 18 — Section 17(3): Specific Powers

Christopher Huhne (Liberal Democrat, Eastleigh)

I beg to move amendment No. 2, in page 17, line 39, at end insert

'for the purpose of avoiding any tax.'.

I too will attempt to be very brief. This is a modest amendment, which I should like to advocate. We discussed this issue in a Committee of the whole House and I put various points to the Economic Secretary, to which I hoped that he would respond with, perhaps, a Government amendment. Such an amendment has not been forthcoming so far, and it would be very pleasant to have from him an assurance about the problem created for qualified investor schemes by the current wording of subsection (3). Unfortunately, it is possible that an entirely blameless, taxpaying investor, through no fault of his own, could find that an institutional investor, or some other large investor, has left him with 10 per cent. of the qualified investor scheme. That blameless person would then be subject to the taxation regime set out in clause 18(3).

That cannot have been the Treasury's intention, as the clause contains various careful exemptions designed to make sure that smaller investors are not caught by the problem. I hope that the Economic Secretary will address that matter, and try to get qualified investor schemes up and running. They have cross-party support, and would be an adornment to our financial services industry.

Ivan Lewis (Labour, Bury South)

I cannot accept the amendment, but I want to reassure the hon. Member for Eastleigh (Chris Huhne) about some of his reasonable concerns. First, he will accept that a purpose test needs careful consideration to ensure that it hits the right target and can be effectively enforced. The amendment would pre-empt the further discussion and work required before such a test could be introduced. The wording of the amendment restricts the application of the rule to situations in which the investor's only purpose in owning 10 per cent. or more of a fund is tax avoidance.

That would make it simple for investors to get around the rule. It is almost always possible to find some other reason, however trivial or irrelevant, for owning 10 per cent. or more of a fund. To prevent sidestepping other-purpose rules, the Bill stipulates that tax avoidance must be the main purpose, or one of the main purposes, behind entering into transactions. Without such protection, it is unlikely that the different tax treatment rule would ever be applied.

To police a combined 10 per cent. and purpose test would inevitably lead to greater compliance costs for the industry, investors and HMRC than would be incurred by a straightforward rule that applies a different tax treatment based simply on percentage ownership of a fund. The experience from other-purpose tests is that proving that tax avoidance was the only purpose is difficult and time consuming. It also leads to uncertainty for the investor while the position is resolved.

I hope that the hon. Gentleman finds the next bit helpful. We recognise that some investors may end up owning 10 per cent. or more of a fund inadvertently. For example, that might happen if a substantial investor redeemed his units. To ensure that investors who find themselves over the limit unwittingly are not affected adversely, the regulations will provide a period of grace for matters to be reversed. I have said that before, but I am happy to repeat it today.

As with all the regulations planned for authorised investment funds, officials will continue to consult stakeholders on the detail of how the relaxation in respect of the sort of inadvertent breach that I have outlined will operate. We believe that the 10 per cent. rule is a simple percentage rule that applies a different tax treatment to investors who meet or exceed it. Qualified investor schemes are restricted to sophisticated investors who will know when that different treatment will apply to them. Such investors will also know exactly what the consequences will be if they meet or exceed the limit. To add a second leg that requires a subjective test of motive would remove those certainties.

I hope that my response goes some way towards answering the concerns voiced by the hon. Member for Eastleigh in respect of those people who might find themselves to be inadvertent victims of the proposals. We are making it very clear, on the record, that the regulations will be sensitive to investors' circumstances. Given what I have said, I hope that the hon. Gentleman will feel able to withdraw the amendment.

Christopher Huhne (Liberal Democrat, Eastleigh)

On the basis of the reassurances given by the Economic Secretary, I am pleased to beg to ask leave to withdraw the amendment.

Amendment by leave, withdrawn.

Schedule 9 — Insurance Companies Etc

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 5, in page 131, line 14, at end insert

' ; but no order under this section shall be made unless a draft has been laid before and approved by resolution of the House of Commons.'.

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

With this it will be convenient to discuss amendment No. 6, in page 131, line 43, at end insert—

'(8) No order under this section shall be made unless a draft of it has been laid before and approved by a resolution of the House of Commons.'.

Mark Field (Conservative, Cities of London and Westminster)

As the Economic Secretary will appreciate, the amendment covers some of the ground that was cantered over in Committee, but that is unavoidable. We are attempting to ensure that statutory instruments are required for the inserted section 431A of the Income and Corporation Taxes Act 1988 that appears in schedule 9. One of those SIs would be to ensure that as life assurance company taxation is driven off regulatory returns, the tax rules can be altered where necessary where there is a change in the regulatory rules that has a consequential effect. The second is set out in paragraph 3 of schedule 9, which we debated at some length in Committee and is fundamental to how such companies are taxed. It effectively allows the Inland Revenue to alter the tax sections that determine either the rate of tax on which a life assurance company pays its profit or the allocation of investment return between non-taxable pension business and taxable life assurance. Life assurance companies are subject to a tax charge that combines two factors, one being a charge on the shareholder profit that the company makes and the other a charge on the investment return on the assets that are backing life assurance companies. That is effectively then charged to the policyholder.

As the Economic Secretary will be aware, there are no limits on what the Treasury can include in the secondary legislation, and we believe—the amendment tabled by the Liberal Democrats suggests that they agree—that that gives far too much power to the Inland Revenue and too little potential protection to the taxpayer. We argued in Committee that there should be, as a matter of course, parliamentary scrutiny as to whether the proposed changes should be introduced by statutory instrument and the limitations placed on what should be contained in that instrument.

There is also a concern that a double charge might inadvertently arise following the implementation of the statutory instrument, in one of two ways. Either the investment return on the attributed estate could be included in the pension business computation and taxed as proposed in an earlier draft SI as taxable life business—the latest SI, released as recently as 17 June—indicated that the regulations would be written so that that would be the case. We would like the Minister to confirm that. Alternatively, any investment return on attributed estate that is now taxed would be taxed again when taken to shareholders' funds. That is an obvious double charge that remains, which is why we tabled an amendment in Committee, which was discussed at length.

In Committee, the Economic Secretary said:

"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."—[Official Report, Standing Committee B, 30 June 2005; c. 252–53.]

Without querying the Government's good faith, I have to say that the insurance industry does not regard that as a fully accurate statement. I am sure that it was not intended to mislead, but the industry feels that although there have been discussions and some of the more outlandish proposals, such as taxing mutuals as having shareholder profit, have been dropped—it appreciates that there has been some movement—it does not regard the final outcome as entirely satisfactory. The industry rightly considers that such amendments should be made by way of primary legislation and should not be introduced in what is effectively—partly because this is the second Finance Bill this year—in a rush. The industry also believes that the Government should be even-handed and ensure that life assurance companies will not be taxed on more than 100 per cent. of their investment return, which is the potential downside of the double charging to which I have referred. In the view of the industry, the regulations remain in a draft state. The Inland Revenue has known about the tax planning in question for almost a decade, so it cannot reasonably claim that the rules have to be introduced in a rush.

The Economic Secretary also claimed that there could be no double charge under the proposed regulations as the investment returns on a non-profit fund cannot be deferred through the use of an investment reserve. Two specific points arose from the insurance industry briefing. First, the industry feels that non-profit funds can have investment returns and, in years of high investment return, should maintain them as a matter of reasonable actuarial prudence. Secondly, the income on such attributed estates may need to be maintained in the longer-term fund due to agreements that may be made with the regulator, which leaves open the possibility of a double charge, to which we referred. I hope that issue can be addressed in the final form of the regulations.

I do not want to go over old ground and repeat the arguments, as I am sure that the Minister is fully aware of all of them. Given the continued uncertainty, however, many experts in the insurance industry remain unconvinced of the necessity to enact the change in the current year, rather than awaiting the outcome of a proper review of the apportionment system. We hope, therefore, that he will give serious consideration to taking on board the amendments that we have tabled. In any event, we shall be interested to hear what he has to say, although I appreciate that he may want to reply relatively briefly as many of the issues of principle were debated at great length in the Standing Committee.

Christopher Huhne (Liberal Democrat, Eastleigh)

I, too, shall attempt to be brief, as time is marching on and we discussed the issue in the Standing Committee at considerable length. I have three points. The first is that the measure is not being proposed by the Treasury to deal with tax avoidance. There is no pressing reason why the Government should include it in this Finance Bill, rather than allowing the consultation process to continue and introducing a more substantive measure in the Finance Bill next year. The matter has been under discussion for a long time, and the fact that the Treasury proposes an explicitly time-limited measure lets the cat out of the bag and reveals the rather half-baked nature of the basis on which the Government intend to proceed.

My second point is that the regulations are tax-raising measures that should properly be the preserve of Parliament and positively agreed by the House. For that reason, I commend the amendment. Thirdly, the proposals are arbitrary and discriminatory and have changed dramatically from those that were first aired in the draft regulations published at the end of 2004. They would have had an impact throughout the life insurance industry, whereas under the current proposals the focus would be on only a small number of companies for a similar amount of revenue. Those companies are thus entitled to expect some independent restraint on the freedom of civil servants—albeit under the direction of Ministers, who are no doubt already on the case—to push through measures that could have a significant impact on their commercial position.

For reasons relating to the technical taxation aspects of the substantive measure and the principle that the matter should be discussed in the House, I hope that the amendment will be supported. I look forward to the Minister's response.

Ivan Lewis (Labour, Bury South)

First, I shall respond to some of the specific points made by hon. Members. The hon. Member for Cities of London and Westminster (Mr. Field) again expressed concern about double charging and again I reassure him, on the record, that we believe that no double charge is possible and that regulations will deal with the issue. If people can demonstrate that there is a risk of double charging we will ensure that the regulations reflect whatever is necessary to prevent it. I hope that that reassures the hon. Gentleman.

The hon. Member for Eastleigh (Chris Huhne) implied that, somehow, the position that we have arrived at in the Bill was a bolt out of the blue—an unexpected, entirely different proposal from the one that emanated in the past. I refer him to a High Court judgment about a transfer of business that involved AXA Sun Life. It is interesting to note what the judge said:

"AXA accepts that the calculation"

of the assumptions about the tax that it would pay in future

"was on the basis alleged but contends that it is highly likely that in the future the Inland Revenue will seek to close what they regard as a loophole in the taxation of insurance funds and that accordingly tax rates will rise . . . The FSA says that they do not regard AXA's tax assumptions as unreasonable."

That judge made those comments in the year 2000, so our proposal can hardly be described as a bolt out of the blue or something that has come as a tremendous shock to the industry.

I respond to what the hon. Member for Cities of London and Westminster said about the sector's claim that our description of the consultation and negotiations with them was inaccurate by saying that we specifically attached a sunset clause to the substantive measure because of the representations and concerns that have been articulated by the industry and the sector. Either they accept the inevitability that such changes will be made, or they continue almost to play for time, to engage in consultation that is not real. We have responded sensitively and directly to their requests that we attach a sunset clause to the measure because of the concerns that the industry has expressed on a number of occasions.

As hon. Members know, we had a lengthy debate in Committee on Opposition amendments to remove the regulation-making power altogether. Having withdrawn those amendments, they now seem to be coming from a different angle to try to achieve the same objective: making the regulations follow the affirmative procedure. Obviously, we are not unsympathetic to the points made by some Opposition spokespeople. Where the Bill, or the first Finance Bill introduced in March, enacts a major reform under secondary legislation, that may be done by regulation under the affirmative procedure in some circumstances.

For example, the affirmative procedure is used for the rewriting of the rules for authorised investment funds in the Bill—the subject of amendment No. 2, which we have just debated—and the securitisation companies in the Finance Act 2005. However, the legislative framework established by the powers in both those cases is permanent. In both cases—the legislation for authorised investment funds and securitisation companies—the affirmative power has been limited to the first use of the power when the new structure is established.

Schedule 9 is different as it involves a temporary use of powers, limited by the sunset clause that the industry sought. On Second Reading, the hon. Member for Eastleigh said:

"At present, there is a simple approval of new regulations by the House when they are first introduced; thereafter, revisions are subject only to the negative resolution procedure. There is no trigger point at which a general assessment of the operation of delegated powers can be undertaken, but it seems to us that there should be."—[Official Report, 7 June 2005; Vol. 434, c. 1153.]

I assume that what he meant by a "trigger point" is a sunset clause. I take him to be saying that a sunset clause is an alternative to an affirmative procedure. That is exactly the position that the Government have adopted in the legislation.

I appreciate that the power in schedule 9 to make regulations is capable of being used to make radical changes, even if only for 2005. If that were done, there ought to be an opportunity to debate those changes, but hon. Members who served on the Committee will know that I circulated a letter that contained details of the proposed regulations and that the regulations will affect only a limited number of cases in precisely the way I that described. They ensure that income from assets that are wholly excess to policyholder requirements is taxed at the appropriate rate and that, as I have said, there are mechanisms to ensure that no double counting takes place.

It has been claimed that there has been no scrutiny of the regulations. I resent the suggestion from the industry that there has not been ongoing and serious consultation. The consultation will continue. With a sunset clause, as hon. Members will know, any replacement legislation will be primary legislation that gets full scrutiny, and I made that absolutely clear in Committee. I place that on the record again now. When the sunset clause expires, it will be replaced by primary legislation in the next Finance Bill, setting out a permanent framework for apportionment rules, which will be fully debated in the usual way.

Even if I were minded to accept an amendment—which I am not—along the lines proposed, neither amendment No. 5 nor amendment No. 6 would do. They go too far. They also cover very straightforward and simple changes that are a direct consequence of minor technical changes to the Financial Services Authority rules. I am sure that that was not the prime objective of the amendments, because that would establish a precedent that would not be practical or applicable in terms of minor changes to FSA rules.

I believe that we should put in place a sunset clause. By doing it in the way that we are proposing, there remains the possibility that the Opposition can seek a debate; they still have that opportunity through parliamentary procedures. On that basis, I urge the hon. Member for Cities of London and Westminster to consider seriously withdrawing the amendment, or I will be obliged to ask my hon. Friends to oppose it.

Mark Field (Conservative, Cities of London and Westminster)

I am glad that we have had a concise debate and a precise response from the Minister on this issue. He is quite right when he identifies that the Government have gone some way, through the sunset clause, to keeping the insurance industry happy. One of the main reasons for the sunset clause was the fact that this was rushed legislation.

I am glad that the Minister has also been able to demonstrate that if anyone in the insurance industry is able to show that a double charge would take place and that they would lose out on the grounds that we have set out, there will at least be an opportunity to reassess the situation.On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Order for Third Reading read.

Dawn Primarolo (Labour, Bristol South)

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

I would like to take this opportunity to thank all the right hon. and hon. Members who participated in the Committee of the whole House and the Standing Committee. The quality of the contributions produced good, productive debate, animated exchanges and some improvement in the substance of the Bill.

As my right hon. Friend the Chancellor outlined in his Budget back in March, the Government's economic objective is to build a strong economy and a fair society, in which there is opportunity and security for all. The long-term decisions that the Government have taken—giving independence to the Bank of England, new fiscal rules and a reduction in debt—have helped to shape economic stability, which in turn has created the platform for building prosperity, achieving social justice with security and opportunity for all, and maintaining investment in public services. This Bill contains measures to strengthen further stability while sustaining enterprise and ensuring fairness.

I have made this point to the House before and I will do so again because I believe it goes to the heart of this Bill: a fair tax system is one in which everyone pays their fair share. The protection of tax revenues is imperative both in providing improvements in efficiency and enabling increased investment in public services. Tax avoidance undermines the ability of the Government to deliver their objectives and imposes increased burdens on those who pay their fair share of taxes.

Tackling avoidance is not incompatible with maintaining UK competitiveness. In fact, avoidance undermines fair competition. Turning a blind eye while some companies obtain an unfair advantage by exploiting avoidance schemes is not the same thing as supporting and maintaining UK competitiveness.

As I said to the hon. Member for Runnymede and Weybridge (Mr. Hammond) in Committee, competitiveness is based on the question of whether the tax system is modern and fair and whether it has appropriate rules that respond to the challenges that it faces, so that it discharges its responsibility to all taxpayers by ensuring that there is fairness in the system. As we have seen, the Bill's provisions will do just that. They reflect the Government's resolve to ensure that our tax system is both fair and competitive.

In the Budget 2004, the Government introduced disclosure rules to tackle tax avoidance. Those rules have revealed that several areas of the tax system are at risk from high levels of tax avoidance. The Bill will close several schemes of which we have been made aware, including schemes involving the exploitation of arbitrage, employee securities, VAT avoidance and financial avoidance. The measures that achieve that make up much of the substance of the Bill and have been subject to much scrutiny in Committee.

On arbitrage, increasing globalisation presents new opportunities for the few who attempt to evade their UK obligations. Clauses 24 to 31 and schedule 3 introduce legislation to target avoidance involving tax arbitrage. The measures catch contrived avoidance structures that seek to achieve a UK tax advantage and will apply only when a company is involved in a scheme that increases UK tax deductions because of the exploitation of arbitrage.

Alongside the 2004 pre-Budget report, I made a statement to the House stressing how successive Governments have been perpetually presented with ever more intricate arrangements designed to avoid income tax and national insurance on the rewards from employment. Clause 12 and schedule 2 are a carefully focused response to such avoidance schemes. The measures will effectively target arrangements that are used to disguise cash bonuses and thus avoid tax and national insurance. It is important to remember that without prompt and decisive action, around £500 million in tax and national insurance would be at risk every year. The Government estimate that around £2 billion of payments were going through such schemes in 2004–05.

I should also remind the House that in my statement alongside the pre-Budget report I made it clear that the Government's objective was to close down such activities permanently, initially by closing down schemes that had been identified by Her Majesty's Revenue and Customs. Furthermore, I made it clear that should further attempts be made to frustrate that intention, legislation would be introduced to combat the problem, where necessary, with effect from 2 December 2004. The response is thus fair and proportionate, given the substantial amount of revenue at risk and the history of the previous attempts made by some taxpayers and their advisers to get around legislation that was aimed at stopping their avoidance schemes. I must stress that only those who, despite these warnings, choose to avoid their responsibilities and pass a heavier burden on to other taxpayers will be affected.

Furthermore, the disclosure rules are an integral part of the Government's strategy to ensure that there is fairness. They target the information deficit on which tax avoidance is based. They enable Her Majesty's Revenue and Customs to act faster and with a more targeted response to abuse of the tax system, thus providing an early warning about new avoidance schemes. Clause 6 and schedule 1 will improve the effectiveness of the rules by drawing on the experience of disclosures up to this juncture, extending the definition of tax advantage and simplifying the requirements on business to disclose schemes so that if a new listed scheme is designated, the tax authorities will be able to act swiftly.

The Bill introduces important measures to promote fairness and confront tax avoidance while maintaining our competitiveness and providing certainty to businesses, allowing them to keep pace with the opportunities presented by the fast-evolving global economy. It will help to develop the macro-economic stability that is essential to our future productivity, growth and stability. It will support business while ensuring fairness, and will enable the country to sustain and build on a competitive enterprise-based economy, allowing for security and opportunity so that everyone benefits from growing prosperity.

The Finance Bill sets in statute the measures proposed in the Budget to enable the United Kingdom to respond to and meet the challenges of a global economy. I commend it to the House.

Philip Hammond (Conservative, Runnymede and Weybridge)

We reach Third Reading with some of our concerns unresolved, although it would be untrue to say that no progress has been made. Certainly, the Bill is a big improvement on the one published in March. I would like to say that that is due to parliamentary scrutiny and debate, but, perhaps inevitably in the case of the complex matters that form Finance Bills, and this one in particular, which deals with anti-avoidance, the reality is that it is due to the enhanced scrutiny and discussion outside this place, between business and the Revenue. That is purely a happy side effect of the extra time made available by the general election.

Several of the original Bill's provisions have been shown to be unworkable or too wide reaching and have been substantially amended. Unfortunately, even with the enforced break in an election year, the Revenue still appears obsessed with the need to introduce anti-avoidance legislation without notice, and hence without prior discussion. All the evidence points to the fact that pre-legislative consultation leads to better legislation, and the Bill as it now stands and the disclosure rules in the Finance Act 2004 are the most obvious and recent examples. We have seen no evidence of loss of tax through prior notice.

The Revenue now has the disclosure rules in the 2004 Act, so it is pretty clear what is likely to be targeted. It has the press notice system, whereby it effectively gives taxpayers notice that a scheme will be closed down before the details are published. It has the tools to enable proper pre-legislative consultation of anti-avoidance measures, which it has engaged in this year to an extent. In a genuinely constructive spirit, I suggest that the Paymaster General might consider an exercise to analyse whether engaging in that way resulted in a significant loss of tax. I think the Revenue would accept that it resulted in a number of improvements to the legislation and perhaps the avoidance of embarrassing unintended consequences later.

In addition, we received reassurances from Ministers during the course of the Bill's progress on the intended effect of the measures and commitments to keep various things under review, although I regret to say that we failed to persuade them to amend the legislation, with one small exception, to ensure that the reassurances on scope appear in the Bill.

The reassurances that we received—we are grateful for them—include the active monitoring of the effect on compliant taxpayers of the VAT warehousing scheme; the development of a workable relieving measure to cover the insurance tax rules that levy a charge when a subsidiary transfers its insurance business to its parent; the operation of the insurance tax rules as they apply to subsidiaries of life assurance companies; commitments to consultation on e-conveyancing, ensuring that new stamp duty land tax rules do not apply so that there is a multiple clawback; reviewing the scope for abolishing the Treasury consent rules; monitoring operating problems that arise on e-conveyancing, e-filing and land transaction returns; and the Government's welcome pledge to amend the draft guidelines on the gift aid scheme.

I reiterate that we accept the need to monitor and react to tax avoidance schemes. We have two overriding concerns. First, the Bill's provisions may apply more widely than Ministers say is the case. The Government have not narrowed the scope of those provisions and have responded to criticism by adopting the maxim, "Draft widely; apply narrowly." We are constantly reassured by Ministers that the examples that we have suggested are within the scope of the provisions will not, in fact, be subject to the regime in question. That is particularly true of the arbitrage provisions, which are an especially complex part of the Bill. The legislation's application to individual cases in that area will be left to Revenue officials via the issue of a notice, effectively making them the arbiters of scope.

Secondly, even if those measures are applied narrowly, as Ministers have suggested is their intention, their refusal to change the legislation to give it a narrow focus creates a climate of business uncertainty, which undermines confidence and impacts on investment decisions, especially by overseas investors in the UK. Two aspects of a tax regime determine its relative attractiveness to business: the effective level of business taxes, and the certainty and transparency of the system. Britain's effective business taxation level is increasing at a time when many competitors are consciously moving in the opposite direction. The Bill reduces the level of certainty, transparency and accountability in the system, which represents a serious threat to investment in UK jobs and prosperity. While we acknowledge the need to address tax avoidance, the Opposition fear that the balance in the Bill is not right, and that long-term benefit has been sacrificed for a short-term tax haul.

Corporate tax planning is a complex area, but the Paymaster General likes to paint it as a black and white issue. It is not that simple—the boundary between acceptable tax planning and unacceptable tax avoidance is not fixed. The Opposition want tax laws that enable business, and thus underpin continued economic growth in the UK, which is why we have sought to introduce changes to the Bill, all of which the Government have blocked. Those changes included a binding statutory clearance system to remove the uncertainty that the Government have introduced with the tax arbitrage regime; the early introduction of real estate investment trusts; amendments to the stamp duty land tax rules to avoid impediments to commercial intra-group re-organisation; and changes to schedule 7 to protect compliant taxpayers from the downside risk of being caught by the wide-ranging changes; and proposals to set in train a far-reaching review of tax law to simplify and clarify it. The Government rejected all those proposals.

We remain concerned that the Bill's scope is too wide and its operation too uncertain to be conducive to a favourable investment climate for international business. We are grateful for the reassurances that we have received during the passage of the Bill, although we are naturally disappointed that they have not been incorporated in it. We await with interest the plethora of regulations that will emerge from clauses 6, 13, 17, 45, 47, 48, 50, 66 and 67, and from schedules 6, 7 and 9. As the Paymaster General would expect, we shall monitor carefully with people outside the House the practical implementation of the Government's assurances and the Bill's impact on the United Kingdom's business and investment climate. We owe nothing less to the people of this country, who depend on a competitive investment climate for the jobs and prosperity that underpin their future and, indeed, for the stream of revenues to the Exchequer that will ensure that our public services can be maintained to the standard that we expect and demand in the 21st century. Only through economic growth can we achieve that, and only through continued investment in the United Kingdom can we deliver that economic growth.

Christopher Huhne (Liberal Democrat, Eastleigh)

I share many of the sentiments expressed by the hon. Member for Runnymede and Weybridge (Mr. Hammond), particularly about the measures that the Treasury has introduced to deal with tax avoidance. The scope of those measures means that we often have to rely on the word of the Paymaster General, who is effectively telling us, "Trust me, I'm the Paymaster General." That is an enticing invitation given that she has been in that post for a lengthy period, but she will not occupy it for ever.

These powers might be used by people with a less beneficent view than the one that she expresses towards taxpayers. It is unfortunate that the checks and balances in the Bill are not stronger, because the scope of the measures—I am thinking particularly of schedule 8 and transfer pricing, for example—and the powers that we have given to HMRC are very substantial indeed.

In another neck of the woods entirely, I regret, and I believe we will have in our constituency surgeries a substantial number of complaints about, the Treasury's unwillingness to be a little more flexible on the gift aid provisions relating to museum admissions. Setting a minimum of one year or requiring an excess charge of 10 per cent. over the entry price means that a number of smaller museums will suffer considerable problems.

The performance of those on the Treasury Bench on the issue of REITs—real estate investment trusts—reminded me of the recent performance of the Paymaster General in dealing with another classic Treasury case, that of tax credits, where the issue is not the objective of a particular policy, but its implementation. REITs is another case of the Treasury failing to deliver on promises made time and again to the House in respect of a measure that has wide cross-party support across the Liberal Democrat, Conservative and Government Benches. Once again, the Treasury has not delivered, on a measure that would provide a real prospect of the financial services industry being more competitive in an area where a number of other countries—the United States and various continental countries—have already introduced similar measures.

On simplification of the tax regime, we were disappointed that the Treasury was not more open-minded in introducing a proposal for a tax law commission. That has wide support among professionals, who are after all the people advising us on the matter and also HMRC. The tax law commission would go beyond the tax law rewrite project in being able to propose ways of simplifying the tax code that would command broad support. The argument from the Treasury Bench was that the commission would pre-empt the powers of the House of Commons. I do not believe that for a minute. It would be a professional body that could put forward proposals, and the Government could accept or reject them.

The insurance provisions tell us more about the motivation of the Bill than almost anything else. A substantial change is proposed in the basis of the taxation of the life assurance industry through secondary regulation powers given to the Treasury without adequate consultation or scrutiny in the House. That tells me that the Treasury is rather more worried about the prospect of revenue than about the prospect of good tax legislation.

Finally, I thank the Clerks for all the support they have given my hon. Friends and me in tabling amendments. I thank the Economic Secretary for the assurances that he gave us earlier today on the qualified investor schemes, which will be of benefit to the City and the financial services industry. I thank you, too, Mr. Deputy Speaker, for your support through these often arduous proceedings.

Question put and agreed to.

Bill accordingly read the Third time, and passed.