Finance (No.2) Bill

Public Bill Committee, 9 May 2006.

Standing Committee A

Dawn Primarolo (Labour, Bristol South)

I beg to move,

That during proceedings on the Finance (No. 2) Bill (except Clauses 13 to 15, 26, 61, 91 and 106, Schedule 14, and new Clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984), the Committee do meet at half-past Ten o'clock and half-past Four o'clock on Tuesdays, and five minutes past Nine o'clock and half-past Four o'clock on Tuesdays, and five minutes past Nine o'clock and a quarter to Two o'clock on Thursdays, when the House is sitting.

On behalf of the Committee, Mr. O’Hara, I warmly welcome you and your co-Chairmen, Sir John andMr. Benton. You are all experienced and knowledgeable, and I am sure that you will keep us in order. We look forward to your expertise and are confident that our deliberations will be both thorough and relevant. I extend a warm welcome to the hon. Member for Chipping Barnet (Mrs. Villiers) who will lead for the Opposition in Committee and to the members of her team, the hon. Members for Rayleigh (Mr. Francois) and for Fareham (Mr. Hoban), and those who support them.

I welcome Mr. Cranmer, the Clerk to the Committee. I am pleased that we shall benefit again from his significant experience of Finance Bills. I also welcome the Hansard staff, as I do the hon. Member for Falmouth and Camborne (Julia Goldsworthy) and her Liberal Democrat colleagues. I am pleased to see the hon. Member for Dundee, East (Stewart Hosie). He has been assiduous on the Floor of the House. No doubt he will welcome his happy and long stint in Committee, but perhaps he can tell me about that at the end of our proceedings.

I will be supported in Committee by the Financial Secretary and the newly appointed Economic Secretary, who is truly looking forward to being here every Tuesday and Thursday—morning and afternoon. That will come as news to him. Given that my hon. Friends will follow our proceedings in great detail, I hope that they will not be disappointed. The good news is that we have only one Finance Bill this year, not two—or three Bills, as we had last year. I look forward to our debates in the coming weeks. I hope that we can conduct ourselves in an appropriate manner, being pressing in debate, but always remaining civil. We shall need to behave in such a way to get through the proceedings and for the sake of our sanity.

Theresa Villiers (Conservative, Chipping Barnet)

I echo the Paymaster General’s welcome to you,Mr. O’Hara, and to your co-Chairmen. My team and I also look forward to working with you, as we do with the right hon. Lady and her team in the constructive and co-operative manner that she has just mentioned. Obviously, we shall make it clear when we disagree with the Government on certain points, but we hope in many instances to table amendments that go more towards ascertaining the meaning of the Bill and teasing out uncertainties, rather than necessarily pushing for a Division and a change in the published Bill.

I also echo the Paymaster General’s welcome to the hon. Members for Falmouth and Camborne and for Dundee, East. I particularly welcome Back Benchers. It is not always considered to be a great privilege to discuss the Finance Bill in Committee, but although it may prove to be a fairly long and gruelling experience, we are well aware of the importance of the task ahead of us. Indeed, as my hon. Friend Member for Rayleigh said a few weeks ago, in the past there has almost been an outbreak of Stockholm syndrome in the Committee as matters become a little eccentric after several weeks discussing the details of United Kingdom financial legislation. With those words, I welcome the sittings motion.

Colin Breed (Liberal Democrat, South East Cornwall)

I, too, welcome you to the Chair, Mr. O’Hara. I think that my hon. Friend the Member for Falmouth and Camborne has written to you, apologising for not being able to be here this morning due to a prior speaking engagement that she could not get out of.

It is many years since I had the great pleasure of sitting on the Finance Bill Committee and, from my memories, I was not certain that I wanted to renew that experience immediately. However, I look forward to working with Committee members co-operatively on this Bill to try to tease out of the Government some of the important issues that will affect hon. Members, and our constituents, in the months and years to come.

Edward O'Hara (Labour, Knowsley South)

Before we proceed, I have several announcements to make. The Ways and Means and money resolutions agreed by the House and on which the Bill is founded are available in the Room. There has, apparently, been a software bug, which means that the contents pages of the Bill as printed are slightly inaccurate. If hon. Members have an inaccurate version, they may obtain new contents pages, printed separately on green paper, which are available in the Room.

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

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

The Vote Office would be very grateful if we could try not to mislay copies of the Budget documents, for the obvious reason that supplies are short and, if we keep losing them, it may be embarrassed in finding replacements.

I should, as usual, like to draw attention to the fact that adequate notice must be given of amendments. Neither my co-Chairmen nor I will, as a rule, call any standard amendments, including any starred amendments that may be reached during an afternoon sitting.

Finally, please switch off all mobile phones.

Clause 1

Edward O'Hara (Labour, Knowsley South)

With this it will be convenient to discuss the following: New clause 1—Review of tobacco products duty—

‘The Chancellor of the Exchequer will publish a review in relation to the effectiveness of tobacco products duty before1st March 2007 and will consult with organisations which have a special interest in tobacco products duty before publishing that review.'.

New clause 2—Review of hydrocarbon oil duties—

‘The Chancellor of the Exchequer will publish a review in relation to the effectiveness of hydrocarbon oil duties before1st March 2007 and will consult with organisations which have a special interest in hydrocarbon oil duties before publishing that review.'.

New clause 3—Review of rates of gaming duty—

‘The Chancellor of the Exchequer will publish a review in relation to rates of gaming before 1st March 2007 and will consult with organisations which have a special interest in gaming before publishing that review.'.

New clause 4—Review of amusement machines—

‘The Chancellor of the Exchequer will publish a review in relation to classes of assessment machine and rates of duty before 1st March 2007 and will consult with organisations which have a special interest in gaming before publishing that review.'.

I should explain that the purpose of grouping the clause with the proposed new clauses is to enable the Committee to debate the proposal for a Government review of the various duties referred to. We should not anticipate debate on subsequent clauses. I trust that that is understood.

John Healey (Labour, Wentworth)

I welcome you to the Chair, Mr. O’Hara. It is a pleasure to serve under your chairmanship again. In my experience you Chair proceedings with a firm and fair hand and I know that you will continue to do so. I am grateful to you for the guidance that you have given us on the grouping of new clauses to be discussed as part of the clause stand part debate.

I shall mention my views on the new clauses later, but first let me deal with clause 1, which increases the rate of duty on cigarettes, cigars, hand-rolling tobacco and other smoking and chewing tobacco products. It does so in line with inflation, therefore increasing the typical price of cigarettes by 9p, including VAT, and did so with effect from 6 pm on Budget day, 22 March 2006.

The Committee is aware that smoking kills more than 100,000 people in this country each year. It is the greatest cause of preventable illness and premature death in this country. So the duty increase, in line with inflation, will help to maintain the real price of tobacco, the contribution to Government revenues and the price support—a level of pricing that encourages people to smoke less or to quit, and discourages children or young people from taking up the habit in the first place.

Duty rates form an important part of our strategy to drive down the level of smoking in this country and of our target to reduce the prevalence or level of smoking to 21 per cent. by 2010. Those measures run alongside important provisions that we are making through the NHS to support those who want to quit and also the public places smoking ban due to come into effect in the summer of next year. So the duty increase continues a well-established policy—a twin track of maintaining the high real price of cigarettes while clamping down hard on the unregulated supply of cheap smuggled tobacco. That will help to reduce smoking, and lower the financial, social, personal and health costs associated with it.

On the new clauses, I welcome the interest of the hon. Member for Wycombe (Mr. Goodman) in evidence-based tax policy decisions. I say to him and his colleagues on the Opposition Front Bench, we publish more information relevant to their new clauses than they might realise. In fact, we might publish more than they care to read. In relation to new clause 1 on tobacco, I gathered up on my way here a selection—not an exhaustive list—of the documents that we have published in the last 18 months.

“The Demand for Tobacco Products in the UK”, published in December 2004, is a detailed model for the elasticities of tobacco demand. The pre-Budget report 2004 included an update on our strategic approach to measuring and tackling indirect tax losses, including from tobacco, and in late 2004 we published an analysis of, and plans to deal with, counterfeit cigarettes. I have brought also a copy of a quarterly publication that includes a tobacco fact sheet—hon. Members might or might not be aware of it—with data on tobacco clearances and duty, and on the state of the market. As I said, it is a quarterly publication and the hon. Gentleman might care to pick up the next one, which is out later this month.

In December 2005, as part of last year’s pre-Budget report, we published an analysis of indirect tax losses which took into account the impact of duty. This year we have published a detailed fresh analysis of how we will reinforce our strategies for tackling tobacco fraud and smuggling. Furthermore, of course, there are the Budget notices—once again I have brought only one copy with me—published alongside the Budget, which are legally binding, and which we attempted to write in plain English, setting out the changes announced in each Budget, how they impact, and on whom.

We make a considerable effort to assess the impact of tax regimes on specific industries and the wider economy. We meet regularly with and take into account the views of organisations with special interests. We frequently reassess the general design or specific aspects of the operation of areas of the tax system, and when we do so we run a public, open consultation process.

In each year’s pre-Budget report and Budget, we give updates on tax and wider policy, and each year we publish a pre-Budget report for the excise regimes—an analysis of the tax gap, the losses and the impact of the rates. Ours was the first finance Ministry to make such a systematic analysis of the operation of the tax system and the first to put in place comprehensive strategies for reducing the tax gap, and I believe that we are still the only Government to do so. In those circumstances, when we come to decide on whether the proposed new clauses should become part of the Bill, I hope that hon. Members of all parties will bear in mind the quantity and the quality of what we already produce.

Paul Goodman (Conservative, Wycombe)

It is a pleasure to see you in the Chair, Mr. O’Hara. Unlike the Financial Secretary, I have not had the pleasure of serving under your chairmanship before. Although I am sure that, in the course of these proceedings, the Financial Secretary and I will not agree on everything, he was right to pay tribute to your chairmanship, and I look forward to your guiding us in our transition through today’s clauses in a dignified, orderly and efficient manner.

The clause that we are considering invites us to approve the tax rise proposed in the Chancellor’s Budget. As the hon. Gentleman said, new clause 1 would have the effect of compelling the Chancellor to publish a review in relation to the effectiveness of tobacco duties. You, Mr. O’Hara, will be pleased to know that I do not intend to discuss the proposed review in detail, and the hon. Gentleman will be pleased to hear that too. I want to refer to what he said about the quantity and quality of the information already published by the Treasury; he was right to draw attention to that. The proposed new clause seeks to draw an assessment from him of how all those documents come together in terms of the effectiveness of the Government’s strategy with regard to the duty.

We need to explore the effectiveness of that strategy in some detail. Any tax needs to be effective; it must achieve its aims. The Financial Secretary made it clear that the aim is to discourage smoking. That is an aim that we share. However, he did not mention the other aim of the clause, which is to raise revenue for the Exchequer—[Interruption.] He did. I apologise to him. We are covered so far as aims go.

The Financial Secretary will be mindful of that great law in relation to taxation and many other matters, the law of unintended consequences, as well as of the effect that raising a tax beyond a certain point might have on expected consequences, namely that it might not discourage the behaviour that it seeks to discourage. If raised beyond a certain point, it might raise less revenue than it would if it were not increased or if it were decreased. Raising it beyond a certain point could cause such unexpected consequences as evasion, in this case tobacco smuggling, which we shall discuss in more detail when we debate clause 2.

At present, according to the Tobacco Manufacturers Association—which would like duties to be frozen, not unusually—smuggling increased between 2002 and 2004, the last few years for which the organisation has figures, resulting in a rise in revenue loss from£2.6 billion to £2.9 billion. The Minister will doubtless point this out when he replies, so I shall point it out for him: it is true that the cross-border element has fallen from £1.4 billion to £1.3 billion. However, when both figures are added together, the result is a rise from£4 billion to £4.2 billion. The Tobacco Manufacturers Association suggests that those developments threaten the Government’s smuggling targets. I am sure that the Minister will want to respond to that point too.

According to a Gallaher monthly pack swap survey, the consumption of counterfeits has risen slightly, from 2.4 per cent. to 2.8 per cent. of total consumption. It is worth standing back from the figures for a moment and looking at them in context. According to the TMA, cigarette prices in the UK are already the highest in Europe, and the UK’s excise duty burden is the highest in the EU. The rising number of freight movements and visits within the EU, good things in themselves, naturally increases opportunities for smuggling. There has also been a significant rise in UK consumption of hand-rolling tobacco.

Brooks Newmark (Conservative, Braintree)

My hon. Friend makes a good point about the influence of duty increases on smuggling, but I should be most interested to hear the Minister’s response to the point made earlier about the analysis of elasticity. What is the Government’s analysis of the effect on reducing smoking of each 1p increase in duty? It would be extremely interesting to hear that.

Paul Goodman (Conservative, Wycombe)

My hon. Friend has conveyed his request to the Financial Secretary through me, so I shall not repeat it. We look forward to hearing the answer.

I return to hand-rolling tobacco consumption. In 1995, £5.1 billion-worth of hand-rolling tobacco was consumed. Last year, £10.8 billion-worth was consumed. The amount of non-UK-produced hand-rolling tobacco in particular has increased every year since 1995.

The Minister works on enforcement with the Tobacco Alliance, which represents some 17,000 independent UK retailers. I know that he sees the alliance regularly, and I am sure that he will join me in paying tribute to its work. The Tobacco Alliance is seriously concerned about the effect of smuggling on small shopkeepers’ livelihoods and on public health, given smugglers’ greater propensity to sell tobacco, particularly counterfeit tobacco, to children.

Last August, 83 per cent. of retailers surveyed by the alliance reported that smuggling had decreased their sales, 27 per cent. had cut staff—those are the two most serious figures—and 21 per cent. said that they were considering closing. Some 71 per cent. were aware of tobacco smuggling in their area, 35 per cent. were aware of counterfeit tobacco smuggling and 20 per cent. knew of smugglers who supplied underage smokers. A total of 90 per cent. thought that the Government were not doing enough to help retailers affected by smuggling—I suppose that when surveyed people always tend to think that the Government are not doing enough, but there it is—while 74 per cent. thought, perhaps unsurprisingly, that the Government should reduce or freeze taxes.

Yesterday, I received a letter from Ken Patel, a Leicester retailer and the chair of Retailers Against Smuggling, the campaigning arm of the Tobacco Alliance. The Financial Secretary will know him. What he wrote is important:

“Tobacco sales account for a large proportion of our footfall and when a customer comes in to buy their cigarettes, the chances are they will pick up something else, like a pint of milk or a newspaper at the same time. We shopkeepers are therefore losing out twice. We simply cannot compete with the smugglers who can undercut our prices by half.

Let me put to you a hypothetical situation: say I was the European head of a smuggling organisation who had to report in to my boss, the worldwide head of a smuggling organisation who wants profits and wants them fast. Where am I going to focus on to get the most profits as quickly as possible? Clearly the solution would be to focus on the country where I can undercut shop prices but still make the most profit—the place with the highest tobacco levels in the EU—the United Kingdom.

On top of that, the best thing about the situation”—

he is writing from the vantage of the imagined head of a smuggling organisation—

“is that the Government in Britain is going to help me out, by increasing tax every year and encouraging more people who smoke to buy their cigarettes from my street-sellers.

Let’s take another hypothetical situation: that I smoke 20 cigarettes a day. I enjoy it and it is part of my life. I am not going to stop just because my pack has gone up over the £5 threshold. It could go up over the £6 threshold and it would not make me stop smoking. It wouldn’t matter that much because I know that if the cost of a pack of legitimate goes over a price barrier I might have subconsciously set, then I can go and get some smuggled from the street corner. It’s going to be quite a while before the cost of a pack of smuggled reaches that subconscious level I have set for a legitimate pack.”

I will not read the rest of Mr Patel’s remarks nor will I explore, in the manner of the Hutton inquiry, subconscious motives. However, I wanted to draw the letter to the attention of the Committee because it represents the views of 17,000 retailers and Mr Patel makes some important points.

It is worth standing back from those figures for a few moments to consider which organisations are making profits from tobacco smuggling. Ministers do not know and cannot be expected to know all the organisations involved, but they do know, as the rest of us do, the names of some of the organisations. When we refer to smuggling gangs, it can be assumed that they are ordinary criminal gangs. However, they do include the Provisional IRA and loyalist paramilitary groups, which is plainly a serious matter.

Two months ago, Radio 4’s “File on 4” programme reported that the IRA is linked up with other criminal gangs and is behind the smuggling of millions of pounds of contraband across the North sea. It is perhaps significant that cigarettes were among the items seized when premises of the IRA’s reputed chief of staff, Thomas “Slab” Murphy, were sealed off in March, after an operation by customs officers, detectives and soldiers from both sides of the border.

Rob Marris (Wolverhampton, South-West) (Lab) rose—

Paul Goodman (Conservative, Wycombe)

I am delighted to see the hon. Gentleman here and I am sure he will contribute enthusiastically to the debate, just as all his other colleagues will.

Rob Marris (Labour, Wolverhampton South West)

I am grateful to the hon. Gentleman, who I know well from our time in Select Committee. Can he tell me whether he is talking to clause 2 or clause 1?

Paul Goodman (Conservative, Wycombe)

I am addressing clause 1, because as my hon. Friend the Member for Braintree said a moment ago, one of the phenomena that impacts on smuggling is price. Thus, the duties relate to price, so I am addressing clause 1. I am glad that he is following proceedings so closely that he can see that is taking place.

Gordon Banks (Labour, Ochil and South Perthshire)

Will the hon. Gentleman give way?

Paul Goodman (Conservative, Wycombe)

I am very happy to give way to another hon. Member whom we also look forward to hearing from many times in Committee.

Gordon Banks (Labour, Ochil and South Perthshire)

You mentioned the Northern Ireland situation? Do you not acknowledge that this year many tens of millions of cigarettes—

Edward O'Hara (Labour, Knowsley South)

Order. May we establish at the outset that remarks must be addressed through the Chair?

Gordon Banks (Labour, Ochil and South Perthshire)

The hon. Gentleman mentioned the situation relating to Northern Ireland. Cannot it be accepted that tens of millions of cigarettes have been seized in Northern Ireland this year? That showsthat the Government are trying, and succeeding significantly, to get a grip on the issue.

Paul Goodman (Conservative, Wycombe)

If I deal with that point in detail, I am concerned that the hon. Member for Wolverhampton, South-West (Rob Marris) will accuse me of delving into clause 2. However, the hon. Gentleman is right; the Financial Secretary has reported progress in that field, and I am delighted, as I said earlier, that customs officers from both sides of the border were involved in the recent raid on the farm of Mr. Thomas “Slab” Murphy.

Stepping away from the issue of smuggling and the perils of becoming entangled in clause 2, we, like the Government, believe that it is right in principle to use the tax system to discourage smoking. It is also reasonable, in principle, to use taxes on tobacco to raise revenue. We also note that the consumption of tobacco continues to decline, albeit slowly, and that the Treasury has brought down revenue losses from smuggling.

Stephen Hesford (Labour, Wirral West)

Given that the Financial Secretary indicated that the rise is in line with inflation, I am not clear what point the hon. Gentleman is making. If there is some elasticity and the rise is the result of inflation, what other increase would he make? Would it be less than inflation?

Paul Goodman (Conservative, Wycombe)

I do not know what rise, freeze or reduction my hon. Friend the Member for Tatton(Mr. Osborne) will propose when he introduces his first Budget in 2009, but I hope that the hon. Gentleman will recognise that there is a relationship between the level at which a duty is set and smuggling. If the Government were not concerned about smuggling or about the level of the increase, we would hear the first noises in Committee from the Economic Secretary to the Treasury, whom I congratulate on his promotion. I am glad that his hon. Friends are as enthusiastic about the issue as I am; doubtless he is, too.

Brooks Newmark (Conservative, Braintree)

Is not one of my hon. Friend’s key points the fact that our tobacco price is among the highest in the European Union? That high price is driving the smuggling industry and putting many shopkeepers out of business.

Paul Goodman (Conservative, Wycombe)

My hon. Friend is right. We are considering the relationship between the high price, smuggling and counterfeit goods. That is the best answer that I can give to the hon. Member for Wirral, West (Stephen Hesford).

Before the Government Back Benchers became so enthusiastic, I was moving on to make a point in the Government’s favour. Although losses from smuggling rose last year, they fell to £4 billion in 2002-03—from £4.2 billion in the previous year and £4.3 billion in the year before that. It is at least possible to believe that HMRC will begin to reduce the figure in future years. For that reason, while we want to hear what the Financial Secretary says, we have no plans to oppose the tax rises in line with inflation that are proposed in clause 1. However, we would like him to address the questions about the rate of duty, and to tell us whether he accepts that there is a point beyond which, if the tobacco duty were raised, revenues would fall and smuggling would increase. Given the high prices and duty levels to which my hon. Friend referred, we would like the Financial Secretary to give us an indication as to the Treasury’s thinking about how close we are to that point.

Philip Dunne (Conservative, Ludlow)

I, too, would like to express my enthusiasm about serving on this Committee under your chairmanship, Mr. O’Hara, and that of Sir John Butterfill.

I declare that I have a prejudicial interest that is not shown in the Register of Members’ Interests. I am a fervent and passionate anti-smoker. If that colours my remarks on the clause, I am sure that Committee members will at least understand. I am curious about the increases in the rates of duty, because they are somewhat at odds with the Government’s stated policy. I welcome the proposed increase in line with inflation, but I am concerned. Recently, we in the House have advanced proposals banning smoking in public places on grounds of public health, and the Financial Secretary has argued that duty rates are being increased to discourage smoking on the same grounds. Why, then, are the Government limiting themselves this year to an increase in line with inflation alone?

I have done a bit of research into the increases in tobacco duty under this Government. I understand that between January 1998 and March 2006 tobacco duty has been increased from 131.9p per 20 cigarettes to 210.2p, which is a rise of 59.4 per cent. in nominal terms and an increase of 14.9 per cent. in real terms using March 2006 prices. However, we are presented with no increase in duty in real terms, despite the Government’s stated intent.

In trying to understand what may be lying behind this modest increase, I have considered the incidence of smoking under this Government. In the 2004 general household survey, published in December 2005—the one most recently available from the Office for National Statistics—table 8.6 refers to the prevalence of cigarette smoking in Great Britain between 1978 and 2004 in persons aged 16 and over. The incidence of smoking across the population as a whole has declined from 27 per cent. in 1998 to only 25 per cent. in 2004, which is a modest decline given the Government’s ambitions.

The table helpfully goes back to 1978, the period immediately before the last Conservative Government, so I should like to set the issue in context. I remind the Committee that at that point the proportion of adults smoking was 40 per cent., but that declined to 27 per cent. in 1998. That was during a period of the Conservative Government who were clearly more successful in bringing down smoking for a number of reasons. I am not claiming that tobacco duty is the sole reason why the incidence of smoking declined. None the less, the previous Government had a more successful record. I invite the Financial Secretary to comment on the elasticity of demand for cigarettes related to duty and why the Government are being so modest with this measure.

Colin Breed (Liberal Democrat, South East Cornwall)

The hon. Member for Ludlow(Mr. Dunne) has said much of what I was going to say about the strategy behind the rates of duty.

Duty can be lowered, frozen or raised. Raising it in line with inflation would perhaps be the minimum amount that a Chancellor could do to preserve the amount of revenue received. However, it is the Government’s desire and wish—and the wish throughout the House—for this duty to contribute to a general reduction in smoking and, let us hope, to discourage young people, in particular, from starting.

Like the hon. Gentleman, I ought to declare an interest, because I have never smoked anything. I am not certain whether that makes me anti-smoking. Nevertheless, I think that we all want to reduce smoking, because of the health effects.

Bearing in mind that the Government have, as the hon. Gentleman said, introduced with a huge amount of support in the House and the country the measure for no smoking in public places as a drive to reduce smoking generally, perhaps it was a surprise that the duty on tobacco products in the Budget was raised only in line with inflation. Paragraph 8 of the explanatory notes states:

“The estimated revenue yield from these changes is nil against an indexed base.”

I assume that that is because it has been raised only in line with inflation. However, given the Government’s proposals for driving down levels of smoking, which have been largely supported, one might have assumed that in the next year levels of smoking would reduce and that therefore fewer cigarettes would be purchased. That, in turn, would reduce the tax revenue. That might well be considered a success.

The Government could have considered combining different legislation. For instance, the Scottish Parliament has banned packs of 10 in an attempt to make certain that young people, who are one of the principal purchasers of packs of 10, are unable to buy them and therefore have to spend more money on packs of 20. The hope is that that will reduce the numbers of young people smoking. There is alsothe idea of increasing to 18 the age of purchase. So the Government could have reinforced their proposals with other measures.

As has been said, price is a main driver. As it goes up, fewer people will want or be able to purchase cigarettes. That could spur reduced consumption. Perhaps the Chancellor might have been a little more ambitious by increasing duty further, but we support the overall contention of maintaining the real value.

As has been pointed out already, the real problem is that as we drive up the price, we almost encourage continued smuggling. I am sure that we will discuss that in much greater detail during consideration of the next clause, but a year or two ago, I and other hon. Members visited a business in Belgium that dealt exclusively in what I suspected were smuggled tobacco products. The man who ran the business told me that all he needed for his business to thrive was for the Government over here to keep driving up the price of cigarettes.

Until we can get agreement on the way in which tobacco is taxed, particularly in other parts of the European Union, that problem will continue. The Government should not be deflected or bow down, but should try to stop the smuggling. Certainly, we do not want to give smugglers any encouragement, even if we are going to increase the price.

Rob Marris (Labour, Wolverhampton South West)

To take the hon. Gentleman back a couple of sentences, is he suggesting tax harmonisation?

Colin Breed (Liberal Democrat, South East Cornwall)

I am not suggesting that at the moment, but it ought to be considered over time. There is smuggling from all sides in Europe and certainly there is a great deal that could be done in France, Belgium and elsewhere to prevent some of the smuggling into Britain. At the moment, there seems to be a rather laid-back effort. Of course, if other countries in Europe shared our views on the health aspects of smoking, they might be encouraged to increase their prices too. However, if we are not careful, I suspect that harmonisation would end up with us substantially reducing our duty, which I could not possibly accept. It is somewhat fanciful to think that they might harmonise up to our level immediately but, over the next few years, their broad strategy ought to be to recognise the associated health problems. A French person’s lungs are as likely as those of an English person to be affected by the consumption of tobacco.

I expected a modest increase in duty beyond inflation. However, we can look at that again next year and assess the effect on smoking levels and tax yields of the duty rise and the ban on smoking in public places.

Brooks Newmark (Conservative, Braintree)

I shall try to be brief and focus on the effectiveness of duty and its impact on the elasticity of demand and pricing.

We have heard already that we have the highest duties in the EU. As always, the hon. Member for Wolverhampton, South-West makes a very interesting point on tax harmonisation. However, a synthetic tax harmonisation is effectively occurring because of the impact of smuggling, which was mentioned by my hon. Friend the Member for Wycombe. Although in reality taxes are not coming down, the tax take may ultimately come down as prices increase. The tax take is becoming a synthetic tax harmonisation, and we need to be concerned about that.

My second point has to do with the analysis of elasticity of demand and pricing, which the Financial Secretary probably has in hand in one of the documents that he was waving about. Action on Smoking and Health has quite correctly pointed out that tobacco price rises are key in discouraging individuals from smoking, but the problem with price rises, as my hon. Friend said, is that they encourage more and more smuggling. I should like to focus, however, on that elasticity of demand.

Paul Goodman (Conservative, Wycombe)

Does my hon. Friend agree that it is also possible, if not likely, that there is a floor beyond which consumption cannot go? In other words, no matter how high taxes are raised, it is impossible to reduce consumption below a certain level, although no one can be sure what that level is. No matter how high Governments attempt to raise the tax, they cannot remove that floor. It also encourages smuggling, as he said.

Brooks Newmark (Conservative, Braintree)

As always, my hon. Friend makes an excellent point. As a member of the Select Committee on Science and Technology, I know that there is an addictive element to smoking cigarettes. I believe that increasing prices will encourage those with extremely addictive personalities—or, I should say, those who are affected more strongly than others by cigarettes—to go to the black market to buy their cigarettes at a price below the market price effectively set by the Government. That will encourage a larger and larger black market to satisfy the needs of a core minority of people who need their tobacco fix. I am interested in what the Financial Secretary will have to say on the Government’s analysis. For every 1p increase in tobacco duties, what reduction do we see in consumption, at least down to the rock bottom mentioned by my hon. Friend? I am curious to hear a little more about that analysis.

As Imperial Tobacco has said, smuggling into the UK is the direct result of the differential in excise duties. We want to clamp down on that smuggling or prevent it from happening. Small shopkeepers in my constituency are no different from the shopkeepers of Leicester mentioned by my hon. Friend, or indeed from any of the 17,000 retailers in all the constituencies represented in this Committee. We must be sensitive to their interests.

Clearly, the health of the nation is paramount. As a non-smoker, like the previous two speakers, I want to discourage smoking as much as possible. However, we need to deal with the tension of duty increases and their effect on the black market and smuggling. I shall be interested to hear from the Financial Secretary what analysis the Government have done on the link between the reduction in smoking and the increase in the tax take. What numbers can he give us to show that the tax take is increasing, even with the inflation-linked increase in duty?

John Healey (Labour, Wentworth)

Let me respond to the hon. Member for Wycombe (Mr. Goodman). I know Mr. Patel. I met him before the Budget and wished him well. He has recently taken over as chair of the Tobacco Alliance, and I discussed with him the Government’s interest in working with him and his network of small retailers to see how we can improve the public information that warns people about the dangers of counterfeit cigarettes and smuggled tobacco. Having published the Budget, we will do that work jointly with his organisation. As the hon. Gentleman said, small shopkeepers such as Mr. Patel are concerned, because cigarettes and tobacco bring into their shops people who then buy other things—the footfall, as Mr. Patel puts it. That trade is affected by the availability of illegal, smuggled tobacco. One of our principal reasons for giving such priority to the anti-smuggling strategy is that legitimate, honest businesses are undermined by the bootleggers and smugglers who make available cut-price cigarettes and tobacco.

Small retailers also face a number of other trends, not least the increasing range of retail products available at garages, and the patterns of shopping that, increasingly, take people to supermarkets and out-of-town centres, rather than to their local high streets and corner shops.

Paul Goodman (Conservative, Wycombe)

The hon. Gentleman is right. However, I just want to be sure that he acceptsMr. Patel’s key point, which is that there is a relationship between the rate of duty and smuggling.

John Healey (Labour, Wentworth)

I shall come to that point. Thehon. Members for Ludlow and for Braintree(Mr. Newmark) both tried to probe the relationship between price—underpinned in part, but not entirely, by duty—patterns of smuggling and patterns of consumption. That is clearly complex, but I shall deal with it when I refer to the detailed modelling that the Government economic service has done.

In addition to the Tobacco Alliance, the hon. Member for Wycombe mentioned the Tobacco Manufacturers Association. We work closely with that organisation. Our analysis is that the illicit market trend is consistent, but the precise figures sometimes differ. The counterfeit figures—I am not sure whether they were the TMA’s—that the hon. Gentleman cited certainly differ, and we believe that the anti-fraud measures that we have put in place are making a great impact.

It is important to consider—as the hon. Gentleman encouraged us to do—the modest measure of retaining the real value of tobacco duty in clause 1 in the wider context of the anti-tobacco smuggling strategy, which we launched in 2000-01. Between then and 2003-04, we succeeded first in halting the rapid rise, then in stabilising it and then in beginning to reduce the illicit market. By 2003-04, the illicit market was still too big, but it was down to 16 per cent. Since the launch of the anti-tobacco smuggling strategy in March 2000, the number of cigarettes smuggled into this country each year has been reduced by more than 5 billion, and we have cut the illicit share of cigarettes by a quarter and protected almost £6 billion in revenue to the public purse. Without that action, and the investment that we have been prepared to put in, the illicit market would be not 16 per cent. but 36 per cent. We still have to do more to clamp down, because smuggling gangs change their tactics and their methods very rapidly. Part of what we have to do, and which we set out in the publication “New responses to new challenges: Reinforcing the Tackling Tobacco Smuggling Strategy”, published alongside the Budget, is to deal with the increasing levels of counterfeit cigarettes and the persistently high levels of smuggled hand-rolling tobacco.

Brooks Newmark (Conservative, Braintree)

What analysis does the hon. Gentleman have that lies behind those projections, which show that the number would have been 36 per cent. as opposed to the 16 per cent.? What is the detailed analysis behind that differential?

John Healey (Labour, Wentworth)

The hon. Gentleman brings me neatly to one of the documents that we published about18 months ago. I will send him a personal copy.

Dawn Primarolo (Labour, Bristol South)

Signed.

John Healey (Labour, Wentworth)

I am not sure that the hon. Gentleman wants me to do that. The publication is the most rigorous attempt to model and assess the often complex combination of inter-relationships in which the Committee is interested. It contains much of the information for which he and the hon. Members for Ludlow and for Wycombe have been asking. If the hon. Gentleman has time, I suggest that he study it.

The model’s main findings show that, with tobacco, we are close to the revenue maximisation point with cigarette duty. That means that any large real increase in duty rates would increase smuggling and start to reduce, not increase, revenues. Duty cuts wouldnot produce proportionate reductions in tobacco smuggling. Only a large cut in duty would be likely to have any significant impact on the behaviour of consumers and suppliers. The Government economic service tobacco model—this is the answer to one or two of the points that the hon. Gentleman has made—shows that a 1 per cent. real increase raises, in revenue terms, only about £5 million pounds.

Philip Dunne (Conservative, Ludlow)

I am most interested in what the hon. Gentleman is saying. If possible, may I receive a copy of the document? Will he look back at the historic impact of the real increases in the past and explain how effective they were in raising revenue versus the increased smuggling?

John Healey (Labour, Wentworth)

I shall be delighted to ensure that the hon. Gentleman receives a copy. If any other Committee members would like a copy, it is available through the Vote Office.

According to our calculations, a 4 per cent. increase in duty would increase smuggling by about 1 per cent. It would have a negligible impact on consumption. The assessment suggests that it would hit consumption by 0.2 per cent. only. It would increase revenue by only about £10 million pounds and that is the point at which we would reach the revenue maximisation point on cigarette duty.

Brooks Newmark (Conservative, Braintree)

I very much appreciate the analysis that the Financial Secretary has explained. However, there is a slight contradiction, or perhaps, if he could clear it up for me, it is not a contradiction after all. He said that a 1 per cent. increase in duties would increase tax take by £5 million pounds. However, he also said that there is a point of diminishing returns; that one cannot keep increasing duties ad infinitum. I am curious about the analysis in that document. What is the actual tipping point? Are we there now or do we need to increase duties by another 2 to 3 per cent.? Clarification would be helpful on where that tipping point is and the point at which we meet those diminishing returns?

John Healey (Labour, Wentworth)

I do not want to repeat myself. Perhaps the hon. Gentleman did not catch my words when I said that we are very close to the revenue maximisation point on cigarette duty at present? Were we to increase the duty on cigarettes by 4 per cent., we would raise only an extra £10 million or so. We believe that that is the level at which we would hit the revenue maximisation point.

In his intervention and his contribution, the hon. Gentleman argued that our smuggling problem is principally a product of the fact that our tobacco duty rate is high compared with that of our European Union counterparts. I do not really wish to refer him to other documents, but if I did he would see that the vast majority of illegal cigarettes are smuggled into the UK in freight from outside the European Union. No duty is paid on those cigarettes anywhere, let alone in the European Union, so to concentrate on the difference in duty between Britain and Belgium, Spain or France is to miss the point. It is misleading as a focus for analysis. I am not sure whether the hon. Gentleman advocates cutting the duty in the UK to a rate that is comparable with those that prevail in the rest of the world, but his Front Benchers might be interested in that proposition financially—because it would cost billions of pounds—and in terms of health, because it would lead to an increase in smoking.

Brooks Newmark (Conservative, Braintree)

On a point of clarification, I would never make any suggestion that would contradict my Front Bench, or the aspirations of my fellow Opposition Members.

John Healey (Labour, Wentworth)

I think that we have heard the first public job application from the hon. Gentleman. I wish him well in supporting all the positions that his Front Bench takes during the course of these proceedings. If he does not disagree with the hon. Member for Wycombe, he certainly does with the hon. Member for Ludlow. While he was arguing that rates should be lower, the hon. Member for Ludlow said that the price of cigarettes and the duty on them should be higher. There is clearly an interesting discussion taking place behind the hon. Member for Wycombe. All hon. Members will be interested in the fact that the UK has long maintained high levels of duty so as to keep prices relatively high in order to try to affect consumption. Other countries in Europe, such as France, Germany and Ireland, are beginning—both for public health reasons and for revenue reasons—to follow our lead.

As part of his contention that we should increase tobacco duty in real terms, the hon. Member for Ludlow is rightly concerned, as all hon. Members will be, to bring about further reductions in smoking in this country. It has been the policy of successive previous Administrations and this one to use duty rates to maintain high cigarette and tobacco prices. That has undoubtedly been a significant factor in the reduction in the number of smokers in the population, which has dropped from 35 per cent. in the early 1980s to some 25 per cent. now.

As the proportion of the population who smoke reduces, further gains are harder to achieve. While duty rates were never low—they were never the single club in the policy bag—a number of other measures are needed. That is why I mentioned in my opening remarks that, through the NHS, we are making a large investment in programmes to help people who want to quit smoking. Hon. Members will be aware that 70 per cent. of smokers say that they would like to quit. The cessation programmes that we have put in place through the NHS are important in that respect. Given our experience in Ireland and Scotland, we believe that the ban in smoking in public places is likely to have a further impact on the overall level of smoking in this country.

I welcome the support of the hon. Memberfor South-East Cornwall (Mr. Breed) for the Government’s policy of a comprehensive smoking ban in public places. I am not sure that his hon. Friend the Member for Twickenham (Dr. Cable), as the Liberal Democrats’ shadow Chancellor, will be quite so keen, but he will certainly be interested in his approach to tax harmonisation.

Let me end by saying that any members of the Committee who believe that there is merit in any of the four new clauses should have a word with me and I shall undertake to let them have copies of all the documents that we have published recently that cover the relevant territory. Hon. Members may take that as a promise or a threat, but I hope that it will help them to come to the right decision when we finally vote on the new clauses, not just on whether clause 1 should stand part of the Bill.

Paul Goodman (Conservative, Wycombe)

As I explained earlier, the new clauses were primarily an attempt to elicit from the Financial Secretary an up-to-date summary of the effectiveness of tobacco duty. He has thoroughly outlined the Government’s thinking, particularly on the revenue maximisation point. It was useful to hear him explaining the Treasury’s position that there is a point beyond which, if the duty were raised, it would almost certainly not drive consumption down, but it would drive smuggling and counterfeiting up. He was also right to say that duties are only one club in the bag, albeit an important club, and to give us details.

We have been given two pointers. One is the point that was raised by the TMA that the Government might miss their smuggling target if present trends continue. The other relates to the Financial Secretary’s kind offer to shower us with documents. While, as I said earlier, the Government’s anti-smuggling strategy succeeded in reducing the revenue loss for two successive years from 2001, it rose again last year. I should be glad—goodness knows why I am exposing myself to more documents in this way—if the Financial Secretary would point me towards the sections of the document that explain clearly and straightforwardly why that occurred. We do not intend to oppose the proposed rise in duties and will not press the new clauses to a vote.

Edward O'Hara (Labour, Knowsley South)

Order. The new clauses have not yet been moved. At the appropriate time, the hon. Gentleman may decide not to move them.

Clause 2

Paul Goodman (Conservative, Wycombe)

I beg to move amendment No. 10, in clause 2, page 2, line 13 [Vol I], after ‘who', insert

‘on a balance of probabilities'.

Edward O'Hara (Labour, Knowsley South)

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

No. 11, in clause 2, page 2, line 16 [Vol I], after ‘likely', insert

‘on a balance of probabilities'.

No. 12, in clause 2, page 2, line 28 [Vol I], after ‘subsection (1)', insert

‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.

No. 13, in clause 2, page 2, line 30 [Vol I], at end insert

‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.

No. 14, in clause 2, page 3, line 2 [Vol I], after ‘specified', insert ‘and reasonable'.

No. 15, in clause 2, page 3, line 28 [Vol I], after ‘may', insert

‘after seeking to establish the facts of the case with the manufacturer'.

No. 16, in clause 2, page 4, line 17 [Vol I], after ‘state', insert ‘fully'.

No. 17, in clause 2, page 4, line 27 [Vol I], at end insert

‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.

No. 18, in clause 2, page 4, line 28 [Vol I], at end insert

‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.

No. 19, in clause 2, page 4, line 46 [Vol I], leave out from ‘notice' to end of line 2 on page 5.

No. 20, in clause 2, page 5, line 4 [Vol I], leave out

‘(or are taken to have confirmed it)'.

No. 21, in clause 2, page 5, line 43 [Vol I], after ‘may', insert

‘after consulting the Commissioners, manufacturers and other interested parties'.

Paul Goodman (Conservative, Wycombe)

In introducing these amendments, I do not want to anticipate the clause stand part debate that will take place later. On the other hand, I have to say something about their context. The clause is important for this part of the Bill. In relation to the evasion of tobacco products duty, which we discussed in part a few moments ago, it sets out a series ofduties on manufacturers and penalties if they fail to comply with those duties, an appeals system and various supplementary provisions. The proposals are controversial. The Chartered Institute of Taxation, the Institute of Chartered Accountants and the Institute of Directors have reservations about them, and I shall explain later what those are. Before I do so, I want to go through the amendments in turn.

Amendment No. 10 refers to line 16 on page 2 of the Bill.

Edward O'Hara (Labour, Knowsley South)

Order. It is line 13.

Paul Goodman (Conservative, Wycombe)

I am grateful.

The amendment draws attention to the word “likely”. At present, the clause states:

“A manufacturer of cigarettes or hand-rolling tobacco shall so far as is reasonably practicable avoid—

(a) supplying cigarettes or hand-rolling tobacco to persons who are likely to smuggle them into the United Kingdom”.

I acknowledge that “likely” has been used in legislation, but it is the view at least of the Chartered Institute of Taxation that the word is a bit vague. We must remember that the assessment of likelihood will be made in due course by the commissioners, so it is important to be clear about the meaning of “likely”.

If I am not misrepresenting the position of the Chartered Institute of Taxation, it suggested that there are two interpretations of “likely”: one is a balance of probabilities, while the other is the alternative legal idea of beyond reasonable doubt. It is obviously important to be clear which meaning the Government have in mind. I take it that the Bill refers to likelihood on a balance of probability. If that were the Government’s view, it might be as well to write it into the Bill.

The Chartered Institute of Taxation said that the term “likely” is not absolute and could range from being likely on a balance of probabilities to beyond reasonable doubt. I will take its advice on the matter. When I read that, it occurred to me that something could be likely on a balance of probabilities and yet it had to be certain beyond reasonable doubt.

Rob Marrisrose—

Paul Goodman (Conservative, Wycombe)

I am happy to give way, not only to the hon. Gentleman but because he is a lawyer. He will probably cast some light on the matter.

Rob Marris (Labour, Wolverhampton South West)

I advise the hon. Gentleman in contradiction to the Chartered Institute of Taxation that “likely” means on a balance of probabilities. It is a standard legislative word; it does not mean “beyond reasonable doubt”. That is a criminal definition.

Paul Goodman (Conservative, Wycombe)

I thought that the hon. Gentleman might say that. As I said a moment ago, I was struck by that when I read the Chartered Institute of Taxation’s document. However, if the Government’s meaning of “likely” is “on a balance of probabilities”, the Paymaster General should explain why she might or might not want to make that clear under the Bill.

Rob Marris (Labour, Wolverhampton South West)

The Paymaster General does not need to take such action. The meaning is clear under the Bill and the word would be interpreted by a judge as meaning “on a balance of probabilities”. It is not a matter of ambiguity; there is no ambiguity. The word would be interpreted by a judge as the Chartered Institute of Taxation wishes it to be interpreted.

Paul Goodman (Conservative, Wycombe)

The hon. Gentleman might be right. If so, the Paymaster General will confirm that. There could be other interpretations of “likely” that I do not know about. It is even possible that the hon. Gentleman might not know of some interpretations of “likely”.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I wish to explore the matter a little further. I am also a lawyer. I am not sure whether that is good enough, but I shall do my best. Does my hon. Friend agree that, if a tobacco manufacturer were to get the judgments wrong, he would face a potential penalty of up to£5 million? Is it not right therefore that as much certainty as can be drawn into the Bill is desirable?

Paul Goodman (Conservative, Wycombe)

As my hon. Friend said, he is also a lawyer. The hon. Member for Wolverhampton, South-West did not know what he was starting when he got to his feet. My hon. Friend is right, and I shall return to the size of the penalty in due course. It is extremely important to get that matter right.

We have explored thoroughly amendment No. 10 on the importance of defining “likely”. AmendmentNo. 11 seeks also to insert the words

“on a balance of probabilities”.

Amendment No. 12 refers to subsection (2)(b) which describes the “written policy” that a manufacturer will be obliged to keep for the purposes of describing what they are doing to ensure that they are not unwittingly participating in fraud. The manufacturer will have to keep that policy to satisfy the commissioners. M hon. Friends and I are seeking to insert after “subsection (1)” the words

“unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty’s Revenue and Customs.”

Evidently, keeping such a policy will impose a burden upon manufacturers. That burden might be justified—we shall have that discussion a little later—but it is reasonable in principle to establish a means by which that burden might be lightened a little. A memorandum of understanding would be a possible means not unknown to the Treasury.

In March, the Treasury and Her Majesty’s Revenue and Customs published a joint document entitled “New Responses to New Challenges: Reinforcing the Tackling Tobacco Smuggling Strategy”. It acknowledged that the memorandum of understanding procedure, in which HMRC co-operates with UK tobacco producers rather than compelling them to act, has been a success. No doubt, the Financial Secretary wishes to draw our attention to that document. It states:

“MoUs between HMRC and the UK tobacco manufacturers have been an important element of the strategy, and have played a crucial role in restricting the availability of genuine cigarettes to smugglers. Since its peak in 2000/01, the incidence of UK manufactured cigarettes being smuggled into the UK has fallen markedly, from about 75 per cent of large seizures to 28 per cent in 2003/04.”

The Government were thereby acknowledging that those memorandums of understanding are an important element in their strategy.

It is true that in that document the Government ruled out using memorandums of understanding in the way that I have suggested. However, we feel that that decision has not been fully justified, although the Financial Secretary might attempt to do that in his reply. The main point of the amendment is to seek to establish whether a means can be found of lightening the considerable burden that will be placed on manufacturers if clause 2 comes into effect. Amendment No. 13 refers to the same policy and seeks to insert the same wording as amendment No. 12.

The Committee will be delighted to hear that we now turn to page three, where, on line 2, a requirement is placed on manufacturers. It states:

“The Commissioners may by notice in writing require a manufacturer of cigarettes or hand-rolling tobacco to provide, within a specified period of time, specified information”

contained in the three following subsections, which I shall not read out. The point is that the Bill says

“within a specified period of time”,

but there is no indication about how long that period will be. In effect, if manufacturers get a letter from the commissioners demanding that they fulfil their undertakings under the clause, they may, as far as I can see, be required to reply immediately; that might be the “specified period of time” referred to.

Stephen Hesford (Labour, Wirral West)

When the hon. Gentleman was dealing with clause 1, it was not entirely clear whether he was sanguine about the concept of smuggling. Clause 2(5) gives effect to subsection (4), under which the commissioners are attempting to cut down smuggling. I see the hon. Gentleman nodding. The commissioners may want to act sooner rather than later, with little notice or some flexibility, because that would give more weight and effect to the function that they would ordinarily carry out under subsection (4). Inserting the word “reasonable” might hamper the commissioners. Does he accept that? In those circumstances, would he ask leave to withdraw his amendment?

Paul Goodman (Conservative, Wycombe)

Without repeating the debate on the previous clause, it is evident that my hon. Friends and I take smuggling seriously. Debating the level at which the duty is set in no way suggests that we are frivolous about it. However, I am grateful to the hon. Gentleman for bringing me to the next point that I wanted to make, which is about the word “reasonable”.

I think that the hon. Gentleman said that if “reasonable” were inserted, it might hamper the entirely laudable anti-fraud drive of the Treasury and the commissioners. If that is so, the Financial Secretary will doubtless give us adequate reason when he replies. However, just for argument’s sake, I cannot immediately see why inserting the words “and reasonable”, which would merely require the commissioners to be reasonable, would be a blow against the laudable, praiseworthy anti-smuggling efforts of the Treasury and the commissioners. I think that, with the assistance of the hon. Member for Wirral, West, I have covered that point.

David Gauke (Conservative, South West Hertfordshire)

If there is a particular need for information to be provided quickly, it would be reasonable for there to be a demand for it to provided quickly; if the demand was not reasonable, it could take longer. It depends on the circumstances, and I do not think that one should assess all the factors and circumstances. If there is a reasonable need for information to be provided promptly to enforce the measure, I see nothing in my hon. Friend’s amendment that would prevent that.

Paul Goodman (Conservative, Wycombe)

Well, these—[Interruption.] My hon. Friend the Member for Fareham has just whispered, “He’s a lawyer, too”, which the rest of the Committee should know.

My hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) is right and as helpful as ever in making his point about reasonableness. The idea of reasonableness is not exactly foreign to Government Bills—whichever political party forms the Government—or foreign or extraneous to this Bill, which is full of clauses that use the word “reasonable” or the concept of reasonableness. I am attempting—I am sure that the Financial Secretary is attempting it too, and doubtless he will take up the point when he responds—to strike the right balance between the burden being placed on manufacturers, which raises important issues that we propose to discuss in the debate on clause stand part, and the Government’s anti-fraud drive. We must get that balance right.

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Gentleman give way?

Paul Goodman (Conservative, Wycombe)

I thought that I had finished, but I have not. I give way.

Rob Marris (Labour, Wolverhampton South West)

I suggest again that the amendmentis redundant. We are talking about tobacco manufacturers, who usually have a lot of money. If they think that the Government have not acted reasonably, they can apply for judicial review under Wednesbury principles, and they will win.

Paul Goodman (Conservative, Wycombe)

It is wonderful that that will be tobacco manufacturers’ only recourse, considering all the time, trouble and difficulty that they would face in applying for judicial review. I am waiting to hear what the Financial Secretary has to say, but I suggest that the Government might want to find a means to ensure that the manufacturers would not have to go to that trouble in the first place.

Mr. Gaukerose—

Paul Goodman (Conservative, Wycombe)

I am sure that a sharp legal point will be whizzing my way and yours, Mr. O’Hara, any minute now.

David Gauke (Conservative, South West Hertfordshire)

I am not sure whether it will be a sharp legal point, but it is a legal point none the less. The Wednesbury judicial test of unreasonableness is a very high bar that is difficult and expensive to meet. The word “reasonable” in this situation will set a more realistic bar than the Wednesbury idea of unreasonableness.

Paul Goodman (Conservative, Wycombe)

I have to confess, Mr. O’Hara—I am sure that the hon. Member for Wolverhampton, South-West already knows this, although my hon. Friend might not—that I am not a lawyer. Naturally, I say that with some embarrassment.

Mark Francois (Conservative, Rayleigh)

Some of his best friends are.

Paul Goodman (Conservative, Wycombe)

As my hon. Friend says, some of my best friends are. I do not know whether the hon. Member for Wolverhampton, South-West would automatically include himself among that number, but rather than explore that point, I shall return to concluding this section of my remarks. If the Financial Secretary believes that it is so unreasonable to insert the concept of reasonableness after the specified words in clause 2, he will say so. I shall listen to him with interest.

Subsection (1) of proposed new section 7B of the Tobacco Products Duty Act 1979 says that if “the commissioners think”—the word is not “believe” but “think”—

“that a manufacturer has without reasonable excuse”—

the word “reasonable” there was produced by Ministers rather than the official Opposition—

“failed to comply with the duty under section 7A(1)—

not to facilitate smuggling—

“they may give him written notice that they are considering requiring him to pay a penalty.”

In the interest of getting the balance right between the burden on manufacturers and the efficacy andefficiency of the Government’s anti-fraud drive, I ask the Financial Secretary whether, in the spirit of co-operation rather than confrontation, the commissioners can seek to establish the facts of the case with the manufacturer before winging out the written notice.

I move to line 17 on page 4. At present, the clause says that the penalty notice from the commissioners under proposed new section 7B(4)(a)

“must...state the grounds on which the Commissioners think that the manufacturer has failed to comply with the duty under section 7A(1)”—

the duty not to facilitate smuggling. We tabled amendment No. 16 in a probing spirit. It would insert the word “fully” after “state” to ensure that the manufacturer receives as full a letter as possible from the commissioners explaining how, in their view, the manufacturer has failed to comply. The Financial Secretary may argue that the concept of fullness is covered by the present form of words. If he does, I am sure that he will say so.

Amendment No. 17 refers to the concept of the memorandum of understanding, which is part of the Treasury’s practice, and seeks to include it in the Bill. The next amendment would do the same.

Amendment No. 19 refers to proposed new section 7C(3), which states:

“A manufacturer who is given a penalty notice may require the Commissioners to review the decision to issue the notice”.

However, the wording of subsection (3)(d) states that, if the commissioners have not varied or withdrawn the penalty within 45 days, they

“shall be taken to have confirmed the penalty”.

It is arguable that, should the commissioners seek to confirm the penalty, they should be obliged to do so, rather than it being assumed that they have done so. In that event, paragraph (d) should be deleted from the Bill. I look forward to the Financial Secretary’s response.

Amendment No. 20 refers to the same point. It would delete from subsection (4) the words:

“(or are taken to have confirmed it).”

I come now to the supplemental provisions. There is a tendency under such provisions to let the Executive branch of the Government have pretty wide sway. Proposed new section 7D(6) states:

“The Treasury may by order—

(a) amend the list”.

In other words, that is the list of matters to which the commissioners may have regard. Under the Bill, the Treasury may simply add, remove or amend at will entries in respect of that class of tobacco products, by order. The amendment would ensure that the Treasury consults commissioners, manufacturers and other interested parties before making what may, in effect, be sweeping changes to the lists of products.

The Financial Secretary might confirm that that is the Treasury’s proposal. However we seek that assurance from him. The purpose of the series of amendments is to strike the right balance between the burden on manufacturers and the effectiveness of the Government’s anti-fraud, anti-smuggling strategy. I look forward to hearing what the hon. Gentleman has to say.

Colin Breed (Liberal Democrat, South East Cornwall)

We must all agree that smuggling has been, continues to be and is likely to be a problem. However, an island nation like ours ought to be better placed than most in trying to prevent it from happening. The smuggling of cigarettes and alcoholic drink has become almost socially acceptable. It is unfortunate that many people do not see it as a great sin or breaking the law in any way.

Therefore, we have a situation in which, according to the notes, one in six cigarettes and half of all hand-rolling tobacco are smuggled. That in itself must cause us considerable concern. As, I think the Financial Secretary pointed out, much of that is large-scale smuggling in containers by organised criminal gangs who quite frankly are making huge profits—many millions of pounds. But those products are purchased by people. As we have seen recently, people are quite willing to buy materials in pubs that they do not question, but which might have been stolen. I suspect that there are considerable distribution networks that underlie those huge gangs. I do not know how they could distribute literally millions of cigarettes without clear distribution networks in this country in order to dispose of the smuggled material.

I shall return to my visit to Belgium to which I alluded earlier. I went there with a few other hon. Members to look at a particular operation set up purely to ensure that smuggled tobacco came into this country. We visited a warehouse just inside Belgium that was stacked to the gunwales with cigarettes and hand-rolling tobacco. Apparently it was restocked twice a week—a massive warehouse emptied out and refilled twice a week.

The proprietor seemed to use a cash system. I did not see anyone paying with cheques, credit cards or anything like that. He had a huge tea chest for a till which was full of £10, £20 and £50 notes and more in euros and other currencies. Next to it were standing two large gentlemen as a sort of insurance policy against someone taking the tea chest away.

We were invited to have a conversation with the owner, who, I imagined from his accent, was from London. He was quite open about what he was doing. I said, “Well, doesn’t anyone come to check?” He said, “We get checked probably every week. We are raided every week by the authorities. They come to check on what we are doing.” I asked if there were ever any problems and he said, “No, we adhere to all the regulations that we are required to meet, so we carry on.”

With four or five hon. Gentlemen in their suits parading around that place, a considerable number of cars came, slowed down, looked at us and then disappeared around the corner. So we were not invited to stay for long because it looked like we were having a bad effect on the owner’s trade. I asked him roughly how much cash went through his business in a year. He said, “I can be quite clear about that. Last year we tipped just over £100 million.” I asked what sort of profit margin that was and he said, “Easy. Between2 and 2.5 per cent.” I said, “So you make about£2.5 million in profit.” He said, “That’s about right.” Moreover, I would not have thought that his overheads would have amounted to a huge amount.

The owner made no bones about the fact that some people even had sports bags that carried precisely the amount of rolling tobacco that they considered could get through customs, which were then put in with others. They appeared to be returning tourists when they were actually day trippers. Sometimes such people would go over two or three times a week to do nothing other than pick up that sort of material and bring it back. I do not suppose that that has changed much. That might be considered small-scale, but while we were there at least 100 customers must have come along and picked up goods for cash. I cannot imagine that that was all for their own consumption.

So we have day trippers going not only on booze cruises, but on tobacco forays. Part of the problem is defining personal consumption. To me and other Committee members, it would be nil, but to others it could be 50, 60 or 100 a day. Many of my constituents, and perhaps others, have fallen foul of customs—even people who might have been quite innocent in their decision to get some cigarettes for their friends and themselves. We know of cases when even cars have been confiscated because customs have decided that people have gone over the limit. There was certainly not great clarity then about what could be imported and how it could be used. I hope that there is much better clarity now. Clearly, if the products are to be sold in this country, that is illegal. Most people understand that, but few people would decide not to purchase cigarettes, and rolling tobacco in particular, from people whom they knew had bought them without paying the duty.

As many members of the Committee have said, such action undermines our confectioners, tobacconists and newsagents who are under siege anyway. They are under siege because of supermarkets having taken their business; they are under siege because of newspaper wholesalers being difficult to them and they are under siege because of so much smuggled tobacco. That was pointed out by my local CTN who in one week sold only about 20 or so packs of rolling tobacco, but enough cigarette papers to roll about 5,000 or 6,000 cigarettes. He was for ever more having to order and sell cigarette papers, but did not sell too much of the rolling tobacco that was supposed to be put in them.

It is obvious that there are huge amounts of smuggled material. It is right that the Government should get the position under control. Perhaps the Minister or others may know about it, but I have not seen reports in my local papers of organised networks of distribution in this country that have been busted. No great effort has been made to close down some of the internal networks, but I hope that there will be in future. The manufacturers have an obligation to support such efforts. They make huge profits from tobacco products. We are moving away from memorandums of understanding to a more statutory obligation. We are trying to put more pressure on manufacturers. If that is so, a certain amount of clarity in respect of what the manufacturers need to do is required by tourists and day trippers to avoid penalties.

Will the Minister say whether the provisions cover small-scale smuggling? Will those who bring in small-scale amounts of cigarettes and rolling tobacco be caught more heavily under the Bill? Will it be made clear to them what the penalties will be? Will we make certain that constituents will not realise suddenly that they are infringing the law to the extent that they will be subject to huge penalties? Clause 2 refers continually to cigarettes.

Edward O'Hara (Labour, Knowsley South)

Order. I am listening carefully to the hon. Gentleman. He is slipping between speaking to the amendment and speaking to clause stand part. I have been generous with him so far, but I must say to him and others who wish to speak that we are not debating clause stand part, but these fine amendments.

Colin Breed (Liberal Democrat, South East Cornwall)

I am grateful to you, Mr. O’Hara. I am sorry for speaking in a wider context.

The amendments refer to specific parts of the clause, which refers only to cigarettes and hand-rolling tobacco. However, clause 1 refers also to cigars. I do not know whether there is a huge smuggling operation in cigars, but is the clause confined purely to those two products?

David Gauke (Conservative, South West Hertfordshire)

I hope to speak during the clause stand part debate, but I want to speak to amendmentsNos. 12, 13, 17 and 18, which refer to the memorandum of understanding mentioned by my hon. Friend the Member for Wycombe. He quoted from a document produced by the Treasury and HMRC, “New responses to new challenges: Reinforcing the Tackling Tobacco Smuggling Strategy”, which identified the important role played by co-operation between the industry and the Government. There seems to be no doubt that restricting the availability of genuine cigarettes to smugglers is crucial, too; that is an important part of Government policy, and that is to be welcomed.

One of my concerns about clause 2 is that there is no recognition of the role of co-operation with the industry and no reference to the memorandums of understanding—other than those in my hon. Friend’s amendments, of course. The purpose of amendments Nos. 12, 13, 17 and 18 is to put the memorandums on almost a statutory basis, or at least to create a role for them, so that there is a recognised role in legislation for co-operation between the Government and the industry. That is important because greater co-operation with the industry may continue to be essential in reducing smuggling.

We all wish to reduce the amount of smuggling, for obvious reasons, but industry co-operation has been essential to the success in doing so in recent years. I fear that as we move towards a statutory basis, industry involvement may diminish; there may be less incentive and less desire for the industry to assist the Government. I am concerned about that, and that is why I should be interested to hear the Financial Secretary’s views on where memorandums of understanding will lie following the implementation of the Finance Bill. Is there still a desire on the part of the Government to work with industry, and how could that be recognised in the Bill? Could the burdens on industry be not reduced, but made more suitable for them, so that there is a line of communication between Government and industry, and so that there are effective measures for tackling smuggling?

Philip Dunne (Conservative, Ludlow)

support the amendments tabled by my Front-Bench colleagues. In particular, I wish to speak on the amendments referred to by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke), which have to do with the memorandum of understanding.

According to the document referred to, we have had some success in reducing the proportion of smuggled cigarettes manufactured in this country to 28 per cent. in 2003-04. That is obviously good news, but it means that 72 per cent. of smuggled cigarettes being sold in this country are manufactured overseas. My concern about the Government proposals thus far is how the measures will affect overseas manufacturers in practical terms. I shall be most interested to learn from the Minister how the Government expect to encourage manufacturers to comply with the regulations if we do not encourage them to co-operate with HMRC and the authorities in this country through means such as memorandums of understanding.

The wording in proposed new section 7A, referring to the likelihood of manufacturers’ customers smuggling into this country, is extremely vague and gives manufacturers a great deal of opportunity to argue that all their customers are bona fide. How on earth can HMRC, when prosecuting those manufacturers, prove that there was not bona fide intent? That would be extremely difficult, and that is why a memorandum of understanding can work through the arrangements between the manufacturer and the Revenue to provide proper enforcement. The other matter that arises, given that the clauses are directed at overseas manufacturers, is jurisdiction and territoriality. I am not an expert on that. Unlike others who have spoken, I am not a solicitor, and would have difficulty in interpreting this legislation alongside the legislation that might apply in jurisdictions under which non UK-based manufacturers are incorporated. Does the Minister appreciate the fact that memorandums of understanding with foreign-based companies might be the best way to overcome territorial and jurisdiction issues?

John Healey (Labour, Wentworth)

It is difficult to debate the amendments without dealing with the broader context of the clause. Although the hon. Member for Wycombe did that very effectively, his hon. Friends ranged rather more widely. Some of the points that they raised were better suited to clause stand part.

Edward O'Hara (Labour, Knowsley South)

Order. The Minister has highlighted something that I have seen from the Chair—the difficulty of staying within the amendments while keeping clear of clause stand part. If the Committee will be happy, I shall move from the Chair that we combine the debate on the amendments with a clause stand part debate, in which hon. Members who have spoken may speak again. That should overcome the difficulty that a number of us have identified.

John Healey (Labour, Wentworth)

I am grateful for that guidance,Mr. O’Hara. In that case, I shall have a bash at both. Let me start with the hon. Member for South-East Cornwall, who made a number of general comments, and gave us a vivid description of the retail warehouse that he visited in Belgium. I am curious to know—he might not wish to answer—whether he rang the customs confidential phone line when he came back. If he did not have the number, I shall happily supply it to him.

Colin Breed (Liberal Democrat, South East Cornwall)

I did better than that. We raised it in an Adjournment debate in Westminster Hall, in which all of those who went spoke.

Mark Francois (Conservative, Rayleigh)

Was that designed to keep it confidential?

John Healey (Labour, Wentworth)

The hon. Gentleman made a serious point, namely that those operations are highly organised and can be very profitable. Both the memorandums of understanding and the clause that we are debating are designed to ensure that we can clamp down further on sources of tobacco that might enter illegal or illicit supply chains. His comments, while vivid and relating to events two or three years ago, were pertinent to our discussion today.

The hon. Members for South-West Hertfordshire and for Ludlow wanted proper recognition of the role of memorandums of understanding, and of the co-operation that there has been with tobacco manufacturers in recent years. I shall come to that in detail. The hon. Member for South-West Hertfordshire mentioned the document that we published at the time of the Budget, “Reinforcing the Tackling Tobacco Smuggling Strategy”. That clearly points out how important close co-operation and voluntary memorandums of understanding can be in helping us to clamp down on sources of tobacco and cigarettes that have found their way into illegal and illicit supply chains in this country.

Jeremy Wright (Conservative, Rugby and Kenilworth)

Will the Minister accept that not including the memorandums of understanding specifically in these clauses and this new regime tends to indicate to manufacturers, if to nobody else, that the Government’s view is that the memorandums of understanding regime has not done the job properly? If he accepts that memorandums of understanding are important, is it not vital that they be specified in this clause?

John Healey (Labour, Wentworth)

If the hon. Gentleman will allow me, I shall explain the position. If he feels that I have not dealt with it, he can respond. I do not think that he appreciates the fact that clause 2 mirrors the memorandum of understanding. Those of our UK manufacturers that have a memorandum of understanding in place will find it much easier to comply with the clause than those that do not. We want manufacturers that do not have one to be covered by the same regime, and clause 2 will ensure that they are.

Memorandums of understanding go beyond the provisions and purpose of clause 2. They cover issues that help us to work with the tobacco manufacturers to deal with counterfeit cigarettes, and they set out levels of co-operation that support other anti-smuggling strategies. Memorandums of understanding are important. They are the basis on which clause 2 is built. The clause mirrors the memorandums of understanding in many ways but does not replace them, because they play an important and much wider part in our anti-smuggling activities.

I shall deal with the comments of the hon. Member for Wycombe, amendment by amendment. The problems appear to have been raised more by tax advisers than by tobacco companies and the industry itself. He described the amendments as probing amendments. I hope that I can reassure him and other Committee members on the points.

Amendments Nos. 10 and 11 seek to introduce a defence for tobacco manufacturers, based on the balance of probability, against the accusation of facilitating smuggling. My hon. Friend the Member for Wolverhampton, South-West was right: the amendments are not necessary, as the conventional legal interpretation of “likely” is based on the balance of probability. The clarification proposed in amendments Nos. 10 and 11 is simply not necessary.

Amendments Nos. 12 and 13 seek to exempt tobacco manufacturers that have entered into memorandums of understanding with HMRC from the requirements to maintain and provide a written policy setting out their approach to controlling and monitoring their supply chains. Likewise, amendments Nos. 17 and 18 aim to remove the content of the supply chain policy and the manufacturer’s compliance with it from the list of factors taken into consideration when determining the amount of any penalty.

As I have said, the draft legislation is designed to mirror those memorandums of understanding. UK manufacturers with MOUs supply us with their documents already. Although a manufacturer might have agreed particular terms in an MOU, which might be helpful evidence of its willingness to comply, such agreements are voluntary. They do not provide any means of enforcement if a manufacturer does not adhere fully to the terms agreed.

An additional point worth making is that the clause as drafted will create equality of responsibility among tobacco manufacturers. In other words, it will ensure that those manufacturers that have entered into and complied fully with a memorandum of understanding are not disadvantaged. Providing exemptions on the strength of a memorandum of understanding would send the wrong signal to manufacturers, providing a potential incentive to enter into a voluntary agreement for the purposes of avoiding the clause’s obligations.

Amendment No. 14 refers to any notice given by HMRC to the manufacturer to provide within a reasonable period specified information about supplies of its brands to particular customers and markets. Such notifications will be made by HMRC where there is a particularly high risk of smuggling, and as a result manufacturers will be expected to exercise greater control over their supply chain policy.

It is a general principle of public law that HMRC must act reasonably. The addition of the word “reasonable” is therefore unnecessary, as it is implicit not just in the provision but in the clause as a whole.

Brooks Newmark (Conservative, Braintree)

I have been perusing the explanatory notes. Paragraph 33 of the section that relates toclause 2 states:

“HMRC attach a large margin of error to estimates of profits tobacco manufacturers gain from this trade,”—

I assume that that refers to the illicit trade that we are discussing—

“but they estimate profits to be in the region of £33 million or £55 million, depending on different methodologies used.”

It would be helpful if the Minister clarified that that refers to the illegal or illicit trade that manufacturers enter—unbeknown to them, I assume. I am curious about why there is an almost 60 per cent., more than £20 million, difference between the sums.

The paragraph goes on to state:

“The UK tobacco manufacturers accept that they have a certain responsibility for ensuring that cigarettes and HRT, sold to markets outside the UK, are not supplied or re-supplied to persons likely to smuggle them into the UK. To this end a number of the UK tobacco manufacturers have agreed a Memorandum of Understanding...with the Commissioners of HMRC.”

Does that memorandum of understanding have any teeth that the Minister is aware of, or is that statement just generic? Will we have a debate in a year’s time and find out that £33 million to £55 million in illegal profits is still being made?

John Healey (Labour, Wentworth)

The purpose of clause 2 is to giveteeth to the very provisions and approach of the memorandum of understanding. If the hon. Gentleman and other Conservatives were successful in blocking the progress of the clause, we might indeed return to this issue, next year or the year after, with little impact having been made on the profit margins that he cited from the explanatory notes.

Calculating anything connected with the operation of and margins in an illicit supply chain is inherently difficult. Such calculations involve the profits that can accrue to legitimate manufacturers producing and supplying genuine products that may, at a point down the supply chain, be diverted, avoid duty and be resold. That is not the profits that those manufacturers make on that activity, but the profits made on the products at source that may eventually find their way, according to our ability to calculate and estimate, into the illicit market. That is why there is inevitably a margin of error with such calculations. That is the nature ofhow the product is sourced and supplied, and the memorandum of understanding, reinforced byclause 2, is designed to try to choke off such illicit profits.

Brooks Newmark (Conservative, Braintree)

The margin of error strikes me as rather large; we are talking about not 5 per cent. or10 per cent. but a more than 60 per cent. margin of error. That has perplexed me. Has the Minister done any analysis on how we could narrow that margin of error?

John Healey (Labour, Wentworth)

We are able to improve our analysis; sometimes, doing that reduces the margin of error to the extent that we have good quality and improving information about the activities in the illicit field and the operation of the supply chain right back to the source—the legitimate manufacturers. Given that we are building up that work and that HMRC is sharing information with tobacco manufacturers about seizures, we are building up a better picture of the pattern of supply chains. With that picture, we can more effectively try to choke off such illicit activities, and ultimately we will be able to get a better measure of them.

I cannot give the hon. Gentleman any promises on reducing the margin of error, but I hope that I have explained the nature of the problem that we are trying to assess and calculate and why it is right to indicate that there will inevitably be a margin of error.

Brooks Newmark (Conservative, Braintree)

I understood that, as the Minister correctly pointed out, the whole point of the memorandum of understanding was to give more teeth. I hope that the Minister can give me confidence that, if I am lucky enough to be on the Finance Bill Standing Committee one year from now and I refer to the explanatory note on clause 2, the margin of error will not be 60 per cent. and the numbers will be far smaller than those in this year’s explanatory notes.

John Healey (Labour, Wentworth)

I hope that I, too, will be on the Standing Committee next year and still in the position that I hold now.

Rob Marris (Labour, Wolverhampton South West)

Will my hon. Friend take the opportunity to explain to the hon. Member for Braintree that it is not a question of margin of error? As the explanatory notes say, different methodologies produce different results. That does not mean a margin of error. The hon. Gentleman does not seem to understand that.

John Healey (Labour, Wentworth)

My hon. Friend is right. It is essentially a measure of margin of uncertainty.

Brooks Newmark (Conservative, Braintree)

Let me clarify the point. Two or three questions ago I asked the Financial Secretary to clarify what the methodologies are.

Edward O'Hara (Labour, Knowsley South)

Order. It is not clear to me whether the Financial Secretary is taking that intervention.

John Healey (Labour, Wentworth)

I give way to the hon. Gentleman.

Brooks Newmark (Conservative, Braintree)

I apologise, Mr. O’Hara, and I thank the Financial Secretary for giving way. If the hon. Member for Wolverhampton, South-West had listened to my question two or three questions ago he would know that I asked what assumptions lie behind those methodologies that created such a large difference and how we can narrow them.

John Healey (Labour, Wentworth)

I shall take this opportunity to return to the point that I was dealing with and the sensible questions asked by the hon. Member for Wycombe about the reasonableness of HMRC’s approach. That is important because the question of judicial review was raised by my hon. Friend the Member for Wolverhampton, South-West, who asked whether failure to provide information becomes a factor in issuing any penalty. The reasonableness of the request may be brought before a VAT and duties tribunal, which may then judge the matter. That may be a more available form of challenge and legal redress than judicial review.

The clause to which amendment No. 15 relates deals with the issuing of an initial notice to a tobacco manufacturer when HMRC believes that that manufacturer has failed to comply with its duty. The amendment would require HMRC to establish the facts of the case with the manufacturer before issuing any notice. Again, the amendment is unnecessary because such a requirement is implicit in the various factors that HMRC must consider before issuing a notice, the majority of which would benefit fromsome serious dialogue between HMRC and the manufacturer. The provision reflects the framework of sharing information and the ongoing dialogue based on the memorandums of understanding within which the clause has been created, and permits any manufacturer to place the facts of the matter before HMRC at any time prior to the issuing of a notice. It would not be in HMRC’s interests to issue a notice without trying to establish the facts first.

Amendment No. 16 would require HMRC to state fully the grounds for any penalty notice rather than just to state them. Again, it is clearly in HMRC’s interest to state the factors taken into consideration when issuing any penalty and any failure to do so is likely to be looked on unfavourably in any subsequent tribunal proceedings.

Amendments Nos. 19 and 20 deal with the provision for a departmental review of a penalty notice. That is an important stage in the safeguards for manufacturers and the way in which HMRC manages the process. The clause states that unless the manufacturer has been informed to the contrary within 45 days the penalty will stand. That decision may subsequently be contested at the VAT and duties tribunal. That is standard practice with excise duties and I am not sure that it would make much sense to try to make an exception in the clause. To do so would merely add uncertainty for those organisations and manufacturers involved in dealing with duty on tobacco products.

Amendment No. 21 would require consultation with commissioners, manufacturers and other interested parties prior to any amendments made by Treasury order. I shall say a couple of things that I hope will reassure the hon. Member for Wycombe, because we are discussing a proper concern about the process through which the Government go to legislate either by primary or secondary legislation, or by subsidiary guidance. As I think he knows, there are well established forums for HMRC and the Government to consult, and discuss with, manufacturers and other interested parties. They would be used before any amendments were made to the clause.

The hon. Gentleman might not be aware, although I have circulated copies to the Committee, that tobacco products amendment regulations have been circulated in draft, and manufacturers have received them. They are already the subject of discussions with those parties and they cover aspects such as the detailed operation of the scheme, the seizure thresholds and information to be provided on seized products. I hope that he will take that as an indication of our approach to the development of policy and of any legislation that may flow from the primary clause.

Before the scheme is implemented fully, we willprepare and issue guidance. Before and as we do so, we shall consult manufacturers about it. That process is also under way. I hope that I have given the hon. Gentleman sufficient explanation or assurance on the specific points that he was probing with hisamendments to encourage him not to press them to a Division. If he does so, I shall ask my hon. Friends to resist them.

The clause imposes a general duty on tobacco manufacturers to avoid, as far as possible, facilitating the smuggling into the UK of cigarettes or hand-rolling tobacco that they may have manufactured and distributed. The measure forms a central part of the reinforced strategy to tackle tobacco smuggling that was published on Budget day. By discussing the amendments, we have dealt with the operation of clause 2 in many respects. I stress that the legislation includes important safeguards to avoid the manufacturer being penalised unjustly for the actions of others or being penalised without having a chance to take steps to control better their supply chains. Such matters lie behind the hon. Gentleman’s amendments.

I have already talked about how the legislation and the memorandums of understanding encourage and foster a greater degree of dialogue between the tobacco manufacturers and HMRC. I would be delighted if HMRC never has to raise a penalty notice under the provisions of clause 2 and would regard the clause as being equally successful as I would if we had to do so. If HMRC were to raise a penalty notice, it would have to take into account a long list of factors, which would help to provide important checks and balances. As I have said, tobacco manufacturers will have a right to a departmental review of any decision to impose a penalty and the right of appeal to a VAT and duties tribunal if they are not satisfied with the results of the review.

I pay tribute to the level of co-operation that now exists with our leading manufacturers, through the memorandums of understanding with HMRC.Tim Lord, the chief executive of the Tobacco Manufacturers Association, said:

“This new MOU demonstrates the high level of co-operation that exists between HMRC and the tobacco companies in the UK. We hope that it will contribute to a further reduction in the level of smuggling and so curb the consequent damage to legitimate business”.

The reaction at Gallaher Group plc to the Budget strategy and the provisions in the Finance Bill typified that level of co-operation and the extent of the acceptance that we now need to reinforce the memorandums of understanding with legislation.Jeff Jeffery from Gallaher commented:

“We continue to support the Government’s initiatives to stop tobacco smuggling. The Government’s actions to reinforce its strategy for tackling tobacco smuggling will, we hope, result in further reductions in the illicit trade in tobacco and cigarettes.”

We have discussed the provision fully with those affected and will continue to do so as we develop the detail of the implementation process. I hope that the hon. Member for Wycombe will regard as satisfactory my specific comments on his amendments and not seek to press them, and that when we come to the clause stand part debate, he and his hon. Friends will actually support it.

Edward O'Hara (Labour, Knowsley South)

Perhaps it would be easier if I clarified the procedure that we are now following. The amendments have been proposed and in the course of the debate it became clear that it was difficult to isolate remarks on the amendments from the substance of the clause, so I incorporated the clause stand part debate into that on the amendments. The clause stand part debate may continue and references may be made to the amendments, although I hope that they will not be repetitious. At the end of the debate we shall dispose of the amendments and I shall put the question that the clause stand part without further debate.

George Young (Conservative, North West Hampshire)

It is a pleasure to serve under your chairmanship,Mr. O’Hara, and to return to the Standing Committee on the Finance Bill after a gap of some 10 years.

I welcome any measure that deals with smuggling and indeed any that deals with smoking. I happen to be opposed to both. I listened carefully to the Minister, but did not hear any estimate of the impact of clause 2 on the substantial evasion of revenue listed in the background notes—the figure of some £2.9 billion. That should be of interest to any Treasury Minister. I would like to know what the impact on that figure would be if the measures in clause 2 were implemented.

I have looked through the Red Book to see if it contains such an estimate. Under the heading “Budget Policy Decisions” is a section entitled “Protecting Tax Revenues”, which is what clause 2 does, but there is no estimate in that column of the impact of extending the use of the memorandum of understanding. Likewise, I looked at the text of the Red Book to see what will happen to tobacco revenues, but the only reference to a revenue forecast that I could find was on page 265, which states:

“The tobacco forecast includes an estimate of the impact of the smoking ban on consumption in enclosed workplaces”

which will reduce receipts. However, it does not say if clause 2 would increase receipts.

It would be helpful if the Minister could tell us by how much the £2.9 billion loss would be reduced if clause 2 were to stand part of the Bill. Listening to his remarks I can see that on the one hand revenue might increase because if access to illicit tobacco is eliminated and people have to buy through the tobacconist, there will be more revenue for the Treasury, but on the other hand, if overall demand is reduced and the manufacturers produce fewer cigarettes, there will of course be less revenue.

All I seek is an estimate of by how much the Treasury will benefit if the measures in clause 2, which seem entirely sensible, are adopted. By how much will the Treasury be better off? I am sure that the Treasury would not put such a clause before the Committee unless it had made some estimate of the benefit that would accrue to the public Exchequer.

Jeremy Wright (Conservative, Rugby and Kenilworth)

May I take this opportunity to say how pleased I, too, am to serve under your chairmanship, Mr. O’Hara?

I support the intention that the Government have demonstrated in clause 2 of cutting back on the smuggling of tobacco and increasing the revenue that the Exchequer can then retain, but I am concerned about the burden of obligations that will be placed on tobacco manufacturers. Will the Minister make it clear that those burdens have been thought through properly and that the language in the clause will assist tobacco manufacturers in knowing exactly what they have to do to comply?

It will be difficult for tobacco manufacturers or anyone else to moderate their behaviour to avoid someone else behaving in a criminal way, but that is what clause 2 expects of them. Under proposed section 7A of the Tobacco Products Duty Act 1979,

“A manufacturer of cigarettes or hand-rolling tobacco shall so far as is reasonably practicable avoid...supplying cigarettes to persons who are likely to smuggle them into the United Kingdom”

or

“supplying cigarettes...where the nature of the circumstances of the supply makes it likely that”

smuggling will take place.

We have broadly clarified the fact that the likelihood will be based on a balance of probabilities, whether or not it is stated in the Bill, but there remains the difficulty of what it is that a tobacco manufacturer can reasonably be expected to anticipate in the behaviour of the person to whom he is supplying the tobacco. That is a substantial difficulty. In the situation described by the hon. Member for South-East Cornwall—a large gentleman and a tea chest full of money—it is pretty clear that something illicit is about to happen. However, such situations are not faced by every tobacco manufacturer when supplying its product.

There should be some clarity about the circumstances in which tobacco manufacturers should look to understand their obligations. Some assistance is given under subsection (2) of proposed section 7A.

Stephen Hesford (Labour, Wirral West)

The hon. Gentleman misleads himself. Subsection (2) of proposed section 7A sets out some of the things that the tobacco manufacturers will have to consider. As has been said, this is not a new thing. It is an ongoing process; we are including something in the Bill that is already in train. If a manufacturer knows that the market of a tobacco supplier who is buying huge quantities of tobacco is a tiny home market, it will be obvious that the tobacco is being sold elsewhere. I am not sure what point the hon. Gentleman is making.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I suspect that the hon. Gentleman may have been a little too hasty in his intervention as I was about to deal with subsection (2). Indeed, I had started to do so.

I concede that there is some assistance for the tobacco manufacturer, but nowhere enough. Subsection (2) states:

“In particular, a manufacturer...in supplying cigarettes or hand-rolling tobacco to persons carrying on business...shall consider whether the size or nature of the supply suggests that the products may be required for smuggling into the United Kingdom”.

That is a helpful indication of the sorts of things that tobacco manufacturers might look for. Indeed, I go further. I concede that subsection (4) of proposed section 7A states:

“The Commissioners may notify a manufacturer in writing that they think the risk of smuggling into the United Kingdom is particularly great in relation to”

particular people, particular products or particular places.

The clause provides assistance. My concern is that it could have been phrased the other way around. Why should not the Government set out the sort of things that they want manufacturers to consider, giving a definitive list rather than simply imposing a general obligation on tobacco manufacturers to avoid getting into trouble with those who might be about to smuggle the goods that they had supplied? They could list specific things that tobacco manufacturers should avoid doing—specific ways to avoid entangling themselves—and if tobacco manufacturers failed in that, penalties should of course follow.

That broad obligation given in subsection (2) is not specific enough about what precisely a tobacco manufacturer should avoid doing. As has already been observed, the penalties for a tobacco manufacturer failing to comply with the obligations set out in the clause can be considerable. I ask the Minister to assist us by being a little more specific about why the Government chose the language of this clause and did not tighten it up.

Tobacco manufacturers are being asked to decide whether they believe it likely that products that they supply are likely to go on to be smuggled by others. That is a very subjective judgment. The Government require them to construct policy statements that say, “We considered the following things before we supplied our product to the potential smuggler.” Again, there does not seem to be any aspect of the clause that indicates how to measure whether that policy document is reasonable. What is to prevent the manufacturer from saying, “I have considered whether the person to whom I am supplying is likely to smuggle, and I believe that he is not likely to do so. That is my decision; I have written my policy document in those terms and therefore I have done what I need to do.” There does not seem to be enough specificity in the clause to make tobacco manufacturers clear about what they have to do.

Finally, the clause provides for an appeal to the VAT and duties tribunal. It is not clear—or at least as clear as I should like it to be—what the grounds for such appeals would be. Again, I ask the Minister to assist us by indicating in what ways appeals can be made, and the grounds for them.

Paul Goodman (Conservative, Wycombe)

It is also not clear from the clause whether the person who will hear the appeal is to be somebody other than the person who made the original judgment.

Jeremy Wright (Conservative, Rugby and Kenilworth)

My hon. Friend is entirely right. The clause provides for a review of the original penalty notice to be made by the commissioners, but it does not indicate that that review should be made by somebody other than the author of the original penalty notice, which would be desirable in the interests of justice. Again, the Minister may wish to assist us.

Rob Marris (Labour, Wolverhampton South West)

I welcome you to the Chair,Mr. O’Hara, and thank the hon. Member for Wycombe for probing the wording of the Bill. In my experience, on occasion the wording of Bills is not as good as it should be. That is particularly important in the case of the Finance Bill, because it does not go to the other place, where it might be tidied up further. I know that my hon. Friend the Financial Secretary will think that I am being pedantic, but to demonstrate that we need to be careful about wording, I refer him to line 24 on page 2. That sets out the facts that are to be looked at by manufacturers as guidelines and, inter alia, says:

“shall consider whether the size or nature of the supply suggests”.

I invite my hon. Friend to introduce an amendment on Report to change the word size to quantity or amount, which is more elegant and more accurate.

Philip Dunne (Conservative, Ludlow)

I was disappointed that, in responding to the debate on the amendments, the Minister did not take the opportunity to pick up my points about territoriality. It is increasingly clear from this debate that the clause is directed primarily at UK-based manufacturers; the Financial Secretary quoted from their representatives at the beginning of the stand part debate. However, as has also been made clear by me and others, the bulk of the smuggling into this country is of cigarettes that have been manufactured outside this country. I urge the Financial Secretary to address how the clauses will work in practice against foreign-based firms. In that connection, has any form of regulatory impact assessment been undertaken on the impact of this sledgehammer approach on the UK firms that already co-operate thoroughly with the Government in seeking to reduce smuggling? It might be that, because this is my first Finance Bill, I am not aware of the necessity or otherwise for RIAs, which are usually made for non-financial Bills. It would be helpful if that could be clarified.

The hon. Member for Wirral, West illustrated very precisely the nature of the problem.

Standing Committee A

Andrew Selous (Conservative, South West Bedfordshire)

On a point of order, Mr. O’Hara. I have spoken to some of the members of the public who listened to our deliberations this morning. They have told me that in these long Committee rooms, it is quite difficultfor them to hear. I wonder whether through you,Mr. O’Hara, the Committee would agree to allow them to move to the end of the first gangway, so that they could hear us a bit better.

Edward O'Hara (Labour, Knowsley South)

That seems a reasonable request. We could move the notional bar forward to just beyond the table, and perhaps arrange next week to have a physical bar. If there are no objections to that, I invite members of the public to move forward.

Clause 2

Edward O'Hara (Labour, Knowsley South)

I remind the Committee thatwith this we are discussing the following amendments: No. 11, in page 2, line 16 [Vol I], after ‘likely', insert

‘on a balance of probabilities'.

No. 12, in page 2, line 28 [Vol I], after ‘subsection (1)', insert

‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.

No. 13, in page 2, line 30 [Vol I], at end insert

‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.

No. 14, in page 3, line 2 [Vol I], after ‘specified', insert ‘and reasonable'.

No. 15, in page 3, line 28 [Vol I], after ‘may', insert

‘after seeking to establish the facts of the case with the manufacturer'.

No. 16, in page 4, line 17 [Vol I], after ‘state', insert ‘fully'.

No. 17, in page 4, line 27 [Vol I], at end insert

‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.

No. 18, in page 4, line 28 [Vol I], at end insert

‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.

No. 19, in page 4, line 46 [Vol I], leave out from ‘notice' to end of line 2 on page 5.

No. 20, in page 5, line 4 [Vol I], leave out

‘(or are taken to have confirmed it)'.

No. 21, in page 5, line 43 [Vol I], after ‘may', insert

‘after consulting the Commissioners, manufacturers and other interested parties'.

Philip Dunne (Conservative, Ludlow)

Mr. O’Hara, I thank you for calling me after the intermission. I am particularly grateful for the point of order, too, because it has given the hon. Member for Wirral, West (Stephen Hesford) time to take his place. I was in mid-sentence and using his intervention in the previous sitting to illustrate not the point that he was trying to make but the reverse. If I interpreted his remarks correctly, he suggested that it would be possible to identify whether foreign-based manufacturers were likely to be selling to customers who might smuggle cigarettes or tobacco products into this country. The nature of the local market would indicate in itself whether the sale was of sufficient scale for the market to be prone to smuggling.

Some nations are small but active traders. This country has established most of its economic heritage on the back of trading with other larger and smaller nations. From my own experience, I know for example that the market of Hong Kong, with 6.5 million residents, is an entrepot to the market of greater China, with its more than 1 billion inhabitants.

I should be interested in whether the hon. Gentleman’s test was relevant to a customer of a tobacco-importing business in Hong Kong determining whether smuggling into this country was likely. I venture to suggest that it is an irrelevant test. The point remains, however, that the thrust of the clause is directed at UK-based manufacturers, rather than foreign manufacturers where the bulk of smuggled goods comes from.

Stephen Hesford (Labour, Wirral West)

The hon. Gentleman amazes me, because the test that I set out in a few words is the one that is included in the Bill and to which I referred his hon. Friend the Member for Braintree (Mr. Newmark).

Philip Dunne (Conservative, Ludlow)

I am grateful for that observation, but my point remains perfectly valid. It will be down to the measures that the Government impose on foreign-based manufacturers to prove that the manufacturers are not likely to be smuggling. That will be a difficult test for the Government to establish in the absence of the greater use of measures such as the memorandums of understanding with those individual manufacturers

In relation to the stand part debate, why are the Government seeking to use such measures to combat smuggling when they are not using the full forceof existing laws to combat smuggling in our constituencies? I accept that this is a Finance Bill, and that I may be referring to an example that strays beyond its confines, but if you will indulge me,Mr. O’Hara, I want to point out that we suffer from a particular problem in my constituency—the blight of the car boot sale. I am sure that the hon. Member for Wolverhampton, South-West (Rob Marris) will nod his assent that it affects the area between our constituencies. Several operators use the very limit of the law to provide car boot sale facilities for many of his constituents, and mine. On the rare occasions that they are raided by the police, significant quantities of contraband goods—such as tobacco products, CDs and other goods—are found in large numbers. If effort was expended by this Government on cracking down on venues for the sale of illegal goods, they would find that smuggling rates would decline more rapidly than will be the case under this measure.

Stephen Hesford (Labour, Wirral West)

With respect, the hon. Gentleman was wrong about his last point, but this point is even more confusing. Is it his policy and that of the Conservative party to prohibit car boot sales?

Philip Dunne (Conservative, Ludlow)

I shall not indulge your good nature,Mr. O’Hara, by requesting that you allow me to respond in too much detail to the hon. Gentleman.

Edward O'Hara (Labour, Knowsley South)

It would help because I would rule you out of order anyway.

Philip Dunne (Conservative, Ludlow)

I simply say that I do not believe that my first point was incorrect. It was valid, and I look forward to the Financial Secretary’s response to it. I am certainly not arguing that we should stop car boot sales. I am arguing that the legislation that exists to deal with what is sold at car boot sales should be enforced.

David Gauke (Conservative, South West Hertfordshire)

It is difficult to argue the case that the clause is unduly harsh on the tobacco industry because that is not the most sympathetic of causes. We will not often see senior politicians in open-necked shirts visiting cigarette factories, saying what a marvellous job they are doing for the British economy. Along with nearly all my colleagues, I am a non-smoker. It is certainly true that the lawyers here outnumber the smokers, on these Benches at least. It is not very often that the tobacco industry is treated particularly sympathetically by politicians. The only instance I can think of in recent years was in 1997 when Formula 1 was exempted from the ban on tobacco advertising, but we know that particular circumstances were involved in that case.

My hon. Friend the Member for Rugby and Kenilworth (Jeremy Wright) made several good points about the difficulties that exist in the clause. It is worth dwelling on them, not so much from the point of view of the tobacco industry, but from the Government’s point of view and that of Her Majesty’s Revenue and Customs. There are one or two circumstances where there must be some concern as to whether everything in the clause will be enforceable.

My hon. Friend raised the point earlier regarding the degree of uncertainty that must exist when determining the intention of the purchaser of the cigarettes. It is difficult to test the intention of that individual or that entity: in some circumstances it may be clear, but in others it will not be. Therefore, there is a fundamental uncertainty in the law. One questions whether the provisions might be vulnerable to a challenge under human rights legislation, and I would be interested to hear the Financial Secretary’s views on that point.

A second area of potential concern relates to the£5 million fine. The procedures set out in clause 2 are more of an administrative nature than a criminal one, and there may be concerns that problems will exist under human rights legislation as a consequence.

I am also slightly concerned about the broader issue of the way in which the Government increasingly use private businesses to perform the role of policeman. There may be a good reason for doing it. A private business, such as the tobacco industry, may be in a stronger position to regulate smuggling than the law enforcement authorities. However, that increasingly places great regulatory burdens upon private business, and has one or two other potential dangers. The police are democratically accountable, although not as democratically accountable as some of us would like, but none the less an accountability mechanism exists. However, no such mechanism exists for a business in the way that it enforces rules.

The hon. Member for Wolverhampton, South-West also raised the issue of judicial review in a different context, and public bodies are liable for judicial review. There is a different mechanism and a well established, sophisticated way with which law enforcement and public authorities are dealt. We are passing on public duties to private companies, which can cause problems.

Looking at the clause earlier, I was reminded of the provision on money laundering under the Proceeds of Crime Act 2002, an area of law that I once knew somewhat better than the law on tobacco smuggling. I refer, in particular, to the imposition of a reporting regime for the regulated sector. There is a different approach to money laundering than is applied to tobacco smuggling under clause 2, which says that the businesses must avoid dealing with potential smugglers.

The approach proposes a positive obligation on tobacco firms because, in doing so, they have to draw up a policy and investigate the potential counter parties. It is more than simply avoiding matters; it is a positive duty. I am not complaining about that. However, it does cause difficulties. Within the money laundering regime, if the private business is suspicious, it does not have to be judge and jury about whether the entity or transaction that it is dealing with involves money laundering. The private business must follow the rule and report the matter to the authorities.

As for tobacco smuggling, rather than the potential difficulties involved with imposing a duty toavoid entering into certain transactions, has any consideration been given to whether the problem should be looked at on the basis of reporting? The memorandum of understanding might already contain details of the reporting obligations, but could the Government consider beefing them up? That may prove to be a more satisfactory way for tobacco companies to deal with the matter.

It seems reasonable to say to a tobacco company, “You should have suspicions in these particular circumstances. You are entering into a transaction and you should inform us, the law enforcement authorities.” It should then be for the law enforcement authorities to pursue the matter, rather than for the tobacco industry to say, “We have to decide. We may have some guidance, but we are not really in a position to make a judgment”.

There may already be some provision on how reporting works that I am unaware of. However, I wonder whether clause 2 is going down the wrong route. Given the considerable uncertainty that exists within the current provision, it may be difficult for tobacco firms to comply with the clause. For example, they may face difficulties at a human rights law level and, therefore, the Government should establish a reporting, rather than an avoiding, regime.

Brooks Newmark (Conservative, Braintree)

I shall be brief because I can tell from the looks of those onthe Government Front Bench that they are anxiousto proceed. I thank the hon. Member for Wolverhampton, South-West, who taught me, almost a year ago in my first debate on the Finance Bill, the wonders of explanatory notes.

I was intrigued when my right hon. Friend the Member for North-West Hampshire (Sir George Young) pointed out that there were annual revenue losses of £2.9 billion, which an extraordinarily large figure. In note 31 of the explanatory notes to clause 2, there is mention of a package of measures to reinforce the tackling tobacco smuggling strategy. There is a lot of conversation about cigarettes, and we read in the notes that it is estimated that one in six cigarettesis smuggled, which is an extremely high number. However, what really struck me was that half of all hand-rolling tobacco for roll-your-owns is actually illicit. That is an extremely high figure. I would like to draw out from the Financial Secretary which of the measures referred to in note 31 focus particularly on the smuggling of hand-rolling tobacco, because that figure of 50 per cent. seems extraordinarily high. I look forward to his response.

Paul Goodman (Conservative, Wycombe)

You,Mr. O’Hara, and the Financial Secretary were absolutely right to say this morning that our consideration of this issue has been curious in thatour debate on the amendments has preceded a stand part debate on the substance of the clause. However, our debate on the amendments had in part to address the substance. Following your advice, Mr. O’Hara, I propose to speak to clause stand part. The Financial Secretary will then respond, and then I will make it clear whether we intend to press our amendments to a Division. I welcome the hon. Member for Falmouth and Camborne (Julia Goldsworthy) to the Committee, because we did not have the chance to do that this morning, although the Paymaster General welcomed her in absentia.

Before I turn to clause stand part, I point out that—as the Committee has already heard, and as my hon. Friends have already all made clear when touching on points of real substance—these are important and controversial clauses. This morning, I listed the Chartered Institute of Taxation, the Institute of Chartered Accountants and the Institute of Directors, all of which have concerns about the measures. In fact, in the break between the morning and afternoon sittings, I found among my e-mails a further briefing from the Law Society that was not present when I left for Committee this morning.

The Financial Secretary made the point that all those bodies are involved directly with taxation and are not tobacco manufacturers, and I make two brief points in response to that. First, obviously, it does not follow that their concerns are mistaken—nor did he suggest that. Secondly, tobacco manufacturers have privately related concerns about some of the provisions to me, although I say plainly to the Financial Secretary that there have not been as many from those manufacturers as from the other bodies.

The concerns basically fall into four parts. First, the organisations are concerned that the proposals may be unnecessary in that they appear to duplicate existing information-gathering powers, money-laundering rules and parts of criminal law relating to aiding and abetting and conspiracy. You will already see,Mr. O’Hara, that this debate is another paradise for lawyers. Secondly, the organisations are concerned that the proposals may be ineffective in that they appear—certainly in the view of the Chartered Institute of Taxation—to contravene EU treaties and the European convention on human rights, a point that my hon. Friends referred to earlier. Thirdly, in so far as the measures are necessary and effective, they are none the less excessively subjective. Fourthly, they createa disproportionate administrative burden on manufacturers and break new ground in obliging businesses to take active steps to help to police the criminal laws intended to prevent tax loss—a point made by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) a moment ago. However, there is no legal duty on citizens actively to enforce laws against crimes that are no less serious, such as crimes that cause death or injury, or theft of private property. Let me deal with each of those points in turn.

First, there is the question of whether the proposals are necessary. There are already measures in civil law under the law of tort in England and delict law in Scotland that would allow the HMRC to recover any damages arising from the fact that a business had acted recklessly and as a result allowed a person to escape duty. There are also laws such as the Customs and Excise Management Act 1979 and the Tobacco Products Duty Act 1979 that already apply to those sections of the Government’s proposals that require information about importation or exportation. Therefore, I ask the Financial Secretary to explain what parts of the proposals are not already covered by those Acts. It is the opinion of some bodies that have commented on the proposals that they are in part already covered in law.

Secondly, there is the question of whether the proposals will be effective, particularly in respect of EU law. That concern is shared by the Institute of Chartered Accountants. Although excise duties are not subject to harmonisation measures such as those found in EU directives, they are still subject to EU VAT law in the context of the right to freedom of establishment. The proposals may concern transactions between UK businesses and businesses carrying on a trade in a country other than an EU country, a point alluded to by my hon. Friend the Member for Ludlow(Mr. Dunne). The proposals therefore may affect intra-community trade.

EU law does not prevent member states from taking action to prevent fraud and evasion, but limits have emerged from case law on what can be done to prevent fraud. In representations made to me, the recent Optigen case has been cited. It saw Optigen Ltd pitted against Customs and Excise commissioners. Even though I am not a lawyer, I have some apprehension of the principle of proportionality, which is the key legal principle involved, as it has been imported into law in recent years. In the view of the Chartered Institute of Taxation, the measures taken are disproportionate to the aim intended to be achieved because the size of the penalty exigible for non-compliance, which proposed new subsection 7C(2) sets at a maximum of£5 million—a considerable penalty, which my hon. Friend the Member for Rugby and Kenilworth referred to earlier—is, in the institute’s view,

“on such a scale as to be criminal in nature. It is questionable whether it is right for the tax legislation to convert a supposedly civil offence into the equivalent of...aiding and abetting a crime. Accordingly, it is improper to allow such a penalty to be imposed by what is in effect an administrative decision.

The penalty is exacerbated because, to the extent that a business is required to avoid carrying out transactions likely to result in smuggling, it is required to curtail its business with a consequential loss of profits. While this may be justified where smuggling is almost inevitable it will, because of the subjective nature of the decision to be made, lead to transactions declined even though no fraud is involved.”

I take it that that is a reference to what could happen if a firm is involved in legitimate activity but also in activity that may subsequently be judged to be illegitimate. There could be an effect on the legitimate business of the firm.

The institute continues:

“There would appear to be potential conflicts with other law e.g. a transaction might be potentially reportable under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003 since a money launderer might seek to use legitimate transactions such as an ordinary sale of goods to launder money. In such cases, a business could be faced with the dilemma that confirming a transaction is contrary to the TPDA 1979, but not doing so might amount to ‘tipping off’—a rather more serious offence.”

The institute adds:

“It is also necessary to bear in mind the difference in the levels of knowledge which a business might have”—

that touches on another point raised earlier—

“and which the tax authorities—who have access to a wider range of information—may have. The judgment of HMRC might therefore be different to that of a business, yet it is HMRC...who will decide whether”—

to quote proposed new section 7B(1) of the Tobacco Products Duty Act 1979—

“they ‘think that a manufacturer has without reasonable excuse failed to comply’. It is difficult to conceive of how a tax officer deeply involved in countering tax fraud can place himself in the shoes of the business to decide whether there is compliance or not. Moreover HMRC will be operating with the benefit of hindsight, whereas the tobacco manufacturer will not have that advantage.”

What legal advice has the Financial Secretary received on the matter of subjectivity?

Fourthly, there is the question of the administrative burden that the proposals will place on manufacturers. Does the Financial Secretary share the view of the Institute of Chartered Accountants that unless tobacco manufacturers are content with the wording of the clause, it risks being subject to lengthy litigationin the UK and at the European Court of Justice?What legal advice has he taken, particularly on proportionality and the relation between the proposals in the Bill, the recent Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003?

The Institute of Chartered Accountants points out that clause 2 has territorial problems—which relates to the point made by my hon. Friend the Member for Ludlow—that the HMRC might be open to claims for damages and that there seems to be no adequate provision for independent review of the HMRC’s actions. What assessment has the Financial Secretary made of any new vulnerability in the HMRC to claims for damages? Can he guarantee that any review carried out by the HMRC under section 7C(3) will be carried out by someone other than the officer who authorised the report? That goes back to another point made this morning by my hon. Friend the Member for Rugby and Kenilworth.

Finally, given that the new proposals seek to place new duties on tobacco manufacturers, I am curiousto know the Government’s further thinking on the matter. Are they considering extending those duties to manufacturers of other products vulnerable to fraud, such as alcohol?

John Healey (Labour, Wentworth)

I shall deal first with the series ofpoints made by the hon. Member for Wycombe(Mr. Goodman), and then try to answer the points made by other hon. Members.

The hon. Gentleman asked me whether the Government had taken legal advice on a series of matters before framing the clause. The short answer is yes. The slightly longer answer is, “Of course we have.” We have taken advice on the questions of proportionality and compatibility with European Union legislation. We have also taken advice on the question whether other laws would give us powers to control supplies of tobacco. Our judgment and knowledge is that such laws do not exist.

The hon. Gentleman asked about HMRC review. HMRC practice on any regime for which it is responsible is that the review of a taxpayer is conducted by HMRC officers independent of those who are involved in pursuing that taxpayer or, in this case, undertaking the clause 2 process.

The right hon. Member for North-West Hampshire (Sir George Young) asked about the impact ofclause 2, and about its benefit to the Treasury. The clause is based on and complements the memorandums of agreement that are currently in place with the three major UK-based tobacco companies, which supply the majority of the UK market. The memorandums of understanding, reinforced by the clause, will make it harder for smugglers to source large quantities of cigarettes and of hand-rolling tobacco for the purposes of smuggling and selling within the UK.

The existing memorandums of understanding have resulted in a significant fall in the proportion of genuine manufactured tobacco in cigarettes that have been seized by HMRC. Because the supply of genuine tobacco is being choked off, it has been replacedby counterfeit tobacco. In 2001-02, 85 per cent. of cigarettes seized were genuine—albeit diverted, rerouted or smuggled in some way—but by 2004-05, the proportion was about a half. In other words, legitimate sources have been choked off at theirorigin by arrangements and close co-operation with manufacturers. Smugglers have therefore had to adapt their techniques and have increasingly used counterfeits as their source.

It was the pre-Budget report that originally set out the impact on combined revenue of clause 2, together with the measures and new initiatives that were set out in “Reinforcing the Tackling Tobacco Smuggling Strategy”, the document published alongside the Budget. The report indicated that there would be positive impact of £50 million this year, £90 million in 2007-08 and £115 million in 2008-09. If the hon. Member for Braintree wants to see our other proposed measures, including those in relation to hand-rolling tobacco, he should consult chapter 5 of the pre-Budget report and the document that we published alongside the Budget in March.

Stewart Hosie (Scottish National Party, Dundee East)

The Financial Secretary said that the purpose of the clause is to choke off the supply of large quantities of cigarettes and hand-rolling tobacco to smugglers. That is perfectly reasonable, but the lobby notes also saythat clause 2 imposes a duty on tobacco manufacturers not to facilitate smuggling, and that tobacco manufacturers will be required to avoid supplying cigarettes or hand-rolling tobacco to those likely to resupply to those likely to smuggle. Do tobacco and cigarette companies have the necessary due diligence skills to determine whether potential resupplying companies may be functioning legally in their place of operation?

John Healey (Labour, Wentworth)

The short answer is that the memorandums of understanding already contain a commitment on precisely that point and the tobacco companies, working with HMRC, are increasingly able to do that.

The hon. Member for Rugby and Kenilworth asked about the burdens that would be placed on manufacturers. There should not be any significant additional costs to tobacco manufacturers that have already put agreed memorandums of understanding in place, because the clause mirrors those existing working arrangements. In meetings with HMRC, some tobacco manufacturers have indicated that they may incur some additional costs, because they intend to inspect all seizures that are notified by HMRC intelligence communications. They have not tabled any estimates, nor have they put forward any objections on grounds of cost during the formative stages of the clause.

The hon. Gentleman then argued that the provisions needed to be clearer and more specific. He referred, in particular, to the limits that the manufacturers may be able to exert on the supply chain when they have sold to the principal primary customer. We accept that there is a limit to what manufacturers can do to control the supplies beyond that first customer, but there have been instances when the volume of tobacco supplied to certain markets has significantly exceeded the legitimate demand in those markets, including even the permissible requirements of the travelling customers. As I said, manufacturers can encourage their customers to adapt their supply chains and are doing so in some cases. They can contractually oblige their customers to adapt their supply chain policies and similarly are beginning to do so in some cases.

We shall set out more clearly some of the expectations and requirements in the regulations and guidance that we are producing. We will do so not under primary legislation, in order to give ourselves greater flexibility. It will benefit the industry and ourselves to be able to change the provisions should that be required without primary legislation in the future. That is especially important in the area of smuggling, where the methods, tactics and routes change rapidly.

My hon. Friend the Member for Wolverhampton, South-West traded on his lawyerly background by urging more elegance in the drafting. Size of supply is the terminology that we tend to use in the memorandum of understanding. We have tried to mirror the clause on the memorandum of understanding. Manufacturers are used to it; they understand it. It is a sensible approach. The Government’s lawyers are satisfied and content that the terminology covers the purpose for which the provision is designed. The nature of supply is broad. It is intended to include such issues as unusual or convoluted transit routes, large cash payments and changes in buying patterns that may warrant further investigation.

The hon. Member for Ludlow referred to car boot sales. It is part of the operational pattern and strategy of HMRC to tackle the illicit supply of goods, whether at car boot sales, car parks, pubs or clubs. If the hon. Gentleman is coming across car boot sales in his constituency where such activity takes place, I encourage him to ring the Customs confidential hotline on 0800 595 000. In order to tackle the supply of smuggled hand-rolling tobacco and cigarettes, it is necessary to intervene and clamp down at each stage of the supply chain. That is precisely what HMRC does. It has about 2,000 operational staff who are deployed as front-line officers at the borders and inland to intercept and deal with the supply routes. If the hon. Gentleman consults the Budget document that we published, he will see that an extra 200 people will be deployed this year specifically to step up our efforts to deal with hand-rolling tobacco.

I say to the hon. Member for South-West Hertfordshire that the reason why it is hard to argue that such provisions are unduly harsh on United Kingdom tobacco manufacturers is that they are not arguing that themselves. As I said earlier, they may not like the clause, but they accept that it builds on what we have done already on a voluntary basis and that it will make a further contribution to choke off and reduce the supply of legitimate tobacco and cigarettes to the smuggled market.

I hope that I have dealt with the questions asked about the consistency with human rights legislation. For the hon. Gentleman’s information, the Chancellor signs the human rights statement in respect of the Finance Bill. I have signed the regulatory impact assessment that relates to the provisions as being compatible with human rights legislation, so if serious questions arise, it is I in the first instance who will have to answer for the judgment that I have already made. In making that judgment, we take on board careful and comprehensive advice from the lawyers, and in respect of what the hon. Member for Wycombe is concerned about, we are confident that the provisions of the clause are compatible. On that basis, I hope that the hon. Gentleman will withdraw his amendment, and that the Committee will agree to clause 2 standing part of the Bill.

Paul Goodman (Conservative, Wycombe)

It became evident in earlier exchanges between the Financial Secretary and me that these amendments were intended to be probing amendments. The Financial Secretary dealt satisfactorily with many of the points that were raised. For example, he made it clear that “likely” means

“on a balance of probabilities”,

and that has saved the hon. Member for Wolverhampton, South-West and I from being locked together in some Dantean circle arguing over the matter indefinitely. Also, in relation to amendment No. 16 and the word “state”, the Financial Secretary made it clear that there is no need to insert the word “fully” because “state” implies “fully”.

However, there is one specific concern arising from the Financial Secretary’s response that we may wish to raise later. He probably will not be surprised to hear that it is in relation to the memorandums of understanding. The Financial Secretary said thathe did not want to give an undertaking that manufacturers who enter into memorandums of understanding will receive any different treatment in the Bill from any other manufacturer who has them first because he wanted a level playing field—he wanted equality of treatment for all. He then explained that there is a process in respect of the signing of these undertakings.

John Healey (Labour, Wentworth)

Perhaps I did not make myself clear. The point I was making was that those manufacturers that already have a memorandum of understanding in place with us in a sense have a head start, because they have in place the information provisions and the relationship with HMRC on which the provisions and requirements of clause 2 will be based. The point about clause 2 is that the obligations that it will contain and the sanctions that may potentially apply will apply to all manufacturers that may be supplying the UK market, not just those that have memorandums of understanding already in place. I hope that that helps the hon. Gentleman.

Paul Goodman (Conservative, Wycombe)

I was coming to that point, but if I am correct I think the record will reflect the fact that the Financial Secretary did say that he did not want written into the Bill any special treatment for those manufacturers who had signed memorandums of understanding, which would mean that they would not have to go through exactly the same procedures as other manufacturers who had not signed. He did of course say that those who had signed these memorandums of understanding would be in a better position; that is true.

However, my concern is about what the Financial Secretary said about writing into the Bill a provision that if a manufacturer had previously agreed a memorandum of understanding, that manufacturer would be exempt from some of the procedures in relation to, for example, notices being provided in writing. He said that that would send the wrong signal. I am not quite so sure about that; I think it might actually send the right signal were a manufacturer, or manufacturers, able to enter into memorandums of understanding that would make it clear to the authorities what they were prepared to do to counter fraud, and if they did so it might actually be helpful to them to be able to come to that kind of arrangementto be able to circumvent some of the procedures in clause 2.

I am not going to press the amendment to a Division at this stage, but we might return to this matter in due course.

Clause 3

John Healey (Labour, Wentworth)

We now quit cigarettes and move on to beer.

Clause 3 increases, in line with general inflation, the excise duty charged on beer. That is part of a broader package of decisions on alcohol duty that continue progress towards the Government’s long-term aim of achieving a fairer balance of taxation across all alcohol products without imposing real-terms increases on those, such as beer, that currently are more lightly taxed.

Excise duties on alcohol provide a crucial£7.9 billion a year to invest in tackling crime and essential public services, such as schools, hospitals and transport. Beer accounts for more than 40 per cent. of alcohol duty receipts. The inflation-only duty increase, which, together with VAT, is equivalent to about a penny a pint, is necessary to maintain that important source of revenue. By way of background, I remind the Committee that that modest increase, a freeze inreal terms, follows freezes—actual, not real-terms freezes—in beer duty in three of the past eight Budgets.

However, I am aware also of the pressures on brewers and the pub industry, which play an important part in our economy, our heritage and, for those of us who like a beer, our leisure. This modest, inflation-only increase in beer duty recognises their concerns but maintains an important stream of revenue necessary to support our long-term commitment to continue to increase investment in some of our vital public services. I commend the clause to the Committee.

Paul Goodman (Conservative, Wycombe)

I shall be as brief on this clause as I was lengthy on clauses 1 and 2. We have no quarrel with the inflation-only increase in the price of beer, and do not oppose the clause.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I should like to thank the hon. Member for Wycombe (Mr. Goodman) for his generous welcome.This morning I was at a PricewaterhouseCoopers conference on public services reform that had been arranged prior even to my joining the Liberal Democrat Treasury team. Unfortunately, the conference was unavoidable and I could not be here this morning.

We have no quarrel with the increases in excise duty on beer in clause 3. Including VAT, it represents a penny a pint and it is sensible to maintain revenues. I should like to raise only one point. Why did the Chancellor of the Exchequer feel it appropriate to freeze duties on sparkling wines, in anticipation of success at the World cup, when the majority of supporters will be drinking beer, not champagne?

Philip Dunne (Conservative, Ludlow)

I should like to raise a brief point, to which I hope the Financial Secretary will respond; it is the obverse of the point that I raised about tobacco duty. There has been an inflation-only increase on duty on beer, but there has been a freeze on spirits for, I think, the eighth Budget in succession; I may have got that wrong. In real terms, the duty on spirits has declined by 18.4 per cent. since 1997.

Put that in the context of the public health aspects of excise duty, which were part of the justification for the increase in tobacco duty. Today we have learned that the primary justification for the increases in excise duty on alcohol is to do with revenue, yet the incidence of alcohol as a cause of admission to hospitals is increasing steadily.

According to my calculations, there was a rise of4.6 per cent. between 1997 and March 2003, the last period for which statistics are available in the 2004 statistical bulletin. That is an increase of 8,000 to 176,100 admissions in which alcohol is cited as the primary reason, or is referred to, in the relevant note. There is at least a case—I should be interested to hear whether the Financial Secretary considered it during his preparation for the Budget—for using excise duties as a means of improving public health in relation to alcohol-induced illness.

Colin Breed (Liberal Democrat, South East Cornwall)

In a similar vein, the explanatory notes say that since 1997 the duty on beer has fallen by 6 per cent. in real terms. That is not a huge amount, but it is a fall in real terms. Yet during that period we have seen clear evidence that alcohol, particularly beer, plays a large part in some of the antisocial behaviour, not least binge drinking, that we experience from time to time.

We have recently seen a relaxation of the licensing laws and availability in terms of cost and access has increased. It would not be surprising if we saw more antisocial behaviour, let alone the health problems that the hon. Member for Ludlow described.

We have spent a lot of time discussing the smuggling of tobacco but have not mentioned the considerable amount of beer that is imported during trips to hypermarkets on the continent. The brewery industry is probably right to be concerned about the amount of beer that is being imported in that way.

Overall, there is a case for not objecting because I think the increase is correct, but we should recognise some of the dangers of alcohol, particularly among young people, and recognise that price is a driver, as it is in other areas. The Government should at least look at the overall duty on beer not just as a revenue-raising exercise but as a contribution to health and reducing some of the antisocial behaviour that emanates from the consumption of large quantities of alcohol.

John Healey (Labour, Wentworth)

The reason for the decision on beer duty compared with that on spirits is that spirits are significantly more heavily taxed than beer and we have in place a long-term policy goal of a fairer balance of taxation across all alcohol products. That is the reason for the differential treatment in this year’s Budget.

In reply to the hon. Member for Falmouth and Camborne, spirits are heavily taxed and sparkling wine is the most heavily taxed of all alcoholic drinks. That is part of the reason why the decision that we took in previous years to freeze the duty on sparkling wines was taken again this year. There may be some champagne drinkers among the officials who support me on the Bill because I have a note that says that the freeze on the duty on sparkling wine will affect not only the traditional champagne products to which the hon. Lady referred, but the excellent sparkling wines from Britain, including the 2002 Merret Bloomsbury from the RidgeView estate in East Sussex which was recently crowned the best sparkling wine in the world at the international wine and spirit competition.

Clause 4

John Healey (Labour, Wentworth)

The clause increases the rate of excise duty charged on still wine in line with general inflation. The duty on sparkling wine is unchanged. Wine accounts for about 28 per cent. of total alcohol duty receipts. The increase, with the VAT, is equivalent to1p on a glass of wine and 4p on a bottle of wine. It is necessary, as is the measure on beer, to maintain this important source of revenue to support our investment in public services.

I am also aware that there are concerns in the wine trade, which argues that the demand for wine is beginning to weaken. We recognise that and that the wine trade plays an important part in our economy. However, we need to maintain our revenue and support for public services. The increase is modest and is in line with inflation only. It does no more than maintain the real value of the revenue from that part of the alcohol duty regime, so I commend the clause to the Committee.

Paul Goodman (Conservative, Wycombe)

Again, we have no quarrel about what is proposed in this clause, although we note the wine trade’s concerns, to which the Financial Secretary referred.

I have a question that arises from the point made by the hon. Member for Falmouth and Camborne about beer, champagne and the World cup. I am sure that the Financial Secretary will be able to give us a better insight into the Chancellor’s thinking than I can; if he cannot, perhaps the Economic Secretary could. I assumed that the Chancellor’s thinking was that there would be good reason for people to drink more champagne than beer because of what would happen in the World cup. That drew my attention to a curious point that arises because the Chancellor said,

“in anticipation of World cup success this summer, I am freezing duty on champagne, and on British sparkling wine.”—[Official Report, 22 March 2006; Vol. 444, c. 297.]

He did mean World cup success for the England team, did he not?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Again, I have no real issue with the clause, but I recognise the points that have been raised by various hon. Members about the differential impacts that different types of alcohol can have on antisocial behaviour and the negative impacts that they can have on health. Does the Treasury have any plans to work with the Department of Health to examine the differential impacts of different forms of alcohol? Will differential pricing be considered as a way of affecting behaviour?

John Thurso (Liberal Democrat, Caithness, Sutherland and Easter Ross)

In case the Minister might wish to make reference again to International Wine and Spirit Competition Ltd, may I declare an interest? I am the chairman of the company.

John Healey (Labour, Wentworth)

I did not want to prolong this debate. I thought that I had responded to the points, but more emerged. I congratulate the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) if that is indeed a company that he chairs. I am glad to have been able to pay tribute to it. I assume that he would have done so anyway, but I am glad that I did just in case.

May I say to the hon. Member for Falmouth and Camborne that we work closely with the Department of Health on some of the concerns that exist for all of us about the impact of excessive drinking and the antisocial behaviour, aggression, violence and damage that often flow from it? Tax is often a blunt instrument. We have not been convinced that using alcohol duties would be an effective way of trying to reduce the harms caused by excessive alcohol consumption. That is not a feature of Government policy and in my judgment the case for it to be has not been made.

I say to the hon. Member for Wycombe that the Chancellor is extremely well informed about football. The fact that Scotland has not qualified for the World cup finals means that his loyalties can be completely and undividedly behind England in this World cup. I believe that he made that clear in an interview that he gave this morning on GMTV.

Clause 5

John Healey (Labour, Wentworth)

This clause is of a rather different nature, although it falls within the broad chapter of excise regimes. I am pleased that we are able to introduce it. It reflects the Government’s commitment to simplifying and updating tax administration thatis outdated, outmoded and causing unnecessary complications for taxpayers. Those complications can also add to businesses’ compliance costs, and sometimes act as a barrier to entry to market. The clause allows us to remove from the statute book a number of provisions that fall into that category.

The clause amends the Alcoholic Liquor Duties Act 1979 by removing a number of provisions that are either obsolete or no longer serve any practical purpose. Some of them restrict businesses’ legitimate commercial freedom while frankly no longer serving any useful purpose in terms of revenue protection. The clause is part of our wider package of changes to the alcohol duties regime, under which we will repeal or simplify over 40 provisions in alcohol legislation. It has been welcomed by the drinks industry. We are discussing in detail with them whether there are areas where we could go further. I commend the clause to the Committee.

Paul Goodman (Conservative, Wycombe)

We have received no representations suggesting that any inappropriate changes are being made under the clause, or that any changes are being made in error, so we will assume that the clause is in order and shall not oppose it.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

We have no issue with the clause, and welcome the fact that it simplifies and updates tax administration that causes unnecessary complications. It is just a shame that the same cannot be said of many other clauses in the Bill.

Philip Dunne (Conservative, Ludlow)

I rise to ask the Financial Secretary for clarification on subsection 1(o), which removes section 82—which is on the power to make regulations with respect to stills—from the 1979 Act. I ask him to clarify precisely what powers are being removed, and shall explain why I have an interest in the subject. Naturally, I welcome deregulatory moves of any kind, and particularly those that scrap unnecessary regulations. I would particularly welcome the measure if it encouraged further agricultural diversification, which is how I read it.

I represent a rural constituency where agriculture remains an important economic driver. Many farmers are looking to establish local products with higher value added, through which they can diversify, and many smaller farmers in my constituency still have orchards—they have not been grubbed up, as in many other parts of the country—supplying apples, pears, damsons and even cherries and soft fruits to local processors of cider, fruit wines and spirits. The largest cider processor in the country is located in neighbouring Herefordshire, and a lot of my farmers provide it with fruit.

I hope that the Financial Secretary can confirm my reading of the clause, which is that in future it will be possible for such growers to establish their own mini-stills and to distil their product into spirits, which they can sell through local markets or whatever outlets they can find. That would be a welcome development. It might also help to ensure that any such activity that is going on at the moment in an unregulated and illegal fashion is brought into the realm of the above board, which would be welcome. I have some limited experience of that practice in other counties, because my father-in-law—he is no longer with us, unfortunately—lived in Somerset, which is another area of substantial apple production. He took me to a number of his neighbouring farms where some activity of that kind had been under way for decades. I am sure that that is not widespread, but there are pockets in the country where some distillation is taking place behind barn doors.

John Healey (Labour, Wentworth)

In response to the hon. Member for Ludlow, in many ways section 82 of the 1979 Act is a throwback to a regime that was largely dispensed with in the 1980s. It required, in former days, people other than distillers, rectifiers or vinegar makers who kept stills to take out an excise licence and this regulatory power is no longer required. Anyone who uses a still to distil spirits—this is the point the hon. Gentleman made—must nevertheless have a distiller’s licence and they are committing an offence if no licence is held.

There are other provisions in the clause dealing with the simplification relating to stills and distillers, and to give the Committee an example of the degree of obsolescence in some of the provisions we are proposing to repeal, we shall repeal section 15(4), which requires distillers to provide accommodation for HMRC officials in the distillery. That is clearly no longer required because the pattern of monitoring and assuring the operation of distillers has changed these days. That is an exemplar of what we want to achieve through the clause and I hope that the Committee will support it.

Clause 6

John Healey (Labour, Wentworth)

The clause amends the duty rates as set out in primary legislation so that they will be the same as the amounts a person is currently liable to pay. It also provides that certain statutory instruments introduced to adjust the liability to duty on hydrocarbon oils and other fuels will cease to have effect. The clause will bring about a technical change. It simplifies the legislation so that the actual rates of duty for road fuels and oils can be easily established by reference to one piece of legislation, rather than sources of primary and secondary legislation, as at present.

Paul Goodman (Conservative, Wycombe)

As the Financial Secretary said, the clause deals with technical changes relating to hydrocarbon oil duties. I would like to make some general remarks about further changes proposed,but they would be more appropriately made under clause 7. We have no objections to the clause.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

We have no issue with this clause. It looks back more than it looks forward and, as the Minister said, it will put on the statute book changes that took place under statutory instruments. We will talk about future changes, but it is more appropriate to deal with those under future clauses.

Rob Marris (Labour, Wolverhampton South West)

Can the Financial Secretary tell me why the rate of duty on aviation gasoline—avgas—is charged at one half the rate specified for light oil, particularly in light of the environmental concerns that many of us have?

John Healey (Labour, Wentworth)

As my hon. Friend knows, the freedom of any Government to charge tax on aviation fuel is heavily hedged in by a network of international agreements and conventions, which constrain the policy choices any Government can make in this area.

Helen Goodman (Labour, Bishop Auckland)

In the light of what the Financial Secretary just said, are the Government taking any steps to re-open or reconsider those international treaties, or to initiate any international negotiations on the matter?

John Healey (Labour, Wentworth)

We have indeed taken such steps. We have publicly and strongly argued the case that the special protections the aviation industry has in relation to taxation are not warranted. Given the rising concern about climate change and the evidence about the impact that aviation has on producing gases and emissions that contribute to climate change, that is becoming a more pressing challenge. It is one that we must confront internationally, not just because climate change is a global problem, but because any serious solution to the legal constraints that exist in many areas will be found internationally rather than domestically. Owing to difficulty with progress on the tax front, it is also the reason why we have put such a strong emphasis on other measures leading to effective international action that contributes to the climate change challenge. This Government were one of the strongest supporters of establishing and operating the European Union emissions trading scheme, and we remain so. Without wishing to test the limits of what is in order, Mr. O’Hara, we were the first country to set up an economy-wide emissions trading scheme—the forerunner of the EU emissions trading scheme that is widely regarded as an important and effective instrument.

Clause 7

John Healey (Labour, Wentworth)

This is a substantial clause, covering a number of areas of excise duty for hydrocarbon oils and biodiesel. The hon. Member for Ludlow will have a particular interest in some aspects of it, because it offers opportunities for constituents such as his in rural areas to diversify their production.

The clause changes the rate of excise duty for hydrocarbon oils and biodiesel from 1 September. Our established policy is that as the UK seeks to meet its targets of reducing pollutant emissions and raising revenue to fund essential public services, fuel duty rates rise each year at least in line with inflation. Budget 2006, however, announced that because of continuing oil market volatility, the inflation-based increase would be deferred until 1 September. Not implementing the change on Budget day, but delaying it to 1 September will cost the public purse £275 million in forgone revenue this year—a considerable saving to the motorist in anybody’s terms.

Fuel duty rates were last increased in October 2003, and since there were cuts in rates in 2000-01 to incentivise the delivery of less pollutant fuels, the main duty rates for road fuels are lower in cash terms than they were in March 1999, and 14 per cent. lower in real terms than they were in 2000. That is an equivalent saving of 8p per litre on road fuel for motorists. Even after the September increase proposed in this legislation, duty rates will still be lower in cash terms than they were in March 2000.

Our policy on fuel duty has been to balance a number of competing and complex issues: for example, our environmental improvement objectives and our concern to raise sufficient funding for public services, with the impact on families and businesses when fuel costs may be higher than they need to be. We have weighed the social, environmental and economic imperatives in the duty decisions in the clause. We have been ready to freeze duty when appropriate and to increase it when circumstances dictated. Through that approach, we have been able to ensure that fuel duty policy supports environmental goals while retaining flexibility at times of high oil market volatility.

Questions have been raised about why we increased duty rates for rebated oils from 1 September in the Budget, after we increased them in the pre-Budget report last year. It is important to stress that the increase merely ensures that the existing differential between rebated oils and main road fuels is maintained and remains unchanged. Our HMRC analysis suggests that even a small increase in the differential offers serious fraudsters appreciable extra profits. Freezing rebated fuel duty while increasing the main fuel duty rates would have widened the differential by 1.25p per litre, significantly increasing the incentive for fraudulent misuse of rebated fuels as road fuel. That could have undermined some of the efforts and pressure that we are exerting on oils fraud through the oil strategy.

However, I am also aware that some industries are heavy users of rebated fuels and that they form a significant proportion of their operating costs. We announced in the Budget that the Government would work with sectors that make heavy use of rebated fuels to examine the wider impacts of the oil strategy, and those discussions have already begun.

We must continue to recognise that transport is the second largest source of carbon dioxide emissions in the UK, and that emissions are likely to continue growing until the end of the decade as the UK economy remains strong. Duty differentials help to encourage the use of more environmentally friendly fuels and to stimulate the development of new technology that can help to reduce greenhouse gases. They can therefore help to reduce the impact that motoring may have on local air quality as well as on climate change.

Therefore, the clause covers the duty rate for biodiesel. It is worth reminding ourselves of the impact of the differentials that we introduced for biodiesel in July 2002 and for bioethanol in January 2005. Several years ago, there was virtually no market for biofuels in the UK. It has grown to 118 million litres, or 0.25 per cent. of the total road fuels market. That is still a low base and there is still a long way to go, but the measures that we are taking will increase usage to 5 per cent. by 2010-11. The 2006 Budget proposes to encourage the wider take-up of biofuels by announcing the extension of the 20p per litre duty incentive for biodiesel and bioethanol until 2008-09, which will add a degree of certainty for those who are planning to invest in and develop the industry.

We also set out in the Budget further details on how we will introduce a renewable transport fuel obligation, which will require transport fuel suppliers to ensure that a percentage of their sales are from a renewable source. It will be introduced in 2008-09 with the obligation level set in the first year at 2.5 per cent. and in the following year, 2009-10, at 3.75 per cent., reaching the target of 5 per cent. in 2010-11.

The renewable transport fuel obligation is a significant new measure that will give long-term certainty to the development of the industry. Hon. Members may be interested to know that it will also deliver savings of some 1 million tonnes of carbon a year by 2010, which we estimate is the equivalent of taking 1.4 million cars off the roads in Britain. I commend the clause to the Committee.

Helen Goodman (Labour, Bishop Auckland)

We acknowledge that the Financial Secretary and the Treasury have to balance several competing demands in this clause. One is in respect of the impact on the environment. If there were no increases in duties, the Treasury would be subject to criticism on that score. Another demand is in respect of the impact on agriculture, about which my hon. Friend the Member for Ludlow is extremely concerned. If there were increases in duty, the Government would be criticised on that score, so it is difficult for them to strike a balance.

Then there is the question of fraud. The Financial Secretary and I considered the matter previously, during a debate in January on a statutory instrument. I asked him what the impact on fraud had been of reducing the differential between main road fuels and rebated fuels. I wanted to know to what degree any reduction in fraud had been the result of beefing up fraud detection by the recruitment of more inspectors, rather than narrowing the differential. I want to give credit to the Financial Secretary, who said with commendable honesty that he could not answer the question. He went on to say that

“analysing and estimating the scale of fraud generally is a relatively inexact science. Very often, it is not really possible to isolate the impact of individual measures.”—[Official Report, Third Standing Committee on Delegated Legislation, 9 January 2006; c. 10.]

That raises the question of how effective the anti-fraud element of the measures will be.

As the increases will not be implemented before September and will generally be in line with inflation, we shall not oppose them. I return, however, to the question of balance. We are concerned, as is the National Farmers Union, about the effects of rises on agriculture. The Financial Secretary and I know that the NFU announced in the wake of the Budget that it intended to write to the Chancellor seeking an exemption from the increase in the cost of red diesel. I do not think that the Financial Secretary confirmed that he received such a letter, but I should like to know whether he did and, if so, what is the Government’s response?

We shall not oppose the clause. We have serious concerns about the effects of the rises on agriculture, and we will be watching closely what happens in the run-up to next year’s Budget.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I begin by commending the Financial Secretary for the clause’s welcome measures to encourage more environmentally friendly vehicle use. I hope that the introduction of greater certainty to the duty differentials on biofuels will make a difference and will encourage more people to make the necessary conversions.

However, I would appreciate it if the Financial Secretary provided clarification on the definition of biodiesel. Any confusion about the definition could hinder the development of the market. I understand that biodiesel must be “of diesel quality,” which means:

“It must be a liquid—not gaseous at a temperature of 15° C and under a pressure of 1013.25 millibars; and

It must be made from biomass or waste cooking oil;

The total ester content must not be less than 96.5 per cent. by weight; and

The sulphur content must not exceed 0.005 per cent. by weight or be nil.”

According to the Hydrocarbon Oil Duties Act 1979, “diesel quality” means that when blended with ordinary diesel, biodiesel will run an engine that would normally run on diesel. Biodiesel does not have to be used exclusively in the fuel tank, although that is possible.

I understand that vegetable oil is not perfect for cars. In order to make it suitable for car use, the oil must be modified in some ways. One way to do so is through transesterification, which involves cleaning the vegetable oil so that it can be used in a diesel engine. That uses a great deal of energy and some methanol, and leaves glycerine as a by-product that must be disposed of. It is also possible to add certain things to vegetable oil to make it usable. On the other hand, it is possible to make changes to the car so that it can accept vegetable oil as it is.

Does adding chemicals make vegetable oil of diesel quality? If the car is modified, does that make unmodified vegetable oil of diesel quality? There is clearly an element of confusion that could lead to perverse tax incentives for people to use changed vegetable oil, which has to go through a damaging process that could harm the environment, while those who go to the expense of modifying their engines or using additives might have no similar incentives. If such incentives exist, does the Treasury intend to make them clear?

I turn to the deferred increase in hydrocarbon fuel duty rates. I understand that the increase will not take place until 1 September 2006. When the re-valorisation kicks in, it will represent an increase in line with inflation. It will not be a real rise but will prevent a real-terms fall. That is welcome; since 2000, when fuel duty began to decline in real terms, the rate of increase in greenhouse gases has doubled. The take of green taxation as a percentage of national income has also fallen during that time. In 1999, green taxes represented 3.6 per cent. of national income; that has now fallen to 3 per cent. Fuel duty accounts for two thirds of the total take of green taxation, so the rise will help to counter the decline.

However, a question similar to those raised during our discussions of other measures on vehicles arises: what changes will the clause make to behaviour? What other measures is the Department considering to fulfil its environmental obligations? The proposals are okay as far as they go, but is the Treasury considering longer-term ways of producing changes that will impact on behaviour, pollution and the environment?

The changes in the clause will not achieve that; neither will the changes proposed for vehicle excise duty. What meetings has the Treasury had with the Department for Transport, which is considering proposals for road-user charging—a real way of making the polluter pay and relating vehicle use and the impact that it has on behaviour?

John Thurso (Liberal Democrat, Caithness, Sutherland and Easter Ross)

My hon. Friend is absolutely right to say that road-user charging is the most effective way to tax road use; it impacts on those who create the most environmental problems—in other words, cause congestion. It has the added benefit of reversing the current problem: people who live in far-distant places such as the north of Scotland pay 12p more for their fuel than those in metropolitan centres. Road-user charging puts more tax on people in areas with congestion and therefore with alternatives.

Implementing that will take five or six years at the very least. In the interim, what could my hon. Friend offer my constituents? Would she favour using the EU derogation, which would permit such remote areas to have a lower fuel duty?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I can put my hon. Friend’s constituents’ minds at ease; I shall support the use of the EU derogation on that issue. Amendments were tabled in respect of other measures that would ease the burden of those in rural areas who have no alternative but to use a car. Unfortunately, they were voted down.

Rob Marris (Labour, Wolverhampton South West)

The hon. Lady seems to be contradicting herself, as she did during Committee stage in the House. She criticised the Government for the fact that the proportion of green taxes has fallen, but now agrees with the hon. Member for Caithness, Sutherland and Easter Ross that they should fall further through an EU derogation on fuel duty. Her position seems entirely contradictory, although that is not surprising in a Liberal Democrat.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I am afraid that the hon. Gentleman may have missed the point. The derogation refers only to a tiny, very isolated, minority of areas. If alternatives such as improved public transport were provided in such areas, they would probably end up being less environmentally friendly than allowing the people there, who have no other option, to continue to use their cars.

If we are to impact on behaviour, we have to change the behaviour of those who have other options. As has been mentioned, any changes would have a massive impact on the pockets of those living in rural areas, but would not influence their behaviour. The only reason for using pricing mechanisms to change behaviour is to make people use an alternative; if they do not have one, they will have to continue to pay and the objective will not be achieved.

John Thurso (Liberal Democrat, Caithness, Sutherland and Easter Ross)

I am grateful to my hon. Friend and shall not intervene on her again. The question to ask the Government is as follows: why should increases in fuel duty be capped when they reach a certain point so that people are not adversely affected, when it is all right for the prices people pay in remote areas—they pay 5 per cent. more—not to be capped?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

My hon. Friend makes a good point. I shall close my remarks by expressing my hope that the Minister will provide clarity on the time scale to which he will work with the Department for Transport on introducing road-user charging, so that the changes in the clause represent only a holding measure rather than a long-term strategy.

Helen Goodman (Labour, Bishop Auckland)

I welcome subsections (3) and(4), which maintain the differential that the environmentally friendly biodiesel and bioethanol have in the whole regime. Together with the renewable transport fuels obligation, the provision is providing a significant incentive for both the domestic and European production of these fuels.

In last year’s Standing Committee on the Finance Bill, I referred to the excellent farmers’ co-operative, Farmway, which is on the border of my constituency and that of the Prime Minister. These measures are of environmental benefit. They are of benefit to the farming community because they are providing an alternative outlet for it. They also have significant employment benefits. In fact, as a result of the additional incentives, there is a chain of petrol stations called “One green route” throughout the constituency where people can specifically buy biodiesel and bioethanol.

I have some questions on the capital allowance treatment of biodiesel and bioethanol on which I hope we can have a move to more generous treatment. As for subsection (2)(c) and the ultra-low sulphur petrol rate, I understand from the explanatory notes that it affects the rate of duty on aviation gas as well, which is charged at one half of the rate set aside for light oil.

Earlier, the Financial Secretary explained reasonably that we are constrained in what we can do on aviation fuel due to a network of international treaties. I am sure that he is aware that the fastest growth in aviation fuel is on domestic flights. Therefore, does the hon. Gentleman know whether international treaties apply to fuel bought for domestic as well as international flights?

George Young (Conservative, North West Hampshire)

I want to follow the hon. Lady by focusing on subsections (3) and (4), which maintain the differential rates. The Financial Secretary approached the matter from a number of angles. He mentioned the agricultural angle. Like my hon. Friend the Member for Ludlow, I have a rural constituency where there is enormous interest in diversification—an appetite. They have got to have either a new crop of houses or a new crop of biofuels. Within an appropriate balance, I would prefer to have the biofuels rather than an excess crop of houses in some of the scenery. Two points arise from that.

First, the Minister mentioned enhanced capital allowances. What progress have the Government made in the application for state aids clearance? Is the Minister still confident that he will get the necessary clearance and that the scheme will be up and running by 2007? Because without that, the infrastructure to support the diversification may not be available.

I want to raise a second, broader issue. The Minister is maintaining a 20p differential, but what is the logic behind 20p? Why has that figure been chosen? Is there any flexibility or are we stuck with 20p for ever and a day because that figure was put in initially? Some targets in the Red Book seem to be rather modest against a background of 0.25 per cent. of road fuels being accounted for by biofuels. That does not seem a high base, but the targets are to hit 5 per cent. by using the RTFO by 2011.

The Minister said that the RTFO was a new invention. In a sense it is, but it is a close relative of the non-fossil fuel obligation, which was introduced by the previous Administration and applied to the supply of electricity and fuel. I welcomed that. However, if the Government are serious about reducing carbon dioxide emissions, will a target of 5 per cent. deliver? The higher target of 5 per cent. after 2010 and 2011 is heavily qualified. Page 766 of the Red Book says:

“The Government intends that the target should rise beyond 5 per cent. after 2010-11, so long as infrastructural requirements and fuel and vehicle technical standards allow, and subject to the costs being acceptable to the consumer.”

That is important small print. Should not one approach the matter from the other direction? Given that there is a strong commitment to reduce carbon dioxide emissions and that transport costs account for such a high percentage, should we not find out the percentage reduction that has to be achieved through the RTFO and work backwards through that and, perhaps, end up with a different differential from the one that we have at the moment? Perhaps we should do that, rather than starting from where we are and arriving at a solution that may not enable the Government to hit their carbon dioxide emission target.

I should like to know whether there would be any flexibility in the Government’s approach, if it turned out that their targets were not ambitious enough to deliver the Kyoto targets to which I believe they remain committed.

Stewart Hosie (Scottish National Party, Dundee East)

Some hon. Members may recall that, in last week’s Committee of the whole House debate concerning vehicle excise duty in sparsely populated rural areas, the point was made that the major financial pain felt by people in such areas was from the price of fuel, not the one-off cost of vehicle excise duty. Indeed, with petrol and diesel in the Western Isles today sitting at around £1.06 a litre, the time has come for some form of change to the duty system.

The Financial Secretary said earlier that he had had numerous discussions and consultations and published a large amount of information. I want to question him on how he got to the duty rates that will be implemented from September 2006. I welcome the comments that he made earlier about discussions with those who use rebated fuels. In his discussions on setting this year’s rates, did he consult the haulage industry, particularly, which is continuing to find trading difficult, in no small measure due to the high cost of fuel and not least because, as Committee members know, the largest element of the cost of a litre of fuel—slightly under 50 per cent.—is duty, with the remainder, up to around 65 per cent. of that cost, being VAT?

In the Financial Secretary’s consultations, did he speak to organisations other than the obvious ones concerned with the production, refining and distribution of fuel and the large motoring organisations? Did he speak to some of the smaller, sectoral and geographic interests, where the high price of fuel is particularly punitive, being based on a high duty regime? Did his review and his consultations and discussions not only lead him to set this year’s duty rates, but will those in any way inform debate in future—perhaps on the need for a more sensitive fuel duty regulation regime? Will he consider in future, notwithstanding the rates set for this year, the EU derogation option, which has been raised on a number of occasions by the Liberal Democrats? I am straying ever so slightly, but do the Financial Secretary’s discussions lead him, perhaps, to changes in subsequent years’ excepted vehicles amendment to schedule 1 to the Hydrocarbon Oil Duties Act 1979 statutory instrument? Those are important questions.

I hope that in the Financial Secretary’s discussions he considered the effectiveness of the fuel duty regime in relation to business competitiveness, not least because a litre of unleaded petrol, at 94.6p, is cheaper in every other European country, with the exception of Denmark, Finland, the Netherlands and Norway, and because a litre of diesel, at 97.8p, is cheaper in every other country reported by the European Road Information Centre, based in Geneva.

I should like briefly to give a few examples: the Automobile Association’s figures from April show that the 97.8p average price in the UK is opposed to 73.2p in Austria, 78.91p in Belgium, 77.84p in France, 69.27p in Spain, and so on. Is the Financial Secretary confident that those increases, delayed as they are until September, remain the only way to proceed, or does he keep an open mind about whether a more sensitive regulatory regime may be appropriate and whether future derogations may be appropriate? Will he consider options to help sectoral and remote geographical interests?

Brooks Newmark (Conservative, Braintree)

I shall take a slightly different focus. I notice from the explanatory notes that the decision to defer the increase until 1 September was expected to cost £275 million to the Exchequer in revenue forgone in 2006 and 2007. Part of the rationale for the delay, as I understand it from the Government’s announcement regarding the 2005 Budget, was that the increases would not go ahead because in the short term uncertainty and the risk of price volatility remained high, with oil trading at the end of the week preceding 6 June at above $59 per barrel. That was a year ago. The price of crude has gone up, and I believe that it is more than £70 now.

Stewart Hosie (Scottish National Party, Dundee East)

Dollars.

Brooks Newmark (Conservative, Braintree)

I am sorry. The price is fairly close to $70, so it has gone up and volatility has gone up. I read from the explanatory notes:

“Changes in oils duty rates would normally take place on Budget day, but, owing to continued volatility in the oil market, the Government has decided to defer increases in fuel duty rates until 1 September 2006.”

Volatility has increased since the production of that document and since the report last year, and prices are even higher than they were in 2005. So, I am curious about why 1 September 2006 is still the magic date for increasing duty, when the situation has not only remained the same, but gotten worse. I look forward to the Minister’s response.

Rob Marris (Labour, Wolverhampton South West)

It was an interesting exchange with the hon. Member for Falmouth and Camborne, because principles are all right for the Liberal Democrats until they are inconvenient. We heard the principle that the proportion of taxes from green tax should rise until it is a bit inconvenient to her hon. Friend from the north of Scotland, the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso), when the proportion would drop—but we heard that that is all right, because it is only a tiny drop. There go the principles. I understand: it is pragmatism.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

It is an issue of reconciling principle with fairness. If we are going to take difficult decisions with a view to having an impact on consumer behaviour, we must consider the areas in which the burden will fall heaviest. It will fall heaviest on those who are least able to afford it and have no alternative. I see no contradiction in pursuing fairness and greater environmental measures.

Rob Marris (Labour, Wolverhampton South West)

I agree with the hon. Lady’s general proposition that there is no contradiction. Unfortunately, in the proposition that she set out earlier, there was just that contradiction, which is what I highlight to the Committee.

Secondly, the biodiesel and biofuel chemistry lesson was helpful—esterification and all that stuff. It would be interesting if the hon. Lady explained her party’s view on the E85 fuel, which is being pioneered in her region. I am happy to take an intervention.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I thank the hon. Gentleman for his invitation to intervene. Of course we fully welcome the fuel. I was asking for clarification, because there is confusion among consumers about what rebates they may be entitled to and what support may be available to them to make a more environmentally friendly conversion to their vehicle.

Rob Marris (Labour, Wolverhampton South West)

No details on E85 then either.

I have a question for the Financial Secretary. In terms of the renewable transport fuel obligation target of 5 per cent. by 2010-11, to which he and other hon. Members referred, what proportion of arable land in the United Kingdom would be required to provide the bio part of the biofuels? It is all very well talking about such targets, which is very laudable in terms of cutting emissions, but if it means that we will have crops for fuel at the expense of crops to eat, there may be a limit to how far we as a relatively small country can go because of the amount of arable land that we have. Was that availability of land, or lack thereof, taken into account in setting the 5 per cent. target?

Philip Dunne (Conservative, Ludlow)

I will be brief as many of the points that I wanted to raise have been covered by other Members.

On the level of oil prices and the relationship between duty, VAT and price, which the hon. Member for Dundee, East (Stewart Hosie) went into in some detail, when these measures come into force at the beginning of September we are likely to face a point of extreme political sensitivity. When I filled up my car with petrol over the weekend, I paid 98.9p per litre. Once this duty comes into force the price, assuming everything else stays the same, will tip over the symbolically highly significant £1 a litre point. A couple of years ago, the Chancellor responded to pressures—in particular from the haulage industry, as was referred to earlier—by deferring an increase in duty. However, as my hon. Friend the Member for Braintree said, oil prices have now risen considerably above the point of the 2005 Budget when that deferral was introduced. I confidently predict that we will be living with petrol and diesel prices that will rebound on the Government. That could be good news for those of us who are not members of the Government, but I am more concerned about the consumers who will have to pay these prices to help the Chancellor with his public accounts problems.

I wish to touch briefly on two other points: rebated oils and biofuels. In respect of the rebated oils, I served on the Standing Committee that discussed the last increase in January, when I declared an interest as a farmer and therefore a consumer of red diesel, which I should do again. I expressed the concern that at a time when agricultural incomes are under great pressure we are adding to the difficulties of farming for food in terms of making a profit by raising the Government’s take of that endeavour. Yet again, I plead with the Financial Secretary to consider whether it is really appropriate to maintain a duty differential. I heard his arguments in relation to fraud on rebated oils, but I am unconvinced.

On biofuels, I wish to make a point that followson neatly from something that the hon. Memberfor Wolverhampton, South-West referred to. The renewable transport fuels obligation is welcome. It is starting from a very low base, as my right hon. Friend the Member for North-West Hampshire suggested. However, what is not included in these measures, and in my view should be, is any suggestion that the percentage of renewable fuels that the Government are rightly encouraging should come from a sustainable source. At present, the cheapest biofuels come from parts of the world where palm oil can be produced, and palm trees, out of which palm oil is extracted, are being planted in areas that hitherto were sources of the greatest biodiversity on the planet—parts of the equatorial forests. We should not put in place measures that will encourage the further despoliation of forests in Brazil and elsewhere along the equator. There should be a measure—if not in this Bill, then in the next Finance Bill, which I look forward to discussing with the Financial Secretary—that ensures that we are only supporting the use of sustainable renewable fuels.

Stewart Hosie (Scottish National Party, Dundee East)

In discussions with the National Farmers Union Scotland last year, I was told that many of its members were desperate, willing and able to grow oilseed rape to turn into biodiesel but the processing capacity simply did not exist. Is the hon. Gentleman suggesting that the processing capacity to build up secure supply in this country should be addressed in a future Finance Bill, so that we do not have the despoliation of the third world by the growing of trees for palm oil there to provide cheap supply to the west?

Philip Dunne (Conservative, Ludlow)

I am grateful for that intervention but I suspect that the Financial Secretary will respond by saying that that is precisely why he announced the introduction of capital allowances for biofuels in the Budget, a fact that I welcome. Nevertheless, it is a valid point that by insisting on an arbitrary duty differential of 20p per litre the Budget is not providing the right incentives to encourage domestic biofuel production. No reason has been given that bears scrutiny as to why the duty differential should be maintained at 20p, and if there is a logical analysis supporting that figure I should be interested to hear it.

Helen Goodman (Labour, Bishop Auckland)

The hon. Gentleman may not believe that there is any logical reason for it, but I can tell him that industry members fully support it and see its benefits for industry financing.

Philip Dunne (Conservative, Ludlow)

I am grateful for that intervention because I think that the hon. Lady misunderstands my point. I am not arguing that the duty differential should be scrapped; I am arguing that it should be maintained not at 20p but at 21.25p. There should not be an increase in duty on the biofuels that are proposed in clauses 3 and 4. The hon. Lady is acknowledging that from a sedentary position.

I shall make the following final remarks because I take a great deal of interest in biofuels for the purposes of agricultural diversification, as the Minister was kind enough to say. In my constituency there is what I believe to be the very first 100 per cent. biodiesel forecourt pump—I was certainly told that when I opened it. It is in the town of Bishop’s Castle, which is a leading innovator in all forms of green effort. The feedstock for that plant comes from waste rapeseed oil from the catering establishments of local authority schools, which I am told is the only source of waste rapeseed oil that is available in this country and which is clearly a very finite supply. To expand domestic production we must undoubtedly put farmers in a position where they can supply on an industrial scale, and my understanding is that that is beginning to happen, although only slowly. There are sugar beet farmers in my area who would welcome the opportunity to turn sugar beet into bioethanol, but at present the only plant under construction is in Norfolk, and it is probably uneconomic to transport material to Norfolk from Shropshire.

Rob Marris (Labour, Wolverhampton South West)

I caution the hon. Gentleman on his enthusiasm for used rapeseed oil or canola oil deriving from schools. As the Ricardo Associates report for the Department for Transport showed, either last year or the year before, if that fuel is put in unmodified engines, the pollution emitted from unmodified vehicles can be significantly worse than if they were running on diesel or petrol.

Philip Dunne (Conservative, Ludlow)

I am most grateful, and I shall not detain the Committee by discussing with the hon. Gentleman the proportions of fuel that should be ordinary diesel and biodiesel. Biodiesel is being gradually introduced alongside regular diesel in Bishop’s Castle—I am reliably assured that once the tank has been topped up on a sufficient number of occasions it can be used at a 100 per cent. level without engine damage. Fuel efficiency is also improved, and by definition that reduces emissions.

John Healey (Labour, Wentworth)

I shall try to respond to the points that have been made in a wide-ranging and rich debate that has reflected the different provisions in the clause. I welcome the interest that has been shown on both sides of the Committee in developments in supporting biofuels, including from the hon. Member for Ludlow, the right hon. Member for North-West Hampshire and my hon. Friend the Member for Wolverhampton, South-West. The primary policy purpose of the road transport fuels obligation is environmental impact: the contribution it can make to the UK’s effort to deal with emissions and climate change. To deal with those things we want to expand the UK biofuels market, and that is our principal purpose. The principal purpose is not to expand the UK biofuels industry, although we hope that that will be an important consequence of our approach and we are putting some measures in place to support its development. There are signs that it is expanding. A new biodiesel plant is coming into production and some bioethanol plants are starting to be in process.

My hon. Friend the Member for Wolverhampton, South-West asked whether the 5 per cent. RTFO could be met by domestic rapeseed and crop production in the UK. The short answer is that if he examines the studies that the Department for Environment, Food and Rural Affairs has done, he will see that it is confident that 5 per cent. production could be met entirely from feedstock grown in the UK. That could be done without affecting the production of food crops, which he is concerned about—partly, I guess, because we are a net exporter of wheat. We also have a substantial amount of set-aside land available, which could in theory be turned over to such crops.

The principal purpose of the range of support that the Government is putting in place is to achieve environmental gains by expanding the UK biofuels markets. It is not designed to be a new source of subsidy for UK farmers and agricultural production.

Nia Griffith (Labour, Llanelli)

Does my hon. Friend agree that there is further potential with the reform of the common agricultural policy, particularly in respect of sugar beet? There will be more opportunities for the poorer nations of the world to export sugar cane sugar to the EU. Subsequently, some areas in Britain where sugar beet has been the main source of income will be interested in turning to biofuels in the future.

John Healey (Labour, Wentworth)

My hon. Friend is right. I do not think that she joined the debate that I was involved in last night in the Commons Chamber about the future financing of the European Union. The imperative to reform the CAP further was a central part of the agreement that was reached under the UK presidency in December. On sugar, she might be aware that under the UK presidency an historic reform of the EU’s sugar regime took place to remove some of the indefensible levels of subsidy and protectionism that were part and parcel of it.

The hon. Member for Ludlow made the important point that in developing the RTFO we must be concerned about the source of the feedstock, to ensure that there are no unintended consequences that are environmentally damaging. He might be interested to know that as part of the preparation for the introduction and development of the obligation we are examining how we can put in place a carbon assurance system that allows, on a life cycle basis—this is precisely the point that he was making—an assessment of the impact and the contribution that the obligation will make.

You might remember, Mr. O’Hara, that the hon. Member for Braintree promised the Committee this morning that he would never take a view that was different from the view of those on his Front Bench. This afternoon, he has been arguing that the inflation duty increase on road fuels should not go ahead in September. He might have missed the hon. Member for Wycombe saying a little earlier that the Conservatives accepted the provisions in the clause.

Brooks Newmark (Conservative, Braintree)

Ever on the ball myself, I had a feeling that that question would be asked. That is why I began my mini speech with the phrase, “This is merely a probing question”.

John Healey (Labour, Wentworth)

We are only on our first day in Committee, although it feels a lot longer than that. I look forward to the further probing questions that the hon. Gentleman may ask the Committee that will be directed, I suspect, as much at those on his Front Bench as at those on ours. The serious point is that the Government keep all options under review, but it is our intention to increase rates in line with inflation from 1 September this year. As in the past, we shall take full account of all the economic as well as the social and environmental factors.

If the hon. Member for Dundee, East believes that there is a case for a different fuel duty regulation regime, he may wish—as his colleagues in the Scottish National party did last year—to frame such a proposal as an amendment to the Finance Bill, which we could debate fully in the future. He asked, in particular, whether we consulted beyond what he might regard as the usual and obvious suspects, including those associations that represent some of the essential users of road fuels, including the haulage industry. I have met the Road Haulage Association several times since the pre-Budget report. Immediately before that, in part to examine the findings of the Burns review, officials met the association almost weekly in the run-up to the Budget. That important sector of the industry has had a fair chance to put forward its point of view. It welcomed, as did Roger King the chief executive of the Road Haulage Association, our decision to defer the increase in fuel duty.

My hon. Friend the Member for Bishop Auckland asked me a straight question about whether domestic aviation turbine fuels are taxable. I shall give her a straight answer: the answer is yes, with the qualification that if the United Kingdom took the unilateral decision to raise significant rates of duty on AVTUR on domestic flights, the consequence might be precisely the opposite to which she wants to achieve. She is worried about environmental impact. Were we to take a unilateral decision, there would not only be a risk to the commercial competitiveness of some of our flights, but a serious risk that airline companies would tanker and refuel outside the United Kingdom and therefore fly extra air miles to service domestic routes, but doing so on fuel that was purchased outside the United Kingdom. Such a proposal might defeat her purpose.

I had not mentioned the enhanced capital allowances for biofuel plants, but the right hon. Member for North-West Hampshire asked me about them. We submitted the application for state aids clearance on Budget day. As he would expect from his knowledge of how the Government work, we had discussed it in detail with the European Commission before we put in our formal submission. I therefore remain confident that we shall gain the clearance that we seek for the enhanced capital allowances. I hope that we can start the scheme early in 2007.

The right hon. Gentleman and the hon. Member for Ludlow questioned the 20p per litre duty discount and support for biofuels. We set it at that rate because we believe that it is a sufficient incentive to help support the development of the biofuels market. Furthermore, because it is a significant source of tax forgone to the taxpayer, we do not want the public purse, in a sense, to be paying over the odds for that form of support. If the right hon. Gentleman and the hon. Gentleman consult the Budget document, they will see that, alongside the duty discount support for the development of biofuels, we have announced that, with the obligation, there will also be a buy-out mechanism. That combination of duty incentive on the one hand, and penalty or discipline through our buy-out level on the other, will give the obligation the kick-start that it requires. It will also give the industry and prospective investors the certainty for the long term that they require from Government policy.

In response to the hon. Member for Falmouth and Camborne, I point out that biodiesel is eligible for duty discount if it meets the specifications set out in the Hydrocarbon Oil Duties Act 1979. That is it. However, we announced in the Budget that the HMRC would review the definition of biodiesel and how it operates. I aim to report back from that review by the time of the pre-Budget report this year, so if there are specific points that she wishes the review to take into account, I suggest that she lets me have them and I will ensure that they are properly considered.

On the hon. Lady’s broader argument, we know that she wants to whack up environmental taxes and price people out of their cars, but the hon. Member for Wycombe reiterated my point that, when making decisions about duty, there is inevitably a balanced judgment to make and a balance of factors that have to be taken into account. Although the hon. Lady is concerned for duty to be used as a way of raising prices so as to discourage people from driving, I point out that when we made our decision on the 2005 Budget, the pump price that motorists were paying for petrol was 82p per litre. We proposed a duty increase of just over 1p per litre, being conscious that that might contribute to achieving our environmental ends, but also balance the other factors. By the time of the pre-Budget report, we decided that we would not go ahead with a duty increase, because the pump price was 6p per litre higher. In those circumstances, because of demand, the market had the environmental impact that the she advocates that we should seek through duty. In the circumstances, we were right not to go ahead with the duty increase and not to load those extra costs on to motorists and hauliers; and for those concerned about the environmental impact, the market and the price mechanism were doing far more of the heavy lifting than the Government could or should do through duty increases.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

The point that I was making was that we are talking about a very blunt instrument. If the Government are serious about changing behaviour—and their stated intention is that they are—this is not an appropriate structure; hence my call for the Government to consider other mechanisms and structures, such as road-user pricing, which is being investigated by the Department for Transport.

John Healey (Labour, Wentworth)

Interestingly, my right hon. Friend the Paymaster General has just told me that the Liberals opposed road-user charging in Bristol, which is my right hon. Friend’s area. That is an interesting contradiction between the views that the party seems to take nationally and locally, but perhaps that is not terribly new. I say to the hon. Lady that, in the end, there is not one, single policy solution to the challenges that we face. Road-user charging may well help on one front, but it is not the single solution—the silver bullet—in policy terms.

George Young (Conservative, North West Hampshire)

The Financial Secretary made an interesting point a moment ago. Should we therefore assume that if the petrol price goes up by more than 6p between Budget day and 1 September, the Government will once again defer the increase?

John Healey (Labour, Wentworth)

No, I was explaining the situation that we faced in 2005. I explained, in response to the hon. Member for Braintree, the difficult and complex balance of factors that we had to take into account and the judgment that we arrived at.

Finally, on the concerns raised by the hon. Members for Ludlow and for Wycombe about those sectors of the economy that are heavy users of red diesel or rebated fuel, I understand the concerns of the National Farmers Union, which I met before the Budget. We will examine the impact of the oil strategy with the NFU, as we will with other heavy using sectors. During the discussions, the NFU will have the opportunity, which I encourage it to use, to help us assess the strategy’s impact and put forward its view on what consideration the Government should give to future policy in the agricultural sector.

By way of warning, though, I say that it is not just the agricultural sector that is asking for preferential treatment. It is quite difficult to see a unique case for treating any of the sectors that make heavy use of rebated oil in a way that differentiates them significantly from other sectors.

Clause 8

John Healey (Labour, Wentworth)

The Hydrocarbon Oil Duties Act 1979 requires road vehicles to use fuel on which the full rate of duty is charged. However, schedule 1 to the Act describes excepted vehicles, which are entitled to run on rebated gas oil, popularly known as red diesel. This clause will introduce a power to enable Her Majesty’s Treasury to amend schedule 1 by statutory instrument.

The schedule for excepted vehicles was first introduced in 1935. It has failed since then to keep pace with changes in technology and commercial practice. As far as we can tell, the last serious review of that policy took place in the 1960s. Vehicle technology and design continue to evolve, creating new types of vehicles that were simply not envisaged when the framework for schedule 1 and the excepted vehicle status were first drawn up. For that reason, vehicle owners, enforcement agencies, tribunals and the High Court have interpreted the schedule on a case-by-case basis, which has resulted in some inconsistency of approach. Consequently, it has become increasingly unclear why some types of vehicle should benefit from excepted vehicle status and others should not.

In December 2004, the Government issued a consultation document on changes to the excepted vehicles schedule. A summary of responses to that consultation was published in December 2005 alongside proposals for changing the schedule against a set of principles for establishing greater clarity and consistency.

The reasons for the powers in clause 8 to amend the schedule by Treasury order are threefold. First, they will make it easier to keep the schedule up to date so that we do not stifle developments in new engine design and technology. Secondly, they will enable the Government to respond more quickly when loopholes are identified to ensure the degree of consistency and fairness that we seek in the system. Thirdly, they will give the industry the opportunity to contribute fully to ensuring that changes in definitions fit their industry and do not have unintended regulatory consequences and impacts.

Industry associations with particular interests inthe matter have welcomed our approach almost unanimously. The Agricultural Engineers Association commented that it considers it a practical solution.The International Powered Access Federation, the Construction Plant-hire Association and others have also backed our approach. We have published in draft the Treasury order to amend the schedule, together with a partial regulatory impact assessment. Those have been circulated to Committee members and to associations and groups representing interests in the field.

In the long run, this valuable relief can remain viable only if it has clear rules based on consistent principles. The changes we have announced are aimed at restoring clarity and consistency to the schedule, and the power to add, amend or delete categories by Treasury order set out in clause 8 will ensure that the schedule continues to provide that clarity and consistency and continues to keep pace with modern developments.

Helen Goodman (Labour, Bishop Auckland)

As the Financial Secretary has just intimated, this is an important clause because it introduces a new power for the Treasury to amend the list of vehicles permitted to use red diesel. Those are clearly considerable powers so this debate is rather like the one we had on the provisions in clause 2 that gave the Treasury similarly considerable powers.

At that time, I asked the Minister about consultation because I wanted to be sure that it had occurred. He has just said that a consultation document has already been published and that groups with which the Treasury has held consultations are satisfied. That is important because it is quite a wide-ranging power and we shall not have the opportunity to add to or subtract from the list in primary legislation. None the less, we shall not oppose the clause, but I have a question for the Financial Secretary.

This morning, he sent round a draft of the statutory instrument in question, which is quite detailed, and it defines agricultural tractors, agricultural machine handlers, mobile cranes and road resurfacing vehicles. It will clearly be an important statutory instrument. In the letter to my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) that accompanied it, the Financial Secretary said that he enclosed a partial regulatory impact assessment for the Committee. We would like to know when the regulatory impact assessment will be complete and when others will be able to see it.

Rob Marris (Labour, Wolverhampton South West)

I have a brief question based on the draft regulations to which the hon. Gentleman referred. Why are road surfacing vehicles included? It seems to me that most roads built in the UK are built directly or indirectly at the behest of the Government and financed by them. It appears cursorily that there is a swings and roundabouts effect in this case. Either those vehicles are not exempt, and therefore the cost of building the road is higher because they have to pay more for fuel, or they are exempt, and the costs of building roads are somewhat lower.

In the first case, of course, the Government will be getting the money back through taxation because of higher fuel prices. However, that removes an incentive for operators and constructors of road surfacing vehicles to make them more fuel efficient because they get to run them on cheaper fuel. It may appear to be a matter of swings and roundabouts in the context of total Government expenditure, but whether it comes through a lower bid price for a road with lower fuel costs or a higher bid price with higher costs, environmentally it is not a good idea to lessen the incentive for those building and operating road surfacing vehicles by allowing them to pay red diesel prices rather than full prices.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

We welcome the proposals in principle as a way of overcoming abuse with regard to exempted vehicles and as a way of keeping up with the change in build, specification and technology of vehicles without referring back to primary legislation. They are also a way of overcoming adverse tribunal rulings that have highlighted the lack of clarity and ambiguity that exists in the current legislation.

Although I welcome the consultation that has taken place and I thank the Financial Secretary for the draft regulations, I am afraid that I did not receive the updated partial regulatory impact assessment and I wonder whether that is because it was not enclosed in the letter that I had, or because it went astray more widely. On that basis, I would like to ask the Minister how much of the annual fraud of £0.5 billion a year will be overcome by the changes, and will any additional resources be committed to enforcement measures to ensure that the level of fraud is reduced?

David Gauke (Conservative, South West Hertfordshire)

I merely have a brief question for the Financial Secretary. I notice that clause 8 is entitled “Road vehicles”, but my question is about the application of red diesel in respect of canal boats. The issue is of particular concern in my constituency because a major canal runs through it. Constituents have contacted me about the ongoing issue of red diesel, which I believe will no longer be available for canal boats. I seek further clarification, because there is nothing in the draft statutory instrument to which he referred in respect of that matter. It might be that as far as pleasure boats are concerned it is dealt with in a different regime, but I would be grateful for further clarification.

Stewart Hosie (Scottish National Party, Dundee East)

I welcome the clause, not least, as the Financial Secretary said, because it will allow the Treasury to keep up to date, identify and close loopholes and allow the industry to engage to avoid unintended consequences. As I said, it might provide a mechanism to provide relief to certain other sectors and geographic areas. I am sure that that will be examined in the months and years ahead.

Like the hon. Member for Falmouth and Camborne, I think my partial regulatory impact assessment was put in a different envelope that has gone walkies. I would like to read it.

Colin Breed (Liberal Democrat, South East Cornwall)

Like the hon. Member for South-West Hertfordshire, who alluded to pleasure boats, I have received representations from a wider series of people who use red diesel in fishing boats and in boats where training is undertaken on one part and pleasure on another. Some activities qualify for red diesel and some do not and there are difficulties in trying to swap between the two. I am not sure whether certain things happened as part of that consultation exercise. Certainly pleasure craft, fishing boats and the marine industry as a whole have not been mentioned in the statutory instrument. Are the Government still considering that matter or have they reached a decision?

Brooks Newmark (Conservative, Braintree)

In considering clause 8, I wanted briefly to reflect the concern of the road hauliers in my constituency. The issue is about a level playing field. The Freight Transport Association’s chief economist, Simon Chapman, said:

“Whether it is the cost of the diesel itself or the duty, every lp per litre on the price of diesel adds £140 million to industry’s overall operating costs. The Chancellor already takes £4.2 billion per year in diesel duty and lorry VED from heavy goods vehicles out of a total of £43.5 billion from all road users.”

Duty on diesel in the UK is 47p a litre, which contrasts with a European average of just 22p a litre.

Edward O'Hara (Labour, Knowsley South)

Order. I think that the hon. Gentleman is discussing the wrong clause. Clause 8 is about excepted vehicles.

Brooks Newmark (Conservative, Braintree)

I am referring to duties.

Edward O'Hara (Labour, Knowsley South)

Order. If the hon. Gentleman would square the circle, I should be very pleased.

Brooks Newmark (Conservative, Braintree)

I am attempting to do so. Substantial problems are generated for the domestic industry, which is in competition against foreign vehicles that are working in the UK using cheap European fuel. About one in eight of the heaviest vehicles on UK roads now comes from overseas. The level playing field—

Edward O'Hara (Labour, Knowsley South)

Order. The hon. Gentleman is out of order. Clause 8 is about excepted vehicles.

Brooks Newmark (Conservative, Braintree)

I accept the Chairman’s charter.

John Healey (Labour, Wentworth)

I am glad that we have had the opportunity to hear several contributions to this debate, because the provision is important. The excepted vehicles schedule and scheme is important.

I am grateful for the welcome that the hon. Member for Falmouth and Camborne gave to the clause. The partial RIA will be posted shortly on the HMRC website. I will make sure that members of the Committee receive a copy and that it is available in the Vote Office for other hon. Members to consult. The full regulatory impact assessment, about which the hon. Member for Wycombe asked me, is a draft order out for consultation in order to help us finalise the provision. It will be published alongside the instrument, in the summer.

I shall tackle the question of my hon. Friend the Member for Wolverhampton, South-West by referring back to the purpose of the clause, which is to reintroduce a clearer set of principles to underpin the eligibility set out in the schedule. Whether or not different categories of vehicle qualify for excepted vehicle status would be made clearer and more consistent.

The principle derives from the fact that the duty on oil raises funds for the Government. We spend that revenue in various ways, including the upkeep of the road network. It has long been accepted, and was behind the original introduction of the scheme, that vehicles used in areas, such as agriculture and construction, that make only incidental use of public roads that are maintained in that way, should not make the same contribution to the upkeep of that road infrastructure. For that reason, categories of vehicle that only incidentally use the main road network are classified as executive vehicles and therefore eligible to use red diesel at the heavily discounted duty rate in comparison with main road fuels.

Rob Marris (Labour, Wolverhampton South West)

My hon. Friend said that the regime has been amended and tweaked, to use my words, since it was introduced in 1935 when, I would venture to say, environmental concerns about emissions from vehicles were not high on the agenda of any Government or individual. By road surfacing vehicles continuing to use red, rather than full price, diesel, an incentive is removed that ought to be there for operators of those vehicles to buy road lane vehicles that are more fuel efficient. It is precisely because it goes back to 1935 that the provision is a historic hangover that the Government ought to address.

John Healey (Labour, Wentworth)

Once we start considering the environmental consequences of such matters, red diesel is a lot less clean than main road diesel. The types of vehicles involved in various facets of road construction need to be treated in the way that we propose under the schedule. Some are quite heavy users of the road fuel network, which is why some, according to our proposals, will not be eligible in the way that they have been in the past.

The principal case, which I have attempted to explain to the Committee, is the answer to the question of the hon. Member for Braintree. No one can say that road hauliers are anything other than heavy road users. There is no case and they have never been excepted road vehicles under the terms of schedule 1. Therefore, there is no case for their being treated as such even though they may wish to make other parallel arguments about the levels of fuel duty and the costs that they impose as part of their operations.

Finally, turning to the rather extraneous question that the hon. Members for South-West Hertfordshire and for South-East Cornwall (Mr. Breed) asked me, canal boats come under a separate regime. They are not excepted vehicles. However, they have a right to use red diesel rather than main road diesel paid at that rate. The reason is that the UK has a derogation from the energy products directive in the European Union. It allows private boat owners to continue to use red diesel—a derogation that is due to expire at the end of December of this year.

Following a long process of detailed discussion with many boating associations, and following detailed analysis within HMRC, we announced in the Budget that we believe that there is a strong case for arguing with the European Commission that we should havean extension of that derogation. The UK has the opportunity to submit an application for that extension. We confirmed in the Budget that it is our intention to do just that. Alongside the Budget, we published our first regulatory impact assessment, which we built in consultation with the boating associations. That sets out our case quite strongly. We will apply in that way for the UK’s derogation, which would allow private boat owners in the UK to continue to use red diesel, and which would mean that we did not incur the cost and the consequences that an ending of the permission would entail.

The hon. Member for South-East Cornwall talked about fishermen in his constituency. Just to be clear, commercial boats are not subject to the derogation. Commercial boat owners and users can use rebated gas oil or red diesel anyway, without the provision of that derogation, so they will not be affected by the European Commission’s ultimate decision on whether we will be entitled to extend the derogation that applies to private boat owners. I hope that that is helpful to the hon. Gentleman, and generally to Members who raised points about the clause. Given the hour, I hope that members of the Committee will allow clause 8 to stand part of the Bill.

Edward O'Hara (Labour, Knowsley South)

I allowed the debate to run on past7 o’clock because I could see that it was coming to a conclusion.

The rest of the debate is in Hansard.