Finance (No. 2) Bill

Public Bill Committee, 20 June 2006.

Standing Committee A

Schedule 21

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 122, in schedule 21, page 142, line 33 [Vol II], leave out ‘residential property' and insert

‘property that is normally used or adapted for use as one or more dwellings'.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following amendments: No. 123, in schedule 21, page 142, line 34 [Vol II], leave out from ‘is' to end of line 34 and add

‘any personal chattels other than choses in action (or in Scotland any moveable property other than incorporeal moveable property).'.

No. 124, in schedule 21, page 142, line 36 [Vol II], leave out paragraph 7.

No. 125, in schedule 21, page 143, line 11 [Vol II], at end insert

‘but subject to paragraph 8(2)—'.

No. 126, in schedule 21, page 143, line 22 [Vol II], after ‘(2)', insert

‘Except where a member or related person as defined in section 4 is resident,'.

Mark Hoban (Conservative, Fareham)

May I welcome to the Chair, Sir John? If anyone is talented and qualified to chair a debate about pensions, it is you. I am sure that we will benefit from your wise guidance in what I hope will be the ultimate sitting of the Bill. Now that the Economic Secretary is in his place, I shall move amendments Nos. 122 to 126.

John Butterfill (Conservative, Bournemouth West)

Order. The hon. Gentleman cannot move all the amendments at once. He can move only amendment No. 122. We can debate the others, and if he wishes to move them separately thereafter, he is at liberty to do so.

Mark Hoban (Conservative, Fareham)

Thank you for your guidance, Sir John.

Amendments Nos. 122 to 124 seek to change the Bill’s definitions back to the definitions that applied prior to the Finance Act 2004. Committee members might remember from our proceedings on Thursday that, in the Finance Act 2004, a number of rules relating to the investments that a self-invested personal pension could make were removed or liberalised with a view to encouraging investment in a wider range of assets. Subsequently, in the 2005 pre-Budget report, the Government reversed that, and we see in this Bill quite a complex series of rules concerning residential property.

The amendments probe why the Government have not simply sought to reinstate the pre-2004 position. Rather than going into depth to distinguish between different types of potentially residential property—nursing homes, beach huts, prisons, hospices and a range of different assets—the old rules, although brief, were clear, as was the associated guidance. For example, paragraph 11.18 says:

“Commercial property with a residential aspect, such as hotels, guest houses and nursing homes, is not a prohibited investment. It would not however be permissible for the member or any connected person to use the facilities other than at a commercial rate.”

Those were the rules in place. We seem now to have a much more complex set of rules.

I draw the Committee’s attention to paragraph 7(1)(b) of proposed new schedule 29A to the Income and Corporation Taxes Act 1988, which expands on the meaning of the phrase “residential property”. It will include

“any land consisting of, or forming part of, the garden or grounds of such a building (including a building on any such land) which is used or intended for use for a purpose connected with the enjoyment of the building”.

The paragraph makes explicit reference to beach huts. It seems also to refer implicitly to sheds, greenhouses, Wendy houses and any other form of garden building. I am concerned that the definition seems to be getting more complicated, and I am not sure why.

The definition includes gardens. In my constituency, many back gardens are now being used for development. If I had a SIPP, I could legally buy a field with the intention of using it for residential development, but apparently I could not put my back garden into the SIPP if I wanted to build some more houses there. That seems a curious distinction for the Government to draw when they are keen to build more residential property on brownfield sites.

In responding to amendments Nos. 122 to 124, will the Economic Secretary explain in more detail why the Government have sought to define “residential property” when the previous rules worked very well? It is almost as though, having decided to abandon the previous rules, the Government have let the genie out of the bottle and are having a great deal of difficulty putting it back.

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Gentleman tell the Committee whether he is in favour of “backfill” as it is sometimes called—that is, building homes in gardens as brownfield sites? He seems to be, given that he wishes people to be able to put them in their SIPPs as an investment, so that they can build homes in big back gardens.

Mark Hoban (Conservative, Fareham)

The issue of brownfield development and whether back gardens should be developed is controversial and will probably be the subject of a debate tomorrow in the House, in which I hope to express some thoughts on the issue.

Rather than wishing to encourage more brownfield development on back gardens, I was just pointing out the distinction that the Bill seems to draw. It separates one type of land purchase for residential development from another. That was the point that I wanted to tease out from the Economic Secretary. In a way, I also wanted to tease him in that the Minister for Housing and Planning is keen to see more residential development in back gardens and similar brownfield sites.

I turn to amendments Nos. 125 and 126. In schedule 21, distinctions are drawn between different types of residential property. There are particular, complex rules that relate to hotels and similar forms of accommodation. I understand the rules’ purpose; some people’s residence may well be part of a hotel. Given that the Government seek to clamp down on personal benefit in respect of residents’ property, I understand the route that they are going down.

It seems odd, however, that when we come to the different category of residential properties set out in part 2(8)(1), a distinction is drawn. The Government do not seem as concerned about the people who live in one of the properties listed there having some personal benefit. For example, paragraph 8(1) lists children’s homes, student halls of residence, residential or nursing accommodation for the elderly, hospitals, hospices, prisons or similar establishments. My amendments Nos. 125 and 126 seek to impose on residents of those properties, when they are connected to a pension scheme member, constraints similar to those imposed on people whose residence is part of a hotel.

Will the Economic Secretary explain why he has separately identified a hall of residence—a place where people pay to live and may get meals? Why is the tax treatment of people connected to pension fund members who live in such a place different from that of people who are similarly connected but live in a hotel? We need consistency on the issue. Amendments Nos. 125 and 126 seek to extend the rules.

I turn to an allied point. I am not entirely sure that I know what the definition of a “hall of residence” is. The explanatory notes suggest that it is not a collection of houses. Student houses, of which your constituency has a number, Sir John, do not constitute a hall of residence. However, at what point does a house become a hall of residence for the purposes of the Bill? There are issues around the accommodation of students in many of our towns, and it would be helpful if people could understand the distinction. I seek the Economic Secretary’s guidance and explanation.

Edward Balls (Labour, Normanton)

Welcome again to the Chair, Sir John. We hope to have a productive day and move through a number of clauses. I will try to make sure that while responding in detail to the hon. Member for Fareham (Mr. Hoban), I do so as expeditiously as possible.

We discussed the broad thrust of these issues when debating the previous clause last Thursday. We got into some of the more general issues surrounding beach huts and other ways in which people might try to use the opportunity to invest in lifestyle areas using pension tax reliefs. There is a consensus on all sides that is something we do not want, but the question is how?

Schedule 21 and part 2 of schedule 21, to which these amendments apply, provide the basic definitions of taxable assets so that we can prevent people from abusing the generous tax reliefs they are given on pension savings to purchase assets that may benefit them personally. The tax reliefs are given in order to help save the fund that will ensure secure income in retirement. They are not there to provide a means of buying assets for the personal use of pension scheme members. The taxable assets targeted by the schedule are those where personal use is most likely. These are different versions of residential property and tangible, moveable property.

Amendments Nos. 122 and 124 propose that the definition of residential property in the Bill be replaced with the reverse definition that is derived from the regulations that were in effect before A-day. The hon. Member for Fareham asked me about this point in particular and why, if the previous definitions are understandable and are not dissimilar to the definitions that are here today, we did not stick with the previous rules. As I explained last Thursday, the answer is that we looked at the previous rules in a number of areas and found that there was imprecision, a lack of clarity and the language was outdated. For example, the term previously used for tangible, moveable property was “personal chattels”. It is an outdated term, outside the parameters of the Bill and rarely used in common parlance. Those definitions have worked for a number of years but, over time, there was a considerable need for substantial guidance in order to interpret some of the looseness in the definitions that had arisen. What we are seeking to do in this detailed schedule today is to bring in some precision and to clear up some minor loopholes to make sure that we are as clear as we can be in legislation, rather than having to rely on guidance in how we will apply the regime.

The first amendment removes the reference to garden, grounds and outbuildings. It is important for pension schemes to be clear that the legislation covers such items. Further, if the references are removed, it would open up the prospect of pension schemes attempting artificially to reduce the tax charges by claiming that substantial parts of the value of a residential property is instead within the grounds or the outbuilding. The legislation is designed to prevent such private use of pension scheme assets. Allowing the person to sell their gardens into a SIPP would allow a loophole in the legislation whereby people could sell private land. The legislation strikes a balance between preventing people from using private assets from which they can get personal benefit and the sensible use of pension fund moneys.

Secondly, the amendment removes the provisions that treat parts of buildings as separate buildings. It is an important provision that allows pension schemes to own commercial parts of a building that also contain residential property owned by other parties. The amendment also removes the reference to beach huts, which we debated on Thursday, and prevents schemes investing in these relatively expensive structures that would be available for private use by members. When the committee reflected on the scale and cost of beach huts and their extensive private use in today’s world, as well as on the desirability of whether one wants to be inside or outside a beach hut, I think we would agree on both sides that that we do not want directly to subsidise that through the tax system, using pension tax relief.

Finally, the amendments would remove the reference to hotels. This is an essential part of the drafting of the schedule, as it links in with provisions in paragraph 14 which prevent schemes investing in timeshare-type properties. This is estimated to cost up to £20 million in the first four years as pension savings are directed towards hotels and other holiday lettings. Allowing people to buy, in such a detailed way through their pension fund, a particular room in a timeshare-style way to invest in a hotel, is not the intention on either side of the House. The provisions do not disallow more general investment in hotels; the issue is whether one is allowed to use one’s pension fund to invest in a particular room in a particular hotel for one’s personal use.

Amendment No. 123 seeks to replace the definition of tangible moveable property in the schedule with a definition based on the concept of personal chattels. The alternative definition proposed in the amendment is, as I said, derived from the previous regime. In our view, that old terminology is a bit out of date. The Bill contains simpler definitions that are easier to understand, and that is a better way forward. We published a draft order and asked the pension industry to comment on the range of definitions and types of tangible moveable property, and we have a satisfactory outcome.

Amendments Nos. 125 and 126 relate to the part of the schedule that removes completely from the scope of the measure categories of commercial or public accommodation used to house large groups of unconnected individuals, including children’s homes, nursing homes and prisons. The amendment would bring the excluded categories of accommodation back into the taxable property provisions if a pension scheme holds the accommodation and a member of the scheme, or a person related to that member is resident in it. The likelihood of a pension scheme buying a children’s home, hospice or hall of residence for the personal use of a member—and therefore avoiding the taxable property provisions—is very low. It is different from the example of beach huts. A beach hut for one’s personal use and that of one’s family is much more meaningful. It would be impossible and impractical for pension schemes with many thousands of members to monitor all members and related persons to determine whether they were benefiting personally from an investment that the scheme has made.

The exceptions from the charge will apply to institutional accommodation only where a number of unconnected individuals reside. A private family home does not apply, but a home for the residential accommodation of children is quite different. To answer the question that the hon. Member for Fareham asked earlier, in the case of investment in a hall of residence, although such buildings act as dwellings for people to live in, they are essentially commercial operations. It is unlikely that one would invest in a pension scheme to buy a large hall of residence to benefit one’s son or daughter. There is little risk of that problem arising.

Mark Hoban (Conservative, Fareham)

I am grateful to the Economic Secretary for his comments so far. He said that halls of residence, children’s homes and residential homes were places where a large number of unconnected persons could be together. Will he define what he means by a large number?

Edward Balls (Labour, Normanton)

If one were to buy a house on the Cowley road, put a sign outside it that said “Hall of Residence” and then install one’s son or daughter, such a property would fail the test. On the other hand, if a college or a private company invested in a block with a number of rooms or a set of houses that were to be commercially let, that property would clearly count as a hall of residence if a number of individuals who were probably unconnected to the investors in normal business were to rent from that company.

We do not rule out the idea that, if one invests in a commercial property with a number of student residents, one’s son or daughter might end up renting there, but that would be unusual. It would need to be clear that that was not the intention of the investment; there would need to be a number of other individuals in the property. It is clear that that would be different from investing in a beach hut, a second home or a larger building at the end of one’s garden. It is not for me in debating the measure to put a precise number on that, but it is pretty clear what the intention is and why there is a distinction between a student hall of residence and an individual buying a second or third home for the benefit of a son or daughter.

Obviously, we will need to make it clear in guidance exactly how the rules will be applied in implementing the legislation. However, we are getting to a better place than we were under the previous regime.

I have covered the detailed amendments tabled by the hon. Member for Fareham. We have the opportunity to debate the broader issues about housing policy, design and supply later in our proceedings.

Mark Hoban (Conservative, Fareham)

I am grateful to the Economic Secretary for his explanation. He demonstrated the Government’s problem in that, having decided to scrap the rules two years ago, it is now difficult to put the system back in place to stop further abuse. It would have been better to have thought such issues through first rather than scrap a regime and impose a new one.

When I asked how large the number of unconnected people had to be, the hon. Gentleman gave the polar extremes. I visit several rest homes in my constituency in which there are six, seven, eight or nine residents, so someone related to a member of the pension fund might be in a small rest home. There will be some definitional issues at which people will look closely. I think that the 28 pages of guidance that have been published about the matter will grow over time, rather than diminish, as the issues are teased out by people who work in such areas.

Edward Balls (Labour, Normanton)

Is the hon. Gentleman saying that the definitions and rules are inferior to the regime that applied pre A-day? Does he wish to return to a pre A-day regime? Does he not understand the use of common sense when applying such definitions?

Mark Hoban (Conservative, Fareham)

When we reach the clause stand part debate, I shall explain the other problems that I have with the provisions and say why they are not as clear in some respects as the pre A-day rules. The Paymaster General commented about advisers probing and trying to push the boundaries and I am sure that the same will happen in respect of the issue under discussion. It may be a matter of common sense, but people will look for loopholes to see how the rules can be used to benefit pension funds. Given the fact that the Economic Secretary’s explanation and my remarks have opened up more latitude, I beg to ask leave to withdraw the amendment.

Edward Balls (Labour, Normanton)

I beg to move amendment No. 393, in schedule 21, page 151, line 31 [Vol II], at beginning insert

‘For the purposes of paragraph 23'.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following amendments: No. 129, in schedule 21, page 152, line 8 [Vol II], leave out ‘10% or more' and insert ‘more than 10%'.

No. 130, in schedule 21, page 152, line 10 [Vol II], leave out ‘10% or more' and insert ‘more than 10%'.

No. 133, in schedule 21, page 152, line 11 [Vol II], leave out ‘10% or more' and insert ‘more than 10%'.

No. 131, in schedule 21, page 154, line 34 [Vol II], leave out

‘(a) any member of the pension scheme'.

Edward Balls (Labour, Normanton)

The group of previously six, but now four, Opposition amendments and one Government amendment all refer to part 3 of schedule 21, which sets out when a pension scheme acquires and holds taxable property and the extent of the scheme’s interest in that property. Part 3 of the schedule goes into considerable detail about when a pension scheme is treated as holding an interest in taxable property and the extent of that interest. That is essential because it serves several purposes. It ensures that there will be no getting around the rules by investing through companies and other vehicles controlled by the pension scheme or its members. It also ensures that any tax charge reflects the true extent of the pension scheme’s interest in the taxable property. It also prescribes when an investment is to be treated as made through a genuine diverse commercial vehicle. That will allow genuine investment without the risk of abusive tax advantages arising through scheme members attempting to enjoy personal or uncommercial use of their pension scheme assets.

The real estate investment trusts clauses that we debated earlier offer one way in which to invest in residential property. Investments in residential property made through other collective investment schemes, insurance funds and even smaller commercial vehicles will also be acceptable so long as they meet certain requirements in respect of value and diversity: they must not hold an interest in any property of 10 per cent. or more, and they must not hold the property, so that any investor or relative can use it or occupy it.

Where a pension scheme chooses to invest through one of the acceptable types of commercial vehicles as described in part 3 of the schedule, but still invests in taxable property, the members of the scheme who benefit and the scheme administrators will be subject to tax charges that recover the release already given.

Amendment No. 127, which was not moved, and amendment No. 128 referred to issues around the use of hotels, which we discussed in the debate on a previous amendment. Government amendment No. 393 is a highly technical amendment, which does no more than add a cross-reference, erroneously missed out of the published Bill, to ensure that the provisions limiting investment in taxable property to genuinely diverse commercial vehicles will work as intended.

As three of the Opposition amendments—Nos. 129, 130 and 133—are similar, I will deal with them as if they were one amendment, which is the logical thing to do. The purpose of the measure is to remove the tax advantages for pension schemes investing in residential property and other taxable assets, where the members have influence over the scheme’s investment strategy.

That includes where the pension scheme holds an interest in residential property indirectly via a vehicle and the scheme and its members have a sufficiently large interest in the vehicle that they are able to exert influence over it. That is to prevent the diversion of generous tax reliefs that are given to help savers to build a fund into assets that are available to provide personal benefits for scheme members.

The pension scheme, together with any associated person, is therefore precluded from holding 10 per cent. or more of the share capital and voting rights and from being entitled to receive 10 per cent. or more of income distribution or cash on a winding-up in respect of a vehicle that holds taxable property. If it holds a greater interest, tax charges to recoup the relief given on the amount invested will arise.

The amendments seek to change the conditions on the interest that the pension scheme is permitted to have in the vehicle from less than 10 per cent. to not more than 10 per cent. It affects three of the five tests set out of the schedule.

It has been suggested to the Government that there was no abuse of the restrictions on investment in residential property under the old pensions tax regime, so there is no need for a rule covering indirect investments by pension schemes in such assets. We reject that analysis. Preventing direct investment in residential property, while allowing investment via a company or trust, would give the green light to schemes seeking to avoid the provisions. We cannot allow that to happen.

It has also been suggested that, rather than having complex descriptive rules, the Government should have drawn up a list of acceptable, pooled investment vehicles. Although superficially attractive, that would have been wholly impractical. The rules need to have European and international coverage. It would have been virtually impossible to eliminate discrimination and to avoid international loopholes. Instead, the legislation sets out several straightforward characteristics that the vehicles must have to demonstrate that they are genuinely diverse commercial vehicles.

In most cases, it will be clear to investment-regulated pension schemes which large pool of investment schemes are acceptable. For any large organisation, the tests are reasonably lightweight and easy to apply. Most large occupational schemes will not be investment-regulated schemes and will not be within the legislation.

If an investment-regulated pension scheme wants to tread closely to the boundaries and to invest in smaller vehicles, it must expect its compliance burden to be higher. In conclusion, the scheme removes all tax advantages where the pension scheme invests in a vehicle, 10 per cent. or more of which is owned by the scheme and its associates.

Amendment No.131 will disregard any interest in the vehicle held by members of the scheme, when applying the 10 per cent. test. That would open a loophole that was easy to exploit. It would enable a pension scheme and its members fully to control a vehicle that owned residential property. The arrangement would not trigger any tax charges, so long as the pension scheme did not own at least 10 per cent. However, with control of the vehicle, the property would potentially be available for private use of one or more of the members. We estimate that the amendment would cost £10 million per year. We do not want to allow those loopholes to arise. They would allow the abuse of generous tax reliefs. We therefore ask Opposition Members not to press the amendments.

Mark Hoban (Conservative, Fareham)

May I first deal with amendmentsNos. 129, 130 and 133? The point that I was trying to get at was that those three amendments and amendment No. 131 are very technical. Under the current rules, no one can own a stake of 10 per cent. or more. Therefore, we could have a situation where each member will own a maximum of 9.99 per cent. recurring in the vehicle. Rather than having 10 people own an equal stake in the vehicle, 10 people will own 9.9 per cent. and somebody will own the balance. All I was trying to do was tidy up the measure, so that people could own equal shares in the vehicle. It is not about avoidance, abuse, or exploiting or creating any problems. The aim is to tidy up the drafting so that we could have neat and tidy arrangements for people seeking to use the vehicles to invest indirectly in residential property.

Amendment No. 131 picks up an issue that has been raised with me by one SIPP adviser. I understand that a number of SIPP providers will effectively have an umbrella trust or a master trust set up over a seriesof SIPP arrangements. A member could have his own SIPP, which forms a subset of a much larger SIPP. A SIPP for a small business might be part of a SIPP provided by another company. That company might be based in Fareham and there might be a SIPP based in Newcastle, both of which would be part of the same SIPP umbrella. Each might choose to invest indirectly in residential property through a real estate investment trust, but because they are part of the same SIPP umbrella the risk is that their interest will be added together and come to more than 10 per cent.

That is the issue that I want to probe the Economic Secretary about. Where there is a master SIPP and the participants are different companies or individuals who do not know each other and have no other involvement apart from the fact that they are all clients of a particular firm, their holdings in indirect vehicles will be aggregated under paragraph 30 of the schedule.

Edward Balls (Labour, Normanton)

I slightly regret the fact that the hon. Gentleman did not speak before me, as I could then have listened to his comments first. I had interpreted amendments Nos. 129, 130 and 131 as being a rather more complex attempt to probe the thinking behind the potential use of trading companies. I ended up going into rather more detail about how we are treating these issues than he was probably expecting, so I apologise to him for allowing myself to be overly probed.

We think that the application of the 10 per cent. rule is sensible and understandable; it is what we consulted on and what the industry is expecting. While I appreciate the rather more detailed drafting point that the hon. Gentleman proposes, we are where we are, and this is what people are expecting. The best thing to do is to get on with implementing it. I apologise to him for thinking that he was making a bigger point. I could have just said, “Thanks, but no thanks.”

On amendment No. 131 and the issue of indirect holdings of property through a vehicle, the 10 per cent. rule is simply to administer that and is reflected in a number of other areas—for example, a number of double taxation treaties. The figure is common and understood, including in areas where there will be an investment strategy of a company or a vehicle rather than of an individual. Our view is that this is an understood way of dealing with exactly the kind of problem that the hon. Gentleman raises. I do not think, on the basis of our consultation so far with the industry and advisers, that the particular point he refers to, which was made by one SIPP adviser, is reflected more generally across the industry.

We will be conscious of the point that the hon. Gentleman makes to ensure that the guidance is clear, but our consultation so far does not suggest that this will be a general problem. On that basis, while being grateful to him for that further probe, we must reject his proposal.

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 132, in schedule 21, page 159, line 27 [Vol II], leave out from ‘occurs' to end of line 30 and insert—

‘(a) the property becoming residential property;'.

This brief amendment aims to establish the point at which a property that is being converted or adapted becomes residential.

Edward Balls (Labour, Normanton)

That is an example of particularly efficient and to-the-point probing. In fact, I was probed so fast that I had not realised that I had been probed by the time the hon. Gentleman sat down. I am not sure whether you did, Sir John.

I am happy to deal with the question. Amendment No. 132 would change when the tax charges arose when a pension scheme converted its commercial property to residential use. We propose a tax charge as soon as the property becomes suitable for residential use, even if the conversion is still going on.

To explain the background, when a pension scheme invests in taxable property but does not do so through one of the acceptable types of commercial vehicle, this measure will remove tax advantages in respect of that investment. The schedule achieves that by making scheme members and administrators liable for tax charges that recoup the tax relief already given in respect of the cost of investment. One way of investing in residential property is for the scheme to convert commercial property, such as a barn, into residential. The amendment is about when tax charges arise on a conversion of the property to residential use.

We are making a minor change to timing in a small proportion of cases. Normally, a property becomes residential property at about the same time that the conversion works are substantially completed. In such a case, the amendment would have no effect, but it might have a limited effect if the property became suitable for use as a dwelling before the conversion works were completed.

It may not always be clear exactly when a property that is being converted or adapted from non-residential use becomes suitable for use as a dwelling. We can imagine that in converting a barn, depending on whether it was sunny or rainy, someone might choose to sleep overnight with a hole in the roof, for example, just to give a colloquial flavour to the deeper point that the hon. Gentleman probes on.

We do not want the tax charge to arise only when a property begins to be used as a residence. That is too late. Nor do we want a charge to arise when it becomes a residential property if the conversion works are still in full swing. That is too early.

It is possible for a property to be suitable for use as a dwelling before the conversion works are completely finished. As I said, there might still be a hole at one end of the barn, or the house itself might be finished but a new garage might be under construction, or the works might be finished apart from post-conversion snagging, which Opposition Members might know can sometimes take not just weeks or months, but years, to complete. Snagging is perhaps a technical term more commonly known to the public than straddling, but it is no less frustrating.

It might even be possible to manipulate the work so that ancillary building works carry on long after the property has begun to be used as private residence. The legislation therefore imposes the tax charges after the property has become suitable for use as a dwelling, but only when the conversion works have been substantially completed.

The test for the works—with apologies to the hon. Gentleman—is a matter of common sense. The measure applies a fine balance, which pension schemes can operate fairly simply—not seeking to recover the tax reliefs too early or too late, but preventing the opportunity for abuse, which might be, as I highlighted earlier, when someone allows the snagging to occur deliberately, rather than inadvertently or frustratingly, for years rather than months.

I hope that that provides some detail for the hon. Gentleman, which of course will be reflected in the guidance and the operation of the scheme. On that basis, I encourage him to withdraw the amendment and the building industry not to see the opportunity for tax-driven snagging in future.

Mark Hoban (Conservative, Fareham)

I am grateful to the Economic Secretary for his remarks. We will not go down the road of snagging. I know someone who has been in a house for four years and is still completing the snagging list, so to say that completion of snagging is an indicator of when the property is suitable for residential use is to go too far.

I wonder whether a certificate of habitations might be a better way of identifying the transition point between development and residence, but the Economic Secretary has put his views on the record very clearly. Therefore, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I am sorry to detain the Committee for slightly longer, but I want to raise one or two issues that did not fall within the amendments that I tabled. The first is the inclusion within SIPPs of unquoted shares. The 1991 rules stated that SIPPs could not hold shares in an unquoted company when the pension scheme held more than 30 per cent. of those shares. This is one area where there is a deficiency in the clarity of the schedule and an example of where the old rules might be slightly clearer than the current ones.

It is difficult to wade through the schedule trying to find the rules that tackle the issue. The Government have sought to tackle it through indirect investment, which is referred to in paragraph 23. The only tangible moveable property that pension SIPPs can invest in is gold that meets particular rules or individual items taken with the administration scheme that cost less than £6,000. That appears to rule out shares in unquoted companies where a pension scheme has a particular interest.

Paragraph 21 enables direct investment in a vehicle such as a limited company holding tangible moveable property where the company is carrying out a trade or profession. However, subsections (2) and (3) prohibit that where the pension scheme, in conjunction with associated powers, has control of the vehicle or if a member of the scheme either directly or indirectly controls the vehicle.

That convoluted route effectively prevents SIPPs from holding shares in unquoted companies by preventing them from investing indirectly in tangible moveable property. While we think about computers falling within the £6,000 limit, if we are thinking about a trading company with the same machine source, it is likely that the value will be much greater than £6,000, which would preclude the SIPP from investing in the shares of unquoted companies where the members had a particular interest.

John Lawson of Standard Life said:

“It seems like they’ve deliberately snuck this in. It’s a very obtuse way of getting rid of unquoted shares, by saying any investment in a business which has tangible moveable property such as computers, desks and chairs will be subject to a tax charge if it is connected to the member”.

Will the Economic Secretary clarify the Government’s position on unquoted shares being held by SIPPs? He referred to guidance, which is already out with the industry in draft, on tangible moveable property. That is limited entirely to gold bullion. What further consultations does he expect to have with industry about what falls within the definition of tangible, moveable properties?

Turning to page 165 of schedule 21 and to one of the issues that arose prior to A-day, Her Majesty’s Revenue and Customs gave SIPP providers guidance saying that SIPPs could invest in residential properties so long as they did not become residential prior to 6 April 2006. A number of people bought property off-plan, as it were, with a view to completing after 6 April. There is sufficient transitional relief in place to allow people who bought properties in the UK before 6 April to sell them on, but in some territories, such as Florida, one can buy off-plan only once.

Schemes that have bought off-plan with a view to completing the transaction post-6 April will find that they own residential property after that date and are therefore subject to the penalties and charges set out in schedule 21. Will the Minister carefully consider the situation of schemes caught out by the change in Government policy, and will he ensure that, where schemes are unable to sell their property before it becomes residential, because of the rules in the States or whatever country the property is located in, they are not caught by the penalty charges?

I want to raise the subject of the penalty charges themselves. A number of Committee members have received a brief in which Philip Baker QC gives an opinion sought from him by a solicitor. He considered the four charges put in place in the Finance Act 2004—the unauthorised payments charge, the unauthorised payments surcharge, the scheme sanction charge and the potential deregistration charge—in the context of the European convention on human rights, particularly articles 1 and 6. I do not want to go into the opinion in detail, because it is fairly lengthy, but the nub of Philip Baker’s argument was that the charges were disproportionate given the potential mischief; that is, given the tax relief that would be paid as a consequence of investing savings in property, or as a result of indirect investment in businesses. The penalties were much greater than the tax loss, and there was no opportunity to mitigate that loss, because the charges were automatic; there was no opportunity for someone to appeal against them.

I would be grateful for the Economic Secretary’s comments on Mr. Baker’s opinion, which suggests that the penalty regime in the 2004 Act could come under scrutiny from the perspective of the European convention on human rights and could lead to pension scheme operators embarking on a significant amount of litigation at taxpayers’ expense. Does the Economic Secretary think that that is likely to happen?

There have been changes to the investment regime for SIPPs, which has become more restrictive than it was under the 2004 Act; at that time, the rules were liberalised, so the amount that a SIPP could borrow was reduced from 75 per cent. of its assets to 50 per cent. of its assets. That seems one way to choke off investment in residential property. Now that we have gone back to a more restrictive regime, do the Government have any plans to relax the restrictions on borrowing?

Edward Balls (Labour, Normanton)

The hon. Gentleman asks four questions and I shall try to cover all four. On the first point, which was about unquoted shares and investments in business assets, as the hon. Gentleman knows, the legislation is aimed at preventing abuse of the tax reliefs given to pension schemes for investment in assets, which may provide the opportunity for private use. The legislation ensures that such assets, held by companies and other vehicles owned by pension schemes, are also caught. If the legislation had not covered the ownership of such property by investment vehicles, that would have provided a large loophole; indeed, the legislation would have been largely ineffective. Pension schemes, for example, could have invested money in private companies that bought residential properties. A simple example would be that of a SIPP owning 100 per cent. of shares in a company that owned a flat in Marbella; that would be very little different from direct ownership.

A number of points have been made on investments in trading companies, to which the hon. Gentleman referred. First, it is said that the scope of the legislation is too broad, because it will catch genuine commercial investments in trading stock and plant and machinery used in trades for which there is no possibility of private use.

Although that may be true in some circumstances, there are also a number of occasions on which trading stock or plant and machinery used in a trade may be available for personal use; for example, fine wines, cars or residential property development. In such cases, trading stock may well be available for private use. Furthermore, assets held to provide benefit to employees may well be plant and machinery held for the purpose of the trade, but still available for private use. Those are exactly the loopholes that we want to prevent.

It has also been asserted that it would be difficult for pension scheme administrators to monitor the underlying activities of companies. We do not agree. Most trading companies in which small pension schemes want to invest are controlled by the pension scheme members themselves. The same people are often the pension scheme trustees. Also, an investment in a trading company will not be a genuine diverse commercial vehicle if only the pension scheme and those associated with it control that company or if a member of the scheme or connected person is a controlling director of the company. There will therefore always be a controlling relationship for which tax charges arise, and that will clearly allow the scheme administrator to monitor the company.

It is also asserted that a pension scheme might be caught when a scheme administrator or pension scheme member would not be able to calculate the tax charges that arise. We reject that assertion. As the hon. Gentleman said, we have issued regulations to try to ensure that we can prevent the opening up of those loopholes while allowing proper business practices to continue.

We have issued regulations that allow investment in small items of property used in the administration of vehicles owned by pension schemes. That allows investment companies to hold the general items of administration—chairs, desks, computers and so on—and therefore allows commercial investments in such vehicles with a minimal risk of using pension scheme funds to purchase assets for the private use of pension scheme members. As the hon. Gentleman knows, we have provided for an order power to define items of tangible moveable property that are not subject to the tax charge. The draft order is available on the HMRC website for comment.

We will consider the representations made on trading companies by certain sections of the industry and will consult informally on the draft order. I hope that we will take up some of the hon. Gentleman’s concerns, and some of the detail, in those more detailed consultations.

I say to the hon. Gentleman that until now we have not had representations on the issue of transitional relief and the difficulties of international property investment. If there are concerns about those points in the industry, HMRC will be happy to talk to pension schemes or the individuals concerned, but cannot guarantee that they will not come within the provisions. Obviously, that will depend on the facts and circumstances. However, we are happy to have discussions to ensure that the concerns raised with the hon. Gentleman are picked up. However, so far the issue has not been raised with us.

The hon. Gentleman’s fourth point was about reducing the borrowing limit for SIPPs from 75 per cent. to 50 per cent. The previous borrowing limit allowed borrowing only of a specific asset type—for example, commercial property plus some short-term borrowing. The short-term borrowing limit was trailed in the consultation documents on simplifying the taxation of pensions. Of 200 respondents to the second consultation, only 20 specifically mentioned that they believed the level of 50 per cent. for scheme borrowing to be too low.

A number of people in the industry have taken a different view. Stewart Ritchie of Scottish Equitable has commented that 75 per cent. is too high, being a potentially huge proportion of the funds; he actually favours such restrictions. If there are representations about the new regime in practice, we will look at them, but so far the majority of respondents to the consultation have not raised that as a problem—and some have supported the reduction in the limit.

The final point is about the European convention on human rights and the opinion of Philip Baker QC, which has been circulated to the Committee. Tempted as I am to dwell upon the irony of the hon. Member for Fareham using that convention to probe whether the Government are being overly intrusive in impinging on the human rights of individuals in Britain, Sir John, I fear moving into a broader debate about whether the convention and its incorporation here has been an advance, or whether we would prefer to return to a previous era. I presume that I would be ruled out of order were I to stray too far down that road. So, I will not dwell on the irony of that point but will stick to the substance if that is OK with you, Sir John.

Philip Baker makes a number of points. Generally, it would be fair to say that he, as an individual practitioner in this area, has not been overly enamoured of the Government’s attempt to ensure prevention of tax avoidance in these areas. Therefore, on the content of the legislation and the importance of acting in this area he probably takes a different view, as a matter of principle, to that of hon. Members on both sides of the Committee. There are some more detailed points in his opinion. We have looked at those issues and, contrary to what Mr. Baker says, in our view in both measures that he addresses—the issues of provisions in this order in schedule 21, and the recycling provisions which we will come to shortly—we have struck a fair balance between protecting the rights of the individual taxpayer and safeguarding the public interest, by ensuring that the general body of taxpayers bear no undue burden.

These are generous reliefs and it is important that they are not abused by some who seek to make them even more so. We have a clear duty to protect the general body of taxpayers. It would be wholly unfair to them if an individual were able to receive these generous reliefs on pension saving—on the clear understanding that they were to be accumulated and invested prudently to produce a retirement income—when they were in fact being used to buy a yacht, fine wine or an expensive coastal beach hut. In our view, that would not be right; nor would it be right if some should seek to double up a relief without putting in any more general additional pension savings. We will come to those issues in a moment, but in both cases we have put in place provisions which encourage people to stick to the rules. They provide for a range of tax charges to apply in particular cases and are proportionate to the mischief that they seek to address. In my view, while he is well intentioned, Philip Baker QC is not right to accuse us of not striking the right balance.

Having spent a considerable time some years ago on the issue of windfall tax on private utilities, I note that my sense is that when it comes to making tax policy, a sovereign Parliament has substantial powers and responsibilities, but also latitude to ensure that so long as legislators move correctly through parliamentary processes that this matter remains sovereign to Parliament. Personally, I think that right and proper. It should be for Parliament to make those decisions, so long as they are done in an open, transparent and fair manner and that we strike the right kind of balance. That was undoubtedly so in the case of the windfall tax. Lawyers said that a legal challenge could arise but when people looked at the detail they concluded that it would not. That was why, despite a years’ scaremongering, when it came to it no such legal challenge arose.

The Bill is also clearly well intentioned in aiming to protect the British taxpayer. That is being done in an open and consultative way, and I hope and believe that it will have support from both sides of the House. We have struck a careful, fair and proportionate balance. On that basis, the right thing for us to do, as Members of a sovereign Parliament, is to agree to the provisions.

Mark Hoban (Conservative, Fareham)

I thank the Economic Secretary for his remarks. I would have been much more nervous had my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) been here, because he would have questioned my use of the ECHR rather than the Economic Secretary’s breathtaking irony. I am delighted that he is sure of the penalty regime’s correctness and confident that it will withstand all challenges. We look forward to that proving to be the case.

On the transitional reliefs, I note the Economic Secretary’s remarks on property being bought off-plan, pre-A-day. I am sure that they will have been noted. On borrowing, I welcome the fact that he talked about the consultation process that had gone on prior to this legislation and the support for the existing borrowing limits.

On the unquoted shares, according to the Economic Secretary’s explanation, it seems that the problem started when the rules were relaxed in the Finance Act 2004 and we had investment in the pension Picasso, the pension Porsche, the pension penthouse and so on. He said that he will consider representations from the industry on that. In trying to stamp out one particular set of abuses, we must be careful that we do not deprive SIPPs of the opportunity to invest in other assets where they might feel it to be in their interest. I hope that the industry takes up his offer of consultation.

Clause 160

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 141, in clause 160, page 134, line 39 [Vol I], leave out ‘because' and insert ‘following the receipt'.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following amendments: No. 142, in clause 160, page 135, line 1 [Vol I], leave out ‘envisaged' and insert ‘intended'.

No. 143, in clause 160, page 135, line 7 [Vol I], leave out ‘1' and insert ‘10'.

Mark Hoban (Conservative, Fareham)

The Economic Secretary alluded to the clause in his remarks in the schedule 21 stand part debate. The clause is interesting and perhaps I should explain a little of the background. It appears to be quite a sweeping clause as it lays a charge of 55 per cent. on the pension commencement lump sum of people who make a significant increase in their pension contribution having already received the lump sum or in the knowledge that they will receive a high lump sum in the future.

The provision could capture a great deal of pre-retirement pension planning, as anyone who makes a significant contribution to their pension prior to retirement will do so envisaging that it will lead to a higher pension commencement lump sum. A pension commencement lump sum is what was hitherto referred to as a tax-free lump sum that people received when they retired. The provision could lead to a situation in which someone who makes a significant increase in his pension contributions prior to retirement gets taxed on the lump sum because he knew that making a significant increase in his contribution would lead to a higher pension commencement lump sum. We are talking about a perfectly reasonable form of pension planning.

That is, in a nutshell, how the clause works. Having said that its effects are quite sweeping, its broad effects are mitigated by 28 pages of non-statutory guidance notes that act to restrict it. Take away those guidance notes and many people could be swept within its scope.

It has been possible for people to recycle lump sums as contributions to pension schemes since at least 1988 and possibly as far back as 1956. All that they must do is take the benefit and reinvest the tax-free lump sum as a pension contribution if they have unused allowable pension contributions. Historically, it was not much of an issue, as the limits on pension contributions as a percentage of earnings were relatively low and based on age, although there was a nuance whereby people could carry forward six years of unused contribution relief for retirement annuities.

By lifting the cap on contributions and making it much easier to withdraw lump sums from pension funds, the A-day regime has created an opportunity for people to reinvest those lump sums in pensions. They can effectively invest 100 per cent. of their salary in a pension fund in any particular year, and the unsecured income option allows them to take the cash and still draw no income at all. They do not need to take their pension benefit when they withdraw the cash and reinvest it in a lump sum. It does not take a genius to realise that there is a big potential for tax loss.

For example, if someone has a £400,000 scheme, they could withdraw £100,000 and invest it in a new scheme, gaining tax relief for £40,000. From thatnew £100,000 pension fund, they could extract a further 25 per cent., or £25,000, invest that in a new pension fund and receive tax relief at 40 per cent.—a further allowance increase of £10,000. The process can go on iteratively until the money is exhausted.

Clause 160 and the 28 pages of guidance seek to tighten up the rules to prevent the alleged potential for widespread abuse of recycling by preventing people from withdrawing lump sums from their pension funds and reinvesting them. The change was heralded in the 2005 pre-Budget report, which stated:

“action will also be taken to prevent abuse of the rules for tax-free lump sums from 6 April 2006. The legislation will remove tax advantages where lump sums are recycled back into funds in order to generate artificial levels of tax relief.”

The draft legislation has put that into effect. The pre-Budget report announcement suggested that we should tackle those abuses.

According to the details of the rules, a scheme can make an unauthorised payment if several conditions are satisfied. The pension commencement lump sum received must exceed 1 per cent. of the standard lifetime allowance, which is currently £1.5 million—in other words, the lump sum must be £15,000 or more. The additional pension contribution must exceed 30 per cent. of the lump sum and must be a significant increase in the contributions paid. Also, the taxpayer must have envisaged that the lump sum would have led to a significant increase in contributions at the relevant time.

From looking at the pre-Budget report announcement, I would assume that the sequence envisaged was the receipt of a lump sum followed by the payment of a significantly increased pension contribution. However, the Bill’s definition of “relevant time” means that an individual can make the significantly increased pension contribution and then receive the pension commencement lump sum.

The sequence works both ways. A person can either receive a lump sum and reinvest it to get the tax relief or make significant contributions now in the knowledge that they could receive a significantly enhanced pre-commencement lump sum later. It is the latter sequence that causes a problem, because it captures what people might think is legitimate pre-retirement tax planning.

Revenue and Customs has recognised that that could have an impact on ordinary retirement planning. Its guidance notes include four paragraphs on pre-planning—less than one page out of 28 to tackle an issue that is difficult to identify. It says in paragraph 4.4:

“There must be pre-planning for the recycling rule to be triggered, an individual will know that a conscious decision has been taken to use a pension commencement lump sum as a direct or indirect means to pay significantly greater contributions to a registered pension scheme.”

That seems quite clear, but let us consider three examples to help illustrate the divergence of the broader circumstances.

Let us consider Mr. B of Westminster, who is planning to retire shortly. He might decide to increase his pension contributions, knowing that that will lead to an increased lump sum. The language of the 2004 Act suggests that he envisaged that that would be caught, but the meaning of the guidance notes is clear: it would restrict the application of the provision, because although he knew about it, he did it and nothing seemed to happen deliberately.

If the same Mr. B took out a pension commencement lump sum and reinvested it in another pension fund, assuming all the other conditions were met, in terms of the amount withdrawn and the change to the contribution package, HMRC would say that it was recycling and would levy the additional charge. But what if Mr. B decided to sell a flat and put the proceeds in his pension fund, rather than topping up his savings, knowing that he would, as a consequence of investing that money in his pension fund, receive a higher pension commencement lump sum to replenish his savings? He knew that the investment would lead to a higher pension commencement lump sum and that he did not need to put the proceeds of the sale in his savings, because he would be able to withdraw that lump sum later and replenish his savings that way. There is a relationship: he knew that he would draw a lump sum out in future, so why should he tap into the savings now? Why should he not use the proceeds from the sale of the flat to top up his pension scheme? He would have entered into an arrangement apparently in the knowledge that it would lead to an increase in his contributions. I am not sure how that would be treated. It seems to be a legitimate approach, but it does not satisfy either of the polar cases that I mentioned at the outset: it was neither a straightforward transaction made on his income, nor did he take any money out of his pension commencement lump sum.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman mentioned the relevant time, which is defined in the clause. It refers to

“paragraph (a) of sub-paragraph (2)”.

It does not refer to paragraph (2)(b), which deals with the “envisaged” point that the hon. Gentleman is making.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman makes an interesting point and it illustrates the complexity of the rules: a relatively straightforward, short clause needs to be explained by 28 pages of guidance notes. It is a sweeping clause that causes a problem with the sequencing of events.

The amendment would restrict the clause so that it only tackled circumstances where the lump sum is received and recycled. It does not take into account situations where contributions are increased with the intention that a higher lump sum will be received in future; it considers recycling as set out in the PBR measure, which proposed that there would be a clear sequence—receive lump sum and invest—rather than any other relationship.

Amendment No. 143 would restrict the scope of the clause by lifting the threshold for investigation from1 per cent. of standard lifetime allowance to 10Â per cent. This is a probing amendment. The £15,000 threshold is potentially quite low and could lead to a significant burden on administrators and others who are trying to identify contributions that have been made. I wonder whether that is too low and does not focus on wide scale abuses, and whether it will pick up a wide range of pre-retirement planning in a grey area. We need to recognise that the taxation consequence of breaching the clause is a 55 per cent. charge on the pension commencement lump sum and is not based on the additional contribution that a member might make to the scheme.

I do not know whether 10 per cent. is the right level or whether it should be varied between 1 and 10 per cent., but I would like the Government to explain why1 per cent. has been chosen as the right level. Is there a better a level that would not pick up a relatively low level of transactions that were not directed towards abusing the recycling regime?

I have a broader concern. This is a short clause with extensive guidance notes attached to it that do not have statutory status. They could be changed and amended. My concern is that the breadth of this clause is so great that there need to be stricter and more tightly defined regulations underpinning it that the House can discuss. Otherwise the Government could at some stage in the future withdraw the guidance notes and allow the clause to have its full effect.

Finally, could the Economic Secretary guarantee that the provision does not affect the tax-free status of the lump sum? This is one of the first times in which that status has not been used in legislation and there is reference to a pension commencement lump sum. The sweeping nature of this clause may lead to tax charges being levied in the future and I would welcome the Economic Secretary’s clarification that the intention behind this clause is not to remove the tax-free status of that sum.

Edward Balls (Labour, Normanton)

The answer on that last point is no; of course, that is not the intention and that has been made clear in the pensions White Paper and by me today. The new pensions tax regime, which we have put in place since 6 April, will make it easier for people to invest for their retirement using tax relief by lifting the limit on contributions. Individuals can save as much as they like, where they like in registered pension schemes, with annual tax relief on contributions limited to the lower of 100 per cent. of earnings or £215, 000.

We became aware of the potential within these new, generous and less restrictive rules for a systematic exploitation that could lead to potentially generous and substantial amounts of tax relief being diverted through a device known as recycling or turbo-charging. Under this device, an individual’s tax-free lump sum is put back into a pension scheme as a further tax relief contribution.

To explain how turbo-charging occurs, let us consider an individual with a pension pot of £100,000 who takes a tax-free lump sum of £25,000, leaving £75,000 in his pension pot. He then puts the lump sum back into the pension scheme as a contribution, and this picks up a basic rate relief of £7,051 on the way back in. He also gets a further £5,769 in higher relief in his pocket. If he stops there, he has inflated his pension pot from £100,000 to more than £107,000 and has got a further £5,769 in his pension pot, all from the same money going round in a circle and picking up Exchequer relief funds on the way. He can go further if he wishes by putting his higher-rate relief back into the pension pot as well, and he could also repeat that cycle to get further relief and inflate his pot even more. I am not sure whether there is a technical term for that. It may be called repeated reverse turbo-charging. [Interruption.] Or reheated turbo-charging, perhaps.

What I need to clarify is that we believe that very few lump sum payments will be affected by the rules that we are putting in place to deal with this issue. I am grateful to the hon. Gentleman for allowing me to correct a fundamental misconception. Some people have wrongly assumed that our aim is to prevent individuals from putting additional contributions into their pension schemes late in their working lives to fulfil a shortfall in their fund and ensure that their pension benefits pay out as much as they have been hoping for. That is something that we want to encourage. We are happy for individuals to put genuine additional money into their pension funds, including lump sums.

The recycling measure does not aim to catch or prevent that behaviour. It aims to catch individuals who deliberately take their tax-free lump sum in order to put it back into a registered pension scheme and generate additional tax reliefs through an artificial circulation of the same money, and it will catch them only if that happens in a structured and pre-planned way. We were keen to deal with the misconception, and that is why we produced a substantial amount— 28 pages, as the hon. Gentleman said—of guidance for what is, as he said, a short piece of legislation.

The guidance, however, does not seek to add to, amend or change the intent of the clause. It aims to make it clear that the cases that some people have feared might get caught inadvertently will not be caught. The intent of the legislation is absolutely clear. That is why the Chartered Institute of Taxation concluded:

“HMRC have consulted effectively on these changes; the resulting rules”—

that, I think, means both the clauses and the guidance—

“seek to separate structured tax avoidance from accidental or insignificant increases to pension fund payments, while the guidance includes a lot of excellent worked examples.”

The fact that there are 28 pages of guidance is evidence of the fullness as well as the excellence of those worked examples. They are there to make clear what we are attempting to do, which is to stop recycled turbo-charging or reverse and multiple turbo-charging, without trying to disadvantage people genuinely trying to top up their pension funds.

We have had to act in that way with the legislation and guidance because the simplification and shift in more generous limits, as a result of the A-day reforms, means that, although in the previous regime past restrictions made it difficult for deliberate tax avoidance through turbo-charging and reverse multiple turbo-charging to occur, the matter could conceivably arise in our new more light-touch and deregulated pension tax regime. Through the use of guidance in the clause, we wanted to make clear that that tax avoidance would not be allowed.

The hon. Gentleman spoke to three different amendments. Amendment No. 141 would effectively allow individuals to step around the anti-recycling provisions quite easily. As drafted, the provision ensures that it is not possible to get round the anti-recycling rule by making additional contributions before taking the lump sum—for example, by funding them with short-term borrowing to be repaid when a lump sum is received. That potential means of sidestepping the rule was touted around in the specialist press even before the draft legislation was published. Such pre-emptive multiple turbo-charging is something that we are not minded to allow to occur, but the amendment would allow it to happen. That is why I urge the hon. Gentleman not to press it.

Amendment No. 142 seeks to replace the word “envisaged” with “intended.” The hon. Gentleman explained why. Twenty years ago, in studies on the philosophy of mind, which were part of my degree, I read an interesting book by Professor Davidson from the University of California, called “Actions, Reasons and Causes”. It isan excellent and forward-thinking book in which almost the entire text of 300 to 400 pages focuses on the use of terms such as action, reason and intention. As those who have studied those terms will know, they have quite different meanings.

A desire to do something is different from an intention to do something. An intention is a narrower and more purposeful word. I might like, desire or hope to do something, but to intend to do somethingimplies a degree of pre-planning and foresight, and of structuring one’s behaviour in order to go down a particular road. It is different from the word “envisage”, which has a broader meaning. This philosophical discourse on the meaning of “intention” is, I hope, relevant to our broader debate on tax policy. I must say that I never realised back then that Professor Davidson’s book would become useful in a Finance Bill Committee for multiple reasons that I shall not dwell on.

When drafting the Bill, we considered the issue and consulted with lawyers—but not philosophers. However, we have seen in this Committee that it is possible to be a Member of Parliament and a lawyer; presumably it is possible to be a Member of Parliament and a philosopher, or even a lawyer and a philosopher, and therefore to have a philosophical, as well as a merely legal, discussion about the use of “intention”. In the case of recycling, in which a lump sum is taken, the term “intended” is used and—I go back to my earlier remarks about the philosophy of mind—that suggests that the individual must actively plan the recycling on the date that they receive the lump sum. If I intend to go to the zoo, one would assume that I know the date on which I am going; I may have even made a plan. A desire to go to the zoo would mean that I will perhaps go at some point over the summer.

An intention would normally imply a degree of active planning around the receipt of the lump sum, and that means that a case where the recycling had been planned and set up before that date so that no further action was necessary on the part of the individual on the date itself, might not be caught. Similarly, a case where an individual had made arrangements for someone else, such as an employer, to make additional contributions might not be caught. However, in such a case, the individual may not be “intending”. “Envisaging” is a broader term; it might be an intention on behalf of someone else, rather than a personal intention. “Envisaging” may mean opening up the possibility that someone else may use the provision—in this case, to recycle the lump sum on that date. If “envisaging” were used, that case would be caught. The difference between “envisaged” and “intended” is subtle but essential. “Envisage” will cover the concept of intention, as sought by the amendment, and will go a little wider, so as to ensure that we catch all necessary cases.

I am sure that the hon. Gentleman will have reflected on those issues when drafting the amendment, but I urge him to reflect further and agree that we cannot risk a change that might render the legislation ineffective against some of the most offensive pre-planned cases of recycling. In some of those cases, the word “intention” may not be the most appropriate way of catching the action, reason and cause in question.

Finally, turning to amendment No. 143, the recycling legislation has been carefully framed to strike a balance between deterring recycling activity, catching the more blatant and artificial cases and leaving unaffected those smaller pensions savers and those going about the normal business of retirement planning. To achieve that balance, we have included a threshold of 1 per cent. of standard lifetime allowance, or £15,000 in a tax year. Individuals taking total lump sums of no more than that amount in a 12-month period will not be caught by the rule. The amendment would increase that threshold tenfold from £15,000 to £150,000.

Given the generosity and flexibility of the A-day regime, introducing that further substantial increase in the threshold would be unnecessary and would make the legislation ineffective in all but the most exceptionally large cases. It would not provide an effective deterrent against recycling activity, because the majority of people using deliberate and planned recycling and tax avoidance schemes would know that they could safely do so within the ambit of the legislation as a result of the hon. Gentleman’s amendment.

The proposed threshold of £15,000 already carves out the majority of pension savers. To go further,from £15,000 to £150,000, would be grossly disproportionate. We think that we have struck the right balance, allowing small pensions savers not to trigger recycling rules, but catching the medium and larger potential multiple and turbo-charging recyclers. On that basis, we urge the hon. Gentleman to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I did not appreciate when I started on the Finance Bill that, as well as seeking advice from accountants and pension experts, I would need to seek the guidance of philosophers. If only I had, I would have come up with a more elegant rebuttal of the Economic Secretary’s way of distinguishing between “envisaged” and “intended”. Without wishing to do a disservice to him, it is perhaps just as well that it was his officials who drafted the guidance notes. We would have had a much more weighty philosophical treatise landing on the desks of pension advisers if he, rather than his officials, had done so.

In a way, the Economic Secretary undermined his arguments. He said that the Bill was trying to capture structured and preplanned tax avoidance. I was struck by that. When he read from Professor Davidson’s book—or recalled chunks from memory—the explanation of “intended” mostly aligned with the definitions that he had given himself. “Intended” would appear philosophically to be the right word, since structured and preplanned tax avoidance was going on, rather than vague “envisaging”.

“Envisaged” is too vague a word. The Economic Secretary gave the reasons, because the measure is about capturing preplanned and structured tax avoidance, not some vague whim or thought about what should happen.

Rob Marris (Labour, Wolverhampton South West)

Planning and preplanning seem to be the same thing. Did the hon. Member for Fareham envisage the response of the Economic Secretary, or did he intend the response?

Mark Hoban (Conservative, Fareham)

That is a good one. I thought that the Economic Secretary’s response would be intended, in the sense that it would be planned and structured. The line between “envisaged” and “intended” is difficult to draw, but given that he is seeking to capture structured transactions that aim, through recycling, reheated turbocharging or whatever, to lead to tax avoidance, “intended” is better than “envisaged”.

I do not dispute the Economic Secretary’s view that the guidance notes are good—he used the word “excellent”. There are 21 examples in those guidance notes that give a flavour of what the Government are seeking to capture. He is right that the guidance notes are not seeking to expand the scope of the legislation—far from it. They are restricting the legislation. They are making the clause much tighter and clearer for its application and narrowing the scope significantly, trying to highlight the circumstances that would be captured. Separating the clause and the guidance notes is difficult, because without the guidance notes the clause would have far wider ramifications than is intended at the moment.

My concern is that looking at the clause and notes together today is all very well, but in six months’ or one or two years’ time those guidance notes could change, relaxing the narrow scope now given and leading to wider transactions being caught within the clause, causing unintended mischief. The problem is that the guidance notes will not come back for scrutiny to this Committee, or to another Committee of the House. They can be changed by Revenue and Customs, or at its behest, with or without consultation with the industry. That is what I am most concerned about.

This is our only chance to debate the clause and the guidance notes. Much more of the Minister’s thinking should be in either the primary or the secondary legislation, rather than tucked away in guidance notes, which can be changed at whim without a decision of the House. That is my principal concern. Although I shall withdraw the amendment, I hope to come back with some further thoughts on the matter on Report because the House needs more control over what is happening to pension funds, while less control needs to be delegated to the civil service, no matter how good its members are at drawing up regulations and guidance notes. I beg to ask leave to withdraw the amendment.

Rob Marris (Labour, Wolverhampton South West)

The difficulty with turbocharging or recycling arose when we introduced the £1.5 million lifetime pension pot and the contributions regime of £215,000 or 100 per cent. earnings in a given year, whichever was the lower figure. The financial press started talking about recycling and so on. A long time ago I wrote to the Paymaster General about the problem and I wish to thank her publicly for clause 160, although I am sure that it was not a direct consequence of my letter. Other people made representations about the matter because the loophole seemed huge and one to be exploited almost invariably by the very rich, those with the huge pension pots. I thank her for dealing with the matter under clause 160.

Edward Balls (Labour, Normanton)

To defend philosophers, the point of philosophy is to be precise and, thus, to be sparse. Casting a philosophical eye on such matters sometimes leads to greater efficiency of language, rather than a proliferation of terminology. It is also important to get matters right. In our view, “intention” was too narrow. I assure the hon. Gentleman that, if significant material changes are made in the guidance, I shall make sure that they are circulated to the Opposition so that they have a chance to comment on them. I shall take advice to make sure that we continue to take a consultative approach to guidance issues.

Clause 161

Mark Hoban (Conservative, Fareham)

We have just touched on two issues. I expect that the Economic Secretary probably had prior notice of both of them as they were set out in briefing supplied by the Institute of Chartered Accountants in England and Wales. I refer first to the interaction of inheritance tax and income tax charges. Under the Finance Act 2004, rules were introduced to set up alternatively secured pensions to meet the objection to annuities of members of Plymouth Brethren. They enabled people to draw down income from their pension fund after the age of 75 rather than by an annuity.

Under the mechanism that the Government put in place, on the death of a pension fund member, leftover funds that can be left to a surviving spouse. If they hold the same view on annuities or choose not to buy an annuity, there will be leftover funds for other dependants. A series of tax consequences arise from the timing of a death of a pensioner and their spouse and from the use to which the fund was put at the time of death.

Let me give five examples of such circumstances. First, if Mr. Jones dies before he takes any benefit from his pension fund—Mr. Jones being a member of the scheme—the fund is under discretionary disposal and free from inheritance tax. That is clear. If Mr. Jones died when he had started to take unsecured income, but before the age of 75, and if the fund had not paid out a lump sum, income tax would apply.

Sir John, I appreciate that I should have spoken about these matters under the schedule stand part debate.

John Butterfill (Conservative, Bournemouth West)

Order. I was coming to that conclusion myself. Does the hon. Gentleman wish to have such a debate on schedule 22 stand part, or does he want to have it now? The clause is purely an enabling clause. I shall leave that to his discretion, but he cannot have the discussion twice.

Mark Hoban (Conservative, Fareham)

Sir John, at this stage of what I thought was the final sitting, I do not wish to debate such matters twice. I apologise for having been too keen and eager to participate in the debate. I hope that I have your leave, Sir John, to continue on this matter. I promise not to recycle my remarks.

John Butterfill (Conservative, Bournemouth West)

Order. It is probably best if we simply deal with the enabling clause immediately and then move to schedule 22, to which, in any event, there is an amendment.

Schedule 22

‘Interest

Mark Hoban (Conservative, Fareham)

I apologise to Committee members for the confusion that I inadvertently created. I am not sure how those transcribing the proceedings will cut and paste what has happened into the report. To recap without recycling the points that I have made, I was elaborating on the five circumstances that relate to the interaction between income tax and IHT in respect of alternatively secured pensions.

My second example is that if Mr. Jones should die once he had started to take his unsecured income, but before age 75, the fund would be paid as a lump sum and a 35 per cent. income tax charge would apply. The third circumstance is that if he should die once he had gone into the alternatively secured pension, no tax charge would arise as long as he had nominated his spouse to receive the fund into her SIPP.

The fourth example is that if Mrs. Jones died before age 75, the leftover fund would be paid out and subject to a 35 per cent. income tax charge. However, because the fund would have derived from Mr. Jones’s alternatively secured pension, inheritance tax would apply as well. The inheritance tax charge would take precedence and apply before the income tax charge, and the effect would be a combined tax burden of61 per cent. If, however, Mrs. Jones died after age 75, having used the ASP, the leftover fund—the one transferred to any dependants—would be subject to inheritance tax. There are varying tax rates. Is the intention behind the schedule to give rise to an effective 61 per cent. tax rate in the circumstances that I identified in my fourth example?

My next brief point is about requirements. Paragraph 2 of the schedule legislates for an existing Revenue and Customs concession, which exempts a pension fund from IHT when the member who died before age 75 had yet to buy an annuity. However, that exemption does not apply if members are in poor health; the suggestion might be that they had deferred the annuity to maximise the death benefit. That provision would apply when the decision to defer taking the annuity was made within two years before death.

The question asked by the ICAW is what steps beneficiaries and executors need to take to establish what the deceased knew about the state of their health when they decided not to take an annuity. It might be rather difficult for them both emotionally and otherwise to establish what the deceased knew at any point in time. Will the Minister set out what would be acceptable information in those circumstances?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I have a brief point about new section 2C of the Inheritance Tax Act 1984, which follows from the remarks of the hon. Member for Fareham. Will there be no inheritance tax charge if the individual dies before 75 and passes the inheritance on to his partner, spouse, dependant or a charity, or if the individual chose not to take his pension when in good health? Where does the burden of proof lie for the motives of the deceased. and what records does the Minister expect individuals to keep with regard to understanding their medical position, which clearly could be an additional burden? Will people be exempt only if they can provide that proof, or will the assumption be that they did not have that knowledge beforehand?

Edward Balls (Labour, Normanton)

Clauses 161 and schedule 22 set out the inheritance tax rules for choices made by members of registered pension schemes on or after 6 April 2006. In broad terms, the measures provide that longstanding inheritance tax rules for scheme members under the age of 75 will continue to apply as before, so in most cases there is no inheritance tax to pay. For those over 75, the measures bring the alternatively secured pension option within the IHT framework and will come into effect from 6 April for consistency with other pension simplification measures.

The Committee will recall that the ASP has a new option available for A-day for scheme members aged 75 or over. Some people have principled religious objections to the mortality risk inherent in annuities. ASPs were designed specifically to enable those with such objections to benefit from tax-privileged pension savings.

It may help the Committee if I give a little background information. We were asked last year to clarify how the IHT rules would apply to pension choices post-A-day. That followed widespread media speculation that wider choices open to members under the new post A-day pension rules would provide opportunities for IHT planning. We launched the discussion exercise with key industry stakeholders about how the existing IHT law could be applied to the choices under the new pension rules. We are grateful to all who responded to HMRC’s discussion paper. Their comments have materially affected us in finalising the new rules.

The responses confirm that, without change, IHT will arise in situations that were IHT-free in the past. The broad consensus with the longstanding IHT rules should continue for scheme members under 75, and new rules should be introduced specifically targeted at leftover funds and ASPs. We agree that that is a broad approach and is what the provisions achieve. Generally death benefits under pension schemes are IHT-free for scheme members under 75, but an IHT charge can arise in certain circumstances under a pension scheme where a general IHT anti-avoidance rule is triggered. The rules are complex: they interact with the state of the scheme and members’ health. There are two particular instances that relate to the deferral of the scheme member’s pension, where in practice an IHT charge is not taken under the resulting enhanced death benefits.

One is where death benefits are paid to the scheme member’s bereaved spouse or civil partner or their financial dependant. The other is where the scheme member was in good health when they first admitted to draw their pension, so no IHT charge was triggered, but despite a subsequent deterioration of their life expectancy they simply continued to defer their pension. We are legislating so that concessionary practice for the anti-avoidance charge continues not to be triggered in those circumstances, and where death benefits are paid to a charity we are ensuring that they, too, are IHT-free.

The other aspect of this measure sets out the IHT rules where scheme members die with funds in an ASP. They restrict control over the amount of income that they withdraw under ASP rules. That means that there must almost always be funds left over on the scheme member’s death, and it is necessary to bring those ASP funds within the IHT framework in a way that is consistent with the existing rules. This measure means that there will be no IHT charge on any ASP funds paid in one of three ways: to provide pension benefits for the scheme member’s spouse or civil partner; to provide such benefits for any person who is financially dependent on a scheme member at the time of his or her death or whether funds are paid to charity, or else IHT will be charged with the leftover ASP funds where a scheme member dies; or on any funds left over where a dependent’s pension benefits cease, except where on the death of a dependant they are paid to charity. Scheme administrators will be responsible for paying and accounting for the tax to HMRC. We are working closely with the industry to strike an appropriate balance.

As the hon. Member for Fareham mentioned, we have had consultation with some religious groups about whether it would be possible for there to be particular and special treatment for them. The Plymouth Brethren are one such example. They have contributed to the HMRC consultations on the IHT changes, and we have carefully considered their comments. We are clearly sympathetic to the principled religious objections that they have set out. Indeed, they were part of the thinking behind this whole area of legislation.

However, we cannot simply carve out specific groups from tax. Leftover funds can be given tax-free to charity, but we cannot have particular and specific carve outs relating to members of a specific religious group. We are sympathetic to the position. We have tried our best to ensure that this is a general provision that allows us to be sympathetic to particular concerns and beliefs, but we cannot have a particular carve out for those groups. As I said, ASP leftover funds can be given tax-free to charity.

The hon. Member for Hoban—

Mark Hoban (Conservative, Fareham)

Fareham!

Edward Balls (Labour, Normanton)

I mean the hon. Member for Fareham; I feel as if we have been here before. He reminds me that it is important to be careful in the use of language, which takes us back to our preceding philosophical discussions. I clearly made an unintended and unenvisaged slip for which there was no reason or cause. All I can do is ask the Committee’s leave to withdraw it.

The hon. Member for Fareham asked about two particular points. One was whether we are imposing a double tax charge and whether that is our intention. The answer is no. There is nothing new in what we are doing. The particular instances that he set out could have arisen in the pre-A-day situation as well. For example, overlapping charges could have arisen where an unsecured pension was paid out as a cash sum to the member’s estate, attracting both a pension scheme tax charge and an IHT charge. Depending on the options chosen, the tax charges cannot overlap in two circumstances where leftover ASP funds are involved. One is where funds are refunded to an employer and the other is where remaining funds are paid out as a cash sum on the death of a dependant under the age of 75.

There are choices in the pension rules on how pension funds can be used, so no one is forced down a particular road. Generous tax reliefs are given to provide a secure income on retirement, and where ASP funds are paid other than for that purpose there is no reason why tax charges should not apply.

The second issue that the hon. Member for Fareham raises is whether we are imposing unfair or unreasonable burdens of proof on executors. No changes are proposed to the previous HMRC approach. The evidence of health requirement will continue to be operated on the same lines as have applied under tax bulletin 2 since 1992. HMRC is fully aware that this is a sensitive area. We also need to act in a sensitive manner, but this process has operated in a relatively smooth way under the previous practice. We have no reason to think that these legislative provisions will operate any differently.

Depending on the hon. Gentleman’s view, he will be either pleased or concerned to note that we will be publishing updated guidance on these matters on the post-IHT A-day rules. The hon. Member for Falmouth and Camborne (Julia Goldsworthy) also raised this issue. The answer is that, in terms of the burden of proof, things will operate as they have done in the past. We will ensure, through guidance, that there are no undue bumps along that road.

Rob Marris (Labour, Wolverhampton South West)

May I draw the Economic Secretary’s attention to the wording on page 172? The word “actually” in proposed new subsection (2B) is inelegant and redundant and should not be included.

More importantly, I ask him to re-examine the wording further down the page in proposed new subsection (2C)(b), because I fear that the liberal use of negatives means that it has the reverse effect of what he intended. It may be simply that I am not able to read it well because it so inelegantly worded, but I ask him to look at again—not today, but later—as I think that the wording is wrong.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for saying that he will look at alternatively secured pensions and the record-keeper requirements. Confusing my surname for the name of my constituency is an easy mistake to make. It is a mistake that I shall not make in the case of the Economic Secretary to the Treasury, the hon. Member for Normanton (Ed Balls).

John Butterfill (Conservative, Bournemouth West)

Did you wish to reply, Mr. Balls?

Edward Balls (Labour, Normanton)

indicated dissent.

John Butterfill (Conservative, Bournemouth West)

Probably just as well.

Schedule 23

‘Amendments and transitionals

Clause 163

Celia Barlow (Labour, Hove)

I wholeheartedly support Clause 163, raising the threshold for stamp duty land tax on residential transactions from £120,000 to £125,000. This, of course, follows the welcome doubling of the threshold in March last year and Government initiatives to help young people and key workers to get on the housing ladder.

However, the average price for a residential property in Brighton and Hove has risen to £222,241 in the first quarter. A flat or maisonette costs, on average, £168,236. That implies that the increase will probably not have the desired effect in my part of the world. Although we have made great progress in tackling homelessness, with a 75 per cent. cut in people sleeping rough since 1997, and although tens of thousands of people have been given new life chances, homelessness and overcrowding are still key indicators of child poverty. There are also many young families and public servants in my area who face difficulties in buying their own homes, albeit even the tiniest flat.

I therefore tactfully ask the Minister whether further such increases in the threshold might be considered if that proves to be affordable for the public purse. As house prices nationally rose by 6 per cent. in the year to the first quarter, I presume that could be done in a way that is revenue neutral.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I have a very brief question for the Economic Secretary about the changes to stamp duty land tax. I would be interested to hear the rationale behind the increase and to hear what impact he thinks that it will have on home buyers, particularly first-time buyers as mentioned by the hon. Member for Hove (Ms Barlow). Surely it is the slab-like structure of stamp duty land tax that poses so many problems for first-time buyers, because they have to pay a percentage of the whole value of the property rather than paying on a sliding scale.

In my constituency, where average house prices are above the threshold, the difficulty for first-time buyers is not just stamp duty but the gap between incomes and house prices. Houses are worth many multiples of people’s incomes. Stamp duty is only a tiny proportion of the problem. Only a tiny proportion of houses will fall below the threshold, so I will be interested to hear what impact the Economic Secretary feels that the minor change being made will have on behaviour and on opening up the housing market to more first-time buyers.

Stewart Hosie (Scottish National Party, Dundee East)

I have a similar question. In Scotland, the average price of a first-time buyer’s property is less than the stamp duty threshold, so stamp duty is of little consequence to first-time buyers other than those who are very rich or who can afford to pay many multiples of their income. The real difficulty for us is that the larger family houses now being built are routinely priced by developers at £300,000 at least, and so attract the higher level of stamp duty. What is the Economic Secretary’s thinking on that for the longer term? Families with good incomes are effectively priced out of the larger family homes that they may wish to live in.

Edward Balls (Labour, Normanton)

I thank hon. Members for their contributions. To give a bit of background, the clause increases the starting threshold for stamp duty land tax to £125,000. That follows the doubling of the threshold last year. The increase means that an additional 40,000 home buyers a year are taken out of stamp duty. The doubling of the threshold in 2005 and this year’s increase together mean that a total of 400,000 home buyers a year are out of stamp duty entirely; that is about 50 per cent. of all home buyers.

My hon. Friend the Member for Hove makes the good point that there is regional variation in house prices. In London, 26 per cent. of home buyers are exempt. Some 25 per cent. of those in the south-east will be exempt after the changes that we propose, but the figure is 78 per cent. in Wales, 75 per cent. in the north-west, 72 per cent. in Scotland, and 83 per cent. in the north-east. Given that the stamp duty regime is national, and given the regional variation in house prices, at least a quarter of all home buyers across the country will benefit, but that proportion rises to well over three quarters of home buyers in those parts of the country where house prices are lower. That seems a fair and equitable way in which to proceed.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I represent a constituency in Cornwall, which is the poorest county in England. In some parts of Cornwall, house prices are up to 10 times average income, which is often 20 per cent. below the national average. In such places, there is real inequality, and great difficulty in getting a foot on the housing ladder. The problem of access to the housing market is not just in the south-east, and does not just affect people with poorer incomes who live where house prices are lower. The increase does not resolve that issue.

Edward Balls (Labour, Normanton)

I completely agree with the hon. Lady. She is pointing to the wider issue of housing policy and to the need to tackle the still substantial deficiency in the supply of new housing, particularly in the south. Despite the substantial extra investment that has gone into social housing and despite the Barker review, we are still not building enough houses, which means that it is much more difficult for a first-time buyer on average or below-average income to get on the housing ladder than it was 20 years ago.

I completely accept the hon. Lady’s point but, frankly, although stamp duty can play a role in dealing with the issue, it will not solve the problem in any way. There are things that we can do to help first-time buyers, and stamp duty is part of that. Stamp duty also plays an important role in raising revenue in our economy and in making the housing market work efficiently. The problem with saying easy things such as, “Why don’t you move from a slab system to a slice system?” or “Why don’t you abolish stamp duty entirely, or raise its limits substantially?” is that that costs billions of pounds that would have to be found somewhere else. Simply doing those things without addressing the fundamental point of housing supply in our country would not meet the challenge in her constituency and constituencies throughout the country.

I was taunted earlier about housing issues by the hon. Member for Fareham, who looked forward to tomorrow’s debate on housing policy on the Floor of the House. Over the breakfast table this morning, I read a quote from the hon. Member for Chipping Barnet (Mrs. Villiers), the shadow Chief Secretary to the Treasury. She said to her constituents last year:

“Suburbs like Barnet are under attack from John Prescott’s excessive targets for new house building.”

She also said:

“Mrs. May has called on our council to fight the Government plans which she believes will turn the royal boroughs into a concrete jungle”—

John Butterfill (Conservative, Bournemouth West)

Order. The Economic Secretary is going somewhat wide of the subject under debate.

Edward Balls (Labour, Normanton)

One could say the same of the earlier remarks of the hon. Member for Fareham about housing policy. I was asked whether stamp duty would solve the problem, and I was making the point that unless we have a consensus across all parties in the House—not just on stamp duty, REITs and shared equity but on building houses for people to live in—we will never tackle the inefficiencies in our economy and the inequalities to which the hon. Member for Falmouth and Camborne referred. If Members of the House speak words suggesting that they are on the side of working families but spend their time making statements contrary to the interests of first-time buyers by opposing new development and saying that concrete jungles and new houses must be opposed—

John Butterfill (Conservative, Bournemouth West)

Order. I cannot have this any longer. We are debating stamp duty in this Committee, not housing policy. I will not allow any further debate on the subject.

Edward Balls (Labour, Normanton)

In that case, Sir John, I shall sit down.

Schedule 25

Clause 168

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 184, in clause 168, page 138, line 20 [Vol I], leave out from second ‘company' to end of line 25 and insert

‘in connection with demutualisation of an insurance company'.

This is a brief amendment to consider demutualisation of insurance companies in a slightly different light. The amendment would extend the reliefs to situations in which one mutual must take over another mutual that has fallen into financial difficulty, for example, and probes whether there would be an exemption or release from stamp duty in those circumstances, given that demutualisations have cropped up in the debate.

I add a further comment to save the need for a stand part debate on the clause. The Economic Secretary will probably have received representations from the Institute of Chartered Accountants in England and Wales on this matter. The reliefs in the Bill apply in the very final stage of a demutualisation, and similar issues arise in clause 170. The suggestion is that the reliefs should also be available in the steps leading up to demutualisation. At the moment, the companies going through the process have to apply for anti-avoidance reliefs instead. It would be much more elegant and straightforward if the same reliefs that apply at the point of demutualisation applied in all the stages preparatory to that taking place.

Edward Balls (Labour, Normanton)

As the hon. Member for Fareham told the Committee, the clause concerns the stamp duty land tax and the consequences for SDLT when a mutual insurance company transfers its business to a group headed by a company listed on the stock exchange, a process normally referred to as demutualisation.

The amendment to the clause extends the reliefs available under the stamp duty land tax when a mutual insurance company transfers its business to such a company. At present, the clause gives relief only where as part of the demutualisation process shares in the listed company are offered to members and employees of the mutual company, and to those persons only. In other words, the only demutualisations affected by the clause are those where, immediately after transfer of business, those who were members or employees of the mutual company—and only those persons—own the new listed company.

Relief is not available when a mutual company transfers its business to an existing listed company with outside shareholders. The proposed relief and the existing relief on the stamp duty land tax and the stamp duty reserve tax reflect the fact that the ownership of the business, apart from the issue of shares to employees, is effectively unchanged. As discussed on an earlier clause with my hon. Friend the Member for Wolverhampton, South-West (Rob Marris), the Government’s policy is that the SDLT treatment of this type of demutualisation should be neutral in tax terms, neither favouring nor hindering the process.

The amendment would extend the relief in the clause to any situation where mutual insurance companies cease to be mutual, including the purchase of a mutual company by an existing listed company with outside shareholders—effectively a takeover of the mutual company. The Government do not think it is appropriate to extend tax relief in that way. I should point out that clause 168 is an extension to the existing SDLT relief for demutualisations, when shares are offered to members. The amendment would not extend existing SDLT relief to takeovers and so would not achieve the aim intended. However, as I said, we do not think extending demutualisation reliefs to takeover scenarios appropriate.

I was asked a couple of other questions. The hon. Gentleman asked whether the relief applies when a mutual takes over a mutual. The answer is no. The existing relief applies only when shares are offered to existing members. He asked whether reliefs should be available in the steps leading up to demutualisation. That is the intention of the clause. The ICAEW representations did not relate to demutualisation, but to corporate reconstruction. I hope that that answers his two related points. On that basis, I urge the Committee to reject the amendment.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for that response. He makes a valid point about how my amendment would affect other forms of takeovers. I suspect that he is right about that.

I will conclude by sharing with the Committee a quote that Mr. Cranmer provided, which might be appropriate to characterise some of the discussions that we have had to date between the various professions on the Committee. A solicitor at the Ecclesiastical Law Society annual general meeting said that all lawyers would be accountants if they could add up, just as all accountants would be lawyers if they could read.

On that basis, I beg to ask leave to withdraw amendment No. 184.

Rob Marris (Labour, Wolverhampton South West)

I shall be brief, because we had a debate earlier on this matter, as my hon. Friend the Economic Secretary said. I shall abstain on clause 168. I do not think that we should be neutral on tax terms for demutualisation. I previously declared my interest as a member of Standard Life. Interestingly, since the other 95 per cent., or whatever, of Standard Life members voted for demutualisation, the prospective share price in that organisation has tanked because of the way the market has gone. My hon. Friend the Economic Secretary says that a takeover by a private company, as opposed to another mutual with an amalgamation, would not get the benefit of clause 168, but I reiterate to him that a Labour Government should not be neutral on tax terms for mutuals and doing so in this way is a step towards encouraging demutualisation, which I regard as most regrettable.

Clause 169

Edward Balls (Labour, Normanton)

The clause is about delivering a level playing field but, at the same time, taking steps to liberalise the stamp duty land tax treatment of alternative finance mortgages. It is therefore in the spirit of some of our earlier debates on different aspects of the tax system.

The clause will benefit anyone who wants to access financial products that do not involve interest, especially those who do not want to pay interest for religious reasons. Current tax treatment makes such products more expensive than other financial products. Alternative finance mortgages generally involve the purchase of a property by a bank and resale to the customer at a premium. The resale to the customer is currently exempted from stamp duty land tax if the customer is an individual. The clause extends its relief to all, including companies; it has been developed in concert with business in response to a demand on the market for alternative finance products. As with the previous clauses in this area, I commend it to the Committee.

Clause 171

John Healey (Labour, Wentworth)

I welcome you to the Chair, Sir John.

The clause takes us into part 9 of the Bill, which is entitled “Miscellaneous provisions”. Perhaps hon. Members will take heart from the fact that, although we are not quite there yet, the end of our proceedings is in sight. In line with the 2005 pre-Budget report announcement, the clause increases the standard rate of landfill tax, which applies to active waste disposed to landfill, by £3 per tonne to £21 per tonne with effect from 1 April. The Government have been urged to provide clarity and certainty in their policy framework to give the greatest possible certainty for those looking to raise investment in the long term. We announced as long ago as the pre-Budget report in 2002 that the standard rate would increase by at least £3 per tonne each year on the way to a medium to long-term price for the landfill standard rate of £35 per tonne. A steadily increasing rate sends a clear market signal, and announcing the increases in advance maximises that effect.

The increase will encourage waste producers to seek more environmentally friendly alternatives to landfill by encouraging them and the waste management industry to switch more to waste minimisation, alternative forms of disposal, reuse and recycling and, therefore, away from landfill. The increase covered by the clause, and the future increases already announced, are part of a principled, broad national policy to reduce the volumes of waste in this country going to landfill and are complemented by significant additional public spending on sustainable waste management and other policy mechanisms that are in place. There are clear signs that the combination of landfill tax rates and those other measures is beginning to have the impact that we want and reducing our reliance on landfill. The amount of active waste going to landfill between 1997 and last year fell by almost 16 per cent.

Increases such as that proposed by clause 171 are an important part of that policy mix and of the long-term signals to the industry, and a long-term contribution to the important shift away from landfill to other more environmentally friendly and sustainable forms of waste management. I commend the clause to the Committee.

Paul Goodman (Conservative, Wycombe)

It is a pleasure to see you in the Chair, Sir John.

As the Financial Secretary has intimated, this is one of the shortest, perhaps the most predictable, clauses in the Bill. In the 2003 Budget, the Government confirmed that the tax would increase, in that year, to £18 and by £3 a year thereafter, on the way to £35. The Government have carried through that policy in this year’s Budget, and we have no intention of opposing the clause.

Clause 172

George Young (Conservative, North West Hampshire)

It is a pleasure to see you in the Chair, Sir John. Thismay be my last contribution to this Finance Bill. It is 10 years since I last participated in a Finance Bill Committee, and I think it will be 10 years before I do another.

The clause changes the rate of the climate change levy, and I have no difficulty with the principle behind it. I should like clarification on two issues. As the explanatory note says, the rates are being increased to maintain their real value and environmental effect. In page 14 of the Red Book for the 2006 Budget, one sees:

“Climate change levy: revalorise from 1 April 2007...—20 —20 —20”.

Will the Minister explain why increasing the levy produces that negative effect? Perhaps it is because it is reinvested somewhere else and given back to industry, but it would be helpful to have an explanation.

My other point is about the relationship between the climate change levy and the cost of electricity. I want to find out whether there is a parallel between the treatment of the climate change levy and that of the duty on petrol. When the Government have reviewed the duty on petrol, they have looked at the market price of petrol. When that has escalated, they have taken the opportunity to defer the increase on the grounds that they want to use the price mechanism to promote efficiency. If the market price has gone up, that has an impact on the imperative to increase the petrol duty.

The same argument could apply to the climate change levy. If the market price of electricity is going up—and it is—does that impact on the Government’s policy on the climate change levy? In other words, is there a direct read-across between their policy on the petrol duty and that on the climate change levy, or is the climate change levy in a little box on its own, to be driven up irrespective of what happens to the market price of electricity? It would be helpful if the Minister shed a bit of light on that issue.

Paul Goodman (Conservative, Wycombe)

I have only one further question on the climate change levy. It is in the same territory as the question just asked by my right hon. Friend. Commenting on the change proposed in the Budget, the National Farmers Union said that

“it is not clear from the Budget documentation how the additional revenues from the increase in levy rates will be returned.”

I presume that they will be returned in the same manner as always, but I should like the Financial Secretary to cast a bit of light on that question.

John Healey (Labour, Wentworth)

As a current Treasury Minister, I say to the right hon. Member for North-West Hampshire (Sir George Young) that we measure our contributions on a year-to-year basis in Finance Bills; I am interested that he does so on a decade-to-decade basis. I look forward to the Finance Bill in 10 years’ time, when he makes a return appearance.

The right hon. Gentleman asked me two specific questions. The scoring in the Red Book is essentially the impact on the scorecard of revenues looked at from this current financial year onwards. Clearly, because we are delaying the revalorisation and not increasing by the rate of inflation this year, there is a hit to the public finances of about minus £20 million, which is what is scored.

On the question of the comparability—or the alignment of the decisions that we have taken on fuel duty—the right hon. Gentleman will remember from his period of serving in the Treasury that with any tax the specific decisions that the Chancellor takes on rates are taken as a result of a combination of factors. However, they are also taken in relation to the purpose of the particular tax itself.

The right hon. Gentlemen may remember that historically the principal purpose of fuel duty for Governments of all parties has been to make a significant contribution to the overall public finances. It has also played a part in dealing with the challenge of climate change. Historically, for several decades, the levels of fuel duty in the UK have been comparably and relatively high. If he examines the decisions that we have taken on fuel duty over the past six years, he will see that they have been made bearing in mind the imperative to raise revenue for public services, the concern about climate change and the costs and pressures on consumers and on road fuel-using industry.

The fact that we have consistently frozen fuel duty, although we raised it in line with inflation in 2003, means that cumulatively, in the face of rising world oil prices and pump prices, the relative take in tax of fuel duty has decreased. Since 2000, there has been a real reduction in the value of fuel duty of 8p per litre, which is of benefit to the motorist and the haulier. In addition, to a significant degree it offsets the price pressure, which is driven by world oil prices and reflected at the pumps. That is the balance of factors that the Chancellor took into account in making his decisions on fuel duty this year and in previous years.

I think the right hon. Gentleman will remember that when we announced the climate change levy back in 1999 we made it clear that our expectation was that when it was properly established it would be revalorised; it would be raised annually in line with inflation. That would be done to maintain its real value and, specifically, to maintain its incentive effect—that is its principal purpose, unlike fuel duty—to encourage business to invest in and do more on energy efficiency and make the gains that are possible.

Having seen a period of bedding in of the new levy since its introduction, the Chancellor’s decision and judgment is that now is the time to seek to revalorise the climate change levy. Given the pressure on fuel costs and energy prices, it is important both to signal that intention so that businesses can recognise that that is coming and take any steps that they might wish to improve their own business efficiency, and to delay changes until 1 April 2007. That is what the clause does.

In other words, the rates under clause 172 are being increased to ensure that the levy continues to have the beneficial effect that we intended—its principal purpose—of trying to encourage business to reduce its energy usage and increase its energy efficiency. On that basis, I hope that all Committee members will give backing to the clause and in doing so give backing to the climate change levy and the essential contribution that it makes to the UK’s necessary set of measures to tackle climate change.

Standing Committee A

Clause 174

Dawn Primarolo (Labour, Bristol South)

Good afternoon, Sir John. It may help the Committee, given that clauses 175 to 177 result from clause 174, if I briefly explain its purpose.

The clause is an enabling measure that will extend the United Kingdom’s ability to enter into international agreements for mutual assistance in the enforcement of taxes. Those agreements may cover the exchange of information, assistance in tax collection and the service of documents. The UK has more than 100 bilateral agreements providing for such exchange on direct taxes. Within the European Union, there is a well established framework for assistance on direct and indirect taxes, including the recovery of debt. The clause allows for the United Kingdom’s entering into multilateral tax arrangements.

The Government announced in the pre-Budget report our intention to ratify the Council of Europe and Organisation for Economic Co-operation and Development convention on mutual administrative assistance in tax matters. The convention contains provision for exchange of information, multilateral tax examinations, and assistance in tax collection and service of documents. It also contains important safeguards, and I want to discuss those in particular. They relate to the confidentiality of taxpayer information.

Rob Marris (Labour, Wolverhampton South West)

I understand that the convention to which my right hon. Friend referred is a 1988 convention. Has it really taken the United Kingdom 18 years to put it into domestic legislation?

Dawn Primarolo (Labour, Bristol South)

No, it has not taken the United Kingdom 18 years. For a convention to be effective the member states that subscribe to it must also put it into their law; otherwise it cannot work. Regrettably, although the United Kingdom has championed the argument about the exchange of information internationally, both in the OECD and in the European Union, it is only relatively recently that the convention has reached the point at which it can be ratified by the United Kingdom, and used. My hon. Friend will be well aware that the principles in the convention will be found also in our tax treaties. It has been the practice of both Conservative and Labour Administrations for a long time to advance and extend the double taxation agreements.

I was referring to the important safeguards on the confidentiality of taxpayer information. That is a matter that always prompts some discussion in debates on double taxation treaties. So it should—for every agreement. Each one is negotiated individually, and reassurance about that is important for every tax treaty.

Under the convention, the information obtained is to be treated as confidential in the receiving state in the same manner as information obtained under its domestic law, or under the conditions of secrecy applying in the supplying state, if those are stricter. That is particularly important for the United Kingdom, because we have strict confidentiality with respect to the exchange of taxpayers’ information. We shall have occasion to consider that aspect of the matter again on clause 178. That applies even within United Kingdom authorities. Outside the United Kingdom, we adhere very tightly to the strict conventions, and that dictates whether we will exchange certain types of information with other states; their standards have to be at the same level as ours.

The convention also sets outs instances in which states are not obliged to provide assistance. An example would be where a state’s domestic law would not allow it to obtain information or if there were public policy grounds.

The clause also allows the United Kingdom to extend the scope of its bilateral treaties to include indirect taxes, such as VAT. VAT is, of course, a tax on consumption, and consumers should pay that tax at the rate voted for by the Parliament in the country where the consumption takes place. That is another important principle that the UK continues to advance in all international forums, but particularly in the European Union.

As a result of globalisation, deregulation and technological advances, a range of services can routinely be purchased by private individuals from suppliers in other jurisdictions, including those outside the EU. Extending mutual assistance arrangements with such countries will support our efforts to ensure compliance and help to tackle tax fraud—an issue about which this Committee, like all Finance Bill Committees, has been very concerned.

In addition, the clause consolidates the existing enabling legislation concerning agreements about the international exchange of information. As with the existing legislation, agreements provided for in the clause are made by Her Majesty in Council subject to prior consideration and approval by the House. I reassure the Committee that, as now, any order will be subject to the affirmative resolution procedure, in the same way as our double taxation treaties are.

I will be happy to hear points on which hon. Members seek clarification, but I commend the clause to the Committee.

Theresa Villiers (Conservative, Chipping Barnet)

I am grateful to the Paymaster General for her opening remarks, which have given me some reassurance on one or two of the points that I wanted to raise, but I still have some anxieties about clause 174 and the consequential clauses, 175 to 177. I shall follow her lead and deal with them as a whole, so that I need not trouble the Committee separately in relation to the subsequent clauses.

Of course, the Opposition recognise the advantages of entering into agreements with other countries in relation to the collection of information on tax. That should, we hope, put us in a stronger position to ask for help from foreign Governments in collecting information about the overseas tax affairs of British citizens. The exchange of information has been part of our general tax law for some years. However, traditionally, such exchange has been based on specific double taxation agreements. The information exchange envisaged by such treaties in the past was rather more narrowly focused than the clauses under consideration. It generally extends only to that which is required to allow the treaty to give relief—that is, only to the extent that the treaty relieves individuals’ tax liabilities.

The clauses seem to give Her Majesty’s Revenue and Customs rather wider powers to start to enforce the tax laws of other countries and to investigate people’s liability to tax under foreign jurisdictions. However, it has long been established—since the case of Government of India, Ministry of Finance v. Taylor in 1955—that the courts will not enforce the tax laws of other countries. I have received a number of representations from organisations that are worried that the clauses may undermine that long-standing principle.

The Institute of Chartered Accountants expresses a number of concerns. Its briefing for Committee members states:

“We are concerned that the consequence of the UK signing up to the...Convention”—

the 1988 convention—

“could be that the UK would be asked to enforce tax collection on behalf of overseas jurisdictions, party to the multilateral convention, which do not have the same...standards of ‘due process’ as the UK to ensure that tax was properly payable by the person against whom the enforcement was being required. This would breach the Human Rights of the person against whom the enforcement was being required. This is compounded by the fact that HMRC officers have a unilateral power to disclose and the taxpayer has no rights of appeal, nor to know that it has even happened.”

The institute goes on to point out that although subsection (5)—the Paymaster General has adverted to this—specifies that the clause will not be applicable where the overseas jurisdiction does not have appropriate confidentiality rules in place, it contains no such safeguard in relation to human rights, due process or the general integrity of the tax system.

Similar concerns are expressed by the Chartered Institute of Taxation, which says:

“We are concerned that should the UK ratify”—

the 1988 convention—

“tax payers resident in the UK could automatically be exposed to foreign tax claims from jurisdictions having a system of law (in connection with the process and assessment of tax) which does not meet the same standards as those applicable in the United Kingdom.”

The institute points to the problems that could arise where the taxpayer has no right of appeal in the foreign country on the substantive question of whether the tax is due.

The tax systems in a number of countries are not rules-based in the way that the United Kingdom system is. I have received representations about countries taxing companies on their so-called profits, which far exceed the actual profit made in that jurisdiction. I am told that that is a problem in some middle eastern countries, and similar concerns have been raised about certain African countries. In countries such as Russia, the interpretation of tax rules can differ widely between different tribunals and cities. In some countries, there are also disproportionate penalties in tax law. In China, for example, non-payment is technically punishable with the death penalty.

The Law Society echoes the concerns of the other professional organisations that I mentioned. It says:

“Our concern is that HMRC may find themselves compelled to collect taxes by an overseas jurisdiction that does not have the kind of rules based tax system or tradition of non-corrupt administration that is taken for granted in the UK.

We believe that mutual assistance with the collection of taxes should be restricted to those countries that have a high standard of public administration”.

It is worth looking at the experience of cross-border tax law enforcement in the European Union. The powers that we are considering have some precedent in EU law and in the EU directive on mutual assistance in the recovery of taxes. The difference, however, is that the EU directive requires member states to adhere to minimum levels of fairness. The accession process and the adoption of 50,000 pages of the acquis communautaire involve, among many other things, an extended vetting process to ensure that accession countries’ tax laws meet minimum requirements.

Agreeing to enforce the tax laws of other EU member states, therefore, is one thing, but enforcing the laws of any country that signs up to the 1988 Council of Europe convention on mutual administrative assistance in tax matters is quite another. There is real anxiety that the safeguards in relation to the EU laws are not in place here in relation to the convention. We should not forget that countries where there is widespread abuse of human rights will not hesitate to use their tax systems as part of their means to suppress dissent, and I imagine that the Government would not be happy enforcing the tax laws of countries such as Burma or Zimbabwe. I would be interested to hear the procedure that the Government would follow should a country with a controversial human rights record sign up to the 1988 mutual assistance convention.

At present, only certain EU member states, plus the United States and Azerbaijan, are signatories. It would be useful to hear from the Paymaster General what will happen when other countries, with more controversial tax systems and human rights records, sign up. It seems that such countries do not have to give guarantees about the content of their own tax systems before they sign up. The Paymaster General said that there will be a process of parliamentary assent before any further use is made of the powers, and I should be grateful if she could confirm that that process will operate in the case of any new country that signs up to the 1988 convention. That would give Parliament the opportunity to scrutinise the wisdom of agreeing to disclose information to and assist the tax authorities of controversial countries.

In conclusion, I have just a few practical concerns. One, on which I would value the Minister’s views, relates to the cost of inquiries made on behalf of foreign Governments. What happens if the Government spend time and money making investigations on behalf of foreign Governments only to find that they do not receive an equivalent level of assistance in relation to the tax affairs of British citizens abroad? Is there any procedure for reimbursement of the cost of investigating tax matters on behalf of foreign Governments? Do the Government have the power to turn down requests on the ground of disproportionate cost?

There are also concerns about the notice of investigation. Another restriction that could be incorporated would be to confine investigation on behalf of foreign Governments to cases in which the Government had already chosen to investigate a particular taxpayer’s affairs. Some concern has been expressed about the prospect of British taxpayers being subject to a bolt-from-the-blue investigation of their tax affairs with no indication of what is going on. The Chartered Institute of Taxation would go even further, calling for safeguards to be written into the legislation so that no disclosure could occur without the approval of the High Court.

Another practical concern on which I would value the Paymaster General’s input is that HMRC could be carrying out investigations on taxes that are entirely unlike taxes levied in this country. They might include the Saudi religious tax—the Zakat—or the Korean education tax. Others include the Eritrean rehabilitation tax, which has caused concern in relation to religious freedom, and the Libyan jihad tax, a form of payroll tax that I believe has given rise to complications. I value the Minister’s assurance that HMRC will not be involved in investigating such controversial taxes, even should the relevant countries sign up to the 1988 convention, because it could give rise to significant practical as well as constitutional difficulties.

My last anxiety is about the extent of the reciprocity in relation to the information to be gained under clause 175. It refers only to taxes or duties covered by those arrangements; there seems to be no explicit requirement that a foreign Government should have agreed to investigate the evasion of UK taxes in their country. Such an undertaking would surely be an important prerequisite to action in this country by our Government. I am particularly concerned to ensure that we have genuine reciprocity; even when double tax treaties are in place, enforcement sometimes leaves something to be desired. For example, Italy is meant to give tax credits on dividends paid to UK shareholders, but it has an almost decade-long backlog in refunding those credits.

The provisions give HMRC some significant new powers to take legal action and to make investigations in relation to foreign taxes. Some view the provisions with anxiety, as if the Bill has a sting in the tail, and the Opposition are concerned that although the legislation provides some safeguards, as outlined by the Paymaster General, they are insufficient. That is so particularly in relation to countries with doubtful human rights records, which could in theory sign up to the 1988 treaty. I hope that she will be able offer some reassurance to me and to those organisations that have contacted me expressing their anxiety about the provisions.

Dawn Primarolo (Labour, Bristol South)

I am happy to respond to the hon. Lady’s inquiries on this important area. I am a little surprised at the views expressed by the Chartered Institute of Taxation, which normally follows closely tax law and tax practice, not only in the UK, and which I thought understood very well the processes with regard to our double taxation treaties. Of course, confidentiality, protection and the refusal to provide information are all pertinent to the double taxation treaties, which allow for the exchange of information, and this and previous Governments’ approach to the matter is well known.

It is also well known and generally accepted that the quickest way to ensure that the tax authorities have the information that they require is through information exchange. It is less burdensome, it is transparent, and it deters those who might think about concealing their tax affairs in another jurisdiction, because it is quicker to settle them in the correct jurisdiction.

I shall deal first with the hon. Lady’s example about signing of the convention by countries with human rights records that are at best inadequate and at worst positively unacceptable. She cited Burma, China and Zimbabwe, although there are others. The convention is open only to OECD and Council of Europe countries, and both those organisations have strict policies on human rights. In the case of the OECD, human rights are relevant even to whether a country receives observer status, let alone full participation rights or final membership. So the point is a red herring.

Furthermore, there is a back-up. The convention provides that—as is currently the practice in our double taxation treaties—information can be refused. The small and dedicated team that deals with information requests at HMRC has a lot of experience, and if the team suspects that the requested information might in any shape or form endanger the human rights of an individual, it can refuse to provide it without explanation. We have discussed that in previous Finance Bills when we considered mutual information exchange.

On tax treaties, the hon. Lady misunderstands. All the existing tax treaties contain exchange of information provisions that allow parties to tackle evasion and ensure that correct amounts of tax are paid. That has been operational for some time, and no principle will be breached by the proposals, nor are we moving on to new ground. It is correct that there are relatively recent developments on indirect tax in relation to double taxation treaties, but those treaties do slightly more than just relieving double taxation.

I shall deal shortly with disproportionate penalties and the important points about confidentiality, as well as the matter of comparable, like for like taxation.

John Hemming (Liberal Democrat, Birmingham, Yardley)

Will the Paymaster General explain subsection (1)? It says:

“those arrangements have effect (and do so in spite of any enactment or instrument).”

Obviously, that does not exclude the European Communities Act 1972, nor the Human Rights Act 1998, and to that extent an important constitutional precedent is being established—particularly as the provision deals with debt recovery, which is a more definite action than information provision. What consideration have the Government given to the constitutional implications of the proposal?

Dawn Primarolo (Labour, Bristol South)

I was going to come to debt recovery, because the hon. Member for Chipping Barnet (Mrs. Villiers) also asked questions about it, so perhaps the hon. Gentleman will let me take things step by step. If hon. Members think that there is something new and different from our double taxation treaties here, they are labouring under a misunderstanding. This is about tax information provisions, which follow the same point.

The next point that the hon. Lady made was about which taxes and duties would be covered. She made points about a tax that would not be levied here. All the taxes covered are those with a UK equivalent that—to make it even narrower—is within the remit of the Finance Bill. Anything that moved beyond being an equivalent of such a tax would not be required for exchange; it has to be narrowed down for that point.

I want to reiterate a number of points about confidentiality and then go on to the process. I tried to make it clear in my introduction that the rules operating in the other state that we are exchanging information with would have to be as strict as ours in order to open the exchange. If we did not think them comparable, with the same protections, it would not be opened. That reassurance is sought as part of the negotiations on double taxation treaties. If HMRC was not satisfied on those assurances, the provisions would not be applied.

The hon. Lady then asked about acting on behalf of other jurisdictions—covering the debt recovery point—and exactly what is going to happen here. I again need to put on the record that HMRC has a great deal of experience with the 100-plus taxation treaties that we already operate, and we are building on that. However, a state would not be required—so we would not be required—to carry out measures at variance with its own laws or administrative practices. That is another way out.

Then, the request for assistance in recovery—not investigation—should not be made in the first place if the requesting state has not gone through all the necessary legal processes to prove that the debt exists. States cannot decide that they prefer to use our enforcement rather than their own. They have to go right the way through their processes and make the case for the debt. Only at that point can the request be made, and even then there would be conditions. Is it comparable? Are we satisfied on the confidentiality standards? Are we satisfied that there is a case to be answered?

The hon. Lady asked about costs being proportionate. HMRC could refuse assistance, even after being satisfied on those other points, if it felt that the costs were disproportionate. That kicks back into our own rules as well. That is a double lot. It could say that the cost of providing the assistance is disproportionate in its view and therefore it declines to make that arrangement.

The hon. Lady said something about a right of appeal. It is true that there is no right of appeal against disclosure of information, but there never has been. I keep going back to the 100-plus tax treaties that we have. What the taxpayer can do, because we are talking about a tax debt in another jurisdiction, is to contest it there. They can contest the debt—

Theresa Villiers (Conservative, Chipping Barnet)

Only if they are allowed to.

Dawn Primarolo (Labour, Bristol South)

Yes, absolutely, but that would come back through the powers that say that the same rights are not provided as in the UK system, so the principle of the highest standard is not met, and we shall not assist in the recovery of the debt, whether it is considered proven or not.

The Department’s practice has always been that it would need to be satisfied that in providing the information—this is one of many qualifications—or pursuing the debt, if it had been established, the confidentiality of the taxpayer’s information would be safeguarded to the same standard as our own. At such a point, we could say, “No, we are not doing this.”

May I remind the hon. Lady that our standards are very high? The standard in the UK is that sharing confidential taxpayer information is a criminal offence that can be prosecuted. If an official in HMRC shares any taxpayer information with a non-authorised person—someone outside HMRC or, sometimes, outside the specific area—they are liable to criminal prosecution. HMRC has information gateways, and when the information moves on, the criminal prosecution is attached to the information and not to the person who discloses it. If we were not satisfied that the information was protected to that level, we would not disclose it.

The Department understands the delicate balance involving the confidence of taxpayers and their knowing that they are providing information that is used for the appropriate measures for which it was sought. Where it is transmitted, either in the UK to another authority or outside the UK, it must have that same protection and exceptional grounds must be involved.

I think that I have dealt with the point. I said to the hon. Lady that if there is any situation in which HMRC honestly believes that providing the information requested could lead to an abuse of the individual’s human rights, that information will not be provided. There are tight standards. Members of this Committee need to examine how HMRC protects information here in the UK. Things will be done to those standards and information will not be provided in any other circumstances.

I think that I have covered all the points. An individual’s human rights are clearly protected, but we must make it clear to individuals that due process and co-operation can take place in the exchange of such information in tight circumstances. The hon. Lady need only examine the tax treaties that we currently have to see that.

The double taxation treaties are already subject to affirmative resolution. Any tax agreement will come through this House on affirmative resolution. At every point, the Government will be able to be pressed. They will therefore give the assurance that all these considerations—at each point in each agreement and not just as a general series of points on this clause—are protected. That gives tax authorities the appropriate tools to do their job effectively, but importantly it provides the strict safeguards that we would expect in respect of information that is provided on a confidential basis.

I hope both that the hon. Lady accepts those reassurances and that she will be reassured that the points she raises are important. It is important that all Governments and all Ministers should be vigilant on the use of taxpayer information and its protection by confidentiality.

Theresa Villiers (Conservative, Chipping Barnet)

I am grateful to the Paymaster General for what she has said. This has been a useful debate and it has reassured me on a number of serious matters. I acknowledge the strength of the Minister’s point that to get into the OECD and the Council of Europe a nation must be subject to vetting procedures. I fear that she may still need to use other safeguards, because the process might not be foolproof given the detail involved in tax legislation. A few countries with tax systems in which due process is not up to scratch might slip through the net, get into the Council of Europe and the OECD and have the opportunity to sign up to the convention. They would have to surmount a useful hurdle, but the other safeguards outlined by the Paymaster General, particularly the public policy safeguards, should be ready for deployment in case the vetting procedures for those organisations do not cover all relevant issues.

I am also grateful to the Paymaster General for emphasising not only the fact of the safeguards but the importance of being vigilant and using them extensively to ensure that HMRC is not party to collecting taxes levied with the motivation of a breach of human rights. I hear what she says on costs and I am reassured to hear that the powers in question will have an impact only on taxes broadly aligned with those levied and collected in this country. It is also welcome that she has confirmed that each time a new country is brought within the scope of the powers there will be individual consideration of that country by the Government and the House. Because of the importance of the issues raised, which she acknowledged, I hope that when new countries come into the framework Ministers and other Members of the House will be vigilant in ensuring that all safeguards are in place to preserve human rights and due process in the tax system.

Clause 178

Dawn Primarolo (Labour, Bristol South)

I point out to the hon. Member for Chipping Barnet that the clause provides an example of the fact that the onward transmission of material from HMRC, even within the net of Government or public bodies, carries with it criminal sanctions for the unauthorised, unlawful disclosure of taxpayer information.

The clause ensures that information requested through an information gateway under the Gambling Act 2005 is subject to such a sanction. There was a slight mismatch, because the Gambling Act went through the House in parallel with the Bill that set up HMRC and introduced the criminal sanction, and it was dealt with in the short period before the last general election. That is why we have had to return to the matter now. I assure the Committee that the information has been protected in all that time as well, and the gateway is operational only with criminal sanctions applicable.

John Butterfill (Conservative, Bournemouth West)

We dealt earlier with new clauses 1 to 5 and new clause 7. Is it your wish, Mrs. Villiers, to press any of those new clauses further?

Mrs. Villiersindicated dissent.

New Clause 8

“Automatic application of inheritance tax provisions

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

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

The new clause seeks to exempt from pre-earned assets tax persons whose estates fall below the inheritance tax threshold, by amending schedule 15 of the Finance Act 2004.

In Standing Committee, we have spent a lot of time debating inheritance tax and the scope for avoidance. We have also spent much time talking about those whose estates are above the inheritance tax threshold. However, the new clause deals with property that could fall below the inheritance tax threshold but be liable for pre-earned assets tax. The annual income tax on continued use or occupation of pre-earned assets was introduced in 2004 to ensure that those who sought to get round the inheritance tax rules on gifts with reservations without a tax charge were caught. We support that.

However, with the help of the Chartered Institute of Taxation and its low incomes tax reform group, I have drafted the new clause to highlight the group of people who fall under the tax, whose assets may fall well below the inheritance tax threshold and who would be inadvertently caught by the tax, perhaps without realising. After making the gift, people may find that they are liable to the tax.

The Chartered Institute of Taxation and its low incomes tax reform group helped me by providing examples that fall outside the narrowly defined exemption that exist in the legislation but still fall in the broad remit of the pre-earned assets tax regime. The first refers to a mother and father who help their daughter and their son-in-law with the purchase of a house. Time passes, the husband vanishes and the daughter succumbs to a serious long-term disease. Six years after giving the money to help with the purchase of the property, the parents move in with their daughter to help to look after the children. According to the interpretation of the Chartered Institute of Taxation, those parents then fall into an annual tax based on the extent of their contribution to the original purchase of the property. I welcome the Paymaster General’s comments on whether she concurs with that interpretation.

The second example refers to a mother and daughter who live together following the death of the father. The mother makes an outright gift to allow the daughter to purchase part of the house in which they both live. The daughter moves abroad to live and work but retains her stake in the house in which her mother continues to live. In that case, the mother would be liable to the tax charge ad infinitum even though the estate would fall below the inheritance tax property threshold. At the point at which the gift was made, they did not consider that they would be reserving a benefit. That would be the case even if the mother had only loaned the money to her daughter. She would still be caught by the tax. I would again like the Paymaster General to confirm that that example would fall into the tax regime. The system could work in reverse. If a son who helped his mother buy a sheltered accommodation property moved in with her to look after her, it would be the son who would be caught by the tax. The new clause seeks to overcome the difficulties for those people who are below the inheritance tax threshold.

Before I talk through the details of the clause, I draw the Paymaster General’s attention to not just the apparent unfairness of the situation but the wider issue of whether the public are even aware that they could be liable to this charge. It is not clear to an individual where in the self-assessment tax return they are held liable to such a charge. At present, those who may be subject to the charge are expected to give an affirmative answer to self-assessment return question 13, which states:

“Did you receive any other taxable income which you have not already entered elsewhere in your tax return?”

I am sure that plenty of people in Committee would not be aware whether they would fall into the circumstances that make them liable to pre-earned asset tax given that question. The pre-earned assets charge is explained only in the explanatory notes, and people consult those only if they think that the question might apply to them at some point. How are those who are currently outside self-assessment even to know that they might be liable? It is not clear how anybody can make sense of this tax without professional advice. Again, I ask the Paymaster General how many people she thinks might be liable for the charge, and how many of them might not be paying it.

Even if one gets so far as to realise that one might be liable for the charge, and one understands it, one will be aware that there is de minimis exemption of £5,000 if the yield is deemed to be an annual rental value of that amount. I shall be interested in the Paymaster General’s comments on how that de minimis was arrived at, as it could clearly catch people whose estate falls below the inheritance tax threshold.

The new clause suggests that the problems for the taxpayer who does not have an accountant could be resolved if the rules and restrictions for the pre-owned asset tax were aligned with those on inheritance tax. Any estate that is below the inheritance tax threshold is exempt. The new clause seeks to amend schedule 15 of the Finance Act 2004 by inserting a series of new paragraphs on property, chattels and other miscellaneous assets, one of which would be new paragraph 6A, which states that the preceding paragraph

“does not apply if the value of the chargeable person’s relevant estate is below the relevant threshold at the relevant time.”

The calculation in that respect is done by taking 80 per cent. of the inheritance tax threshold, which allows for some variation in the valuation of the estate. It also seeks to create a situation in which, if the estate is below the inheritance tax threshold, it is simplified; there is one easy alignment. If a benefit is needed later on the gift that has been given, that will be counted with the estate. That is simpler and makes more sense.

To conclude, our concern is that, as it stands, there is a presumption in the legislation of tax avoidance, although in many cases family circumstances may dictate changing arrangements. The new clause seeks to make arrangements fairer for families who might not have the liquidity to explore the POAT regime, or who might simply want to help each other in difficult times. If people are not eligible for inheritance tax, it seems unfair inadvertently to catch them in that way. I would much appreciate the Paymaster General’s response.

Rob Marris (Labour, Wolverhampton South West)

I have some sympathy with the new clause, but I am not sure that it is worded in the right way or whether it will do what the hon. Member for Falmouth and Camborne (Julia Goldsworthy) said. I seek clarification, and I have seven questions for her, because it seems from what she said that, for example, question 13 on the self-assessment form could be better worded, and that people might unwarily end up liable for tax without realising it.

I cannot refer to line numbers, because the amendment paper does not give them, but at the top of page 1345, we find new paragraph 3A(2)(b). My first question is to ask the hon. Lady what that means. The second and third refer to sub-paragraph (3)(a), which concerns the disposal condition, and (3)(b), which refers to a contribution condition. Can she give examples in each case? Fourthly and fifthly, can she give examples of the disposal condition in paragraph 6A(3)(a) and of the contribution condition mentioned in paragraph 6A(3)(b)?

My sixth question concerns paragraph 25(2)(a) at the bottom of page 1346, which refers to “relevant property”. That is defined in proposed new paragraph 25(3), at the top of page 1347, which refers us back to paragraph 22 of schedule 15 to the 2004 Act. Will the Paymaster General therefore remind the Committee what paragraph 22 currently says about relevant property?

My seventh, and final question, relates again to the top of page 1347. Proposed new paragraph 25(9) states that new clause 8 would be retrospective and apply from 6 April 2005. I stand open to correction, but I seem to remember the hon. Member for Falmouth and Camborne expressing grave reservations in this Committee about retrospective tax legislation. Have I misunderstood her previous comments? If not, why does she seek to make an exception in respect of new clause 8?

Theresa Villiers (Conservative, Chipping Barnet)

I outlined the Opposition’s reservations about the pre-owned asset tax regime at some length when we discussed clause 80, and it would not be productive to repeat those points, but I shall refer briefly to some of them.

As I outlined during that earlier discussion, there is a degree of consensus between the two Front Benches about seeking to ensure that people cannot gain tax advantages by giving away property that they continue to use. However, that consensus breaks down in relation to the Government’s decision to supplement the long-standing reservation of benefit rules, which have applied since the 1980s, with the pre-owned asset tax regime.

We have significant reservations about how the regime operates, and the hon. Member for Falmouth and Camborne gave a number of examples to illustrate that. On a number of occasions, the regime has caught transactions that have nothing to do with tax, and which are all about family members trying to support and financially assist one another. As I said, we live in an era in which the elderly are increasingly asset rich and cash poor, and it is not uncommon for children to wish to buy out a proportion of their homes to release cash for their parents. However, such arrangements fall foul of the regime.

As the hon. Member for Falmouth and Camborne said, one of the real anxieties about the pre-owned asset tax regime is that it bites not only on innocent transactions, but that the people who enter into them can be wholly unaware of the negative tax consequences. That is why we have reservations about that aspect of the pre-owned asset tax regime. As I outlined earlier, we also have reservations about the fact that inheritance tax and pre-owned asset tax could bite in the same circumstances. That is certainly not the Government’s intention, but it does happen, as the examples that I outlined show.

Although new clause 8 would address one area of controversy—the lack of a nil rate band for pre-owned asset tax rules—it would be welcome if the Government were to review the whole operation of the regime. That includes the points raised by new clause 8, although I would not seek to interpret and analyse it in quite the depth that the hon. Member for Wolverhampton, South-West (Rob Marris) did. I have a degree of sympathy with what the new clause seeks to achieve, but it is important to look at the pre-owned asset tax regime as a whole, because it needs significant reform, and I hope that the Paymaster General will consider undertaking a review of its operation.

Dawn Primarolo (Labour, Bristol South)

The new clause seeks to cater for the position of those who do not have sufficient wealth to be liable for IHT if they die, but who, as the hon. Member for Falmouth and Camborne said, have entered into arrangements that are liable for income tax under the pre-owned asset tax regime.

My officials have been contacted by the Chartered Institute of Taxation and the low income tax reform group and have discussed the views of those organisations about the current provisions and about whether we need to arrange for further changes to the legislation. Despite that discussion and the concerns raised, there has been no evidence—it would be good to have evidence rather than theoretical propositions—of whether people are caught in such a situation. That is despite positive discussions with those two organisations. In fact, as a result of those discussions, HMRC has put detailed guidance on the internet. It was updated at the end of last month, following further consultation and helpful contributions from those organisations.

However, the hon. Member for Chipping Barnet is right; we covered the issue extensively during our discussion of clause 80 and the charges aimed at taxpayers who have engaged in complex tax avoidance schemes. On the whole, such taxpayers know whether they are liable. In addition, there has been detailed guidance to calculate liability and there is printed guidance on the tax return guide, which also directs the taxpayer to the internet guidance and the probate and IHT helpline.

I say to the hon. Member for Falmouth and Camborne that I am aware of the two organisations’ representations, but the facts of the matter—whether there are real cases, the number of them and whether they merit changing the legislation—have not been established. In addition, I am unable to accept the new clause because it would not make the provisions described by the hon. Lady. In particular, the new clause would operate by reference to the value of all of a person’s property at the time that the relevant arrangements are entered into. Some such arrangements could be long-standing, which would mean that there could be cases in which attainment values were not so much impracticable as impossible, and would therefore be a bar.

So far, approximately 1,000 elections into IHT have been received by HMRC. However, the deadline for the self-assessment return for the first year of the charge is 31 January 2007. Although I cannot accept the new clause, which produces an impossible proposition, I have asked my officials, in good faith with the discussions with the two organisations, to work closely with those organisations and to seek out whether there really are examples, and to keep the situation under review. Should it be necessary to return to this matter, we will. That is the better way in which to proceed.

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

The Paymaster General asked for concrete examples. I have a constituency case that I think fits the bill precisely. It concerns a son who is trying to look after his parents, and I believe that the value of the property is just over £100,000. I do not have the details to hand, but if I may, I shall write to the Paymaster General with them.

Dawn Primarolo (Labour, Bristol South)

For a minute, I thought that the hon. Gentleman was going to ask me to express a view on that individual case. He prefaced his remarks by saying that he thought the case might be covered.

I am advocating that it is not sufficient to advance that there is a theoretical problem; before we change legislation, we need to be reassured that there are specific examples. I hope that the Committee will be reassured. I hope also that the hon. Member for Falmouth and Camborne will withdraw her new clause and be reassured that the sensible thing is to monitor the situation and to seek out examples, if they exist. The deadline is not until January 2007. If further action is then needed in the very specific cases in question—whatever the reason for such cases arising—and if the legislation does not cover the situation, that will be the appropriate time at which the Government should return to the matter.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I thank the Paymaster General for that response, which provides some reassurance that the Treasury is aware of the potential for a problem. The examples that I gave are, of course, theoretical, but it would be useful to know whether the Government intend that people in the circumstances in question should be affected by tax in the way suggested. I should be interested to know what research is being undertaken by the Treasury to see whether that is happening. Perhaps there is no evidence—but perhaps there has been no research. I appreciate that the deadline may not have passed, so the problem may not yet—

Dawn Primarolo (Labour, Bristol South)

With respect to the hon. Lady, that is a daft proposition. The idea of a problem has been advanced and outside organisations and the hon. Lady have suggested that the legislation should be changed. We cannot set up a research project every time there is a change to the tax system. What is required is that if people have concrete examples not covered by the de minimis of £100,000 they should come forward. That is exactly what the two organisations concerned have been asked to do. We shall then consider the evidence base. The obligation is on those organisations.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I thank the Paymaster General for her intervention. Of course, Her Majesty’s Revenue and Customs will also have access to such theoretical examples as I have given. Given that the tax returns do not have to be filed—

Dawn Primarolo (Labour, Bristol South)

Will the hon. Lady give way?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I was not planning to keep the Committee much longer.

Dawn Primarolo (Labour, Bristol South)

I know, but I just want to explain that the tax authorities know what people tell them. If people do not tell them things, such as that there is a problem, they do not know. That is how tax works. That is why we discuss confidentiality. Taxpayers provide us with information on which we act.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

My concern is that there may also be people who may not be aware that they fall under the regime in question, until they are investigated by Her Majesty’s Revenue and Customs. There are potentially other reasons why they may become liable for the tax.

To return to the point that I was making, given that the returns will not need to be made until 31 January 2007 and that it may not be possible until then to determine the potential scale of the problem, and given the helpful reassurances by the Paymaster General about how people may or may not be caught, and her agreement to monitor the situation, I shall be happy to withdraw the new clause.

Rob Marris (Labour, Wolverhampton South West)

The hon. Lady sounded as if she was about to ask leave to withdraw the new clause; will she reply to my seven questions before she does?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Of course, I am withdrawing the motion, but if the hon. Gentleman wants me to clarify I am more than happy to do that.

The hon. Gentleman raised an issue about retrospection: given that the returns do not have to be filed until January 2007, application from the date in question seemed consistent and sensible. He also raised questions about the value of the property. As I said, the key issue was that the intention of the new clause was that the value of the chargeable person’s estate meant the aggregate of, first, their estate at the relevant time, and, in addition, any other gifts that they might have had, for which they would receive benefit in the future. The intention was—and this holds for the three different paragraphs—that if that value represented 80 per cent. of the inheritance tax threshold it could be exempt from inheritance tax.

I hope that that clarifies matters for the hon. Gentleman, but, as I said, given that the returns will not be filed until 31 January 2007, and given the Paymaster General’s reassurance that she will be open to continued dialogue and representations from those organisations that have raised concerns, I am happy. I beg to ask leave to withdraw the motion.

New Clause 9

Stewart Hosie (Scottish National Party, Dundee East)

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

I will be mercifully brief, not least because some Members may recall that we debated a similar amendment to last year’s Finance Bill. However, today’s new clause is slightly different. It would regulate the price of road fuel when world oil prices push up the pump price. It would do that by utilising the additional VAT charged on pump prices that have gone beyond a forecast level, which is to be laid down each year by the Chancellor.

The subject came up in debate last year. The Chancellor already makes forecasts. The question was asked about last year’s Finance Act, and I ask again through the new clause. If such forecasts are to be referred to in statutory legislation, it would have to be provided for in the Bill.

The new clause is not designed to weaken the impact of rises planned for environmental reasons. Using the additional VAT gathered to minimise rises in the pump price will happen only when the price reaches the forecast price and consequently the yield set down by the Government.

When the Chancellor publishes that forecast, I suggest that he should be obliged to publish the anticipated yield from duty and VAT on oil prices up to 50 per cent. above the forecast. That would allow far greater transparency, and all road users would be able to see how much of the VAT yield might be offset against the higher fuel prices in any given circumstances.

Fundamentally, we need this measure or one like it because of the great difficulties faced by the haulage industry, which suffers bankruptcies at twice the rate of other industry sectors. We need it to assist in rural areas—we have debated the subject many times—where the car is essential, no alternative is available and prices are higher.

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

The hon. Gentleman and I share our concern for the premium paid by motorists in remote rural areas; it is largely a matter of market forces because of the throughput of cars on the garage forecourt. Will the new clause do anything to address the premium, or will the premium be enshrined, with the overall price going up or down throughout the country?

Stewart Hosie (Scottish National Party, Dundee East)

Sadly, it is the latter. By necessity, the fuel tax regulator needs to address a number of issues. The question is relevant insofar as prices are much higher in rural areas, and they will benefit more from any decrease in the price. We need to look at the cost to business, especially the ability to plan road fuel costs properly, because of the uncertainty that we have seen over the past year. I shall put that into context.

Notwithstanding what the Financial Secretary said earlier, the percentage of tax in the retail price has gone down by 8 per cent. in real terms—from 68 per cent. to 60 per cent. Duty and VAT still account for about 60 per cent. of the cost of a litre of petrol. Within that, there remains a great deal of scope for the Government to do something. To put the price into context, when we last debated the subject on 6 July 2005, I said:

“the AA, using its own estimates on unleaded petrol, indicated that some six months ago the price of a litre was about 80p. This month it is about 86p.”—[Official Report, 6 July 2005; Vol. 436, c. 361.]

During the past four or five weeks, the price per litre has crashed through the £1 barrier in many parts of Scotland. Since we had the debate less than a year ago, there has been a price rise of between 20 and 25 per cent.

Something needs to be done to assist the road haulage industry and those who live in remote rural areas and to provide businesses with more certainty as they budget for their road fuel costs. I will not push the new clause to a vote today. It is a probing amendment to see whether the Government have changed their mind in any way on the proposals we submitted last year and to allow consultation with the other parties in Northern Ireland, Scotland and Wales who backed the proposals last year. We may wish to come back to it on Report.

Rob Marris (Labour, Wolverhampton South West)

I am surprised that an hon. Gentleman representing the Scottish National party in a seat in Scotland suggests that the measure would help the haulage industry. Of course, he and other hon. Members are more expert on the issue than I am, but I suggest that in Scotland the haulage industry competes principally with rail. Perforce, because of the lower density of population in Scotland, the rail network is less dense. The haulage industry is hit by the problem where we have a system of cabotage in the south of the country, where trucks may come from the continent where they pay lower fuel prices. By the time they get to Scotland, I would have thought that they had emptied their tanks so I cannot see how the measure would assist the haulage industry in Scotland.

John Healey (Labour, Wentworth)

The hon. Member for Dundee, East was brief in his remarks. I will try to be similarly concise in mine. I pay tribute to the hon. Gentleman and to his party. They are dogged about pursuing the issue through the Finance Bill. He mentioned the Committee of the Whole House, which sat last July, though the proposal that we are considering this year turns on the oil price rather than on both the oil price and the pump price, as did last year’s proposal. It is a mechanism that would introduce considerable complexity. It would do little to bring stability to the UK market. It would also not offer any guarantee of reducing prices at the pumps because the duty increase to be frozen would more than likely be less than the fluctuations driven by the upstream oil market volatility.

At its heart, the new clause is based on a misconception, which is that high fuel prices lead to higher overall VAT receipts. The reality, particularly given the VAT regime, is that that is not necessarily the case. Where people spend more on one commodity, they tend to spend less on another, so the overall level of VAT receipts usually remains unchanged. Also, the hon. Gentleman did not mention that VAT-registered businesses can reclaim the VAT incurred when buying fuel for their business journeys, so the level of VAT that they pay at the pumps has little or no effect on their balance sheet.

In summary, it is for those reasons that the Government believe that the best way to deal with high oil prices is to work with oil-producing countries and, through the G8 Finance Ministers, to try to stabilise the volatility in the oil market to improve its functioning, rather than simply focusing on short-term changes in levels of duty, as the new clause does. The hon. Gentleman described it as a probing amendment. He reserves his right to return to the issue on Report. He may well press it to a vote at that point, but I remind him and the Committee that when he did so last year his proposition was defeated by 12 votes to 351.

Stewart Hosie (Scottish National Party, Dundee East)

I thought that we got 18 votes. I say to the hon. Member for Wolverhampton, South-West on competition, a local haulier from my constituency came to see me recently devastated that it had lost a huge amount of business from 42-tonne wagons with big tanks filling up in Europe, coming up to Scotland and picking up business to return down south. So the issue of competition from those wagons is precisely what he described. It does not just exist in the south of England and the midlands but in my constituency. On competition to rail, I wish that what he said were so. If all the freight yards and the Red Star parcel offices were still open, and there was competition from that, perhaps the debate would be different but, as the hon. Gentleman knows, after 18 years of Conservative Government and, before that, Beeching, that is not the case.

I say to the Financial Secretary that I am aware that the use of VAT to offset fuel duty would not result in a full offset. The AA said that last year the price rose from 80p to 86p. Using the mechanism here—effectively the same one—that would have resulted in an offset of 1.2p. The industry supported that measure. It would provide the Government with yield and ameliorate the worst excesses of spiking and global price rises.

I have put that point on the record and listened to the Financial Secretary. I reserve the right to return to the issue at a later stage, but I beg to ask leave to withdraw the motion.

Schedule 26

Dawn Primarolo (Labour, Bristol South)

On a point of order, Sir John. Before we conclude the business, I would like to put on the record my thanks, on behalf of the Committee and all the Ministers, for the excellent way in which you, Sir John, as well as Mr. O’Hara, and Mr. Benton have stewarded, assisted and ably guided the Committee through our complex debates. I would like also to thank the Clerks, the Hansard writers and the Doorkeepers for their help and assured touch in making the business of the Committee run smoothly.

I congratulate the hon. Member for Chipping Barnet; speaking for the Opposition on the Finance Bill is a huge challenge, and this was her first time doing so. She was ably assisted by the hon. Members for Rayleigh (Mr. Francois), for Wycombe (Mr. Goodman) and for Fareham (Mr. Hoban)—her Front Bench team.

I congratulate also the hon. Member for Falmouth and Camborne who, too, was in her first Finance Bill and supported by her colleague, the hon. Member for South-East Cornwall (Mr. Breed). I congratulate all the other Opposition Members on their—I do not want to make anyone laugh—patience and skill in contributing to a thorough and high-quality debate, despite the competing demands of other issues, particularly the World cup.

I thank my hon. Friends the Financial Secretary, and especially the Economic Secretary—it was his first Finance Bill too—for some new concepts. We now know what “straddling” means—not always in terms of the legislation, but certainly the posture of Ministers. We were greatly encouraged by the Economic Secretary’s observations today on philosophy, and I think that all of us are assured that tax legislation will be safe in his hands.

I congratulate the right hon. Member for North-West Hampshire (Sir George Young) on attending a Finance Bill after 10 years. He said that he will not come back for another 10 years. All I can say is, “Good luck”: being in Opposition will be just as unpleasant to him then as it is now. I thank Mrs. Gauke, who at times I thought was a Committee member. I do not know what we would have done without her. Actually, I do know but I am not unkind enough to say.

I also thank my hon. Friend the Member for Wolverhampton, South-West. I do not think that he realises this, but he makes many officials in HMRC happy because, as they slave over explanatory notes and regulations, they know that there are at least some in this world who read those notes and regulations intently and have questions to ask of them. I am not sure that Ministers always welcome those questions; none the less my hon. Friend has played his part.

I thank all my hon. Friends who have participated for all the hard work that, I am sure, they have done and for participating in the Committee. I am eternally grateful—I really am—for their support and assistance in ensuring proper discussion of the Bill.

I thank all those from the professional bodies who brief us and who have supported all Members on the Committee and, dare I say it, my officials.

I know it is inappropriate but I thank the Whips. Normally they are not referred to in Committee but they have done a splendid job in ensuring that we have timely discussion, not for too long but of appropriate length.

I look forward to the remaining stages of the Bill. Again, I put on record our thanks to you, Sir John., in what is, I think, your 16th Finance Bill.

John Butterfill (Conservative, Bournemouth West)

Or 17th.

Dawn Primarolo (Labour, Bristol South)

Or 17th. I hope that you do many more.

Theresa Villiers (Conservative, Chipping Barnet)

Further to that point of order, Sir John. After what seems like several years, we are at the end of the Committee. We had the thrills and spills of snagging, straggling, probing, turbo-charging, recycled reheated turbo-charging and pre-emptive reversed multiple turbo-charging. That was just this morning. Both the Economic Secretary and I demonstrated our inability to pronounce Arabic financial instruments. We had a lively discussion on whether the age of financial capability and responsibility was appropriately 18, 25 or, in the case of the hon. Member for Wolverhampton, South-West, 52.

As the temperature climbed, I felt that the Committee lost the will to live but our sentence is nearly up, or at least we are on day release until Report in a couple of weeks. I echo the thanks of the Paymaster General to our three Chairmen—to you, Sir John, and to your co-Chairmen, Mr. O’Hara and Mr. Benton—for the exceptionally patient and skilful way in which you guided our deliberations in Committee. Like the Minister, I give my grateful thanks to the Doorkeepers and to the Hansard reporters for their hard work and assistance.

I also thank the Clerks of the Committee—Malcolm Jack for his work on the Committee of the Whole House and Frank Cranmer for his incredible patience and hard work in assisting all Members of the Committee on the difficult task of taking a Finance Bill through the scrutiny process. It was certainly a challenge to take on the Finance Bill as my first Standing Committee and to lead for the Opposition on it. I am grateful for the assistance given to me by Mr. Cranmer and the Clerks of the Committee.

I am also grateful to my Front-Bench team—my hon. Friends the Members for Rayleigh, for Wycombe and for Fareham—for their hard work. They all worked exceptionally hard, as did the Back-Bench team. I see that some of the latter have retired hurt, but they endured the lengthy deliberations with great application and diligence.

In his absence, I apologise to my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) for getting in trouble for passing notes in class. I repeat my apologies to the Committee for getting that wrong. I note that my hon. Friend has fled the country, but I am sure that it is not because of anxiety about contempt of Parliament. I also pay tribute to Mrs. Gauke, who was ever present in our discussions, if not in fact.

I acknowledge the civilised approach taken by those on the Government Front Bench in almost all the Standing Committee debates. We had some lively exchanges and some constructive ones. I am grateful for the movement we saw from the Paymaster General on schedule 20. I also thank the Liberal Democrat Members for their occasional guest appearances. I pay tribute to the hon. Member for Dundee, East (Stewart Hosie) who made some thoughtful contributions on film and on oil.

Lastly, I put formally on the record my thanks to the many professionals, experts and organisations that provided a wealth of commentary and advice on the Finance Bill. A particular “thank you” should go to PriceWaterhouseCoopers for the advice and assistance given to the whole Opposition Front-Bench team. We owe it a large debt of gratitude for its assistance. In similar vein, I should like to express my thanks to KPMG for similar assistance and advice. It is impossible to run through all the individuals and groups on whose briefings I and my colleagues have relied, but they certainly include the Society of Trust and Estate Practitioners, the Chartered Institute of Taxation, the Law Society and the Institute of Chartered Accountants in England and Wales. Without their assistance, it would have been simply impossible to provide the effective scrutiny necessary for so important a piece of legislation. Lastly, I thank the Whips for, as the Paymaster General outlined, managing the whole process in a very civilised and effective manner.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Further to that point of order. Sir John. I shall keep my remarks short in case it degenerates into an Oscar-style ceremony of thank yous. I should like to add my thanks to you, Sir John, for chairing the sittings so skilfully. I also thank the other Chairmen, Mr. O’Hara and Mr. Benton. With so many Finance Bill virgins—I suppose one might put it that way—on the Committee, it must have been difficult to ensure that we all remained in order.

I would also like to thank the Paymaster General for her very kind words, and I congratulate the hon. Member for Chipping Barnet on doing such a sterling job on her first time. I would also like to thank my colleagues and the professional bodies who made my life a lot easier during my first Finance Bill. It has been a baptism of fire, but I have enjoyed it, and I am sure that I shall many happy memories, once I am looking back at it. I am sure that that will be the same for the remaining stages. Finally, I forgot to thank the Clerks for all their help, because so much of the procedure was new, and their patience and guidance was much appreciated.

Stewart Hosie (Scottish National Party, Dundee East)

May I, Sir John, thank you for your chairmanship, as well as that of Mr. O’Hara and Mr. Benton? This was my first Finance Bill Committee, and I have learned a great deal from it. I would like to be in a position to thank my hon. Friends for all their help and assistance, but such is the lot of a small party. I thank all the staff. Sadly, I fear that, like the hon. Member for Wolverhampton, South-West, I am looking forward to next year already.

John Butterfill (Conservative, Bournemouth West)

I will certainly report to Mr. O’Hara and Mr. Benton hon. Members’ thanks, and I am very grateful to them for those kind words. It has been an excellent Committee, which has conducted its proceedings with courtesy and extraordinarily good humour—at times, a little ribald for the Chair, but there we are. With my usual masochism, I have to say that I have enjoyed it greatly.