Finance Bill

Public Bill Committee, 15 May 2007.

(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration) - Clause 17

Roger Gale (Conservative, North Thanet)

With this we may discuss clause 18 stand part.

Paul Goodman (Conservative, Wycombe)

Welcome to the Chair, Mr. Gale. The clause marks the beginning of the part of the Bill that deals with the environment. It is progress to have such a part, given that there was no similar part in last year’s Finance Bill.

By way of introduction, I shall point out that my hon. Friends and I have done some research and discovered that in last year’s Budget alone, the Chancellor mentioned climate change no fewer than 15 times, whereas in the Budget and pre-Budget statements between 1997 and the autumn of 2005, he mentioned it on average only once. I shall leave it to the Committee to work out what stimulated his interest in the environment, and what might have happened in the autumn of 2005 to awaken that interest.

Stephen Timms (Labour, East Ham)

Will the hon. Gentleman confirm that, under the Governments of the party that he represents, the Budget documentation never included an environment chapter? Our documentation has consistently done so since 1999.

Paul Goodman (Conservative, Wycombe)

I can confirm that carbon emissions have risen since 1997. I am afraid that I have to disappoint the Chief Secretary by saying that my research has been less rigorous than his; I have not sat back and looked at every Bill that was issued in every year since 1979. I should want to check his claim closely, as we always want to examine with great care claims that are made by the Treasury.

David Gauke (Conservative, South West Hertfordshire)

Will my hon. Friend confirm that, during the Chancellor of the Exchequer’s period in office, not only has climate not featured heavily in Bills and Red Books, but green taxes, as a proportion of taxation as a whole, have fallen?

Paul Goodman (Conservative, Wycombe)

I can confirm that. Green taxes represented 9.4 per cent. of receipts in 1997; that figure has slid to 7.7 per cent.

Brooks Newmark (Conservative, Braintree)

The Chief Secretary gave 1999 as the critical year in which green issues suddenly became important for his Department. I note that since 1999, 15 Departments have increased their carbon emissions. What does that say about the Government’s green strategy?

Paul Goodman (Conservative, Wycombe)

I am grateful to my hon. Friend. I assume that he refers to the Sustainable Development Commission’s finding that said exactly that.

David Gauke (Conservative, South West Hertfordshire)

Will my hon. Friend also accept that although 15 Departments have increased their carbon emissions since 1999, of all Departments the Treasury has the third highest carbon dioxide emissions per person from air travel?

Roger Gale (Conservative, North Thanet)

Order. It has taken me 24 years to work out that Parliament is a reasonably party political place. I would be awfully grateful if we could discuss the clause under debate.

Paul Goodman (Conservative, Wycombe)

I shall not respond to my hon. Friend’s question, Mr. Gale, although I was prepared to do so. I shall instead turn to clause 17, which, by amending the Income and Corporation Taxes Act 1988, seeks to extend to corporate landlords the availability of the landlord energy savings allowance. Proposed new section 31ZC sets out regulatory powers associated with the earlier provisions of the clause. How many corporate landlords does the Chief Secretary expect to install energy-saving devices as a result of the clause? What does he expect total carbon saving to be?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I shall be brief in dealing with clauses 17 and 18. The hon. Gentleman was right: this is the first time that we have seen part of a Finance Bill deal specifically with the environment. That is slightly confusing, as we have just discussed some environmental clauses under the previous part.

Clauses 17(5) and (6) specify the definition of an energy-saving item and stipulate that such items will be defined by regulation. I am not sure that I have seen the regulations; will the Chief Secretary provide some detail of exactly what kind of items those will be? Will they refer just to electricity, or will they include items like ground source heat pumps, the development of which is making great strides in my constituency? I also note at the bottom of page 11 in the proposed new section 31ZB(3) that expenditure relating to holiday lets has been excluded. Can he explain why that is the case? Surely, we want to encourage greater energy efficiency in all properties, and not limit that process. Finally, I would like to know what the projected cost to the Exchequer of these measures will be, and what the Chief Secretary expects take-up to be in terms of the number of properties that will respond to these incentives to improve energy efficiency.

Brooks Newmark (Conservative, Braintree)

I welcome clause 17, because it begins to deliver on the Treasury’s promise of fiscal incentives for energy efficiency. Although I am sad to see that the hon. Member for Wolverhampton, South-West is not here, I saw in the explanatory notes that the measure is an attempt to standardise corporation tax reliefs with an existing income tax relief. The explanatory notes state:

“A similar deduction...is currently available for landlords who pay income tax.”

I also welcome that principle, if only because the clash between the two regimes has caused so many problems elsewhere in our Finance Bills over the past few years.

I have a few questions about the details, which I hope that the Chief Secretary can answer. My first question is whether there is any need for new section 31ZA(5), regarding the definition of an “energy-saving item”. If the aim here is to achieve harmony between the income tax and corporation tax regimes, why is it not possible to use the existing regulations that were made for the purpose of income tax deduction? I do not want to stray into the territory of the next clause, but we have had some recent regulations, a copy of which I have here, that define what an energy-saving item is for the purposes of income tax deductions under section 312 of the Income Tax (Trading and Other Income) Act 2005. The Energy-Saving Items Regulations 2007 were laid before the House on 14 March and came into force on 6 April. They define energy-saving items as

“(a) hot water system insulation;

(b) draught proofing;

(c) solid wall insulation; and

(d) floor insulation.”

They also prescribe limits on expenditure.

If the idea is to achieve harmony between the deductions possible under the Income and Corporation TaxesAct 1988 and the Income Tax (Trading and Other Income) Act 2005, I must ask the Chief Secretary whether it is not possible to use a common definition of an energy-saving item, and if possible the same regulations.

Proposed new section 31ZA(7) seems to imply a wide range of possible conditions, which may be imposed upon the definition of an energy-saving item. I hope that the Treasury does not intend to develop a definition of an energy-saving item that is so specific that no one can make use of the relief. The list given in the Energy-Saving Items Regulations 2007 is hardly exhaustive, and I hope that the Treasury is not signalling that it is going to become any shorter. If this relief is to be useful and not another of the Chancellor’s gimmicks, it will be helpful if the Chief Secretary could offer the Committee some idea of what will be covered by the proposed definition, and whether that definition will be based on the existing regulations.

My second question concerns restrictions on the use of the relief, particularly that it is not applicable if a house is in the course of construction. I would have thought that the best time to make the relief available is during the acquisition and construction phase; I see the Chief Secretary nod there. It is at that point that the availability of a deduction is best able to influence commercial decisions about whether to proceed with energy-saving measures.

The Government seem to be establishing a false dichotomy between businesses that improve the energy efficiency of an existing building and those that elect to improve the specification of a prospective building. I am sure that there is some logic in that distinction and I would be grateful for the Chief Secretary’s explanation.

My third point concerns the restriction in proposed new section 31ZB(5), which restricts any deduction in respect of expenditure which

“is not for the benefit of a dwelling house.”

That seems very nebulous and the Chief Secretary may be able to put my mind at ease by providing the appropriate legal definition. As it stands, I can think of a number of possible disputes arising over whether an energy-saving item has been installed to the benefit of a dwelling house or for another commercial purpose. The scenario I am thinking of is tied accommodation in which there is very little differentiation between residential and commercial premises, such as a pub.

If a pub landlord were to install some energy-saving technology, even choosing from the very modest list in the current regulations, would he be benefiting his dwelling or his commercial premises? Presumably both to some extent, but does that mean that no deduction is allowed at all or that the benefit should be apportioned out in some way or another? My concern with the whole of the clause is that its intentions are positive, but its details risk producing a deduction that is so specific or so complex that nobody bothers to use it. I should like to see the clause put to good effect by business, rather than providing another two pages of primary legislation and yet another set of regulations.

Kitty Ussher (Labour, Burnley)

I rise briefly to express my support for the clause. Obviously its purpose is to address the market failure that exists because landlords have a disincentive to invest in energy efficiency in their properties because the benefits of the investment flow to the tenant so they cannot get a return on it. The clause would correct that by giving a direct financial return to the landlord. I should like to explore the parallels between this clause and the clauses relating to microgeneration that we discussed late one evening on the Floor of the House. Those clauses give individuals exemption from income tax on income from any surplus electricity generated from installing solar panels and wind turbines, perhaps we should consider a similar provision for landlords. For a landlord there is also, presumably, a market failure to invest in microgeneration, solar panels, wind turbines and so on because he would not be the one to benefit from selling the surplus energy back. Surely, the microgeneration clauses should also be extended to landlords. Perhaps the Chief Secretary can clarify that point.

Stephen Timms (Labour, East Ham)

Good morning, Mr. Gale. I welcome you back to the Chair. Let me briefly repeat the point that I made in an intervention. The Chancellor introduced in the Budget documentation for the first time an environmental chapter and it has been in each pre-Budget report and Budget Red Book since 1999. Before that we published a statement of intent on environmental taxation in July 1997. I will not go further down that road, Mr. Gale, given your wholly proper strictures to Opposition Members earlier on.

I want to comment on clauses 17 and 18 as they are grouped together on the selection list. About one third of the UK’s carbon emissions come from residential properties. We have therefore introduced, not as the hon. Member for Wycombe suggested this first measure, but a series of measures to encourage household energy efficiency. For example, energy efficiency measures professionally installed in residential properties now qualify for a reduced rate of VAT. The energy efficiency commitment provides incentives under which energy suppliers are installing a range of energy efficiency measures in residential properties. By 2010, in combination with initiatives introduced as part of the warm front scheme, that will reduce carbon dioxide emissions by more than 2 million tonnes per year.

The Government have also set out our ambition that, by 2016, all new homes will be zero carbon. We will shortly come to a clause that introduces a stamp duty exemption for zero-carbon homes. However, action targeted specifically at the rented residential sector is needed, since such properties typically produce about 500 kg more carbon dioxide a year than other homes. There is an obvious incentive for home owners to improve the energy efficiency of their homes, but, as my hon. Friend the Member for Burnley said, that does not apply in the case of rented properties, hence the need for this measure.

In the 2004 Budget, we introduced the landlords energy saving allowance—LESA—which allows private landlords to deduct the cost of installing loft and cavity wall insulation from their taxable profits. Since then it has been extended to include solid wall and hot water system insulation, and draught-proofing.

We have explored the options for a green landlord scheme in some depth. An option that we discussed in the past was to reform the wear-and-tear allowance, linking it to the energy efficiency of a property but, having fully investigated the practicalities, we concluded that LESA provided a more cost-effective and better targeted way to encourage improvements in the energy efficiency of privately rented properties.

LESA has been successful in encouraging investment: landlords spent more than £1.3 million on energy efficiency improvements to rented properties in its first year. The Energy Saving Trust and the Energy Efficiency Partnership for Homes are also doing good work in encouraging landlords to improve energy efficiency in their properties. Building on that progress, we announced several extensions to LESA in the pre-Budget report last year to ensure that its scope and coverage are as comprehensive as possible. Those extensions are expected to reduce carbon emissions by up to two thirds of a million tonnes a year by 2011.

LESA is at present available only to private landlords subject to income tax, and clause 17 extends it to landlords in the corporate sector. Corporate landlords own about a quarter of all properties in the residential rental sector, so that is a very significant widening of access to the allowance. As a Government support to businesses, the extension requires state aid approval from the European Commission before it can be implemented and we will be shortly be submitting notification of this aspect of the LESA and seeking approval.

The clause also gives powers to the Treasury to change the level of allowance available to ensure that the allowance operates fairly in all situations and to specify the types of energy-saving items covered. I will return to that matter in a moment.

We will lay regulations introducing the same conditions for corporation tax that are already in place under the existing allowance for income tax, and the regulations will set the maximum deduction available at £1,500 per property per year and provide for that deduction to be apportioned in cases of joint ownership. A draft of the regulations has been provided for the Committee and I hope that all members will have seen it.

Paul Goodman (Conservative, Wycombe)

Will the Chief Secretary say when the regulations were sent to the Committee, as I have no recollection of receiving them? If he cannot answer my question now, perhaps he will do so in due course.

Stephen Timms (Labour, East Ham)

I do not have the date in front of me but I will check it. I hope to be able to respond to the hon. Gentleman in a moment.

Corporate landlords will be able to deduct the cost of acquiring and installing solid wall, cavity wall and loft, floor and hot water system insulation, and draught-proofing.

Extensions to LESA for non-corporate landlords, who already benefit from the original LESA, aremade for income tax in clause 18 to match those in clause 17 for corporation tax, and represent a further incentive for landlords to increase the energy efficiency of their properties. Clause 18 extends LESA by making the allowance that is currently set to end in 2009 available until 2015.

From 2008, energy performance certificates will be introduced in the private rented sector for every home bought, sold and let in the UK. Those certificates will highlight to landlords and tenants the existing energy efficiency of properties, as well as suggesting affordable ways to improve them. Setting 2015 as the date strikes a good balance between giving landlords enough time to take advantage of the allowance and encouraging them to take steps to improve the energy efficiency of their properties as soon as possible. The extension of the allowance by six years gives them time to take full advantage of the extended allowance and to benefit from the information provided by energy performance certificates.

Secondly, the clause ensures that the LESA is available for expenditure on increasing the energy efficiency of communal areas within properties, providing an incentive to improve the energy efficiency of the whole building. We have already, through secondary legislation, made the allowance available for expenditure on floor insulation, changing the maximum annual deduction available from £1,500 per building to £1,500 per property. That means that for a landlord who owns and lets a block of 10 flats, the maximum deduction available per flat is increased from £150 to £1,500. I hope that the Committee has seen the draft of the regulations that we intend to lay afterthe Bill receives Royal Assent. They ensure that the maximum annual deduction of £1,500 will continue to operate correctly for expenditure on communal areas.

Let me respond to some of the points that have been raised in our brief debate. The hon. Member for Falmouth and Camborne asked a fair question about furnished holiday accommodation. We have thought carefully about that, and the evidence is that there is not the same market failure in the case of furnished holiday lettings that there is in the private rented sector more generally. For example, it is common for owners of furnished holiday accommodation to live in their properties for part of the year, so they will benefit directly from energy efficiency improvements.

In any case, the commercial letting of furnished holiday accommodation is treated more favourably for tax purposes from other rental businesses. That suggests that it would not be right to provide the LESA for furnished holiday accommodation. However, it is a fair point that we ought to keep under review arrangements to encourage the right level of energy efficiency in furnished holiday accommodation. If it is appropriate at some point to introduce fiscal incentives for that purpose, we will be open to doing so.

We expect the cost of the extensions to be up to£10 million per year. That is set out in table 1.2 of last week’s pre-Budget report documentation. The things that will count as energy-saving items in the regulations will be those that I have listed: floor insulation, loft insulation, cavity wall insulation, solid wall insulation, draught-proofing and hot water system insulation.

The hon. Member for Braintree asked why we did not make the incentive available for a dwelling under construction. The answer is that, as a result of recent changes, building regulations require new properties to be built to a high standard of energy efficiency. As a regulatory requirement already exists, making the LESA available would cost the taxpayer money but would not have a beneficial effect. The aim of the LESA is to target a market failure where there is no requirement, as in the case of existing privately rented properties, for energy efficiency measures to be taken.

Finally, the hon. Member for Braintree also asked why we needed separate regulations for income tax and corporation tax. It is because they are covered by two different Acts, so it is necessary for there to be two separate sets of regulations. Indeed, they will take effect on different dates. However, I can reassure him that the definition of energy saving items will be the same for both income tax and corporation tax. I hope that that will be of some comfort to him.

Clause 19

Paul Goodman (Conservative, Wycombe)

This clause covers relief for new zero-carbon homes and as you know, Mr. Gale, Friends of the Earth and the National Landlords Association do not always find cause to unite them, but this clause seems to have done the trick. Friends of the Earth said that it would affect

“a tiny number of new properties”,

while the National Landlords Association said that

“the impact of the tax break is likely to be relatively limited.”

Clearly, they agree on that. I am sure that both organisations, none the less, welcome the proposal, which we will not be opposing. However, their reaction suggests some useful lines of inquiry.

The clause empowers the Treasury to make regulations granting relief on zero-carbon homes, which may take the form of an exemption from charge or a reduction in the amount of tax chargeable. As the House of Commons Library points out—I went to the Library to see what it had to say—

“the budget report itself does not give an estimate, stating the Exchequer impact to be ‘negligible’. Item A.90 in the budget measures shows the cost as...less than £3 million a year”.

This is what the Red Book describes as a relief to

“kick-start the market for new highly efficient technologies in homes.”

The Library also says that

“at this stage it is difficult to estimate how many homes would qualify for the tax relief, and much will depend on the projected number of new homes that may be built during the qualifying period.. .at this stage there does not appear to be any reliable estimate or figure of the likely number of houses to be covered and how much this will cost the Government until 2012”.

That is the Library’s assessment.

So it is not at once apparent how this welcome but modest measure can accurately be described as “likely to kick-start” a market, or how exactly it will make a substantial contribution towards the Chancellor’s goal announced last weekend of five eco-towns, containing 100,000 carbon-neutral homes.

When I say “announced”, of course I mean“re-announced”, since that goal was first announced, according to my researches, by the Minister for Housing and Planning almost exactly a year ago, on 17 May 2006. [Hon. Members: “Hear, hear.”] I hear Government Members say “Hear, hear” but I was about to go on to remark that the process of passing this information on to the Economic Secretary, with whom I believe the Minister in question is acquainted, and then for him to pass the information on to the Chancellor, with whom he is also acquainted—though not, of course, in the same way—has taken the best part of the year.

When I say “re-announced”, I mean, of course,“re-announced and slightly modified”, since the Housing Minister’s original speech, as the Economic Secretary will know, referred to 120,000 homes, not 100,000, so there has been a net loss of 20,000 homes. When I say “re-announced”, I mean, “re-re-announced”, since the Government apparently announced that they would build seven new eco-communities, with 9,000 new homes 10 years ago, and have to date built only one in 10 of those homes.

A number of questions obviously follow. First, how many zero-carbon homes exist at present? The Chief Secretary told the shadow Chief Secretary, my hon. Friend the Member for Chipping Barnet, in the Chamber that the answer is “a very small number”. He was a bit more forthcoming on “Newsnight”, when he told Jeremy Paxman that the answer is

“I think a couple of dozen”.

I will spare the Committee the whole exchange, because it makes for painful reading. However, because it is obviously unsatisfactory for “Newsnight” to have the precise figure when the House does not have it, we are confident that the Chief Secretary will respond appropriately.

Secondly, what estimate has the Treasury made of the number of additional zero-carbon homes that it expects to be in place by 2012 as a result of this measure? Thirdly, what estimate has the Treasury made of the number of zero-carbon homes that it expects to qualify for this tax relief? What proportion does it expect to be exempted from charging altogether?

Fourthly, can the Minister give us an idea where these homes are expected to be built and which local authorities have expressed an interest in seeing them built? The Chief Secretary said on Second Reading:

“a development of zero-carbon homes is going forward at Gallions Park in my constituency.”—[Official Report, 23 April 2007; Vol. 459, c. 661.]

Can the Economic Secretary confirm that, as common sense would suggest, “going forward” means that planning permission for these homes has been given? Fifthly, what carbon saving does the Treasury expect as a result of the measure? Finally, does the estimate in the table contribute to the cost of the five eco-towns and 100,000 zero-carbon homes and where in the Red Book are those costs covered?

The clause gives rise to a number of more specific questions as its main effect is to give the Treasury the power to make regulations granting relief on zero-carbon homes. Picking up on an exchange on the last clause, I may be at fault but I am not aware of having seen the regulations that will offer a definition of zero-carbon homes, that may extend the relevant tax concessions beyond 2012, that may set up a process of certification under the home information pack regime which could affect take-up, and that may, although not necessarily, provide for relief to be withheld where a person acquires more than one zero-carbon home within a specified period. Obviously those are important regulations. If they have not been published, when will they be published?

Can the Economic Secretary tell the Committee whether the definition of zero-carbon home will include carbon emitted during construction or in the manufacture of building materials? What evidence on the carbon neutrality of their homes will people be required to provide and through what process will they do so? Above all, can he guarantee that the House will get the opportunity to debate the regulations which, by their nature, will be unamendable under the affirmative procedure?

Finally, may I offer some good news? Speaking of acquaintances of the Economic Secretary, the hon. Member for Morley and Rothwell (Colin Challen)—the future Lord Challen, as my colleagues insist on calling him—is on the case. I received from him only yesterday an invitation to a meeting entitled “Zero-carbon homes: how we can meet housing costs and protect the environment.” His letter begins: “Dear Helen Goodman”. I look forward to the Chief Secretary’s response.

Roger Gale (Conservative, North Thanet)

Before we proceed, I am slightly concerned by the hon. Gentleman’s remark that he has not had sight of the regulations. I was under the impression that copies had been mailed out to all members. My co-Chairman and I have received them. If they have not been made available, are they available on the table? If not, why not, and could all Members on both sides of the Committee have them as swiftly as possible?

Edward Balls (Labour, Normanton)

On a point of order, Mr. Gale. I told the hon. Gentleman at the end of last week that we would send him the draft regulations. As I understand it they were mailed out at the end of last week. If hon. Members have not received them, I apologise, but I had them mailed out at the end of last week.

Theresa Villiers (Conservative, Chipping Barnet)

Further to that point of order, Mr. Gale. I was sent a copy of the letter that was sent to you, which I received this morning. I understand that my office was forwarding it on to my hon. Friend. The error may lie with me rather than the Minister. If so, I apologise.

Roger Gale (Conservative, North Thanet)

I will respond to the points of order. It would appear that my co-Chairman and I have received the documents. While I am grateful for them, I am concerned that they do not appear to have been made available to all hon. Members. Perhaps the Minister could ask his officials if they would be kind enough to run off copies immediately and have them distributed to all members of the Committee, so that everyone on both sides has the same information as I have before me.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

The regulations may have arrived with my mail this morning, but it had not been processed by the time I arrived here today. They may be sitting in my in-tray, but I have not had a chance to look at them yet. In any event, there was hardly a huge amount of time to scrutinise them before the debate.

As the hon. Member for Wycombe said, we do not know what impact clause 19 will have on Treasury revenues. My key concern is that although it will provide a demand-side incentive for people to purchase new zero-carbon homes, there will not be a similar incentive for builders to build them. That lack of symmetry may mean that demand will not be met, thus there will be no opportunity to take advantage of the tax incentive.

Given that the announcement was made in the pre-Budget report, I wonder if there have been any applications since then for zero-carbon homes. Proposed new section 58B(5) states:

“The relief may take the form of—

(a) exemption from charge, or

(b) a reduction in the amount of tax chargeable.”

Do I take it that it depends on the price of the property—that if it is above the £500,000 threshold it will result in a reduction, but if it is below that threshold it will result in an exemption? Exactly how will the measure operate? Will the Economic Secretary explain why it should apply only to the first time that the new building is sold? Why are not the Government extending it to future sales, as that will clearly have an impact on the price?

I mentioned regulations, but my concerns revolve around the impact that the proposal will have on affordable housing. A couple of years ago, there was a high-profile demonstration in my constituency of a zero-carbon house, a BedZED property, that could be built for less than £70,000, which still puts it out of reach for people on an average household income, which in my constituency is just below £20,000 a year. The £70,000 is just the price of the property; the key expense will be the plot of land. What impact does the Economic Secretary think the measure will have on the entire price scale, not just on the most expensive properties? People who want to buy new, affordable housing will still find it very difficult to buy a zero-carbon home.

What impact will the measure have on social housing stock? It would be excellent if new social housing could be built on a zero-carbon basis. The fundamental problem is that the proposal will apply only to new properties when, as the Chief Secretary said earlier, one third of all emissions from the UK are from the housing stock. How does that break down between projected new housing stock and existing housing stock? Three quarters of the stock that is standing today will still be standing in 2050, and on that basis the key target must be existing stock, not least because that is where fuel poverty, for example, is at its worst.

In my constituency, there is very poor, usually very old, housing stock, a high incidence of fuel poverty and a poor take-up of the Warm Front scheme, not least because there are no installers anywhere in the county of Cornwall. That deprived group of people cannot access the environmental benefits of the clause or take advantage of provisions that would have an impact on their pockets and save them money. The problem is that those people, whether they are in rented or privately owned housing stock, will not be in a position to benefit from the proposal.

There is great innovation out there, but I am worried that the measure is a very limited way of stimulating increased development. In my constituency there is a hot rocks project—technologies investigating making use of disused mines as a way of cutting down on heating costs. Carrick Housing is being innovative in retrofitting those technologies to its existing social housing stock. The proposed incentive sits outside that framework, however. What plans are there for incentives not only for people looking to buy new houses, but for developers and builders? Ultimately, if using more energy-efficient materials increases costs, the builder who uses them faces increased risk. What plans do the Government have to tackle the inherent inefficiencies in the existing housing stock?

Roger Gale (Conservative, North Thanet)

Before we proceed, I confirm that I am arranging to have the relevant document printed and circulated, within the timescale of the debate, I hope.

Edward Balls (Labour, Normanton)

On a point of order, Mr. Gale. In Committee last Thursday, I said to the hon. Member for Wycombe that I, rather than the Chief Secretary, would respond for the Government on these clauses, and that I would ensure that the regulations were circulated in draft. I cleared them on Thursday. I understand that they went from our office to the shadow Chief Secretary, the hon. Member for Chipping Barnet, in the normal way on Friday. I should have endeavoured to ensure that they got to the hon. Member for Wycombe directly as well, so I appreciate the generosity of the shadow Chief Secretary. If we were remiss, I apologise.

I shall re-examine the procedural point that the hon. Member for Wycombe made. This is an important part of the Bill, which creates a regulation-making power on which we will consult. In that light, and given that we intend to conclude the consultation by July and publish a further set of regulations, I would be happy—subject to agreement from the business managers—if we could deal with the regulations under the affirmative, rather than the negative, procedure, to ensure that the House has a further opportunity to scrutinise the detail of the regulations before they come into effect.

For the purposes of today’s debate, it would be good to have the regulations in front of us. Some of us have them and some do not. I hope that there will be an opportunity for the House to debate the regulations further in due course, to satisfy the Committee that we are treating this issue with the seriousness it deserves.

Roger Gale (Conservative, North Thanet)

That is not strictly a point of order for me. As the Economic Secretary said, it is a matter for discussion by the business managers of the Government and the Opposition. I am sure that the Committee appreciates the courtesy of the Economic Secretary’s statement and will find his remarks helpful.

Brooks Newmark (Conservative, Braintree)

In an attempt to give the Clerks time to print off whatever documents are necessary, I have a number of points to make.

Roger Gale (Conservative, North Thanet)

Order. I am sure that the hon. Gentleman’s remarks will be in order; I would hate to think that he was proposing a filibuster.

Brooks Newmark (Conservative, Braintree)

My points are always in order and relevant, Mr. Gale.

Roger Gale (Conservative, North Thanet)

I shall be the judge of that.

Brooks Newmark (Conservative, Braintree)

I welcome the initiative in the light of the 27 per cent. of the UK’s greenhouse gas emissions, or 40 million tonnes a year, that are attributable to households. I am concerned that from the outset there is a limited window of opportunity—five years—attached to the scheme, however. As a business man, I point out that the technology required to approach the standard of a true zero-carbon home will require significant capital investment from developers to reduce the high unit cost of microgeneration technology.

If the Treasury is committed to achieving a culture of change within the building industry, which I wholly support, it is unhelpful that these provisions will be curtailed in 2012. I do not think that proposed new section 58B(7), which mentions the possibility that the Treasury will extend its largesse, will be reassuring to the building industry when looking at long-term investment decisions. The Chancellor’s record shows too many examples of initiatives that are cancelled once they have begun to become effective—the home computing initiative springs to mind.

The rationale seems to be that stamp duty relief will act as a catalyst for change, after which it can be reassessed and presumably quietly scrapped. However, a five-year window for that process to occur is almost hopelessly optimistic; just how optimistic is shown by the fact that the zero-carbon home is not so much an endangered species as a mythical beast. Although the Chief Secretary says that some zero-carbon homes have now popped up in his constituency, they are hardly widespread. My point is that, even if developers make the decision to develop zero-carbon homes, there will be such a long lead time that the relief will have expired before such homes begin to appear in meaningful numbers.

Paul Goodman (Conservative, Wycombe)

What the Chief Secretary said was that a development of zero-carbon homes is “going forward” at Gallions Park in his constituency. Is my hon. Friend entirely clear—I am not—about what “going forward” means?

Brooks Newmark (Conservative, Braintree)

I am not sure if the Chief Secretary is talking about a new eco-friendly mobile home; perhaps he has the Foreign Secretary in mind.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

If I could broaden the debate for a moment, the hon. Gentleman was talking about lead times. Is it not the case that, for individual planning applications, it may well be possible to go ahead and submit a planning application for a very small development? The problem is that there are very large developments on the cards for the coming years which are exactly the type of developments that need to be zero-carbon, but they will probably not go ahead on that basis.

Brooks Newmark (Conservative, Braintree)

The hon. Lady makes a good point in support of my argument, and I thank her. As I said, my point is that, even if developers make the decision to develop zero-carbon homes, there will be such long lead times that the relief will have expired before such homes start to appear in meaningful numbers.

Aberdeen-based developers the Stuart Milne group have already unveiled a prototype for a low-carbon home. The prototype includes microgeneration technology, such as solar panels and wind turbines, together with reuse of grey water and so on. However, it is telling that the plans still fall short of the desired six-star zero-carbon rating. Quite simply, it will take time to reach the required standard and to roll out both the technology and best practice across the industry. The managing director of the Stuart Milne group had this to say:

“The single biggest impact on our business will be climate change and we felt we should take an industry lead by building a commercially viable house that reflected the Government’s objective to achieve zero carbon houses within a decade.”

However, the key remains that the project must be commercially viable. It is no good making such projects commercially viable for five years, then pulling the rug from under the developers just when they are beginning to catch on.

I have one further point to make on the envisaged time scale. As we have all heard, the Chancellor has recently announced the construction of 100,000 new eco-homes that will meet the zero-carbon standard. Perhaps we should welcome the prospect that 100,000 new home owners will be able to buy homes that benefit from clause 19, but precedent suggests that it will take far longer than five years to deliver those homes. The last time that this policy was launched was 10 years ago, as we heard from my hon. Friend the Member for Wycombe. Then, there were high expectations of the Government. Now, we know better.

Some £130 million has been spent on the seven millennium communities, delivering homes to the excellence standard. I was amused to see—perhaps this is what my hon. Friend was alluding to—that one of the seven communities, which is in east Manchester, was in true new Labour fashion named New Islington. It is a wonder that the Chancellor did not go the whole hog and call it New Jerusalem, but I hope that he can at least name a street after the Granita. The fact remains that after 10 years the homes have not been delivered, so the idea that a large number of homes will be built in time to take advantage of clause 19 is, once again, optimistic.

We have a zero-carbon standard that many people think is unattainable, we have a very limited window of opportunity to take advantage of tax relief, and we have a Government with a strong track record of scrapping tax reliefs that are actually used. If the Chancellor’s 100,000 houses were to go on the market at an average price of £200,000 each, the Treasury would forgo £200 million in stamp duty. In contrast—I note that paragraph A2.10 on page 230 of the Red Book predicts that “The Exchequer cost” of clause 19

“is expected to rise to around £15 million by 2011-12.”

I know that the Chancellor is strong on mathematics, but that is an anticipated uptake of only 7,500 carbon-free homes by 2012. Even if the Chief Secretary cannot answer the question asked by my hon. Friend the Member for Wycombe, I hope that I have.

Adam Afriyie (Conservative, Windsor)

I have now had the pleasure, or the disappointment, of reading the Stamp Duty Land Tax (Zero-Carbon Homes Relief) Regulations 2007, and it is interesting to note that, under regulation 14(4), the amount of tax chargeable will be reduced by £15,000, which would mean that the £15 million going to the Exchequer would represent only 1,000 homes.

Brooks Newmark (Conservative, Braintree)

I am sure that my hon. Friend, in true fashion, makes an even more conservative analysis of the numbers than I have, but I was trying to be generous to the Government in my analysis.

To put it another way, if the Treasury’s projections of revenue impact are not underestimated, it would take roughly 13 years to build the Chancellor’s 100,000 eco-homes alone. In Second Reading, the Chief Secretary was unable to tell my hon. Friend the Member for Buckingham (John Bercow) how much clause 19 would cost each year. Perhaps now that he has had time to reflect and do his homework he can tell us the answer.

Wayne David (Labour, Caerphilly)

The hon. Gentleman has talked eloquently and at length about these new homes, but does he anticipate Conservative local authorities supporting these new homes?

Brooks Newmark (Conservative, Braintree)

A mere Back Bencher, I am not here to make Conservative policy on the hoof. However, I know that my own council in Braintree is incredibly innovative when it comes to the use of innovative financing and support for eco-friendly homes.

I want to conclude with a plea to the Government for a commitment that clause 19 will become a valued tool to effect a long-term culture change in the construction industry and not just another short-term gimmick.

Philip Dunne (Conservative, Ludlow)

Like my hon. Friend, I support the construction of energy-efficient housing and the Government’s objective in that respect. To help out in response to the intervention from the hon. Member for Caerphilly, there are a number of projects around the country, including in my south Shropshire constituency, where imaginative, creative construction engineers are coming up with projects to develop energy-efficient homes. They are not necessarily all new homes. Many of them include energy efficiency measures for existing homes that we discussed under earlier clauses.

That brings me to the point of my contribution to this part of the debate. The title of the clause that we are considering is not only misleading but a misnomer. As my hon. Friend the Member for Wycombe mentioned, the measure defines zero-carbon homes in terms of energy efficiency in ongoing maintenance and running costs once the property has been constructed. Nothing in the definition in the Bill or in the draft statutory instrument covers the construction costs of such homes. They are not, therefore, zero-carbon, but they are energy efficient going forward. It is unfortunate that the Government have chosen to cloak the clause in green credentials by claiming for it something that it will not actually deliver.

A much more effective means of encouraging energy efficiency than the intended relief from stamp duty would be the introduction of a zero rate of VAT on energy efficiency measures. What work was done by the Treasury to compare the cost of the measure before us and the cost of introduction a zero rate of VAT? That would seem to be a much more effective way of kick-starting the development of such properties, which is the Government’s objective.

In the Red Book, paragraph 7.70 on page 183 includes a reminder of the Government’s ambition

“to ensure that, within a decade, all new homes will be zero carbon.”

That is a very ambitious objective. The proposed measure will go only a modest way towards achieving it—such a modest way, in fact, that I have been unable to find out from the analysis of policy decisions what revenue impact it will have. There is no line setting out the impact of zero-carbon homes on Government revenues this year, next year or the following year. By their own admission, the Government anticipate that this will be a puny measure and will contribute little to the achievement of their objective.

It is no surprise to those who have studied Government measures for energy efficiency and VAT that a zero rate has not been introduced. Only last year, the Government decided to apply VAT to grants given by the Energy Saving Trust, which advises households on energy efficiency. Its chairman told the BBC last July:

“We collect about £25m that we spend on energy efficiency measures and reducing carbon, and we will now take about £5m of those and return it back to the Treasury'”.

So the Government are using energy efficiency measures as a revenue-raising mechanism rather than to encourage increased energy efficiency. This measure smacks of green gestures rather than of a genuine commitment to greater energy efficiency in housing construction.

Adam Afriyie (Conservative, Windsor)

I was not intending to speak to this clause, so I shall be brief. I was stunned when I looked a few moments ago through the regulations that have just arrived in front of us. Thank you for ensuring their swift delivery, Mr. Gale.

Since 1997, carbon emissions have risen, green taxes have fallen as a percentage of overall tax take, and the Chancellor has missed his target on renewable energy. The question to which all that gives rise is: why should we have confidence in this new measure, which has suddenly—miraculously—appeared in the Finance Bill, almost as a knee-jerk reaction to pressure from other parties?

My hon. Friend the Member for Braintree mentioned the figure of £15 million, which appears on page 230 of the Red Book in paragraph A2.10. That says:

“The Exchequer cost is expected to rise to around £15 million by 2011-12.”

Although I might be misreading the regulations because I have looked at them so quickly, it is clear that paragraph 14(3) on linked transactions including the first acquisition of a zero-carbon home says:

“The amount of tax chargeable shall be reduced by £15,000 in respect of each first acquisition of a zero-carbon home”.

From a quick calculation, it appears that the Government are allowing for only 1,000 homes to be sold under this regime. Where do the 100,000 zero-carbon homes fit in? Where is the incentive to kick-start the market? How many zero-carbon homes are expected to be built as a result of this measure? It is trumpeted as being a wonderful thing, but as soon as one looks at the detail, it appears almost trivial and irrelevant.

Finally could the Economic Secretary give us one or two tangible reasons why we should have confidence in the measure, given that the regulations seem to be working against the picture that the Government try to paint and we do not even know at the moment whether a single zero-carbon home exists?

David Gauke (Conservative, South West Hertfordshire)

I think it would be fair to summarise the Opposition’s contributions as welcoming the principle behind the clause while expressing concern that its provisions may not be used very frequently. We can examine whether one or two developments might come under the clause, given the time frame. Unless it is extended, the provisions of the clause will come to an end on 30 September 2012.

The first and most obvious example of a potential development was referred to by a number of hon. Members, including my hon. Friend the Member for Wycombe, namely the proposals made by the Chancellor over the weekend for five new eco-towns, each consisting of 20,000 homes. My hon. Friend described that as a re-announcement and he may be correct, but let me for the moment assume that it is an exciting, new and wholly original proposal. If so, the time frame—less than five and a half years—is, as my hon. Friend the Member for Braintree pointed out, a somewhat short period in which to benefit from the proposals in the clause. Will there be time? If there is time, it suggests that sites have already been identified. Perhaps there has been some consultation with local authorities already. Perhaps local authorities will not have a role within this area and planning will be done at a central or regional level.

I would be grateful to know what stage these proposals have reached. Perhaps, to be fair, they rely on the work undertaken by the Minister for Housing and Planning. May I say how pleased I am to see the spouse of a member of this Committee feature in our deliberations, particularly when it is someone else’s spouse?

Edward Balls (Labour, Normanton)

But don’t call her Mrs. Balls.

David Gauke (Conservative, South West Hertfordshire)

I am well aware of that.

My hon. Friend the Member for Wycombe referred to the announcement made in May 2006. Perhaps I can focus on two other announcements made by the Minister for Housing and Planning. In October 2006, she announced 45 new developments as part of the new growth points programme. She described it as

“a significant opportunity for the new communities to become exemplars of sustainability by pioneering eco-development and encapsulating high design standards in parallel with meeting the housing needs of local communities.”

Perhaps that work might be useful in assisting the Chancellor in his exciting, new and wholly original proposals that he announced at the weekend. Perhaps even more relevant would be the announcement made in March this year about new towns. As the Minister said:

“Now is the time for us to look at new eco-towns”.

As a £2 million fund was also announced for the purposes of these new eco-towns in March, will the Chancellor be making use of that fund for his new proposals?

The appointment of David Lock, chair of the Town and Country Planning Association, was also announced; he will report to the Government on further developing the criteria for eco-towns. Will Professor Lock’s report be used for the Chancellor’s new proposals? If the£2 million fund and Professor Lock’s report will indeed be used for those purposes, it may well increase the chance of those five new eco-towns being developed before October 2012, but it might bring into question just how poor the original proposals were.

My hon. Friend the Member for Braintree alluded to an important point, which is that the Treasury tends to propose exemptions in order to encourage particular behaviour. However, if that behaviour is actually carried out on a much greater scale, that exemption and encouragement tends to be withdrawn. The home computing initiative to which my hon. Friend referred was a good example.

We know that, within the provisions of the clause, the Treasury has the opportunity to extend the stamp duty land tax relief available for zero-carbon homes. Does the Economic Secretary have any criteria in mind that might be used in deciding whether to do so? Given that, by 2016, as we have heard, all new homes are supposed to be zero-carbon, if there are, in fact, many developments by 2012 would it indicate to the Treasury that the relief is successful and should therefore be continued, or would it then constitute too great a cost to the Exchequer and be withdrawn? Conversely, if it is little used—and, as my hon. Friend the Member for Windsor pointed out, there are such indications—would that be an argument for abandoning the relief, because it proves to be useless, or for maintaining it? I am conscious that the Economic Secretary cannot bind his successors and that, by the time that we come to make this decision, I shall perhaps be referring my questions to those sitting on my Front Bench rather than to this Government. None the less, I should be grateful for an indication of what the criteria will be.

Finally, as this relief will apply only to properties of less than £500,000, if house prices continue to grow substantially in the years ahead, a home of £500,000 might not be that exceptional by 2012. Indeed, in some parts of the south-east of England, it is already not that exceptional a price. Would the Government then look at reviewing the figure of £500,000, as that may preclude a lot of new properties by 2012?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I am very grateful to you, Mr. Gale, for ensuring that all Committee members have been provided with drafts of the regulations and for giving me the opportunity to speak again. Looking through the draft regulations conjured up concerns borne out of my experience from working as a regeneration officer for Carrick district council before being elected to Parliament. The area of my work was in helping small businesses to access objective 1 funds, and part of the funding available was for work and business space. Because there was a real shortage of business space in Cornwall, it was one of the few areas where private developers could access objective 1 funds. Because there was such demand, tight environmental standards were set for the buildings, so only those applications with the highest environmental standards went forward.

Two things arose from that. First, concerns arose from the fact that the goalposts kept moving, which echoes the concerns of other Members about how people can have confidence that the scheme will not be withdrawn or that higher standards will be set. The moving goalposts undermined confidence in that scheme. Secondly, there was a total lack of capacity to assess the environmental standards that had been set. Even for those projects that were entirely compliant with all the restrictions that had been specified by the objective 1 partnership, it was impossible to find someone in the whole of the south-west region—not just in Cornwall—who was qualified to say whether the criteria had been met.

The concern here is that an accredited assessor will be appointed, but it is not clear from these regulations whether all members of the accreditation scheme for the energy performance and buildings regulations will be eligible to assess whether a home is a zero-carbon home. I suspect that the experience will be the same as mine when I worked for the Carrick regeneration team. Particular people will be specifically qualified to comment on whether a property is zero-carbon, but it is difficult to find such people and, in practice, it could prove impossible.

I would appreciate the Economic Secretary’s comments on how many people he thinks will be accredited, and what the spread will be across the country. My concern is that it will end up being impossible to accredit anyone and that we will encounter exactly the same problems that came up during my experience working for the Carrick regeneration team. I therefore urge him to hold a conversation with the objective 1 partnership office in Cornwall to discuss the problems that it encountered and to find some practical solution. If he does not, the regulations may encounter problems in terms of delivery.

Edward Balls (Labour, Normanton)

Thank you, Mr. Gale, for your generosity in dealing earlier with the points of order. It is a privilege to serve under your chairmanship for the first time in a Finance Bill, and I hope that we will be able to continue to have such a co-operative relationship as we move towards the “thank yous”? As I said in my point of order, to the extent that an error was made on my part, I apologise in particular to the hon. Member for Wycombe, with whom I had a direct conversation.

The comments just made by the hon. Member for Falmouth and Camborne, which drew on her own experience, show that it would be desirable to debate the regulations under the affirmative procedure if that can be done. In the policy area in which I have been active in the Treasury, I always welcome the use of the affirmative procedure. When important areas of policy are taken forward, it is right that there should be an opportunity to discuss the detail in the House. I think that sensible Ministers welcome such opportunities. In this case, both because of the problem that we have had this morning but because of the importance of the issues, that would be desirable. I should also say—I shall some back to this in a moment—that these are genuinely draft regulations for consultation.

The consultation process over the next few months will be conducted properly. There may well be changes, as an opportunity to revisit some of the issues would be welcome if that could be achieved. I also think that a debate would provide a welcome opportunity for Conservative members to have a further chance to debate these matters. So far, I have felt a sense of confusion among Conservative Members about the measure. I cannot work out whether they think that it is a good thing, or a bad thing; whether they think that it is insufficiently generous or far too demanding; and whether they believe that the objective of zero-carbon homes is beyond reach or whether the measures are insufficient to the task.

I have also noted the regular tendency of Conservative Members, when talking about the environment, to return to questions of presentation. When an announcement is made and if we are to take forward an agenda on the environment or housing, the important thing is to get beyond the presentation and start talking about the substance. That is what the regulations are about.

The problem with matters of substance is that, when it comes to housing and the building of new houses for first-time buyers, Conservative Members have been consistent in their local opposition to building new houses. When it comes to the measures that we have taken forward since 1997 on the environment, such as the climate change levy, Conservative Members have been consistent in their opposition to taking forward concrete action on the environment. It would be my guess that over the next two years, there will be an increasing debate, not simply about presentation but about substance. Labour Members will relish those debates, because the more we focus on substance, the more people will see that it is this party that produces concrete proposals that deliver for hard-working families. For all their spin and bluster, Opposition Members consistently oppose measures to take forward policies for hard-working families.

The clause, which deals with exemption from stamp duty and land tax for new zero-carbon homes, will take effect from 1 October 2007. It will kick-start the technologies and techniques needed to build zero-carbon homes to meet our ambition that from 2016 all new homes should meet the zero-carbon standard and make no net contribution to carbon emissions. As hon. Members have noted, that has been a subject of much debate lately. The issue has been with me day and night in recent days—

Mark Hoban (Conservative, Fareham)

Months.

Edward Balls (Labour, Normanton)

And months. As Opposition Members point out, to take an idea, to build support not only in Parliament but among voluntary organisations and house builders, to discuss it with local authorities and the wider public, and to persuade what looks likely to be the next Prime Minister to back it in public is the process of policy-making that delivers hard outcomes. That is what has been going on over the past year. I cannot work out whether Opposition Members support the proposal or oppose it, or whether they are just confused. When people read the Hansard report, they will conclude—

David Gauke (Conservative, South West Hertfordshire)

The Economic Secretary places great significance on being able to persuade the next Prime Minister to back a proposal that was publicly made under the present Prime Minister. Is the hon. Gentleman therefore saying that until the Chancellor publicly backs announcements that were made under the previous Prime Minister, we cannot necessarily assume that the Chancellor supports them?

Edward Balls (Labour, Normanton)

As I said, a notable feature of the debate is that one listens hard but ends up being very confused by the contributions of Opposition Members. The Chancellor of the Exchequer announced in the Budget a tax measure to back our zero-carbon homes plans, so he has clearly been backing the proposal for some time. It was prefigured in the pre-Budget report.

My point is that when the putative Prime Minister backs a measure on the campaign trail it increases the substance and salience of the issue. Over the next two years there will be two potential Prime Ministers—one in office, and the Leader of the Opposition. Debates of substance on these issues will be very much welcomed on the Labour Benches.

Theresa Villiers (Conservative, Chipping Barnet)

The Economic Secretary is very focused on concrete outcomes, but so far the concrete outcome of the measure is that the Government cannot tell us that there are any zero-carbon homes at all.

Edward Balls (Labour, Normanton)

I was expecting you to allow your indulgence to be stretched only so far, Mr. Gale, to encourage us to get back to the substance of the debate.

Roger Gale (Conservative, North Thanet)

Order. The hon. Gentleman is very impressive; he has hit the nail exactly on the head.

Edward Balls (Labour, Normanton)

Encouraged by your good self, Mr. Gale, and by the hon. Lady, I shall continue. I am happy to respond in detail to the questions asked by the hon. Member for Wycombe and others.

I shall briefly put the proposal in context. We set ourselves a target to reduce overall carbon emissions in the UK by 60 per cent. from 1990 levels by 2050. More than 25 per cent. of all carbon emissions in the UK result from energy use in the home. In 2050, about one third of all homes will have been built after 2016. If we can ensure that all homes built after 2016 are zero carbon and that they will make no net carbon emissions, it will make a very significant contribution towards the 2050 objectives. In answer to a question asked by Opposition Members, if all new homes were zero carbon by 2016 the annual carbon saving would be 8 million tonnes a year, amounting to 90 million tonnes saved by 2050, which is a substantial potential contribution to meeting our environmental challenge.

I encourage Opposition Members, particularly the hon. Member for Ludlow, to be more confident and ambitious in backing our objective for zero-carbon homes, rather than starting from a position of scepticism and conservatism. Our ambition to have zero-carbon homes from 2016 is bold and radical, but I believe that it is deliverable and I shall explain why.

In recent years, we have used building regulations to improve the energy efficiency of new homes. Changes to the building regulations in 2006 achieved a 40 per cent. improvement on pre-2002 standards, and a 70 per cent. improvement on pre-1990 standards in the efficiency of new homes. However, this Government want to go further. In part, we will do that through regulations that require that by 2016 new build houses will meet the zero-carbon standard. As the hon. Gentleman knows—this is outside the scope of the Committee, but relevant to the debate—a consultation process on building regulations and the definition of zero-carbon homes is under way, led by the Department for Communities and Local Government.

Guidance on six different levels of sustainability has been issued to help the industry. The strategy of the DCLG is to build the regulations up over time toward the level that will ensure the building of zero-carbon homes. Building regulations will play an important part in our achieving our objective. We will also, as we heard in the announcements that were made at the weekend, depend on local leadership. The Government’s objective is not to impose new planning requirements or new eco-towns on local communities but to encourage proposals for eco-towns to be made locally.

I urge hon. Members on both sides of the House to back such proposals rather than to be sceptical about them. It is crucial to build a cross-party consensus in our country on the importance of building sustainable homes. I am continually frustrated that, for all the talk, Opposition Members all too often appear to stand in the way of such developments. The right way forward is not to impose from the centre but to encourage local leadership. That is our objective in the eco-towns proposal.

Paul Goodman (Conservative, Wycombe)

On the subject of frustration, I am waiting for the Economic Secretary to answer some of the questions that were asked. For example, given that he was able a few moments ago to give us a figure for carbon savings, surely he can tell us how many zero-carbon homes the Treasury estimates will be built as a result of this measure. What is the answer?

Edward Balls (Labour, Normanton)

The hon. Gentleman will have to hold back his impatience and wait for me to answer his question. I said that I would do so and I meant what I said, so I will—in due course and in my own time.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I am pleased to hear the Economic Secretary speaking about the need for local leadership. However, I do not understand how he can square that with the position that the Government took on the Local Planning Authorities (Energy and Energy Efficiency) Bill—the private Member’s Bill that came after Second Reading of the Sustainable Communities Bill—which specifically allows local authorities to set higher environmental standards when giving planning permission for properties. Why did the Government take that position and how does he resolve the contradiction?

Edward Balls (Labour, Normanton)

That point goes well outside the responsibility of the Treasury or the scope of this Committee. However, a consultation is under way on building regulations for interim steps to improve standards between 2010 and 2013, before we go to full zero-carbon homes by 2016. The Government have launched the code for sustainable homes in England as a voluntary standard. It will allocate a star rating from one to six for new homes by assessing their overall sustainability and setting out aspirations for new build housing. Progress is being made.

It is important that we make progress on social housing, too. We have announced that the minimum requirement on all homes built with social housing grant or on English Partnerships-developed land will be to meet code level three. That is a 25 per cent. improvement on current building regulations for energy performance. Obviously, we want to go further in that area, too. The lead on that, however, will be taken by the Minister for Housing and Planning rather than by me. My role is to talk about the tax measure that we are introducing today, which I shall turn to now.

The clause amends the stamp duty land tax legislation in the Finance Act 2003 by inserting new sections to deal with relief or exemption for the first sale of new zero-carbon homes. They will enable the Government to make regulations to define zero-carbon homes, to quantify the amount of relief or exemption and to deal with administrative matters. The regulations will cease to have effect at the end of a five-year period, on 30 September 2012, unless we decide to extend that relief further. In the Budget, we said that we will review the effectiveness of the relief before the end of that period to see whether it should be extended. We will make that decision in the light of the circumstances at the time and the effectiveness and cost of the measure.

To the hon. Member for South-West Hertfordshire, I say that we will use a range of criteria to assess the measure. If it turns out that the objective has already been reached by the time of the assessment and every home is zero-carbon, that might suggest that we do not need to continue with the measure. If, as I anticipate, developments are proceeding apace but there is still further to go, it might be right to extend the relief, subject to cost considerations, which the Chancellor of the day will have to consider carefully. In this area, it is sensible to make policy by setting out regulations for five years, to assess performance along the way and to give a clear, public signal of our future intentions well in advance of the end of that five-year period. That is what we will do.

Adam Afriyie (Conservative, Windsor)

From my business background, and given how long it takes to build properties, it seems to me that putting a short time limit on the tax relief sends a signal that the Government are uncertain whether the relief will continue. What confidence does that inspire in builders, who have to invest hundreds of millions of pounds developing new homes? It sends no confidence signal at all.

Edward Balls (Labour, Normanton)

I have great respect for the hon. Gentleman’s business background. Let me quote from Stewart Baseley, the executive chairman of the Home Builders Federation:

“We welcome this package of measures in setting both the goal and direction for achieving more and greener homes. Progress will be achieved most effectively through a framework in which Government sets clear objectives, industry is given the space to deliver and consumers are on board.”

That is exactly what we will achieve with these measures. Dave Hill, a developer in Upton, Northampton, said:

“The costs of making a conventional home into a zero-carbon home aren’t as bad as I thought. It gives me confidence that, in 10 years’ time, we will be building them for the mass market.”

Hon. Members do not have to take my word; they can take the word of the business men who made those contributions.

Brooks Newmark (Conservative, Braintree)

Will the Economic Secretary give way?

Edward Balls (Labour, Normanton)

I want to make a bit more progress, then I shall take the intervention.

The regulations that we set out are in draft. For reasons of good policy making and wider politics, we welcome the opportunity to have a further debate if the business managers allow. We genuinely intend to consult on the regulations. The Department for Communities and Local Government is currently consulting on the definition of zero-carbon homes by 2016, which is part of the reason why our approach must be consultative. Our regulations are running in parallel, and it desirable that those consultations end up with aligned definitions. That is our hope and expectation. The regulations will therefore have to be considered in the light of those wider consultations.

The first exemption will be complete for all new homes priced at less than £500,000; purchases above that level will benefit by £15,000. Stamp duty land tax will be paid only on the balance, which is equivalent to stamp duty at £500,000. The regulations set out a technical definition of a zero-carbon home, but that is in draft and for consultation.

As the hon. Member for Falmouth and Camborne said, the regulations provide for operational matters, particularly certification. Stamp duty is a one-off tax, so it is important to ensure that the certification is robust and protects us against avoidance when we levy it, and that is partly why we need to ensure that we get the consultation right. Finally, the regulations also contain rules about microgeneration and dealing with linked transactions.

Let me now turn to the questions that hon. Members put to me. The first relates to current developments and costing, which I am happy to discuss. There is much discussion of the Gallions Park development in the Chief Secretary’s constituency, and that development is moving forwards, not backwards.

Mr. Goodman rose—

Edward Balls (Labour, Normanton)

Shall I make the point first, or does the hon. Gentleman want to intervene before I do so?

Paul Goodman (Conservative, Wycombe)

I would like to intervene first. The Economic Secretary says that things are moving forward, but will he clarify whether that means that planning permission has been given?

Edward Balls (Labour, Normanton)

The hon. Gentleman has intervened to make exactly the same point that he made in his speech. Given that it is the same, I will answer both his speech and his intervention now. The London Development Agency has earmarked the site for the development of a zero—[Hon. Members: “Ah!”] Ah? The agency has earmarked the site for the development of a zero-carbon house—[Hon. Members: “A house?”] Sorry, homes. A developer has been announced since the pre-Budget report, and the GLA has appointed an approved contractor. The development is within GLA guidelines, as the hon. Gentleman knows. In due course, under the present process, planning permission will be considered. Has planning permission been granted at this stage? As I understand it, it has not. The reason is that the development is going through the planning process. That is what happens when we build houses: we go through a planning process, and that is what is going on with that development.

There is also a development on surplus public land at Northstowe in Cambridgeshire, which is intended to be an exemplar growth-area development. The development aims to be low carbon, but I do not believe that it is intended to be zero carbon at this stage.

As I explained earlier, the ambition is to move towards all homes being zero carbon by 2016. The starting point today is that few or no homes are zero carbon. We have set out to achieve our objective by 2016 and we believe that it can be achieved by steadily building up building regulations and using a tax incentive to encourage developers to take the necessary steps. That objective can be achieved by 2016, but it is not being achieved today. We are taking the proposed steps so that we can save a further 8 million tonnes by 2016.

There are few or no zero-carbon homes today. As the Chief Secretary said on the Floor of the House, there is intended to be a development in his constituency and there are small demonstration projects around the country. However, we are starting with no or few zero-carbon homes and we intend to get to the point where 200,000 such homes are built each year by 2016—that is the ambition. When hon. Members say that there are no zero-carbon homes today and say “Ah!”, they are right, which is why we are introducing a policy of regulations and tax incentives to achieve our objective. Opposition Members were very sceptical about whether our objective is deliverable, and I understand that, but I disagree. By taking the right action, we can deliver on our objective of moving from zero homes to 200,000 over the next eight years.

Mark Francois (Conservative, Rayleigh)

Let us return to Gallions Park as an example of the process that is under way. If I heard the Economic Secretary correctly, he said that planning permission had not yet been granted for zero-carbon homes at that location. However, he implied, although did not state, that a planning application had been submitted. If so, it would have to specify how many zero-carbon homes were proposed. Will he confirm whether a planning application has been submitted for zero-carbon homes at Gallions Park and, if so, how many are to be zero carbon?

Edward Balls (Labour, Normanton)

It would be inappropriate in a Finance Bill debate for a Minister to set out the details of a particular planning application, or to give indications of its contents—[Interruption.]

Roger Gale (Conservative, North Thanet)

Order.

Edward Balls (Labour, Normanton)

As for its content or its chances of success, the question was raised with me, and I said that as I understand it, the proposal is going through the planning process but a decision on its acceptability or otherwise has not been made. That decision would never, in any event, be made by a Treasury Minister, so it would be inappropriate of me to comment.

Mark Francois (Conservative, Rayleigh)

Will the Economic Secretary give way?

Edward Balls (Labour, Normanton)

I shall finish the point first. The development intends to deliver zero-carbon homes—that is its objective, as I understand it. I also said that the proposal is within GLA guidelines and a contractor has been approved. It is a good job that it is in a constituency that has a Labour Member of Parliament. I fear that if it had had an Opposition Member of Parliament, there would have been local objections on the hon. Gentleman’s website.

Mark Francois (Conservative, Rayleigh)

This doctrine that the Economic Secretary has developed that Members of Parliament and Ministers do not comment on planning applications is a revelation to me. The Secretary of State for Communities and Local Government has a great history of commenting on planning applications—usually to object to them in her own constituency. He has reinvented parliamentary doctrine on his feet.

To come back to the point, a planning application, by definition, is a publicly available document—under the planning process, it has to be. Given that it is a publicly available document, there should be no problem about the Economic Secretary’s commenting on it. Has a planning application been submitted at Gallions Park and, if so, how many zero-carbon homes are in it? Will he answer those two simple questions?

Edward Balls (Labour, Normanton)

As I said, it would be entirely inappropriate for a Treasury Minister, during proceedings on a Finance Bill, to comment on a particular housing development. I am not going to comment on what individual Members do in their constituencies. That is a matter for them. I shall just point out that, as it happens, hon. Members opposite consistently oppose housing developments in their constituencies.

In the case of Gallions Park, I am advised that the planning process is under way. I do not know what stage it is at, and there is no reason for me to know that. All I know is that the intention is that it will be a development of zero-carbon homes. The hon. Gentleman is trying to make the point that there are currently no zero-carbon homes. I would say that he is right. There are none. That is why we are legislating in the Finance Bill, with public money, for an incentive to deliver such homes—in fact, for all homes to be zero carbon by 2016.

As I said to the hon. Member for Wycombe last week, I cannot understand the point that hon. Members are making. If they are claiming that there are no zero-carbon homes today, they are correct. Luckily, we have a Government with the confidence and commitment to set an objective to deliver zero-carbon homes by 2016 and to take the actions on tax and regulation to achieve that. If the hon. Gentleman would clarify his point, it would help me very much.

Paul Goodman (Conservative, Wycombe)

I can certainly clarify it. We are trying get a clear answer from the Economic Secretary as to whether the figure is a couple of dozen, as the Chief Secretary claimed on “Newsnight”, or, as he said today, very few or none. Very few and none are not the same, so which is it?

Edward Balls (Labour, Normanton)

The answer is that, to all intents and purposes—given that our objective is to get to 200,000 a year by 2016, and we are currently consulting on regulation changes and legislating on tax so that we can start the process of getting zero-carbon homes—so far as I am concerned, today there may well be none.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Will the Economic Secretary give way?

Edward Balls (Labour, Normanton)

In a moment.

I do not know the answer to the hon. Gentleman’s question. It may well be that there are a number—a small number—of lower-carbon homes around the country. Given that the Department for Communities and Local Government is currently consulting on what the definition of zero-carbon homes should be, and given that we are consulting on draft regulations about what the definition of zero-carbon homes for tax purposes should be, I am afraid that the answer to the question of how many zero-carbon homes there are rather depends on the outcome of those two consultations.

The point that the hon. Gentleman seems to enjoy making is unbelievably obscure, and therefore we might as well all agree that we are starting from a position whereby the number of zero-carbon homes is low or zero and our objective is to get to 200,000 a year. Perhaps we should get on to the substance of whether we are taking the right decisions on regulation and tax to reach that objective, rather than engaging in this seemingly obscure and meaningless debate.

Paul Goodman (Conservative, Wycombe)

I will help the Minister to move on, passing over the point that he has just given us a fourth answer, which is that he does not know. The question that I would like to ask him is can he tell us how many homes will be built as a result of this measure?

Edward Balls (Labour, Normanton)

I will come on to the costing of the measure in a second. I do not think that there is a single member of the Committee who knows how many zero-carbon homes there are. We are currently consulting on what the definitions should be exactly, for regulatory and tax purposes.

Julia Goldsworthy rose—

Edward Balls (Labour, Normanton)

Perhaps some clarity can be provided by the Liberal Democrats, because we are getting none from the Conservatives.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Because the definition of a zero-carbon home has not been set—the clause establishes how that definition will be achieved and what the tax reliefs will be—surely that means that there are no zero-carbon homes at present? There may be some energy-efficient homes out there; I can think of some in my constituency. However, if the definition has not been set, one cannot say how many exist. Is that not straightforward?

Ed Balls rose—

Roger Gale (Conservative, North Thanet)

Order. I have listened carefully—probably rather more carefully than some other people in the room—for quite a long time to this debate. It strikes me that it is going round in circles.

When I first entered the House, there were devices called parliamentary questions, which enabled Back Benchers in particular to obtain information of the kind that is being sought in the Committee. It seems to me that we are getting to the point at which the Economic Secretary is being asked questions that are probably, and properly, outside his ministerial remit. I would be grateful if the Committee could return to clause 19 and the economic substance of the Finance Bill.

Edward Balls (Labour, Normanton)

I shall come on to the substance of the hon. Gentleman’s question, which is about the costings.

As I said, we start from a position where a small number, or zero, homes are zero carbon. We are consulting on exactly what the definition of zero-carbon homes should be for tax purposes; it is a genuine consultation, and it was conducted mainly to change the regulations following that consultation. Our aim is to get from zero to 200,000 zero-carbon homes a year by 2016. At this stage, given that this is uncharted territory, we do not know what the pace of build-up will be. It will depend on the way in which the regulations are calibrated and ratcheted up, and also on the success of this tax measure. It is not easy for us to make a forecast. Therefore, the Treasury has to make a decision as to how we sensibly cost this measure in the Finance Bill, when we do not know exactly what the outcome is likely to be. There is not really any sensible basis for a forecast, because we are starting, essentially, from zero.

We took the view that we start from zero and will get to 200,000 in 2016, and that the build-up will not be linear, or like a straight line, but that there will be a progressive acceleration over that period. On the basis of that, from nought today to 200,000 a year by 2016, and on the basis of the stamp duty relief that we have set out today, we will produce a costing.

Brooks Newmark (Conservative, Braintree)

Will the Minister give way?

Edward Balls (Labour, Normanton)

In a second.

On the basis of the costing, as set out in the Red Book, for the build-up that we have estimated or projected, the costing by 2012 will be around £15million.

Stewart Hosie (Scottish National Party, Dundee East)

Will the Minister give way?

Edward Balls (Labour, Normanton)

In a second.

On that basis, costing by 2012 will be around£15 million a year. It may well be that the target will be reached faster than in that non-linear projection; it may well be that that happens more slowly. If it happens more slowly, we will either have a later acceleration or miss the target. We may need to make the relief more generous. If it happens faster, it may well be that the cost of the measure will exceed our estimates—a very desirable thing indeed. This is one of those areas where the Treasury would be pleased if the cost of the measure exceeded our expectations. We have projected forward from zero to 200,000 on a curve, and produced some costings on that basis.

Given the nature of the exercise, it would not be sensible for us to set out in detail the actual numbers at each point along the curve because that would give the impression that the process was based on science and forecasting, and that it was an objective. Frankly, it does not have that status. We do not know what the take-up will be, but we will have much more evidence in a year or two. It is a sensible, projected way to cost, and that is what we have done.

I am sorry if that does not satisfy the hon. Member for Wycombe, but it is the best way to proceed, given that what we are doing is so innovative. It has not been done before, and there is no sensible way of making a forecast. He asked what my forecast was for 2012. We do not have a forecast, but our objective is to get from zero to 200,000 a year by 2016.

Stewart Hosie (Scottish National Party, Dundee East)

I like the Minister’s honesty in saying that this is not based on science and that there is no sensible way of making a forecast. However, given the consultation on the definition and that only after the outcome of that will we know what the real cost of a low or zero-carbon house will be, surely that should be the point at which to determine what tax incentives might be necessary to provide the correct incentive for a large number of such properties to be built. Would not that be the correct approach?

Edward Balls (Labour, Normanton)

I understand the hon. Gentleman’s point, but we are using language carefully, which hon. Members mocked, and kick-starting a process. If something like a motor bike is kick-started, it is because it is stationary and one wants it to move forward. There are very few carbon-zero homes and we want to kick-start the process by saying that as well as regulatory change there will also be a tax incentive on the table. That is what we are legislating for, and consulting on in the case of the regulations, so that we can kick-start a path towards 200,000 such houses a year by 2016.

The hon. Gentleman is absolutely right to say that as we gain more experience we will be able to see whether the stamp duty exemption—it is only part of the package; the regulations are also important—is sufficient. We do not know the answer, which is why we must return to the matter following a debate in Committee on future Budgets. We may need to make the measure more generous, or we may find when we look in advance of 2012 that we were more generous that we needed to be and that there is a lot of dead-weight cost.

The problem is that because we are at the start of the process, we do not know the answers to the questions. After five years’ experience we may know how we could have kick-started the initiative, but logically that is beyond us. We must set out a sensible incentive and use it to deliver our goal.

Brooks Newmark (Conservative, Braintree)

As I said at the beginning of my speech, I support the aspirations and ambitions of the clause, as I believe we all do, but we are questioning the detail. One question that the Minister has not answered is about the time frame. He set an ambitious target for 2016 and, as a business man, I have said that 2012 will be challenging, given the planning challenges and so on. How many business men did he consult in coming up with the 2012 and 2016 figures, and what feedback did he receive on 200,000 a year being realistic, which I would support if he could get there?

Edward Balls (Labour, Normanton)

That point was also well made by the hon. Member for South-West Hertfordshire, who asked in particular about 2012, and I answered the question then. Clearly, it is sensible at the beginning of a process to set out tax relief over five years and then to assess its effectiveness clearly before the end of that time frame. I have said that if we have not achieved our objective but the tax incentive is working, the sensible thing for us to do would be to extend it—[Interruption.]

Roger Gale (Conservative, North Thanet)

Order.

Edward Balls (Labour, Normanton)

We will do that in plenty of time. I answered that point carefully.

The hon. Member for Braintree, again citing his business credentials, asked about businesses being consulted and I read out two quotes from business people who have given their views. We are now consulting on the basis of the regulations for the stamp duty exemption. Consultations on the wider zero-carbon homes initiative are being taken forward by the Department for Communities and Local Government, and the Treasury is part of that process.

I assure the hon. Gentleman that in order to meet our objectives, we will be consulting the business and wider communities in the coming months. As I said, we have also consulted on the preparation of the policy. I was confused because Opposition Members seemed to claim that the objective was both trivial and unachievable. They had no coherence of view.

We are setting out a bold, innovative, radical, coherent policy in which tax can play a part in contributing to the wider objective of every home being a zero-carbon home by 2016. I hope that it will be possible to have a debate in Committee on the regulations because Labour Members relish debates on housing and the environment. A further opportunity to set out thinking following consultation on some of the detailed points would be welcome and desirable. I hope that the Committee will allow us to move forward.

Clause 22

Paul Goodman (Conservative, Wycombe)

I simply want to ask for the tonnage of aggregate to which the Treasury expects the exemption to apply to be put on the record.

John Healey (Labour, Wentworth)

As the Committee knows, the aggregates levy is designed to bring environmental benefits by making the price of aggregates better reflect their true environmental costs, and therefore encouraging recycling and the use of alternative materials.

The clause introduces a new exemption from the levy for aggregate removed from the ground along the proposed line of a railway, tramway or monorail in the course of maintaining, constructing or improving it, provided that the aggregate was not excavated purely for the purpose of extracting it. It makes the treatment of railways, tramways and monorail consistent with those of the construction and maintenance of highways. It is also consistent with the environmental rationale, which is to give aggregate produced as a by-product a commercial advantage over directly quarried aggregate.

We expect that the cost of the revenue exemption in the clause is unlikely to exceed £3 million each year. We treat that as an estimate, therefore there are no specific calculations of the tonnage that will be affected. I hope that is sufficient information for the Committee to accept the clause.

Clause 24

Paul Goodman (Conservative, Wycombe)

Members of the Committee will see from the explanatory notes that the clause gives powers to Entrust—it is not actually named in the notes, but it is the regulatory body that oversees environmental bodies that make use of the landfill communities fund—and to HMRC, which oversees Entrust. The scheme, which allows a portion of the landfill tax to be given to local community social and environmental schemes, was reformed in 2003 following fears that it was being abused to some degree. The HMRC website lists further changes that the clause will bring about. How many environmental bodies had their approvals by Entrust revoked in 2004-05 and during subsequent years, and what is the cost of administering the scheme?

John Healey (Labour, Wentworth)

The clause should improve the operation of the landfill communities fund, which was known until last year as the landfill tax credit scheme. Every member of the Committee will have a significant number of projects or schemes in their constituency that have been supported in recent years by the landfill communities fund—valuable projects, such as improving, building and repairing village halls, churches or historic buildings, or providing sports facilities, cycle trails and wildlife sanctuaries. Since the fund was set up, it has received £875 million towards such ends, providing projects and schemes that benefit a spectrum of our communities.

HMRC approves a regulatory body to oversee the fund. Currently, that body is Entrust. We have not specified Entrust in the legislation, because, as the hon. Gentleman will recognise, there might be circumstances—although we do not have this planned—in which the regulator body would change. It does not seem sensible, therefore, to specify Entrust in the legislation.

Entrust oversees a fund that we increased in the Budget by a further £5 million, so that it will be worth £65 million in this coming year. It already works to conditions agreed by HMRC that are contained in its terms of approval, which is a document agreed between HMRC and Entrust each year. The statutory instrument provided for by the clause will enable the commissioners to impose enforceable conditions. In the event of a failure to observe those conditions, they may take steps in extremis to revoke the approval of the regulatory body.

The statutory instrument will give a binding effect to any targets or performance measures that the commissioners might wish to see from Entrust. It will also allow Entrust to add or remove conditions on environmental bodies in line with best practice and the principles of better regulation. Under the conditions of its approval, Entrust will now have to provide the commissioners with advance notice and obtain their agreement to any general conditions it intends to impose on environmental bodies.

The first condition that is being added will require environmental bodies to provide project details in advance of spending. That is already established as best practice and is followed in the vast majority of cases. However, at present when it is not followed and when there is resistance from the environmental body, Entrust is not in a situation in which it can require that the environmental body follows those best practices. Indeed, as things stand, an environmental body that was determined not to follow the best practices as set out by the regulator could challenge Entrust’s ability to insist on them. The clause and the regulation that stems from it will remove that uncertainty and reinforce Entrust’s hand, quite rightly, in ensuring that environmental bodies follow the best practice that it sets. There is negligible cost to the Exchequer from the changes.

The hon. Gentleman simply asked how many environmental bodies had had their approvals revoked in 2004-05. A very small number have had them compulsorily revoked. My estimate, from dealing with this territory in the past few years, is fewer than five, but, if he will accept this way of dealing with things, I shall write to him if I recover further information from HMRC.

The statutory instrument goes wider than the clause, but it came into effect on 1 April, in line with, and in time for, Entrust’s new financial year, and the business plan that applies to it.

Theresa Villiers (Conservative, Chipping Barnet)

I beg to move amendment No. 38, in schedule 3, page 90, line 16, after ‘payments’, insert ‘for a year of assessment’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following amendments: No. 39, in schedule 3, page 90, line 19, after ‘services’, insert ‘for that year of assessment’.

No. 40, in schedule 3, page 90, line 21, leave out from ‘person’ to ‘the’ in line 22 and insert

‘whose sole or main business is the provision and facilitation of’.

No. 41, in schedule 3, page 90, line 23, leave out ‘involved with the company’ and insert

‘regularly involved with all or most aspects of running the company on an ongoing basis’.

No. 42, in schedule 3, page 90, line 24, at end insert—

‘(1A) In considering whether a company is a managed service company within the meaning of subsection (1), no regard shall be had to any other companies with which the MSC provider is involved’.

No. 43, in schedule 3, page 90, line 35, leave out ‘subsection’ and insert ‘subsections’.

No. 44, in schedule 3, page 90, line 35, after ‘(1)(d)’, insert ‘or (2)’.

No. 45, in schedule 3, page 90, line 36, leave out from ‘providing’ to end of line and insert

‘services of a nature provided by advisers in a professional capacity, including legal, accounting and company secretarial advice.’.

No. 46, in schedule 3, page 90, line 36, at end insert—

‘(3A) For the purposes of subsection 3, accounting advice includes, but is not limited to, advice and assistance concerning:

(a) preparation or provision of records, returns, financial statements, reports or financial information concerning accounting;

(b) auditing, insolvency or taxation matters;

(c) communication and representations made on behalf of a client to third parties in matters concerning accounting, auditing, insolvency or taxation.

(3B) The Treasury may by order provide for a non-exhaustive list of professional services which fall within the meaning of subsection (3) and (3A) above.

(3C) The Treasury may not make an order under subsection (3B) unless a draft of it has been laid before and approved by a resolution of the House of Commons.’.

Government amendment No. 97

No. 47, in schedule 3, page 91, line 2, at end insert—

‘(3A) An MSC provider may be a partner in a partnership (other than the individual referred to in section 61B(1)(a)) and may, for the purposes of section 61B(1)(d), carry on, through the partnership, the business of promoting or facilitating the partnership to provide the services of individuals.’.

No. 48, in schedule 3, page 92, line 2, leave out ‘mentioned in section 61D(1)(b)’ and insert

‘which satisfies both section 61D(1)(b) and section 61D(1)(c).’.

Theresa Villiers (Conservative, Chipping Barnet)

It is a pleasure to address the Committee in the pre-lunch graveyard slot. Schedule 3 provides for the insertion of new section 61B into the Income Tax (Earnings and Pensions) Act 2003, which contains conditions setting out the definition of what is known as a managed service company; that is the focus of this measure. Where the relevant conditions are satisfied in relation to a particular company it will be obliged to account for PAYE and national insurance on payments that it has made in connection with the services of the workers whose services it provides.

If the company does not make those payments, schedule 3’s proposed new section 688A of ITEPA allows HMRC to pursue certain third parties for the tax liability. The provisions represent the Treasury’s latest attempt to police the borderline between those operating and providing services of a freelance and contracting nature through companies, and those who are employed. They are a successor to chapter 8 ofpart 2 of ITEPA, the controversial measure commonly referred to as IR35.

Stephen Hesford (Labour, Wirral West)

The hon. Lady will recall our debates in the House on clause 25. She and I discussed IR35, which she has now conveniently mentioned. I said to her that Opposition Members had overplayed its problems, and were overplaying the problems with the schedule, and that no one had ever approached me in my constituency subsequent to the previous so-called row.

After I said that, one of the so-called organisations that she seeks to represent put on its website a message encouraging people in Wirral, West to contact me if they had had problems with IR35, because I had said that there had not been any. No one contacted me, except one person who turned out not to be my constituent. What she is about to say is overplaying the problems with the schedule.

Theresa Villiers (Conservative, Chipping Barnet)

I do not accept that we are overplaying concern about schedule 3, and I shall refer to some of the contractors who have been in touch with me about the fact that their work is in jeopardy and they are suffering problems because of the schedule and the uncertainty associated with it. I understand that IR35 has cost an incredible amount of money and time in compliance checking. It is regrettable that the Government have always refused to publish any information on the revenue that they have collected through IR35, given the significant compliance burden that it has placed on every contractor; every time contractors enter into a contract with an end client they must check. That costs money. I am not convinced that the revenue raised as a result has justified that compliance cost.

The Opposition are happy to support properly targeted attempts to crack down on abusive behaviour in that area. However, we are concerned that legitimate freelance workers who are genuinely in business on their own account will be hit by schedule 3 where they choose to outsource functions relating to the service company with which they are connected. Similar concerns have been expressed by a range of bodies, including the Institute of Chartered Accountants in England and Wales, the Chartered Institute of Taxation, the Law Society, the Professional Contractors Group, the London Society of Chartered Accountants, the Institute of Directors and the Association of Technology Staffing Companies.

The goal of the amendments that we have tabled is to prevent the new framework from biting on genuine freelance workers who are not in a disguised employment relationship. We also seek to ensure that those professionals who advise freelancers and small service companies are not unwittingly or unfairly caught up in the legislation and made liable for the tax debts of their clients. Lastly, we seek to prevent the serious damage that could be caused to the flexibility of the UK labour market if staffing companies and the end clients who engage contractors find themselves at risk as a result of schedule 3.

Above all, we will be seeking clarity and certainty from the Minister about what his legislation means. That is an incredibly important task for the Committee—even more important, dare I say it, than in our previous debate on how many zero-carbon homes there might or might not be. The confusion surrounding schedule 3 is causing enormous anxiety and it is already costing people their jobs. To illustrate that, as I told the hon. Member for Wirral, West, who intervened earlier, I will refer to just three of many representations that I have received from people worried about the proposals.

Ian Preece, director of Greybeard Consulting Ltd, told me:

“the biggest issue I have with the proposed legislation is the fact that it is impossible to understand if you will be ‘caught’ or not. Therefore trying to understand if I will be affected or not is akin to gazing into a crystal ball.”

Andrew Frith of AFMS, an IT consultancy based in the north-west, told me:

“We seem to have fallen victim to the new MSC regulations even though the legislation is not yet on the statute books and in any case would not seem to directly affect our company at all. The problem is that due to the transfer of debt provisions...recruitment agencies are not prepared to deal with us ‘just in case’ we come within the provisions. Our supply of new work for our consultants has dried up...we are now making a significant loss and have already had to take action by giving notice to our newest recruit.”

Chris Cumber, who runs a small contracting business, said:

“My concern is that my accountant appears unable to answer my question ‘Does his involvement make my company an MSC?’. I seem to be spending more and more time worrying about uncertain taxation and less time actually producing income for my company. The latest attempt is badly worded...and designed...to have us contractors running around like ants”.

He concluded on this pessimistic note:

“It will all end in tears with some case-law, which is totally counter-productive for the Chancellor’s coffers and for us contractors”.

Having introduced the general issues, I will deal with amendments Nos. 40, 41, 45 and 46, which go to the heart of the concerns that I have set out. Subsection (1)(d) and subsection (3) of proposed new section 61B, which these amendments seek to amend, play a central role in determining the scope of the provisions under discussion. Paragraph (d) states that a company becomes an MSC if it is involved with “an MSC provider”, which is defined as someone who

“carries on a business of promoting or facilitating the use of companies to provide the services of individuals”.

Subsection (3) provides a limited carve-out from paragraph (d) for certain professional advisers.

Amendments Nos. 40 and 41 would restrict the scope of paragraph (d) so that it bites only where someone

“whose sole or main business is the provision and facilitation of”

the use of companies to provide the services of individuals, is

“regularly involved with all or most aspects of running the company on an ongoing basis”.

Amendments Nos. 45 and 46 would clarify the ambit of the protection afforded to professionals under subsection (3).

Those four amendments seek to address the concern that the definition of MSC provider is very wide, and would catch anyone involved in setting up companies as part of their business—for example, lawyers, accountants and company secretaries. The amendments tackle an important flaw in the legislation, in that it could hit genuine freelancers who choose to outsource aspects of the management of the companies through which they work. Without clarification, paragraph (d) could also impose significant risks on those who regularly advise freelance workers and it would leave them potentially liable for the tax debts of their clients, as well as leaving them at risk of being sued by other people who might be drawn into the MSC net or the third-party debt rules as a result of the professional adviser’s activities.

The danger is that that will drive up the cost of professional advice for small companies, as advisers withdraw from the market or charge higher fees in order to compensate for the increased risk that they are undertaking. The intention behind the four amendments is to ensure that the legislation does not impose unreasonable restrictions on contractors who want to outsource administrative functions in relation to their service companies and that ordinary professionals on a day-to-day basis are not included in the definition of MSC providers.

The key question that the Committee needs to address is how do we ensure that a sensible line is drawn between those professionals operating on an ordinary, day-to-day basis and the dubious operators whom HMRC wants to shut down. The Institute of Chartered Accountants has highlighted, naturally, some of the problems that its profession faces. It points out that many accountants will recommend a corporate structure to a client, provide them with an off-the-shelf company for that purpose and then go on to carry out the necessary company secretarial services.

Without clarification of the legislation, it would appear that a professional accountant who advises her client to incorporate in that way is “promoting” the use of companies under paragraph (d). If she provides an off-the-shelf company for that purpose, she is “facilitating” the use of companies under that paragraph. However, as the Institute of Chartered Accountants points out, those activities are an incidental part of a professional accountant’s business of providing an all-round service to the client.

Considerable concern has been expressed about the wide scope of the concept of “promoting” in paragraph (d). If accountants provide services relating to company structures, will advertising those services automatically bring them within the scope of paragraph (d)? Arguably, promoting services relating to setting up companies is promoting the use of those service companies, which could pull them into the scope of the MSC provisions. Any clarification the Minister can give on what “promotion” means and how it will operate in practice would be very welcome.

Subsection (2) of proposed new section 61B introduces a second concept: influencing. The problems in this area are compounded by newsection 61B(2), with its broad concept of involvement with a company. It is focused around the concept of “influence”, yet any professional adviser could be expected to influence their client. People do not go to professional advisers and pay them large fees unless they are considering acting on their advice. Advice and influence are inextricably linked. In particular, many advisers will give clients advice on the best way to make payments. That could bring them within new subsection (2)(c). Surely it is not worth engaging an accountant unless they have at least some influence over the company’s finances or activities. That seems to bring them within the scope of new subsection (2)(d).

The solicitors Blake Lapthorn Tarlow Lyons, advising members of the Association of Technology Staffing Companies, commented on the influence tests:

“Note that it is enough for any one of these (still rather sweeping and hard to interpret) tests to be satisfied.

They do not all have to be satisfied.

Clearly this captures many so called Personal Service Companies who thought that they would be outside the new legislation...The test can be satisfied by the fact of the MSC provider receiving ongoing payments linked to the contractor’s ongoing services, or ‘influence’ over how payments are made or activities carried out.

Therefore it is intended that the only types of PSC who are outside the new regime are ones who genuinely do not use third party assistance to setup or operate or manage their PSC.”

There is at least a risk that the concept of influence could be so broad as to cover insurance companies. By way of illustration, selling insurance to small service companies, for example to cover professional risk, certainly facilitates the use of such companies, which could pass the test set out in paragraph (d) of proposed new section 61B. However, an insurance company that sells such policies to contractors may lay down particular rules and working practices to mitigate risk. Does that mean that the insurance company is “influencing” within the meaning of subsection (2)(b)? There is therefore a danger that it could become liable for the tax debts of the companies it insures. As an insurance company, there is no way it could get the protection of subsection (3), because it cannot be described as offering services relating to accounting or legal services.

Similar problems occur for company formation agents. A core part of their business is setting up companies. Again, their services facilitate the use of companies that provide the services of individuals. It seems that the legislation is not intended to bite in that way. It is not intended to hit ordinary accountants, insurers or company formation agents who just happen to be providing services to small service companies as part of their business.

HMRC seems to have indicated that the target of the legislation is those who set up companies to provide the services of individuals as a discernable and core part, not an incidental or occasional part, of their business. Amendment No. 40 translates that informal indication into the wording of the legislation. Proposed new section 61B(1)(d) would catch only those whose sole or main business is providing or facilitating the use of companies through which to provide the services of individuals. It is these specialists that HMRC seems to be concerned about. The Opposition believe that amendments Nos. 40 and 41 would greatly assist in targeting those providers, while leaving other advisers outside the scope of the legislation.

HMRC has also indicated that the average accountant, company secretary, or formation agent would not be caught by the legislation, because they are not sufficiently involved with the company, even if they have set it up and run its books and statutory returns. It seems to want to focus on someone who takes over all the activities of the company, so that its ostensible proprietor has no meaningful involvement. Why not make this clearer in the legislation? The situation the Government seem to want to get at is where the company is essentially the creature of the scheme provider. In seeking to draw a distinction between what they describe as “personal service companies” and “managed service companies”, they seem to be concerned about a situation where the worker does not really have any involvement with the company at all and the company is the emanation of the scheme provider and not a genuine going concern.

Amendment No. 41 would give real substance to that interpretation by stating that companies would be caught in the definition of an MSC provider only if they are regularly involved in almost all aspects of the way the company works. Situations where the company is a genuine going concern and the worker has merely decided to outsource an aspect of running it, are less likely to be hit if the Committee were prepared to accept amendment No. 41.

It is not enough for HMRC to issue guidelines which seek to remove and mitigate some of the risks, which I have just outlined, for both contractors and their professional advisers. Guidance does not give enough certainty. Firms under risk of falling within the MSC provisions are under significant financial and legal risk to the last penny of their personal wealth. They are likely to have to make significant provision for litigation risk, and there are indications that the risk may be uninsurable. Guidance cannot be litigated in court, so there will be no clarification through legal proceedings. As the Institute of Chartered Accountants of England and Wales has pointed out:

“There is no substitute for having a legal definition.”

Clarification of what this provision means is needed now and not in two or three years’ time, when a case may have made its way through the courts.

I turn now to the closely linked issue of the safe harbour for professional advisers in subsection (3), because the Minister will no doubt tell me that that sorts out all the problems. If amendments Nos. 40 and 41 were adopted to rein in the scope of paragraph (d), most of the problems in relation to professional advisers would fall away and the scope of the safe harbour in subsection (3) would become much less important. However, amendments Nos. 45 and 46 seek further clarification on the safe harbour for professionals and the meaning of

“providing legal or accountancy services in a professional capacity.”

Amendment No. 45 would broaden the range of professionals who could use the safe harbour, while retaining the focus on services provided in a professional capacity, such as through a practice. Amendment No. 46 would set out some of the services that will not trigger problems with the MSC legislation. Given that the real difficulty in finding a general formulation that covers the wrongdoers but leaves the innocent adviser outside the framework, setting out a non-exhaustive list of services could be one of the simplest and most effective ways to give the clarity and certainty that we so badly need here. It would give critically important assurance and guidance to those who want to comply with the legislation.

Proposed new subsection (3)(b) would also give the Treasury power to set out in secondary legislation further examples of services that professionals could safely provide without incurring any risk of the MSC legislation. Parliament would also have the chance to keep a close eye on how the legislation is working in practice when the secondary legislation came to it for scrutiny.

The simple question for the Committee to consider is what types of services can accountants, lawyers and other professionals continue to offer to small service companies without losing the protection of the safe harbour set out in subsection (3). There seem to be at least three possible approaches. First, a narrow one, which says that a safe harbour covers only basic, traditional accounting services and legal services, such as bookkeeping. Secondly, there is a wider definition that could cover any services ordinarily provided by accountants. The third approach would cover accountancy services ordinarily provided in the course of an accountancy business.

We need much greater clarification on services, such as invoicing and routine tax advice, company secretarial services and IR35 compliance checking, and on which side of the divide they fall. Accountants frequently perform many of those services, so a wide interpretation would not cause a problem. However, if a more restrictive interpretation is correct, setting up companies and company secretarial services might fall outside the safe harbour and leave the accountant at risk of liability.

Stewart Hosie (Scottish National Party, Dundee East)

The hon. Lady is making a good case, but she seems to be narrowly focusing on accountancy in general and not on secretarial services. In the case of many contractors, the agents whom they instruct may well advise them on specialist training courses before, for example, taking an offshore North sea job. They could be advised on accommodation, if they were going to take a job in engineering or a contract job in the middle east. Those are perfectly legitimate things to do in the early stages of acquiring a contract, so should we not agree that the scope of the exemptions must be as wide as possible rather than using the narrow definition for accountancy?

Theresa Villiers (Conservative, Chipping Barnet)

If I understand it correctly, the hon. Gentleman is concerned about the position of employment agencies and staffing companies, which I shall come to in due course. He is absolutely right to say that it is not only accountants and lawyers under consideration here. We must ensure that we get clarity from all the relevant parties, or contractors are going to find life very difficult—their costs will increase and the flexibility of the UK labour market will be damaged as a result.

I have a series of questions for the Minister about what is meant by “in a professional capacity” in subsection (3). First, is it the nature of the services provided that determines whether someone is an MSC provider, or is the question determined by the qualification of the professional status of the person providing the service? If someone is providing services “in a professional capacity”, do they fall outside the MSC provider definition, regardless of what services that they perform? Is it possible for anyone who is not part of a regulated profession to use the subsection (3) safe harbour? Do people need a current practice certificate in that profession to use the safe harbour? Does one need to be part of a traditional professional practice? What about accountants and other tax professionals, who are not registered but who are instead employed in-house? And to what extent can service providers outside the remit of the traditional professional set-up use the safe harbour?

That brings me to a series of questions about accounting service companies, which have emerged in recent years to offer companies cheap, commoditised services, which were previously offered only by accountants. Does the Minister envisage that any accounting service companies would be able under any circumstances to use the carve-out in subsection (3)? Some of them seem to think that they can carry on almost as normal, if they have an accountant on their books. Does an accounting service company have to be owned by qualified professionals with current practising certificates to use the safe harbour?

Clearly there are players in the accounting services sector that the Government want to shut down. HMRC has some justified concerns in this area, but my concern is that there is no evidence that all accounting services are somehow dodgy. Do the Government envisage that any of those companies will be able to survive under the new framework? Do they want to shut them all down? If so, a slightly unfortunate side effect of the legislation seems to be that freelancers would be completely barred from using specialist providers to manage their company affairs and would be restricted only to using the more traditional accountants, who have a more broadly based area of work. I would be interested to hear whether there will still be room for cheaper and more commoditised, factory-style services.

As partly adverted to in the intervention by the hon. Member for Dundee, East, in focusing in people who hold legal or accounting qualifications, subsection (3) misses some of the important problems caused by schedule 3—solving a problem for lawyers and accountants does not solve the problem with schedule 3. For instance, the subsection (3) safe harbour does not seem to take into account how many professionals hold qualifications other than accountancy and legal qualifications. Company formation agents have been mentioned, and other examples include those holding qualifications relating to company secretarial services or to tax, such as those from the Association of Taxation Technicians or the Chartered Institute of Taxation.

Adam Afriyie (Conservative, Windsor)

Should mention also be made of software manufacturers, which write software that performs such functions without the intervention of an adviser?

Theresa Villiers (Conservative, Chipping Barnet)

My hon. Friend makes a good point. Many different sectors are affected by the changes, but my concern is particularly about the impact on the IT sector, where contractors and freelancers perform such a valuable role. The nature of the IT sector is that, very often, specific people are wanted to build a specific project. Keeping permanent employees on an ongoing basis is very difficult if the project only lasts a few months. Critical in scrutinising schedule 3 is for the Committee to assess the impact on the IT sector, including the point made by my hon. Friend the Member for Windsor.

I understand that a number of professional bodies, such as the Institute of Chartered Secretaries and Administrators, is seriously worried that their members may fall into the definition of MSC providers automatically—after all, their business is to set up and run companies. By amending proposed new subsection (3) as I propose in amendment No. 45, those professionals can gain the same protection as accountants and lawyers.

The status of other professionals is also uncertain under the current wording of subsection (3). Other professionals whose activities might conceivably bring them within the scope of “promoting” or “facilitating”, yet seemingly without the protection of the safe harbour, could be management consultants, franchisers who help franchisees run their business, factoring and invoice discounting houses which help follow up unpaid invoices, payroll companies and business advisers. I would be very interested to hear from the Minister how he sees their status under proposed new section 61B.

None

Stephen Timms (Labour, East Ham)

On a point of order, Mr. Illsley, and I welcome you to the Chair. This morning, when Mr. Gale was in the Chair, it came to light that Committee members had not received copies of the draft regulations that were relevant to our discussions. We had sent copies of them to you, Mr. Illsley, to Mr. Gale and to the hon. Members for Chipping Barnet and for Falmouth and Camborne, but not to other Committee members.

Copies of all letters sent to date about the Bill’s secondary legislation and accompanying draft regulations have in the past few minutes been sent to members of the Committee to ensure that everybody has the information that they need. Copies of my letter of 9 May are also being sent. It included information on the regulation-making powers in schedule 3, which we shall debate this afternoon. I shall ensure that all future letters on secondary legislation are sent to you, Mr. Illsley, and copied not only to the shadow spokespeople but to all Committee members. I apologise to all Committee members for the inconvenience that they were caused this morning.

Eric Illsley (Labour, Barnsley Central)

The Chair is grateful to the Minister for addressing the concerns that Committee members raised this morning. As I understand it from what he said, the relevant documents have been circulated to Committee members.

Schedule 3

Eric Illsley (Labour, Barnsley Central)

I remind the Committee that with this we are discussing the following: No. 39, in schedule 3, page 90, line 19, after ‘services’, insert ‘for that year of assessment’.

No. 40, in schedule 3, page 90, line 21, leave out from ‘person’ to ‘the’ in line 22 and insert

‘whose sole or main business is the provision and facilitation of’.

No. 41, in schedule 3, page 90, line 23, leave out ‘involved with the company’ and insert

‘regularly involved with all or most aspects of running the company on an ongoing basis’.

No. 42, in schedule 3, page 90, line 24, at end insert—

‘(1A) In considering whether a company is a managed service company within the meaning of subsection (1), no regard shall be had to any other companies with which the MSC provider is involved’.

No. 43, in schedule 3, page 90, line 35, leave out ‘subsection’ and insert ‘subsections’.

No. 44, in schedule 3, page 90, line 35, after ‘(1)(d)’, insert ‘or (2)’.

No. 45, in schedule 3, page 90, line 36, leave out from ‘providing’ to end of line and insert

‘services of a nature provided by advisers in a professional capacity, including legal, accounting and company secretarial advice.’.

No. 46, in schedule 3, page 90, line 36, at end insert—

‘(3A) For the purposes of subsection 3, accounting advice includes, but is not limited to, advice and assistance concerning:

(a) preparation or provision of records, returns, financial statements, reports or financial information concerning accounting;

(b) auditing, insolvency or taxation matters;

(c) communication and representations made on behalfof a client to third parties in matters concerning accounting, auditing, insolvency or taxation.

(3B) The Treasury may by order provide for a non-exhaustive list of professional services which fall within the meaning of subsection (3) and (3A) above.

(3C) The Treasury may not make an order under subsection (3B) unless a draft of it has been laid before and approved by a resolution of the House of Commons.’.

Government amendment No. 97

No. 47, in schedule 3, page 91, line 2, at end insert—

‘(3A) An MSC provider may be a partner in a partnership (other than the individual referred to in section 61B(1)(a)) and may, for the purposes of section 61B(1)(d), carry on, through the partnership, the business of promoting or facilitating the partnership to provide the services of individuals.’.

No. 48, in schedule 3, page 92, line 2, leave out ‘mentioned in section 61D(1)(b)’ and insert

‘which satisfies both section 61D(1)(b) and section 61D(1)(c).’.

Theresa Villiers (Conservative, Chipping Barnet)

Thank you, Mr. Illsley. I welcome you to the Chair.

I had just started to address the position of staffing and recruitment companies and employment agencies in the schedule. The purpose of the Opposition’s amendments to the definition of a managed service company provider is to focus on those people

“whose sole or main business relates to the provision and facilitation of”

use of service companies. If the amendments were agreed to, they would remove the threat of liability from staffing and recruitment and employment companies, because they would be only incidentally involved with managed service companies. Their main business would be related to placing individuals, which would be different.

Proposed new section 61B(4) of the Income Tax (Earnings and Pensions) Act 2003 provides some protection for staffing companies, but its ambit is unclear, and I hope that Government amendment No. 97 will provide further assurance to the recruitment sector. It is vital that we clarify the position of recruitment companies in the schedule, because damaging the recruitment industry could have a negative impact on the flexibility of the UK labour market.

The key concern is that if a recruitment company has any influence over the choice of service company or the professional adviser through the workers with whom it is involved, the company could be liable for “promoting or influencing” within the meaning of new section 61B. That is a particularly strong concern when staffing companies have contractual control over the freelance worker, as many do. Furthermore, many staffing and recruitment companies influence the way in which payments are made to the worker, and again, such influence might trigger the MSC provider status that we were discussing before the Committee adjourned.

I make it clear that the Government’s response to the recruitment industry’s concerns is welcome; many of its representatives are pleased by their movement on that issue. However, we still need more clarity and we need to asses what risk mitigation steps the recruitment industry can take to avoid inadvertently falling within the scope of proposed new section 61B. The feedback that I have had is that the recruitment industry wants to be compliant, but it does not know what compliance looks like.

It would be useful, for example, if the Chief Secretary could confirm whether holding a list of approved company suppliers and advisers is sufficient to amount to “promoting and influencing” within the meaning of paragraph (d). It would be unfortunate if the changes that we are considering under schedule 3 were to encourage staffing and recruitment companies to take no interest in the contracting arrangements of their contractors and workers, as that would remove an important quality control that is currently exercised. The absence of a tax status review by staffing or recruitment companies could increase the likelihood that less reputable operators—the kind of people about whom Her Majesty’s Revenue and Customs is concerned—have more, not less, scope to supply their services.

Amendments Nos. 42 to 44 concern the problem of tainting, about which I have received a number of representations. The anxiety is that if an adviser has a sufficiently close relationship with a client to be deemed to be “promoting or facilitating” under paragraph (d), it will become an MSC provider in relation to any client and any company with which it is involved. The Bill does not specify that the promotion or facilitation must relate to one particular company. Provision of services within the meaning of paragraph (d) could taint all the companies with which the adviser deals. The upshot will be that a freelancer will be faced with the hassle not only of ensuring that the relationship between her company and her professional advisers is compliant and does fall not within paragraph (d), but that her adviser does not provide any non-compliant services to other clients. Frankly, that will be difficult in practice.

It will also be difficult for end clients and staffing companies that are anxious to comply with the legislation to ensure that they are not brought within third-party debt rules, via an indirect connection to a company that has a non-compliant relationship with another adviser or client. There is a real danger of litigation if someone finds their tax bill suddenly increasing because their adviser entered into a non-compliant relationship with other clients.

The amendments are intended to deal with such tainting. Amendment No. 42 proposes a new subsection (1A) to make it clear that one should consider only the relationship between the scheme provider and the company whose tax affairs are under consideration. It is important to bear in mind that this is a serious problem, which could have a significant impact on how the proposals are enforced. If HMRC believes that a particular company falls within the MSC provider definition, for example, it will presumably inform not only that company, but all its clients. They will immediately leave, because they will be worried about being tainted by the activities of that particular scheme provider. That could trigger an instant cash-flow crisis and, quite possibly, put the provider out of business instantaneously. We therefore need to deal with the issue of tainting. The Bill might not be intended to have that effect, but I fear that that is the effect that it might have. It could cause significant inconvenience for freelance workers.

Amendments Nos. 38 and 39 are essentially tidying-up points that were suggested by the Law Society in its useful briefing on the Bill for the Committee. They would amend proposed new section 61B(c), which specifies one of the triggering factors for a situation to be categorised as one involving a managed service company. A situation would be considered as such if the way in which payments are made to the worker would result in her receiving payments that exceed those amounts that she would receive, even if every payment made in respect of the services provided were employment income.

Committee members will see from the briefing that the Law Society welcomes paragraph (c) as helpful, because it prevents the mere provision of services of individuals from giving rise to MSC status even when employee tax is paid. It makes the sensible point that the Bill does not specify the period for which test is to be applied, however. The amendments would makeit clear that the relevant period is the year of assessment.

Amendment No. 47 was also a useful suggestion by the Law Society. It is designed to remove a possible loophole in the framework. The provisions seem to be somewhat unclear as to how they impact on partnerships. The amendment is intended to go with the grain of the Government’s proposals and ensure that they operate effectively in relation to partnerships and also to ensure that a partnership structure cannot be used as a loophole. So the amendment would extend the reach of the proposals to make them bite in a situation where the scheme provider is a partner in a partnership, which amounts to the MSC. The Government’s drafting seems to be largely based on a corporate model and it does not seem to work exactly in relation to partnerships. The amendment might help to achieve greater clarity and ensure that the measure operates more clearly in relation to partnerships.

Amendment No. 48 is another tidying-up amendment. It is essentially a technical point to ensure that any payment taken into account for the extra MSC taxes does not include payments that have already been taxed as earnings elsewhere. The consequence of the application of the MSC legislation is that various payments are treated as if they were the earnings of an employeefor tax purposes, and therefore they are subject to PAYE and national insurance. Where the Bill applies, these payments become part of what is referred to as the deemed employment payment. That is calculated using a series of steps set out in the proposed new section 61E(1). Step 1 defines

“the amount of the payment or benefit mentioned in 61D(1)(b).”

However, new section 61D(1)(b) covers all payments received by the worker, including those that have already been taxed as employment earnings. Therefore, if that measure is left unamended, there is a danger that extra taxes would be applied to earnings thathave already been taxed as employment earnings. By adding, as this amendment would, a reference to new section 61D(1)(c), payments already taxed as earnings are excluded from the scope of the deemed employment payment.

I would like to turn to amendment No. 49, which focuses on a concern raised by the Private Contractors Group.

Eric Illsley (Labour, Barnsley Central)

Order. The hon. Lady is speaking to amendment No. 49, which is in the next group of amendments.

Theresa Villiers (Conservative, Chipping Barnet)

I apologise, Mr. Illsley. That was an error on my part; I must have got the number of the amendment wrong.

In conclusion on this group of amendments, the Committee has listened patiently, which I appreciate, to my lengthy submission on the potential problems caused by schedule 3 and the best way, in our view, to deal with those potential problems. I have spoken at length about the position of the professional advisers. I have done so partly out of concern for the position of those professionals, but my main reason for doing so concerns their clients—hard-working, hard-pressed freelance workers, who are just trying to make an honest living. It is their relationship with their professional advisers that the Government have chosen to focus on in determining how much tax those people will pay and whether their company is treated as a MSC. That is why I have dwelt on the relationship with advisers.

I emphasise that being a freelance worker does not make someone a tax dodger. Yes, the tax system for freelancers is different to that for employees, but one must factor in the fact that those workers get no sickness pay, no holiday pay and no employer-funded pension schemes. With IR35, the Government have hit those people with hassle and huge compliance costs. The hon. Member for Wirral, West may not be worried about IR35, but thousands of contractors are. The Opposition are proud of the stance that we took on IR35. If the hon. Gentleman has not had many e-mails so far, I suspect that he might get a few more in the future. Now the Government, to add insult to injury, are not only imposing the hassle of IR35, but they want to prevent contractors from getting professional help with navigating the bureaucracy caused by IR35 and other regulations produced by the Government.

I close by reading an e-mail that I received from an IT contractor, Steve Birchall, which sets out just how disruptive schedule 3 is proving to be even before it is on the statute book. He said:

“I used to use a MSC simply because they made sure that all required tax, VAT and legal requirements were met. In particular they ensured that I had a clear and full understanding of how much of the money my company had in its accounts was mine and how much needed to be paid to the various government bodies, VAT, NI, Income tax. Corporation tax etc. etc.

I DID NOT use this as a vehicle to avoid tax.

If I wanted to do this a normal Ltd company option provided more tax savings due to the ability to reclaim more VAT and claim certain additional expenses. I simply wanted someone to look after the finances of the company so that I did not personally spend any money that should have been put aside for taxes etc. I just wanted a clear indication of what was MY money to spend and what had to be paid over or put aside.

Due to the recent changes relating to MSCs, I have now been robbed of that option. I have tried to find a company that would help with the financial running of the business, but in every case they have stated that they cannot now do this, for fear of being seen as having some control of my company and in so doing, incur risks and penalties.

So I now find myself being responsible for running a company (that I don't want to run) and having full responsibility for the tax, NI, VAT etc, bills, with no help from anyone. I have the use of my accountant, but they can only do so much to help because they fear that they might be held responsible for any tax claims from HMRC should that situation arise.

It does seem crazy to me that I now cannot use a professional body to help me control my finances, this would seem to be a responsible thing for me to do and yet I risk financial penalty just for trying to act responsibly.”

On behalf of Mr. Birchall and the thousandslike him, I urge the Minister to think again about schedule 3 and accept the Opposition’s amendments.

Stewart Hosie (Scottish National Party, Dundee East)

I support the principles behind the schedule. It is right and proper that the Government seek to stamp out the misuse of managed service companies, particularly when employees are unaware of the situation, by self-employed contractors and organisations that are, to some extent, no more than posh gangmasters. It is right and proper that such misuse is sorted out. In the light of my own experiences, however, I do not think that some of the provisions in the schedule will work. I think that its impact will be much wider and broader than the Government intend.

I was a self-employed contractor working with recruitment companies and using an accounting service company, although I suspect that they were not called that in those days. I have been a departmental manager, a project manager and an operations manager in large private and public well-funded start-up companies and have employed contracting companies and individual contractors, both directly through those companies and through recruitment agencies. I know that many of them, and many others in various sectors at the moment, manage their affairs through accounting and managed service companies for the very reasons that the hon. Lady described in the e-mail that she quoted.

From my experience and that of those with whom I have spoken, I find it difficult to understand how the legislation would not have an unintended impact on any of the professional bodies currently assisting those people. I would like, therefore, to go through the Conservative amendments and make a few points about some flaws in the Bill.

As the hon. Lady said, amendments Nos. 30 and 39 would simply clarify the year in which calculations are to be made. That is a tidying-up matter. Amendment No. 40 would replace the words in the schedule with:

“whose sole or main business is the provision and facilitation of”.

That is a key amendment, because it narrows the scope of the provisions in relation to third-party companies carrying out their business, and excludes thosewho might facilitate an MSC as a consequence of almost any relationship, even those that might be unintentional.

Amendment No. 41 would replace “involved with the company” with the words:

“regularly involved with all or most aspects of running the company on an ongoing basis”.

The “ongoing basis” element of the amendment is incredibly important. Someone beginning a contracting career or starting a new contract significantly different from their last one might have a huge amount of additional requirements—for accountancy, legal and financial advice, recruitment, new invoicing formats and time scales, new requirements for different tax returns and the practical advice that I mentioned earlier. If it is an overseas contract, assistance might be needed with accommodation and visas. Whether the recruitment agency or managed service company is a preferred supplier to the employing company or not, it might be retained to provide additional services over and above the services that might be allowable under the schedule or with the Government’s amendments.

Adam Afriyie (Conservative, Windsor)

The hon. Gentleman is making some good points that are deeply relevant. Does he share my concern that, as highlighted by the e-mail that my hon. Friend read a moment ago, people with learning difficulties, such as dyslexia, and all sorts of other difficulties would choose the route that he sets out because it is an easier way for them to navigate through the tax system, rather than having a separate accountant and legal adviser and trying to do it all themselves?

Stewart Hosie (Scottish National Party, Dundee East)

I have been in the self-employed sector, too, and retained an accountant to do that work, and it is much easier to use a managed service company or an accounting service company. It is worth reflecting on the point that the self-employed contracting route is taken by many individuals to get into proper business when they do not want to—or cannot—raise the funds to recruit people initially. If it succeeds, they prosper and the money that they make—the rewards can be higher if they have taken the risks—is a good route into becoming a proper business that employs people. People go down that route for many reasons, most of which are honest and fair.

Amendment No. 42 suggests that MSC definitions must exclude reference to any other companies that an MSC might be involved with. My reading of that, and of the Bill, is that that must apply or else proposed new section 61B(2)(a) would catch legitimate recruitment companies if they were an associate of the MSC provider. They might also be caught by the influence clauses in proposed new section 61B(2)(b) and (c), particularly that which regards influence over the provision of services. If a recruitment firm is a preferred supplier to a company and that company requires a particularly skilled individual, the recruitment agency might say, “Well, we have this person for you but we cannot provide him for two or three weeks a month for two months.” In that sense, it would be directly influencing the provision of the service. It could also influence how payments were made, under instruction from the contractor or by offering advice to the contractor, by saying that it was better to invoice and be paid weekly, fortnightly, monthly, three-monthly or whatever. That is a direct influence on the way in which payments are made and would allow the companies to be caught under proposed new section 61B(2)(c). The influence clauses are far too wide.

There is an exemption in proposed new section 61B(4). However, it applies only if a company’s business consists “only of placing individuals.” However, if advice is offered to a contractor in addition, such as, “Go to company A rather than company B because they always pay well and they pay on time”, or “Go to company C rather than company D because our experience is that the contract is likely to be extended”, the provision of that advice would breach the definition of only placing individuals with a third-party company and those companies would be caught. Let us think about the consequences, on which I hope the Minister will comment. An individual contractor might have a relationship, possibly with a prime adviser or principal adviser, and certainly with his or her bank, and as they were not providing legal and accountancy services and were certainly not providing a recruitment service or the service of only placing an individual, they might also be caught.

Amendment No. 43 refers to a new subsection and amendment No. 44 excludes legitimate recruitment firms by exempting them from falling into the facilitating trap of proposed new section 61B(1)(d), which I have described. Amendment No. 45 extends the description of support activities, which is a useful description of professional services and so on. That may have to go a little further, but the amendment at least extends the protection to some extent. Amendment No. 46 describes the key activities that one would expect in new subsection (3A) but it, too, may need to go a little further. I hope that the hon. Lady will explain a little further the issue addressed in amendment No. 47, which is on partnerships. I did not see a particular issue in that regard, but I may well have missed it.

Amendment No. 48 deals with the calculation of the deemed employment payment. Should I have this wrong, I would be open to correction, but I understand that it would change the calculation of the money that a worker receives; it would involve proposed new section 61D(1)(b) but would exclude proposed new section 61D(1)(c), other than in respect of the commission fee that an agency would receive. It would not take into consideration any of the elements of the real earnings of the contractor, which is what I believe it is meant to do and which strikes me as correct. Amendment No. 49 is in the next group, and I shall not discuss that.

There are a number of weaknesses. The first part that we are discussing—the definition of MSCs, the exemptions and how people might be caught—is too wide. I have examined Government amendmentNo. 97. If I read it correctly, it will remove some of the safeguards offered by proposed new section 61B(4), because should an individual do anything in relation to 61B(2), which relates to influencing the provision of services, they may be caught. Government amendment No. 97 reduces and weakens the safeguards in an unintentional way.

I have described the issue of a preferred supplier influencing the provision of service. I hope that Ministers will examine Government amendmentNo. 97 and convince me that I am wrong, but I suspect, having read it any number of times, that it weakens the safeguards in an unintentional way.

Colin Breed (Liberal Democrat, South East Cornwall)

It is a privilege to follow the hon. Gentleman, who clearly brings a wealth of personal experience to a complex area of policy. The Liberals support the principles behind clause 25 and schedule 3, but share many of the concerns expressed. The amendments are valiant attempts to address some of those concerns, but perhaps they do not go as far as will be necessary to allay fears that are shared by a considerable number of people both inside and outside the House.

The amendments principally address the employed/self-employed area, which has become much blurred in recent times. I must profess a certain dÃ(c)jà vu because of the exchanges that we had on IR35 in previous Finance Bill debates. When IR35 came out, I, perhaps like a number of hon. Members, had a few constituents writing and telephoning me, although that has gone away in recent years. It may be that the professionals have found other ways of addressing some of the concerns, which is perhaps why we are in this situation.

Let us consider whether or not IR35 was successful. Presumably it has not been so successful—why else would we be confronting some of the proposals in schedule 3? Many hon. Members have mentioned that in any anti-avoidance legislation it is essential to try to target the proposals properly, so as to reduce the number of people or businesses that might be included despite their being perfectly respectable and honest in their transactions and despite their managing their businesses perfectly properly. It seems to us that there is a distinct danger of the measure drawing the net so wide as to include a considerable number of businesses and people whom we would not wish to catch.

Many of the problems seem to relate to the definitions and tests. Surely one of the most important aspects of legislation is to try to ensure that the definitions, terminology and tests are as exact as they can be. However, I am afraid that some of the terminology and proposed wording does not provide that directness and clarity.

It is also important not to create excessive administrative costs or disproportionate penalties. The unintended consequence of much in schedule 3 could be excessive administrative costs for people who, frankly, should not have to face them and businesses having to make considerable changes to their administrative procedures. The penalties that can be exacted upon businesses could sometimes be disproportionate to both the amount of business that they do and the degree of actual control that they have over their clients’ businesses.

I have some sympathy for the Government in trying to tackle a difficult issue. The amendments that the hon. Member for Chipping Barnet and Conservative Members have tabled have been helpful, in the main, in trying to narrow down how we tackle the problem, as have the Government’s amendments, although I take what the hon. Member for Dundee, East said about the possibility of their doing the reverse. That perhaps serves to demonstrate the complexity of the situation. Is the wording adequate to bring into being something that will address exactly what we all want to address, or will its openness to different interpretation create only confusion?

It is also important to be clear about the exclusions and exemptions. I find that a difficult area, because some of the businesses affected are hybrid businesses, offering a range of services. The experiences of business people, even at this early stage, give a powerful demonstration of the effects on businesses. Indeed, I suspect that there will be an effect on many other businesses throughout the country.

Perhaps the most unclear area, as well as the one with the greatest potential to cause disputes, is that of the unpaid liabilities rules. When I first read the provisions, I almost could not believe what I was reading. The idea of businesses being responsible for unclaimed and unpaid tax seems quite incredible in its potential reach. Although I accept that far too many businesses and organisations organise themselves so as to avoid tax and then to make it unclaimable, trying to move the process into other areas is fraught with dangers. The proposals are far too widely drawn. Many innocent people could find themselves caught up in something that the Government did not intend, yet the courts might decide otherwise.

As I have said, there are great difficulties and dangers in the future. I suspect that there will be great anger if the proposals go through as drafted with no further amendments. I can foresee many difficult situations and discussions between HMRC, and businesses and other organisations. It is right, of course, for the Government to tackle avoidance. However, the provisions need to be properly targeted to ensure that we do not impose excessive administrative costs. We need somehow to provide clarity of operation for something that I suspect will be strongly opposed by certain elements, particularly those who have perhaps already benefited from organising their businesses so as to avoid paying tax and national insurance.

We on these Benches support the principles behind the proposals, but I remain to be convinced that sufficient time or care has been taken to address the obvious deficiencies and inadequacies, such as the ability of those affected to amend their payroll procedures and change their paperwork. Only time will tell whether schedule 3 will be a success or as much of a failure as the ill-fated IR35. I feel that we may be in for another bout of dÃ(c)jà vu in one year’s time, and the year between now and then may be a period of considerable misery for many people.

John Healey (Labour, Wentworth)

We have had a detailed debate, and concerns have been reflected from a range of interest groups and individual companies that either may be or feel that they may be affected by the proposals. The hon. Members for Chipping Barnet, for Dundee, East and for South-East Cornwall consistently urged us to aim for clarity and certainty, as the provisions intend to, and to minimise the unintended impacts as far as we can.

In the spirit of the detailed points that have been put to the Committee, I hope to provide a detailed exposition that will reassure the hon. Member for Chipping Barnet and other hon. Members who have contributed. I appreciate the hon. Member for South-East Cornwall saying that he had “some sympathy” with the Government over the task that we face, and I welcome his saying that we are right to tackle that area.

The amendments relate to the schedule, which introduces measures to deal with the problem of managed services companies. When the Committee of the whole House debated clause 25, I described in detail the problem that we face, but it is worth reminding Committee members why action is necessary. I hope the Committee agrees that the Government are right to be concerned and to take action in that area, even if we may differ on whether the provisions are quite right and quite clear enough.

Our problem is that managed service companies are corporate structures through which workers provide their labour services. Those mass-marketed schemes are promoted on the basis that the worker will pay less tax. As a shareholder in the company, the worker is normally paid a combination of salary, at the level of the national minimum wage, and dividends, on which a lower rate of income tax applies and on which no national insurance is paid.

In the vast majority of cases, as HMRC’s compliance work has confirmed, the nature of the worker’s engagement with the end client is equivalent to one of employment. The hon. Member for Chipping Barnet alluded to the current rules—the intermediaries legislation, more commonly known as IR35. They mean that the amounts of tax and national insurance that should be paid on income from such engagements are computed on the basis that they are employment income. However, in most cases, the rules are not followed, and there is a considerable loss to the public purse. The action that we propose, however, is not just about the loss of revenue.

Theresa Villiers (Conservative, Chipping Barnet)

My anxiety over what the Economic Secretary has just said about the old IR35 rules is his statement that they are not enforced properly. What evidence does he have for that statement?

John Healey (Labour, Wentworth)

I did not say that they were not being enforced; I said that they were not being followed. I also said that we are confronting mass-marketed schemes for which the IR35 legislation proves inappropriate and inadequate.

Members will accept that the Treasury is right to be concerned about lost revenue, the impact on the public purse and the shortfall that must be made up in other ways. However, the issue is not simply about lost revenue. The measures aim to deal with the unfairness that, as businesses have told us, those who follow the rules and pay the required tax and national insurance contributions are being undercut by those who do not apply the rules correctly. There are concerns—Committee members on this side will be conscious of them—that some workers are encouraged or even forced to use managed service companies without understanding that they might, at the same time, be losing some of their employment rights. Although this legislation does not deal with employment rights, by removing the tax incentive for using MSCs and, therefore, reducing the likelihood of mass-marketed schemes, it makes it less likely that employees will enter such schemes without understanding the implications for their employment status and their employment rights.

The hon. Member for Chipping Barnet suggested in the Committee of the whole House and again this afternoon that IR35 had somehow failed. That is not true. However, it is true that the IR35 legislation was not designed to deal with mass-marketed schemes on the present scale. The contract-by-contract approach of the legislative test makes it very resource intensive for HMRC to police, so this Bill introduces targeted action to tackle the wider problem.

The legislation defines MSCs and applies income tax on the basis of the amounts of employment income of MSC workers. In due course, national insurance contributions will also be charged on that income, although that cannot happen until the Bill has Royal Assent. It also tackles the problem of MSCs escaping payment of PAYE debts.

It is worth pausing and stressing—in case Committee members have not been following the matter very closely since the pre-Budget announcements in December last year—that consultation on the legislation began last December. Many of the responses at that time recognised the problem of MSCs and the need for the Government to act to deal with them. It is clear that it will be a challenge to achieve what is, I hope, a common goal—protecting the Exchequer from those who want to bypass the rules for paying income tax and national insurance, while ensuring that the legislation is focused specifically at the abuse that it aims to tackle. I hope that the Committee will accept that, with the constructive input of those involved in the consultation throughout, we are going to achieve that goal with schedule 3, and that the amendments proposed by the hon. Lady are either unnecessary or would undermine the intent or application of the provisions that we want to introduce.

I reassure the Committee that we are doing all that we can to deal with the legitimate concerns that have been raised with us. No one would dispute that the consultation has been thorough, that it has involved a wide range of industry experts and interested parties or that the Government have listened to the concerns and suggestions. We have made appropriate amendments, where we think them right. The legislation has been significantly revised since it was published for consultation in December.

Since the publication of the Finance Bill, dialogue, consultation and discussion with industry has continued. Officials continue to meet the representatives of accountants, tax advisers, businesses and employment agencies, among others. The comments of Marcia Roberts, chief executive officer of the Recruitment and Employment Confederation, help to underline the consultation process that we have been trying to conduct. In response to the Budget announcements, she said:

“The Treasury is right to tackle abuse within the MSC market...We welcome the new definition of an MSC, which we have worked closely with the Treasury on...there were very real concerns that the legislation would adversely affect the flexibility of the UK labour market...We are delighted that the Treasury has taken our concerns on board.”

It is precisely because the Treasury and the Government are keen to consult fully that the regulations that will flow from the schedule are not provided to accompany the debate. The draft regulations on the PAYE debt transfer were published for consultation on 8 February, and the consultation closed on 30 April. I think that hon. Members will agree that we should consider the comments fully and in detail before proceeding. As was explained in the letter of 9 May that the Chief Secretary wrote to you, Mr. Illsley, your co-Chair, Mr. Gale, and Opposition Front-Bench spokesmen, copies of which have been made available to the Committee, we have committed to publish the PAYE and national insurance regulations next month, which we will lay before the House when the Bill has Royal Assent.

Before I turn to the detail of the amendments, I want to reiterate to the Committee the significant amounts of tax and national insurance that are at stake, and the scale of the threat to the public purse. Given the sharp growth of MSC schemes in recent years, we estimate that the measures in the schedule and its associated clause could take revenue of £350 million in this year alone.

Our starting point, which has formed the core of much of the debate today and in the Committee of the whole House, is the definition of an MSC. There is, understandably, much concern that there could be collateral damage to those who are genuinely in business on their own account, and that there might be increased burdens on them. There are also concerns that people to whom the proposed legislation is not intended to apply will be caught by the measures. I hope that we can remove some of the many misunderstandings and that I can provide some certainty for members of the Committee and the businesses that have made representations. I give the undertaking that further guidance on the legislation will be produced by HMRC next month, and HMRC will consult informally with interested parties to ensure that the guidance gives the necessary clarity that those groups seek.

The definition of an MSC in the draft legislation published in December focused on who controls the company. As was discussed in the Committee of the whole House, not least by the hon. Member for Falmouth and Camborne, the subsequent response from MSC providers made it clear that they were determined to get around the new definition. They rapidly made MSC workers the directors of new companies to give the impression that those workers were in control of those companies. Many people who responded to the consultation pointed that problem out to us, and it became clear that a tougher, clearer and stronger definition was needed. The definition in schedule 3 is a response to those calls in the consultation and to the actions of MSC providers who tried to get around the definition that we proposed in December.

Proposed section 61B(1) sets out the four conditions that must be met for a company to be defined as an MSC. They are, in summary: that the business consists wholly or mainly of providing the services of an individual to others; that payments made to the individual are equal to the greater part or all of the consideration for the provision of the services; that the way in which those payments are made would result in them receiving, net of tax and national insurance, an amount exceeding that which they would have received if the payment were employment income; and that an MSC provider is involved with the company.

Amendments Nos. 38 and 39 seek to change the third of these conditions. We have deliberately framed the provisions in a way that is not time specific or time related so that each payment must be considered as and when it is made. These amendments seek to apply the criterion on an annual basis, which would have the effect that consideration of whether a company is or is not an MSC could only be made on an annual basis at the end of a tax year.

There is no justification for these amendments and I hope to explain why they would be detrimental to the intent of the legislation. The hon. Member for Chipping Barnet may have adopted this from the intermediaries legislation, but the approach that we are taking in this Bill is deliberately different. Under IR35, the terms of engagements are considered after the end of the year on the basis that many may not be within IR35. By contrast, the Bill deems all income received by a worker by means of an MSC to be employment income. As such it is liable to the deduction of PAYE when received. There is no reason to wait until after the end of the tax year to make that judgment. If the amendments were adopted, there is a risk that the flow of PAYE to the Exchequer could be impeded.

Turning to the fourth of the conditions in proposed new section 61B(1), it is essential that this subsection is read carefully and in its entirety. It may be that we keep coming back to the point that I wish to make now. Proposed new subsection (1)(d) states that a company is an MSC provider if

“a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals...is involved with the company.”

The first element that must be satisfied is that a person is carrying on a business of promoting or facilitating companies to provide the services of individuals, not a business to promote or facilitate companies generally. For that reason, those promoting or facilitating companies generally—for example, company formation agents—are not MSC providers. The same would be true of training providers and a number of companies that may provide advice.

Some have asked whether a person who promotes their business and who provides services to those working through service companies is an MSC provider. The answer is no. There is a clear distinction between a person who promotes themselves or their business and someone who is, as a business, promoting the use of companies to provide the services of individuals. Even if a person fulfils the criterion of being an MSC provider, it does not automatically follow that their client companies are MSCs. That depends on the nature of their relationship with their client companies—namely, whether they are involved with the client companies. The word “involved” is separately defined in the legislation and I will say more about that in a moment as it was another concern.

Amendments Nos. 40 and 41 relate to the fourth condition set out in proposed new subsection (1)(d). If they became part of the Bill they would undermine its effectiveness by giving MSC providers the opportunity to sidestep the definition of an MSC provider while providing no additional safeguards for those merely providing accountancy services. Amendment No. 40 would bring into the definition of MSC provider the condition that the activity was their “sole or main business”. Our legal advice is that the Courts may well interpret the term “main business” as more than 50 per cent.

For those determined to sidestep the definition—we have seen ample evidence of that since we published our draft proposals in December—it is not beyond the bounds of possibility that an MSC provider would seek to run a dual business of which the provider element consisted perhaps of only 49 per cent. For the same reason, therefore, the word “sole” would provide even greater scope for circumvention. Similarly, substituting “promoting and facilitating” for “promoting or facilitating” would enable MSC providers to circumvent the definition of an MSC provider by splitting the two constituent elements of their business. The association rule, as some might describe proposed new section 61C(4), which seeks to counter the splitting of a business, would not be effective in that situation because in order for it to apply there needs to be an MSC provider before there can be an associate.

I am afraid that amendment No. 41 would also undermine the effectiveness of the legislation. First, it would include in proposed new section 61B(1)(d) a description of an MSC provider’s relationship with a client company, which is set out already in proposed new section 61B(2). I think hon. Members can appreciate that that structural change would simply confuse those attempting to interpret the legislation and, potentially, could mislead courts when they come to construe it.

Secondly, and perhaps more importantly, we are looking for greater certainty and clarity, but the amendment would introduce what I am sure most hon. Members would accept is a rather vague concept of

“most aspects of running the company”.

Those terms, allied to the proposed inclusion of the word “regularly”, again would give MSC providers ample scope to challenge a claim that they did not fit the criteria or to sidestep them in the first place.

The hon. Lady raised a serious concern about tainting, as she put it. I think that that is what led to amendment No. 42, as she explained to the Committee. My concern is that the amendment is not necessary or helpful and could undermine the intent of the legislation. I understand from what she said that it would ensure that an MSC provider’s other client companies with which it is involved are disregarded when determining whether an individual company is an MSC. To a large extent, the legislation does that already by virtue of proposed new section 61B(1). Specifically, proposed new subsection (1)(d) refers to the MSC provider being “involved with the company”. That links directly to the opening words in proposed new section 61B(1), which reads:

“A company is a “managed service company” if—”.

We are aware, however, that MSC providers seeking to circumvent the legislation will claim that each relationship with their thousands of client companies is unique and does not constitute being involved. Let me try and be clear about how HMRC will approach this. First and foremost, it will look at the nature of the product provided by an MSC provider. Where it is clearly a standardised product constituting the MSC being involved with client companies, it will take the starting view that all client companies are MSCs. The onus will then be on the individual companies to demonstrate no involvement.

If the amendment were adopted, it would risk undermining the legislation because in determining whether a person is an MSC provider it is necessary to look at the nature of their business. Clearly, to do that it is necessary to look at the services provided by the clients more widely. There is the risk that an MSC provider would seek to challenge the assertion that it is carrying on a business of “promoting or facilitating” by arguing that in determining the nature of its business, HMRC could not consider the nature of the services offered widely. Clearly, that could constrain HMRC unduly and could undermine the effectiveness of the legislation.

Adam Afriyie (Conservative, Windsor)

Will the Financial Secretary make some observations about an MSC changing its behaviour by relocating overseas? Is there a possibility that the tightening up of the regulations, or the introduction of this legislation, would perhaps drive some of these businesses to operate overseas?

John Healey (Labour, Wentworth)

I suppose, particularly in this day and age, that many companies of many types may consider the question of their national base. I see no reason why this Bill should lead to that response from MSC providers, but clearly there may be MSC providers that consider such a move as part of their business planning.

I mentioned a few moments ago the question of the definition of “involved” and that is an important point.

Mrs. Villiers rose—

John Healey (Labour, Wentworth)

I am happy to move on to my next point, which the hon. Lady is concerned about, or I will give way if she wants to pick up on previous points.

Theresa Villiers (Conservative, Chipping Barnet)

Amendment No. 42 is about tainting and the provision that one should not have regard to the scheme provider’s relationship with other companies. If the amendment were adopted, it would not stop HMRC from examining the general business of the scheme provider, assuming that other amendments were not accepted. It would still be open to HMRC to examine whether the scheme provider was in the business of promoting or facilitating the use of companies. It would be possible to examine the general nature of the product offered by the scheme provider under proposed section 61B(1)(d), even if my amendment, which would solve the tainting problem, were to be adopted.

John Healey (Labour, Wentworth)

That is not the view that we take of the impact of amendment No. 42. As I think that I have explained to the Committee, the risk is twofold: first, the amendment would give grounds for the MSC provider to sidestep or challenge the assertion that it was carrying on the business of promoting or facilitating; secondly, in determining the nature of the business, which is clearly one of the factors that HMRC would have to take into account, the amendment may prevent HMRC from considering the nature of the services that are offered more widely, because it may constrain HMRC simply to examining the specific company.

Turning to the question of involvement, proposed section 61B(2) sets out five tests of involvement. If one of these tests is met, the company is an MSC. It is important to emphasise that this measure needs to be considered only if there is an MSC provider. For example, a tax adviser providing tax advice is not an MSC provider and therefore the tests set out in proposed section 61B(2) are not considered.

The five activities defining “involved” go beyond the services provided by accountants. Some have suggested that the word “influences” in proposed section 61B(2) captures all the advice given by accountants and advisers, but there is a distinct difference—I think that hon. Members would accept that there is a difference—between a person who provides independent, tailored advice to a client, who is then able to consider that advice before accepting it or rejecting it, and the person who simply supplies a client with a standard solution or product that the client accepts. It is not the intention that the former situation—the provision of advice—be considered to be influencing in this context. However, the latter situation—supplying a standard solution or product—is regarded as influencing.

I hope that my statement on this matter—I recognise that it has been a matter of concern—will help to provide clarity and reassurance to those who are interested.

Theresa Villiers (Conservative, Chipping Barnet)

The Financial Secretary is generous in giving way and I appreciate it. However, I draw his attention to the point that I made in my remarks on proposed section 61B(2)(d), that one “influences” if one

“influences or controls the company’s finances or any of its activities”.

People do not engage accountants and pay them fees unless they expect them to influence their company’s finances or its activities. Otherwise, why have an accountant?

John Healey (Labour, Wentworth)

I thought that I had been quite clear. In the majority of situations where concerns have been expressed to us, this measure becomes relevant only if the company is an MSC provider. In other words, as I tried to explain, it is only if an MSC provider is established that the provisions and questions around the word “involved” apply. In the vast majority of examples, that will not be the case.

Let me turn to new section 61B(3) and reinforce the fact that a person who merely provides legal or accountancy services in a professional capacity is not an MSC provider involved with their client. There is a specific exclusion—this is the point about which the hon. Lady is concerned—from subsection (1)(d) for those who provide such services. Let me try to make this absolutely clear: even when the specific exclusion does not apply, the purpose of the legislation is not to include within the definition of MSC provider accountants, tax advisers, lawyers and company secretaries who provide advice or other professional services to companies in general. Those persons are not in the business of promoting or facilitating the use of companies to provide the services of individuals, nor are they regarded as involved with the company in the way in which the legislation envisages.

Theresa Villiers (Conservative, Chipping Barnet)

Will the Financial Secretary give way?

John Healey (Labour, Wentworth)

Perhaps I could just give this example, as it might help the hon. Lady. When an individual asks a tax adviser for help or advice in setting up a business to provide that individual’s services to end users, the tax adviser considers the individual’s position and might recommend a corporate structure that includes the payment of dividends to the individual as a shareholder worker. The tax adviser is not acting as an MSC provider.

Theresa Villiers (Conservative, Chipping Barnet)

I am grateful to the Financial Secretary. Let us take a different example, where an accountant specialises in giving advice to freelance workers and contractors. Day in, day out, contractors come to that accountant to get advice on the best way in which to run their business. The accountant regularly sets up companies and carries out services in relation to them. Do they not fall within the scope of paragraph (d), so that there is a danger that they might be construed as being in the business of promoting or facilitating the use of companies to provide the services of individuals?

John Healey (Labour, Wentworth)

Freelancers or agency workers who are engaged directly by any agency or who are in some way in business on their own account and run their own affairs, either through a personal service company or some sort of umbrella company, are simply not affected by the legislation. Only those freelancers or agency workers who operate through managed service companies will be affected by the changes that we propose.

Stewart Hosie (Scottish National Party, Dundee East)

On that point—it is my main concern—when one considers new section 61B, which defines the meaning of a managed service company, one could easily come to the conclusion that a normal recruiting company or accounting services company with a recruitment element would fulfil all the criteria in subsection (1), whether it was wholly or mainly providing people or whether payments were made in a certain way or were of a certain size. It would certainly be promoting the business as if it were an MSC, particularly in its involvement with companies, as I have described. I am still not sure that the safeguards will be there for legitimate recruitment companies. I have not heard anything to tell me that they will not fall into this category and be punished in a way that I think is unintentional.

John Healey (Labour, Wentworth)

If the hon. Gentleman will allow me, I shall come to employment agencies and recruitment companies in a moment.

Amendments Nos. 43 to 46 appear to intend that the exclusion for the provision of accountancy and legal services should apply to the tests of involvement under proposed section 61B(2) as well as the definition of an MSC provider. It is the Government’s view that they are not necessary. As I have said, the tests of involvement are considered only if proposed section 61B(1)(d) applies in its entirety, so only in the case of

“a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals”.

Amendments Nos. 45 and 46 attempt to expand and clarify the scope of the exemption for the provision of accountancy and legal services in a professional capacity. The difficulty with amendment No. 45 is that it would undermine the legislation. Far from providing clarity, the terms that it would add, such as “services of a nature” and “including”, would simply render proposed new section 61B(3) of the 2003 Act so ambiguous that many MSC providers would arguably claim that it exempted them. The reference to company secretarial services is also unnecessary, since generic services such as those and company formation do not fulfil the criteria that we have set out in proposed new section 61B(1)(d), as they are not in the business of

“promoting or facilitating the use of companies to provide the services of individuals”.

Amendment No. 46 sets out a list of what accounting services might include and provides for the Treasury further to provide a list of such services by affirmative resolution. My judgment is that the services listed will not help to tackle what we are trying to tackle and would not be necessary. The reason for coming to that conclusion is as follows. To reiterate, proposed new section 61B(3) explicitly excludes certain categories of persons providing certain services from the scope of proposed new section 61B(1)(d). Those providing the type of services listed in amendmentNo. 46 would already be excluded, either explicitly, by virtue of proposed new section 61B(3), or because they are not in the business of an MSC provider as set out in proposed new section 61B(1)(d).

I apologise to the Committee for a mistake in the explanatory notes, which we published on 29 March. The note on clause 25 and schedule 3 contained an error in paragraph 24, which provides the explanation of proposed new section 61B(3). The error was helpfully pointed out to us by a lawyer from one of the representative bodies—not by my hon. Friend the Member for Wolverhampton, South-West, although I am sure that he would have spotted it and been on his feet anticipating my remarks if he was in Committee this afternoon. Unfortunately, the original note misquoted the text, by referring to the

“business of promoting and facilitating”,

rather than the

“business of promoting or facilitating”.

Clearly the hon. Member for Chipping Barnet also spotted that. Just to reassure the Committee, we have amended the explanatory notes on our website, although we have not published a new printed version.

Before turning to some other points, I should like briefly to mention Government amendment No. 97. I said in the Committee of the whole House that employment agencies and businesses have an important and legitimate role to play in the temporary labour market and we would not want to disrupt that. To ensure that employment agencies are not caught by the definition of MSC provider, we have provided an exclusion in proposed new section 61B(4). However, given the potential for MSC providers simply to re-badge themselves as employment businesses or agencies, the exclusion in proposed new section 61B(4) was restricted, to the extent that employment businesses and agencies do no more than would be expected from such businesses.

Our amendment No. 97 corrects a technical flaw in the legislation, which, if left unchanged, would have resulted in the exclusion being too narrow and therefore bringing employment businesses back within the scope of the definition, which was clearly not our intention. Our amendment will allow an employment business or agency to influence a worker’s company or its finances to the extent that that relates to the placing of the individual with an end client. That will mean that such businesses can carry on their normal activities, as intended.

I hope that I have been able to make it clear to the Committee that the measures have been subject to detailed and constructive consultation. Underpinning our work has been a clear consensus that action is needed to tackle the problems identified. The Committee has been indulgent this afternoon. I hope that what I have said is helpful and will bring a degree of certainty and clarity about who falls within the scope of the legislation, which I recognise is important to businesses involved in the sector.

I hope that I have also explained why the amendments and arguments put forward by the Opposition would not improve the certainty of the legislation in most cases, and in some cases would cause greater confusion and more scope for circumvention. I hope that the hon. Member for Chipping Barnet will not press the amendment, but if she does, I shall have to ask my hon. Friends to oppose it.

Theresa Villiers (Conservative, Chipping Barnet)

I remain concerned about the proposals. As I said from the outset of the debate on schedule 3, the Opposition would support appropriately targeted attempts to deal with what is a genuine problem. Regrettably, the Financial Secretary is not prepared to accept any of our amendments. I am not convinced that what he said about the restrictive scope of paragraph (d) will be reflected in a court decision in two or three years’ time, for example.

I do not think that there is sufficient certainty, as we still have not heard enough of an explanation of what “promoting and facilitating” involves. All we have heard is that someone producing a standardised product for the use of freelancers and contractors is likely to be caught by the provisions, but people whose services are more tailored are not. I remain concerned about tainting; I do not believe that the amendment that I tabled would have the negative consequences that the Financial Secretary suggested it would. I wish to press amendments Nos. 40 and 41 to a Division. I do not propose to press amendment No. 38. I beg to ask leave to withdraw the amendment.

Theresa Villiers (Conservative, Chipping Barnet)

I beg to move amendment No. 49, in schedule 3, page 95, line 45, at end insert—

‘61K Implementation, investigation and enforcement

(1) The provisions of this Chapter may be administered and enforced only by officers of the Revenue and Customs acting with the authority of the Commissioners for Her Majesty’s Revenue and Customs.

(2) A certificate of the Commissioners for HMRC stating that an officer of Revenue and Customs has authority to act under this Chapter shall be conclusive evidence of this fact.’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss the following amendments: No. 82, in schedule 3, page 96, line 9, leave out

‘an officer of Revenue and Customs considers’.

No. 50, in schedule 3, page 96, line 10, after ‘Customs’, insert

‘, acting with the authority of the Commissioners for Her Majesty’s Revenue and Customs,’.

No. 51, in schedule 3, page 96, line 12, at end insert—

‘(1A) A certificate of the Commissioners for Her Majesty’s Revenue and Customs stating that an officer of HMRC has authority to act under the regulations provided for in subsection (1) shall be conclusive evidence of this fact.’.

No. 52, in schedule 3, page 96, line 16, leave out ‘encouraged, facilitated’ and insert ‘actively encouraged or facilitated’.

Government amendment No. 98

No. 53, in schedule 3, page 96, line 20, at end insert—

‘(2A) No person shall fall within the scope of subsection (2)(c) above unless they knew or should have reasonably been expected to know that the services of the individual were being provided by a managed service company.’.

No. 54, in schedule 3, page 96, line 20, at end insert—

‘(2B) Ordinary employees of the MSC provider shall not fall within the scope of subsection (2). For the purposes of this subsection, “ordinary employees” means employees who are not involved with organising, managing or directing the overall activities of the MSC provider.’.

No. 55, in schedule 3, page 96, line 20, at end insert—

‘(2C) An individual whose services are provided by the managed service company does not fall within subsection (2) unless he knew or should have reasonably been expected to know that his services were being provided by a managed service company.’.

No. 60, in schedule 3, page 96, line 20, at end insert—

‘(2D) A person does not fall within subsection (2)(c) merely by virtue of contracting with businesses who provide the services of individuals to it and which may be MSCs.’.

No. 61, in schedule 3, page 96, line 20, at end insert—

‘(2E) A person does not fall within subsection (2)(c) merely by virtue of carrying on a business consisting only of placing individuals with persons who wish to obtain their services (including by contracting with companies which provide those services); but this subsection does not apply if the person, or an associate of the person, does anything within any of the paragraphs (c) to (e) of subsection (2) of section 61B.’.

Government amendment No. 99

No. 56, in schedule 3, page 96, leave out line 22 and insert

‘services of a nature provided by advisers in a professional capacity, including legal, accounting and company secretarial advice.’.

Government amendment No. 100

No. 57, in schedule 3, page 96, line 22, at end insert—

‘(3A) For the purposes of subsection 3, accounting advice includes, but is not limited to, advice and assistance concerning:

(a) preparation or provision of records, returns, financial statements, reports or financial information concerning accounting;

(b) auditing, insolvency or taxation matters;

(c) communication and representations made on behalf of a client to third parties in matters concerning accounting, auditing, insolvency or taxation.

(3B) The Treasury may by order provide for a non-exhaustive list of professional services which fall within the meaning of subsection (3) and (3A) above.’.

No. 58, in schedule 3, page 96, line 22, at end insert—

‘(3C) In determining the amount sought to be recoveredunder these provisions from any person, regard must be had to the degree of involvement by that person in the activities of the MSC, the running of the MSC or the provision of services of the individual.’.

(3D) Any notice given under this section must include details of all those persons under subsection (2) from whom recovery is being, or has been, sought.

(3E) The Treasury may specify by order the sequence in which categories of persons against whom recovery will be sought under this section.

(3F) HM Revenue and Customs may not pursue persons mentioned in subsection (2)(c) under the provisions of this section unless, in the opinion of an officer of Revenue and Customs—

(a) it is impossible to recover the specified amount from persons mentioned in paragraphs (a) and (b), or

(b) it is impracticable to recover the specified amount from those persons.’.

No. 101, in schedule 3, page 96, leave out lines 35 and 36.

No. 59, in schedule 3, page 96, line 37, after ‘subsection’, insert ‘(3B), (3E) or’.

Theresa Villiers (Conservative, Chipping Barnet)

I apologise for trying to get to this a little prematurely a few minutes ago.

The amendments in this group are broadly focused on proposed new section 688A and the third party debt transfer provisions in schedule 3. There is a concern that they could be used to target the innocent, ranging from end users of contractors to employment business and their advisers. The Committee should be aware that the proposals are powerful. They are more far-reaching, by some measure, than the rules that rendered company directors liable for the debts of their company.

In this regard, I should cite Blake Lapthorn Tarlo Lyons, a firm of solicitors to which I have referred before. It has said:

“This is a fairly revolutionary principle...People are now going to be liable for the tax affairs of their suppliers (i.e contractors) even where those suppliers are clearly self-employed but just happen to fall within the new MSC regime...It is clear that ultimately staffing companies and others who are some way from the day to day affairs of the MSC and not directly interested (in terms of shareholding or profit share) in the MSC, may become liable for the MSC’s unpaid tax and NICs.”

More worrying, it points out:

“Conceivably a staffing company which fails to take appropriate steps may find itself hit by an unprovided for tax bill for as much as 20 to 30 per cent. of its turn-over”.

Ann Swain, the chief executive of the Association of Technology Staffing Companies, described the current situation bluntly, saying:

“There is too much risk...It’s ridiculous.”

She continued by saying that the Chancellor

“is cutting back on the flexibility of the workforce in a huge way.”

It is not an answer for Her Majesty’s Revenue and Customs to say that it will only enforce the provisions responsibly and will not target the innocent. If the legislation is too widely drafted, it must be restricted by statute. It would be unconstitutional to leave the problems identified in relation to proposed newsection 688A to be resolved at the discretion of HMRC.

As I have told the Committee, some legitimate consultants and contractors are finding that their work is drying up because people are so anxious about these provisions that they are becoming increasingly reluctant to deal with any small service companies. The Opposition’s amendments in this group therefore seek to achieve three important goals: to clarify the third-party debt rules; to prevent their being used against innocent third parties who are unaware that they are dealing with an MSC; and to provide important safeguards in the way in which the rules are administered and enforced.

I should like to deal with the timing of the introduction of these proposals. They have proved to be so controversial that their implementation has been postponed from the start date of 6 April that applies to the rest of the legislation. The HMRC website states that the debt transfer provisions come into effect for MSCs and MSC providers from 6 August and for other third party parties on 6 January 2008. As those dates do not appear in the Bill, it would be useful if the Financial Secretary would confirm, as I believe that he did earlier, that those are the appropriate dates. It would also be useful if he would confirm whether or not the clock is already running on tax debts that have accumulated since 6 April? Given what he has said, I do not think that that is likely to be the case, but I know that some people believe that it might well be and clarification would be useful. It would be very unfair if these penal liabilities could be building up now, even though the legislation has not been finalised.

Even assuming that debts can build up only from August or January, the timetable is a short one—it is much shorter than the lengthy run-up to IR35. Unpopular though that measure was, at least people who were affected by it were given a chance to understand what it meant and to adapt their systems to ensure that they were compliant with the new rules that the Government were introducing.

The liabilities will kick in in just two months, yet a major part of the relevant rules—the final draft of the secondary legislation—has not even been published, although we have the initial draft, which appeared in the consultation. It is a matter for concern that the Committee does not have sight of the final draft of the secondary legislation. It would be inappropriate to finalise the secondary legislation before considering the consultation responses, but it would have been useful if the Government had timed the consultation in such a way that it had closed earlier with sufficient time not only for the Government to consider the responses, but to produce the legislation in time for the Committee to consider it.

Amendment No. 49 focuses on a point of concern raised with me by the Professional Contractors Group, and is linked to amendments Nos. 50 and 51. They are probing amendments to give the Committee the opportunity to discuss the approach that might be taken by tax inspectors with limited expertise or experience in this technical and specialist area. They seek to ensure that the managed service company provisions are enforced and administered by specialist units at HMRC. I understand that HMRC has indicated that that will be the case, and I think it is important to ensure that those involved with enforcement of the provisions have appropriate training and understanding.

The PCG has made representations that the enforcement of IR35 has often been problematic and that cases have often been withdrawn by HMRC after lengthy wrangling when they were passed from local inspectors to specialist units. It seems to be under the impression that it is fairly common for non-specialist local inspectors to make errors in the difficult task of implementing IR35, and it has justifiable concerns that that might happen with the new legislation, which, as we have heard from this side of the House, is difficult to understand. PCG members certainly feel that local inspectors have not always understood IR35 correctly, and giving statutory backing to the commitment to use specialist enforcement in this area could reduce errors, as well doing something to promote confidence in the new measure.

Amendment No. 82 relates to the term “HMRC considers”. We will no doubt come back to the matter, but it essentially raises the same concerns that many have raised in relation to the term “HMRC thinks” in other parts of the Bill. New section 688A permits sums to be recovered under the third party debt provisions when HMRC considers they should have been deducted by the MSC from payments to workers.

My concern is that either the law required the sums to be deducted by the MSC, or it did not. The mental processes, views and opinions of what “HMRC considers” should have been done should not be relevant in determining the amount of tax to be paid. I hope that the Minister will consider supporting the amendment to delete “HMRC considers” or at least inform the Committee why the wording in new section 688A(1) is necessary. How will a determination be made of what “HMRC considers” to be the case, and how can that be challenged? Does the Revenue’s opinion have to be based on reasonable grounds, and are there any circumstances in which the tax that HMRC considers to be due is not required to be paid under statute?

Amendment No. 82 reflects serious worries raised by the Institute of Directors, which states in its briefing on the Bill:

“We have a general concern about the underlying attitude, which we see as being one of ‘trust me, I’m a Government official’...It is not easy to square such legislative recognition of the significance of officials’ opinions with the spirit of the Bill of Rights of 1689 or of the standard preamble to a Finance Act, both of which make clear that decisions on who pays what taxes rest with Parliament rather than with the Crown.”

I hope that the Minister will think again about the terms “HMRC considers” and “HMRC thinks” later in the Bill.

I move to amendments Nos. 52 and 53 and Government amendment No. 98, which address the heart of concerns surrounding the third-party debt provisions that we are considering. The Opposition amendments seek to restrict the wide reach of subsection (2)(c) of proposed section 688A, which imposes liability on any person

“who (directly or indirectly) has encouraged, facilitated or otherwise been actively involved in the provision by the MSC of the services of the individual”.

Although the relevant issues here are similar to those that we discussed regarding proposed section 61B(2)(d), paragraph (c) of subsection (2) is even broader.

Amendments Nos. 52 and 53 are designed to answer some of the many concerns that have been expressed about the wide-ranging scope of paragraph (c), and should be read alongside amendments Nos. 54, 55,60 and 61, which would provide clarity about the liability of specific groups. Those groups are: the ordinary employees of the scheme provider; the worker in the MSC; the end-client who engages the services of the worker; and staffing and recruitment companies.

Before I discuss our amendments in detail, Ishould like to make it clear that I welcome Government amendment No. 98 to delete the word “facilitated” from paragraph (c). I am pleased that they have responded to the concerns that I expressed on Second Reading andin the Committee of the whole House about the scope of the third-party debt rules. The Committee has already considered the problems with the concept of facilitation in relation to proposed section 61B, and the issues here are similar. Accountants, company formation agents and even insurance companies might be caught by the third-party debt rules because their activities can undoubtedly facilitate the use of companies to provide the services of individuals.

In amendment No. 52, I sought to qualify and restrict the scope of the word “facilitated” by requiring active conduct before liability could be established under paragraph (c). It is preferable that the word should be deleted altogether, but that would not solve the problems with the paragraph. The word “encouragement” is still retained in the paragraph, and is, as the Law Society has pointed out, very broad. Its briefing states:

“The focus of the secondary liability rules should be persons who are involved in the management of the activities of the MSC and who make money from those activities. A person who encourages is someone who is on the sidelines rather than someone who is involved in the activity.”

Even with the removal of the word “facilitated”, the Opposition believe that more needs to be done to introduce an element of culpability before liability can be established.

Amendment No. 53, which would insert a new subsection (2A), would remove from the scope of the third-party debt rules people who did not know or could not reasonably be expected to know that they were dealing with a managed service company. The amendment is designed to remove from risk people who have unwittingly been involved with an MSC by requiring deliberate conduct or complicity with the MSC scheme. The Institute of Directors put this point well in its submission, when it said:

“Subsection (2)(c) encompasses too wide a range of people. It means that people could have tax debts passed on to them even without culpability. This is a major departure from the normal principle that people can only be penalised when there is some fault on their part. We regard the failure to include some culpability test as wholly unacceptable, and as reflecting a desire to design a system to suit the convenience of officials. The reference to active involvement does not amount to a culpability test, and no permanent reliance should be placed on any Ministerial or official expression of intent that it will be interpreted as a culpability test.”

The final point is particularly telling. The word “active” did not appear in the draft section 688A in the consultation document. HMRC added the word “actively” to section (c) to turn “or otherwise been involved” into

“or otherwise been actively involved”,

and seemed to think that that sorted out the culpability problems.

HMRC also seems to believe that it has provided for the element of conscious wrongdoing that was hitherto missing from the measures. I agree that the insertion of the word “actively” is useful—indeed, my amendment No. 52 also uses that concept to qualify not only involvement but encouragement and facilitation—but it is insufficient to inject the element of culpability that is needed if we are not to catch people who are innocent and unaware of their connection with an MSC in the net of the debt transfer rules. That is why proposed new subsection (2A) is necessary. The Committee should note that it would not protect people who deliberately shut their eyes to what is going on, or those who, given the facts that they knew, ought reasonably to have known what was going on.

Let me anticipate some of the concerns that I think that the Minister might express. He might say that importing a knowledge requirement explicitly into the statute could give rise to evidential problems. In response I point out the reference in amendmentNo. 53 to:

“should have reasonably been expected to know”

To a large extent that will deal with such evidential concerns. If a person knew facts that would lead an ordinary person to conclude that they were dealing with an MSC, that will suffice. I point out also that very similar wording appears in other contexts in the law, particularly in section 214 of the Insolvency Act 1986 in relation to directors’ liability for debts of their company. If the courts can cope with that concept elsewhere, they should be able to cope with it in schedule 3.

My second response to resistance to the amendment comes from the Treasury’s own consultation paper, which states that,

“the scope of the provision is limited so the legislation is not intended to include anyone who didn’t know or could not reasonably be expected to know that they are dealing with an MSC”.

That was repeated by the Financial Secretary in a letter to me dated 10 May. If that is the Treasury’s intention, why not make it clear in the statute? If he will not accept that amendment, it is critical that he clarify in Committee what led him to believe that proposed new section 688A as it stands produces the result set out in his letter and the consultation paper. We need a further explanation of the meaning of the statement in the consultation paper and of how the principle that it will establish will operate in practice.

I shall turn to amendment No. 54, the first of the amendments on different groups affected by the third-party debt rules. As drafted, the ordinary non-director and non-shareholding employees of an MSC provider could be caught by proposed new section 688A(2) as someone who has

“encouraged, facilitated or...been actively involved in the provision by the MSC of the services of the individual”.

For example, a payroll clerk or secretary might well have facilitated or been actively involved, but it seems pretty harsh to hold those people liable for significant sums of money. The amendment is focused on imposing the liability on the controlling minds of the MSC providers, rather than just its junior staff. It would focus the statute and liability on staff members who were actively

“organising, managing or directing the overall activities of the MSC provider.”

Amendment No. 55 raises slightly more difficult issues. It is a probing amendment designed to highlight issues concerning workers operating through the MSC and to get a clearer idea of the circumstances in which a worker might be pursued under proposed new section 688A. The PCG is concerned about that point. It is clear that workers could fall within the scope of the third-party debt rules; they do so explicitly under new section 688A(2)(a) if they are a director or office holder. However, even if they are not, presumably carrying out the work itself would bring them within the remit of paragraph (c) as actively involved in the provision of services via the MSC; providing those services must amount to active involvement.

A concern needs to be cleared up about whether a worker could end up with the tax liability for all the other workers in the MSC. That point was raised with me by the London Society of Chartered Accountants, which is concerned that the provision would enable HMRC to claim PAYE and then NICs from a contractor who had worked for an MSC in relation to all the other co-workers in the MSC. That could lead to significant liabilities for workers, and the society advocates steps to be taken to amend the situation.

I think that the answer the problem might be partly provided in new section 688A(2)(d), where it is required that acts of encouragement and facilitation focus on the activities of “the individual”, not “individuals” or “an individual”, so the liability for a co-worker’s tax debts would come only with encouragement in relation to the provision of their services. However, if one contractor gets other contractors into a particular project, the criteria might be satisfied. So there is a risk, and if the Financial Secretary can eliminate it today, it would be useful.

Even if new paragraph (c) does not mean inevitably that a worker is liable for the tax debts of other workers in the MSC, might the liability be imposed if they were an associate of the company under paragraph (a)? The meaning of “associate” is set out in new section 61I(3) as

“a person connected with the company”

and is defined in section 839 of the Income and Corporation Taxes Act 1988 as someone who has control over the company. A worker can certainly be said to have control over the company in a case in which just one worker is entitled to all the dividends. However, catching the worker on the grounds that he controls the MSC rather contradicts the Government’s assertions that workers in MSCs do not control their own companies. That lack of control and independent operation by the worker is what the Government say that they want to target and stamp out, so it would be useful if the Minister could confirm that workers in MSCs are unlikely to be liable as associates of the company.

Amendment No. 60 is critical. It concerns the end client—the company that engages the services of the contractor. The end client should not be at risk as a result of new section 688A merely by virtue of having hired people who happen to be operating via MSCs. Amendment No. 60 would make that crystal clear by inserting a new subsection (2)(d) with a safe harbour for those who engage the services of contractors. It provides that the end client will not be liable merely because it hires a contractor who is operating via an MSC. Without clarification, it might seem that that conduct is enough to amount to encouragement of the provision of services via an MSC. What could be clearer encouragement to provide services via an MSC than paying the MSC to provide the worker?

The end client should not have to check details of contract workers’ relationships with their service companies or their professional advisers. Any requirement to do so would significantly disrupt outsourcing in this country and would have a damaging impact on the flexibility of the labour market. There was an extensive debate on that under IR35, and the Government eventually conceded that end clients should not be targeted.

I understand that HMRC believes that inserting the word “actively” in relation to “or otherwise involved” would remove the threat from innocent end clients. However, that would provide very uncertain protection and could be interpreted in a number of different ways by the courts. Given the large liabilities involved, it is vital that the issue be cleared up, preferably by an amendment. Certainly, any clarification that the Minister can give this afternoon will be very much welcomed by those who are affected.

Amendment No. 61 is designed to clarify the operation of the framework in relation to staff in recruitment companies. We have heard a number of concerns expressed about that. The Institute of Chartered Accountants has raised the point that recruitment agencies could be exposed to liability under new section 688A. Again, I welcome the Government’s attempt to tackle the issue through amendments Nos. 99 and 100. It is a matter of concern that the Bill contains a degree of protection for the recruitment industry in relation to new section 61B, but that that is not repeated in relation to new section 688A. The amendment would address the problem by lifting the wording from proposed new section 61B and inserting it in proposed new section 688A. We have already discussed the concerns raised by the recruitment sector and it is critical that those be addressed.

Amendments Nos. 55 and 56 track the identical amendments tabled in relation to the safe harbour for professionals. We have already discussed those at length, so there is no need to look at them again in detail. However, I would like to raise one point. Can the Minister clarify the difference between the wording here and that in new subsection 61B(3)? Why does the Bill refer to services there but to advice in new section 688A? Advice seems to be a narrower concept than services. Does the Minister anticipate that the safe harbour in new section 688A would have a narrower remit than that in new section 61B? If so, what is the justification for that?

Amendment No. 58 provides for a number of important safeguards in relation to the operation of the third party debt provisions, and amendment No. 59 is consequential. As we have discussed, these are serious and powerful provisions. We therefore need to ensure that they are operated and enforced in a responsible and efficient way by HMRC. We are concerned about the selection of people who could be pursued for the same debt. HMRC might be tempted to go for the low-hanging fruit—the easiest target. The amendment suggests a number of new subsections to deal with that concern.

New subsection (3C) seeks to make it clear that there is an obligation on HMRC to take a proportionate approach when using the third party debt provisions. It should be explicitly acknowledged that not all parties potentially in the frame under the Bill are equally culpable. It is to combat the deliberate winding-up of companies to prevent recovery by HMRC that these provisions have been drafted. This type of deliberate conduct should be taken into account in making decisions on enforcement. Those who are unwittingly caught by the legislation should not necessarily receive the same treatment as these deliberate evaders.

New subsection (3D) provides that if someone is being pursued for a debt under section 688A, they should know the other parties from whom HMRC is taking steps to recover the debt. That seems to me a matter of fairness. If HMRC wish to go for a scattergun approach and pursue several people, it seems only fair that their targets should be made aware of the other relevant parties and the sequence in which they are being pursued.

Turning to new subsections (3E) and (3F), again I have received representations from the PCG on the matters covered and the sequence in which parties will be pursued under section 688A. The informal indications from HMRC seem to be that the MSC will be approached first, then its directors or office holders, then the scheme provider and finally others who are actively involved in the provision of services via an MSC within paragraph (c). The amendment is designed to draw out the Minister to make some formal comment on the approach that HMRC will take and the order it will adopt. Will there be any formal sequence? If so, what will it be?

Rule 97B(6) of the draft secondary legislation provides for a restriction along the lines set out in paragraph (3F). Third parties liable under paragraph (c) will be pursued only if the debt proves irrecoverable from the MSC provider or its directors. However, the draft secondary legislation would override this sensible restriction on HMRC by adding a get-out clause that the sequence set out can be set aside if the protection of the Exchequer would be prejudiced. The amendment provides the opportunity to hear from the Minister what this restriction would involve and why he feels it is necessary to include it in the secondary legislation.

Last of all I should like to comment on amendment No. 101, which deletes the Treasury’s power to amend section 668A by secondary legislation. In a number of amendments I have suggested that the Treasury should have the power to look at particular aspects of the legislation that we are discussing, but it is a matter of concern, given the seriousness of these provisions, that HMT can have the unfettered power to amend primary legislation using secondary legislation. Given the significant liabilities and harsh nature of the provisions, I believe that if the Government wish to amend section 688A, they should bring forward primary legislation to bring that about.

John Healey (Labour, Wentworth)

This is a large group of amendments. I will concentrate most of my remarks on those that reflect the greatest concern and are therefore central to the Committee’s consideration. I hope that I can offer some further reassurance and clarity to the Committee and to those with an interest in the Bill about how it will operate in relation to MSCs.

I shall deal first with amendments Nos. 49 to 51, which deal with the implementation, investigation and enforcement of the provisions. These amendments seek to require that the measures we set out in schedule 3 should be administered and enforced only by officers of HMRC, acting with the authority of commissioners for HMRC, and that a certificate from the commissioners stating that the officer has this authority wouldbe evidence of that. It is important to understand that all officers of HMRC in exercising their statutory functions act with the authority and under the direction of the HMRC commissioners and that they do so after the appropriate training and in accordance with the legislation and published guidance. Schedule 3 means that MSCs must comply with existing PAYE legislation, including the resultant monthly payments to HMRC and the filing of returns. To require the administration of the PAYE system for MSCs to be dealt with by different HMRC officers from those who deal with employers in general seems an extraordinary proposition, which is rather impractical and therefore not appropriate.

In terms of the debt transfer provisions under proposed section 688A, the draft regulations published for consultation in February make it quite clear that an MSC debt can arise only by virtue of one of the provisions within the PAYE legislation. If the amendments were adopted, that would result in a wholly anomalous situation whereby employer debts that are established generally would be dealt with by the trained staff in whichever part of HMRC was most appropriate, but identical functions related to MSCs would be vested in specially authorised officers who would fulfil precisely the same role as their non-authorised colleagues. The Committee should think carefully if it is urged to consider those amendments.

Let me reassure the Committee on the transfer of debt. Given that the transfer notices are expected to be issued infrequently, HMRC intends to vest such work in a central, specialised team that undertakes work of a similar nature. I hope that the hon. Lady will recognise and welcome that confirmation, but I should emphasise that it is my belief the decision should remain operational and should be made by HMRC, and should not be specified in legislation.

Let me turn to the core of the concerns about the transfer of the PAYE debts. We have included the provision because we have encountered a specific problem with MSCs. We have found that when a PAYE or national insurance contributions debt is established, the MSCs frequently escape from making payment by winding up or ceasing to trade and moving workers into a new company, and because MSCs are simply a vehicle through which workers’ income is routed,they often have no assets and so HMRC is unable to recover the unpaid tax and national insurance contributions.

Proposed new section 688A contains provisions to enable regulations to transfer PAYE debts to appropriate third parties when the MSC does not pay. It sets out, of course, who those third parties are. As respondents to the consultation confirmed, the provision for the transfer of debts is essential to ensure that the wider aims of the legislation are achieved. Without it, those promoting and benefiting from the schemes could carry on without any financial risk.

As the hon. Lady recognised, we made changes as a result of the consultation. However, I am aware that concerns remain about the scope of the transfer provisions, so the three remaining Government amendments represent our considered response to dealing with those concerns. To a large extent, they overtake some of the Opposition’s amendments.

Government amendment No. 98 will remove the word “facilitated” from proposed new section 688A(2)(c) so that only those who have encouraged or been actively involved in the provision by the MSC of the services of the individual will fall within its scope. Both tests require the third party to have an active role, so those who simply use MSC workers will not be caught. If an end client did more than simply use MSC labour, for example by telling those who it employed that they must move to an MSC, it would fall within the scope of the measure as that would be regarded as encouragement—the hon. Lady asked about that point. That was the reason why we included the word “actively”, which I am glad she welcomed. She asked for clarification of whether the tax clock is ticking from April. I confirm that debts can be transferred only for PAYE or national insurance contributions from August or January, depending on which third party is considered, not from April.

The hon. Lady also voiced her concern about the notion of the power given to an officer who “considers” being rather broad. It is not as broad as it appears; it simply reflects that fact that under existing PAYE legislation, debts may arise both as a result of an employer failing to pay a sum declared as due, and on a sum estimated to be due by HMRC. Proposed new section 688A does not provide for HMRC to create a PAYE debt, but for regulations to enable the transfer of debts that have been created by virtue of existing legislation.

Government amendments Nos. 99 and 100 reflect the consideration that we have given to concerns that employment businesses or agencies might be within the scope of the debt transfer provision, simply as a result of carrying on their normal business of placing individuals. We have considered the risk that such activity might be regarded as “actively involved” under proposed new section 688A(2)(c), and have decided to remove that risk by expanding the exclusion, as set out in proposed new section 688A(3), so that the mere placing of individuals with clients is not within the scope of the provisions. An employment business will be within that scope where it is involved beyond such activity, perhaps by advising workers to use an MSC.

Theresa Villiers (Conservative, Chipping Barnet)

If a recruitment company holds a list of approved suppliers and advisers that it makes available to the contractors with which it works, such as a list of approved suppliers of corporate structures, would that bring it within the scope of the third-party debt rules?

John Healey (Labour, Wentworth)

I cannot be specific about the judgment to which an HMRC officer might come in those circumstances, but they would increase the potential for a company to fall within the scope of the rules. The Government amendments address the Opposition’s intent and concerns in amendments Nos. 52, 60 and 61.

I turn now to amendments Nos. 53 and 55, which the hon. Lady stressed. Amendment No. 53 seeks to include as a condition of the transfer of debt to other parties, or to workers providing their services, the concept that the person

“knew or should have reasonably been expected to know that the services...were being provided by a managed service company.”

My fear about the amendment is that it does not deal with the evidential concerns, as she argued, but may create them. She is right that dealing with those concerns is the objective of the legislation, but including her wording would open the door to abuse, as it would inevitably lead to legally based claims of ignorance as a defence.

The hon. Lady was rightly concerned about the position of those she termed “ordinary employees” of MSCs. Let me make it clear that we do not intend ordinary employees of MSCs or third parties to be caught by the debt transfer provision. Defining an ordinary employee would be difficult, however, and her attempt to do so made that point for me. Except for MSC directors, providers and associates, the debt transfer provisions cover only those who have encouraged or been actively involved with the supply of labour services through MSCs. It is important to recognise that the transfer of debt regulations include a specific right of appeal on the grounds that

“the amount specified in the transfer notice does not have regard to the degree and extent to which the transferee...has encouraged...or been involved.”

On those grounds, the special commissioners may reduce the amount specified in the transfer notice to a level that, in their opinion, is just and reasonable.

Amendment No. 58 is an attempt to pre-empt a provision that is more appropriate for the regulations. We set out in the draft legislation matters such as the order in which debts may be transferred, the circumstances in which they may be transferred and the rights of appeal against such transfers. In response to the representations made through the consultation, it is our intention to amend the draft regulations to provide further safeguards. I can assure the hon. Lady and members of the Committee that, as part of the process of preparing the regulations for publication next month, I shall consider carefully the point that she made this afternoon.

I hope that the hon. Lady will accept that the amendment would not improve certainty. I also hope that she will accept that the Government amendments take account of concerns that have been raised in discussions and that they will make the legislation work as intended. I hope that she will not press any of her amendments to a vote. She described some as probing amendments, but if she does divide the Committee on any of her amendments, I will ask my hon. Friends to oppose them.

Theresa Villiers (Conservative, Chipping Barnet)

I shall withdraw amendment No. 49, but I would like to press amendments Nos. 53 and 60 to a vote. I am particularly concerned that the Financial Secretary has not responded positively on amendment No. 53. He is concerned about the possibility of legally based claims and defences based on lack of knowledge. As I said, our law deals with that kind of situation in other contexts—in particular, the Insolvency Act 1986—without any problem, as I understand it.

Nor did the Financial Secretary explain why he is rejecting an amendment that uses exactly the same as his letter to me. He seems to believe that the Bill will have a particular impact, yet he is rejecting an amendment to make it clear in the legislation. Sadly, he failed to explain how the Bill will create that result.

I remain concerned about the provisions, in particular the potential impact on completely innocent end clients and the possible disruption to outsourcing in the labour market, so I will be keen to press amendments Nos. 53 and 60 to a Division. I beg to ask leave to withdraw the amendment.

Clause 26

Theresa Villiers (Conservative, Chipping Barnet)

The Opposition have grave concerns about the provisions in schedule 4, which is implemented by the clause. I shall address my remarks to that schedule in due course, but I wanted to put it on record that the fact that we shall not vote against the clause is not a reflection of our concerns, as we are very concerned about the matters raised.

Schedule 4

Theresa Villiers (Conservative, Chipping Barnet)

I beg to move amendment No. 62, in schedule 4, page 98, line 34, leave out from beginning to end of line 34 on page 100.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss amendment No. 63, in schedule 4, page 99,line 11, leave out ‘£25,000’ and insert ‘£100,000’.

Theresa Villiers (Conservative, Chipping Barnet)

As I have just said, we have grave concerns about schedule 4. The amendment would delete proposed new section 103C of the IncomeTax Act 2007, which is proposed in paragraph 1 of schedule 4. In so doing, the amendment would remove the Government’s restriction on sideways loss relief for non-active partners, as proposed in the schedule. Sideways loss relief allows a partner to set off partnership losses against other income. I understand that it has been part of our tax system for more than50 years. Sideways loss relief is designed to give relief in the early years of a partnership, when losses might be high, as they often are with a start-up business.

In schedule 4, the Government propose a two-stage restriction on sideways loss relief. Proposed newsection 113A of the 2007 Act would disallow any sideways loss relief for arrangements, where one of the main purposes of entering the transaction was tax avoidance. That might not have caused an enormous amount of controversy. There would have been issues to explore around the purpose test and the scope of the proposals, but they would not have caused huge concerns. However, the Treasury proposes to go much further with new section 103C. That will impose significant restrictions on ordinary commercial ventures that are not motivated by tax avoidance. To obtain full sideways loss relief under the proposals in schedule 4, a partner will have to spend 10 hours a week working personally on the partnership’s business. For those partners who do not devote 10 hours a week to the venture, the sideways loss relief that they can claim is limited by the schedule to £25,000.

As the Institute of Chartered Accountants has pointed out:

“The measure is not targeted solely at tax avoidance schemes...The result is that the measure will impact upon many small businesses being set up with substantial investment in the early years.”

The London Society of Chartered Accountants has expressed concern that schedule 4 means that many deserving investment projects will now never see the light of day. It urges the Government to reconsider, and so do the Opposition.

That is why I tabled amendment No. 62 to delete the 10-hour condition and the £25,000 cap. Amendment No. 63, to which I shall come at the end of my remarks, is proposed as a compromise alternative to raise the cap from £25,000 to £100,000, although in our view it would be preferable to opt for amendment No. 62 and the complete deletion of proposed new section 103C.

I point out also that the Committee will soon have the opportunity to consider amendments Nos. 64 and 65, which form a key part of a package of proposals that the Opposition suggest in relation to schedule 4. They would restrict sideways loss relief to those ventures that can pass a demanding threshold designed to show that they are commercially motivated ventures, not artificial tax-avoidance schemes. We recognise that some of the schemes that have utilised sideways loss relief have caused problems in terms of revenue leakage from the Treasury. We do not oppose efforts by the Government to shut down abusive and artificial schemes that are motivated only by tax avoidance and that do not involve genuine commercial risk. However, we are worried that vital commercial ventures will be hammered by the Government’s attempts to shut down problematic tax-avoidance schemes.

The package comprising amendments Nos. 62,64 and 65 is aimed at giving Her Majesty’s Revenue and Customs the power to shut down abusive schemes, but without clobbering genuine enterprise and investment. The Opposition fear that, unless those amendments are adopted, schedule 4 will have a very damaging effect on high-risk investment and small business start-ups.

The first point to make about schedule 4 centres on the way in which the changes were announced on Friday 2 March this year. They were rushed out right at the end of the financial year, when many people had made their plans on the basis that the reliefs would be available. The changes will impact on many ventures in respect of which investments have already been committed on the basis of the existing tax system. Now, investors have had the rug pulled from under their feet, and they find themselves at risk for large amounts of money with no prospect of relieving potential losses in the way in which they had envisaged.

I have received protests on that point from many people, including Mr. Wood of Morgans Independent Advisers, Jeff Moores of Moores Warren, and Richard Grant of Pantheon Financial Management. They point out that the legislation impacts unfairly in treating partners in the same arrangement differently according to whether they contributed earlier or later in the tax year, even if both investments were made before these provisions came into effect. That might not be such a huge problem if the only arrangements hit by the changes were dubious and artificial tax-avoidance schemes, but as I have said, that is not the case. The retroactive nature of schedule 4 adds to the concern of the Opposition about the measures and their impact on ventures and contracts agreed on the basis that sideways loss relief was available.

The Committee may be aware that there was a rapid U-turn when the proposals were initially announced. They were initially due to cover film tax reliefsunder section 42 of the Finance (No. 2) Act 1992 and section 48 of the Finance (No. 2) Act 1997. Within, I think, three working days, there was a rapid about-turn, and the Treasury decided that section 42 and section 48 reliefs would not be restricted. That certainly seemed to make sense, because only a few weeks before that the Treasury had announced a temporary extension of those reliefs. The assumption seems to be that, the section 42 and section 48 problem having been solved, this sorts out the film industry, but that is not the case.

No doubt the Minister will quote back at me statements that suggest that not everyone in the film industry is worried about the remaining provisions in the Bill on sideways loss relief, but I have received a number of very concerned representations on that issue. The film industry has found sideways loss relief so important because of the high degree of risk involved in a film project. It is very difficult to predict in advance whether a film will be successful. Hence, investment proposals are often based around investing in a number of films. The assumption is that, if one backs 20 films, there is a chance that one of them might make money and offset some of the losses from the others. That becomes impossible with the abolition of sideways loss relief.

Sebastian Speight of Ingenious Media has told me that two high-profile UK films, “St. Trinian’s” and “Brideshead Revisited”, had seen their private investment withdrawn as a result of the announcement in schedule 4. These films were relying for up to a third of their funds on investors expecting to be able to reduce the risk of the investment by using sideways relief. Those films were rescued by the Film Council, but it remains a concern as to how other films will find funding in the absence of sideways relief. Mr. Speight put the problem as follows:

“The new film tax credit will provide 20 per cent. of the cost of making a film. However, for larger projects, it is difficult to see where the remaining finance will come from beyond a few national and local grants. Big films need a critical mass of investment before they can be undertaken and this restriction makes it much harder to get.”

The issue here is that part of film funding which is not covered by the film tax credit. Sideways loss relief reduces the high risks for investors who are asked to provide the 80 per cent. of funds that are not covered by the tax credit. The Government’s film tax credit will not work if projects find it impossible to raise the other 80 per cent. of funds that they need. Restricting sideways relief makes that much more difficult.

Stephen Timms (Labour, East Ham)

I have listened to the hon. Lady’s argument with interest. She has acknowledged that the new film tax relief will provide 20 per cent. of funding for films, but she is saying that that is not enough. I presume that she is saying that the public purse should provide a still higher proportion. What proportion does she think should come from the public purse towards the cost of producing a film?

Theresa Villiers (Conservative, Chipping Barnet)

I am saying that the Government should not abolish sideways loss relief, because that relief is reducing the risk that investors face when they go into a film project.

Coupled with restrictions on venture capital trusts, these measures could cause significant problems for the film industry, and the problems for the film sector are replicated in other areas of the creative industries. As with a film project, predicting how the public will respond to a new computer game, for example, is much more difficult than, say, developing a new soap powder or shampoo. Again, sideways relief allowed investors to take a punt on risky proposals for new games, knowing that at least they had the protection of being able to set losses off against other income. I would like to ask the Minister if the Treasury has conducted any research whatsoever on the impact that schedule 4 would have on the hugely important computer games industry.

It would be wrong, however, to think of this issue as a film tax issue, or to think that the creative industries are the only ones that will be affected. The Chancellor has often referred to the “funding gap”, in other words the difficulty that many start-ups have with raising finance. We have always been a nation of inventors and innovators, but far too often we have had difficulty turning those ideas into commercial reality. Sideways loss relief has been one of the few useful mechanisms for bridging that funding gap, and now the Treasury wants to scrap it.

A number of distinguished academics have indicated serious concern about the impact of schedule 4 on scientific research, which is also something that the Chancellor has repeatedly said that he wants to encourage. Professor Ian Swingland, founder of the Durrell Institute of Conservation and Ecology and Emeritus Chair in Conservation Biology at the University of Kent, has said:

“At least 10 per cent. of high-risk research will be destroyed by this aggressive move against collective investment, and probably more. Many investors will be dissuaded from funding key environmental projects rather than use other existing highly bureaucratic mechanisms. If environmental research and development is to grow in the UK, it is essential that sideways loss relief continues to be available for high-risk and innovative ventures.”

He expanded on those concerns in a letter published in the Financial Times this morning.

The impact of schedule 4 on crucial emerging markets for environmental technology has been raised with me by a number of people. Martin King, who leads the Silver Planet consortium of investors in environmental technology, told me:

“I and a number of colleagues have organised high risk venture funding via Business Angels using the sideways relief that was available to offset failed investments...The changes proposed...in the draft Finance Bill mean that partnerships will not now invest in high risk ventures and in particular research which has been particularly targeted by Treasury. Already we have had to turn down over 20 projects that were of a very high risk nature...Obviously we have informed all those organisations that they cannot be funded in this traditional way and I assume they will have to look overseas for their funding...HMRC have suggested that funding could be switched to State approved schemes such as EIS and VCT but most business angels find the bureaucracy and severe limitations these schemes have to be a real deterrent... Equally the HMRC suggestion that Banks will replace this kind of funding is ludicrous.”

Tony Blakey, founder of Ethical Trading and Marketing, contacted me to express his grave concern about the impact of schedule 4 on projects to develop technology that is effective in tackling climate change. He is involved with a number of revolutionary projects in areas such as tidal energy, applied accelerated tree-growth technology, accelerated community biomass technology and environmentally-friendly biodiesel production. He believes that if such projects prove successful, the technology that they harness could produce low-cost renewable ways to cover a significant proportion of the world’s energy needs. He tells me that up until 2 March, the UK had a very significant share of that developing market, but now all the projects are likely to go offshore as a result of schedule 4 to Germany, Pakistan, Brazil and other countries. Funds dried up as soon as the 2 March announcement on sideways relief was made.

Mr Blakey told me:

“The abolition of sideways loss relief has significantly reduced the number of investors willing to risk early stage research funding...Partnerships currently fund vital environmental projects like tidal energy, biodiesel, and accelerated tree growth...These projects cannot now be completed using partnership funding...Foreign investors will benefit as the projects will no longer be controlled or owned by the UK.”

The problem is that no one knows which research will yield results. Of 50 projects to accelerate tree growth to produce cheap environmentally-friendly energy, 49 might fail. Before now, investors at least had the cushion of sideways relief to soften the impact of the losses. The Government propose to remove that cushion, so the risk becomes higher and the funds more difficult to obtain.

Chris Dodson of Torftech Ltd has also written to me about a range of environmental energy projects that are being shifted overseas as a result of the changes proposed in the Bill. The Chartered Institute of Taxation has told me that schedule 4 is jeopardising projects to make use of the special capital allowances introduced by the Chancellor himself in 2003 to encourage environmental technology.

Rupert Lywood, to whom I referred on Second Reading, is an investor in a partnership pursuing research and development work on lung and bowel cancer vaccines. He is concerned about the impact of schedule 4 on existing and future medical research projects. He commented:

“Investment in private medical research is very high risk, projects such as cancer vaccines research and development couldn’t be contemplated without the availability sideways loss relief...These proposals have a retroactive effect on existing projects and will undoubtedly jeopardise potentially life-saving medical research and the opportunity for UK businesses to lead in important fields of research and profit from international exploitation of newly developed technologies.”

Mr. Lywood tells me that important existing projects on cancer, HIV and multiple sclerosis have already been put in jeopardy by schedule 4.

The proposed 10-hour limit is fundamentally unsuited to this kind of project. Many of the business angels hit by schedule 4 will have investments in a wide spread of high-risk projects. They need to take that approach to spread their risk, and they cannot possibly find 10 hours in every week to devote to each project. The restriction simply misunderstands how such investment projects work.

Nor can HMRC’s approved investment schemes plug the gap left by the abolition of sideways loss relief. HMRC’s response to the concerns expressed about schedule 4 is that those affected should use one of the Government’s state-approved arrangements, such as the enterprise investment scheme or venture capital trusts. Such schemes simply will not take up the slack, because the amounts that can be put into them are limited and, in many ways, they can be bureaucratic, inflexible and expensive to run.

Rupert Lywood has said:

“Everyone supports measures to counteract tax avoidance, but that’s not what these proposals do. What they do, is to create powerful disincentives for individuals wishing to invest in bona fide commercial enterprises which would enhance the UK’s competitiveness and wealth-creation. The Government has reneged on its promise not to use these provisions to disadvantage business. The incentives delivered through the Enterprise Investment Schemes and Venture Capital Trusts have been steadily eroded over recent years to the point where they are now, in practical terms, almost irrelevant as a source of serious capital for new or developing businesses. Sideways loss relief was the last real practical incentive available to encourage private investment is growing enterprises, its removal is completelyat odds with the Government’s objective to encourageenterprise”

The Institute of Chartered Accountants has expressed concern about the impact of schedule 4 on start-up businesses that source finance from family and friends who become non-active or sleeping partners, and it has given a number of examples of micro-business start-ups involving family members that could be hit. Those micro-businesses already face increasing corporation tax rates and possibly problems with the MSC regime, and they are thumped again by the loss of sideways relief that would have provided assistance in the difficult early years of any enterprise.

Amendment No. 63 would increase the cap on sideways relief from £25,000 to £100,000. Of course, if amendment No. 62 were adopted, the need for that change would fall away with the deletion of the cap. I tabled amendment No. 63 for two reasons. First, it is a compromise. If the Government were not able to accept the complete deletion, they might mitigate the damage of section 103 by raising the cap. Secondly, it allows the Committee to probe the Government’s rationale for the £25,000 cap. In making a similar request, the Institute of Chartered Accountants points out that no justification has been given for the imposition of the £25,000 limit—the figure seems to have been plucked out of the air, so I should like the Minister to explain why that figure was chosen.

In conclusion, the Chancellor says that he wants to plug the funding gap, but he is ripping away one of the few measures that helped to do that. In his Budget statement, he said that he wanted the UK to be a world leader in the discovery and development of new energy technologies, yet in the very same Budget, he was proposing to abolish a key tool in driving forward that discovery and development. Schedule 4 would damage the film industry, damage enterprise and investment and damage many projects vital to tackling climate change. I urge the Chief Secretary to think again about schedule 4 and to consider accepting the amendments that I have put forward.

Philip Dunne (Conservative, Ludlow)

At the risk of trying your patience, Mr. Ilsley, and that of other members of the Committee, I wish to contribute at this late hour to the debate on this amendment, because of all the aspects of the Bill, this schedule is the one that will cause most damage to the structure of enterprise in this country and to innovative investment. It is the measure on which I have received the most comments from outside this place, and the one on which I urge the Chief Secretary, whom I know to be a reasonable man, to take note of the arguments that have been so well put by my hon. Friend the Member for Chipping Barnet. He should think again about its impact and what it will do to the growing entrepreneurial and innovative investment climate that has been cultivated in part under his Government—let me give credit where it is due.

The measure will have a major impact in driving investment offshore and shutting down a large proportion of high-risk investment in this country. I should remind the Committee that I am a partner in two partnerships, a farming partnership and an investment partnership. Although they have been going for a long time—they are not new partnerships, so the measure would not directly apply to them—I have experience of investing in partnerships. I know that they provide a valuable structure, not for tax avoidance but for suitable flexible equity involvement in a business by both active partners and those who retire or become less active, as I did when I came into this place. We are at risk of diverting investment activity out of a good structure that exists for positive reasons into sole trading or individual investment, or into a corporate structure in which the ability to offset losses against other kinds of income is not currently threatened. The measure will divert business activity in an entirely unintended way.

The ministerial statement of 2 March from the Paymaster General sought to clarify why the clause was being introduced. She stated:

“The capital contributions to be excluded will be those paid by non-active partners on or after 2 March 2007 where the main purpose, or one of the main purposes, for contributing the capital to the partnership is for the partner to obtain a reduction in tax liability by means of sideways loss relief.”—[Official Report, 2 March 2007; Vol. 457, c. 105WS.]

That is an appropriate measure to deal with tax avoidance, and the Conservative amendments seek to achieve the Government’s precise objective. Their measures will restrict all sorts of other bona fide commercial activity.

Let me pick up on one other point. Thought has clearly been given to what types of activity will be affected. The ministerial statement specifically carved out high-risk underwriting at Lloyds as an activity that should be exempted from the clause, and it is exempt under proposed new section 103C(8). As my hon. Friend said, there was a U-turn over the film industry, as a special exemption was sought for qualifying expenditure for films, which can now be found in proposed new section 103C(6). However, the ministerial statement referred to professional firms as exempt, but that does not appear in the Bill. Why has the Chief Secretary had a change of heart? Where is the logic behind that decision? If special pleading by a particular industry has found favour in the Treasury and in the Chief Secretary’s deliberations, will he think too about the special pleading on behalf of investors—business angels of the type described by my hon. Friend?

Time is pressing and hon. Members will wish to move on, but I have two more questions. The measure is designed to get at losses generated from the early stages of a partnership. When the Chief Secretary sums up, will he confirm that the provisions will not apply to partnerships that have existed for some time but where losses might legitimately arise as a result of the business getting into difficulty a year or two later? That is not clear from the explanatory notes.

As far as the two limits on working hours and the amount of money that can be invested are concerned, it seems extraordinary that the drafting should apply in such a way that in order to qualify for sideways relief, individuals will be compelled to spend 10 hours a week—presumably the Government will not encourage them to breach the working time directive, so that is25 per cent. of their working time—committed to a project. Most people who invest in high-risk projects and wish to benefit from sideways loss relief are doing so because they are entrepreneurial investors with other activities. They do not necessarily have the relevant skills to work for 10 hours a week in the business.

My hon. Friend referred to individuals who had engaged in biotech research. They might well be entrepreneurs with a commitment to developing new vaccines or environmental energy projects, but they might not necessarily be scientific boffins who could spend the time doing so, and, because of their other activities, they might not have the time to promote the business. There is a lack of logic to the 10-hour limit and an equal lack of logic to the £25,000 limit. If the amendment is put to a vote and not accepted, I urge the Chief Secretary to go away and come back on Report with a more considered clause.

David Gauke (Conservative, South West Hertfordshire)

I should like briefly to pursue one of the points that my hon. Friend the Member for Chipping Barnet made about film tax relief. She described how the Treasury’s original proposals appeared to rule out section 42 and section 48 film tax relief.

From my limited experience of the Committee this year and last year, as well as from my experience of a Committee on a statutory instrument, the Treasury devotes a fair amount of attention to film tax. In passing a lot of legislation in such an important and sensitive area, it has no doubt developed a highly skilled team, with much expertise in the field. I should therefore be grateful if the Chief Secretary could tell the Committee whether the Treasury’s film tax experts were consulted on the original proposals on sideways loss relief, and if not, why not. If they were, did they spot the difficulties that became apparent after the original proposals were announced? The Treasury appeared to do a U-turn in three working days, which is fairly quick. I have some experience of seeing the Treasury do U-turns on film tax, but they usually take a matter of months, not days.

The Treasury seems to be particularly sensitive to film tax and to ensuring that the burden does not drive films offshore. I assume that the reason for that is that the film industry is highly mobile, as well as highly innovative and high risk, as my hon. Friend mentioned. If the tax burden were greater, fewer films would be made and the Treasury’s tax revenue would therefore be reduced. I suspect that my hon. Friend the Member for Braintree would describe that as a perfect example of the Laffer curve in operation.

However, could the same principle apply to other sectors? My hon. Friend the Member for Chipping Barnet gave some examples of sectors that perhaps do not have such a well-developed lobbying capability and to which the Government are perhaps not always as sympathetic as they appear to be to the film industry. In the light of the difficulties that emerged with the film industry, as a consequence of the abolition of sideways loss relief, has the Treasury given any consideration to whether any other sectors would be adversely affected by the proposals?

Colin Breed (Liberal Democrat, South East Cornwall)

Once again, we seek through tax avoidance schemes to distinguish between organisations that are genuine commercial enterprises and those that are set up purely to avoid tax. The Chartered Institute of Taxation suggested that the Government consider introducing a motive test, which might have made a contribution, so I should be grateful if the Minister could say whether that proposal was feasible or not.

Adam Afriyie (Conservative, Windsor)

The schedule seems to reflect a fundamental misunderstanding of the investment environment. It confuses working for an enterprise for 10 hours a week with providing finance for risky ventures, and thereby plugging what is clearly a seedcorn finance problem for many creative industries. I therefore urge the Government to rethink the schedule.

Stephen Timms (Labour, East Ham)

I do not want to try to the Committee’s patience unduly, but I certainly do want to respond to some of the points that Opposition Members have made.

The schedule changes the rules for offsetting the trading loss of a non-active or limited partner in a trading partnership against their other income and capital gains, which is known as sideways loss relief, as we have heard. The Exchequer has incurred significant and growing losses from the misuse of sideways loss relief by wealthy people who participate in partnerships not in anticipation of an investment gain, but purely to access losses—frequently highly contrived in nature rather than real—to reduce their tax on income or capital gains.

The new rules have been targeted specifically to halt that form of avoidance while preserving access to a significant degree of sideways loss relief for people who are not seeking to avoid tax. On a number of occasions, Opposition Members talked about the abolition or removal of sideways loss relief, but that is not correct. There is a limit in the schedule to the amount of sideways loss relief available, and the vast majority of sideways loss relief that is not motivated by tax avoidance falls within that limit. We are not withdrawing it.

David Gauke (Conservative, South West Hertfordshire)

Will the Chief Secretary give way?

Stephen Timms (Labour, East Ham)

In a minute.

I want to make very clear the Government’s position in response to the points that have been made. We have a responsibility to block schemes for tax avoidance. The argument that some ancillary benefit arises from the scheme is not a justification for retaining the ability to establish such schemes. We have introduced a number of measures to encourage productive investment, such as the new film relief measures, and the research and development tax credit, which if I remember rightly, Opposition Members want to abolish. Ours is the proper way to encourage investment.

The claim that some tax avoidance schemes may lead to investment that would not otherwise have occurred is not a justification for leaving tax loopholes in place, and the claims for the amount of investment that may take place are often grossly exaggerated. At the very least, tax avoidance schemes are a deeply inefficient use of public money. Sideways loss relief is not an efficient use of taxpayer funds for promoting the investment that we have heard about; it is deeply inefficient.

Committee members are perfectly entitled to believe that there is a need to use taxpayers’ money to promote investment in a part of the economy, and they are at liberty to propose measures to help, along the lines of the film relief or research and development tax credits. However, let us reject the argument that scams should be left in place because this or that incidental benefit arises from them.

It is very important that we are not naive about what is going on. FT.com on 10 March explained that the schemes

“work by generating trading losses in the first year which high net worth individuals have been able to offset against their earned income for tax purposes using sideways loss relief.”

It quoted Martin Churchill, editor of “Tax Efficient Review”, who said:

“Snipping the sideways loss relief has really choked up these schemes.”

The piece went on:

“He believes that £2 billion would have been poured into those schemes between now”—

10 March—

“and April 5”.

Mr. Churchill was quoted further:

“Everyone was gearing up to put significant amounts of money into these schemes. Bonuses gets paid in February and people don’t tend to do anything until the run up to the end of the tax year”.

We can get an idea of the impact of the change resulting from the announcement through published data on limited liability partnerships. In 2005-06, about 40 per cent. of the total number of partners in avoidance partnerships, which are set up for an avoidance purpose, were recruited after 1 March and before 6 April—just in time for the end of the tax year. In 2006-07, the most recent financial year, only 1.1 per cent. were recruited following the announcement.

The hon. Member for Chipping Barnet explained that amendment No. 62 would completely remove the proposed annual limit on sideways loss relief while amendment No. 63 would increase it to £100,000. We are dealing with a particularly aggressive form of avoidance whereby schemes consistently adapt their arrangements to get around the rules. It has become very clear that a purpose test alone will not deter it.

In response to the hon. Member for South-East Cornwall, there is a purpose test in the Bill, but there is also a limit. We need an annual limit to provide an additional deterrent to the purpose test and to make it uneconomic to challenge the intention of the legislation. An annual limit of £25,000 will achieve that deterrent, comparing the relief gained with the fees required to set up a scheme. A limit of £100,000 would not do so. It would provide a significant incentive to continue to use those schemes to avoid tax, even after allowing for the quite considerable promoters’ fees and for other costs.

In practice, more than 90 per cent. of losses incurred by people in the partnership population who are not motivated by tax avoidance are lower than £25,000. The vast majority of losses that arise to those who are motivated by tax avoidance exceed £25,000. An annual limit of £25,000 strikes the right balance between allowing non-avoiders access to sideways loss relief, while preventing avoiders from abusing it.

The cost of the more modest of these two amendments—raising the limit to £100,000—would be at least £150 million per year. Given behaviour changes on the part of the avoiders, in due course it would quite likely reach the full £400 million score against this measure in the Red Book. It could be more, but we have scored it at £400 million. Of course if the limit were £100,000, and it was economic to avoid tax still by this route, people would set up a whole string of these arrangements so they could continue to avoid tax in this way. I hope that I have explained the purpose of the annual limit and the reason that it is set at £25,000. I hope that the hon. Lady will agree to withdraw her amendments. If not, I shall certainly urge ask my hon. Friends to oppose them.

I should finally like to make a couple of points on films. The hon. Lady quoted a couple of remarks by people in the film industry. Let me just quote Andrew Eaton, co-founder of Revolution Films, who said:

“Everyone has been aware that there have been funds that have been able to make quite a lot of money out of tax schemes and haven’t always been putting money back into the business. There was a very strong sense across the industry that at some point those funds were going to be stopped.”

Indeed, a number of people in the film industry have made the point that what they want is a sustainable industry. It is ludicrous for the hon. Lady to say that the taxpayer must provide not only the 20 per cent. that the tax relief now pays, but the rest of the 80 per cent. cost of producing films too. The film industry is a commercial business like every other. It is in the interests of the industry that it should be viable and commercial.

Finally, I do not accept for a moment——and I did see the letter in the Financial Times this morning——that there will be a huge impact on investment in research and development companies. Since the announcement at the beginning of March, we have received just two specific responses from research and development interests to that publication of the technical note. We considered both those representations carefully, and we are confident that the rationale for the change remains sound. If hon. Members have evidence of actual loss of bona fide investment not motivated by tax avoidance, I invite them to submit it and I will look at it with great interest.

As I said, more than 90 per cent. of the sideways loss relief claims in the past couple of years that have not been motivated by avoidance have been below £25,000, so they will not be affected by the change. I urge the Committee to reject the amendment.

Theresa Villiers (Conservative, Chipping Barnet)

The Chief Secretary seems deliberately to have misunderstood what I was saying and failed to read the amendments. We are not concerned about the scams as the amendments are deliberately designed to allow HMRC to shut down those scams. What we are concerned about are the genuine, bona fide commercial arrangements that will be shut down by schedule 4.

Stephen Timms (Labour, East Ham)

I put it to the hon. Lady that her amendments under-estimate the ingenuity of the people responsible for these schemes, who would quickly get round the arrangements that she suggests should be left in place.

Theresa Villiers (Conservative, Chipping Barnet)

The very demanding tests set out in the amendment in the next group would enable HMRC to shut down those schemes. No matter how ingenious the efforts to use sideways loss relief for an abusive purpose, there is a way to ensure that the genuine commercial enterprises are not hit by schedule 4 while at the same time giving the Government the power to shut down the abusive schemes.

I would like to correct the Chief Secretary. I was not saying that the taxpayer should stump up the extra80 per cent. of film funding. I was saying that withdrawal of an important way of reducing the risk of investing would have a significant negative impact on the film industry. The Chief Secretary also said that he would be willing to look at evidence that research projects are being damaged. I believe that I presented such evidence to the Committee and would be only too happy to provide further details of those projects that are going to the wall or going overseas as a result of his proposed changes. I would like to press amendment No. 62 to the vote.

Eric Illsley (Labour, Barnsley Central)

Before we come to the next group of amendments, I have to tell the Committee that I am prepared to go on for a little longer if we can achieve a suitable point in the Government’s programme before adjourning, otherwise we have to adjourn for a dinner break and come back afterwards.

Theresa Villiers (Conservative, Chipping Barnet)

I beg to move amendment No. 64, in schedule 4, page 101, line 12, leave out from ‘if’ to the end of line 14 and insert

‘it is made in connection with any arrangement which is not a qualifying arrangement under section 103E.’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss amendment No. 65, in schedule 4, page 104, line 23, at end insert—

‘103E Meaning of “qualifying arrangement”

(1) For the purposes of this chapter, an arrangement is a qualifying arrangement if—

(a) the individual as a partner in a firm or as member of an LLP carries on a trade which is conducted on a commercial basis and with a view to the realisation of profits and involves genuine financial risk; and

(b) before the individual commences carrying on such trade, the Commissioners for Her Majesty’s Revenue and Customs have on the application of the firmor LLP notified the firm or LLP that the Commissioners are satisfied that the arrangement is being entered into for genuine commercial reasons and not as part of a scheme or arrangement of which the sole or main expected benefit is the obtaining of a reduction in tax liability by means of sideways relief or capital gains relief.

(2) An application under subsection (1) shall be in writing and shall contain particulars of the arrangements.

(3) If the Commissioners for Her Majesty’s Revenue and Customs consider that the particulars or any further information provided under subsection (1) of this subsection are insufficient for the purposes of this section, they must notify the applicant as to what further information they require for those purposes within 30 days of receiving the particulars or information.

(4) If any such further information is not provided within30 days from the notification, or such further time as the Commissioners allow, they need not proceed further on the application.

(5) The Commissioners for Her Majesty’s Revenue and Customs shall notify their decision to the applicant within30 days of receiving the application under subsection (1)(b) or, if they give notice under subsection (3) above, within 30 days of the notice being complied with.

(6) If the Commissioners for Her Majesty’s Revenue and Customs notify the applicant that they are not satisfied as mentioned in subsection (1)(b) above or do not notifytheir decision to the applicant within the time required by subsection (3) above, the applicant may within 30 days of the notification of that time require the Commissioners to transmit the application, together with any notice given and further particulars furnished under subsection (3) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (1) above as if it were a notification by the Commissioners.

(7) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Commissioners for Her Majesty’s Revenue and Customs or the Special Commissioners, any resulting notification that the Commissioners or Special Commissioners are satisfied as mentioned in subsection (1)(b) above shall be void.

(8) The Commissioners for Her Majesty’s Revenue and Customs may by regulations provide that any activities of a specified description shall be precluded from being qualifying arrangements for the purpose of this section, where specified means specified in the regulations.

(9) The regulations under subsection (8) above may—

(a) make provision having retrospective effect,

(b) contain incidental, supplemental, consequential and transitional provisions and savings, and

(c) make different provisions for different cases or purposes.

(10) No regulations may be made under this section unless a draft of them has been laid before and approved by a resolution of the House of Commons.’.

Theresa Villiers (Conservative, Chipping Barnet)

I can be very brief on amendmentNo. 64.

The amendments put into practice the entirely responsible approach that the Opposition has taken on sideways loss relief to ensure that the dire consequences predicted by the Chief Secretary would not happen. The conditions set out in the amendments would enable abusive schemes to be shut down while ensuring that genuine commercial enterprise could continue. Critical to our proposal is that schemes and transactions should qualify for sideways relief only where the venture involves genuine financial risk. Tax-motivated schemes generally do not involve that risk, so this is a key divider.

Proposed section 103E would add to the safeguards by providing that an arrangement would not qualify for sideways relief where the sole or main expected benefit was the reduction of tax. There is even a further safeguard in that only HMRC-approved schemes could obtain relief from the package that the Opposition is putting forward, which gives HMRC ample scope to crack down on those ingenious avoiders that the Chief Secretary is so worried about. Proposed subsection (8) would provide yet more protection in that it would allow HMRC to prohibit the use of sideways relief in sectors in which there are significant concerns. Such concerns have arisen in areas such as property development, hotels and residential care homes, which are not generally associated with the high-risk sectors that we have been discussing.

Lastly, I come to proposed subsection (9), which I was not sure whether to include, because it is quite draconian. It would give the Treasury the power to adopt regulations with retrospective effect to close down abusive and problematic schemes. Retrospective legislation must always be approached with extreme care and should be used only when there are genuinely special circumstances to justify that approach. In this case, I would use it to give the Chief Secretary the reassurance that he needs. I regret that the Government do not accept the Opposition’s entirely cautious and responsible approach, which would help to save the high-risk enterprises that are, sadly, being put in jeopardy by the schedule.

Stephen Timms (Labour, East Ham)

I certainly agree that what the hon. Lady proposes is draconian. The amendment would ensure that in every case in which an individual partner proposed to commence business in a trading partnership or, indeed, enter into an arrangement in connection with the business, that partner would have to seek advance clearance from Revenue and Customs. If HMRC was not satisfied or did not notify its decision within 30 days, the case would be referred to the special commissioner.

That would mean that if an individual partner did not seek advance clearance from HMRC before starting a partnership, they would never be able to claim sideways loss relief or capital gains relief for any losses that they made as a limited partner or non-active partner in that partnership. I simply cannot believe that the hon. Lady really intends to impose such an enormous bureaucratic burden on potential investors. It would simply be unworkable.

It is also worth considering who would want to seek a clearance and why. The avoidance arrangements that are caught by the measure are not entered into accidentally. People who use a scheme to create a contrived loss will know that a main purpose of the scheme is to create a loss and gain a tax advantage. It could certainly be expected that avoiders would, as they have frequently done, attempt to dress up avoidance schemes as commercial transactions and would seek clearance through the procedure that the hon. Lady proposes before investing in a scheme.

Conversely, a genuine investor would not anticipate making a loss, or, at least, the existence of sideways loss relief would not be the decisive factor in the investment, so they would have no reason to seek pre-transaction clearance. It is, therefore, clear that a clearance regime would not be appropriate. It would not provide any benefit to the non-avoiding population, but would impose disproportionate and unworkable administrative burdens on them. I hope that with that explanation the hon. Lady will withdraw the amendment. If not, I ask my hon. Friends to oppose it.

Theresa Villiers (Conservative, Chipping Barnet)

I shall not press the amendment, as the Committee has had ample opportunity to vote on this issue already. I beg to ask leave to withdraw the amendment.