Finance Bill

Public Bill Committee, 5 June 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 65

Roger Gale (Conservative, North Thanet)

Good morning and welcome back. I trust that you are all refreshed.

We are about to dispatch clause 65, as the hon. Member for Chipping Barnet has indicated to me that she does not wish to have a formal vote on amendment No. 212.

Schedule 19

Stephen Timms (Labour, East Ham)

I beg to move amendment No. 134, in schedule 19, page 228, line 9, leave out from ‘arrangement’ to end of line 11.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss Government amendment No. 135.

Stephen Timms (Labour, East Ham)

I welcome you back to the Chair, Mr. Gale, refreshed after the break and raring to go, as I am sure we all are.

I am pleased to have the opportunity to speak to the two Government amendments and I shall say a few words about what we are doing with schedule 19. The amendments will make minor drafting changes. Amendment No. 134 clarifies the fact that there will be no further charge to inheritance tax on the death of a dependant where the left-over funds in an alternatively secured pension—ASP—were chargeable to inheritance tax on the death of a scheme member. AmendmentNo. 135 ensures that the changes to remove an option to transfer funds on death from an ASP fund will not affect any members with ASPs who died before 6 April 2007.

I shall briefly remind the Committee of the principles that we have set out in relation to pensions tax relief. The key point is that generous tax relief is provided to encourage and support pension saving that will produce an income in retirement. Pensions tax relief is intended neither to support pre-retirement incomes, nor to support open-ended asset accumulation or bequests. Pension savings are necessarily less flexible than other savings—they are locked away until retirement—which is why it is right to provide favourable tax treatment for pensions savings.

In 2005-06, the tax incentives to encourage people to save for retirement totalled about £14 billion. The best way to secure an income in retirement is via a scheme pension or an annuity. At the time of the 2006 pre-Budget report, we published a paper on the annuities market that explained the underlying policy and the academic evidence base for that policy, and responded in detail to the views of the Pensions Commission on that area.

As we developed our proposals for the new pensions tax regime, the A-day regime, we received a number of representations from groups with principled, religious objections to the pooling of mortality risk in annuities. Therefore, in the December 2003 consultation document “Simplifying the taxation of pensions”, the Government set out our proposals for the ASP. That option and the rules that apply to the sums remaining on the death of member of an ASP were enacted in the Finance Act 2004. Our intentions in doing that were very clear, but it was apparent that some people wanted to use ASPs for uses other than providing a pension.

Some changes were therefore announced in the pre-Budget report in 2006. I will remind the Committee of what it said:

“In line with the principle that pensions tax relief is provided to produce an income in retirement, the Government will bring forward legislation to make changes to the rules governing Alternatively Secured Pensions (ASPs). This will introduce a new requirement to withdraw a minimum level of income each year from an ASP fund. The facility to transfer funds on death as a lump sum to pension funds of other members of the scheme will be removed from the authorised payments rules, with these payments attracting an unauthorised payments charge.”

Clause 68 and schedule 19 change the ASP rules in line with the announcements that we have made. I would be very happy to go through the detail of the proposals, but for now I simply commend the amendments and the schedule to the Committee.

Mark Hoban (Conservative, Fareham)

May I, too, welcome you back to the Chair, Mr. Gale? It is a remarkable testament to the lure of the Committee that my hon. Friend the Member for Rayleigh, now the shadow Minister for Europe, has come back to enjoy the proceedings for one last time. We look forward to the debut of my hon. Friend the Member for South-West Hertfordshire later this week, who has joined our Front-Bench team.

It seems like only a year ago that we last discussed the taxation of ASPs. I then debated with the Economic Secretary, and I had rather hoped for a re-run, but I understand that he is currently in Luxemburg at the ECOFIN meeting, so the Chief Secretary will be dealing with this issue. It is quite remarkable that it is only a year since we last debated these changes, and at that time the House and the Government had settled views on what was the appropriate rate of taxation for ASPs, yet here we are, a year later, with yet another U-turn on pensions policy, discussing a different way of taxing ASPs.

Given the nature of the Chief Secretary’s introduction, we are effectively having a stand part debate here. I will ask him to respond to some particular issues in detail later, but it is worth noting, by way of introduction, that the issue of compulsory annuitisation and the role that ASPs play in tackling it continues to create interest in this House and in the other place. Indeed, on Second Reading of the Pensions Bill just before the recess, Baroness Hollis, a former Minister at the Department for Work and Pensions, stated:

“As others have already said, given the growth of DC schemes we need a fresh look at the annuities-at-75 rule, which is increasingly absurd. After all, a man on median earnings, contracted in, after 40 years on 4 per cent. plus 4 per cent. contribution—a very modest scheme—will have a DC pot of £240,000, £100,000 more than necessary to float him off income-related benefits if he annuitised to that degree... So this is not—I repeat, not—a matter only for the rich any more, but for those on average earnings and a standard rate tax.”—[Official Report, House of Lords, 14 May 2007; Vol. 692, c. 39-40.]

I think that the noble Lady was right. In the past, the Government have criticised moves to end compulsory annuitisation on the back of the argument that it is there only to help the wealthy, but as she rightly said, the growth of defined contribution schemes and the move away from defined benefit schemes means that more and more people have an interest in compulsory annuitisation at 75, and it will be a growing issue. The Chief Secretary explained how the Government’s thinking on this issue has evolved over the last few months and rightly highlighted the fact that the genesis of this measure came from the theological concerns of the Plymouth Brethren, who objected to the pooling of mortality.

Interestingly, the Treasury considered, in the regulatory impact assessment, ending the scheme or restricting discrimination on the grounds of religion, but thankfully that idea was dismissed. In looking at how this product should be sold, at one stage, the Financial Services Authority considered, and issued guidance, that financial advisers should inquire about the religious beliefs of potential purchasers of ASPs. That indicates that the debate that took place last summer and in the autumn became rather overheated and rather too focused on the origin of the idea of why we should have ASPs, rather than on thinking about how best to put the policy into practice.

I could talk about those arguments at some length, but I suspect that this is probably not the occasion to do so. There may be an opportunity to rehearse those arguments at a later stage. I want to concentrate instead on the particular changes that are being made by schedule 19. I understand the reasons for the Chief Secretary tabling the amendments and I have no particular quibbles with them, but I want to focus on a number of issues.

The first issue is how the schedule introduces new rules on the minimum income that can be drawn down from a fund, as well as increasing the maximum draw-down. It introduces a minimum of 55 per cent. and raises the maximum from 70 to 90 per cent. Those are the Government Actuary’s Department rates, as set at the age of 75, but people who have ASPs get older, and there is a serious argument to be made for reviewing the rates that can be used so that the draw-down is based not on GAD rates at 75, but on the ASP member’s actual age. As someone gets older, the opportunity to withdraw funds from their ASP will increase and my concern is that, by not allowing that flexibility to change or for people to draw down more later in life, the unutilised pot that is left on death will grow.

If the Government increased the rates used for the ages of 75, 85 or 95, that would give the ASP holder the opportunity to withdraw more of their income from the plan and to ensure that there was very little of it left at the time of death. The Government’s objective of using tax-relief savings to meet income in retirement would be achieved more fully than under their current proposals.

The other comment that has been made about the draw-down rules is that for unsecured pensions—the situation that arises before the age of 75—the maximum draw-down is not 90 but 120 per cent. of the GAD rate. There does appear to be a mismatch, or a discontinuity, between the rules that apply for unsecured pensions and those for ASPs. It would be helpful if the Chief Secretary addressed the reason for that inconsistency between the draw-down rules for ASPs and USPs, and also explained why there is not an uprating or revision of the maximum draw-down based on someone’s actual age, rather than the rates set at the age of 75.

The second point is about the exit charge on death. Effectively, the Bill introduces an 82 per cent. tax charge on death when the member dies and there are no financial dependants, or where the balance of the pot does not go to a charity. The 82 per cent. charge arises because there is both an inheritance tax charge of 40 per cent. and a charge of 55 per cent. on the unutilised costs. The 55 per cent. charge normally applies where the value of a pension fund exceeds the lifetime allowance. That appears to be quite a high charge and has certainly caused some comment among financial advisers as to why a 55 per cent. charge is applied in addition to the 40 per cent. charge.

I would understand it if the Chief Secretary said that, based on the Government’s principle that tax relief savings should not be used to fund benefits or to enable a pension pot to be passed from a person to members of their family, particularly where there are no financial dependants, it is important to recover all the tax relief gained or obtained by any pension fund member. I could accept that—it would be appropriate to try to claw back that tax relief. I understand that that tax relief is clawed back at a rate of about 55 per cent. That goes back to the situation in which the pension fund value exceeds the lifetime allowance.

I would be grateful if the Chief Secretary advised the Committee at what rate the Government will recover the tax relief given on pension fund savings. That is important when assessing what the right level of the tax charge on death should be. There is, however, another inconsistency. I referred earlier to USPs. In those, different rules apply on the death of a member. If a USP member dies without drawing any pension benefits, his pension pot is transferred to his nominated beneficiaries free of inheritance tax. If he had started to draw benefits, a 35 per cent. charge would be levied on that pot.

Legislation intended to simplify pensions back in 2004 is now creating different tax charges depending on when someone dies. Somebody who died aged 74 years 364 days without having drawn their pension could pass their pension pot on free of tax. If, however, they died a couple of days later, or even some minutes or hours later, an 82 per cent. charge could be levied on their pension pot. That does not strike me as a consistent set of regulations to cover what is a difficult area.

I would also like to ask what the Government believe the impact of the 82 per cent. charge will be. The regulatory impact assessment is silent about the additional revenue that the measure will produce, or what impact it will have in saving or protecting tax revenues. Given the wide interest in ASPs, it is important that the Government are more transparent about what they consider to be the revenue implications of introducing the 82 per cent. charge, and what those implications would be if that charge were not introduced and the rate agreed in last year’s Finance Act continued to hold. It would be useful if the Chief Secretary said what modelling the Treasury has done to assess what would have happened if those changes, particularly on the exit charge, had not taken place.

Finally, I would like to touch on three other matters of concern that have been raised with me. The first is in paragraph 2 of the schedule. The Finance Act 2004 introduced ASPs and led to simplification of the pension tax system. It also allowed for annuity payment scheme pension payments and payments from ASPs to be guaranteed for up to 10 years. Therefore, if a member died within 10 years, the payments would continue. Paragraph 2 withdraws that guarantee for ASPs, although it remains in place for annuities and scheme pensions. I would be grateful if the Chief Secretary explained why that change was made only for ASPs.

In paragraph 12, there is a further change that has raised some concerns. When a member of a small self-administered scheme, or SSAS, dies, the funds that he has built up are distributed to other members as an increase in their rights. That reduces the cost of the benefits to the remaining members and to the employer, in the same way that in a large defined-benefit scheme the cost to members is reduced by any savings coming from deceased members. The SSASs are important for many small businesses, and there is a concern that the changes set out in paragraph 12 of schedule 19 will increase the cost to small and medium-sized enterprises by levying a 55 per cent. charge on reallocations within SSASs. Will the Chief Secretary confirm whether SSASs are caught by the changes outlined in paragraph 12?

On paragraph 20, in cases where there is an unutilised pot at the time of death, that ASP pot is top-sliced in the IHT calculation. In the pre-Budget report, however, the nil rate band was to be apportioned between the ASP and the rest of the estate. I would be grateful to the Chief Secretary if he could explain why that change has taken place. Will he also confirm that, where the rest of the estate does not exhaust the nil rate band, the unutilised amount will be offset against ASPs, thus reducing the IHT bill?

The changes in schedule 19 are quite difficult and they will start to have two effects. As the Government intend, they make life difficult for those who want to exercise greater control over their pensions by increasing the exit charge on death and restricting the draw-down of funds so that there will always be a significant pot left on which the 82 per cent. effective rate can be charged. The changes also create a degree of administrative complexity, for example—I have already touched on this—there are particular rules about the circumstances in which pension pots are passed on to dependants, what happens when that dependant dies and what rate of inheritance tax is applied to those funds. We need to go back to the inheritance tax calculation of the original ASP member. Changes such as those are quite complicated and hard for people to understand. There is a niggling doubt at the back of my mind that they are meant to discourage, and make life difficult for, those who want to exercise control over the use of their pension funds in retirement.

The reforms were not properly thought through in the first place. This is the third significant U-turn on the pensions simplification announced in 2001, and the Secretary of State for Communities and Local Government must be wondering why on earth her reforms are being unpicked, almost on an annualbasis. There appears to be a continual retrenchment away from the spirit of simplification in the Finance Act 2004 towards a more complicated and difficult system. It is remarkable for a Government who have embraced choice on schools, health care and hospitals not to embrace choice on the release of pension funds in retirement. Something is not quite right in the way in which the Government are approaching the issue.

To conclude, I go back to the comments made by Baroness Hollis in the pensions debate in the other place. I suspect that she was right, considering how the rules have evolved and become more complicated and the Government’s dogmatic opposition to an end to compulsory annuitisation, when she said that

“given the growth of DC schemes we need a fresh look at the annuities-at-75 rule, which is increasingly absurd.”—[Official Report, House of Lords, 14 May 2007; Vol. 692, c. 40.]

The complexity that the Bill introduces indicatesthat the Government’s opposition to compulsory annuitisation is introducing increasingly absurd rules.

Roger Gale (Conservative, North Thanet)

It will not have escaped the Committee’s notice that those on the two Front Benches have determined that this shall be a debate upon the schedule being agreed to, as well as the amendment. I am perfectly content with that, as long as hon. Members understand that they cannot have the same debate twice.

Brooks Newmark (Conservative, Braintree)

I, too, welcome you back after the break, Mr. Gale.

My hon. Friend the Member for Fareham has conducted his usual forensic analysis and posed a number of searching questions. I have just three points to add. First, I believe that the Government are in danger of losing touch with the principle behind the rationalisation of the pension system that came into effect last year. The guiding principle of the pension tax simplification reforms was supposedly that, where there was a conflict between simplicity and unfairness, simplicity would prevail. I am not sure that that is a desirable maxim for legislation because the law tends to think that fairness should prevail over rigidity, but having advanced it, the Government ought to have tried to adhere to it for longer than simply one year.

The complicated new provisions for taxing residual ASP funds after a death are neither simple nor clear. However, I am sure that the increased flexibility offered to pensioners by allowing them to make use of the alternative secured pensions regime is desirable. My concern is that the system was developed in response to a specific inequity caused by religious belief, and that Ministers have clung to that rationale despite the problems that have resulted from it. It is strange peg on which to hang wide-scale pension reform.

I do not doubt the seriousness of the problem experienced by the Christian Brethren’s repudiation of pooled mortality risk. However, the Christian Brethren should perhaps have been mere beneficiaries of the introduction of alternative secured pensions, not the cause of them. An article from December last year in Pensions World—I am sure that the Chief Secretary subscribes to it—states quite rightly:

“Religion should not be a tax avoidance issue.”

However, it should not be a cause for unnecessary complication either. The same article cites a census estimate that there are 738 members of the Christian Brethren. This seems to be a significant understatement, because when the issue was debated in 2004—I see the Chief Secretary looking at me quizzically—the figure cited was close to 14,000. Even so, for perspective, some 942 of my constituents described their religion as “Jedi” in the last census.

I am not suggesting that the Christian Brethren should lose the benefit of alternatively secured pensions, but rather that ASPs should, from their institution, have been seen as possessing wider relevance than to the Christian Brethren. At least by acknowledging that there was a wider ideological issue in play here, the Government could have avoided the introduction of a new scheme and the subsequent familiar clampdown.

My hon. Friend the Member for Tatton (Mr. Osborne) tried valiantly in 2004 to engage the then Financial Secretary, the right hon. Member for Bolton, West (Ruth Kelly) in such an ideological debate by suggesting that ASPs should be seen in the wider context of the trickle-down of wealth from one generation to another. In a colourful debate, he quoted from both Corinthians and Timothy, but sadly the Book of Ruth was a little less forthcoming in the response.

My hon. Friend eventually dredged up an actuarial relic in the form of a tontine, to try to get to grips with some of the consequences of ASPs and how trickle-down of residual lump sums might work in practice. Tontines, as I have found, allow funds contributed by participating scheme members to devolve to the last man or woman standing. They certainly captured the imagination of the hon. Member for Wolverhampton, South-West, who correctly observed their crucial importance to Victorian and Edwardian murder mysteries, due to the unfortunate habit of participants bumping each other off in order to claim the funds. If the ministerial pension scheme were run on that basis, there would perhaps be fewer candidates for the Labour deputy leadership.

Rob Marris (Labour, Wolverhampton South West)

I never said that.

Brooks Newmark (Conservative, Braintree)

But I did.

My point is that the Government tried hard in 2004 to avoid engaging with the issue of the inevitable trickle-down of wealth from ASPs. About as close as we got was the then Financial Secretary’s admission that

“if we find that people intend to use the alternatively secured pensions to bequeath any unused funds to their dependants, we will of course review the provisions, and we could consider ways to tighten up the proposals to make that a very unattractive option.”—[Official Report, 7 July 2004; Vol. 423, c. 919.]

But the failure to deal with the issue head-on in 2004 is the reason for the draconian measures in this year’s Bill.

There have been more reverse gears used in the Chancellor’s treatment of pensions than are commonly associated with second world war Italian tanks. [Interruption.] Not Italian; second world war. I love the Italians. This heavy-handed crack-down on ASP lump sum transfers on death is just the latest example of what I have just described.

I would be heartened if the Government gave up on the justification of “principled religious objection” and looked again at the wider issue of allowing pension funds to be preserved and transferred. If the provision of tax relief on pension contributions is to encourage healthy provision in old age, it should follow that lump sum transfers should be preserved for that purpose, rather than being wiped out by punitive taxation. For example, allowing lump sum transfers to non-dependent children, which would then count towards their own pension’s lifetime allowance, would encourage independence from means-tested support and would still achieve value in return for the income tax that the Government have forgone.

My second point also concerns inevitability. It was inevitable that there would be plenty of takers using ASPs for non-religious reasons and it was impracticable that any test of faith should be applied to them, which the Government have at least admitted. There was a chorus of warnings in 2004 and, rightly, a chorus of “I told you so” now. However, it does not take too much Sibylline talent to have predicted the use of ASPs to pass on wealth, so I would like to ask the Chief Secretary to provide the Treasury’s original prediction of ASP uptake and what the uptake has in fact been? I am sure that those figures are available in the old regulatory impact assessment, but if he has them to hand, I would be grateful if he could share them.

My final point concerns the change to the maximum draw-down from an ASP under paragraph 2 of schedule 19. I believe that my hon. Friend the Member for Fareham has already asked why the figure should now be set at 90 per cent. as opposed to a higher figure and, throughout our debate, he has spoken persuasively about the need for consistency. However, I would like to probe the Chief Secretary further as to why the magic number for draw-down was 70 per cent. in 2004, but can be raised to 90 per cent. and no higher in 2007.

I presume that the 70 per cent. figure was arrived at on the basis of an analysis of the risk that some ASP holders would run out of capital. Indeed, that appears to be the case. In 2004, the then Financial Secretary said that, with maximum draw-down set at 70 per cent., only one in 20 people could expect their income from an ASP to fall to a third of its initial value; on the contrary, she said, if people were allowed a draw-down equivalent to 100 per cent. of the maximum annuity, 30 per cent. of people would be placed in a similar situation. I would therefore first like to ask the Chief Secretary whether he believes that these relative risks are still accurate, and secondly what has changed to justify the increased draw-down and the consequently increased risk? Were the Government wrong then and if so, why is the 90 per cent. limit correct now?

Stephen Timms (Labour, East Ham)

Perhaps I should begin by expressing congratulations—I am sure I do so on behalf of the whole Committee—to the hon. Member for Rayleigh on his promotion to shadow Minister for Europe. I think that he has already got a little bit of business from the debate that we have just had. Nevertheless, we are delighted that he is with us and we look forward to hearing from him during the course of the morning.

To respond to the hon. Member for Fareham, let me give a little more detail about what the schedule does. We indicated in the pre-Budget report that we would require a member of an ASP to be paid a pension of at least 65 per cent. of a comparable annuity for a 75-year-old. We subsequently received a number of representations about the level of minimum income, and that led to the announcement in the Budget that we would reduce that figure to 55 per cent. This is not an exact science—it is a matter of finding a balance—but we concluded that that was the right level in order to reduce the danger of exhausting funds prematurely.

Where the minimum income is not paid, there will be a charge on the scheme administrator on the difference between the minimum income requirement and the amount of pension paid out in the year. The maximum withdrawal permitted from an ASP fund will be increased to 90 per cent. of a comparable annuity of a 75-year-old. That figure was also mentioned by the hon. Member for Fareham. The maximum withdrawal ensures that the ASP fund is not depleted too quickly and will continue to provide a pension for the remainder of the member’s life. That is an important consideration, and raising it to 90 per cent. provides a range within which the member can choose to draw an income to suit his circumstances.

Mark Hoban (Conservative, Fareham)

Perhaps I am pre-empting remarks that the Chief Secretary is about to make, but could he explain why 90 per cent. is appropriate for ASPs but 120 per cent. is appropriate for USPs?

Stephen Timms (Labour, East Ham)

I think that the hon. Gentleman is asking about the arrangements for draw-down prior to the age of 75, when there is, as he knows—he has already commented on it—a compulsory annuitisation requirement. The arrangements set out here are those that apply in that post-compulsory annuitisation period, in which an alternative route is now available. The considerations there are different from those that apply prior to the age of compulsory annuitisation. That is the reason for the difference in those numbers.

To deter people from using pension funds as a tax-privileged way of accumulating capital for bequests, an unauthorised payments charge will be imposed on any ASP fund that is transferred to the pension pots of other members when an individual dies. That will not prevent members from providing pensions for their survivors. To pick up a point that was made by the hon. Member for Braintree, remaining funds may be used for a dependant’s pension or paid to charity without attracting an unauthorised payments charge.

Alongside those changes, the clause and the schedule also introduce necessary consequential changes to the inheritance tax rules, mainly to address the interaction between inheritance tax and the unauthorised payments charge where both arise on the same funds. In all cases, the inheritance tax nil rate band will be set in priority against the deceased person’s estate excluding the ASP funds. That will be advantageous for the beneficiaries of the estate in that it will speed up the process for tax-paying estates and it will allow the inheritance tax position to be settled on the ASP funds independently of the remainder of the estate.

Should both unauthorised payment and inheritance tax charges arise on the same funds, the chronological order in which the charges arise will dictate how each is determined. For example, where inheritance tax is due first, the inheritance tax liability will be calculated by reference to the gross value of the ASP fund. In recognition of the fact that the ASP funds will be subject to an unauthorised payment charge in due course, any inheritance tax nil rate band that remains available to be set against them when inheritance tax is due will be grossed up by a formula to prevent double taxation. The subsequent unauthorised payment charge will then be calculated by reference to the value of the funds net of inheritance tax. In all cases, Her Majesty’s Revenue and Customs will calculate the inheritance tax due, if any, on the left-over ASP funds and send the bill to the scheme administrator.

We have consistently made it clear that we do not wish to allow pensions tax relief to be used for purposes other than to secure an income in retirement. Some commentators have expressed the concern that if ASP funds are paid in a manner not authorised bythe pension tax rules, the combined inheritance tax on unauthorised payments charges can in some circumstances reach as much as 82 per cent., the figure named by the hon. Member for Fareham.

The two charges exist for different purposes. The unauthorised payments charge recoups those generous tax reliefs if pension savings have not been used as intended to secure a retirement income, and inheritance tax is a separate charge on wealth being passed on upon death, regardless of the form of that wealth. Together, those measures reinforce the message that the purpose of pensions tax relief is to support saving for an income in retirement and not to help accumulate capital for bequests.

However, those who have principled religious objections to annuitisation maintain the opportunity to benefit from tax relief. I am disappointed that the hon. Member for Braintree should take so lightly the religious concerns that gave rise to the change. We are not talking about something on a par with “Star Wars”, despite his rather discourteous reference. I reassure the Committee about the views of those who have religious concerns about the risk of pooled annuitisation. We have discussed the matter with them, and they wrote to my hon. Friend the Economic Secretary, after the announcements in the pre-Budget report, saying:

“We are totally satisfied with the revised provisions made by the Government and are sure they will secure the desired result.”

In other words, the changes should not undermine our intentions when we introduced the alternatively secured pension. The hon. Gentleman cited my right hon. Friend, the then the Financial Secretary, who made it clear at the time that if we found that the arrangements were being used in ways that we did not intend, we would introduce further changes. That is precisely what we have done.

The hon. Member for Fareham queried the need for compulsory annuitisation at the age of 75, and he referred to debates in the other place. I say again that we have been consistently clear about the fact that the generous tax relief given for pension savings is to provide for an income in retirement. If one attempted to set a threshold beyond which people could use the money as they wished, and if the threshold used to obtain an annuity was set high enough for one to be sure that it would provide an income in retirement above the means-tested level throughout the remainder of the person’s life, however long they lived, only a very small proportion of annuity pots would be large enough. At most, only the biggest 5 per cent. of pension funds would be eligible to withdraw the remainder of their fund as a lump sum if that approach were taken. In reality, that is not viable.

We set the maximum ASP rate by reference to annuity rate for a 75-year-old. Insurance companies know pretty well how long on average a typical pool of people will live and, by pooling that risk at the aggregate rate, they can pay a secure income to individuals for the remainder of their lives, no matter how long that may be. However, alternatively secured pensions do not have the benefit of such mortality pooling, so limits need to be imposed in order to ensure that the fund continues to provide a level of income for members, even if they live much longer than expected. To ensure that, as I have said, the limit imposed by the rules is a maximum withdrawal rate of 90 per cent.

A number of positive remarks have been made about the changes that we are making by people in the pensions industry. Madeline Forrester, the head of UK distribution of Threadneedle Investments said:

“We are delighted the Government has finally brought more clarity to what was an area of some doubt. We think this makes the ASP a viable alternative to an annuity.”

Mark Hoban (Conservative, Fareham)

Does the Chief Secretary not recognise that the considerable doubt in the pension industry was caused by the statements made by the Economic Secretary over the summer? A matter of weeks after last year’s Finance Act received Royal Assent, his comments about further changes created uncertainty in the market. He also talked again about the reasons why ASPs were introduced, saying that they should only be taken up by people who had religious objections. The position was clear when the 2006 Act received Royal Assent, but it became unclear after the Economic Secretary made his statements.

Stephen Timms (Labour, East Ham)

I do not agree. I quote to the hon. Gentleman the view of Citywire on 22 August:

“Providers and advisers are ignoring ministerial warnings that alternatively secured pensions... are only for those with religious objections to annuities.”

The intention was very clear. We have safeguarded that by the changes we are making.

Mark Hoban (Conservative, Fareham)

The Chief Secretary needs to reflect on the fact that nothing in the legislation would prevent people other than Christians or Plymouth Brethrens from using this. Although the Economic Secretary said that it was only meant to be for people of a particular religious view—I respect those views and I understand their objections—there is nothing in law to prevent other people from using ASPs. It is another example of where the Government have created confusion where non existed before.

Stephen Timms (Labour, East Ham)

As long as people are using ASPs to draw an income for their retirement, there will be no difficulty. The schedule contains safeguards that ensure that the funds will be used in that way, thereby maintaining the benefits that ASPs introduced. It was made quite clear when we discussed the issue on Report last year that we would take steps to ensure that ASP rules could not be used other than as intended, to provide a pension in retirement. We are maintaining that with this Finance Bill.

Let me pick up a couple of the other points made, particularly by the hon. Gentleman. The level of the reliefs within a pension fund depend on the particular circumstances of the individual involved. We give very generous tax reliefs for pension savings, and the unauthorised payment charge at 70 per cent. ensures that all those reliefs are recovered when unauthorised payments are made. That is the appropriate approach.

The hon. Gentleman expressed concern about the wider impact on small businesses. Paragraph 12 of the schedule applies to all schemes that provide ASPs, but we have been clear from the outset that ASPs were not intended to be a product taken up in the mainstream. The changes to the rules strike a balance between the needs of those with principled objections to annuitisation and the needs of the wider public being provided with tax relief.

I think that I have answered the point about unsecured pensions. The hon. Gentleman also asked why the changes to set the inheritance tax middle-rate band against an estate have been made and whether I can confirm that the unused nil-rate band could be set against the ASP. The nil-rate band change to top-slicing the ASP ensured that it is set in priority against other assets so that non-ASP property inherited will benefit from the full nil-rate band and bear less inheritance tax. The inheritance tax will fall instead on the ASP. That change also met requests made to us by the pensions industry. I can confirm that the unused nil-rate band will be set against the ASP.

Both the hon. Gentleman and the hon. Member for Braintree said that we were undermining pension simplification by making these changes. I do not agree. The pension simplification changes have proved to be extremely successful and the initial optimism around them has certainly been maintained. The hon. Member for Braintree read out what my right hon. Friend the Secretary of State for Communities and Local Government said when the ASP was being introduced. As that quotation showed, we have made it clear that ASPs would be reviewed if used beyond their original intentions. That commitment is being fulfilled in this schedule.

Clause 69

Adam Afriyie (Conservative, Windsor)

I was conscious that the Financial Secretary did not answer the question on what the expected change in revenue to the Exchequer might be under the clause in terms of inheritance tax and tax on lump sum transfers.

Stephen Timms (Labour, East Ham)

The changes that we are making will ensure that ASPs will be used as intended. Our projections on revenue to the Exchequer were based on that assumption. All we are doing is changing the rules to ensure that they will happen and there is no impact on revenue.

Schedule 20

Stephen Timms (Labour, East Ham)

I beg to move amendment No. 136, in schedule 20, page 232, line 25, leave out paragraph 9 and insert—

‘9 In section 166(2)(a) (when person becomes entitled to pension commencement lump sum), after “paid” insert “(or, if the person dies before becoming entitled to the pension in connection with which it was anticipated it would be paid, immediately before death)”.

9A In section 219(7) (multiple benefit crystallisation events occuring by reason of payment of lump sum death benefits treated as occurring immediately before death), insert at the end “but immediately after any benefit crystallisation event occurring immediately before the individual’s death by virtue of section 166(2).”

9B (1) Schedule 29 (authorised lump sums) is amended as follows.

(2) In paragraph 1(1) (conditions to be met if lump sum is to be pension commencement lump sum)—

(a) for paragraph (a) substitute—

“(a) the member becomes entitled to it before reaching the age of 75,

(aa) the member becomes entitled to it in connection with becoming entitled to a relevant pension (or dies after becoming entitled to it but before becoming entitled to the relevant pension in connection with which it was anticipated that the member would become entitled to it)”,

(b) in paragraph (c), for “of three months beginning with” substitute “beginning six months before, and ending one year after,”, and

(c) omit paragraph (e) (but not including the “and” at the end).

(3) In paragraph 2 (“permitted maximum”), after sub-paragraph (5) insert—

“(5A) But if the member dies before becoming entitled to the relevant pension in connection with which it was anticipated that the member would become entitled to the lump sum, the permitted maximum is the available portion of the member’s lump sum allowance.”.’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss Government amendment No. 137.

Stephen Timms (Labour, East Ham)

The tax reforms for pension schemes and pension savings that came into effect last April remove the complexity that had led over many years to different tax rules applying across numerous types of pension scheme. As I have said, those changes have been very successful. The long-term benefit is a streamlined regime that is easier to understand and cheaper to administer, and which was, and still is, broadly welcomed by the pensions and savings industry.

The regime was put together after close consultation with the industry over a number of years. That engagement has continued since the enactment of the FinanceAct 2004. That continuing dialogue has proved to be very useful and has led to a number of changes in this Bill to improve further the benefits of the new regime. All the technical improvements to the alignment of benefits are in response to representations from the pensions industry. The changes have been warmly welcomed. Most of them fall into one of two categories. Some are responses to either regulatory or tax changes elsewhere. The other group is wider in scope and covers a number of measures to eliminate undue restrictions on the administrative practices of schemes, and so provide greater flexibility for scheme members and administrators. Government amendments Nos. 136 and 137 belong to that second group.

In response to representations, amendment No. 137, on the rules of pension commencement lump sums, will allow lump sums to be paid up to six months before the pension commences so long as a pension scheme is arranging for a pension to commence. That will allow schemes and pension members greater flexibility in arranging a pension. It will allow savers time to take advantage of the open market option and choose the most suitable option annuity for them, and it meets principles underlying pensions tax relief. The amendment will apply retrospectively to A-day to ensure that those lump sums that have been paid remain tax-free. It has been welcomed by the pensions industry and would ensure that tax-free lump sums can continue to be paid in a flexible way. I commend it to the Committee.

Rob Marris (Labour, Wolverhampton South West)

My right hon. Friend referred to lump sums being taken early and the possibility of taking advantage of the open market option and so on. Will he clarify whether the amendment will also cover lump sums from public sector schemes in which the open market option is not usually taken because such schemes have final salary pensions? If he cannot clarify that now, I shall be happy for him to write to me.

Stephen Timms (Labour, East Ham)

I think that the answer is yes. Once the industry made it clear to us that, in practice, the lump sum was often paid in a different period from the one that the legislation assumes, we were happy to make the change. Wherever that arises, this will fix it.

Clause 70

Roger Gale (Conservative, North Thanet)

With this, it will be convenientto take the following: Amendment No. 213, in clause 70, page 44, line 7, leave out from ‘a’ to ‘the’ in line 9 and insert

‘pre-ordained series of transactions is carried out in connection with the disposal and acquisition, and it is undertaken in pursuance of a scheme or arrangement the only or main purpose of which is the avoidance or reduction of Stamp Duty Land Tax payable on the acquisition by P or to secure or increase a repayment of Stamp Duty Land Tax in relation to that acquisition.’.

Amendment No. 234, in clause 70, page 44, line 13, leave out ‘its disposal by V’ and insert

‘the disposal referred to in subsection (a) above’.

Amendment No. 214, in clause 70, page 44, line 13, at end insert—

‘(1A) Transactions taking place more than three years before the acquisition of a property by P shall be disregarded for the purposes of subsection (1).’.

Amendment No. 235, in clause 70, page 44, line 40, leave out

‘the largest amount (or aggregate amount)’.

Amendment No. 236, in clause 70, page 44, line 42, after ‘(a)’, insert ‘the largest amount’.

Amendment No. 237, in clause 70, page 44, line 44, after ‘(b)’, insert ‘the aggregate amount’.

Amendment No. 238, in clause 70, page 45, line 7, at end insert—

‘(c) the exercise of a statutory right of enfranchisement, extension or enlargement of a leasehold interest.’.

Government amendments Nos. 184 to 186.

Amendment No. 239, in clause 70, page 46, line 1, leave out ‘and 75’ and insert

‘75, and schedule 7, Part 1’

Government amendments Nos. 187 to 192.

As this group of amendments contains Government amendments, I shall ask the Chief Secretary if he wishes to speak first, and then I shall come to the hon. Member for Chipping Barnet. That will not preclude the Chief Secretary from responding to anything else that is raised in the course of the debate.

Stephen Timms (Labour, East Ham)

Thank you, Mr. Gale, for clarifying how you intend to deal with the clause, which is the first of two that tackle stamp duty land tax avoidance schemes. It amends the Finance Act 2003 to counter two types of scheme—those that use leaseholds and those that use sub-sales that have been developed specifically to avoid payment of the tax. Clause 71 is designed to counter schemes that use partnerships as a way of avoiding tax.

The two schemes that the clause tackles seek to avoid payment of stamp duty land tax by adding extra stages into the sale of property by one party to another in such a way as to remove the need to pay tax on the transaction. We have always said that we will deal robustly with any avoidance effort along those lines. We were first made aware of the schemes late last year. We initially took action at the pre-Budget report by introducing time-limited regulations that prevented those schemes. We acted quickly because we took the view that it was unfair for those using such schemes to benefit, while most taxpayers who paid stamp duty and land tax could not use such complex avoidance arrangements. The regulations have worked well, and the industry has, on the whole, been happy with that. The clause replaces those regulations, which were introduced at the end of last year, debated in Committee and approved by the House on 15 January.

Hon. Members might ask why we have included the clauses. First, we hope that they will prove to be more finely tuned instruments than the regulations that they replace. Not only do they target more effectively those schemes that we want to stop but, in response to representations about the regulations, they do more to protect those who are involved in innocent transactions whom the regulations might have caught inadvertently. Of course the clauses, unlike the regulations, willhave permanent effect. In introducing the regulations, we explained that they would have effect for only18 months from the date on which they were made. That has given us a chance to consult the sector and I am grateful to all those who took the time to discuss the regulations with HMRC. We have tried to accommodate their comments, and that has made for clearer legislation.

Throughout the process, we have been open to changes that will make it clear that legitimate transactions will not be caught. For example, the Government amendments are the result of further representations from the property sector. Dealing with the avoidance of stamp duty land taxes is, in many ways, different from dealing with avoidance in other areas of taxation. For example, it is much harder to establish whether the main driver in a developed scheme is avoidance of tax or not. It is also sometimes difficult to establish who benefits from schemes, as they can be arranged to benefit both the buyer and the purchaser. Therefore, where we have deviated from what we have done in other areas of taxation to prevent avoidance, we have done so simply because we have not been able to use the same types of legislation to prevent avoidance in this area.

We have been happy to listen to what groups such as the Law Society have had to say about how the clause is drafted and, where possible, we have agreed to changes that will protect those involved in legitimate land transactions.

Theresa Villiers (Conservative, Chipping Barnet)

Does the Chief Secretary agree that a transaction caught by proposed section 75A would include the purchase of a long leasehold where the right to enfranchise is later taken up, because that involves a series of steps?

Stephen Timms (Labour, East Ham)

I am not sure quite how the measure would apply in the particular circumstance that the hon. Lady describes. Perhaps she would like to give a little more detail about the precise type of transaction that she envisages. The intention is to ensure that stamp duty is paid on the full value of the transaction. Artificial arrangements have been devised to try to avoid that; I do not imagine that her example is one of those arrangements. However, that is certainly the intention and I think that the effect of the clause, with the amendments that have been tabled, will be that, in whatever circumstances, the full value of the transaction will be captured for stamp duty land tax purposes.

On the Government amendments, we have made it clear that HMRC will only be allowed to use the retrospective taxation powers if it favours the taxpayer. We have clarified that only property investment partnerships are covered by the clause and that, where separate parcels of land are sold on as part of a transaction, we will use apportionment to reduce the amount of tax that purchasers might have to pay.

Making good anti-avoidance legislation involves dealing with two opposing requirements. First, we must ensure that the legislation is strong enough to stop the avoidance. Secondly, however, we do not want to entangle law-abiding businesses in its scope or make the overall tax structure any more complex. That is a fine line to walk. In tabling the amendments, we have shown that we will listen to concerns about the unexpected effects of legitimate traders and that we will act on those. I will be happy to give more details about each amendment, but I hope that, in these few words, I have explained the intention behind them.

Theresa Villiers (Conservative, Chipping Barnet)

I want to take the Chief Secretary up on his reference to complexity. A concern that has been expressed to me is the complexity and lack of clarityin the provisions. In particular, how will proposed section 75A operate if more than one transaction could count as the notional transaction? How will the notional transaction be selected? Will it be the highest transaction, or the first transaction?

Stephen Timms (Labour, East Ham)

Let me come back to the hon. Lady’s original question about the purchase of a long lease with a right to enfranchise. That kind of arrangement will not be caught unless there is some connection between the transactions—for example, if they are all carried out in a very short time scale. The aim and effect of the changes is to ensure that the full value of the transaction is caught for stamp duty land tax purposes and that the full tax payable will be required. I think that intention is being delivered by the changes.

The hon. Lady makes a fair point about complexity. The clause has to be quite complex. Its aim is to counter schemes that involve the creation of complex networks to avoid paying stamp duty land tax. HMRC has already published detailed guidance on its website explaining what is and is not affected by the clause, giving examples of how it will work. If there are any uncertainties, it is happy to advise those who have queries about complex transactions on a case-by-case basis.

Theresa Villiers (Conservative, Chipping Barnet)

If the Chief Secretary cannot answer the specific question about the possibility of multiple transactions that could qualify as a notional transaction, can he tell the Committee what will happen where there are multiple parties that could fall into the category P as defined by proposed section 75A(1)?

Stephen Timms (Labour, East Ham)

There may well be some quite complex arrangements where sensible questions could be raised. My advice would be that those questions should be raised directly with HMRC in the light of what is already on the website. I think that the appropriate clarification could then be provided.

Roger Gale (Conservative, North Thanet)

Before we debate the other group of amendments, may I make the point that the debate is being conducted on a clause stand part basis, so I am not putting any amendments formally at this stage? If the Opposition Front Bench or, indeed, any other hon. Member wishes to move any of the other remaining amendments formally, they will need to indicate that to me at the appropriate time.

Theresa Villiers (Conservative, Chipping Barnet)

Thank you, Mr. Gale. I join others in welcoming you back to the Chair.

My understanding of the reaction that the provisions have provoked among those affected by them is very much at variance with the Chief Secretary’s account of how they have been received. As ever, the Opposition would support attempts to shut down abusive and artificial tax avoidance schemes that would prevent stamp duty from being charged on transactions. However, we are concerned about the very wide scope of proposed section 75A. Although initially its provisions did not attract a huge amount of attention, considerable concern has since been expressed about their breadth.

The Chartered Institute of Taxation states:

“It is disappointing to note that despite a wide-ranging discussion of this legislation in January 2007 which identified various practical problems with its implementation, nothing has been done to tackle the major defects in the legislation... In our view the drafting of section 75A is fundamentally deficient in a number of respects... Most seriously... the section is drafted in such wide and general terms as to be almost unworkable in practice. Its general application means that it may apply to many common commercial transactions, and it appears to cut across many areas where existing SDLT legislation provides reliefs including, for example, charities and reconstruction reliefs.”

The Institute of Indirect Taxation, the Law Society and the Stamp Taxes Practitioners Group all seem to share the CIOT’s concern that innocent transactions could be caught by proposed section 75A. The Law Society points out:

“The uncertainty which this is generating is not simply the perception of a number of anxious professionals who cannot interpret the legislation and want a hand from HMRC.

Seasoned conveyancing and tax professionals have pored over this legislation and want a hand from HMRC, not with a view to picking holes in it, but with a view to understanding it so that they can give advice to clients as to the consequences of undertaking real estate transactions.

The fact that these professionals are still unclear as to the ambit of the legislation is testament to the fact that the legislation is unclear.”

Similarly, in a letter to Crispin Taylor at HMRC, the Stamp Taxes Practitioners Group stated:

“As a matter of principle, anti-avoidance legislation should be proportionate to the problem...The Stamp Taxes Practitioners Group consider that s75A goes far beyond what is necessary to deal with the type of schemes mentioned in the Technical Note issued by HMRC...and cannot on any reasonable basis be allowed to be enacted without, at the very least, major revision.”

The Government amendments to which the Chief Secretary referred help to deal with one or two problems and drafting errors, but serious issues remain unaddressed and unresolved. A key concern is that many high-street conveyancers and property lawyers who do not have access to specialist and sophisticated tax advice are unlikely to be aware of the risk that the transactions with which they are dealing could behit by the provisions of proposed section 75A. There is a risk of widespread but unwitting non-compliance.At the heart of the problem is the fact that themere linkage of transactions through conveyancing succession might trigger those provisions.

A number of examples of innocent transactions that might be caught by proposed section 75A have been canvassed with HMRC. In its briefing notes for the Committee, the Institute of Indirect Taxation set out the following case. In it, V owns a warehouse, which it sells to A for £250,000, the market value reflecting the hope that planning consent for redevelopment will be granted. However, consent is refused. As a result, A resells the building a year later to P for its then market value of £200,000. Proposed section 75A could bite in that situation because a series of transactions has taken place in relation to the property, ending in its purchase by P, and P could be liable for stamp duty on the higher original price of £250,000 rather than the price that he paid.

HMRC has indicated that proposed section 75A would not apply in that situation. However, the section requires that only one person, V, disposes of property, and that another person, P, acquires it, and that a number of transactions have taken place in connection with the disposal and acquisition of the property. The amount of SDLT payable in respect of those transactions is less than would have been due on a notional direct transfer between V and P. All those conditions would seem to be satisfied in the example given by the IIT, so P might be landed with an unexpected bill for extra stamp duty even though he had nothing to do with the earlier transaction. It seems that virtually all sub-sales could be caught in which A sells to B who then sells on immediately to C at a lower price.

Another example of the innocent transaction that might be at risk is one that I gave to the Chief Secretary—a long lease that is enfranchiseable when the right is exercised after the purchase of the lease. There is a sufficient connection even if the purchase takes place some years later, as there is no temporal restriction on the operation of proposed section 75A. There is a connection between the original purchase of the lease and the enfranchisement because if one had not purchased the original lease one would not be able to enfranchise. That has the potential to be caught by proposed section 75A. It is difficult to see how it could qualify as an artificial avoidance scheme of the sort supposedly targeted by the legislation.

Proposed section 75A does not require the direct disposal from P to V, nor does it require that V should have disposal to P in mind when entering the transaction chain. All that is required is that P should end up with the interest originally held by V, even if it arose because something else had happened in a series of other transactions. As the Law Society points out, wholly unrelated Vs and Ps could find themselves party to notional transactions and thus to the application of the provisions of section 75A. There is no requirement that the transactions should constitute an artificial scheme or that they should be motivated by a wish to avoid tax. The mere fact that transactions occur one after the other could turn them into a scheme under proposed section 75A. The danger is that wholly innocent transactions could be caught simply because they involve a series of steps.

The concern becomes even greater when one realises that those steps could take place over several years and still trigger the operation of proposed section 75A. The wide scope of the provisions is reinforced when one notes that proposed subsection (2) makes it clear that not all of the relevant transactions need to relate to land.

I am told that HMRC asserts—this is in line with the response that the Chief Secretary made to the example that I put to him—that the words “involved in connection with”, contained in proposed subsection (1)(b), mean that the provisions will bite only where V and P are party to the same arrangement. However, that is not what the Bill says. The words “in connection with” give a very limited and uncertain protection to those carrying out day-to-day real estate transactions. Both the Institute of Indirect Taxation and the Stamp Taxes Practitioners Group have expressed serious concern about the lack of clarity surrounding the phrase on which HMRC seeks to rely to ensure that its legislation does not have an impact on innocent transactions.

Leaving aside the infelicitous nature of the term “involved in connection with”, considerable ambiguity is attached to the phrase. The question that is difficult to answer is how substantial a link is needed for HMRC to be able to show that proposed paragraph (b) is satisfied and the required connection is established between the transactions and the acquisition by P.

The words “in connection with” have been interpreted in different ways by the courts. Mr. Justice Nourse in Emery v. IRC thought that it meant a “definite causal link”. In Johnson and Johnson, Lord Justice Somerville thought it meant merely “having to do with”. In one of the more recent cases, in HMRC v. Barclays Bank, Lady Justice Arden took a wide interpretation of the term and also emphasised that it could mean different things in different contexts, and that it had to be read in context.

The phrase “in connection with” provides an inadequate safeguard because it does not require the deliberate and consequential link between the transactions, which groups such as the Institute for Indirect Taxation believe is vital if proposed section 75A is not to hit a range of innocent transactions. The Stamp Taxes Practitioners Group points out that the term

“is seemingly capable of including... a merely causal or historic interpretation—without a time limit, motive connection or even knowledge of the other parts of the ‘scheme’.”

The inclusion of “involved in” seems to offer no effective additional protection.

We need something stronger than just the words “involved in connection with” to separate artificial avoidance schemes that should be restricted from normal, everyday transactions, which should not. That is why I tabled amendment No. 213. As well as introducing a purpose test, it would require amuch closer link between the transactions in issuethan is required by the original drafting of proposed section 75A. The purpose test that the amendment would introduce is similar to those that we have already discussed. They are not without their problems, but they have become a regular feature of our tax law. The Government propose to use purpose tests twice in the Bill in other contexts in relation to their targeted anti-avoidance rule on capital losses and in relation to sideways loss relief in schedule 4.

The amendment takes on board the discussion that we had in relation to capital losses and the TAAR rule, and proposes to cover not just those schemes motivated by a wish to avoid or reduce tax, but those aimed at securing or increasing a tax repayment. I am seeking to insert not only a requirement of a real connection between the different transactions, but an element of deliberation in carrying out a sequence of transactions.

The amendment would remove the risk that the mere fact of a number of transactions taking place sequentially in relation to the property would trigger the operation of proposed section 75A, even where such transactions were years apart and had nothing to do with stamp duty, stamp duty land tax, or a holding tax. The amendment would introduce a concept of a pre-ordained series of transactions that amount to a scheme or an arrangement. Both those ideas draw on case law. The concept of a pre-ordained series of transactions was considered in a line of cases running from Ramsey v. IRC and Furniss v. Dawson. It requires such a clear and well established link between the transactions that they are, in effect, a single composite transaction. That type of close link is missing in proposed section 75A.

Adam Afriyie (Conservative, Windsor)

It occurs to me that if a scheme were designed to avoid stamp duty land tax and for whatever reason it fell apart halfway through, the individual who ended up buying the property but who had no connection whatever with the scheme would also be caught by the provisions.

Theresa Villiers (Conservative, Chipping Barnet)

There is a risk that that might happen. I understand that there have been troubling examples of artificial avoidance schemes that have fallen outside the scope of proposed section 75A. Not only has it the potential to hit innocent transactions, but it is not effective in catching all the non-innocent ones.

The term “scheme or arrangement”, which is also utilised in the amendment, is familiar from case law. It echoes the wording used in a number of contexts in our tax law, such as sections 137, 139 and 140B of the Taxation of Capital Gains Act 1992.

In the view of the IIT, introducing the term “scheme or arrangement”—a phrase that it describes as commonly used and well understood—creates the consequential link that is needed and remedies the problems that occur when reliance is placed solely on the “in connection with” test. Confining the operation of proposed section 75A to instances in which that type of scheme or arrangement is entered into with the main purpose of avoiding tax, rather than for a bona fide commercial reason, would be a much more effective way to tackle the avoidance that concerns HMRC without imposing collateral damage on a range of transactions that have nothing to do with avoiding tax, and, critically, without imposing significant uncertainty and cost on those buying and selling property. The general approach taken in the amendment is broadly in line with representationsmade by the Institute of Indirect Taxation, the Law Society, the CIOT and the Stamp Taxes Practitioners Group.

Amendment No. 214 would also help to deal with the problems that I have outlined, in particular the issues connected with the absence of any time limit for the operation of the provision. It would provide that transactions taking place more than three years before the acquisition by P should be disregarded for the purposes of proposed section 75A. That would put a temporal limit on the scope of the operation of proposed subsection (1) which would significantly clarify the legislation, otherwise HMRC could in theory look back many years at transactions that happen to have been carried out in relation to a particular item of property. Like amendment No. 213, it would answer the very serious concerns raised by the representative groups to which I have referred.

In responding to calls for the scope of proposed section 75A to be tightened and for a motive test to be inserted, HMRC have responded that that is not necessary because uncertainties can be ironed out using the code of practice 10 clearance procedure. It is welcome that HMRC has indicated that access to the procedure will be extended indefinitely instead of being restricted to the early years of new legislation, as would normally be the case.

However, access to the procedure does not provide all the answers to the problems that I have outlined. For a start, it does not amount to the full clearance procedure for which organisations such as the CIOT and the IIT have called. The Law Society points out that if the Government want to introduce a mini-general anti-avoidance rule for SDLT in proposed section 75A, they need to have HMRC officials able and willing to provide the necessary clearances within a commercially acceptable timetable. An adjudicator under the COP10 procedure can give guidance only on what transactions are caught by proposed section 75A. He cannot disapply it to a transaction—even a wholly innocent one—if the law says that it applies.

The Law Society put the position best in relation to the limitations of the COP10 procedure. It said that

“HMRC will have to take a view as to the “innocence” or otherwise of a transaction in deciding whether the legislation should apply. COP10 rulings are not given on what the legislation intends to hit; they are an interpretative provision, where a matter of tax law is unclear, allowing the taxpayer to receive clarity as to how the legislation, as it is laid down, should be applied to a particular set of facts. Our experience is that the complex transactions unit takes a very legalistic view towards legislation, and we have no doubt that transactions which are innocent will get negative COP10 rulings because on the face of the legislation, it applies to them when it was never intended to.”

The Law Society went on to highlight a further problem with the procedure by saying:

“Taxpayers are reliant on HMRC’s executive view as to what is an ‘innocent’ transaction such that two taxpayers in very similar circumstances could be taxed differently at the whim of the HMRC officer to whom a COP10 clearance request is made.”

Moreover, application for such rulings takes time and generates costs, which is a problem. I have received representations about transactions that fell through because it was impossible to get a COP10 ruling quickly enough. Switching from the idea of precise and targeted legislation to a system more similar to US-style rulings has constitutional implications that should be properly debated. The implications for HMRC resources also have to be considered in light of the need for the prompt turnaround of applications.

Another argument put forward by HMRC, which echoes some of the points made by the Chief Secretary, is that we do not need to amend proposed section 75A because interpretive problems can be resolved using guidance. To that end, it has published a so-called white list of transactions that it does not believe should be covered by proposed section 75A. I am not keenon that phrase; I prefer cleared list. However, leaving aside what one should call it, its publication does not solve the problems with proposed section 75A. The Stamp Taxes Practitioners Group points out, with justification, that the white list approach is not an effective substitute for significant revision of the legislation. It identifies particular problems with the white list approach in this context because of the fact that the proposed section needs to be considered in relation to virtually all conveyancing transactions. Relying on non-statutory guidance is difficult enough in narrow specialist areas such as group relief and real estate investment trusts. However, it is much more difficult in relation to legislation that might have an impact on all conveyances and home purchases.

Many solicitors do not have in-house expertise or research staff who can regularly monitor HMRC’s website for guidance. Certainly, an average high-street solicitor is highly unlikely to have access to such resources or expertise. It will also be very difficult to come up with anything like a comprehensive white list. There are even more fundamental constitutional concerns at issue, however.

Richard Stratton, chairman of the Law Society’s tax law committee, wrote to the Paymaster General in March referring to the principles articulated by the House of Lords in R v. HMRC ex parte Wilkinson. He pointed out that

“however willing HMRC is to confirm that a transaction was not caught, Wilkinson makes it clear that a tax collecting authority cannot ignore legislation and cannot have significant discretion in tax collection.”

As Lord Upjohn once famously commented:

“A taxpayer should be taxed by law not untaxed by concession”,

and as the IIT rightly points out:

“HMRC guidance is no substitute for introducing a fair law.”

The Stamp Taxes Practitioners Group has called for a non-exhaustive white list to be inserted into the legislation to give certainty to practitioners and reassurance about how to comply with the law. I welcome proposed section 75C(10), which allows the Treasury to do that and to disapply proposed section 75A in certain cases. However, as the CIOT has commented, that

“does not obviate the need for proper drafting of primary legislation.”

Amendment No. 234 seeks to amend paragraph (c) of proposed section 75A(1). That would deal with a problem that has been raised in a number of representations, which is that, as the clause is drafted, there is no need for the three paragraphs in proposed subsection (1) to be read in conjunction with one another. The amendment would clearly tie together proposed paragraphs (a) and (c) and ensure that they are read together rather than separately. Without that change, there would be an ambiguity about the chargeable interest to which the word “its” in the last line of proposed paragraph (c) refers. The amendment would ensure that the interest referred to in proposed paragraph (c) is that which is transferred to P and not the whole of V’s original interest.

The concern is about the situation in which V transfers only part of his interest. For example, if A agreed to sell land to B for £3 million and then B agreed to sell, via a sub-sale, one third of the land to three purchasers, C, D and E, for £1 million each, there is a danger, as the section is currently drafted, that proposed section 75A could operate to impose an SDLT charge on each of the three purchasers for the full £3 million rather than the £1 million that each of them actually paid.

On amendments Nos. 235 to 237, the CIOT views proposed section 75A(5) as being too wide. The Stamp Taxes Practitioners Group feels that it should be more focused so that it catches only the chargeable consideration that would have been payable for the land but forthe insertion of the phrase “scheme transactions”. It would be useful if the Minister could confirm thatno double counting will be allowed under proposed subsection (5)—in other words, that it should not be permissible to add up receipts and payments by the same party to arrive at the figure for the notional consideration.

Amendments Nos. 235 to 237 are aimed at reducing the risk of double counting. Subsection (5) refers to

“the largest amount (or aggregate amount)”.

That does not give rise to a problem so long as “or” is interpreted in the normal way; in other words, disjunctively, so that the tax is payable on either the largest amount or the aggregate amount. However in some legal contexts “or” has been interpreted conjunctively to mean “and”.

My three amendments would help to remove the problem by moving the reference to the amount to match the relevant paragraphs. The term “largest amount” seems focused on paragraph (a) whereas the only relevant context for the application of “the aggregate amount” is the situation set out in paragraph (b). The amendments make it plain that either (a) or (b) applies and not both.

Amendment No. 238 is a simple amendment to resolve the problem that I drew to the Chief Secretary’s attention. It makes it clear that exercising a statutory right of enfranchisement, extension or enlargement of a leasehold interest cannot trigger the operation of proposed section 75A. Without this change, there is a real danger that someone who buys a lease and later exercises a statutory right to extend it could be hit by proposed section 75A.

Turning to amendment No. 239 and section 75C, the Law Society expresses the concern that the statutory carve-out for reliefs in subsection (2) of proposed section 75C will be restrictively applied. The question here is whether the reliefs and disregards that would be available in relation to the actual transaction will still be available in relation to the notional one. A key problem here is that subsection (2) applies only to reliefs.

Many important SDLT rules that reduce the liability of the taxpayer are not reliefs in a technical sense. They are simply computational rules, exemptions or disregards. If they cannot be applied to the notional transaction under proposed section 75A, this will involve a significant increase in the SDLT bill faced by taxpayers. It would turn section 75A from an anti-avoidance provision into a simple tax increase.

The Stamp Taxes Practitioners Group is also concerned that there is no clear mechanism provided for crediting SDLT that has been paid in relation to transactions earlier in the chain against the SDLT charged on the notional transaction. Considerable uncertainty surrounds this point and any clarification that the Chief Secretary could give would provide significant reassurance to people who are potentially affected by these provisions.

Amendment No. 239 to subsection (4) of proposed section 75C would deal with the specific problem of group relief. It is a concern that the SDLT group relief rules have been excluded from the list carried over into section 75C and thus available to relieve liability under proposed section 75A. Group relief plays an important function in this context and its loss would disrupt many significant commercial transactions. Again, unless this problem is dealt with, section 75A looks much more like a straight tax increase than an anti-avoidance provision. If the Chief Secretary will not accept the amendment, I hope he will at least explain why group relief provisions on SDLT contained in part 1 of schedule 7 of the Finance Act 2003 should not apply to notional transactions under section 75A.

Before concluding, I would like to flag up two general concerns about proposed section 75A. As I said to the Chief Secretary, there could be a number of instances where there could be more than one transaction in the same case that could fall within the definition of a notional transaction for the purposes of these provisions. It is not clear how section 75A is supposed to operate in this situation. It does not surprise me that the Chief Secretary was unable to give me an answer on that point. I should be delighted to take him up on his invitation to address the query to HMRC, but it is a concern that we do not have a clear answer on that yet. In particular, how will a decision be made as to which transaction to select as the notional one?

Another concern is that it might not always be possible to ascertain who is P for the purposes of new section 75A(1). In a recent article for Taxation Magazine, Jeremy de Souza, a lawyer for Blake Lapthorn Tarlo Lyons, pointed out that in many cases there may be a number of potential Ps in the conveyancing chain. He concluded by stating of these provisions that

“warning flags should be flying over many property transactions from now on.”

In conclusion, new section 75A as drafted is simply too wide-ranging. It will have to be considered in virtually all conveyancing transactions. Thousands of high street legal and conveyancing practices across the country will have to grapple with these highly complex provisions. It is highly likely that many will be unaware of the application of the new section and hence of the need to make an SDLT return. Even if they are aware of the rules, it may be difficult in practice to get holdof the information needed to ascertain whetherlinked transactions have occurred, sufficient to trigger section 75A. This provision could add a significant conveyancing headache for thousands who just want to buy a new home. I hope that the Chief Secretary will reassure me that those fears are unfounded.

It is particularly harsh to impose complex, unclear and hard-to-understand tax provisions in a self-assessment system, where taxpayers themselves have to determine whether the provisions apply. One expert told me that these rules could leave transactions open to re-examination by Her Majesty’s Revenue and Customs, potentially backdating 21 years. The provisions are so unclear and uncertain that it will be difficult for HMRC to apply them consistently. The upshot is that significant extra costs will be imposed on the property market and on home buyers.

To return to Richard Stratton’s letter to the Paymaster General on behalf of the Law Society, he wrote that

“uncertainty engenders costs, whether this is due to lenders increasing the cost of borrowing ... or delay pending seeking clarification from HMRC either informally or under Code of Practice 10 procedure.”

The Stamp Tax Practitioners Group said:

“This uncertainty is causing delays in major commercial—and indeed some everyday—transactions because, although clients acquiring high value properties are willing to take risks based on a professional analysis, the banks and institutions that are providing finance for such transactions are generally not. STPG members have reported experience, in relation to transactions in the pipeline at the time when the Regulations were introduced, of funding offers either being withdrawn or the funders being prepared to proceed only on the basis of increased interest rates.”

The Chancellor has significantly increased the burden of stamp duty during his term of office at No. 11. Only a few weeks ago, we had the home information packs disaster, and I urge the Chief Secretary to think again before he imposes further costs and uncertainties on the property market, as a result of legislation which, I believe, contains some serious defects.

Stephen Timms (Labour, East Ham)

I hope that I can persuade the hon. Lady that her amendments are unnecessary. We have seen the text of them before, because they have been suggested by some of those involved in the property sector. As she knows, we have accepted quite a number of her proposals—they were in the Government amendments that we discussed a few minutes ago. We have rejected this particular group for good reason. Some of the amendments would reopen the avoidance opportunities that the clause is designed to shut down.

Understandably, the hon. Lady spent most time discussing amendment No. 213, which would, as she said, replace the clause’s objective test with a different set of tests. First, there would have to be a “pre-ordained series of transactions”. The problem is that it is often easy for the parties to arrange things so that the steps are not “pre-ordained” because they might or might not happen, so it is quite easy to avoid that test. A test of purpose is difficult to apply to a transaction tax such as stamp duty land tax, because the main purpose of the transaction is likely to be the commercial one of transferring economic ownership of the property from vendor to purchaser, so I do not think that the approach in this amendment works. It would not give greater certainty to those not engaged in tax avoidance either.

In most cases where a transaction is financed by borrowing, the lender is most concerned to have certainty about the tax consequences, but it is unlikely that lenders could satisfy themselves as to the purposes of the parties to the transaction. The answer, therefore, is that certainty can be secured through clear guidance from HMRC, both generally and in relation to specific transactions. As I have said, there is a firm commitment to giving that guidance.

I also hope that members of the Committee will be reassured to note that the Government have already responded constructively to representations made both during the original drafting of the Bill and in relation to the Government amendments that we discussed this morning, and we will continue to listen carefully to representations in the future. If it still proves to be the case that transactions that are not tax avoidance transactions are likely to be caught, we can and will help innocent taxpayers who are inadvertently caught. We can do that by using the power that the hon. Member for Chipping Barnet referred to, in new section 75C(10), which can disapply the application of new section 75A in specific circumstances.

Theresa Villiers (Conservative, Chipping Barnet)

Is HMRC contemplating using new section 75C(10) on an individual basis for individual taxpayers? It seems most peculiar to draft wide-ranging legislation and then implement secondary legislation to exempt specific individuals.

Stephen Timms (Labour, East Ham)

I refer the hon. Lady to what new section 75C(10) says:

“The Treasury may by order provide for section 75A not to apply in specified circumstances.”

I do not think that it would be usual for the “specified circumstances” to apply to just one individual transaction, but the wording does not make that impossible.

Amendment No. 214 would assist those avoiding payment of stamp duty land tax by restricting the application of clause 70. It would disregard transactions occurring more than three years before the ultimate acquisition of the property by the purchaser. The intention there is understandable, but there is no reason why purchasers should have to make the inquiries that the amendment would spare them. As long as they are planning to pay stamp duty land tax on their purchase in the normal way or they qualify for a relief such as charities relief, the anti-avoidance provisions in the clause will not apply to them. Incidentally, the hon. Member for Chipping Barnet queried whether charities relief and reconstruction relief would be affected. Those reliefs are expressly preserved and are not affected.

Theresa Villiers (Conservative, Chipping Barnet)

I am grateful to the Chief Secretary for his clarification, which I accept entirely and very much welcome. I would like to ask him about the three-year time limit in amendment No. 214. His answer to my concern about enfranchisement of the leasehold interest was that there had to be sufficient connection between the transactions so that they happened very close together. He therefore seems to envisage that new section 75A should apply only when transactions are relatively close together. If that is the case, why does he not accept the amendment, have the three-year cap and reassure people who are very worried about this legislation?

Stephen Timms (Labour, East Ham)

Because it is not needed. As I have said, as long as the parties involved are planning to pay stamp duty land tax in the normal way on their purchase or they qualify for a relief, they will not be affected. It is only where their involvement results in a reduction of the tax that would normally be payable that the clause will be likely to affect them.

Theresa Villiers (Conservative, Chipping Barnet)

The issue is that people may not know that transactions way back in history are affecting their SDLT liability, so they may be planning to pay the SDLT that they think is due—I am sure that they would be. The concern is that, if HMRC can look back on a string of transactions in previous years, the party concerned will simply not know that that affects their current liability.

Stephen Timms (Labour, East Ham)

It may be of some reassurance to the Committee to know that transactions that occurred before 6 December 2006, when the regulations that preceded this clause were laid, would be disregarded in any event, and a provision such as that set out in the amendment would not have any effect until 2009 at the earliest. I do not think that there is a problem that needs to be fixed here.

I understand the purpose of amendment No. 234, but, again, I think it is unnecessary, because it is clear from the context that the interest referred to in subsection (4)(b) is the same as the interest disposed of by V in subsection (1)(a). Amendments Nos. 235, 236 and 237 do not add anything, and would in fact reduce the effectiveness of the anti-avoidance provisions by changing the circumstances in which the section could be applied. They would lead to the clause not being applied fully in circumstances where any one person gave consideration in the form of more than one transaction, and that would allow tax to be avoided by breaking the consideration into a series of transactions, only the largest amount of which would be liable to stamp duty land tax—which is precisely what we want to prevent.

Amendment No. 238 would mean that newsection 75A would not apply to the exercise of a statutory right of enfranchisement—the point raised with me by the hon. Lady earlier on. That would create an opportunity for avoidance, however, because it is not possible to rule out the exercise of such a right as a step in new types of avoidance schemes. I want to reassure those involved in legitimate transactions that, in most cases, the exercise of such a right would not be one of a number of transactions involved in connection with a disposal and acquisition, so it would not be affected by new section 75A.

Rob Marris (Labour, Wolverhampton South West)

I may have misunderstood, but would not much of the discussion be academic, as stamp duty land tax would never be payable anyway? If we talk about leasehold enfranchisement for many houses in the west midlands, for example, we may note that they were sold originally on a 99-year lease, and the usual multiple was 11 times the annual ground rent, which as I understand it would not get anywhere near stamp duty land tax. I am not saying that no transactions would be caught, but many of the average transactions of our constituents, using the Leasehold ReformAct 1967, would not be caught at all anyway, as they are below the stamp duty land tax threshold.

Stephen Timms (Labour, East Ham)

My hon. Friend is absolutely right, and the increases that we have made in the stamp duty land tax threshold have helped in this context.

Theresa Villiers (Conservative, Chipping Barnet)

The problem is that the enfranchisement cost is unlikely to be above the SDLT threshold in many cases, but if new section 75A bites, the cost of the original lease would have to be taken into account, which could well take the combined cost above the threshold, so it is relevant even where the enfranchisement cost is below the threshold.

Stephen Timms (Labour, East Ham)

Finally, amendment No. 239 would exclude from the application of new section 75A any consideration paid under a transaction that qualified for group relief. We have, I am afraid, seen a number of avoidance schemes in the past that made use of group relief as part of a series of transactions, so I would not at this stage want to exclude considerations paid under a transaction that qualifies for group relief. Again, I can reassure the Committee that if there are specific categories of legitimate transactions involving group relief where it is appropriate to disapply newsection 75A, we would be prepared to consider exercising our powers under new section 75C(10). I hope that that is helpful to the hon. Lady.

My concern is that the Opposition amendments would allow, inadvertently I am sure, some of the very schemes that the clause aims to end, to carry on unchecked. Therefore, I hope that the Committee will not accept them.

I will pick up one or two further points made by the hon. Lady. The schemes that this clause is designed to prevent are wholly artificial, and those using them must expect that we will act to prevent their use, as they pose a significant threat to Exchequer revenue. For example, before the pre-Budget Report, Revenue and Customs was aware of two transactions using these schemes, which alone were worth a combined total of£850 million. We had no option other than to act as quickly as we could to counter those schemes, hence the laying of the regulations at the time, and the clause.

The hon. Lady suggested that, if those involved in the transaction did not intend to save any stamp duty land tax through the transaction, the provision should not be applied. However, it is often difficult to establish what the motivation in any transaction was, and there is a real danger of leaving a gate wide open to those wishing to avoid tax.

The hon. Lady was concerned that mere linkage through conveyancing succession would be caught by proposed new section 75A. I assure her that that will not be the case. There must be more connection than mere succession, as is implied by the phrase “involved in connection with” in proposed new section 75A that she referred to. The acquisition involvement means more than mere temporal succession. When drafting the measure, we looked at the phrase “involved in connection with”. Our legal advice was that the terms are not too vague, as she suggested, and that they will not create any difficulties of interpretation. In any case, as I have said, we will be issuing guidance to ensure that the meaning and intent of the legislation are clear.

The hon. Lady made the point that code of practice 10 rulings cannot disapply legislation. Of course that is true, but a code of practice 10 application might result in the Government exercising their disapplication power under proposed new section 75C(10), potentially with retrospective application. She was concerned about the speed of those rulings. HMRC aims to turn them around within 28 days.

Adam Afriyie (Conservative, Windsor)

I thank the Chief Secretary for his generosity in giving way. Will he make it absolutely clear why there is no exemption for long-term leaseholders who may choose to enfranchise and buy the freehold, in cases in which that purchase exceeds the limit? Why is that not very clearly spelled out somewhere? I sensed a slight hesitancy in his response, even to the hon. Member for Wolverhampton, South-West.

Stephen Timms (Labour, East Ham)

I accept that there are some good intentions behind these amendments, and no doubt behind others, but in drafting the legislation we must avoid opening a new opportunity, or leaving open an opportunity, for avoidance because, sadly, there will be plenty of people piling in to take advantage of such openings if they are provided. That certainly applies to a number of the amendments tabled by Opposition Members, and one can envisage other blanket exclusions that could have the same effect. That is why we are being very cautious about the wording we have adopted.

The hon. Lady was concerned about double counting under proposed new section 75A(5). Subsection (5) will add up the amount paid by any one person or received by the vendor. It is aimed at identifying the true purchase price, which might be artificially split up, and ensuring that the full amount of tax is payable. She was also concerned that there was no clear mechanism to credit to the notional transaction stamp duty land tax paid earlier in the chain. Proposed new section 75C(9) contains precisely such a mechanism, so that issue is addressed.

Finally, in contrast with the concerns expressed by Opposition Members, let me refer to some of the comments made when the regulations that precede the clause, which I think have worked well, were made. Sue Taylor, head of real estate tax at Eversheds, said that this

“will catch most of the planning in current use....It is a serious bit of legislation”.

Craig Leslie, head of stamp taxes at PricewaterhouseCoopers said:

“HMRC are making very good use of all the planning information they receive”.

Patrick Cannon, a leading barrister in the area, said that

“this is a well aimed measure”,

as indeed it is. I hope, on that basis, that the Committee will support my amendments, but not accept those tabled by Opposition Members.

Theresa Villiers (Conservative, Chipping Barnet)

The Chief Secretary may believe that the provision is designed to target a few wholly artificial schemes, but the reality is that the Government have not succeeded in focusing in on that target, and they are going to hit other innocent transactions as well.

I am grateful to the Chief Secretary for confirming on the record that mere linkage through conveyancing succession does not satisfy proposed new section 75A. That is very welcome. I am not sure whether it is consistent with what the statute states, but at least we have it on the record for the purposes of interpretation by the courts.

I continue to be concerned by the approach that the Chief Secretary seems to have confirmed today, which is that the intention is to create a broadly worded provision that can, if necessary, be disapplied in certain circumstances if it operates in an unintended way and applies to innocent transactions. That raises some constitutional concerns about the legislation.

I am also grateful for the Chief Secretary’s reassurance on the operation of proposed newsection 75C(9) and credit for earlier stamp duty land tax paid. Given that relevant transactions can also include share transactions, it would be useful to clarify whether previous tax paid in relation to stamp duty on shares can also be taken into account, but proposed new section 75C(9) provides useful reassurance on the point that I made.

I have listened to the Chief Secretary’s concerns about the purpose test that I have proposed. I will not press that issue to a vote because I wish to reflect further on the appropriate wording and approach of that measure in the light of what he said. There is no excuse, however, for turning down the three-year restriction proposed in amendment No. 214. I would like to press that amendment to the vote.

Clause 71

Stephen Timms (Labour, East Ham)

I beg to move amendment No. 106,in clause 71, page 47, line 9, leave out ‘sub-paragraph (1)(b),’ and insert ‘sub-paragraphs (1)(b) and (4),’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss Government amendment No. 107.

Stephen Timms (Labour, East Ham)

As I indicated earlier, clause 71 amends the Finance Act 2003 to counter known schemes that attempt to avoid stamp duty land tax by moving property tax-free into a partnership—that is, by the ceding of partnerships. The clause will prevent tax avoidance schemes that we initially dealt with by regulations in the pre-Budget report 2006. The two amendments that I am tabling are directly in response to representations from the property sector.

The first amendment is merely to rectify an omission from the clause; it is a minor omission, but if it was not rectified we would run the risk of confusing those trying to interpret the law. The second amendment follows some late representations suggesting that the clause could have an adverse effect on investment structures that use partnerships but are not engaged in avoidance. We have been lobbied to include a transitional provision, so that the provisions that will create the change do not apply where all the property in a partnership was acquired before Royal Assent and stamp duty land tax was paid in full on the gross market value of the property, and that is what the amendment does.

We have taken on all the suggestions we could that will facilitate those involved in legitimate, innocent transactions without creating further opportunity for those seeking to avoid tax. Of course, those developing avoidance schemes will keep on looking for new ways to avoid stamp duty land tax and we will respond by closing avoidance schemes quickly. We have a duty to the majority of taxpayers to maintain a level playing field for everybody, and of course we will keep this area under review.

I commend the amendments to the Committee.

Theresa Villiers (Conservative, Chipping Barnet)

I would like to address some of the issues surrounding the clause at the same time as addressing the amendments, to obviate the need for a separate clause stand part debate.

I appreciate that there are avoidance risks in relation to partnerships, which have not always proved easy to tackle in the past. However, there seems to me a significant risk that clause 71, like the clause that we have just discussed, could have some unintended consequences in relation to innocent transactions.

Again, some general concerns about the operation of the clause have been expressed to me by the Institute of Indirect Taxation. It believes that transactions that a taxpayer might contemplate without professional advice, such as gifts, could be affected by clause 71. It states:

“We are surprised that a Labour Government should take the view that a family that cannot afford professional advice should not expect to be able to make straightforward gifts without triggering tax consequences.”

I would like to raise two points in relation to the scope of clause 71, and I do not think that they are addressed by the Government amendments. One of them is partially addressed, but some remain and it would be excellent if the Chief Secretary could help to answer them.

The first issue concerns the deletion of the requirement of consideration. Under the old law, the relevant partnership anti-avoidance provisions did not bite on gifts, so they did not apply to a transaction where no consideration was given. The Law Society has expressed concern about the removal of the requirement of consideration by clause 71, pointing out that the consequence is that a gift of a partnership interest from individual to individual is now subject to a market value charge based on the value owned by the partnership. It should also be noted that that is a charge on the gross value of the land owned by the partnership rather than the real value of the gift, which could be considerably less where the partnership has borrowed to invest in the land. So the SDLT charge here could be quite a high one. The Law Society expressed concern that a gift of a partnership interest attracts a charge when a gift of the underlying property would not. It would be useful if the Minister could provide greater clarification on that point and explain the reasons behind the proposed deletion of the consideration requirement.

The second point is rather more worrying. It concerns one of the effects that are partially caused by the deletion of the requirement of consideration, but it also interacts with other changes made in clause 71, and it involves property investment partnerships. The point is best explained by looking at the example given by the Law Society in its briefing to the Committee. It concerns a relatively simple case, where A, B and C are in partnership, sharing income and profits equally, with partnership property of £450,000. Each partner is deemed to own £150,000-worth of property. Further property is purchased by the partnership, using its assets. If another person then joins as a new partner, providing £150,000 in cash, the value of everyone’s interest will have stayed the same, at £150,000. I am told that before section 75A, it was accepted that the addition of a new partner did not trigger an SDLT charge.

The amendments to paragraphs 14(1)(b) and 36 contained in clause 71 would throw that into doubt. Will the Minister confirm whether the enactment of clause 71 will result in SDLT being payable in that situation? It seems that it would be. If so, it could have a significant impact on property investment partnerships.

The practice of second closing—bringing a second wave of investors into a partnership some months after it is first set up—is common. The changes proposed in clause 71 would result in SDLT being payable if the partnership had acquired land between the first and second closing, even though it was bought with money put up by the original investors. If second closings are now to trigger an SDLT charge, it could severely restrict the use of open-ended property investment partnerships. Similar problems occur when partners redeem their partnership interests. Coupled with a further concern, such problems could render partnerships almost unusable in the property investment field. I hope that I am wrong, and that the Chief Secretary will reassure me.

My other concern is about changes in the profit sharing ratio in a partnership. The old law made it plain that, if a partner sold his interest for a consideration to another person, it would give rise to an SDLT liability. However, clause 71 would significantly expand the scope of SDLT by applying it not only in that situation but whenever the profit sharing ratio in a partnership changed.

That could give rise to significant problems, as profit sharing ratios can change automatically under the original partnership agreement. A common example might be an agreement that entitled the operator of a partnership to an increased profit share if the partnership reached a particular level of return. When that relevant level of profits was reached, the partnership shares would change. Under the old paragraph 36, there was no SDLT problem because no consideration had been given to changes in profit shares, and a partnership interest, as it was previously understood, had not been transferred. It now seems that SDLT will have to be paid in every case when a profit sharing ratio changes, even if it was provided for in the original partnership agreement, because of the new definition of what amounts to an interest in a partnership and the removal of the need for consideration.

Similarly, development funds using partnerships will typically include a provision to call for more money from investors: it is a well-known fact that developments frequently run over budget. Such calls are not compulsory; some investors may take them up and others not. However, in such cases, we again see that changes in the partnership ratios that to date would not have triggered an SDLT would now do so. Again, the Minister’s guidance on whether that is the case would be useful. The same problem occurs where an investor defaults or goes bankrupt—another occupational hazard in the property development business. Until now, the resulting change in partnership ratios did not trigger SDLT. It now seems that it would.

I have received representations that, if my analysis is correct and SDLT is payable, partnerships will no longer be used for property funds. That is significant, as such partnerships have played an important role in property investment. A solicitor who contacted one of my colleagues about the problem described the change as lunacy, although I would not go that far. I am willing to hear the Chief Secretary’s justification, but I want to know whether that effect was intended by the Government when drafting clause 71. If so, what was their justification for making such a significant change?

What avoidance problem was caused by property investment partnerships that justified penalising them in the way that clause 71 seems to do? What assessments have the Government carried out on the impact that the change will have on the property investment market? I would be interested to hear whether the Chief Secretary is prepared to publish the Department’s research on the impact of the change. To what extent will the amendments assist in solving the problem? They are helpful in some contexts. In particular, they help to tackle the unfairness that the change in the law creates for people who are committed to partnerships on the basis of the existing law. However, they seem to cover only partnershipsthat bought land between December 2003, when the SDLT regime was introduced, and commencement of clause 71.

While it is useful to give assistance in relation to those transactions, the Government amendments provide a very limited lifeline. In particular, they do not seem to solve any of the problems in relation to partnerships that want to carry on business in future, nor do they permit new partnerships to set up start-up arrangements in the property investment businesses. As the Chief Secretary has confirmed, they are merely transitional arrangements to ease the change that is being introduced.

A way should be found to address concerns about avoidance in this area without such radical restrictions on the use of property investment partnerships. In the debate on REITs, the Government have repeatedly stated that they wish to encourage collective investment in property. If that is the case, why are they effectively shutting down an important vehicle for doing so—the property investment partnership? The Committee should consider the likely consequences of that shutting down. The onshore alternative structures that might substitute for property investment partnerships are limited. Not all enterprises are suited to REIT status; as we debated at length in this Committee last year, REITs are usable only in certain circumstances. In particular, many property enterprises may not be large enough to justify the cost of the listing that is required for REIT status. I am concerned lest the net result of the changes is simply a shift of property investment into offshore unit trusts. I cannot believe that that is really what the Government want.

The Chief Secretary referred to Patrick Cannon’s comments on section 75A. I, too, would like to draw to the Committee’s attention to some comments by Mr. Cannon, who is a barrister. They appeared in Property Week a few days ago in an article helpfully entitled, “Latest tax clampdown is shoddy and rushed”. Let me close with a quote from the article, which states:

“The SDLT partnership provisions are an unfortunate example of just how bad tax legislation can get when you have layer on layer of anti-avoidance amendments built on to basic provisions. The provisions seem to have been worked on at different times by different draftsmen, some of whom do not seem to have a full grasp of how property partnerships function.”

I have to say, Mr. Chairman, that I am inclined to agree.

Roger Gale (Conservative, North Thanet)

Before we progress, the hon. Lady has, perfectly reasonably, broadened this into a stand part debate. As the Committee knows, I have no problem with that so long as we do not try to cover the ground twice. However, I listened fairly attentively to what she has been saying and it strikes me that she might have placed the Chief Secretary in a slightly difficult position, because she has commented on one or two things that would otherwise have been raised under the next pair of amendments. If the Chief Secretary wishes to respond now, he might find it necessary to curtail his remarks on the next pair of amendments.

Rob Marris (Labour, Wolverhampton South West)

I had anticipated that you might turn this into a broader debate, Mr. Gale. The hon. Lady has got me totally confused—perhaps my right hon. Friend can help me. I had thought that stamp duty land tax bit on land, but the hon. Lady has talked about changing profit shares in a partnership. I did not think that stamp duty land tax had anything to do with that, so I should appreciate some clarification.

Theresa Villiers (Conservative, Chipping Barnet)

That would be the impact of clause 31. If a partnership holds land and one of the situations that I have outlined, such as a new partner joining, occurs it will be subject to an SDLT charge on that land. That is the connection between the land and a partnership.

Rob Marris (Labour, Wolverhampton South West)

I understood that part of the argument. I am not sure that I agreed with it, but I understood it. However, I did not understand at all what the hon. Lady said about changing profit share. I hope that my right hon. Friend can clarify that.

The second point that I should like to make to my right hon. Friend is that it is often, understandably, prayed in aid in this Committee that the Chartered Institute of Taxation says at paragraph 29.1 of its submission that the proposed changes to the Finance Act 2003, schedule 15, are welcome in that they eliminate some of the anomalies in schedule 15. That is all that it says.

Philip Dunne (Conservative, Ludlow)

I welcome the remarks that the Chief Secretary made in introducing the amendments, which attempt to establish some clarity for partnerships that would be caught incidentally. In other words, they would remove genuine partnership transactions that are not seeking to avoid stamp duty land tax, which is clearly the thrust of the schedule and clauses. However, I am not sure that he has done his job as well as the Committee would normally expect him to do. I am concerned that there are incidental consequences for members of existing partnerships that go beyond the special purpose vehicle type of partnerships that he seeks to catch.

I would appreciate it if he could give the Committee some clarity here and confirm that the Government amendments do not apply to those partnerships where property interests are held incidentally to the activity of the partnership rather than specifically, and interests in those partnerships change over time. My hon. Friend the Member for Chipping Barnet, in her thoughtful contribution, showed that by changing the definition of consideration in the Bill, a partnership gift interest from one individual to another, such as a gift from a partner to his spouse, his children or a family interest, could potentially trigger a stamp duty land tax charge if the partnership happens to hold property. That is quite clearly not the intent of the clause.

I am not sure that the Government amendment is sufficiently clear. We do not have a definition of a property investment partnership although it may exist in the Finance Act 2003. I apologise to the Chief Secretary for not having seen such a definition if it does exist. Perhaps he could put us straight on that. The second point on which I seek some clarity is whether it is intended to catch gifts in the manner that I have just described if they arise in partnership interests. If a property is held outside a partnership, such a gift would not attract stamp duty land tax whereas if it is held within a partnership it would. Is that the Government’s intention? If so, I think that it is quite inappropriate.

Stephen Timms (Labour, East Ham)

As I have indicated already, the clause aims to prevent tax avoidance schemes that were initially dealt with by regulations at the pre-Budget report. As with the previous clause, the regulations were time-limited and so now need to be replaced using the Finance Act. But the opportunity we have had to revise the legislation has been helpful. Not only has it allowed us to make changes to ensure that a variation on the schemes that we did not know about when we drafted the regulations can be dealt with, it has allowed us to consider whether there are any changes we can make to ensure that legitimate transactions are not affected by the legislation.

As far as the clause itself is concerned, I believe that we have been able to reassure most in the property sector that it will be clear, proportionate and effective. My hon. Friend the Member for Wolverhampton, South-West is right to draw attention to the views of the Chartered Institute of Taxation, which were communicated to all members of the Committee. It welcomed the amendments and the clause. The clause brings fairness to the property sector for taxation by ensuring that transactions using these complex avoidance schemes will be taxed in the same way as they would have been if they had been straightforward land transactions between two parties.

I should again point out that significant sums are at stake here. Until the PBR, when we made the regulations, only relatively few transactions had used these schemes, but the loss in stamp duty land tax yield is significant. These are major commercial transactions. The number would have certainly continued to rise. Closing this scheme alone will bring extra combined revenue for the years 2006-07 to 2009-10 respectively of £10 million, £25 million, £25 million and £25 million.

We believe that we have taken on all the suggestions we could that will facilitate those involved in innocent transactions without creating further opportunity for those seeking to avoid payment of the tax. As a result, we have certainly achieved a clearer and more effective clause, which hits our target of preventing avoidance without unduly affecting legitimate land transactions.

As I said during the debate on the previous clause, those developing avoidance schemes will, of course, keep on trying to find new ways to avoid paying stamp duty land tax and we must be ready to respond by closing avoidance schemes quickly, and we will. We have a duty to the majority of taxpayers, who are not using elaborate avoidance schemes, to ensure that there is a level playing field for everybody, so we will be keeping this area under review.

I would like to respond specifically to some of the points raised by Opposition Members. A concern was raised about charging when partnership interests are gifted between individuals, or by an individual to an unconnected company. I think that it was implicit in what the hon. Members asked, but I need to make it clear that charging applies only to cases where there are property transactions. However, in such cases, I do not think that there is any reason why such a transaction should be dealt with more favourably than other transactions where tax would be due.

Regarding the concern about gifts of partnership interests now being chargeable, again they will be chargeable only where the partnership is engaged in property dealing or property investment. Other forms of trading partnership, such as farming partnerships, are not affected. Indeed, partnerships where land ownership is incidental are also unaffected by the clause.

Philip Dunne (Conservative, Ludlow)

I am grateful to the Minister for that clarification. Could he also clarify whether, in the case of an investment management partnership that manages property portfolios as part of its activity but not as its core activity, such a partnership would be caught?

Stephen Timms (Labour, East Ham)

I imagine that it would depend on the extent of the property interest, but I think that the answer is, quite rightly, yes. If the hon. Member wants to raise a more specific question with me, for example in a letter, I would be happy to provide him with an answer. Let me also make it clear that it is not the case that gifts of property from parents to children will be made liable to stamp duty land tax by the clause.

There are substantial sums at stake. The hon. Member for Chipping Barnet asked about the addition of a new partner who contributes cash. She is right that there will now be a charge, because the previous provisions were being used for avoidance purposes and it was necessary for us to ensure that that opportunity was blocked. She also asked about what happens when the profit share ratio between partners changes. Again, this applies only to property investment partnerships, but we think that it is right that there should be a charge where a partner acquires an increased right to income from the property.

This is a complex area, but the balance that we have struck in the clause, with the amendments that we tabled, is right. Certainly, the changes that we have made have been warmly welcomed. I hope that the Committee will support the clause, with these Government amendments.

Schedule 21

Stephen Timms (Labour, East Ham)

I beg to move amendment No. 193, in schedule 21, page 239, line 13, at end insert ‘and’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss Government amendments Nos. 194 to 210.

Stephen Timms (Labour, East Ham)

Schedule 21 introduces changes that will remove obstacles to competition and expand choice in the trading of financial instruments in the UK. They change the stamp duty and stamp duty reserve tax reliefs so that institutions in the City of London can take advantage of the liberalisation of market structures being introduced across Europe by the markets in financial instruments directive, or MIFID.

The rules on intermediary relief are being changed so that, from 1 November, it will no longer be necessary to report and exchange transactions in shares that are admitted to trading on a regulated market such as the main market of the London stock exchange. That will allow providers of transaction reporting services to enter the market more easily. In February, we announced our intention to extend that approach to include shares that are admitted to trading on multilateral trading facilities such as the AIM that are operated by the London stock exchange and other similar markets. Before proceeding, however, we are allowing the Financial Services Authority time to consider fully any regulatory implications. We will provide an update on progress at the time of the pre-Budget report.

The rules on intermediary relief are also being changed to allow persons who provide an over-the-counter service and who are not exchange members to apply directly to HMRC for approval as intermediaries.

Our amendments will remove an unnecessary condition from the stamp duty and stamp duty reserve tax intermediary reliefs. From 1 November, intermediaries will be able to benefit from MIFID, the new regulatory regime. As MIFID contains provisions for making public transactions in shares that are admitted to trading on regulated markets, we have decided that it is no longer necessary for such provisions to be a condition for intermediary relief. The amendments remove the requirement to make public transactions in regulated market shares for shares that are admitted to trading only on a multilateral trading facility. Transactions will still qualify for relief only if reported to the market, so the changes are consistent with the written ministerial statement of 20 February.

We are also taking the opportunity to make a technical amendment to the definition of a European economic area state to ensure that it has the same meaning as the definition in the InterpretationAct 1978.

Theresa Villiers (Conservative, Chipping Barnet)

In contrast to what I said about the last two clauses, I welcome the schedule. It is important that the reliefs available for intermediaries at the London stock exchange be extended throughout the variety of platforms that will open as a result of MIFID. Access to exchanges from other countries in Europe will also be opened up. The Treasury has worked constructively with industry players such as the London Investment Banking Association to get this complicated set of changes into reasonable shape. I understand that there are a few glitches, but I hope that they are of the sort that can be resolved satisfactorily using guidance.

Having spent two years of my life on MIFID, I am pleased that the Government are pressing ahead with implementation. Giving birth to MIFID was a long and painful labour. However, I had the pleasure of working hand in hand with the Treasury on many aspects of the negotiations. I am not sure that what we produced was necessarily a great result, but I hope that it might be of significant benefit in the future, both to consumers, by ensuring lower costs with savings and investments, and to the City of London, by opening access to markets across the European Union.

I pay tribute to the Government for transposing MIFID on time. Sadly, the rest of Europe has chosen not to do the same. It is a concern that, although market participants who are preparing to implement MIFID might comply with UK legislation because it will have been transposed, they will have to deal with multiple systems across the rest of Europe because our European partners have been somewhat slower to implement.

(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 74

Stephen Timms (Labour, East Ham)

I warmly welcome you back to the Chair, Mr. Illsley.

The clause is part of a package of measures to help Islamic finance. We have been working with the industry to remove the barriers to Islamic finance products and have made a good deal of progress. The clause provides a new tax framework for sukuk, which allows sukuk to be issued, held and traded as conventional securities. Sukuk is a sharia-compliant form of securitisation. As members of the Committee will know, in a conventional securitisation, investors purchase bonds and receive interest on their investment, backed by an asset such as a mortgage book as security. In sukuk, however, investors purchase a share of the underlying asset, and their return is in the form of a proportionate share of the income from the asset, so in a sukuk backed by a sharia-compliant mortgage book, investors receive a share of the payments made by the property owners. Sukuk can be backed by any income-producing asset, but clause 74 concerns only sukuk backed by a sharia-compliant mortgage book.

In the case of stamp duty land tax, we recognise that taking and receiving interest is prohibited by sharia law. That has led to the growth of alternative financing mechanisms. Our current taxation system—or the system as it was before we started to change it—has occasionally inadvertently hampered those new mechanisms. Islamic financing of home purchases has grown by 40 per cent. in the past year alone, so we are opening up important new commercial opportunities.

The UK is the only country in the European Union that currently offers Islamic mortgages. Sultan Choudhury, director of sales at the Islamic bank of Britain—whose East Ham branch I was pleased to open last year—said that this Government’s initiatives have been

“key to the UK’s success in expanding the market faster than anywhere else”

in Europe. Neil Miller, a partner at Norton Rose, has mentioned that

“the UK is now more efficient on a tax basis for Islamic finance than many Muslim states”.

I am grateful that the series of changes that we have made has been welcomed on both sides of the House. I am sure that this clause will equally be welcome to all members of the Committee.

Clause 78

Philip Dunne (Conservative, Ludlow)

I would like the Minister to clarify the intent of the repeal. The explanatory notes suggest that the reliefs from stamp duty land tax available for the sale of school land are to be repealed, which I assume means that they are to be abolished. Does that mean that schools seeking to sell or transfer part of their property to other public sector bodies will have pay tax, where previously they would not have had to, which will add to the costs of the public sector body? That seems to be a perverse consequence. If, alternatively, the provision is designed to raise revenue and, therefore, to discourage the sale to developers of school land such as playing fields, I welcome it, but it is not clear from the explanatory notes.

Stephen Timms (Labour, East Ham)

The key point is that stamp duty land tax legislation includes a general relief for transfers between public bodies in connection with a statutory reorganisation, which means that, in most cases, it is no longer necessary to write stamp duty tax reliefs into legislation that includes provision for transferring land between such bodies. To clarify, the clause repeals the existing stamp duty land tax reliefs applying to, as the hon. Gentleman said, certain transfers of school land between governing bodies, trustees, foundations and local authorities provided for under the School Standards and Framework Act 1998. Stamp duty on documents relating to land transactions was replaced by stamp duty land tax on 1 December 2003, so the stamp duty relief is obsolete because there are no remaining transfers, to which stamp duty applies, under the School Standards and Framework Act.

The stamp duty land tax relief was rendered partly obsolete when provisions in the Education and Inspections Act 2006 amending the transfer provisions in the 1998 Act came into force on 25 May this year. Some, although not all, of the amended provisions in the 1998 Act will be covered automatically by the general relief. Under powers included in stamp duty land tax legislation, we have made an order to ensure that all such transactions, and others provided for in the Education and Inspections Act, will qualify. I hope that that provides the reassurance that the hon. Gentleman was seeking. The relief will be perpetuated under existing stamp duty land tax provisions in the Finance Act 2003.

Clause 85

John Healey (Labour, Wentworth)

I welcome you to the Chair this afternoon, Mr. Illsley, and Members back to the Committee.

We move on to a new section of the Bill, in which we deal with matters relating to the powers of Her Majesty’s Revenue and Customs and the penalties at its disposal. HMRC is responsible for criminal investigations throughout the United Kingdom where suspected offences relate to one of its functions—for example, a serious tax offence. Being of a United Kingdom nature, those investigations can involve more than one country of the UK. For example, evidence concerning an offence committed in England might be held at an address in Scotland or Wales. In those cases, it is important that evidence is obtained in a way that is acceptable to the court where the prosecution will take place and that it is clear which statutory provisions and safeguards apply.

Clause 85 ensures that a search warrant granted in England and Wales under section 8 of the Police and Criminal Evidence Act 1984—PACE—in connection with an HMRC investigation can, when appropriate, be executed in Scotland once suitably endorsed by a court in Scotland. Schedule 23 has similar provisions for warrants granted in Scotland to be executed in England. In a similar way, clause 86 applies some existing provisions that allow various powers of arrest or detention of suspects, and search powers on arrest, to be exercised in another country of the United Kingdom when appropriate.

I make it clear to the Committee that the clause does not provide HMRC with new powers, but allows existing provisions to be used appropriately. It will provide greater clarity regarding which provisions can be used and which safeguards apply. It should therefore benefit citizens, the courts and HMRC.

Rob Marris (Labour, Wolverhampton South West)

Will my hon. Friend briefly explain the position in relation to Northern Ireland, given that clause 84 and the schedule cover Scotland and that clauses 84 and 85 are two-way traffic, as it were? I do not see a mention of Northern Ireland.

John Healey (Labour, Wentworth)

I shall complete my points about Scotland and then return to Northern Ireland.

Clause 85, and the equivalent provision for Scotland, was subject at the outset to thorough consultation. Its approach has been supported by most respondents. Indeed, a senior judge in Scotland commented:

“it is sensible to apply clear rules for cross border criminal procedures as suggested.”

It came out in the consultation that a minority of respondents did not accept that HMRC should be dealing with criminal investigations. My hon. Friend the Member for Wolverhampton, South-West is right to look quizzical at that comment. It has been pointed out that HMRC has had to tackle some of the most serious organised criminal fraudsters, such as the fuels fraud in Northern Ireland that was conducted by paramilitaries and some of the most organised, difficult and complex international missing trader VAT frauds. Nevertheless, some argue that, as a tax agency, HMRC should not have criminal investigation powers and thus, in such circumstances, it should have to call on the police or the Serious Organised Crime Agency instead to deal with certain matters for it.

Quite honestly, the police and SOCA have their own priorities. They do not have the tax knowledge or the expertise needed to undertake the sort of investigations that HMRC carries out. Even if there were large-scale secondments to and from HMRC to allow that sort of operational arrangement to work better, I am sure that members of the Committee would accept that there would be extraordinary complexity and a loss of scale if investigations then became the responsibility of 53 different police forces. I made that point because such an argument has cropped up consistently, although it has been a minority view throughout the consultations. It is important that we appreciate the nature of the criminal activities with which HMRC is dealing.

During the consultation, some representative bodies also asked for greater information on the procedures followed when an investigation involves more than one country in the United Kingdom. In its published summary of responses, HMRC said that it would discuss it with the prosecuting authorities because clearly it is a matter for them, not HMRC. It said that it would do so with a view to publishing a guidance note. I confirm to the Committee that the independent Revenue and Customs Prosecution Office and the Crown Office in Scotland have now agreed to work together on a guidance note. That should now put in place the arrangements that we require for cross-border co-operation with Scotland.

The situation in Northern Ireland is different in that suitable provisions already exist. That is why such matters are not covered in the Bill. I hope that the clause will provide greater clarity in relation to criminal investigations, and that it will stand part of the Bill.

Mark Francois (Conservative, Rayleigh)

Welcome back to the Chair, Mr. Illsley. Will you indulge me for a moment so that I may offer my apologies to you and to the other members of the Committee for the fact that, because of my new responsibilities, I shall not be here on Thursday?

In that connection may I thank my hon. Friend the Member for Fareham and the Chief Secretary for their kind remarks this morning. There has been reference in this Committee before to Stockholm syndrome, whereby over time hostages begin to feel sympathy for their captors and, in certain circumstances, even grow reluctant to be free. I am beginning to understand how that feels. I joined the shadow Treasury team in late 2004 and for two and a half years, I have enjoyed working on Treasury-related matters. This is my third Finance Bill and, believe it or not, I am going to miss it immensely. I wish my hon. Friends the best of luck in the battles that lie ahead and all members of the Committee all the best in their continuing deliberations on the Bill, including on Report and at Third Reading. Thank you for your kind indulgence, Mr. Illsley, and I shall now get on with it.

Turning rapidly to the matter at hand, I have one point to make on search warrants as exercised under clause 85, which provides for a search warrant granted in England or Wales to be enforced in Scotland, as the Financial Secretary outlined. I gave the Financial Secretary brief private notice this morning of the question that I want to ask. Prior to the proposed introduction of PACE powers for search warrants, as envisaged in the Bill, the most commonly used powers in that respect have been those in sections 20C and 20CC of the Taxes Management Act 1970, which relate to search warrants, including the power to enter a premises to obtain documents. As I understand it, sections 20C and 20CC were supplemented in the Finance Act 2000 by an additional section 20BA, which was effectively inserted into the 1970 Act in order to facilitate production orders by which the Inland Revenue could compel suspects to produce documents that might relate to a case under investigation.

Part of schedule 22 of this Bill also relates to the operation of search warrants and part 2 of that schedule proposes the repeal of sections 20C and 20CC so that HMRC will rely on a combination of section 20BA and the Police and Criminal Evidence Act 1984 when searches need to be carried out, both in England and Scotland.

Under PACE, HMRC could use one of two procedural methods to apply for a warrant—section 8, which applies generally to search warrants, or schedule 1, which allows for more specialised warrants in certain circumstances, and for which a higher level of judicial approval is required. Given all that, my question to the Financial Secretary concerns the following: we have received representations from the accountancy profession to the effect that using the PACE powers, which would also now apply under clause 85, rather than the well-established sections 20C and 20CC, would be legally more complicated and might be open to challenge. The proposal replaces a piece of well tried legislation that has apparently worked well with something carried across from PACE that might not be as suitable for the task in hand, including in fighting organised fraud.

I would therefore like to press the Financial Secretary on the thinking behind the change, as the original power was well understood both by the courts and by professional advisers in the accountancy and legal professions. In other words, the rules of the game were well understood on all sides. Before we accept clause 85, which would allow the exercise of the revised powers across the border, is the Financial Secretary confident that the measure has been properly thought through?

Adam Afriyie (Conservative, Windsor)

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

I sense that a fairly major step has been undertaken with the introduction of clause 85. It extends the powers of HMRC so that, to a certain degree, they are like those of the police service. Will the Minister give examples of where such powers exist in other Departments or other areas of our state system? Are they available to social services, allowing staff to enter premises and arrest people? Are they available to the education service? Are they available to those who work in the benefit system?

It is a serious step and I wonder why there is no limitation on those powers—or, if there is a limitation, how it works. For example, might it not be a good idea to say that the powers of search or entry to premises or the power of arrest should be limited to serious organised crime rather than the day-to-day business of collecting tax from individuals?

John Healey (Labour, Wentworth)

I congratulate the hon. Member for Rayleigh. I almost rose to my feet to say so this morning. Some members of the Committee might find his admission that he will miss Finance Bill Committees curious. We will certainly miss his presence on the Treasury Front Bench. None the less, we look forward to the hon. Member for South-West Hertfordshire occupying his position; indeed, I hope to be debating with him tomorrow and not having to wait until the Committee returns on Thursday. We know, with the hon. Member for South-West Hertfordshire, that we get two for the price of one, so I also congratulate Mrs. Gauke on her promotion.

I am grateful to the hon. Member for Rayleigh for the notice that he gave me of his question, but as he said, the matter had been raised before by one of the representative bodies. We have considered it carefully, but it is at odds with the majority of the respondents to the consultation and is therefore not consistent with the general view.

We chose to follow the path of the Police and Criminal Evidence Act 1984, and we rehearsed some of our reasons in the Committee of the whole House. Many of the statutory powers inherited from Inland Revenue on the merger have not been updated to match the changing circumstances that faced by HMRC, the changing challenges that it has to deal with and the changing operations that it has to undertake. On the other hand, PACE is a tried and tested piece of legislation. It is widely respected and understood, it already applies to the majority of criminal investigations in England, Wales and Northern Ireland and it has been continuously updated since its introduction.

The former Lord Chief Justice of England and Wales, Lord Wolff, has said that PACE reflects Parliament’s intention as to what should be the balance between the necessary protection of the rights of the individual citizen and the right of the public as a whole that those who commit crimes should be convicted and then punished. The majority of respondents to the consultation supported the adoption of that approach. Applying PACE to all HMRC’s criminal investigations will ensure that all the safeguards enshrined in that legislation will be directly applied to HMRC’s investigations.

That is my answer to the hon. Member for Windsor; we discussed the safeguards fully in the Committee of the whole House. I emphasise that clause 85 gives no new powers to HMRC. It makes more sensible arrangements, allowing those powers to be used when cases involve cross-border activity between Scotland and England.

I hope that I have reassured the Committee that the equivalent and appropriate powers and safeguards in the Taxes Management Act 1970 will be provided for by the adoption of the relevant provisions of PACE. I therefore hope that the Committee will allow the clause to stand part.

Clause 86

Mark Francois (Conservative, Rayleigh)

I thank the Financial Secretary for his kind words and join him in enthusiastically congratulating both Mr. and Mrs. Gauke on their elevation, which is doubly deserved.

Clause 86 relates to the cross-border exercise of powers by HMRC. The explanatory notes state:

“UK wide criminal investigations can raise complex issues around jurisdiction and the correct procedures and powers to use when gathering evidence and apprehending suspects. This clause clarifies how evidence can be gathered and suspects can be apprehended using powers that are familiar and acceptable to the court where any proceedings are likely to follow.”

In light of that, there is a question that I would like to raise with the Minister. In the case of an HMRC investigation that spans more than one of the home nations, would there be a code of practice as to which jurisdiction the investigation and potential legal proceedings would take place under? The Financial Secretary in response to the previous debate intimated that a guidance note is now being drafted by the relevant prosecuting authorities and I am sure that the Treasury will be liaising with them on that. I should like to press him on this a little further while I have the opportunity.

There are many English residents who have their tax affairs dealt with by HMRC offices in Scotland, such as the one in Cumbernauld. Conversely, many Scottish and Northern Irish residents have their tax affairs dealt with in England or Wales. Given that, what would happen in the case of an English taxpayer who is in dispute with HMRC and whose only connection with Scotland is via his tax office in Glasgow? If the dispute then turns into a criminal investigation, could the English taxpayer be arrested and prosecuted under Scottish law? Would he have to travel to Scotland, hire Scottish lawyers or advocates and be put on trial in Scotland even though he ordinarily resides in England?

How does the Financial Secretary see all this working in practice? As he has already referred to a guidance note, which I think would be welcome under the circumstances, could he update the Committee on the progress of those negotiations and give us at least an indicative date, if not a hard one, for when that guidance note is likely to be published? I imagine that not least among the professions, including the legal profession, there would be a great deal of interest in what that guidance note has to say. I hope that the Financial Secretary can understand the spirit of what I am asking him and perhaps give us a little further detail of how this would operate in the real world.

Philip Dunne (Conservative, Ludlow)

To endorse some comments made by my hon. Friend, who is shortly to become my European Friend, does this power give HMRC the option to choose in which jurisdiction it wishes to pursue a case against the taxpayer? If so, that would seem to put HMRC in a stronger position in seeking redress against the taxpayer. It would seem appropriate that there should be some safeguards to ensure at least that such a decision is taken with the agreement of the taxpayer rather than against the taxpayer’s wishes.

John Healey (Labour, Wentworth)

It is important in this discussion to remember that prosecutions and the arrangements for prosecutions are now the responsibility not of HMRC but of independent prosecutors. That is the importance and the relevance of the guidance that I mentioned that will be drawn up by the Revenue and Customs Prosecution Office and the Crown Office in Scotland. They will work together on that guidance note.

Perhaps I can give an indication of how these matters are dealt with currently in practice, which I think members of the Committee might expect to see broadly reflected in the approach that will be taken in future. The Paymaster General set this out in a letter in August last year to the Chartered Institute of Taxation and it was reproduced in the consultation document. The practice is relevant in the sort of circumstances that concern the hon. Members for Rayleigh and for Ludlow.

In practice, the decision on where proceedings are to take place will usually be taken on the balance of convenience——that is, where the taxpayer and the majority of the witnesses reside. That is how these matters are generally conducted now. As I began by saying, these matters are now for the independent prosecutors to decide, not HMRC and certainly not Government Ministers or Treasury officials. I hope that that gives sufficient indication and some reassurance so that the Committee feel comfortable about allowing the clause to stand part of the Bill.

Clause 87

Eric Illsley (Labour, Barnsley Central)

With this, it will be convenient to discuss the following: Amendment No. 247, in clause 87, page 61, line 8, at end insert—

‘or within a reasonable time thereafter when an electronic return cannot be delivered by reason of the failure or non availability of an official computer system as defined in Regulation 189 of the Income Tax (Pay as You Earn) Regulations 2003’.

Amendment No. 245, in clause 87, page 61, line 8, at end insert—

‘(c) on or before 31st January for a non-electronic return, if submitted by a person who is registered blind.’

Amendment No. 246, in clause 87, page 61, line 16, at end insert—

‘(A1) This section shall not come into force until the Commissioners have conducted an independent review of the security and reliability of the HMRC electronic filing system’.

Clauses 88 to 90 stand part.

Government amendments Nos. 241 and 242.

Clause 91 stand part.

Given the number of clause stand part debates contained within the group, I intend to call the Minister first, to speak first to the group of amendments, and then allow the debate to continue from there, with the will of the Committee.

John Healey (Labour, Wentworth)

We now move to a section of the Bill that examines and makes provisions for the filing dates and filing methods of personal tax returns. Clauses 87 to 91 introduce changes to the income tax self-assessment tax return filing dates. These changes flow from the report and review of HMRC’s online services that Lord Carter produced for the Government. It was back in 2005 that my right hon. Friend the Paymaster General asked him to advise on measures to increase further the use of HMRC’s key online services, to maximise the potential benefits that could be gained for the taxpayer, and also to ensure that sustained and efficient delivery of services resulted from that greater uptake.

At Budget last year, we accepted Lord Carter’s recommendations, and clauses 87 to 95 establish the primary legislation that will enable those recommendations to be implemented over the coming years, including changes to the filing requirements for pay-as-you-earn, VAT and corporation tax, which will be introduced in phases from 2009.

Clauses 87 to 89 introduce differential tax return filing dates for tax returns that are required for the year 2007-08, and then in subsequent years. Tax returns issued by HMRC after 6 April 2008 will need to be filed by 31 October 2008 for returns submitted on paper, or 31 January 2009 for returns filed online. Clause 87 sets out the changes to the existing filing date rules for personal tax returns that are completed primarily by individuals, clause 88 sets out the changes needed to the filing date rules for tax returns completed by trustees, and clause 89 sets out the equivalent changes for partnership returns.

Lord Carter originally recommended shortening the self-assessment tax return filing periods both for paper and for online returns. Some hon. Members will remember the discussions that I had in the Finance Bill Committee last year with the hon. Member for Fareham about this matter. As I expressed at the time, I had some sympathy with his argument. Clearly, I had to explain then that we were not legislating for any changes in that Bill, but we are now.

At the time, I explained that HMRC had published a partial regulatory impact assessment with recommendations for our adoption of those changes. I explained also that HMRC had published a partial regulatory impact assessment with recommendations for our adoption of those changes. Alongside Lord Carter’s report, we specifically invited views on the recommendations and the partial regulatory impact assessment.

Last year, we set 30 June—I think—as the deadline for responses and comments. I gave an undertaking to the Committee as well that we would take into account the views expressed in it and during the consultation process. In light of views expressed and received on the partial regulatory impact assessment, Lord Carter himself considered the further representations in the evidence from tax practitioners and revised his recommendations on self-assessment tax return filing dates. The Government listened to and accepted those revised recommendations in July last year.

Lord Carter’s report states also that HMRC should continue to consult practitioners on the detailed implementation of his proposals. I can confirm that that has happened and continues to do so. The spirit in which HMRC has worked with tax practitioners and their representative bodies has allowed us to take a better approach in the Bill. I hope the Committee accepts that. It was ably summed up by Paul Aplin, chairman of the tax faculty at the Institute of Chartered Accountants, when he acknowledged that HMRC was abiding by what he called the Carter principle, which is that

“nothing is launched until it’s been tested and proved fit for purpose.”

I would like to make clear also to the Committee that we are not introducing compulsory online filing for any income tax self-assessment returns. Lord Carter did not recommend that and it is not our policy to do so; I do not want the Committee be under any misapprehension over that.

The introduction of differential filing dates, however, will encourage the further growth of online filing by capable and competent individuals confident about using IT and, of course, by agents. It will do so by offering the incentive of a longer period in which to file an online return. Representations made consistently to Lord Carter identified that as a significant driver in increasing voluntary take-up. The option to file income tax self-assessment returns on paper remains for everyone, but it will, of course, require earlier filing by those who choose that option.

Clauses 87 to 89 preserve the minimum period of three months currently allowed for the completion and filing of a return when the notice requiring the return is issued by HMRC after 31 October. That is a feature of the current system and will ensure that the minimum three-month period for completion is always given, regardless of whether the tax return is filed on paper or online. The rule changes in clause 89 for partnership returns depend on whether the partnership consists of one or more individuals or companies.

For partnerships that consist of one or more individuals, the notice to file a partnership return will, as a result of those changes, specify filing dates no earlier than those available to individuals and trustees—31 October for paper returns and 31 January for online filing. For partnerships consisting of one or more companies, however, the notice to file a partnership return will specify dates no earlier than nine months for paper returns and 12 months for online filing after the end of the partnership’s period of account in any tax year.

Clause 90 makes a small number of consequential amendments to existing provisions resulting from the introduction of differential self-assessment tax return filing dates under clauses 87 to 89 to ensure that the periods during which a tax return can be amended subsequently by a taxpayer stay linked to the 31 January for all paper and online tax returns. No one will be disadvantaged by filing a tax return early.

This substantial group of amendments includes three tabled by the Opposition, on which I shall briefly give the Committee my views. Amendment No. 247 seeks to provide an open-ended alternative to the 31 January filing deadline for electronic returns in the event of a systems failure or the non-availability of HMRC’s online service during the peak filing time on 31 January.

I hope that the amendment is a probing one—no equivalent amendment has been tabled in relation to clauses 88 or 89—because it is unnecessary. As I have stressed, HMRC’s self-assessment systems have been strongly capacity tested in the past two years and are now based on what I regard to be, and what I hope that the Committee will accept is, a strong design and IT infrastructure. Carter encouraged us to give even greater attention to this issue than we were already giving it. The online self-assessment system performed very well in the 2006 online filing peak, and better in 2007. In the final 24 hours of the 2007 peak, 150,000 tax returns were filed—almost two a second. In total, more than 3 million were filed in that way in the last tax year.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Many of the representative bodies have noted how admirably well the system coped in January 2007. However, the Chartered Institute of Taxation reported online filing failure rates of up to 10 per cent. Was the Minister about to give his assessment of the failure rates, especially during that busy period?

John Healey (Labour, Wentworth)

I was not, principally because we are talking about the self-assessment online tax system and the capacity of the HMRC system to accept and process filings. In those final 24 hours, the system was accepting and processing about 6,000 an hour—almost two a second—which is a significant performance.

HMRC is clear and on the record regarding what will happen if there is an unforeseen breakdown in the service, and I am happy to confirm for the Committee, on the record, that no one will be penalised for the delivery of a late return in such circumstances. However, I should make it clear that HMRC already has the power, under section 118(2) of the Taxes Management Act 1970, to put that into practice. I hope that hon. Members will not press the amendment to a vote.

Philip Dunne (Conservative, Ludlow)

Will the Financial Secretary give way?

John Healey (Labour, Wentworth)

On amendment No. 247?

Philip Dunne (Conservative, Ludlow)

On the point about the capacity of the Revenue computer.

John Healey (Labour, Wentworth)

I was about to move on, but I shall give way.

Philip Dunne (Conservative, Ludlow)

What work has HMRC done to consider capacity? The Financial Secretary talked about the speed of processing in January when a total of 3 million returns were filed online. How confident is he that if the move encourages substantially greater numbers of taxpayers to file online, the computer systems and software within HMRC will be able to cope with a doubling, tripling or even quadrupling of capacity? The Government’s track record on the delivery of such IT programmes is not stellar.

John Healey (Labour, Wentworth)

Partly encouraged and underlined by Carter, I am confident that we have been sure to test the capacity that will be required of the system in good time, and that we will move to reforms only after that has been proven. We have already tested successfully the capacity for what we forecast will be the peak flow in January 2008. We will begin testing for the capacity that we expect in 2009 13 months before that. The testing has been done in good time to allow us to have the confidence to move forward with the reforms. When that is set alongside the increasing track record of the system, it should give us confidence that the system will perform as expected. In the event that it does not, the amendment is unnecessary, because HMRC already has the powers to ensure that no one is penalised for that, and I have given the Committee the commitment that no one will be penalised in such circumstances.

Amendment No. 245 would extend the paper return filing deadline to 31 January for a person registered blind. I am not sure whether the hon. Member for Rayleigh is using it as a probing amendment, but I notice that he does not seek similar provision for people with other disabilities. At present, many of the small number of blind people who complete tax returns receive help from HMRC or from friends. That level of support will not change. I urge the Committee to bear in mind five things. First, there will still be nearly seven months available in which to file a tax return on paper. In the unlikely event that all the information needed is not readily available within that period, provisional figures can always be used.

Secondly, in the event of a serious difficulty, when a blind person cannot file on time, HMRC would sympathetically consider any reasonable excuse for late filing and not apply a penalty. Thirdly, many blind and partially sighted people are likely to find that the online services that HMRC provides make the task of filing returns easier, as on-screen forms are increasingly easier to interpret and to complete.

Fourthly, HMRC is developing a new web portal as part of the improvements that the Carter review has encouraged us to make. Those will be in place in time for the filing date changes in 2008 and those will comply with the widely accepted industry standard of access, known as WC3AA, which removed significant barriers to accessing web documents. In this case, for example, a blind person will be able to use a screen reader. Those with a physical impairment that precludes use of a keyboard or mouse—who, incidentally, would not be covered by this amendment—would be able in the future to operate these services by voice commands. So online services are likely to be more accessible and easier for blind people to use.

To reassure the Committee fifthly and finally, I point out that HMRC is conducting further research to examine access and some of the barriers for disabled people to online services. So although I am always sympathetic to the arguments that have been advanced, the amendment is not necessary.

Amendment No. 246 would delay the introduction of differential filing dates for personal tax returns pending an independent review. That is not necessary either. I have explained why we can be confident about the security and reliability of the system, and we will move to the reforms only once we have tested and established those features.

I hope that I have covered the quite substantial territory of this group, which covers clauses 87 to 91 and Government and Opposition amendments. The two Government amendments add two minor consequential changes not picked up in clause 90 as drafted. It is important that we make those changes. I am grateful to the Chartered Institute of Taxation for pointing the relevant issues out to us. I am glad that we have been able to respond with the amendments.

Mark Francois (Conservative, Rayleigh)

As the Financial Secretary says, this is a large group. As he has just spoken about the Opposition’s three amendments, I propose to speak to the amendments reasonably narrowly first and then make some slightly wider points on clause stand part. If that is acceptable procedurally, Mr. Illsley, that is what I shall do. In his usual thorough manner, the Financial Secretary has addressed some, but not all, of the points that I wanted to make. I hope that he will bear with me if, for safety’s sake, I go through all of them.

Amendment No. 247 is designed to build flexibility into the system in order to overcome situations in which HMRC’s IT system is unavailable to taxpayers. The proposed filing deadlines allow little flexibility and, as in the case of the Taxes Management Act 1970, potentially involve the imposition of strict penalties for missed deadlines. That means that were there to be a major IT failure, many millions of taxpayers might be unjustly penalised. The Financial Secretary appears to have given us a commitment on that, and I shall come back to it later.

A quick look at the Government’s management of similar projects shows that that is far from being a theoretical worry. For example, the online portal of HMRC’s tax credits computer has been shut since 2005. At the time, the Financial Times reported:

“When the system went live, it collapsed under the weight of business, contributing to the huge number of overpayments and the continuing row over how those should be paid back.”

That was in October 2005. Then, as we now know, there was an attempt at a major organised fraud against the tax credits system via the e-portal. The Exchequer was defrauded of millions of pounds until the fraud was detected and the portal had to be closed in order to prevent it from continuing.

An occurrence that was similar in some ways affected the PAYE computer this year. It was not able to cope with demand after what Accountancy Age reported as

“a series of crippling glitches to the system ...at one stage the system was down for an entire week.”

That picture is slightly different from the one that the Financial Secretary painted this afternoon, however artfully he put it across.

John Healey (Labour, Wentworth)

Will the hon. Gentleman accept that, as the Committee has no doubt realised, these clauses concern the arrangements for filing self-assessment forms, not tax credits?

Mark Francois (Conservative, Rayleigh)

I do indeed. However, I am simply giving examples of other Government IT programmes, including Treasury ones. The Financial Secretary is tempted to tell us that everything has been tested and is robust, so I am considering whether other Treasury-related IT systems have been robust. The record is far from reassuring.

A concern that there could be similar problems with the self-assessment system was shared by 75 per cent. of the nearly 1,000 accountants who responded to the “Working Together E-group” survey, which was organised by, among others, the Association of Tax Technicians, the Chartered Institute of Taxation, the Institute of Chartered Accountants of England and Wales, and the Association of Certified Chartered Accountants. That found strong support for the proposition that HMRC needs

“a fallback in the event of an HMRC system failure”.

Let me give a practical example. Andrew Sherry, a chartered accountant from Stourbridge in the west Midlands, sent me an e-mail in early May in which he reported:

“I have several times tried to log onto the Inland Revenue agents PAYE system over the last week only to get the message that there is a system error. Having spoken to the helpline I am told that this is because the system is unable to cope with the volume. The Government is pushing for us to file everything online and every year the system fails.”

Our amendment is designed to remedy concerns such as that. It would address the situation by extending the deadline in the event of a computer systems failure, so as to give the taxpayer a reasonable time in which to submit a return.

I should say, in response to the Financial Secretary’s very fair question, that our purpose in tabling this probing amendment is to highlight the issue and to seek assurance from him that taxpayers will not be unduly penalised if they make reasonable attempts to file online but are prevented from doing so by a computer or computer-related failure on the part of HMRC. Given that he could see what we were trying to do, and given his pretty categorical assurance that HMRC will not attempt to penalise taxpayers in the event of a clear failure by one of its IT systems, I am grateful for what he has said, and I am sure that the professions and taxpayers will be grateful for that reassurance, too.

That leads me on to amendment No. 246, on the security of the system. Our amendment is designed to ensure that there has been a full independent evaluation of both the security and the reliability of the IT system on which the electronic filing process is based, before the change of filing dates in 2008. The history of the Government’s recent IT systems highlights major concerns over whether they are capable of designing a system that is secure enough for personal details included on tax returns.

Just today, the Public Accounts Committee published a report entitled “Delivering successful IT-enabled business change”. That could be a fair description of the change that HMRC is going through, following the merger in 2005. The PAC looked into the issue in some detail and was quite critical of the Government’s record on running major IT programmes. Among other things, the PAC reported:

“Lack of relevant experience, combined with a regular turnover of post-holders, adds unnecessary risk to the management of IT-enabled change.”

Interestingly, the PAC also said that there is a lack of internal discussion and learning from past mistakes, stating:

“The lessons from Gateway Reviews”—

that is, IT project reviews—

“are not shared consistently across departments”.

Given the vast amount of money that the taxpayer now spends via the Government on major IT programmes, it is rather concerning that the PAC seems to feel that where something has gone wrong in one Department, other Departments are not being allowed to share the lessons that have been learned from what in many cases is the waste of a large amount of taxpayers’ hard-earned money.

The recent history of problems with major IT systems includes the medical training application system, or MTAS, problems with the Child Support Agency computer system, CS2, and continuing tax credits IT failure, as well as major problems with the PAYE system. I do not need to try your patience, Mr. Illsley; all I ask of the Committee—

Stephen Hesford (Labour, Wirral West)

Will the hon. Gentleman give way?

Mark Francois (Conservative, Rayleigh)

Of course. I would not dream of trying the hon. Gentleman’s patience, either.

Stephen Hesford (Labour, Wirral West)

Are there any problems with grammar schools?

Mark Francois (Conservative, Rayleigh)

I am not aware of the IT systems that most grammar schools use, but I hope for their sake that they work better than the Government’s CS2 computer, which has been a disaster from start to finish.

I shall not reiterate all the background to the MTAS fiasco but, as the hon. Gentleman is clearly interested in the subject, I shall give him a little bit. We know from the Secretary of State for Health’s grudging apology what a complete farce the system was. However, the important point is that a Government system full of private information was so flawed as to allow virtually anyone access to junior doctors’ personal information, which is deeply worrying. “Channel 4 News” looked into how that was done—

Kevin Brennan (Labour, Cardiff West)

This is ridiculous.

Mark Francois (Conservative, Rayleigh)

It was ridiculous of the Government to allow that to happen in the first place. “Channel 4 News” showed that it was possible to access the personal information of junior doctors through the server by altering a few digits of the URL code, or web address of pages on the site. How was it that the Government could design a computer system that was so insecure?

Unfortunately, MTAS is not the only Government IT system to suffer those sorts of failures. To come closer to home for the Financial Secretary’s benefit, I return to the tax credits computer and a point about security of information. The computer added to its woeful record in May, by sending out thousands of letters containing personal details to the wrong addresses. HMRC sent at least 8,000 letters containing bank account numbers of individual claimants. The Yorkshire Post quotes one victim of the error as saying:

“Someone could have walked into a bank, said they’d lost their card and used my details to get a new one.”

There have been major problems with the PAYE computer, in particular the accrual of penalties by up to 154,000 small businesses that filed their returns online in the normal way, as the Treasury has encouraged, only to find months later that they were to be stung for hundreds of pounds in fines due to an HMRC computer glitch. In essence, this appears to have occurred because after the information had been received electronically, it was, in many cases, lost in the system.

To HMRC’s credit, it has apologised for the mistake, admitting that when employers or their agents queried the penalties, internal investigations that it carried out discovered that the “overwhelming majority” were cases where a test submission had been successfully filed but not the full valid return. That was the experience of Joy Aymes, a director of Eldon Design, who wrote to me saying that her company had been wrongfully fined £900, at least in the first instance. She said:

“If a business waited 9 months to let a client know they had failed to make a payment and added extra penalties to the money owing surely they would be breaking the law”.

A similar experience was had by Mr. Desmond Hickey, who wrote a letter dated 2 April 2007 to my hon. Friend the Member for Chipping Barnet, the shadow Chief Secretary, which he entitled:

“The essence of failed government”.

He complained that he, too, had received demands out of the blue for £900. He concluded that HMRC’s attitude showed

“how ‘institutionally business hostile’...Inland Revenue is”.

Such cases underline the need for security and reliability in all HMRC’s systems. The examples from the real world paint a rather different picture from the rosy one that the Financial Secretary gave the Committee a few minutes ago.

Lord Carter’s report stated:

“We recommend that as part of their work to deliver robust, high-capacity services HMRC should build in more rigorous testing. Each of the services should be capacity tested at least a year before our recommendations are implemented, and if any tests are not successful the measures relating to that service should be deferred.”

One must ask what happened with regard to the PAYE computer.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Does the hon. Gentleman agree that in addition to testing the systems once they are in place, we must do something else? As we saw with the tax credits computer system, part of the problem often stems from the fact that there is inexperience in the procurement process. Although companies deliver what is asked, perhaps the Government do not understand what they are asking for and then only find out later. Does he agree that there needs to be intense scrutiny at the procurement level to ensure that these inadvertent problems do not occur?

Mark Francois (Conservative, Rayleigh)

I thank the hon. Lady for that pertinent intervention. I admit that this happened under Governments of a different colour, but this particular Government have a particular penchant for major IT programmes that go wrong. The Public Accounts Committee has looked into these for many years and has very often recommended that lessons must be learned from past mistakes. We have now had 10 years of a Labour Government, and every year the PAC produces more reports saying that more problems have occurred, more taxpayers’ money has been wasted and more confusion has resulted. One must wonder whether anyone on the Labour Benches is listening, because if they are, why do the problems continue to recur?

Page 115 of the 2006 Red Book said:

“Lord Carter recommends that HMRC should continue to invest in its online infrastructure and supporting systems to deliver robust, high capacity services, which should be rigorously tested.”

I believe that the Financial Secretary referred to a similar statement. Why is it that the Chartered Institute of Taxation continued to reflect those concerns a year later? It has stated:

“We feel that to introduce this legislation in 2007 without an adequate fallback position in the legislation, whilst there are still significant e-filing problems, is contrary to ‘Carter Principles.’”

Given all those concerns about reliability and, in particular, security, amendment No. 246 is designed to ensure that a thorough review of HMRC’s IT security is carried out before the move to advanced electronic filing dates in 2008.

Amendment No. 245 seeks to exempt those registered blind from the early-filing provisions of the clause. I accept from the outset that the Financial Secretary was attempting to deal sympathetically with the issue. I acknowledge that fact. The amendment would ensure that blind people were not disadvantaged by the Government’s proposal to encourage online filing. The Royal National Institute for the Blind contacted my office with its concerns. Helen Dearman, the RNIB’s campaigns director, pointed out in an e-mail on 1 June that for some blind people at least, submitting an online tax return is not a practical option. As she put it:

“For some blind and partially sighted people there is a choice; they are computer literate and have ‘access technology’ that allows them to access the internet so are able to choose between the two options available. For around 32 per cent. of blind and partially sighted people of working age, submitting an on-line tax return is just not an option. It seems unfair that some people will be denied the longer submission deadline purely because they are unable to use computer technology.”

The Chartered Institute of Taxation reflected those concerns in its 2007 Budget submission when it expressed under the heading, “Disabled Persons”, the following view:

“Finally, there are many people, e.g. those with mental health problems or physical problems such as blindness, who may not be capable of accessing computers. Accordingly, we believe that there should be strong protection for individuals—whether in business or not—to ensure that they are not penalised by their inability to file online.”

Given that point, I should be grateful if the Financial Secretary could tell the Committee what, if any, consultation with representatives of blind organisations he has conducted concerning electronic filing, and whether he will continue to consult them as the programme rolls out. I should also be grateful if he could assure us that the online system is compatible with common access technology that blind people use, such as audio technology. He referred to it in fairness, but will he assure us that it will be built into any subsequent upgrades?

Will all guidance notes be sent in formats such as large print, audio or Braille for those that need them? I should expect the Treasury to do so, but I should be grateful if the Financial Secretary could confirm that point. Finally, will he sympathetically consider cases in which technological failure means that a blind taxpayer does not have access to the online system? I take it that that point is covered by his assurance regarding the previous amendment. Those are my cases for the three amendments that we have tabled.

I turn to my clause stand part remarks. Clause 87 essentially amends the dates for the filing of paper personal tax returns. It introduces a new regime, which means that from the tax year 2007-08 onwards, a taxpayer will have to file their return on 31 October 2008 rather than on 31 January 2009 the following year, unless they choose to file their return electronically. As the changes will have a substantive effect on all 8.8 million self-assessment taxpayers in the country, I shall detail some general concerns about bringing forward the deadlines and some additional concerns about electronic filing and the way in which it may operate in practice, including importantly, its likely impact on staff at HMRC.

By bringing forward the filing dates for a paper return, the Government seek to fulfil the aspiration of Lord Carter, who wrote in his report, published in March 2006, that

“we have set an ambitious, but we think realistic, timetable for further measures to increase the use of online services, to promote earlier filing and to provide taxpayers with certainty sooner.”

He made an additional recommendation, which has not been mentioned so far. He recommended that by 2012, HMRC should

“aim for universal electronic delivery of individuals’ tax returns from IT literate groups”.

Measures to encourage electronic filing of tax returns have been introduced before, notably to encourage businesses to file their PAYE returns online, and I have already outlined the weaknesses in that. In that case, the Government decided on a carrot rather than a stick, and promised to pay each company a £250 incentive for online filing.

In the case before us, however, the Government have decided to wield the stick by bringing forward the tax deadline for people who continue to file by paper. The Government’s original intentions were set out in the 2006 Budget, in which 31 August was proposed as the date for paper returns. The Sunday Times referred graphically to what happened next:

“Within an hour of Brown sitting down, accountant's e-mails were beginning to wing their ways across the ether, using phrases such as ‘bombshell’, ‘draconian’, ‘devastating’ ‘broken trust’ and ‘all talk, no action’. And this from a budget that was rated one of Brown's duller efforts.”

That being the case, we welcome, as an improvement, the Government’s new proposed date for paper returns of 31 October, as opposed to the earlier proposal of the 31 August. In saying that, I am delighted to have my hon. Friend the Member for Fareham sitting next to me, because, one year ago, he engaged the Government in some detail on that matter, as the Financial Secretary acknowledged. I am pleased that my hon. Friend is here to see that, on this matter at least, the Government seem to have taken some notice and moved back the deadline accordingly. We will count that as a feather in his cap, rather than in mine.

I have some questions for the Financial Secretary about the likely cost to taxpayers of those measures, including those highlighted in the Government’s associated regulatory impact assessment. I have noticed that RIAs are often a very useful source of detailed information about Government proposals and, to be fair, some of the Treasury ones are particularly detailed. Perhaps Treasury officials could have a word with the Foreign Office and we can have an RIA on the new European treaty, which I very much hope that the Chancellor would read.

I shall turn to the cost in both money and time to those who do not have internet access. The RIA that accompanied the Carter report estimated that 1 million taxpayers could be affected by electronic filing at an estimated total cost of about £10 million. The estimated additional costs to individual taxpayers varied from zero for those who use a tax agent and so, in a sense, are paying for a service anyway, to £100 for those who do not use a tax agent and have no internet access, which they would then have to find. The RIA continues:

“Those without easy access will need to obtain it, but there are various ways of doing that and HMRC will be working with taxpayers to ensure that a range of options are available, and that those options are as cost-effective as possible.”

How will HMRC alleviate the additional cost to taxpayers and, specifically, how will it seek to make electronic filing easier in line with the commitment given in the RIA?

In an answer to my parliamentary questions on 12 January and 26 April, the Economic Secretary admitted that currently nearly 1.5 million people are penalised to the total of some £40 million for the late return of their tax returns to HMRC. Will the Financial Secretary reassure the Committee that HMRC believes that the changes that he proposes to the filing dates will not lead to a greater number of taxpayers being fined for the late delivery of their tax returns? I appreciate that he is not personally responsible for every taxpayer sending back their return, but does the Treasury believe that, as a result of these changes, the number of people filing late and being fined will go up, down or remain roughly the same? In addition, I would be grateful if he could reassure the Committee that there are no plans to change the proposed date by which tax underpayments are due. I note that there is no provision in the Bill to change the due date of 31 January for all tax underpayments, but I would be grateful if he could put that reassurance on the record.

Furthermore, I have a number of practical concerns about electronic filing, on which I would also welcome the Financial Secretary’s reassurance. First, if we are to encourage taxpayers to file online, it must be possible for all taxpayers to submit all their relevant information. For that to happen, the software must be provided and be capable of taking in all of the information currently submitted on a paper return. Of the accountants who responded to the “Working Together E-group” survey, to which I referred earlier, only 18 per cent. said that they rely on the current free software provided by HMRC with the remainder buying in third-party specialist software.

Currently, taxpayers with income that they are required to declare, such as foreign or trust income, will have to pay a third party to buy the software in order to submit their returns. That was confirmed to me in a further parliamentary answer from the Paymaster General on 7 February 2007 in which she underlined the fact that some taxpayers will need to purchase their own software, which is a disincentive to filing online as the Government would wish. She put it like this:

“Self assessment tax returns can be filed online using either HM Revenue and Customs (HMRC) full SA online service or proprietary software produced by commercial software vendors. Most proprietary software purchased to facilitate online filing of self assessment tax returns is bought by tax agents and is typically part of a broader package embodying accountancy and client management facilities. As such, no estimate of these costs has been made.

Most individual taxpayers can file their self assessment tax returns online using HMRC’s free online service which covers most circumstances. Other individual taxpayers filed using proprietary software, the cost of which varies.

Partners can also file their own tax returns using HMRC’s free online service. But both the partnership and trust return can only be filed using proprietary software.”—[Official Report, 7 February 1007; Vol. 456, c. 1040W.]

The Law Society further emphasised this concern. It said:

“It is wrong to force them”—

taxpayers—

“over to a system which they can not use without involving them in extra annual expenditure for commercial software; that might be for the purpose of making just one single entry on a supplementary page that HMRC do not provide”.

Also, with regard to being able to submit all the taxpayer’s information electronically the Law Society has a particular concern about the so-called “white space notes”. Those are the panels on the form, Mr. Illsley, where you are encouraged to include additional information if you think it relevant. The Law Society fears that these panels are not big enough on the electronic versions to fully explain some individuals’ affairs. Could the Financial Secretary reassure us that both additional documents and white space notes will be usable and form part of the submitted returns that can be accessed promptly without additional cost?

6 pm

Finally, there is the ability of HMRC to cope with major increases in electronic timing, which will be partly determined by the commitment of HMRC staff to the new process. However, recent survey data now casts doubt on whether that will happen as effectively as Ministers might like to think. An article in Accountancy Age of 17 May this year entitled “Taxman in turmoil as morale plummets” stated:

“Staff morale at HMRC has plummeted in the eighteen months following the creation of the merged department in April 2005, according to a survey filed away obscurely on the department’s website.”

The article goes on to say:

“Tax offices recently went on strike on 31 January, when self-assessment returns are filed, and there is a constant threat of more industrial action.”

I have located the survey on the website and it transpires that of those 18,000 staff who responded, which is a considerable number to respond to a survey, 58 per cent. agreed with the statement that

“change is not well managed in the department”,

while only 29 per cent. agreed that

“the quality of service to customers was improving”.

That is potentially worrying if we are to see a major shift towards greater reliance on electronic filing. I am sure that the staff will do their best to cope with it, but it would appear from HMRC’s own internal staff survey that its staff are not exactly jumping for joy at the way in which the process is being conducted.

The point was further pursued in The Sunday Telegraph this weekend in an article entitled “Tax staff encouraged to go MAD as morale falls”. It reads:

“The survey also found that only a quarter of officials feel secure in their jobs and only 1 per cent. ‘strongly believe’ that the Department is running as well as it should. In response to this, HMRC is sending its staff on make a difference or ‘MAD’ courses, in which staff are apparently encouraged to ‘speak the future into existence’ through ‘learning interventions’ and ‘one to one feedback sessions’”.

Given the morale problems which now appear to be extant at HMRC, can the Financial Secretary “speak into existence” how HMRC intends to bring about the shift towards greater electronic filing by a work force which appears so unimpressed by the progress of the HMRC merger? We were promised that there would be Gershon savings, and electronic filings are obviously part of that. The Opposition have supported the process in principle, but it seems that on the ground it could be handled better than it has been to date.

To summarise, amendment No. 247 would provide some alleviation for taxpayers who are deemed to have filed late because of technical problems at HMRC rather than through any fault of their own. Amendment No. 245 calls for a review of IT security and reliability before the proposed changes are implemented. Amendment No. 246 asks for an extension of the filing deadline for those who are registered blind. As well as addressing those issues, with which, in fairness, the Financial Secretary dealt to some extent in his opening remarks, I would be grateful if he could say something about the wider issues that I have raised, including the availability of specialist software and the ability of HMRC to cope with the changes, given what appear to be some incidents of poor morale in the organisation.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

It is a pleasure to welcome you to the Chair this afternoon, Mr. Illsley, and it is always a pleasure to follow the hon. Gentleman. There is a little nostalgia in that, as I shall not be doing it for much longer. He was a feature of both my experiences of the Finance Bill, so things will not be the same without him. The question is: what changes will there be on the Government Benches by the time next year’s Finance Bill comes around?

It is important that we debate these clauses in Committee and that they are in primary legislation, because they involve significant changes to the way in which our tax system works. As we have heard, they will implement a great deal of Lord Carter of Coles’s recommendations about how electronic returns should be phased in. There is an issue about timing and how we will ensure that Departments, like businesses and everyone else, keep up to date with the fast-changing world. The key challenge is to ensure that the Government’s capacity runs in parallel to individuals’ ability to take on new technology. It might well be the case that new technologies are out there but not everyone can take them up. It is important that the proposals are sensitive to that.

The Financial Secretary mentioned that concerns have been raised by organisations about the capacity of HMRC in terms of online filing and the failure rate. He was right to point out that the 10 per cent. failure rate that I flagged up was for businesses, but I would appreciate his comments on the failure rate for the filing of self-assessment tax returns, although, as I said, the Chartered Institute of Taxation said that the online filing capacity was “admirably met” by HMRC in 2007.

On the Conservative amendments, I have a great deal of sympathy with the points made by the hon. Member for Rayleigh, and it is clear what the amendments seek to achieve. It is important for the public to have confidence in the security of the systems that they use. We have seen examples not only from Government but from national banks of how easy it can be for confidential information to be compromised. It is important that the Government and other organisations pay serious attention to that. When they are going through the process of procurement every effort should be made to ensure that systems are not created that can be easily compromised. On that basis, I have a great deal of sympathy with the amendments.

In relation to the amendments on the non-electronic return for submissions by a registered blind person, I sympathise with the hon. Gentleman’s narrow point. For some people, regardless of whether they are registered blind or not, there will be difficulties with making online submissions. Lots of other people with disabilities might find it difficult to register online, but it is worth making the point that for many of those people filing on-paper returns will be equally difficult and challenging. The key thing is to ensure that a variety of options are available to people who might experience difficulties in whatever manner, and that there is flexibility and sensitivity to those needs, whether they have a physical disability, a visual impairment or low literacy or numeracy skills, because such people might find challenges in submitting a return on paper or on a computer. The problem goes beyond the more traditional definitions of disability and covers areas such as skills.

I was reassured by the Financial Secretary’s comments about what happens in the event of HMRC failure. Will he expand on what would happen if a person who is submitting their tax return experiences failure at their end—either a power cut or a computer meltdown? Is there any opportunity for discretion in that area?

I have a couple more issues to raise. The first one was mentioned by the Institute of Chartered Accountants. It expressed concern about the certainty of the date when a return is received. Obviously, when deadlines are set, it is very important that they are met. There have been disputes in a number of cases about when the submission was received. The Institute of Chartered Accountants notes:

“From this year, HMRC no longer provides receipts when a tax return is delivered by hand or by post.”

Will those who file their returns online receive receipts so that they will be certain that their return has been received?

Finally, I echo the point made by the hon. Member for Rayleigh. What happens if the white space is not sufficient for people to make notes? Is there the opportunity for flexibility to expand that space? Is HMRC considering accepting an attachment so that a more full description can be sent with the formal submission?

As I said when I intervened on the hon. Gentleman, it is important that the Government move with the world. There are important lessons to be learned, particularly in terms of the procurement of very large IT projects. Although the Carter recommendations go a long way towards reassuring people that we are going to have a successful system, more could be done to explain categorically and formally exactly how some of those recommendations are met.

Philip Dunne (Conservative, Ludlow)

I share the general sense that the measure is appropriate and that we should be trying to encourage electronic forms of filing tax returns. I also share the concerns raised by my hon. Friend the Member for Rayleigh and the hon. Member for Falmouth and Camborne that the measures are being introduced with a degree of haste and potentially without sufficient testing, which dents confidence in the systems that are employed by HMRC, and that gives rise to genuine concerns.

My hon. Friend illustrated some of the problems experienced by one of his constituents. If you will indulge me, Mr. Illsley, I would like to give an example from one of my constituents. Mr. Andrew Chapman runs a small practice called STAFF Accounting in Church Stretton. He wrote a letter to the chairman of HMRC on 15 December last year. On that day, Mr. Chapman had spent several hours seeking to access the HMRC website to make some self-assessment returns. Mr Chapman told the chairman:

“The HMRC website for filing self-assessment tax returns on-line has once again been out of action for most of the afternoon. It is the busiest time of the year when agents are under the most pressure. I today telephoned the Online Helpdesk to find out when the website will again be available and was told that they didn’t know.”

The chairman replied to Mr. Chapman and indicated that from HMRC’s online service availability records, the self-assessment online service was apparently available “throughout the day” on 15 December. Quite clearly, something is at fault—either Mr. Chapman’s access to the website or HMRC’s records of its own website availability. One of the interesting things that emerged from Mr. Gray’s letter to Mr. Chapman, which gives an indication of the concerns that we have about HMRC’s procedure, is to do with how it can assess the veracity of the points being made by people issuing complaints.

Having failed to get through on the website, Mr. Chapman made a telephone call, as I have just described. In his letter back to Mr. Chapman, Mr. Gray says:

“Unfortunately we cannot find any trace of Mr Chapman’s call within our systems. This may have been because of a recording error at the time of the call, or that Mr Chapman called via a switchboard. Unfortunately, due to the complexities involved our recording systems cannot identify calls that enter our network via a switchboard as the switchboard masks the caller’s number.”

This may seem an insignificant and trivial point, but I am raising it because it illustrates the difficulty that the Opposition have in accepting the Financial Secretary’s statements that the procedures within HMRC are robust if HMRC cannot even identify from within its own computer systems the telephone calls that are coming in—it acknowledges that the calls are being received within its offices—because the technology is not up to it. The example illustrates our concerns about whether the technology will cope with the proposed electronic filing.

The hon. Member for Falmouth and Camborne raised a question about whether or not the officers in HMRC will have any discretion if errors are made. I appreciate that we are discussing the legislation rather than current practice, but currently errors that are made by HMRC are subject to individual appeal. They must be dealt with on a case-by-case basis and there is no discretion to deal with problems such as that experienced by Mr. Chapman. If such problems are going to become more widespread, as I fear they may, the Financial Secretary needs to address them with HMRC if the Bill is passed.

Another reason for making that observation about HMRC is that the National Audit Office has recently produced a report entitled “Helping Individuals Understand and Complete Their Tax Forms”. I am looking forward greatly to that report coming before the Public Accounts Committee, because my contributions to that Committee will be informed by this debate. However, the thrust of the report is that HMRC could be doing considerably more to orientate its services around the needs of the taxpayer, in particular online—the NAO focused on that. It said that the systems are causing individuals to pay the wrong amount of tax and calculated that

“unintentional errors by taxpayers in completing forms result in over £300 million in underpaid tax.”

It is perhaps not surprising that HMRC chooses not to calculate how much tax has been overpaid as a result of the complexity of its systems; it is just bad luck for the taxpayer unless they happen to spot the error.

Errors occur, whether online or offline. The opportunity for appealing the decisions is not automatic; it is complex. We are being urged, through these proposals, to encourage an acceleration of online filing without there being adequate safeguards in place to ensure that the systems can cope.

John Healey (Labour, Wentworth)

As the hon. Gentleman said, we are indeed looking to encourage greater use of online filing for self-assessment. It will remain voluntary—I stress that. However, the way that we are designing the new service and the system set out in these clauses means that increasingly there will be a greater incentive to file online, which will help to reinforce the trend that we have seen—a trend that we welcome—in the past few years of more people choosing to file returns in that way. Online filing is welcome, because it brings benefits both to HMRC and to the taxpayer. It is more efficient, it is generally more secure, and it is a better way of doing such business.

The hon. Member for Falmouth and Camborne mentioned three specific issues beyond her general concern about the position of blind and disabled people in dealing with HMRC. I will come back to that general concern. First, on the question of receipts for filing online, all taxpayers who file online now receive an automatic confirmation by HMRC as soon as their return has been accepted by HMRC’s systems. That should now be dealing with the problems that she mentioned.

Secondly, the hon. Lady’s concern about the failures of self-assessment filing has been raised with us by the Chartered Institute of Taxation, largely on behalf of agents who have found that commercially purchased software seems not to be performing as well as promised or as well as it needs to. Post-Carter, HMRC is working on developing earlier and faster services for software developers and vendors, to ensure that their software is compatible and fully operational, and on providing validation rules in code format for such vendors. We are working with tax practitioners and vendors to try to identify consistent or common causes of failure so that we can deal with them.

Finally, the hon. Lady mentioned white space, which the hon. Member for Rayleigh is also concerned about. In November last year, HMRC developed and incorporated into the system the facility to take attachments—she asked about that and therefore perhaps was not aware of it. The system now provides for some 30,000 characters to be inserted in white space. That is a not insubstantial essay-length capacity, and I expect that in most cases it would be sufficient for a self-assessment tax form.

I said that we will miss the hon. Member for Rayleigh, and we will. I understand his desire to have a last hurrah. He treated us to a tour d’horizon that covered almost everything that he has dealt with in his two and a half years on the shadow Treasury Front Bench. Let me deal with his points about the clause.

I have explained that blind people will be treated sympathetically if there are good reasons for their not being able to file on time. To keep the matter in perspective, more than 9 million people file self-assessment returns. Last year, some 8,600 registered blind people filed self-assessment returns. Clearly, they represent an important but relatively small proportion of the self-assessment filing population.

The hon. Gentleman asked other specific questions. On consultation with groups that represent blind people, HMRC goes out of its way regularly to discuss issues across the range of its services and the operation of the tax system with groups that represent blind people and those with other disabilities. In large measure, that is why the redesigned web portal that I mentioned will be in place when the reforms come into being. It adopts WC3AA, which is the new industry standard for access. The standard has been developed in consultation with disability groups. I confirm that audio, large print and Braille copies of the guidance that HMRC produces are all available on demand.

Will late penalties increase revenue to the Treasury? No, we do not expect that. There is no reason why a self-assessment taxpayer should file later as a result of the changes and incur a penalty. The Red Book confirmed at the Budget that there is no expected increase to the Exchequer.

How will extra costs to the taxpayer be alleviated? Lord Carter has always been very clear on that. He identified benefits for taxpayers as well as HMRC in adopting online filing. It allows taxpayers to fulfil their legal obligations more accurately, more quickly and with greater certainty, and, clearly, there are benefits on the other side for HMRC as well. Any taxpayers to whom repayments are due are also likely to receive them more speedily and efficiently.

On payment dates, the due date for all payments remains 31 January and is unchanged by the arrangements. That applies for everyone who files on time before that date. Must individuals purchase software? HMRC already provides free software for nine out of 10 individuals, and the Government will introduce supplementary pages and improvements to that situation so that by the time of the reforms the free software will be available to 19 out of every 20 individuals who might be involved in self-assessment.

In summary, we have consulted widely and thoroughly on the changes. They have been refined in response to the further work of Lord Carter and to the consultation responses, and they are broadly supported across the piece. Let us keep a sense of perspective. For those filing on paper, the available time period will still be seven months, while for those filing online it will be 10 months. In Germany, the time period is five months, in Canada it is four months, and for individuals in France it is two months. Given that, I believe that we have a right and reasonable balance that will bring benefits to taxpayers who use the self-assessment system and will lead to an increase in online filing. It will also bring benefits to HMRC and its ability to manage the system effectively in the future.

Mark Francois (Conservative, Rayleigh)

We have indeed had a good debate on the Government’s e-filing proposals. The Financial Secretary has answered many of my questions very directly, and I am grateful for that. The amendment groupings gave us quite a large pitch, so I decided to plough across most of it, but I thank him for meeting me on each bit of the pitch that I covered.

I shall therefore concentrate on the Opposition’s three amendments. On amendment No. 247, I am grateful for the Financial Secretary’s reassurance that no taxpayer will be penalised for a late return if the reason for late submission of the return is an IT systems failure at HMRC. He was clear about that principle and I appreciate that clarity.

On the amendment concerning IT security and reliability, our concerns are genuine. It is fair to remind the Financial Secretary that if we want people to file personal, confidential details online, it is critical that the system be secure, otherwise they will not have the confidence to use it. The security issue is important, and I hope that the Government will continue to bear that in mind as they take matters forward, as Lord Carter encouraged them to do.

The Financial Secretary dealt very appropriately with the amendment relating to blind people. He gave a commitment that HMRC would look sympathetically on any particularly hard cases involving blind people, and that it would continue to consult relevant organisations.

Clause 90

Clause 92

John Healey (Labour, Wentworth)

The previous five clauses all dealt with Lord Carter’s recommendations on self-assessment tax returns. The next clauses complete the package of legislative changes needed to implement his other recommendations. Together, they will mean that both business and HMRC will achieve the benefits that he envisaged.

Clause 92 extends HMRC’s powers to require the use of electronic communications for the delivery of information to all taxes and duties for which it is responsible. In line with Lord Carter’s recommendations, the revised power will enable HMRC to make recommendations to require companies to file their company tax returns online, to require employers to file their in-year forms online and to require VAT traders to file their VAT returns online. Those requirements will be phased in from April 2009, in line with the revised timetable that we announced in the Budget. That timetable will give businesses the time that they need to prepare for the changes.

I am happy to put it on the record again that none of those requirements will be introduced until the services have been thoroughly tested and proven to operate effectively. That is in line with the principles set out by Carter. Both the Treasury and HMRC take that point very seriously. That is one reason why HMRC is investing £170 million in its online services over the coming years——to ensure that it will be able to perform to the level and capacity that we require. I commend the clause to the Committee.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

The Institute of Chartered Accountants has expressed concerns about this matter and sought reassurance that there are no plans for the compulsory electronic filing of income tax returns or the compulsory electronic payment of income tax liabilities. I think that the Minister has just given that reassurance, so I shall simply flag up a few issues.

We have talked about vulnerable groups filing self-assessment returns; there are also concerns about the ability of businesses to submit electronic tax returns. According to the regulatory impact assessment, Revenue and Customs estimates that up to 250,000 businesses will be required to file tax returns online. That is a significant number of businesses. I can think of many small businesses in my constituency that work on a subsistence basis. They might have to deal with the issues that I mentioned earlier, such as low skill levels, and might therefore have low computer literacy as well as any other kind of literacy. I seek reassurance from the Minister that the proposals will not be pushed forward at a rate that will preclude those businesses from being able to take part or that will cause them excessive difficulty or expense in co-operating.

Philip Dunne (Conservative, Ludlow)

I echo the hon. Lady’s sentiments. I did not anticipate that I would be able to bring my experience from the Public Accounts Committee so directly to bear in this Committee, but I alert hon. Members to another session that we had recently with the chairman of HMRC on filing VAT and company tax returns, because it is directly relevant to this clause. It became apparent from our discussions that the proportion of companies that file their tax returns online has increased from 2 per cent. in the year ending March 2006 to 7 per cent. in the year ending March 2007. HMRC’s target for company tax returns for March 2008 is 35 per cent. The chairman acknowledged that increasing performance regarding company tax returns in the next 12 months would be a tough act.

On VAT, the proportion of companies that filed their returns online in the year to March 2006 was 5 per cent. That performance improved to 9 per cent. for the year ending March 2007, but the target for the year ending March 2008 is 50 per cent. and the target for March 2010 is 100 per cent. HMRC’s performance in achieving its targets for online returns has, by its own admission, been modest at best.

The clause will give HMRC the ability to encourage companies to file online returns by law, but I add my voice to that of the hon. Member for Falmouth and Camborne to urge the Financial Secretary not to take advantage of the mandatory powers introduced by the Bill until such time as HMRC can cope with returns.

John Healey (Labour, Wentworth)

I have made it clear, including in my opening remarks, that we will move to introduce the requirements only when the systems necessary for handling them have been properly tested. I say again to the hon. Member for Falmouth and Camborne that the measures will be phased in from April 2009. That should give businesses time to prepare. I would welcome it if she wishes to work with HMRC to ensure that smaller businesses and others in her constituency are fully aware of the measures.

Clause 94

Mark Francois (Conservative, Rayleigh)

The clause essentially gives commissioners of HMRC the power to produce orders so that when payments are made by cheque, the payment is

“treated as made when the cheque clears”

rather than when it is received, as at present. The measure replaces the current position under section 70A of the Taxes Management Act 1970.

We appreciate what the Government are trying to achieve, but it raises potential problems. For instance, what happens when HMRC receives and subsequently loses a cheque? What happens when it receives a cheque but then experiences a delay in clearing it? I have asked Ministers whether they have performance indicators for the receipt of post from taxpayers. I received an answer from the Paymaster General on 5 March that probably bears repetition. She stated:

“HMRC does not record performance indicators for the receipt, opening or acknowledgement of taxpayers correspondence...Through a sampling exercise, HMRC determines and records the percentage of correspondence answered correctly and completely at 15 and 40 working days after receipt of the correspondence in the Department. Validated results are only available annually.”—[Official Report, 5 March 2007; Vol. 457, c. 1676W.]

Will the Financial Secretary tell us the latest annual results? I ask that question in the context of an article in The Daily Telegraph on 8 May that was headlined, “Tax offices ‘have 1.5m mail backlog’”. It said that

“according to the Public and Commercial Services Union”,

the reorganisation currently under way within HMRC, which was referred to earlier, has left

“some store rooms...‘packed with mail’”.

In the same article, Blair Gibbs, who is campaigns director of the TaxPayers Alliance, was quoted as saying that:

“‘They tolerate no delay on our part, but thousands of taxpayers face anxiety and doubt while HMRC routinely takes weeks and sometimes months to reply to their letters and settle cases...Ultimately, this backlog is a product of our hugely complex tax system and a slow, bureaucratic culture in central government.’”

Will the Financial Secretary give us an assurance that no taxpayer will be penalised as a result of HMRC losing cheques or failing to present them for payment in a timely manner?

John Healey (Labour, Wentworth)

The hon. Gentleman’s questions about cheque handling are not specific to the clause. No doubt he will hand his file of correspondence with the Paymaster General and his cuttings and press releases from the TaxPayers Alliance to his hon. Friend the Member for South-West Hertfordshire. The clause is designed to remove the cash-flow advantage to businesses that pay by cheque. I think that hon. Members appreciate that it is a modest, useful, supporting measure in the drive to encourage more taxpayers to file online. There is a wide range of acceptable payment methods, including BACS, CHAPS, bank giro and direct debit, many of which are cheaper, more efficient and easier than cheques and therefore save money for the taxpayers who use them. I hope that the provision will be a useful additional measure that enhances our ability fully to put into effect Lord Carter’s recommendations.

Schedule 24

John Healey (Labour, Wentworth)

I beg to move amendment No. 215, in schedule 24, page 260, line 33, leave out ‘HMRC think that’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss the following: Amendment No. 2, in schedule 24, page 260, line 33, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendment No. 216

Amendment No. 3, in schedule 24, page 262, line 18, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 217 and 218

Amendment No. 4, in schedule 24, page 262, line 41, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendment No. 219

Amendment No. 5, in schedule 24, page 265, line 22, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 220 and 221

Amendment No. 6, in schedule 24, page 265, line 26, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 222 and 223

Amendment No. 7, in schedule 24, page 265, line 30, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 224 and 225

Amendment No. 8, in schedule 24, page 265, line 34, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 226 and 227

Amendment No. 9, in schedule 24, page 265, line 38, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 228 and 229

Amendment No. 10, in schedule 24, page 265, line 42, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendment No. 230

Amendment No. 11, in schedule 24, page 266, line 2, leave out ‘think it right’ and insert

‘have reasonable grounds for believing it to be necessary’.

Government amendment No. 231

Amendment No. 12, in schedule 24, page 267, line 10, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendment No. 232

Amendment No. 13, in schedule 24, page 267, line 19, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendment No. 233

Amendment No. 14, in schedule 24, page 269, line 9, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

John Healey (Labour, Wentworth)

There is a great deal in this group and I have a great deal of briefing for it, but I think that I can boil it down to its essentials. Clause 96 and schedule 24 contain a couple of important features, because together they provide a single new penalty regime for incorrect returns for income tax, corporation tax, PAYE, national insurance contributions and VAT. They will replace the separate—and very different—regimes that we currently have for each of those elements.

The penalty will be determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement, and the extent of disclosure by the taxpayer. There will be a right of appeal against all penalties. The penalties will be set as a percentage of the understated tax. For failing to take reasonable care, the penalty will be 30 per cent.; for deliberate action, 70 per cent., and for deliberate and concealed action, 100 per cent. Importantly, the legislation lays down substantial reductions for prompted or unprompted disclosure. In special circumstances, HMRC will have discretion to reduce the penalty further.

A different measure of penalty will apply where inaccuracy results in tax being declared late rather than not at all. In addition, a new concept of suspended penalties will be introduced, so that HMRC may suspend all or part of a penalty for careless inaccuracies. The significance of that is to prevent the penalties from becoming a barrier to people coming forward when things have gone wrong.

There will therefore also be substantial reductions for unprompted disclosure by taxpayers, including down to nil. Disclosure means telling HMRC about the inaccuracy, taking active steps to correct it and giving HMRC access to check the details. To encourage taxpayers to work with HMRC to establish the correct tax position, there are also reductions to penalties for prompted disclosure, when a disclosure is made in response to a challenge from HMRC. Setting out the penalty and reduction levels, and the approach, in this way in statute for the first time is a major step towards making the regime more visible, effective and transparent.

I come now to the Government amendments, which I pay tribute to the hon. Member for Falmouth and Camborne for prompting. We discussed the issue in Committee of the whole House and I undertook to consider the matter further and to return with my own amendments, which are set out on the amendment paper. She and others reflected a concern about the phrase “HMRC think”, which occurs in a number of places in schedule 24. The Government amendments remove that phrase without replacing it in each instance. Let us be clear. The meaning and effect of the schedule are not changed by the amendments, but they have helped to reassure certain representative bodies, and the CIOT made it clear that it would welcome such an amendment.

There is one place where we consider that the word “think” should be retained, which is paragraph 11(1), which states:

“If they think it right because of special circumstances, HMRC may reduce a penalty”.

The distinction is that this is a discretionary measure and therefore different from the other places where we are making the amendment. The word “think” remains appropriate in that place in the schedule.

There has been extensive consultation, as part of the wider HMRC powers and penalties review, on the provisions. They have met with broad approval, in principle and, largely, in detail, too. The legislative framework in the Bill is only the first stage of the work. Work will continue to develop the guidance required to underpin it, in consultation with interested groups. We will ensure that that is then widely published and communicated. In due course, people will look back on this aspect of the Finance Bill as a significant reform of our penalties regime.

Mark Francois (Conservative, Rayleigh)

The background to the Government amendments to schedule 24 is the now somewhat infamous wording of “HMRC think”. Those words as included in the Bill would have given HMRC the power to penalise a taxpayer in cases in which it thought that they had done something wrong. Those highly controversial words were, in characteristic fashion, buried in the small print of the Budget and, despite a prior period of consultation on wider issues, took the accountancy profession somewhat by surprise when they were included in the Bill.

John Whiting, the respected PricewaterhouseCoopers tax expert, said in Financial Director magazine on 5 April that everyone had objected to the wording and expected that changes would have been made to the Bill. He said:

“The worry is ‘HMRC think’ is far too loose and arbitrary.”

John Cullinane, the then president of the Chartered Institute of Taxation, followed that in a CIOT press release, dated 10 April and entitled, “Alice in Wonderland Tax Penalties”, which argued:

“When this was first suggested by HMRC, the CIOT objected, as did other bodies. On Budget day HMRC admitted that there was almost universal disquiet about the statutory formula ‘If HMRC think’...Despite objections to this subjective clause, it remains in the draft legislation. The CIOT recognises that HMRC have engaged in constructive consultation over many issues. We are doubly disappointed that in this instance they do not appear to be listening.”

The Institute of Chartered Accountants in England and Wales also raised serious concerns. In its Committee briefing for the Finance Bill, it says:

“Paragraph 1(1) includes the phrase ‘HMRC think.’ The Explanatory Notes to the Schedule suggest this is little more than the use of modem language. We disagree.”

The ICAEW went on to argue:

“‘HMRC thinks’ does not suggest that HMRC are using their best judgement or taking a reasonable approach. We believe this phrase will lead to confusion and court cases to determine its true meaning.”

For good measure, the London Society of Chartered Accountants, which is affiliated to ICAEW, simply said this about “HMRC think”:

“This is at best otiose and at worst adds an unnecessary ambiguity.”

It appears that Ministers picked up on the weight of professional opposition to their proposal and a climbdown began. In the debate on HMRC powers in Committee of the whole House, the Financial Secretary dropped a broad hint that some reversal would be forthcoming when he told the House:

“In recognition of the anxiety that has been expressed and in response to those representations that have been made, I intend to table an amendment in the Public Bill Committee to clause 96 and to schedule 24 on civil penalties.”

He did better than that; he tabled more than a dozen. As the Financial Secretary may recall, I welcomed his comments at the time by saying in the next column:

“As the Minister mentioned it, may I say quickly that Conservative members welcome his admission that there has been concern on clause 96. We have received representations on the matter and we look forward to seeing his amendment in due course.” —[Official Report, 1 May 2007; Vol. 459, c. 1460-61.]

Now that we have the amendments before the Committee, in the same spirit, I welcome what the Minister is doing. Conservative Members think that he has done the right thing and that he has listened to the weight of professional opinion on the matter. Therefore, we support his amendments as they will improve the Bill.

As I understand it, there is one example in the schedule where the wording “HMRC think” will remain in the Bill. That is at paragraph 11(1), entitled “special reduction”, which will allow HMRC discretion in “special circumstances” to reduce the penalty but not to increase it. I think that the Minister said that that interpretation is correct and, if it is, will he briefly give some simple examples of what those sorts of special circumstances might be?

Finally, before concluding my discussion of the amendments, it would clearly be desirable to prevent such a situation from arising again. It would have been better if the Government had not gone there in the first place, so, with that in mind, will the Minister say how the situation came about? Were the words inserted on the insistence of Ministers, on the advice of parliamentary draftsmen, or did someone just get out of bed the wrong side one morning? What actually happened and how can we prevent it from happening again?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I will perhaps be more generous to the Minister than the hon. Member for Rayleigh because my view is that the explanatory notes were clear that there was never any intention to introduce a new spectrum of subjectivity to how penalties would be applied. However, genuine concerns were expressed by the various representative bodies that contacted the Minister about how the law would be interpreted. There was a real fear that we would see the introduction of a more subjective test to whether penalties would apply, rather than an objective one. I will not raise everything from the debate on the Floor of the House, which was not in relation to the schedule but to earlier clauses that also used the word “think”.

Essentially, by withdrawing the phrase “HMRC think”, the Government’s amendments achieve the same result as my amendments, which try to introduce a more objective sense to the use of particular language. That is clearly an improvement and allows the representative bodies to welcome the rationalisation more broadly than they were initially able to.

In addition to the points made by the hon. Member for Rayleigh, I would appreciate the Minister clarifying the following matter. I notice from the Minister’s letter that the meaning and effect of the schedule will not be changed by the amendments. If the intention was, as I am assuming, to try and make the legislation more straightforward, what impact has the little exchange between representative organisations had on the drafting of future legislation? We know from the Financial Secretary’s letter to the Committee on 22 May that

“‘think’ is used in over 3,000 instances in other statutes, including in Finance Bills”.

Will there be a policy change from now on? Are we going to see HMRC officers, or anyone else, “thinking” about future Finance Bills and other legislation?

John Healey (Labour, Wentworth)

For future drafting, we will use the formula of “HMRC think” when we think that it is appropriate. As the hon. Lady said, that formula is well established in legislation, in Finance Bills and more widely. Where appropriate, it seems sensible to use it. In this case, we took the view that it was clearer and more transparent to have “HMRC think” in the original drafting. We put it out to consultation on that basis and many were persuaded of our point of view, but some were not. There are still concerns out there, however, which is why we have responded with these amendments. As I explained, in our view, the practical effect of the clause and the schedule will be unaffected by the amendments. I hope that hon. Members feel that they have played an important part and are satisfied with the reframing of the Bill.

On specific examples of special circumstances, the Bill is designed not to reflect circumstances of which we are aware already, otherwise we would have framed the provisions in the clause and schedule in order to deal with that. In a sense, it is a safety valve should such unforeseen circumstances arise where a further reduction is required.

If I may ask your indulgence, Mr. Illsley, I must apologise and provide some clarification to the Committee about something that I mentioned earlier concerning clause 87 and the capacity of the white space on the self-assessment tax form. Having checked the capacity, I find that it is not about 30,000 characters, but 9,180. I apologise to the Committee for that misleading information earlier. I say simply that that figure is still sufficient to contain a short speech by the hon. Member for Rayleigh.

Rob Marris (Labour, Wolverhampton South West)

I welcome the amendments, which do not change the meaning of the Bill. As the hon. Member for Falmouth and Camborne said, the Financial Secretary’s letter said that there are 3,000 instances elsewhere in legislation where that drafting is used. In respect of remarks that I made earlier, I note that the meaning and effect of various other parts of the Bill would not be affected if the word “but” was removed. If I am foolish enough to serve on another Finance Bill Committee, I do not want to get a letter saying that “but” starts 3,000 subsections elsewhere because we did not clean that up in this Bill.

Eric Illsley (Labour, Barnsley Central)

We now come to amendment No. 248. I call Theresa Villiers.

Mark Francois (Conservative, Rayleigh)

I beg to move amendment No. 248, in schedule 24, page 262, line 19, leave out ‘30’ and insert ‘60’.

Interesting to finish my career shadowing the Treasury with a sex change. Paragraph 2 of schedule 24 is designed to give HMRC the power to penalise a taxpayer if they have

“failed to take reasonable steps to notify them, within the period of 30 days beginning with the date of the assessment, that it is an under-assessment.”

Our amendment is simply designed to increase the period that a taxpayer has to 60 days. The amendment is necessary because, in the words of the ICAEW,

“The 30 day time limit looks unreasonable, particularly given that the 30 days starts from the date that is on the assessment rather than the date it is received by the taxpayer. We think it would be more reasonable to give a 60 day period.”

The point about the time that it takes to receive the assessment after the 30-day clock has already started ticking seems valid, not least because the taxpayer could be on holiday when the assessment arrives. Similarly, any disruption to the postal service, say as a result of industrial action, could eat into a good part of the 30-day period. That seems pertinent in light of the stand-off between Royal Mail and the trade unions, which could lead to the first national postal strike in many years.

In addition, the assessment in the case of a complicated return might take some time to check, and the taxpayer might be reliant on their adviser to do it for them and to communicate the information to them. That can all take time. I would be grateful if the Minister could clarify whether the clause is intended to be used in all cases of HMRC errors that lead to an underassessment or, as I believe has been suggested to some members of the professions, it is likely to be used in practice only in cases of default assessments issued in the absence of a completed tax return. Subject to the answer to my question, we believe that it would be reasonable to extend the period that the taxpayer has to receive and check their assessment from 30 to 60 days. I commend the amendment to the Committee.

John Healey (Labour, Wentworth)

It is indeed a provision that relates to the default responsibility of HMRC to raise an assessment when no return has been made by the taxpayer at all. In relation to holidays, the provisions of the clause will come into effect—because this is where the process starts—only in relation to a taxpayer who fails to make any return at all. To make it clear, any taxpayer who sends their return on time will not receive such assessments because they will have self-assessed and so the penalty will not apply.

Some coverage has suggested that somehow taxpayers will be penalised for HMRC errors. That is not the case. I accept that some confusion has arisen from the rubric for paragraph 2 of schedule 24, which was entitled “Error in HMRC assessment”. I am making steps to change that to a more appropriate and accurate “Underassessment by HMRC”. The taxpayer knows the facts or is in a position to find them out, and they should decide whether an HMRC assessment is too low. All they have to do within 30 days is to tell HMRC that an assessment might be too low. They can take longer to work it out, correct the figures or file a correct return. Extending the period in this way would be out of line with similar obligations in the Taxes Act 1988. I urge the hon. Gentleman not to press the amendment.

Mark Francois (Conservative, Rayleigh)

As the Minister rightly admitted, there has been some confusion about this matter with regard to the rubric. I hope that we have performed some small service in tabling the amendment by getting that explanation on the record. I am grateful to the Minister for that commitment, and I hope that it helps to clarify the point. Before I go to the Foreign Office, I beg to ask leave to withdraw the amendment.