Finance Bill

Public Bill Committee, 7 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)

Roger Gale (Conservative, North Thanet)

Good morning. The selection list is being copied and I shall make sure that it is distributed as soon as it arrives. I apologise that it was not here for the start of proceedings as it should have been.

I have been advised that if business is nearing its end, 15 minutes of what is known as injury time is available to the Committee, at the discretion of the Chairman, to allow completion if that is possible. I am acutely conscious that hon. Members might wish to attend questions on the Floor of the House and indeed to ask questionsin the House. If any hon. Member is in that position and does not wish us to run on for 15 minutes, Ishall immediately take account of that and give it preference.

We expect to sit this afternoon. On the other hand, there is no particular merit in dragging everybody back for what might prove to be a very short discussion. If hon. Members bear that in mind, we will exercise our judgment later on in our proceedings this morning.

I call Mr. Gauke to speak on clause 97 and amendment No. 251. I am sure that I speak on behalf of all the Committee in welcoming him to the Front Bench.

Clause 97

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 251, in clause 97,page 68, line 20, after ‘above’, insert

‘in respect of any supply made after the date on which the order has effect.’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following: Amendment No. 252, in clause 97, page 68, line 22, at end add—

‘(9C) An order may not be made under this subsection unless a draft of the statutory instrument containing the order has been laid before, and approved by a resolution of, the House of Commons.’.

Clause stand part.

New clause 3—Missing trader intra community fraud—

‘HMRC shall lay a report before Parliament every three months on the measures taken by the Government to combat missing trader intra community (MTIC) fraud and the effects these measures are having on VAT compliance system generally.’.

David Gauke (Conservative, South West Hertfordshire)

I thank you, Mr. Gale, and the whole Committee for that kind welcome. I also thank the Financial Secretary for his kind words on Tuesday, although I was not present at the time. I offer my particular thanks on behalf of Mrs. Gauke, upon whose illustrious reputation my career is built.

I suspect that other Committee members might well also be promoted in the weeks ahead, in particular on the Government Front Bench, and as far as the Financial Secretary is concerned that would be thoroughly deserved—[Interruption.]—as, I am sure, it would be for others as well. On a personal note, it is a pleasure to follow in some respects immediately in the footsteps of my hon. Friend the Member for Rayleigh, who addressed the Committee on Tuesday and who last year addressed it on the subject of missing trader intra-Community fraud. As it happens, it is not the first time in my political career that I have followed in his footsteps. He was the Conservative parliamentary candidate for Brent, East in 1997 and I performed the same role in 2001. It would be fair to say that that is not the most auspicious precedent. Neither of us was hugely successful. We won the arguments, but lost the votes. Perhaps that will happen again today. Also, I should not forget to welcome you to the Chair, Mr. Gale.

I turn now to the matter in hand—[Hon. Members: “Hear, hear.”]—which is the most popular thing that I have said so far. I wish first to say a few brief remarks about missing trader intra-Community fraud in general, after which I shall discuss new clause 3, which would require a report to be produced quarterly by the Treasury on its measures with regard to MTIC fraud and the implications for the VAT system as a whole.I shall then turn specifically to clause 97 and amendments Nos. 251 and 252.

Clause 97 returns us to the issue of missing trader intra-Community fraud, of which carousel fraud is perhaps the most prominent part. The carousel version of MTIC fraud is defined, among other occasions, by Her Majesty’s Revenue and Customs in a note that the Financial Secretary kindly circulated earlier this week. It involves

“a circular trading pattern that allows the same goods to be imported and exported many times, with an unpaid VAT liability and a corresponding VAT repayment being created in each turn of the carousel”.

The scale of the fraud is considerable. HMRC figures, which were quoted recently in the report of the House of Lords European Union Committee “Stopping the Carousel: Missing Trader Fraud in the EU”, show that in the period from 1999-2000 to 2004-05 the size of the figure was at least £1.1 billion and as high as £2.5 billion in some years. The figure quoted in the report for 2005-06 was £3.5 billion to £4.75 billion, although that may be a misinterpretation of the data. It related to the attempted fraud and the cost to the Exchequer, using the same methodology as used in previous years, of £1.4 billion to £2.4 billion. HMRC also introduced a new methodology in respect of the impact on VAT receipts, which was £2 billion to £3 billion. I am sure that the Financial Secretary will confirm whether my interpretation of the House of Lords report is correct. I see that he is nodding in assent. I am sure that such new methodology is helpful, but it might be interesting to see whether it could be applied for previous years to get a sense of the trend. I do not know whether that would be possible.

I shall leave the matter with the Financial Secretary. We are talking about big numbers to the extent that, according to the Office of National Statistics, MTIC fraud distorts our trade figures. It is substantial. It is persistent and has the capability of adapting and expanding to undermine the entire VAT system. For those reasons, there is no dispute on either side of the House that effective measures must be taken to tackle it.

Hon. Members who discussed last year’s Finance Bill in Committee will recall that we debated MTIC and the Government’s response to it at some length. My hon. Friend the Member for Rayleigh made some well-founded criticisms of the Government’s record in tackling the problem prior to 2006. I have no doubt that the Financial Secretary will describe the progress made in tackling the fraud, and I hope that he will outline the figures for 2006-07, although HMRC has stated that

“trading activity associated with carousel fraud has fallen dramatically during 2006-7.”

We all welcome that progress. None the less there is no room for complacency. It is a dynamic situation. The fraud evolves and mutates, and our responses must develop accordingly.

We are also discussing the necessity to balance the desire to reduce fraud with the need not to impose a disproportionate burden on legitimate businesses. Given the need to balance such competing pressures, the dynamic nature of the fraud and the scale of the problem, it is clear that the need for proper parliamentary scrutiny is considerable. For that reason, we have proposed new clause 3, which requires HMRC to lay before Parliament a quarterly report

“on the measures taken by the Government to combat missing trader intra community (MTIC) fraud and the effects these measures are having on VAT compliance system generally.”

I make no accusation that the Government and HMRC have tried to conceal information in any way. Indeed, as I said, the paper circulated by the Financial Secretary was extremely helpful and informative. Indeed, it repeated points that had previously been raised by HMRC to those Members, of whom I was one, who had independently raised concerns or queries about the Government’s approach. None the less, a formal document published regularly would provide greater clarity and enable Parliament to scrutinise the Executive’s actions much more effectively.

Let me give one example of an area where Parliament would benefit from the opportunity for closer scrutiny. Last year we debated at some length the need to put in place a legislative framework to enable the reverse charge to come into effect. It was at the heart of the Government’s strategy to reduce MTIC fraud and would involve transferring the responsibility for paying VAT from the seller to the buyer. To implement the reverse charge, it has been necessary to obtain an EU derogation from the sixth VAT directive.

Progress towards that derogation has been somewhat uncertain, and I use the word “uncertain” to mean that progress has been somewhat slow and that it has been difficult for Members to evaluate that progress. That is not because of a lack of Government statements; indeed, there have been many. They announced that they had submitted an application for derogation in January 2006. In July, the Paymaster General told Parliament that she was confident of securing an agreement, and later that month HMRC stated that

“we expect to implement the reverse charge on 1 December 2006.”

It was not implemented in the ECOFIN meetings on 9 or 28 November, and at the time rumours circulated that the French Government were reluctant to agree to the derogation because they feared that fraudsters would turn their attention to France, which I find a remarkable argument.

On 13 December, the Chancellor, appearing before the Select Committee on Treasury, said in his opening remarks following the pre-Budget report that he was

“pleased to tell the Committee that last night an agreement was reached on the derogation we have sought with France and, with the support now of other Member States, I am confident that the derogation will be adopted.”

I do not know on what basis he made those remarks, or whether it was in any way an attempt to dominate the news reports of that hearing, although my recollection as a member of the Committee is that much of the press coverage curiously related to the unravelling of education spending figures. None the less, considering subsequent events, it did not appear that agreement had been reached.

If the Chancellor thought that the progress would be swift after 13 December, he was proved to be mistaken. The derogation was not even on the agenda for the ECOFIN meetings on 30 January or 27 February and was finally agreed on 19 March, but at what cost? It would appear that his attempts to protect an element of the rebate were abandoned, according to many reports. As an EU diplomat quoted in The Guardian on 4 April put it:

“The British were given to understand that if they wanted their way on VAT, there was another issue on which they needed to give ground”.

That issue appeared to be the EU rebate. This was not a triumph for British diplomacy by any means, and the Chancellor’s ability to obtain a good deal for the UK must be questioned.

I am reminded by the Chancellor’s attempts to obtain the reverse charge derogation of the comments of Sir Stephen Wall in the recent Channel 4 “Dispatches” documentary. Discussing the Chancellor’s negotiating style, he said that when the Chancellor negotiated a particular point he

“hammered away at something which the majority of the member states weren’t prepared to agree to, he got himself into certain amount of difficulty. And when he tried to sum up three times, as I recall, in the direction that he wanted rather than what the majority wanted, in the end people were just sort of laughing. Because it was, it was so, it had become I thought, sort of embarrassing.”

I am the first to concede that a degree of truculence in EU negotiations might be appropriate but, to coin a phrase, it should be truculence with a purpose.

Stephen Hesford (Labour, Wirral West)

Given that the hon. Gentleman has followed the hon. Member for Rayleigh in a number of situations, does that comment mean that he is after the shadow Europe job already?

David Gauke (Conservative, South West Hertfordshire)

The shadow Europe job is in very good hands and I, for one, would hate to leave the Committee after such a short time.

Roger Gale (Conservative, North Thanet)

Order. I have been listening carefully and with great interest. The intervention of the hon. Member for Wirral, West is the cue for me to say gently that we are dealing with the Finance Bill of the United Kingdom and we should move swiftly to a discussion of the matters before us.

David Gauke (Conservative, South West Hertfordshire)

I am, as ever, grateful for your guidance, Mr. Gale.

Returning specifically to MTIC and the derogation enabling the reverse charge, it is not disputed that the reverse charge is not quite what was originally envisaged. Three elements have changed from the original proposal. The application of the reverse charge has been narrowed to only mobile phones and computer chips. When we debated the de minimis requirement last year, it was due to be £1,000; it will now be increased to £5,000. Indeed, the period for the derogation has been reduced from the time that we originally applied for, from three to two years.

Those changes give rise to a number of questions. Given that the reverse charge was a key part of the Government’s strategy last year and that they envisaged bringing it in somewhat earlier, what cost has the delay incurred for the Exchequer? What will be the cost, if any, of the concession on the de minimis amount? I have mixed feelings about that because, as far as business is concerned, the increase from £1,000 to £5,000 is welcome. None the less, the Government wanted £1,000. What was the cost of that?

In particular, what is the Government’s view of the fact that the derogation is only for two years rather than three and that we have to negotiate it all over again? Further concessions in other areas may be necessary to achieve that. That is important because, as we all recognise, MTIC evolves and mutates. There is no particular reason why it would necessarily stick to mobile phones or computer chips. If we find that we need to expand MTIC, we may be in a difficult position.

I appreciate that the reverse charge has been in place only for a few days; it came into effect on 1 June 2007. Will the Financial Secretary make any observations following its introduction, as I am sure the Committee would welcome that? However, I appreciate that it is early days. That brings me back to my point about a regular, quarterly report, which would enable the Government to set out their views on how the reverse charge is operating as it is introduced and beds down.

A further part of the Government’s approach to tackling MTIC fraud, and one that on the face of it appears successful, is the introduction of extended verification for VAT repayments. The figures in the HMRC briefing paper certainly appear impressive. It states that in more than 95 per cent. of cases where traders are subject to extended verification there was at least sufficient suspicion for HMRC to continue to investigate. HMRC add that only 1 per cent. by value of the VAT withheld under the programme has been found to be correctly claimed and properly payable. That appears to suggest that the extended verification measures have been extremely well targeted.

However, many businesses have expressed their concerns, to the extent that one begins to question the figures. The Federation of Technological Industries informed the House of Lords European Union Committee that every participant in the grey markets for mobile phones and computer chips has had their VAT repayments withheld since spring 2006. Is it possible to reconcile that with HMRC’s view that the measures have been extremely well targeted?

For that reason, it might be helpful to dig a little further into the figures that HMRC has provided. If 1 per cent. by value of the VAT withheld has been found to be correctly claimed and properly payable, what is the comparable figure by case load? The terminology—claims that are correctly claimed and properly payable—is different from claims being linked to MTIC fraud. Is there a figure for the claims that are linked to it? How many of the cases where things have not been correctly claimed and properly payable are because of a more technical breach that is entirely unrelated to MTIC fraud?

I have found no specific figure in the public domain. The House of Lords concluded that the number could be as high as 1,500, but having looked at how it reached that calculation, I would say that a certain amount of guesswork was involved. What amount of VAT is not being repaid because of the extended verification process? How many people at HMRC are working on this area? I am sure that the Committee would be pleased if the Financial Secretary were able to shed any light on those issues. It would be useful if the information could be provided on a formal and regular basis.

There are also problems with the VAT repayment system which appear to be unrelated to tackling MTIC fraud. That goes to the heart of one of the House of Lords European Union Committee’s concerns about the extended verification process, in that it ties up an enormous amount of HMRC’s time and effort. The Committee said that

“the system of extended verification is an inefficient and unsustainable use of HMRC’s resources”.

I should be grateful if the Financial Secretary would tell us whether or not he agrees with that view, because there is widespread concern about how the VAT system is working.

One assumes that resources have been directed to tackling MTIC fraud—that is not necessarily the wrong thing to do; I have stated several times that such fraud is a serious problem—but I, like other hon. Members, have been informed of several cases where there are problems with repayment systems. My hon. Friends the Members for Rayleigh and for Fareham have been contacted by Viking Garages, which is seeking recovery of a VAT overpayment. Delays have occurred, in part because of delays in allocating caseworkers. Viking Garages’ professional advisers have said:

“HMRC are putting woefully inadequate resources to the team responsible for authorising repayments”.

I have also been informed about a case taken up by my right hon. Friend the Member for North-West Hampshire (Sir George Young). It relates to a building firm that is having great difficulties; there seems to be a widespread problem with repayments to builders. Neither of those cases are high risk from an MTIC fraud point of view, but it would appear that people are being taken away from such areas, and that is causing problems in the repayment system.

More widely, there are substantial problems with VAT registrations. I raised that point with the Paymaster General in last year’s Finance (No. 2) Bill Committee and have done so subsequently in a Treasury Committee sitting with senior members of HMRC. At that time, my attention was drawn to problems with VAT registration by a City lawyer with whom I am acquainted. There seemed to be a particular difficulty with delays in getting VAT registrations for companies, and that is a serious concern. There are cash flow problems, particularly for start-up companies, and one of the competitive advantages that we have in this country is that it is relatively easy to get a business started and up and running. The proposal will put that in jeopardy.

As I said, on 24 January 2007 I raised that point with senior HMRC officials. Paul Gray, the chairman, stated that it was

“one of those areas where we have had probably the greatest degree of pressure and the performance certainly was not as good as I might have hoped”.

His colleague, Mike Eland, added that the problem is with

“trying to get a balance between facilitating legitimate business and tackling fraud. We did not get that quite right. We put the emphasis on tackling the fraud. We are now looking to correct it the other way by simplifying some of the procedures and also getting better IT backup to carry out some of the fraud checks so that we can do the checking more quickly”.

Both Mr. Gray and Mr. Eland stated that HMRC was improving but was “not there yet”.

Some months later the problem persists. My hon. Friend the Member for Chipping Barnet was contacted by Ingenious Media plc, which was deeply concerned about delays in obtaining VAT registrations for start-up companies in which it invests. Yesterday, I spoke to the finance director of Ingenious Media plc. He said that

“there is a crisis at HMRC in respect of VAT registrations. They are months behind with their work and seem to be in despair. They are hopelessly short of staff”.

That is not an isolated case. John Arnold, chairman of the VAT committee at the Institute of Chartered Accountants in England and Wales, said that

“there’s no doubt that there is a problem with missing trader fraud but to delay VAT registrations to this extent is disproportionate”.

He added:

“in general it seems to be two or three months from sending the form off. It used to take three weeks”.

I would be grateful if the Financial Secretary could indicate whether there has been a decline in the number of VAT registrations completed within the three-week target, whether the problems are concentrated in areas that could be seen as being related to MTIC fraud, or whether they are more general, and whether there has been an increase in the number of complaints received by HMRC on that point. Last year, I tabled some parliamentary questions on that point, and might do so again, depending on the answers that I receive.

If it is determined that a VAT registration will take longer, an extended verification process might be applied. As I understand it, if that is the case, no notification is given to an applicant, although there might be good reasons for that—along the lines of not wanting to tip off the applicant. However, in some cases that causes added uncertainty and difficulty, and if a company was aware that there was going to be a delay in achieving VAT registration, it might be able to take mitigating steps. Has HMRC considered doing that?

Essentially, does the Financial Secretary see the problems with VAT registration as being directly related to MTIC fraud, either because it takes longer to deal with applications that might be related to MTIC fraud or because resources are being put into tackling it, or is the problem wider and more systemic? Are there particular problems within HMRC? Are the budget cuts affecting HMRC causing particular difficulties and a decline in the quality of service? I am afraid that that is the perception of business.

No doubt we will hear evidence of improvements in tackling MTIC fraud. Those improvements might be overdue, but none the less they are welcome. However, the issue will continue to be of concern, and a regular report, as proposed in new clause 3, would enable us to scrutinise such matters in a well-informed manner.

I turn more briefly to clause 97 and the two amendments relating to it. The clause will amend the joint and several liability provisions applicable to traders who know or have reasonable grounds to suspect that VAT will go unpaid elsewhere in a supply chain. Currently, those provisions apply to a narrow range of products, such as mobile phones, computers and certain other electronic goods and their accessories. The clause will give powers to the Treasury to make orders to extend those into other areas. I assume that the rationale for that is the danger, if not the likelihood, that MTIC fraud will mutate away from those goods, with which traditionally it has been associated, and into other areas.

I am sure that the Financial Secretary will elaborate on that in due course. If that is the reason, how adequate is the reverse charge derogation? At the very least, it suggests that it will be necessary to return to Brussels in a couple of years to seek an extension. Given that we have already had to narrow the scope of our derogation, that throws the difficulties created by that narrowing into sharp focus.

I want confirmation that the Government do not perceive any risk of the legislation falling foul of VAT directives as being disproportionate and therefore ineffective, which is how they were found to be acting in the bondholder case when the European Court of Justice found against them. I seek confirmation that there are no concerns on that point.

Amendment No. 251 would address the concern that provisions made under the clause may be retrospective to some extent. Any supplies made after the date on which the order comes into effect should be affected by the provisions. I presume that the Financial Secretary will say that that would weaken their effectiveness, and I will certainly listen to his argument before deciding whether to press the amendment to a Division, but we are not dealing with persons involved in fraudulent behaviour and we should always be wary of retrospective legislation.

Amendment No. 252 would require an affirmative resolution in the event of the Treasury seeking to extend its powers in these areas. The original provisions under section 77A of the Value Added Tax Act 1994 were debated at length in the 2003 Finance Bill. I believe that the hon. Member for Wolverhampton, South-West was a member of the Standing Committee that considered that Bill, as was the Financial Secretary. They may recall a lengthy debate on that point.

The provision essentially imposes VAT on people who would not otherwise be liable. There may be good reasons for that, but the imposition of tax has rightly and traditionally been seen to be a matter for Parliament and not the Executive. I recognise the arguments for some flexibility for the Government in these circumstances, but parliamentary scrutiny is important and I seek recognition from the Financial Secretary that there will be adequate opportunity for Parliament to scrutinise any extension of the provisions that were debated at length in 2003.

My final point was raised by the Institute of Indirect Taxation. Under existing section 77A of the Value Added Tax Act 1994, a person could reject the assessment that he had reasonable grounds for thinking that a transaction was not suspicious because of the low price if he could prove that the low price payable for the goods was due to circumstances unconnected with the failure to pay VAT. The provision that we are debating would enable that presumption to be scrapped, so that even if someone could prove that the low price was entirely unrelated to MTIC—“prove” is a fairly high hurdle—there would still be grounds for thinking that MTIC fraud had occurred simply because of the low price, whatever the circumstances. Does the Treasury have it in mind to remove that presumption?

My introductory speech from this Bench has been rather lengthy, but I have raised a number of important points. MTIC fraud costs this country a great deal of money and is evolving. All parties want to address it, but if we are to do so sensibly, it would be useful for the House to be better informed, and new clause three would serve a valuable purpose.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

It is a pleasure to welcome you to the Chair, Mr. Gale. It is also a great pleasure to welcome the hon. Member for South-West Hertfordshire to the Opposition Front Bench. I am sure that he enjoyed making his first speech and that it will be the first of many; perhaps not on this Finance Bill but on next year’s if he is not promoted again in the meantime.

In yesterday’s First Delegated Legislation Committee considering the VAT (Payments on Account) (Amendment) Order 2007 and the Value Added Tax (Administration, Collection and Enforcement) Order 2007, there was unanimity about the need to tackle the problem of MTIC, so there is support on both sides of the House for the intention of tackling it. However, I have a great deal of sympathy with the amendments tabled by the hon. Gentleman and his colleagues. It seems reasonable to request a positive resolution procedure, given that it is important for hon. Members to be aware of how that fraud might be evolving and the flexible approach that the Government and HMRC will therefore have to take in tackling it. We have heard about how it might change to involve different products and about the implications that that might have for EU derogations. In addition, the legislation that we have passed and will pass will impact on how the fraud might change.

I am bearing in mind your comments about the timetable this morning, Mr. Gale, so I will keep my remarks brief. There is a great deal of sympathy with new clause 3. Given that the scale of the problem is so significant, it is important that there should be transparency and honesty from the Government. There is a need to restore public confidence that the problem will be tackled. It is important for the Government to demonstrate the impact that the new system of reverse charging will have. Producing a regular report, not necessarily quarterly, would help to keep people up to date with how the situation is or is not improving.

I have a few questions that relate to issues already raised by the hon. Member for South-West Hertfordshire. Concerns have been expressed about whether HMRC is best placed to determine whether taxpayers should or should not have known that tax would go unpaid. Is the implication that many businesses will seek pre-approval from HMRC for every transaction? If so, given that there have been reports of time scales of more than 12 weeks to decide whether to register a taxpayer, will businesses be expected to wait that long to know whether registration will be approved or denied for each transaction?

The Chartered Institute of Taxation believes that a solution to the problem would be real-time checking of specified transactions. I would appreciate the Financial Secretary’s comments on how realistic he thinks that might be and on the potential benefits or pitfalls. The key concern, which I raised yesterday, is that there is significant abuse, which needs to be tackled. We learned yesterday that probably hundreds rather than thousands of businesses are abusing the existing loophole. However, there is a concern that innocent businesses will have to take on the burden, while those abusing the system will either not comply or find ways of getting around the system.

There are concerns that the proposals before us and those that have just been implemented will generate new types of abuse. I seek reassurance from the Financial Secretary that the Treasury and HMRC are alive to the fact that MTIC is a rapidly evolving type of abuse. I appreciate the efforts being made to respond to the abuses, but what efforts will HMRC and the Treasury undertake to be alive to such changes and to ensure that any potential new loopholes or abuses are identified and closed down as quickly as possible?

I raised yesterday the issue of the amount of officer time dedicated to MTIC and I received a partial response from the Financial Secretary. Can he tell us the number of officials, in full-time equivalent terms, who are currently dedicated to tackling MTIC and the number of officials who are working on the introduction of this proposal? He talked about redeployment yesterday, but it is important to know exactly where we are now.

Brooks Newmark (Conservative, Braintree)

I, too, welcome you back to the Chair, Mr. Gale, and I congratulate my hon. Friend the Member for South-West Hertfordshire, who has been with me—painfully—both on the Treasury Committee and on this Committee for some time. He certainly deserves his promotion.

May I begin by thanking the Financial Secretary for his courtesy in having written to the Committee in some detail on the Government’s strategy for tackling MTIC fraud? Carousel fraud is clearly a significant problem. The Government take seriously their duty to deal with it robustly in order to protect the Exchequer. Let me make it clear that if I am critical of the Government’s strategy, it is because there have been significant problems in the way in which that strategy has been implemented, not because I challenge the principle of confronting fraud.

In his letter to the Committee, the Financial Secretary wrote that the Government’s stance on the issue was founded on the need to

“ensure that HMRC’s operational strategy is able to respond swiftly and flexibly to future mutations in MTIC fraud.”

That must be the right approach. There is, indeed, a frantic evolutionary process involving fraudsters and revenue inspectors. In its report on the Budget, the Treasury Select Committee expressed its expectation that the Government should remain vigilant in guarding against new methods of intra-community fraud. If the order-making powers in clause 97 give the Treasury and HMRC greater flexibility in support of that vigilance, they should be welcomed, although unbridled flexibility is no good thing.

I am not convinced, however, that the powers will do anything much to improve how swiftly HMRC can adapt or act. I do not know how many members of the Committee have come across MTIC fraud in the course of their constituency casework. Unfortunately, I have. As a result, I believe that there are significant flaws in HMRC’s capacity to handle the kind of investigation that it is undertaking and that no new order-making powers should be conferred on the Treasury for the purposes of tackling MTIC fraud until that capacity is first expanded and then proven in practice.

Let me share with the Committee the essentials of the case that I was presented with. My constituent’s company supplied mobile phones; it had exports totalling £60 million in 2006. It waited from May 2006 until January 2007 for a VAT repayment claim of £6.7 million to be met, while “extended verification” procedures were carried out on its supply chain. That wait did not have a happy outcome, because on 17 January it went into administration due to the substantial dent in operating cash flow represented by that £6.7 million, which is a substantial sum for a company with £60 million turnover.

I wrote to the Paymaster General and she gave me a very gracious answer. However, she said that she could not comment on the individual case because of the confidentiality issues raised by the involvement of administrators. My letter was dated 15 January, and not even the most efficient private office, which I am sure she has, could have turned around a response in two days. In fact, by some fortuitous accident of the postal system, my original letter was returned to me, and I see that it was not logged for answer until long after the company had gone into administration. Unfortunately, as a result, I have had no explanation as to why it took 10 months for HMRC to investigate that company and why it was allowed to go to the wall during that time. Nor, I strongly suspect, will I ever find out the outcome of that investigation. In the absence of any indication to the contrary from HMRC, I must conclude that an honest company went out of business as a direct result of HMRC’s investigation.

I shall not give the Committee any further details of the company, or its troubles, but I believe that this example is illustrative of the serious delays that can occur while the Revenue is investigating VAT claims.

Sally Keeble (Labour, Northampton North)

If the hon. Gentleman claims that this problem was caused by maladministration, he should take the matter to the ombudsman; it is not connected to this legislation. I have done a similar thing with a company, and the ombudsman will examine such issues if there is maladministration. However, the matter has nothing at all to do with the legislation.

Roger Gale (Conservative, North Thanet)

Order. Forgive me, but the Chairman will decide whether something is in order or not.

Brooks Newmark (Conservative, Braintree)

If the hon. Lady was listening at the beginning of my speech, she will know that I was saying that there was a serious capacity issue in dealing with problems like this one. The point that I am trying to make is that, although I and other Opposition Members take MTIC fraud seriously, the fact is that there may not be the capacity to deal with companies such as this one, which have been victims of a delay and unfortunately then go into administration, when I believe that there was no deceit or intent on their part to defraud the Revenue. That was the point that I was trying to make. The point is relevant to clause 97 because it seems that the order-making powers could significantly increase the competence of HMRC to pursue new and more elaborate forms of MTIC fraud. To me, that implies the need for an increase in work load, which must be met by increased capacity and an attendant increase in resources.

Will the Financial Secretary give me some reassurance that a 10-month wait during an HMRC investigation is atypical? The Chartered Institute of Taxation is of the opinion that investigations routinely last in excess of 12 weeks. Is that figure accurate? Will the Financial Secretary further commit to ensuring that, in future, HMRC is equipped with the necessary resources to conduct investigations in as timely a manner as possible?

In a letter regarding my constituent’s case from the acting chairman of HMRC, which was written in December 2006, the acting chairman said that 600 extra staff had been redeployed to cope with the burden of checking VAT claims. Just two months later, the Paymaster General told me that that figure had risen to 700. Can the Financial Secretary tell me whether that figure is expected to continue escalating and, if so, what will be the effect of any new orders that are expected to be made under clause 97?

I want to touch briefly on one or two of the wider issues raised my constituent’s experience. It is the Financial Secretary’s contention that, when it comes to carousel fraud, black is black and white is white. He believes that one is either a knowing participant in an utterly contrived and fraudulent arrangement, or one is an innocent buffer who is not a party to such an arrangement. More specifically, in his briefing— underlined for emphasis—he said:

“It is difficult to see how any trader operating in a carousel supply chain can be unaware of the fraud, or not suspicious of the trading patterns and practices encountered.”

I agree with that. However, when the Financial Secretary replies, can he set out the process of augury by which an innocent buffer is differentiated from a knowing fraudster?

The Government have taken their lead from the European Court on the test that ought to be applied for judging participation in MTIC fraud, which is that a participant must either have known, or should have known, of the fraud. However, unlike my hon. Friend the Member for Rayleigh, I am not so enthusiastic about all things European that I anticipate the need to leave the Committee in order to pursue my interest. So I would like the Government to look again at whether the question of those who are involved, uninvolved or potentially involved in MTIC fraud is really cut and dry.

More specifically, I would like to ask the Financial Secretary a simple question: if involvement in MTIC fraud is so blindingly obvious when it occurs, why is there the need for a 10-month investigation into a company that is accused of it? If it is blindingly obvious who is guilty and who is not, why did the House of Lords Economic Affairs Committee feel the need to report last year that

“we recall that we expressed our own misgivings, in the light of the evidence given to us in 2003, that safeguards for the innocent trader caught up in a MTIC fraud-tainted supply chain needed strengthening”?

My final point—

Rob Marris (Labour, Wolverhampton South West)

Hear, hear.

Brooks Newmark (Conservative, Braintree)

Perhaps the hon. Gentleman would like me to go on?

My final point is about the question of proportionality. The Financial Secretary’s briefing states—this time the words are in bold—that

“interventions are closely targeted at the criminals who orchestrate, and the participants within, suspect supply chains.”

I hope that I have quoted the extracts to which he wished to draw my attention, but there must be a high incidence of MTIC fraud, indeed, if closely targeted interventions require the attention of upwards of 700 HMRC officers and still take 10 months to run their course.

In my letter to the Paymaster General on my constituent’s behalf, I questioned whether the balance between revenue protection and the burden placed on business was correctly struck. I would do a disservice to the Financial Secretary if I expected him to comment on that specific case, because he does not have any of the details in front of him and he would not be able to commit himself even if they were available to him. However, I hope that he is mindful of an old Blackstone’s maxim that

“the law holds, that it is better that ten guilty persons escape, than that one innocent suffer.”

Perhaps when the Financial Secretary replies he will be able to provide a commitment that the Government will continue to assess the proportionality of their stance on MTIC fraud, and a guarantee that future orders made by the Treasury under clause 97 will neither further erode the principles of proportionality nor blur the sharp distinction between the innocent and the guilty in which he puts such faith at present.

Roger Gale (Conservative, North Thanet)

It has already been noted that the Financial Secretary very courteously circulated both the letter and an extremely complicated but comprehensive and comprehendible briefing note about carousel fraud, which is clearly a very important issue arising from the Bill under discussion. I have quite deliberately allowed hon. Members a certain amount of leeway in the discussion, because that briefing note—I suppose this is one disadvantage of circulating a briefing note—has obviously generated further queries. Having been lenient with hon. Members making contributions up until now, I propose to be equally lenient with the Financial Secretary if he wishes to place things on the record.

John Healey (Labour, Wentworth)

I welcome you to the Chair, Mr. Gale, and thank you for that guidance. We have had a very wide debate on what is a very narrow clause. I shall do my best to deal with the most relevant points that have been put, but I do not intend to test your patience by straying beyond your judgment about what is in order in this debate.

I say to the hon. Members for Braintree and for Falmouth and Camborne that we remain extremely vigilant about such fraud, as the Select Committee on the Treasury and the hon. Member for Braintree urged us to be. As the hon. Member for Falmouth and Camborne urged, we remain alive to the fact that it is a rapidly evolving and highly sophisticated international criminal activity whose networks constantly change their methods and tactics. It requires HMRC officers to undertake some of the most effective and skilled work of anywhere in the Department, and I pay tribute to them and their work. I hope that the briefing that I sent to the hon. Lady and to other hon. Members underlines the point that we are alive to the fact that the situation is constantly changing. It is the underlying reason for introducing the clause, which is one of a range of measures—in this case, a rather narrow measure—that are necessary to try to deal with the problem.

The hon. Lady asked me a couple of direct questions. I do not expect traders to seek pre-approval for transactions. The legislation that the measure amends does not and has not worked in that way since it was introduced in 2003. I should like to put matters in perspective. The provisions on joint and several liability are used when HMRC identifies a company that has traded in a supply chain that has involved MTIC fraud. In those circumstances, HMRC notifies the company, in writing, that it might face an increased risk of being made liable for VAT debts elsewhere in the supply chain.

Hundreds of those warning letters are issued and, in many cases, they deter the sort of activity that HMRC is concerned about, such as people turning a blind eye to suspect trading patterns or practices. That is proved by the small number of cases—the number is in single figures—in which HMRC has gone on to issue formal notification letters. It has gone on to issue notices of liability in only four cases. That is largely because of the deterrent effect of the warning letters.

That is how the original legislation was designed to work; the clause provides for making minor adjustments to that legislation. I want all that to be in perspective when we consider the clause. Any trader who is not satisfied with a decision taken in HMRC’s verification process can challenge it at a VAT and duties tribunal. To date, however, the courts have fully supported HMRC’s approach in that regard.

The hon. Member for Falmouth and Camborne asked about the real-time checking of transactions. Generally, the Government are prepared to consider any proposals or suggestions that might help us to tackle this fraud, but we must be conscious of the implications of putting burdens on business in doing so, and of the complexities for HMRC of managing any regime.

Real-time checking is likely to be extremely difficult, for reasons that are self-evident, such as the volumeof VAT transactions. Some 1.9 million traders are registered for VAT, and about £130 billion of VAT goes through the system. MTIC is not just about checking a particular transaction. A challenge that we face, because of the artificiality, and often the complexity and length, of supply chains, is that we have to check the entire supply chain to determine the link between the first defaulting trader and others. On first sight, therefore, real-time checking does not seem to be a terribly plausible solution, although we are prepared to consider it.

I address my next comments to the hon. Member for Braintree. I appreciate that he speaks with some passion about his constituent’s case, and I shall look into it. If there is more information on that case that I can encourage HMRC to give him, I shall certainly do so.

Brooks Newmark (Conservative, Braintree)

I appreciate the courtesy with which the Financial Secretary is trying to deal with the issue, but the bottom line—the sad fact—is that the company went out of business while the individual waited for 10 months for this serious issue to be dealt with. That is the point that I was trying to make.

John Healey (Labour, Wentworth)

The point that I was about to make relates directly to that concern. MTIC fraud and fraudsters have created increasingly complex and sophisticated transaction chains to disguise and allow the stealing of VAT from the public purse. They are characterised by some of the most opaque trading practices that HMRC comes across. To try to get to the bottom of this and stop it, there is a duty to check such transaction chains, which often include international links and therefore require the involvement of international HMRC-equivalent agencies. Given the complexity involved, it is not surprising that the process of focusing on the trading patterns or traders that we suspect are most at risk can take some time. It is also not surprising that the courts have consistently supported our approach to verification, including in cases for which it has taken up to 12 months to complete the verification checks.

I welcome the hon. Member for South-West Hertfordshire to the Front Bench. On our side, some are disappointed that the job did not go to the hon. Member for Braintree.

Brooks Newmark (Conservative, Braintree)

It went to the right person.

John Healey (Labour, Wentworth)

Indeed. The hon. Member for South-West Hertfordshire has for some time served with great diligence on Treasury issues from the Back Bench. I am sure that he can look forward to a successful and long career on the Opposition Front Bench, and I look forward with interest to watching him.

The hon. Gentleman dwelt for some time on the question of reverse charge, which is not related at all to clause 97. It is disappointing that he did not make his debut in a Statutory Instrument Committee yesterday, when the hon. Members for Falmouth and Camborne and for Wycombe and I dealt with the arrangements for reverse charge and the modifications of them. Nevertheless, before I turn to the clause, let me try to deal with some of the much wider questions that the hon. Member for South-West Hertfordshire posed.

The hon. Gentleman and other hon. Members are rightly concerned about potential burdens on business resulting from the compliance and assurance activity that is necessary to deal with MTIC fraud. We start from the recognition that the vast majority of British businesses are not involved in MTIC fraud and are doing their best to comply with the tax rules. Therefore, we do whatever we can to focus as tightly as possible on those that are behind the MTIC fraud chains and that choose to participate in and profit from the associated trading activity.

The hon. Gentleman helpfully cited the extended verification procedures. I want to stress some figures that we have, because they underline the fact that we do whatever we can to ensure that the most intense activity is focused on the highest risk, where the greatest incidence of fraud takes place. So far, of the case load that HMRC has undertaken on extended verification, it found that over 19 out of 20 traders that it targeted have been participating in or profiting from trading that is linked to MTIC fraud. To put that another way, only 1 per cent. of the VAT that has been withheld so far under the verification programme has been found in the end to be correctly claimed and properly repayable.

How many staff are involved? Just over 1,500 staff are involved in dealing with MTIC and VAT fraud. How many traders are affected? Only a tiny fraction of the 1.9 million traders are affected by any of the extended verification procedures, precisely because we go to great lengths to ensure that the action that we take is as targeted and as focused as possible.

Adam Afriyie (Conservative, Windsor)

May I press the Minister a little further on how many traders are affected? He said that it is a tiny percentage, but how many, broadly speaking?

John Healey (Labour, Wentworth)

I do not have a precise number, and it is quite difficult to give one for the particular traders that are at any time subject to the extended verification procedures. However, I hope that I have made two things clear. First, the action that we are taking is closely targeted, particularly in relation to joint and several liability. Secondly, I hope that the figures that I gave earlier show that we are dealing with a relatively small minority of the large population of VAT-registered traders—nearly 2 million—the majority of whom do their best to comply with the tax rules, and trade legitimately and pay their tax as it is due.

The hon. Member for South-West Hertfordshire talked about delays in VAT registrations. I should like to give him some sense of scale: there are almost 300,000 new VAT registrations every year. Clearly, HMRC aims to process those registrations as quickly and efficiently as possible. In order to do so, and given the evidence that the Treasury Committee took, to which he referred, HMRC has taken steps to streamline that process, particularly by targeting its pre-registration checking in order to speed things up.

So far, the outcome of those steps has been that more people are getting their applications right first time because of the improved application form and guidance. A year ago, that number was under 30 per cent., whereas it is now more than 70 per cent. Better targeting of the procedures for identifying risk has meant that about 95 per cent. of applications are now cleared for registration after the initial check. The average time that it takes to process those applications is less than 30 days.

The hon. Gentleman asked about the costs of the changes in the past year to the derogation on the reverse charge. The short answer is that they are minimal. The new de minimis limit is sufficient to deter the fraud that we seek to stop. The reduction in the scope of the goods is also needed. It concentrates on computer chips and mobile phones—the two principal products on which the bulk of MTIC fraud is perpetrated. The provisions in the clause for extending joint and several liability sit precisely alongside the reverse charge that is focused on those two products.

On the two-year lifespan of the derogation, I think that it is a good principle not to have legislation on the statute books indefinitely, and to review whether it is still needed. If, toward the end of the two-year derogation, we decide that we still need it, we will certainly apply to extend it. The hon. Gentleman might like to know—we discussed this yesterday—that one of the Government’s obligations under the derogation is to report to the European Commission, by 31 March 2009, on the impact of our reverse charge derogation, including on its impact on this type of fraud in other countries.

Finally, the hon. Gentleman asked whether the joint and several liability legislation is contrary to the EU directive. It is not. The European Court of Justice ruled, in a recent case, that UK legislation complies with the directive and is proportionate.

Let me now address clause 97 and the provisions on joint and several liability. The clause introduces a power to amend the provisions that apply to traders that know or have reasonable grounds to suspect that VAT will go unpaid elsewhere in the supply chain. The Committee is aware that the operational strategy and the range of measures that we have put in place have greatly reduced the level of trading activity that has in recent times been associated with MTIC fraud.

The hon. Gentleman mentioned the ONS trading figures, which are produced monthly. Those trading estimates suggest that MTIC-related activity, particularly of the carousel type, over the summer last year was around 90 per cent. lower than in the latter end of 2005 and the early part of 2006. The Committee will also appreciate, because it has been discussed at length alongside the proposal to allow the extension of the joint and several liability provisions, that we have introduced a reverse charge. That is a significant triumph on the part of my right hon. Friend the Paymaster General after a year’s hard negotiation, and it is an important provision for this country.

Currently, under the Finance Act 2003, HMRC can direct that another person in the supply chain other than the seller is responsible for accounting for the VAT payable, if that person knew or had reasonable grounds to suspect that it would go unpaid. That presumption is rebuttable on proof that the price reduction is due to circumstances that are unconnected with the tax being unpaid. The new power in clause 97 will allow us to change the circumstances under which a person can be presumed to know that the tax will go unpaid. Any such change would also include a provision to lay down how the presumption can be rebutted.

I shall now deal with the new clause, then with the two amendments. The hon. Member for South-West Hertfordshire said that parliamentary scrutiny in this area is important. He is right. However, new clause 3 will not add much to the scrutiny by Parliament and is not necessary. I shall explain why. Parliament leads well established reporting and scrutiny arrangements looking at MTIC, which is the right thing to do, given the importance and scale of the problem that we face. The National Audit Office audits HMRC activities every year and, for the past two years, its section 2 audit work has specifically included a look at MTIC VAT fraud. The NAO’s work is overseen by the Public Accounts Committee, which reported on the NAO’s findings in its 2005 standard report. The NAO was subject to a PAC hearing in January this year and we expect a PAC report on this area shortly.

The House of Lords, as the hon. Gentleman has recognised, recently concluded and reported on an inquiry into missing trader fraud in the European Union. He will know that the Treasury Committee, particularly the Sub-Committee that oversees HMRC’s work, scrutinises its operational activities and measures in this area. HMRC publishes a spring report and an annual report, both of which deal with and update activities in relation to MTIC and are laid before the Libraries of the House. Normally—it was the case with the spring report—those reports are subject to a Treasury Committee hearing.

Generally, every year alongside the pre-Budget report, HMRC produces a report on its latest measurements of indirect tax losses, including on VAT and MTIC. The ONS also produces national statistics each month, which include estimates of the effect of carousel trading on the UK’s balance of payments. In addition to all that information—that regular scrutiny—Members of Parliament can and do ask parliamentary questions to probe further. I hope that the briefing that I have supplied to Committee members, and to others who are interested, has been helpful. I have placed that briefing in the Libraries of both Houses.

We already have a significant amount of regular reporting and scrutiny. If the hon. Gentleman is still concerned that Parliament is not paying sufficient attention to this matter, I think the answer is more to step up the scrutiny and cross-examination of what HMRC is doing rather than looking for a greater frequency of figures.

With VAT, there is a problem with quarterly reports, for example. Returns and payments of VAT are generally submitted quarterly, but the return dates are staggered so that a proportion is received each month. The returns are also subject to verification checks, which means, in part, that we can check whether MTIC is suspected. I do not believe that quarterly reports of this nature would add to the useful information that is available to Parliament. If the hon. Gentleman feels that they would, despite the extensive scrutiny in this field, that is a question for the bodies in Parliament. I remind the Committee that the UK remains the only EU country that produces annual estimates of MTIC fraud. As I have said, we publish them each year alongside the pre-Budget report. I hope that the hon. Gentleman will not press his new clause to a vote.

I can deal with amendment No. 251 quite briefly. As the hon. Gentleman explains, it tries to ensure that the new power cannot be applied retrospectively. I understand his concern, but the amendment is not necessary because any order exercising that power can be applied retrospectively only if the power, in this case proposed new subsection (9A), made it clear that there was provision for it to be applied retrospectively. Since proposed new subsection (9A) does not, it cannot.

Let me turn now to amendment No. 252. It is not clear what the hon. Gentleman seeks to do and whether the amendment is intended to refer to the existing power, the new power or both in changing the procedure from negative to positive. The way in which the amendment is drafted means that it would be defective.

The existing power is to amend the scope of the joint and several liability provision by altering the goods to which it applies. Incidentally, we have just used that power; it came into effect from 1 May. That extension passed almost without comment and no hon. Member prayed against the use of that power to extend the goods to include iPods, digital camcorders and so on. The new order-making power does not allow fundamental changes. It is about the burden of proof, not about creating a VAT liability that would not otherwise be there. Nevertheless, there is a case for considering whether it is right to stick to the approach that was set out in the 2003 legislation. There is an argument that the provisions might be better scrutinised where the order-making powers are invoked by positive rather than negative resolution procedure.

As hon. Members will know, I have always been inclined to use the positive order-making procedure where appropriate rather than the negative procedure. I have always believed that it is important that Parliament has a stronger position and power to scrutinise the decisions and legislation of the Executive. I am prepared to consider tabling an amendment on Report to make the sort of change that I think that the hon. Gentleman is arguing for—although it was not entirely clear what he is after.

I hope that that will be welcomed and will help the hon. Gentleman to believe that he does not need to press his amendments or his new clause to a vote. I warn him—this is his first outing on the Finance Bill on the shadow Treasury Front Bench—that he will not find progress as easy in future.

David Gauke (Conservative, South West Hertfordshire)

I thank the Financial Secretary for his generosity. On the point that he just made about positive resolution, I do not expect such generosity to be repeated regularly but I am grateful for it on this occasion.

We have had a broad and wide-ranging debate—[Interruption.]

Roger Gale (Conservative, North Thanet)

Order. The hon. Member for Surrey Heath (Michael Gove) is not a member of the Committee. He must leave the area of the Committee Room reserved for Committee members.

David Gauke (Conservative, South West Hertfordshire)

As I said, we have had a broad and wide-ranging debate, thanks both to your guidance, Mr. Gale, and to the fact that new clause 3 would address many aspects of MTIC fraud. As I have suggested, any such report under new clause 3 would have to address a wide range of issues, and the Financial Secretary manfully attempted to address many of them in his remarks. However, I think that it will be found that there were a number of questions that, quite understandably, he was unable to answer this morning.

The Financial Secretary commented on the amount of MTIC fraud scrutiny that we have, and I fully take on board the fact that Parliament performs considerable scrutiny through the Public Accounts Committee, with the assistance of the National Audit Office; the House of Lords reports to which I referred; and the Treasury Committee, of which I was a member until recently.

The new clause would assist in such scrutiny, because although the information may well be available in ad hoc or informal documents such as the briefing that was released earlier this year, in HMRC’s annual reports or in ONS statistics, it would be helpful to place it in one document. For that reason, I am inclined to press for a vote on new clause 3. I am grateful for the clarification on amendment No. 251, which I shall withdraw, and in particular for the clarification on amendment No. 252. The Financial Secretary’s comments are very much appreciated. I beg to ask leave to withdraw the amendment.

Clause 98

David Gauke (Conservative, South West Hertfordshire)

The purpose of the clause is to restrict adjustments for input VAT when an asset is used partly for business purposes. HMRC has explained that the plan is to restrict adjustments to a 10-year period, according to Budget notice 56. However, the regulations do not limit the power in that way. Is there a particular reason why? Is it still the Government’s intention that the power should be restricted to adjustments over a 10-year period?

John Healey (Labour, Wentworth)

It is the Government’s intention simply that the clause brings the Lennartz accounting period into line with the capital goods scheme. At the same time, it implements the European Court of Justice’s judgment in the Wollny case. We intend the regulations to come into effect on 1 September. We have welcomed and discussed all interested parties’ comments on the matter, and particularly on transitional rules and retrospection, and we have been able to assure them about both points. I hope that the Committee will allow the clause to stand part of the Bill.

Clause 99

David Gauke (Conservative, South West Hertfordshire)

The clause relates to circumstances in which a business is transferred as a going concern, and it amends the VAT Act 1994 in which the transferor retains records. In the debate last year about section 21 of the Finance Act 2006, we considered the issue of records, again for the purposes of tackling MTIC fraud. The Paymaster General made it clear that the burden of additional record keeping would apply only to fraud matters, and that the power should be used specifically to tackle large-scale fraud such as MTIC fraud. She also said that it was impractical to try to limit the scope of the measure with the legal definition of MTIC, but that was none the less the purpose. Does the same thinking apply to clause 99? Will the Financial Secretary confirm that the Paymaster General’s undertaking regarding section 21 of the 2006 Act has been followed through?

John Healey (Labour, Wentworth)

The clause is not connected with MTIC fraud; it is a simplification measure. It has been requested by business, it will be welcomed by business and it will benefit about 50,000 transfers of going concerns, 99 per cent. of which are among small concerns.

Clause 101

Paul Goodman (Conservative, Wycombe)

It is a pleasure to see you in the Chair, Mr. Gale. We now come to three clauses that deal largely with the effects of petroleum revenue tax on—

(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 101

Paul Goodman (Conservative, Wycombe)

Before lunch, I was about to say a few words about the clause. I am tempted simply to ask the Economic Secretary what it means and sit down—

Rob Marris (Labour, Wolverhampton South West)

It is all in the notes.

Paul Goodman (Conservative, Wycombe)

As the hon. Gentleman says, it is all in the notes. I was simply going to observe, given the Committee’s inexhaustible appetite for information, that the clauses dealing with petroleum revenue tax are relatively uncontentious. They implement a commitment that the Government made in last year’s pre-Budget report to even up some discrepancies in petroleum revenue taxation. We understand that the clauses are welcomed by the industry, and nothing has been raised with us. I have no further questions or points to raise.

Rob Marris (Labour, Wolverhampton South West)

Clauses 101 and 102 go together. I want to ask my hon. Friend the Economic Secretary—he may need to write to me, because we are pressed for time—whether the clauses on petroleum tax will have an effect on carbon capture and storage, because in the North sea, the old oilfields, the use of which has been discontinued, may well be used as a repository for carbon dioxide to be pumped and stored there for ever.

Edward Balls (Labour, Normanton)

It is a pleasure to serve under your chairmanship again, Mr. Gale. I add my congratulations to those expressed earlier on the promotion of the hon. Member for South-West Hertfordshire. My hon. Friend the Financial Secretary is the Minister responsible for oil and gas industry issues in the Treasury, but he is currently in the Chamber, about to speak on another matter, so I have taken it on myself to answer and to lead the debate in his absence.

As the hon. Member for Wycombe said, the measure was first announced in the 2006 pre-Budget report and will remedy a problem that arose during discussions between the Government and the industry on the wider strategic issues facing the North sea fiscal regime by providing for the removal of petroleum revenue tax from oil and gas fields where full decommissioning has been completed—that is, all infrastructure has been removed and the fields in effect have been returned to bare seabed—and the fields are subsequently redeveloped.

Under current legislation, if a field on which PRT was chargeable was fully decommissioned and later recommissioned, it could still be liable to PRT. However, the challenge of redeveloping a previously decommissioned field is closest in appearance to the challenge of developing a completely new field. I am referring to fields on untouched seabed, which are not liable to PRT; it was abolished for new fields in 1993. Therefore, it is arguable that there is a disincentive to recommission old fields. Clause 101 is designed to remedy that anomaly and create a level playing field between old decommissioned fields and new fields. As the hon. Gentleman said, the change has been welcomed by the industry following consultation.

My hon. Friend the Member for Wolverhampton, South-West raised the issue of carbon capture and storage. As he will know, new technologies can potentially be used to extract carbon dioxide from gas or coal during the energy production process. Therefore, it will be possible to deliver carbon free, or substantially reduced carbon, electricity from coal and gas and for those carbon dioxide gases to be taken away and stored.

One option is to store those gases in previously used oilfields in the North sea. The Government are considering how to encourage and develop those technologies. My assumption, though, is that if one of those fields is subsequently to be used for such a practice, it would come under a different tax regime to the one that would be applied here. In this instance, we are trying to ensure that it is tax free for the development of new petroleum oil production. If an incentive was needed to encourage gas fields to be used subsequently, a different tax regime would be required. We are currently looking at the nature of incentives that might be needed and the legislative base within which that could occur.

I am very happy to keep my hon. Friend and the House informed of any developments. The Financial Secretary may be able to provide more details on that. The policy area is at an early stage. Her Majesty’s Revenue and Customs is considering what the legislative and tax framework would be. While the clause corrects the anomaly, it would not make it more difficult for us to use those fields for carbon capture storage in future. On that basis, I commend the clause to the Committee.

Schedule 25

Edward Balls (Labour, Normanton)

I beg to move amendment No. 240, in schedule 25, page 275, line 41, leave out ‘charitable purposes only’ and insert

‘a purpose other than that of private gain (within the meaning of the Gambling Act 2005)’.

Clause 104 introduces schedule 25, which provides for amendments to tax legislation as a consequence of, or in connection with, the Gambling Act 2005. When it is fully implemented, the 2005 Act will repeal most of the legislation that provides the regulatory framework for gambling in the UK.

Schedule 25 is divided into six parts. Part 1 provides amendments to the 2005 Act which will preserve the income and corporation tax exemptions that are currently enjoyed by certain charitable lotteries. Part 2 provides for amendments to the Act to be made in respect to general betting and bingo duties. Parts 3 and 4 provide for amendments to lottery and gaming duties. Part 5 deals with other miscellaneous amendments to the Act in relation to bookmakers’ permits and the definition of a “revenue trader”. Part 6 makes commencement provisions for those amendments.

Amendment No. 240 modifies the scope of the exemption to gaming duty that is provided by paragraph 17. It ensures that gaming duty is not charged on gaming when players’ payments are put to a purpose other than for private gain. That very minor change maintains the policy intent of the current legislation and is slightly less restrictive than the exemption in paragraph 17 which would apply when the proceeds of the gaming are used for charitable purposes only. Therefore, I commend the amendment and the schedule to the Committee.

Clause 105

Paul Goodman (Conservative, Wycombe)

The debate on this clause was prefigured in the debate on clause 11, which the Economic Secretary may remember. That was about vehicle excise duty in relation to non-working vehicles used by people in rural or remote rural areas. This clause concerns working vehicles. As the Financial Secretary reminded us in the debate on clause 11, agricultural vehicles are currently exempt from vehicle excise duty. That inevitably raises the question of when, if at all, a working vehicle becomes a non-working vehicle, and vice versa.

The point was raised on clause 11 by my hon. Friend the Member for Ludlow, who may have a word or two to say about it in a moment. He said:

“My understanding is that previously it”—

the exemption—

“applied to tractors and other very heavy equipment, and the proposed exemption would extend it to 4x4-type vehicles.”

The Financial Secretary replied:

“The sort of detailed discussion that the hon. Gentleman is tempting me to have on this clause is better stayed until we reach clause 105.”——[Official Report, Finance Public Bill Committee, 10 May 2007; c. 99.]

Now we are here, and I hope that we can have the detailed discussion, because were I in a meeting with my local branch of the National Farmers Union, I am sure that its members would be able to provide me with an exhaustive list of circumstances in which 4x4s and other vehicles that might at first sight appear to be non-working vehicles are, in fact, working vehicles. I think that that was the point that my hon. Friend was getting at.

The clause is clearly in the Bill for a purpose. It provides circumstances in which further categories of vehicles can be exempted. Is it the Government’s intention to introduce measures exempting further classes of vehicles fairly soon? Can the Economic Secretary provide us with a time scale? With reference to the detailed discussion, can he suggest how the Government’s thinking on the matter is developing, and whether 4x4s might fall into the relevant category? Finally, will we be able to have a debate about the matter by way of statutory instrument? Will the affirmative rather than the negative procedure be used?

Philip Dunne (Conservative, Ludlow)

I am pleased that my hon. Friend has reminded the Committee of our debate on clause 11. I could not allow our proceedings to draw to a close without an opportunity to remind members of my entry in the Register of Members’ Interests, which is in connection with agriculture.

I raised with the Financial Secretary, more in hope than expectation, the question of whether the clause could be used to extend vehicle excise duty relief for agricultural vehicles used solely for the purpose of agriculture, forestry and horticulture. He did not give my hopes much succour, and it is a great shame that he is not here to respond, but I have looked in more detail at the explanatory notes and accept that the aim is to give the Secretary of State flexibility and discretion to redefine tractors and vehicles used for the purpose of agriculture, forestry and horticulture, to reflect technological advance and the development of new machinery in the future.

However, there are two aspects of agricultural practice that need to be drawn out and on which I should like the Economic Secretary to reflect. This is a missed opportunity. As the costs of vehicle excise duty rise—and they are likely to rise in future, given the environmental and behavioural changes that I think hon. Members on both sides of the House anticipate—the challenge for the agriculture and forestry industries in particular is that they require a disproportionate use of vehicles just to be in business. That becomes more, rather than less, apparent as mechanisation continues to develop apace. It is no longer the case that a farm gets by with one tractor. A multiplicity of vehicles of different types are used in agriculture. It is therefore entirely appropriate, in my view, that there should be an exemption and that there should continue to be relief from these duties.

The vehicles involved are not only specific-purpose vehicles; they are often adaptations of other vehicles. I think that that is where there is some difficulty with the wide-ranging discretion that the Secretary of State has, and I will come back to that.

The other relevant aspect is that the use of vehicles by these industries is also increasing significantly. That is partly as a result of pressures within the industry to aggregate holdings, and therefore farmers, to continue in business, need to take on other land that is perhaps some way distant from their existing holding. Obviously, they have to use the roads to get to that land. As a result, a lot of vehicles that were previously confined to off-road use are now also being used on-road, and therefore duties might start to apply where they did not previously apply.

For example, many farms use adaptations on quad bikes to provide specialist applications. Quad bikes are not normally registered for road use. However, as Members of Parliament are increasingly aware, they have a number of uses, not least for Members of Parliament. Another example would be motorised hydraulic lift vehicles, such as the well known JCBs. Those are now used for many purposes on farms and must be taken on the roads more than they used to be. It is difficult to see that a description of vehicles can be adequately encompassed to take account of differing uses. It would be a missed opportunity not to use the definition of “use of vehicle”, rather than just “type of vehicle”, when it comes to drawing up these exemptions.

Briefly—Members will be relieved to hear—clause 105(1) includes the power for the Secretary of State to repeal any of the relevant paragraphs of schedule 2 to the Vehicle Excise and Registration Act 1994. What reassurance can the Economic Secretary give us that he or his colleagues have no intention at present to repeal any of those paragraphs, and that any future attempts to repeal them will be subject to affirmative procedure? Can he also assure us that he supports the arguments that I have outlined in favour of a continuing vehicle excise duty exemption for the industries that I mentioned, all of which have high vehicle use and are, in most cases, trading in fragile circumstances?

Rob Marris (Labour, Wolverhampton South West)

I am grateful to the hon. Gentleman for providing a short history of UK tractors.

I draw the Minister’s attention to proposed new subsection (3)(b), where it refers to:

“vehicles used for purposes relating to agriculture, horticulture or forestry”.

Will he consider whether that list should be extended to vehicles used for conservation purposes? I realise that making such an extension might be tricky, but this is an enabling power that will be given to the Secretary of State. Vehicles that are used for conservation would not be used for purposes relating to agriculture, horticulture or forestry. For example, a vehicle that goes around to pick up great crested newts—an endangered species that seems to appear on every building site in the west midlands—would not come within the three categories that are currently listed, but I think that sort of vehicle should have the exemption. This issue needs to be looked at, and the Secretary of State should have the power to include such vehicles in any regulations made under the amended section 5 of the 1994 Act.

Edward Balls (Labour, Normanton)

For a moment, I thought that I had been remiss by not welcoming the hon. Member for Birmingham, Yardley to the Committee, but I am told that he has been here before, so there is no need for me to welcome him now. In case I missed his earlier appearance, I apologise.

Agricultural vehicles benefit from exemptions from payment of vehicle excise duty which came into effect from April 2001. The clause gives the Secretary of State for Transport the power to redefine agricultural vehicles within the 1994 Act, for the purposes of maintaining the exemption in good order.

The current definition of an agricultural vehicle within the 1994 Act was established when the distinction between vehicles built for purposes relating to agriculture and vehicles with wider utility was starker, as Opposition Members have pointed out. The agricultural machine taxation class currently covers tractors, light agricultural vehicles and agricultural engines. Examples of the type of light agricultural vehicle treated as eligible for exemption are all train vehicles or quad bikes, and an example of the type of agricultural engine eligible for exemption is a crop sprayer.

As has become clear in our discussions, some vehicles are capable of being used on the land although they are not built primarily or solely for that purpose. That leaves the current definitions open to challenge. I am sure that the Financial Secretary would have liked to be here to carry on the discussions that he promised when we debated clause 11. Sadly, he cannot, and I have the pleasure of leading the debate.

On the Thursday sitting before the recess, when we did not sit in the afternoon, I took the opportunity to travel to Bridgend to meet business leaders and members of the farming community, and this very issue was raised. That preparatory discussion certainly informed my thinking as I prepared for the debate.

To answer the third question asked by the hon. Member for Wycombe, the clause provides for an order-making power that will be subject to the affirmative resolution procedure. The intention is to use the power to achieve firmer definitions and legislative concurrence between the vehicle excise duty exemption and eligibility under the Hydrocarbon Oil Duties Act 1979 for agricultural vehicles to use duty rebate diesel. That will ensure greater clarity, as those who are entitled to license their vehicles as exempt within the agricultural machine taxation class will also be eligible to use red diesel. The definition of an agricultural vehicle under the 1979 Act for the purposes of eligibility to use duty rebate diesel was updated last year by statutory instrument No. 93.

The Driver and Vehicle Licensing Agency is currently discussing the updates of definitions with the industry, and it is actively preparing an order that will, in due course, utilise the power granted by this clause to achieve that legislative concurrence. The agency is also working with HMRC and the industry to issue a memorandum of understanding on which vehicles are eligible for VED exemption and to use duty rebated diesel. It is anticipated that by next spring the Secretary of State for Transport will be in a position to put a draft order before Parliament utilising the flexibility conferred by this clause, to answer the hon. Gentleman’s first question.

On how the exemptions will apply and whether we intend to introduce any new agricultural vehicle taxation classes or exemptions, there is no intention at this time to introduce a new agricultural vehicle exemption. The work on improving the current agricultural vehicle definitions within the existing exemption is ongoing. Depending on the outcome, there may be scope for the creation of new definitions in line with advances such as technological innovation.

The hon. Gentleman and the hon. Member for Ludlow asked about off-road vehicles and 4x4s. The Government recognise that four-wheel drive vehicles are used by other businesses, such as professional dry stone wallers and veterinarians, in support of the farming sector, as well as by farmers themselves. There is no intention to introduce an exemption for those who use their four-wheel drive vehicles on the public road. It remains the case that the tax system is designed so that where a vehicle is an essential component of the business activity, businesses can deduct from their turnover all the costs incurred for the sole purpose of generating business profits. Applicable motoring expenses are therefore allowable for deduction against turnover in such circumstances. However, the DVLA is discussing with the industry how the powers conferred by this clause can be used to update the exemption.

A separate exemption already exists for vehicles, including four-wheel drives, that are used mainly on the land. That exemption applies where vehicles are used between different parts of the land in agriculture, horticulture and forestry. It is available where a vehicle is used on the public road only to pass between different areas of land occupied by the same person for a distance of no more than 1.5 km. Provided that that condition is met, vehicles including four-wheel drives that are not otherwise eligible for exemption under the agricultural machine taxation class may be eligible for exemption. The DVLA is consulting industry representatives about updating the definition and to ensure that the proposals reflectlast year’s administrative changes on hydrocarbon oil duty.

Philip Dunne (Conservative, Ludlow)

The suggestion that a 1.5 km limit should apply to the eligibility that the Economic Secretary described seems somewhat perverse. Many contractors, particularly in agriculture, may have to travel many miles, even tens of miles, on public roads to get from one piece of ground to another. I earnestly urge him to discuss that with the industry and to reconsider the limit.

Edward Balls (Labour, Normanton)

The point that I was making was that the 1.5 km limit is available in existing definitions. We are discussing with the industry how to ensure that the clause provides flexibility for vehicles, including 4x4s, that are genuinely used for agricultural purposes rather than on-road driving. The purpose of the consultation is precisely to ensure that we do not allow tax relief for normal public, on-road driving, but that we provide the flexibility that the farming community needs.

The hon. Member for Ludlow asked whether any of the current taxation classes will be repealed. That is not our intention. The clause’s purpose is to ensure that legislation remains current and relevant, and that only vehicles that are legitimately entitled to the exemption are licensed in the agricultural categories. There are no plans to remove any of the existing exemptions. Our intention is only to improve and update, and to include revised definitions for agricultural vehicles in accordance with new technological developments.

The hon. Gentleman also asked whether the changes will put existing users outside the exemption. Clearly, we are trying to reduce the ambiguity in the definitions to enable the agricultural industry to continue to benefit from legitimate exemptions while discouraging unfair competition. The definitions will be carefully framed and will be discussed with stakeholders and businesses to avoid imposing an unnecessary compliance burden. We do not intend to penalise those who already qualify legitimately to license their vehicles in the agricultural machinery taxation class.

I am sure that the matters that my hon. Friend the Member for Wolverhampton, South-West raised will be firmly in the mind of my hon. Friend the Financial Secretary and other Ministers as they take forward our wider agenda to promote conservation and a reduction in climate change. I will ensure that the Financial Secretary is fully aware of the question that he asked. It goes wider than the clause, but it is important. If I can update him on any issues, I shall ensure that they are included in an addendum to the previous letter.

Clause 106

Theresa Villiers (Conservative, Chipping Barnet)

I welcome you back to the Chair, Mr. Gale.

I have considerable sympathy with what the Government are seeking to do in the clause. I have made it clear on a number of occasions—sometimes in this very room—that I am concerned about the impact of the European Court of Justice’s judgments on our tax system and the revenues collected by the Exchequer. I am not asserting that there is necessarily any causal connection between the clause and recent decisions by the court, but there seems to be little doubt that the damage done to tax revenues as a result of ECJ decisions will be reduced if the clause is adopted.

I appreciate that a great deal of money is at stake, and I am happy to support effective and reasonable measures to protect that revenue. However, I am worried that the clause may simply land the Government back in the ECJ. Furthermore, it is important for the Committee to take a few minutes to consider the concerns about the retroactive removal of a right to reclaim taxes paid because they were not lawfully due. The Minister who is dealing with the matter will be well aware that various professional bodies believe that the clause is inconsistent with European law, and in particular that it would contravene the principle of effectiveness. That principle provides that member states are not permitted to render rights conferred by community law that are impossible or excessively difficult to exercise.

The concerns of organisations such as the Chartered Institute of Taxation, the Law Society and the Institute of Chartered Accountants in England and Wales revolve around the ECJ judgment in Marks and Spencer v. Customs and Excise in 2002. The ECJ considered whether the curtailment of limitation periods could be compatible with the principle of effectiveness. It decided that such curtailments could be compatible with Community law as long as certain conditions were complied with. The first condition is set out in paragraph 36 of the judgment, which states that the relevant change to limitation periods

“must not be intended specifically to limit the consequences of a judgment of the Court to the effect that national legislation concerning a specific tax is incompatible with Community law.”

There is certainly a perceived link—I stress that it is perceived rather than definitely established—between clause 106 and the judgment in the Metallgesellschaft-Hoechst case and the follow-up litigation in Deutsche Morgan Grenfell v. Inland Revenue, although the direct claimants in that case will not, of course, be affected by the clause. Will the Minister give the firm assurance that the provision in Community law to which I referred does not cause a problem in relation to clause 106? It would be useful if he outlined the reasons for his view on that. In particular, to what extent do the Government’s references to the large sums at stake encompass taxes paid under a mistaken law that do not relate to the Hoechst case or other ECJ jurisprudence? If, for example, the clause had a range of situations rather than just the Hoechst case in mind, it might assist in satisfying the condition to which I referred, and in answering the concerns arising from that point of European law.

The second condition set out in the Marks and Spencer case is that

“the new limitation period is reasonable”.

The Government should be able to deploy some attractive arguments on that point, given that the six-year limitation period in the clause is in widespread use in our law. The explanatory notes on the Bill refer to the clause achieving symmetry with the period during which the Revenue can collect back taxes, which could be used to strengthen the argument that the period is “reasonable”. However, it is worth noting that in cases of negligent conduct, HMRC can go back 20 years to collect back taxes, which detracts from the strength of the symmetry argument.

The Government hopefully might find themselves on reasonably firm ground on the reasonableness condition, but there might be a problem with the third requirement laid down by the ECJ in the Marks and Spencer case. Paragraph 38 of the judgment required that legislation containing revised limitation periods must include

“transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the original legislation. Such transitional arrangements are necessary where the immediate application to those claims of a limitation period shorter than that which was previously in force would have the effect of retroactively depriving some individuals of their right to repayment, or of allowing them too short a period for asserting that right.”

The Committee will see that there are no transitional arrangements in the clause, so it would seem that that aspect of the Marks and Spencer case poses a problem. The concern becomes more marked when one takes into account the way in which the Marks and Spencer case was interpreted and applied in subsequent cases such as Grundig Italiana v. Ministry of Finance. In that case, the ECJ concluded that

“the transitional period must be sufficient to allow taxpayers who initially thought that the old period for bringing proceedings was available to them a reasonable period of time to assert their right of recovery in the event that, under the new rules, they would already be out of time.”

It would be useful if the Chief Secretary to the Treasury gave the Committee a clear assurance that clause 106 does not fall foul of the principle that a transitional period is required as is set out in the Marks and Spencer judgment. Is he able to distinguish the Marks and Spencer and Grundig Italiana cases and to explain why they do not apply in relation to clause 106? Alternatively, will he provide a justification that would override the application of the principle set out in those cases? Is there any scope for arguing that exceptional circumstances, within the meaning of Stichting “Goed Wonen” v. Staatssecretaris, apply in this case to justify the withdrawal of an entitlement to repayment?

It would also be useful if the Chief Secretary allayed the concerns raised by representative organisations about the principle of legitimate expectations as a part of Community law. In paragraph 46 of the Marks and Spencer judgment, the ECJ held, in the context of a breach of the sixth VAT directive, that the principle of legitimate expectations could apply

“so as to preclude a national legislative amendment which retroactively deprives a taxable person of the right enjoyed prior to that amendment to obtain repayment of taxes”.

It is useful to refer to the opinion provided to the Law Society by Mr. Philip Baker, QC, who is convinced that the principle of legitimate expectation applies to clause 106. He raised a particular concern about section 320 of the Finance Act 2004, which restricts claims for the repayment of taxes on the basis of mistake of law but explicitly excludes litigation that commenced before 8 September 2003. He argues:

“Any person having commenced an action before that date might reasonably have expected that they could continue their action until final judgment without further legislative intervention. Litigants will have continued to pursue claims (commenced prior to 8th September 2003) on the basis of that expectation and will have incurred costs in so doing. In a sense, the Finance Act 2004 legislation would have enhanced the legitimate expectations of those who had commenced their actions before 8th September 2003”

that they would be able to continue them.

Will the Minister assure the Committee that he does not believe that clause 106 infringes the principle of legitimate expectations, and give us his reasons for holding that view? Will he address in particular the point about the sums that have been expended on litigation by affected parties, and the point that has been made by some representative bodies about the number of affected taxpayers who might have chosen to join the Deutsche Morgan Grenfell litigation had they been aware that the law might be changed retroactively? I hope that he will reassure the Committee regarding the points and questions that I have raised.

John Hemming (Liberal Democrat, Birmingham, Yardley)

It is a pleasure to serve under your chairmanship, Mr. Gale, and to entertain the Economic Secretary, who obviously did not notice me on the previous occasions that I attended, because I have not spoken all that much.

The clause is rather weird. Without going into all the details of the constitutional legislation that it may infringe, such as the European Communities Act 1972 and the Human Rights Act 1998, as well as the traditional issues of judicial review and the grounds on which challenges can be brought, there is one particular weirdness in it that I want to highlight. Suppose that someone has sued the Government, because they made a mistake, and won the case. The idea of passing legislation that reverses the judgment and provides that that person has to pay back the money and all the costs on both sides, with interest, which is basically what subsection (4) says, is quite odd. It is a strange idea that when someone has won a legal case, the whole thing can then be reversed through statute.

There is a substantial argument for drawing a line after six years and moving on, in terms of dealing with tax—there has to be some sort of symmetry—but the idea of reversing judgments through statutes, without any consideration of costs, has to be a strange one. Someone has won a case and got their costs, and now we are saying, “You’ve lost the case and you’ve got to pay the money back, with interest,” although the rate is not specified. We are saying, “Obviously, if you’ve lost the case, you have to pay the costs.” That is absurd. Of course, we are not going to divide on this, but the Government should respond regarding the idea of reversing judgments.

Stephen Timms (Labour, East Ham)

It is a pleasure to serve under your chairmanship again, Mr. Gale, and I, too, congratulate the hon. Member for South-West Hertfordshire on his promotion to the Front Bench.

I am pleased that the hon. Member for Chipping Barnet supports the Government’s intention in the clause and, in a moment, I shall provide some reassurance and clarification on the point raised by the hon. Member for Birmingham, Yardley.

Our purpose here is to ensure that the limitation period in which to make a claim for the recovery of direct tax paid by reason of mistaken law is six years from the date of payment. That follows a House of Lords judgment on 25 October last year in Deutsche Morgan Grenfell Group plc v. Her Majesty’s Revenue and Customs. The Lords held that in certain circumstances the limitation period for claims does not begin until the claimant has discovered the mistake, which means that restitution is due in some cases for payments made more than three decades ago. As we have discussed, interest might be due on those payments as well.

That judgment leaves the Government facing potential repayments of very large sums in other cases, which means that the general populous might pay a price through higher taxes or reduced public spending for a disproportionate benefit to a small number of groups and companies. In 2004, legislation was introduced to protect the Exchequer from new claims arising on or after 8 September 2003. We are acting now on claims made before that date to protect the wider public interest.

The clause ensures that a six-year limitation period applies from the date of payment. In other words, the payment groups affected will still be entitled to six year’s worth of repayments. That strikes a fair balance, familiar to other parts of the legislation, as the hon. Lady rightly said, between the general interest of the community and the protection of the rights of claimants. It goes some way, as well, to restoring the general symmetry thought to exist between the rights of claimants to recover overpaid tax and those of HMRC to recover underpaid tax.

To clarify the point raised by the hon. Member for Birmingham, Yardley, the clause will not affect the claimant in the Deutsche Morgan Grenfell case, as the hon. Lady acknowledged, or other claimants for whom that claim was a test case. The clause affects other cases and will ensure that a fair and proportionate limitation period of six years applies from the date of payment.

There have been widespread discussions about a transitional provision, which was raised by the hon. Lady. However, that misses the point of the clause. I imagine that the purpose of a transitional provision is to allow for an extra period in which claims can be made under the previous system. However, the clause affects claims made before 8 September 2003 only. In other words, all of the claims affected by the clause have been made already. I do not think, therefore, that providing for a transitional period in the clause would have any meaning.

It is my clear view that the clause is compatible with the European convention on human rights and strikes the right balance between the interests of the general taxpayer and the claimant companies. We are absolutely confident that it is proper to legislate in this way and we would defend robustly any challenge to the legislation in the courts. It is important to affirm that limitation periods are a matter for national legislation. Claimant groups affected by the measure will still be entitled to six year’s worth of repayments.

The hon. Lady raised a question about people who might have acted differently in the past. I am not sure that there is any great value in speculating about what others might have done in the past. Given the amount of revenue at stake, as she acknowledged, it is very important that the Government take action. The House of Lords judgment in the Deutsche Morgan Grenfell case was made prior to the announcement of the measure before us. We are aiming simply to put things right by ensuring that those claimants bound by that judgment under the terms of the group litigation are unaffected by the legislation, as I have explained. I hope that the clause will find favour with the Committee.

Schedule 26

Edward Balls (Labour, Normanton)

I beg to move amendment No. 118, in schedule 26, page 281, line 17, at end insert—

‘8A In paragraph 4(2C)(b) of Schedule 26 to FA 2002 (derivative contracts: contracts excluded by virtue of their underlying subject matter), for “quoted” substitute “listed”.’.

Schedule 26 amends the legislation defining a recognised stock exchange to enable a more competitive market. It will also modernise the rules and definitions to provide greater clarity and consistency. Current rules do not permit the extension of recognised status to any UK stock exchange other than the London stock exchange. The measure will ensure equal tax treatment for Financial Services Authority listed shares regardless of which recognised investment exchange is used as the primary market.

Amendment No. 118 will ensure that all known consequential amendments have been made. As I said, the legislation’s aim is to ensure competition for markets and to modernise the terminology used. This consequential amendment, which was omitted from the original list, should now be included. If it is not added to the list, it could create uncertainty for the industry and unnecessary administrative burdens in clarifying that there is no essential difference between “quoted” and “listed” for the purpose of schedule 26. I commend the amendment to the Committee.

Theresa Villiers (Conservative, Chipping Barnet)

I rise to ask a question that, now that I come to think about it, probably would have been better directed to a schedule stand part debate, but if the Committee will allow me, I shall ask it. Does the schedule impact in any way on the tax benefits and tax status related to shares listed on AIM?

Edward Balls (Labour, Normanton)

The answer is no.

New Clause 2

Theresa Villiers (Conservative, Chipping Barnet)

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

The new clause aims to deal with quite a serious problem that has arisen for the UK’s investment and legal services industry as a result of changes made to the Taxation of Chargeable Gains Act 1992 by last year’s Finance Act. The new clause would reverse one of the changes that the 2006 Act made regarding determination whether a trustee is resident in the UK or overseas by restoring the definition that operated until 7 April this year.

According to a note published on Tuesday by the technical committee of the Society of Trust and Estate Practitioners, the new formulation introduced last year has

“given rise to widespread uncertainty and difficulty.”

The Chartered Institute of Taxation and the Law Society have also expressed support for new clause 2 and the points made by STEP. Strong concern has been conveyed to me by the representative bodies that HMRC has not yet treated the issue seriously enough. That is a worry, considering that the provisions came into force in April this year. One of the reasons that I have tabled the new clause is to ensure that the points expressed by concerned professionals are listened to and properly and fully explored.

Under the old rules, no problem arose where foreign trustees delegated a number of services relating to trusts to subsidiary firms or affiliates in the UK. The rule was that a trust was resident in the UK unless two conditions were satisfied: first, that the majority of trustees were non-resident, and secondly, that the general administration of the trust was ordinarily performed outside the UK.

However, the 2006 Act introduced a number of changes to the test for whether a trustee is resident or non-resident. One of those was the insertion of a new section 69(2D) into the TCGA to provide that

“A trustee who is not resident in the United Kingdom shall be treated for the purposes of subsections (2A) and (2B) as if he were resident in the United Kingdom at any time when he acts as trustee in the course of a business which he carries on in the United Kingdom through a branch, agency or permanent establishment there.”

As STEP explains in the note to which I have already referred, the difficulty with section 69(2D) is the scope of the words

“branch, agency or permanent establishment”,

which it regards as unclear and broad.

The first problem is whether all three terms apply to both corporate and non-corporate trustees. Other legislation with similar provisions has, I understand, tended to apply the “branch or agency test” to individuals and the permanent establishment test to companies. If the Economic Secretary gave us his view on that, it could provide some welcome clarification for those grappling with the legislation. However, even if this matter is resolved, the meaning of the three concepts remains unclear. We are dependent on case law, much of which is relatively old, for the meaning of “branch” or “agency”.

Assistance on determining what amounts to a permanent establishment is found in section 148 of the Finance Act 2003 and in article 5 of the Organisation for Economic Co-operation and Development model tax convention on income and capital, both of which refer to the concept of a “fixed place of business”. That seems particularly relevant to the issues that the Committee is considering.

The approach suggested by the commentary onarticle 5 of the OECD convention indicates that an overseas enterprise must have unrestricted ability to use premises in the UK before those are capable of constituting a fixed place of business. I have been advised that a number of activities carried on by non-resident trustees, which have caused no problem in the past, could arguably now give rise to the conclusion that a fixed place of business is being used and a permanent establishment has been set up within the meaning of section 69(2D). I have to stress that it is not clear that such activities would bring a trustee under the terms of section 69(2D), but there is a substantial risk that they would. That is certainly the advice that such people are receiving from their legal advisers. Activities at issue, include the regular use of office premises of a UK affiliate for discussions with professional advisers and other meetings that are, perhaps, incidental to the management of the trust and its investments. Another problem area is the use of a UK affiliate’s accountancy services in preparing trust accounts. That could cause a problem, as could the use of an affiliate’s investment management services. The risk remains even where the services and facilities are provided by the UK affiliate at a market rate and on arm’s-length terms.

The consequences of a trustee falling within section 69(2D) and inadvertently becoming UK resident are serious. Put simply, non-resident trustees who use UK affiliates to carry out any back-office functions now risk bringing their trust within the UK tax net when it would not otherwise be so. The trust would therefore be within the scope of UK capital gains tax on all future gains. The gravity of the problem becomes even more apparent when one takes into account the fact that there is no CGT uplift where a trust becomes UK resident. That means that all gains are taxable on future disposals, including those accrued before the trust became UK resident.

Rob Marris (Labour, Wolverhampton South West)

I bow to the hon. Lady’s much superior knowledge on this matter, but on reading the amendment and listening to her it appears, prima facie, that she is arguing for a tax break for the rich who have gone offshore. Is that so?

Theresa Villiers (Conservative, Chipping Barnet)

No, it is not. Just to pre-empt any misunderstanding on what section 69(2D) is about, I make it clear that I do not think it is about anti-avoidance. Obviously, we will hear from the Economic Secretary, but there is, correctly in my view, extensive legislation in place already to prevent UK residents from using offshore structures—whether trusts or anything else—to reduce their tax bill. It is right that we have that legislation. If there are any remaining gaps in that anti-avoidance legislation, I would support the Government in plugging them. However, I am not persuaded that this measure is aimed at that problem.

We are talking about whether the UK can retain a share in international trust business, which is an important professional services market provided to people from overseas setting up international trusts. It is not primarily, or really at all, about UK residents. The current anti-avoidance provisions are effective. This is an international industry providing services to people who usually have little or no connection with the UK. Again, I would be interested to hear what the Economic Secretary has to say. He may be able to explain the anti-avoidance aspect.

I pick up where I left off. If the trustees fall under section 69(2D), they cannot solve the problem by becoming non-resident; if they do, all unrealised gains would become chargeable. In its note of 5 June, STEP says:

“Non-UK trustees will not take the chance of being deemed to be UK resident and work which would otherwise come to UK professionals would be sent elsewhere...And business once lost is hard to regain.”

We need to give serious consideration to that warning.

The Opposition fear that the adoption of a permanent establishment test is inappropriate. It seems to have been lifted from corporation tax rules, which provide that when a non-UK company carries on business in the UK through a permanent establishment, the company will be taxed on profits earned through the permanent establishment. That seems reasonable. However, lifting the terminology into the context of trusts will have serious and far-reaching results, although I suspect that they may be unintended. If a trustee oversteps the mark only marginally, so that his activities come within the scope of the permanent establishment test, it would cause the trust to be UK-resident for all purposes—all the gains that it made and all its income, whether connected with the UK or not, would be liable.

Adam Afriyie (Conservative, Windsor)

It strikes me that the Government recognise the international competition in corporation tax rates, and to ensure that the UK remains effective, they have reduced them by 2 per cent. There is international competition also in the provision of services to those who support and provide services for international trusts. Does my hon. Friend agree that we run the risk of losing those businesses if the provision goes through as it is?

Theresa Villiers (Conservative, Chipping Barnet)

I agree. My concern is that our competitiveness will be undermined, but no clear reason has been given as to why that step was taken in last year’s Finance Act. There may be a good reason for UK jobs being lost—it may be worth the price—but I am not yet persuaded of the justification for making the change.

I turn again to the consequences of section 69(2D) remaining unamended. If one took the same approach to international companies as the 2006 Act applies to international trusts, companies that carried out only a few back-office functions in the UK would have all their worldwide profits and property dealt with under the UK tax system. That would be nonsense for companies, and it is causing a problem in the trust context. All the gains of trusts would be taxed here, even if they became resident here for only one day.

New clause 2 seeks merely to restore the general administration test that applied up until the Finance Act 2006. Not many would assert that the old test was perfect—it had some well-known drawbacks—but it proved to be workable for the 40 years that it was in operation. There seems to be a degree of confidence in the test, given that it operated well in most circumstances. Whatever interpretative problems there might have been were significantly less serious than the concerns centred on section 69(2D).

Issuing HMRC guidance is not the answer. Although further guidance on what the provision means—from HMRC, or indeed from the Economic Secretary this afternoon—would be welcome, it would not resolve all the uncertainties. It would provide insufficient protection for trustees, given the significant liabilities involved if a trustee inadvertently brought the trust within the UK tax net. Even if HMRC stated clearly that none of the back-office functions that I have outlined would trigger the operation of section 69(2D), the result would still be less than satisfactory. In effect, the outcome would be that trusts having no connection with the UK would be liable for UK tax under section 69(2D), but would be let off—essentially at the Revenue’s discretion.

We should remember that almost all trustees would be personally liable for the extra tax that the trust had to pay as a result of changing residence. Professionals would not take that risk. Indeed, as my hon. Friend the Member for Windsor pointed out, the change in the law made under last year’s Finance Act has significantly undermined the UK’s ability to compete in the market for international trust business. I am informed that the change is already leading to jobs being lost in the United Kingdom.

I acknowledge that thus far my evidence is anecdotal, but I have received a number of reports of accounting services being shifted offshore with data inputting going to Bangalore and investment services going to Geneva. For example, I have been informed that, following a meeting with the Revenue to discuss the issue, one of the industry representatives went straight back to his office afterwards and issued redundancy notices to six bookkeepers on the spot and put in place measures to close within six months the facilities that he used in London with a loss of 40 jobs in total.

We have special expertise in trust matters in the United Kingdom. After all, it was an English invention. I shall spare the Committee my treatise on the cultural jurisprudential importance of trust business, given that it received it several times last year. The expertise has given us a significant edge when competing for international trust business. It is a large industry. It is a highly competitive and mobile area of the international market for professional services. I am told that our competitors overseas are delighted at the developments in our law and are advising their clients not to use the UK for any trust-related services. A significant number of jobs in the UK depend on the business and they are being put in jeopardy for no good reason.

We now reach the key point, to which I referred in response to my hon. Friend the Member for Windsor. It is simply not clear why the change to the definition was made. If section 69(2D) was performing an important anti-avoidance function, perhaps it would not matter if it meant that jobs were lost in the UK and offshored to India and Switzerland.

I hope that the Minister will accept the new clause. If not, I hope that he will consider rectifying the matter on Report or at some future stage. Failing that, he should at least explain why section 69(2D) is necessary and say what important function it is performing, because I cannot see what it is.

The STEP technical committee appealed that

“the permanent establishment test needs to be urgently reconsidered”.

I hope that the Minister will give us a commitment that he will do as it asked.

Edward Balls (Labour, Normanton)

I know that the hon. Lady has expertise and a detailed interest in trust matters. The tax rules for determining trustee residency were amended under the Finance Act 2006 as part of the trusts modernisation package. The new regime took effect from 6 April 2007. The new clause would amend the changes to trust residency that were made into legislation last year. As she explained, the 2006 legislation replaced separate income tax and capital gains tax residency tests with a common test to ensure that all trustees have the same residence status for income tax and capital gains tax purposes to make it easier to comply with the tax system for trusts. The changes also dealt with concerns that professional trustees in overseas institutions were able to develop a substantive UK presence while remaining non-resident for tax purposes.

The new residency test was introduced in the Finance Act 2006, but we made it effective from April this year as we wanted to give trustees time to reorder their affairs to retain the residence status that they wanted and to avoid complex transitional provisions. There was considerable consultation and time to prepare for such matters, and I am not sure whether the employment practices described by the hon. Lady in one instance are really the sort that any member of the Committee would condone.

Adam Afriyie (Conservative, Windsor)

It strikes me that the Economic Secretary is casting aside some of the genuine concerns about the UK’s loss of competitiveness in the industry. Will he lay out the research on which he based his statements? How many people does he estimate will be affected by the changes?

Edward Balls (Labour, Normanton)

Given that I have not even said whether we will accept the new clause, but have just stated what has happened during the past year, the hon. Gentleman is jumping to conclusions. If he gives me the opportunity to make my speech, perhaps he will then know whether I have addressed that question.

The new common residency test is based on the old income tax test. It was chosen because it provides a simpler and clearer test to determine the residence position of the trustees as a body. It includes a provision that a non-resident trustee will be treated as a resident trustee for tax purposes when he or she acts as a trustee in the course of a business carried on through a UK branch, agency or permanent establishment.

We are aware that the Society of Trust and Estate Practitioners—STEP—the body that organises on behalf of the practitioners, has expressed concern about the permanent establishment test, and in particular its potential effect on non-resident corporate trustees. I understand that such trustees may well have an associated company in the UK whose offices are made available for meetings with settlors, beneficiaries or investment advisers or which are used as a base for other UK operations. The legitimate concern appears to be that such activity could result in non-resident corporate trustees doing business in the UK losing their non-resident tax status.

The Committee will be pleased to learn that HMRC is engaged in ongoing discussions with STEP on that matter. Whether trustees will be regarded as having a permanent establishment in the UK will depend on the circumstances in each case and the extent to which that is legitimate. To provide as much help as possible for taxpayers, following those consultations, which have involved STEP and other practitioners for some time, HMRC will, as a priority, issue guidance on the new rules to ensure that legitimate business is not being captured. People engaged in legitimate business would be better off waiting until the consultation has ended and the guidance has been issued before they issue redundancy notices.

As part of the work on guidance, HMRC is carrying out detailed analysis of the issues raised by STEP to ascertain the nature and extent of any issues affecting non-resident corporate trustees. This is a complex area that requires detailed discussion. The discussions are ongoing, and once the analysis has been completed and studied carefully by HMRC, we shall issue guidance. We shall not issue it until we have reached conclusions, and no firm conclusions have yet been reached.

It is worth noting that the trusts modernisation legislation in the Finance Act 2006, including the new residency test, was consulted on twice before it was introduced. Although many respondents, including STEP, agreed that a common test was desirable, they expressed a preference for a rule different from that eventually introduced. I have set out that for the purposes of simplicity, and to ensure that proper practice was supported and illegitimate practice was not, we legislated as we did.

Adam Afriyie (Conservative, Windsor)

I hope that the Economic Secretary will not jump down my throat as he did when I made a genuine inquiry about why he did not appear to be concerned about the competitiveness of the sector, but his comments once again seem to cast aspersions on anybody who makes a decision to close their operations in the UK before the guidance is issued. It is not wise, in an area of uncertainty, given that the repercussions are enormous for businesses, for them to make decisions early, even if there is no certainty about whether the decision is the right one in view of when the guidance is issued? Such an approach would seem to be sensible, as opposed to being a dodgy thing to do, as he seems to be suggesting.

Edward Balls (Labour, Normanton)

It is not for me to second-guess the business decisions of any individual company agency, and the hon. Member for Chipping Barnet did not tell us the precise circumstances. Our intention is to ensure that people who are acting as offshore trustees but who, for other purposes, legitimately have business dealings, and therefore premises, in the UK are not unfairly discriminated against by any change. Consultation and detailed discussion is taking place, so anybody who is acting within the intent of the law will not be unfairly impacted by these matters, whereas people who are clearly seeking to use the arrangements to avoid tax will be.

I say to the hon. Lady and to my hon. Friend the Member for Wolverhampton, South-West that in this complex area there is the potential for considerable tax avoidance. We do not intend to allow that avoidance to occur. At the same time, the purpose of the consultation is to ensure proper and detailed guidance, so that people are not unfairly and unintentionally caught by the definition.

The hon. Lady asked whether the definitions apply equally to corporate and non-corporate trustees, to which the answer is that branch, agency and permanent establishment applies to both. She also asked about the OECD test, which is used for working out the definitions of permanent establishment for corporation tax purposes. She is right: the OECD manual has the best definition, which sets out what is meant by permanent establishment. Although the examples given in that manual relate to companies, which is normal because most OECD members do not legislate for trusts, the conclusions can be adapted for trust business. The analysis that HMRC is preparing will examine the definition and how it can be applied to trusts. HMRC will share that analysis with STEP in the coming weeks as it consults on the detailed guidance to which I have referred.

The hon. Lady and the hon. Member for Windsor asked whether we are setting out to damage the competitiveness of the UK as a financial centre. No, we absolutely are not; we always intend to ensure that London maintains its competitiveness as a global financial centre, across a range of tax regulatory matters. London is highly respected around the world as a global financial centre partly because it is a well-regulated, proper place to do business, whose rules, legal system and tax system require high standards of integrity and probity. It is important that there is no ambiguity, which can send the wrong kind of messages. We have no intention of doing anything to damage our competitiveness, but we need to get the measures right.

STEP has provided HMRC with individual cases in which it believes people have been unfairly caught. HMRC is studying the analysis of those examples as it draws up the guidance. I have no statistics on the extent of the potential tax avoidance, but our integrity and probity depend on us taking a robust approach towards it. Many opportunities for tax avoidance in this area can be prevented.

Theresa Villiers (Conservative, Chipping Barnet)

Will the Economic Secretary give an example of tax avoidance that will be countered by section 69(2D) of the Taxation of Chargeable Gains Act 1992?

Edward Balls (Labour, Normanton)

As I was going on to say, it is not the job of the Government to anticipate on behalf of the industry where the opportunities for tax avoidance might arise.

Theresa Villiers (Conservative, Chipping Barnet)

Will the Economic Secretary give way?

Edward Balls (Labour, Normanton)

If the hon. Lady would let me answer her previous point, that might help her to prepare her next intervention. It is not our job to lead the tax avoidance industry down such a road. There are many sophisticated lawyers and accountants; many of them work in legitimate business areas, but some of them seek ways in which the law can be pressed in a particular direction. HMRC judges that this issue could present many opportunities for tax avoidance, and that it would be wrong for the Government to take measures that would further support and advantage the offshore trust industry. That is not our intention. As I have explained, the purpose of the consultation is to produce guidance that will not damage in any way the legitimate offshore trust industry.

Theresa Villiers (Conservative, Chipping Barnet)

As the Economic Secretary could not give the examples that I asked for, can he give any examples of tax avoidance schemes that have been shut down as a result of section 69(2D) of the 1992 Act?

Edward Balls (Labour, Normanton)

I chose not to give the hon. Lady, or the wider public, examples of the kind of tax avoidance that HMRC believes might be opened up by the proposed change. I do not think that that is the role of Ministers; it is not for me to provide such an advisory role.

John Hemming (Liberal Democrat, Birmingham, Yardley)

Is it not the role of Ministers to justify their arguments? If the Economic Secretary cannot cite a loophole that the new clause would create, he cannot justify his argument.

Edward Balls (Labour, Normanton)

To take the hon. Gentleman back to the beginning of my speech, we legislated for the measure in last year’s Finance Bill, not this year’s. We legislated following two lengthy consultations, and we justified fully at the time why, in order to simplify the tax system, to create a definition common to income and capital gains and to ensure that we properly supported the legitimate business of offshore trust practitioners without allowing people to get around the rules, that was the better way to go.

John Hemming (Liberal Democrat, Birmingham, Yardley)

Will the Economic Secretary give way?

Edward Balls (Labour, Normanton)

Let me answer the point and then I shall take another intervention.

STEP and some advisors put it to us that in the early weeks of the measure’s eight-week implementation period, which began in April, some people feared that the way it was being implemented could impact on legitimate business. The right thing to do when those fears—including specific case studies—are raised is to begin discussions immediately. I have made it clear that discussions are ongoing. There will be full consultation and we will issue guidance to ensure that legitimate business is not affected, while preventing tax avoidance by people claiming to be offshore and for tax purposes a trustee, but who have premises to do effectively the same business here in the UK. We were clear last year that we would not condone it. The right thing to do is to consult and to come forward with guidance. My argument is that it would be premature to pass a new clause that took us back to where we were before last year’s Finance Bill when we are still consulting to ensure the right guidance. I am happy if the hon. Gentleman wants to intervene again.

John Hemming (Liberal Democrat, Birmingham, Yardley)

To be fair, that is a more substantial argument, but the Economic Secretary argued earlier that the new clause would allow opportunities for tax evasion and he did not cite any such opportunities. The point is that the new clause has not been passed, so the opportunities do not exist. However, there is a different argument that the objective could be achieved through guidance. That is an arguable case, whereas the other case is not. Whether it is a true case is another question.

Edward Balls (Labour, Normanton)

To repeat what I said: we acted last year because we feared that without the change, there would be complexity and potential avoidance. We have consulted and acted, but to ensure that legitimate business outside the intentions of the Finance Act 2006 is not unfairly caught, we are consulting to produce guidance. My argument is that it would be premature to legislate today to return us to where we were before last year’s Finance Bill when we are still consulting on detailed guidance to ensure that the intentions of the 2006 Act are properly implemented. On the basis of eight weeks’ experience, it would be a premature decision.

STEP has a choice. It can either brief shadow Ministers to try to reverse legislation that the House has enacted, or it can engage in detailed consultation with HMRC to ensure that its legitimate concerns—

Theresa Villiers (Conservative, Chipping Barnet)

Will the Economic Secretary give way?

Edward Balls (Labour, Normanton)

Hang on. Let me just finish my point.

STEP can engage in detailed consultation with HMRC to ensure that its legitimate concerns are properly addressed. The consultation is ongoing, and STEP and the practitioners would be better off engaging in the consultations, working with us on the guidance and through the examples and deciding at the end of that process whether it provides them with the clarity that they want, rather than supporting a return to the status quo ex ante.

Theresa Villiers (Conservative, Chipping Barnet)

STEP has engaged in extensive correspondence and discussions with HMRC, but I should like to ask the Economic Secretary whether he is threatening the professional organisations and saying that they should not engage in discussions with the Opposition, because that seems to be a wholly undemocratic approach.

Edward Balls (Labour, Normanton)

To an extent I understand the point, but I disagree with it. My point was that STEP and the practitioners have a choice. They can either engage positively and constructively to get the guidance right, or they can walk away from the whole process and call for the legislation to be repealed. The former option is a better approach. The latter, at this stage, would be premature. However, I can see why they are going to run with both options.

My view is that the detailed consultation is the right approach. Therefore, I urge the Committee to reject new clause 2 because I think that it is both premature and mistaken. It is not the right way to go. If, after the consultations, STEP concludes that it is satisfied with the guidance, it can encourage the Opposition to come forward with further amendments to future Finance Bills. To do so now, while we are in the middle of a consultation, is a mistake. Therefore, I urge the Committee to reject the new clause.

John Hemming (Liberal Democrat, Birmingham, Yardley)

We have had this system in place for eight weeks. This Finance Bill will be implemented in about a year, so the consequences of the status quo will be fully impacted by the time there is another Finance Bill. There is an opportunity to change it now. If guidance does not facilitate dealing with the issue, it will be too late in a year’s time. We are not going to hang around.

Theresa Villiers (Conservative, Chipping Barnet)

Frankly, I am shocked by the exchange we have just had. It is outrageous for the Economic Secretary to say that representative bodies, or anyone who is interested in democratic scrutiny of our tax legislation, face the choice of either engaging constructively with the Treasury and HMRC, or briefing and advising the Opposition on amendments. That demonstrates contempt for the Committee’s deliberations and I think it is regrettable that the Economic Secretary made those comments.

Edward Balls (Labour, Normanton)

I never suggested that STEP had briefed the hon. Lady on an amendment. I said that it had briefed the hon. Lady on a new clause to reverse last year’s Finance Bill and therefore to reverse the very piece of legislation on which we are currently engaged in a consultation to provide guidance. That is quite different from an amendment. The question is, do we go back to where we were before 2006, or do we make the consultation process work? All I was saying was that it was better to consult to provide decent guidance to avoid the concerns of the hon. Member for Birmingham, Yardley. That seems to be a more constructive approach to making tax policy.

Theresa Villiers (Conservative, Chipping Barnet)

I fail to see how it can be incompatible to engage in the closest, extensive and most constructive negotiations with HMRC and at the same time advise and express concerns to Opposition spokesmen. Any suggestion that those two are incompatible is fundamentally undemocratic and show insufficient regard for the process in which we have been engaged for three months.

It is also regrettable that the Economic Secretary could not answer either of my questions. He could produce no examples of avoidance schemes that would be shut down as a result of section 69(2D). He was unable to give evidence of any avoidance that had occurred as a result of the old test, which has been in operation for 40 years and which new clause 2 would restore. He emphasised that it was important not to have ambiguity because it sends out the wrong signals in our law. Well, we have ambiguity that sends the signal that the UK is no longer open for this type of business. I am willing to bet that people will receive redundancy notices as a result of the discussion that we have had in Committee and the Economic Secretary’s remarks today.

The Economic Secretary also made it plain that the decision on the permanent establishment case would depend on the circumstances of each case. That again confirms the uncertainty to which trustees are subjected. They have no way of telling in advance whether their case will be affected by the provisions. I am pleased that he said that attention was now being directed to this matter with HMRC. I hope that that attention will be directed to the issue as a matter of urgency.

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Lady give way?

Theresa Villiers (Conservative, Chipping Barnet)

No.

The Economic Secretary said that it would be premature to act now. People are losing their jobs right now as a result of this legislation. That is why I tabled new clause 2. I will not press it to a vote, because I tabled it in order to draw this serious problem to the attention of Ministers and officials. I am grateful that the Economic Secretary is going to carry out further consultation. He refers to a consultation happening at the moment. So far as I am aware, there is no formal consultation going on. However, I understand his words to mean that there will be a formal consultation, and I hope that he will move to resolve the issue as a matter of urgency. I remain convinced that it will not be possible to resolve it with any certainty or finality until we have a legislative change. I beg to ask leave to withdraw the motion.

New Clause 3

Schedule 27

Stephen Timms (Labour, East Ham)

I beg to move amendment No. 249, in schedule 27, page 292, line 16, column 2, at end insert—

‘In section 587BA—

(a) subsection (12), and

(b) in subsection (13), paragraph (b) and the word “and” before it.’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss Government amendment No. 250.

Stephen Timms (Labour, East Ham)

The amendments are technical and revenue neutral, and I think that they will find favour with the whole Committee.

Stephen Timms (Labour, East Ham)

On a point of order, Mr. Gale. Before we come to the end of our arduous labours, may I put on the record my thanks to you and to your co-Chairman, Mr. Illsley, for your stewardship and assistance. You have ably and skilfully guided us through these complex debates. Let me also take the opportunity to thank the Clerks, the Hansard writers, the Doorkeepers and the police officers for their assured touch in ensuring that the business of the Committee has run smoothly, and for all the help that they have given to members of the Committee.

The hon. Member for Chipping Barnet confessed, perhaps inadvertently, on Tuesday that as a Member of the European Parliament, she worked with the Treasury on European regulations on financial services. I confirm the accuracy of her confession, although those happy days may have seemed a little distant from time to time in the cut and thrust of debate in this Committee. I congratulate the hon. Lady, the hon. Member for Falmouth and Camborne, who is represented today by the hon. Member for Birmingham, Yardley, the hon. Member for Dundee, East, who I am pleased to see in his place, and their teams. I also congratulate the hon. Member for Rayleigh, who has moved to pastures new, while Mrs. Gauke takes on her new role as adviser to the Opposition Front Bench. The patience and skill of all those hon. Members in contributing to thorough, high-quality debate has been valuable indeed.

I want particularly to thank my hon. Friends the Financial Secretary, who until a few minutes ago was on his feet in the Chamber, and the Economic Secretary, for their support and assistance and their vigorous advocacy of the Government’s case throughout our deliberations. I also thank the representative bodies that have worked with Her Majesty’s Revenue and Customs and with me at the Treasury during the Bill’s passage for their help in identifying the need for Government amendments. There were numerous organisations, all of them helpful in our work.

In preparing these closing thoughts, Mr. Gale, I have, as you will imagine, been particularly vigilant on the question of starting any sentence with a “but”. But I thought that the Committee might be interested in the views of Fowler’s Modern English Usage, second edition, 1965, on that point. It states that reluctance to begin a sentence with “but” is merely a superstition. No doubt that is a matter that we will debate for some time to come.

I thank all my hon. Friends on the Committee for their support and patience and their amenability to the supplications of my hon. Friend the hon. Member for Cardiff, West. I am grateful for their support and help in ensuring a proper discussion of the Bill. I know that the whole Committee will join me in looking forward to the remaining stages.

Theresa Villiers (Conservative, Chipping Barnet)

Further to that point of order, Mr. Gale. Finance Bills certainly are easier the second time around. I am delighted that this Committee’s deliberations have not been quite as long or as stiflingly hot as last year’s. As the Chief Secretary said, we have certainly had a chance to discuss a wide range of issues, and we have had some constructive discussions. We started out with some unfortunate gender confusion in relation to my hon. Friend the Member for Wycombe, but I am pleased to say that it was swiftly resolved. I was particularly pleased, because I did not fancy having to mug up on the details of excise duty on cigarettes and alcohol in the 30 seconds I had before he was due to address the Committee on those clauses.

The Opposition Treasury team is very sad, of course, to lose our shadow Paymaster General. The farewell of my hon. Friend the Member for Rayleigh was not as protracted as the Prime Minister’s, but it had all the characteristic insight and good humour that we associate with him. We will miss him, but no doubt he will be a remarkably robust shadow Minister for Europe.

We heard a little less about Mrs. Gauke this year, but it is a pleasure to see her husband promoted to the Front Bench. I am delighted that his speaking debut this morning was greeted with a famous victory on the affirmative procedure, thanks to the good nature of the Financial Secretary. Little did he know when he dreamed of fame and fortune in political office that his first speech from the Front Bench would deal with missing trader intra-Community fraud and the sixth bank directive, but it was an excellent discussion.

Many other contributions stand out from our deliberations. My hon. Friends the Members for Windsor, for Ludlow and for Braintree made thoughtful contributions based on their business experience. My hon. Friend the Member for Ludlow demonstrated his extensive business expertise yet again with a few declarations of interest, and we heard about the private life of my hon. Friend the Member for Braintree and Mrs. Newmark, and their TV-watching habits. He gets this year’s vocabulary prize for deploying the words “interstices” and “tontine”, and a special commendation for the only mention of “Star Wars” during the Committee’s deliberations.

The hon. Member for Wirral, West braved the wrath of the contractor community by saying that IR35 really was not a big deal at all. The hon. Member for Falmouth and Camborne generally held the fort alone for the Liberal Democrats, although the hon. Members for Twickenham and for Birmingham, Yardley have come off the subs’ bench now and again to make a contribution, which was of course welcome.

Turning to the hon. Member for Wolverhampton, South-West, I think that we ought to add a new word to the dictionary: the verb “to marris”, which means to catch someone out, or to tear holes in their clause, their amendment or their grammar, and to generally beat the bat. The “reverse marris manoeuvre” is when the hon. Gentleman comes to one’s rescue, as he did for the Economic Secretary on clause 27. We also had the odd situation in which my hon. Friend the Member for Fareham came to the rescue of the Economic Secretary when he was faced with questions from the hon. Member for Wolverhampton, South-West to assure him that the insurance clauses under discussion were genuinely a simplification. I think that the best Wolverhampton, South-West moment came at the start of our discussion on clause 4 on inheritance tax. The hon. Gentleman called on his comrades to “squeeze the rich”. He is clearly in tune with the Labour party’s return to its socialist routes this week.

The Committee should thank Government Front Benchers for coping without the Paymaster General, who has shouldered so much of the work on Finance Bills in the past. The Financial Secretary deserves special mention because he has covered so much of the Treasury’s legislative work this year with the Statistics and Registration Service Bill, the Planning-gain Supplement (Preparations) Bill and the Income Tax Bill, which have numbered a mere 1,000 clauses or so. He has very much become the Treasury workhorse. We pass our sympathies on to the Economic Secretary for being landed with the clauses on pre-earned assets tax, which made post neo-classical endogenous growth theory look like an episode of the Teletubbies.

Finally, I thank you, Mr. Gale, and your co-Chairman Mr. Illsley for guiding us so wisely through our debates and for keeping us in line when we strayed out of order or too enthusiastically into a discussion of zero-carbon homes. I thank my colleagues on the Opposition Front and Back Benches for their incredibly hard work, which has taken place over many weeks.

I also thank those on the Government Benches as well for maintaining a generally constructive and friendly approach throughout the Committee; David Doig, who is an admirable successor to the legendary Frank Cranmer, whom we have all missed this year; the Hansard writers, the doormen and the Serjeant at Arms department for running our affairs efficiently; and of course to the Whips—the usual channels—for skilfully managing the Committee’s time. With that I commend my thanks to members of the Committee for their contributions.

John Hemming (Liberal Democrat, Birmingham, Yardley)

Further to that point of order, Mr. Gale, I would obviously like to add my thanks to all the people who have been thanked on behalf of our group of four. We particularly have to thank those who have been schooling people in grammar—grammar schools are very important at the moment. Numeracy seems to have been less important than grammar to the Committee. I thank the external bodies that have ignored the Government’s idea that they either talk to the Government or the Opposition, but not both. I would also like to thank the lead spokespersons from all parties for their excellent presentation.

Roger Gale (Conservative, North Thanet)

Happily, none of those points of order are a matter for the Chair.

As we are strictly out of order, may I add the thanks of Mr. Illsley and myself to the Officers and staff of the House, without whom, as we all know, our work would be completely impossible. I also sincerely thank all members of the Committee on both sides for not only the expertise, but the good humour with which they have handled matters of great importance. It is a tremendous shame that there are no television cameras in the Room. Plenty of people outside the House see what happens on the Floor of the House and criticise us for bad behaviour. Unfortunately, very few people see the real work of the House, which happens in Committees such as this. For the manner in which members of the Committee have conducted themselves, I am extremely grateful.