Finance Bill

Public Bill Committee, 15 May 2008.

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

Nicholas Winterton (Conservative, Macclesfield)

I welcome all hon. Members to our sitting on this rather dull day. I apologise that the weather has broken, but at least it is a little cooler, so perhaps we will make even faster progress.

Clause 10

Justine Greening (Conservative, Putney)

I want to make a few comments about the clause. We recognise that it introduces an inflationary increase to maintain the price of cigarettes and hand-rolled tobacco, and we support that. However, will the Minister give us an update for the record on where we are in terms of duty in relation to tax revenue maximisation, and how the proposed increase relates to that?

During the Public Bill Committee debate on last year’s Finance Bill the then Financial Secretary, the hon. Member for Wentworth (John Healey), said that

“any big rise in the rates of tobacco duty will reduce revenue and increase smuggling, so that is a central consideration for us as we weigh up these duty decisions.”——[Official Report, Finance Public Bill Committee, 10 May 2007; c. 73.]

It would be helpful to have the Minister’s statement on whether that is still the Government’s position and whether the aim of this inflationary increase is to continue to be somewhere close to the tax revenue maximisation point. In addition, will the Minister give us a brief update on the Revenue’s understanding of the impact of the smoking ban on consumption and duty?

A key point is that the Government are considering their smuggling strategy, having had one in 2003-04, but it seems that progress on bearing down on smuggling has plateaued, although I recognise that there was some progress. I understand that that is why the Government are considering the matter again. However, the Tobacco Manufacturers’ Association said:

“The increase in tobacco tax announced today will do little to reduce the level of tobacco smuggling and cross border shopping which lost the Treasury £4.5 billion in revenue last year. The decision helps to maintain the UK’s position as one of the world’s most profitable destinations for tobacco smugglers and this is of great concern to the TMA and its member companies.”

We can put those comments in the context of who is making them, but smuggling takes a hell of a lot of money that would have gone to Her Majesty’s Revenue and Customs in duty. The latest estimates show that up to 18 per cent. of cigarettes and 62 per cent. of hand-rolled tobacco consumption is smuggled, and that 70 per cent. of all large-scale cigarette seizures are counterfeit. On top of that, many other smokers choose to buy their tobacco products from elsewhere in the EU where taxes and prices are considerably lower. That is another statistic provided by the Tobacco Manufacturers’ Association.

Smuggling is not an issue only for the Treasury, and I am interested in the Minister’s response because of my broader concerns. Other people who are hit by smuggling are smaller tobacconists and shopkeepers, and those who trade in legitimate cigarettes but are often undercut by those who do not.

I understand that much of the smuggling strategy is focused on border control and some of the more major mainstream franchises or smuggling outfits—the big business involved in smuggling. The end destination of cigarettes and hand-rolled tobacco is often small traders, and I want to find out whether the reworked smuggling strategy will have more focus on tackling smaller traders who are happy to sell smuggled products and often undercut competitors and small shopkeepers who prefer to sell only legitimate cigarettes. Can the Minister give us some clarity on that?

I want to follow up some parliamentary questions that I tabled a few months ago and perhaps to get some clarity from the Minister on the issues raised in them. I tried to find out the level of resourcing for the smuggling strategy and how many customs officers there were in HMRC. I assumed that the answer would be quite straightforward until I got an answer back saying:

“There is no separate group of staff identified as ‘customs officers’.”—[Official Report, 18 December 2007; Vol. 469, c. 1482W.]

To help me table parliamentary questions that will get answers, let me say that I was talking about the men who are generally at ports and airports and who tend to be dressed in uniforms—

Mark Todd (Labour, South Derbyshire)

Some of them are women.

Justine Greening (Conservative, Putney)

And women. As we go through customs, these people tend to stop us and occasionally go through our luggage to see whether we are smuggling cigarettes. My assumption was that they are called customs officers, but if the Treasury does not agree, I would be keen to know what they are called so that I can table parliamentary questions that will get a proper answer. I look forward to hearing what the Minister has to say.

Jeremy Browne (Liberal Democrat, Taunton)

Good morning, Sir Nicholas. Tomorrow is the 10th anniversary of my giving up smoking, so I do not know whether I need to declare an interest any longer. If I might say something unfashionable, however, I quite enjoyed smoking and I sometimes regret that I gave it up in the first place. However, giving up was no doubt good for my health.

I have two brief points. First, will the Minister confirm that the purpose of tobacco taxation is twofold—to disincentivise people to buy the product and to raise revenue? Will he also confirm that those two objectives are not incompatible? The second point has already been touched on by the hon. Member for Putney. What is the Government’s assessment of the impact of tobacco taxation on the smuggling of illegal tobacco products? What impact does that have in turn on the legitimate retailing of tobacco products?

Angela Eagle (Labour, Wallasey)

It is a pleasure to respond to the debate. It is a pity that the day is dull, although that was fairly predictable, given that this is the first day of the test match between England and New Zealand. An awful lot of disappointed people, myself included, will be looking at the skies this morning.

Clause 10 increases the duty rates on all tobacco products in line with inflation. Together with VAT, the increase is equivalent to 11p on the price of a typical pack of 20 cigarettes and 4p on a pack of five cigars. Our decision to raise duty rates, which the Committee does not oppose, is in line with inflation in the Budget and will maintain the real price of such products. It will thereby continue to encourage people to smoke less or to give up, as the hon. Member for Taunton did, and I congratulate him on his ability to break the habit.

Duty rates form an important part of the Government’s strategy to reduce smoking prevalence to 21 per cent. by 2010, alongside measures such as NHS stop-smoking services, the ban on smoking in public places, which came into effect on 1 July 2007, and raising the legal age for purchasing tobacco from 16 to 18 in October 2007. Budget 2008 retains the reduced rate of VAT that applies to smoking-cessation products. That point has not been raised, but the measure should be acknowledged. When it was originally introduced, it was time limited, but it will now continue beyond 30 June 2008.

When we set duty rates for tobacco, the potential impact on smuggling, which has been on hon. Members’ minds this morning, is an important consideration. As has been acknowledged this morning, the tackling tobacco smuggling strategy, which was introduced in 2000 and refreshed in 2006, was very successful in reducing the size of the illicit markets for cigarettes over the five years to 2005-06 from 21 per cent. to an estimated midpoint of 13 per cent. Since the start of the strategy, we have seized nearly 17 billion illicit cigarettes and more than 1,000 tonnes of hand-rolling tobacco.

The hon. Member for Putney is right to say that we are looking at hand-rolling tobacco, where there is clearly an issue that needs to be dealt with. However, to answer her question about where we are in respect of revenue maximisation, there is always a balance between excise duties and the smuggling phenomenon, as Committee members know. As my predecessor said in the debate on the 2007 Budget, duty rates are close to revenue maximisation, which is why there has been no greater increase than revalorisation in the Budget. That means that any large real increase in the duty rate would increase smuggling and probably increase the availability of cheap tobacco, which would obviously be a perverse result. That is what HMRC’s model demonstrates.

Mark Field (Conservative, Cities of London and Westminster)

As I am sure the hon. Lady is aware, the issue in respect of smuggling and counterfeit cigarettes is not simply about revenue maximisation or otherwise from the Treasury’s point of view, but about the safety of those products. Indeed, such products are often considerably less safe. Can she give some detail on how the success rate has been measured? She mentioned that smuggling was roundabout the 21 per cent. level four or five years ago and fell to 13 per cent, following Government initiatives. On what basis is she confident that those figures are accurate?

Angela Eagle (Labour, Wallasey)

That is the midpoint of a range; that is how HMRC tried to measure something that is difficult to measure. It is clear, from the level of seizures, that the percentages of smuggled goods are down, but it is hard to be deadly accurate about such things, because one does not know how much illicit product is targeted at us. However, we can make estimates from the illicit product that we intercept and by checking what is on sale and what can be picked up in the country. There are ways of doing this.

It is also important to make the distinction between smuggling legally made products—our memorandums of understanding with the tobacco-producing companies have greatly assisted us in dealing with that—and the increasing threat of counterfeit product, which the hon. Gentleman mentioned, which in some cases can have the most interesting things mixed in with it that would do nothing to improve one’s health.

The hon. Member for Putney mentioned her asking further parliamentary questions about Revenue and Customs officers. We do not have Revenue and Customs officers at UK borders whose sole purpose is to tackle tobacco smuggling: they multi-task and do other things as well. Those officers perform numerous roles in protecting the UK from smuggling of all types, be it drugs or other illicit substances, people, money or other things. Such smuggling routes can be used to transfer all sorts of things and it makes sense to have the border authority taking over this aspect of the work to multi-task in that way.

We do not differentiate between HMRC officers at ports and those who are working from elsewhere. However, I am happy to write to the hon. Lady on the overall figures on officers, if she wants me to, rather than pursue the matter through parliamentary questions.

Justine Greening (Conservative, Putney)

Obviously, one major change in the smuggling strategy will be that the inland strategy is presumably largely overseen by HMRC, whereas the border authority deals with smuggling after items have entered the UK. Will the Minister tell us how the Government plan to ensure that those two groups work together effectively, given that I believe they will be in different Departments? They will need to liaise closely and share intelligence.

Angela Eagle (Labour, Wallasey)

We have already put that in place—in fact, in the person of the Minister for Borders and Immigration, who now has a post in the Treasury as well to examine the UK Border Agency. I assure the hon. Lady that a great deal of organisational work is going into ensuring that there is proper liaison between the agency, the Serious Organised Crime Agency and the various other crime squads in question.

The nature of smuggling as a phenomenon means that when one deals with it in a particular place, it morphs into something else. There has been a marked increase in the smuggling of counterfeit cigarettes, as the hon. Member for Cities of London and Westminster pointed out. Some 70 per cent. of large seizures made by HMRC are now counterfeit.

To prevent counterfeit products from penetrating the legitimate retail sector in a bottom-up way, which would greatly increase smugglers’ profit, covert anti-counterfeit markings were introduced for all cigarette packs from October 2007. That will be extended to hand-rolling tobacco products this October, enabling us to tackle the problem from the retail supply end as well as at the borders. I assure the hon. Lady that a great deal of work is being done to ensure that there is co-operation both at the border and inland to detect and seize all such products.

With those reassurances, I hope that the Committee will accept that clause 10 should stand part of the Bill.

Schedule 5

Jeremy Browne (Liberal Democrat, Taunton)

I beg to move amendment No. 66, in schedule 5, page 139, leave out lines 11 to 35.

Would it be convenient to talk to amendment No. 65 at the same time, Sir Nicholas, or shall I do that separately?

Nicholas Winterton (Conservative, Macclesfield)

Separately, please. They have been selected separately, so I ask the hon. Gentleman to address his remarks to amendment No. 66.

Jeremy Browne (Liberal Democrat, Taunton)

I am grateful for your guidance, Sir Nicholas. The amendments are related, but slightly different.

Both amendments are concerned with biofuels, but amendment No. 66 is specifically about off-road rebates. It would remove from the schedule proposed new section 14B of the Hydrocarbon Oil Duties Act 1979, which would allow mainstream use of duty rebates for biofuels that are used off-road.

I have tabled the amendment to explore a few matters, the first of which is what the Government are trying to achieve with the off-road rebate. The explanatory notes on the schedule state that they are trying to

“encourage the wider use of biofuels in off-road applications”.

Can the Minister provide the Committee with a projection of the number of litres of biofuel that will be involved?

As the Committee knows, there are concerns about the sustainability of biofuel production. For example, the rebate mechanism in proposed new section 14B is completely indiscriminate, meaning that sustainable biofuel production will not be differentiated from non-sustainable. If the explanatory notes are accurate, the Government do not appear to be addressing sustainability. It would be interesting for the Committee to learn both how that is factored into the Government’s deliberations and an estimate of the net carbon dioxideemission savings that the Government envisage being achieved as a result.

Will the Minister also clarify whether the measure is a revenue raiser? According to the economic and fiscal strategy report, the new rebate will make money: £5 million in 2009-10 and £10 million in 2010-11. I appreciate that those are not large sums in the grand scheme of things, but it is confusing to me how the Government intend to make money from a rebate.

I should be grateful if the Minister clarified whether the proposal also relates to non-road transport. Committee members will no doubt recall that Richard Branson’s first biodiesel train, the Thames Voyager, was converted to run on 80 per cent. petrodiesel, leading to an estimated 40 per cent. saving on direct emissions. As I understand it, the Government’s proposal requires only that the fuel not be used for a road vehicle. There is no specific mention of other forms of transport, such as planes, trains and sea vessels. I should be grateful if the Minister touched on that issue; that was my purpose in tabling the amendment.

Peter Bone (Conservative, Wellingborough)

I rise to speak on the mixed signals that the Government are sending about biofuel, particularly bioethanol. As I understand it, the Government have taken a decision to end the discount for the use of biofuel on roads, yet the measure seems to encourage people to use it off roads. The Government are saying, “Let’s encourage biofuel as long as it isn’t being used on the roads, but on the roads, we’re going to restore the duty to the same level as petrol.”

Huge carbon savings could be made by using biofuel. The Government have not quite made up their mind whether biofuel is a good thing, because of its huge benefit in saving carbon, or whether they are against it, because of its sustainability and impact on food prices. They are sending terribly mixed messages, and we need some clarity about what they are saying. Is biofuel a good thing or a bad thing? Are they giving in to the petrol lobby, or are they as serious as our European colleagues in Sweden, who have made a big effort to get vehicles to switch to biofuel?

Justine Greening (Conservative, Putney)

I rise to reiterate the points that have been made. There seem to be a couple of inconsistencies. One is the introduction of the off-road rebate at the same time that the Government are signalling the removal of the road rebate, although that will not take place for a couple of years. The Renewable Energy Association has expressed concern about the unintended consequences: good biofuels might stay within the renewable transport fuel obligation, which applies to on-road use, but bad biofuels—those made in a less sustainable way—might be used off-road. I do not think that that will achieve the Minister’s aims.

I shall take this opportunity to ask the Government more broadly what their strategy is with regard to biofuel. Although it is not covered in this Finance Bill, the Government have signalled in the Red Book that they plan to remove the fuel rebate in 2010. That will have no small financial impact: it will prevent the Treasury from losing £550 million in 2010-11, which means that the renewable transport fuel obligation will become the Government’s key fiscal lever for increasing the amount of biofuels blended into the petrol used on roads.

We had a similar debate when the statutory instrument on the renewable transport fuel obligation went through Committee. The Conservatives are concerned that the RTFO does not include fully outlined sustainability criteria at the moment. In fact, my understanding is that the criteria will not be put in place until 2010-11. Will the Minister explain, therefore, why the Government are stepping away from the introduction of two levers with which to encourage biofuels, instead relying on just one, which many people do not think will be strong enough, soon enough? I am sure that we will come on to the issues about the buy-out price in the next amendment, so I shall conclude my remarks for the time being.

Mark Field (Conservative, Cities of London and Westminster)

I, too, hope that we can alleviate the need for a stand part debate, and join my hon. Friends the Members for Putney and for Wellingborough in asking the Minister to go into some detail about the Government’s broader strategy on biofuels. I appreciate that, from her perspective, the issue has received a considerably higher profile in recent months, given the problems with the sustainability of food growth, particularly in the developing world.

Some Opposition Members have always been very sceptical about the idea of biofuels being the grand answer to the entire problem, and I would be interested to have some sense of the Government’s thinking. In fairness, I do not expect them necessarily to have a full plan in place; the situation is very fluid, given the huge increase in the price of staple food commodities across the developing world. I appreciate that utilising biofuels for the purposes of carbon-free fuel is likely to become considerably less desirable, at least in the short term, but it would interesting to have some sense of where the Government see this going in the decades to come.

Patrick Hall (Labour, Bedford)

The hon. Gentleman’s criticism of biofuels is fair enough, as long as he is talking about the first generation, which is very land-hungry. Does he not acknowledge, however, the strong evidence that second generation biofuels would not fall into the same category and that they could have a useful future, so they should be encouraged?

Mark Field (Conservative, Cities of London and Westminster)

I fear that the hon. Gentleman knows considerably more about that than I do, and I shall expose my ignorance if I go too far down this path. As he rightly pointed out, however, the first generation of biofuels are very land dependent and have had some perverse effects that were not foreseen at the outset—they were regarded as the great new idea that would solve many of the problems resulting from the desire and need for oil and fuel while fulfilling the equally strong desire to keep carbon emissions to an absolute minimum. I hope that the Minister will give us some idea of the Government’s thinking. Few Opposition Members expect grand answers; we appreciate that it is quite a fluid and volatile situation, and will remain so in the future, but it would be useful to have at least some sense of the pathway that the Government have in mind.

Angela Eagle (Labour, Wallasey)

I am pleased to say that the hon. Member for Cities of London and Westminster and my hon. Friend the Member for Bedford are both right. If their goals could be achieved, second generation biofuels would certainly be far more sustainable than the first generation. They are not so land hungry and do not have the disadvantages of carbon emissions resulting from the production of the original fuel, whether corn, palm oil, wheat or whatever else people decide to make fuel out of.

The hon. Member for Cities of London and Westminster is spot on in saying that the situation with biofuels is very fluid—forgive the pun. We are trying to develop policies to incorporate the use of biofuels, which will cut carbon emissions if they are the right biofuels produced in the right way. The most obvious example is the fact that clearing a rainforest to produce corn to make biofuels does not necessarily assist the fight against climate change or reduce the planet’s carbon emissions. My understanding is that sugar beet is a far more viable biofuel and is probably already produced sustainably.

Justine Greening (Conservative, Putney)

I thought this would be an appropriate time to bring in the subject of “splash and dash”, of which I am sure the Minister is fully aware. The term relates to shipping the core bio components that go into biofuel over to the United States and adding them in. The biofuel is then shipped back to the UK. That is done, because production subsidies mean that production in the States is so much cheaper. What is the Government’s position on that?

Angela Eagle (Labour, Wallasey)

We are dealing with much of that issue via the European Union and the World Trade Organisation. Of course, I have also been in touch with the biofuel industry in this country. We are well aware of the issues. Unfortunately, the WTO is sometimes frustratingly slow, but I assure the hon. Lady that the Government are well apprised of the issues, as is the EU Commission. She should not worry about the matter.

Schedule 5 is attached to, and introduced by, clause 12. Schedule 5 establishes a new rebated rate for biodiesel and bioblend that is used other than as a road fuel. It allows the commissioners of Her Majesty’s Revenue and Customs to determine the composition of a substance for certain prescribed purposes. If accepted, the amendment tabled by the hon. Member for Taunton would prevent the introduction of a rebate on bioblend used other than as a fuel for road vehicles. It would not alter any of the other provisions in the Bill that relate to rebated bioblends. As such, I hope that it is a probing amendment.

In Budget 2007, the Government announced that they would encourage the use of biofuels in off-road applications, such as the railways—the hon. Gentleman finally mentioned that when he talked about Virgin trains—by permanently reducing the duty rate for those mixtures. That announcement followed the successful completion of a pilot trial undertaken by a rail company which, hon. Members can probably guess, was Virgin. The rail pilot scheme was successful, but it is not expected that there will be scope for the use of biofuel in aeroplanes. There has been a well-publicised one-off short-term experiment with the same company, but we do not expect it to be used at this time.

Peter Bone (Conservative, Wellingborough)

I thought Richard Branson said that all his future profits would go into the development of biofuels for bioplanes to help to massively reduce the carbon footprints of aircraft. That is completely at odds with what the Minister has just said.

Angela Eagle (Labour, Wallasey)

One of the things for which I am extremely grateful is the fact that I am not responsible for Sir Richard Branson’s pronouncements. I do not believe that I have to explain them to the Committee, so the hon. Gentleman will have to ask Sir Richard Branson what he meant.

Justine Greening (Conservative, Putney)

The Minister said that she does not believe that aviation will go down the biofuel route. I understand that, but I wondered whether there was a particular reason why she had reached that conclusion, and if she could share it with the Committee. Is it based on an assessment of which models of current fleet can be adapted, or is it to do with economics? Can she outline her reasons in more detail?

Angela Eagle (Labour, Wallasey)

The comment that I made is about the short term. It may well be that in the medium to long term, the redesign of aviation engines can become as innovative as the redesign of car engines. Certainly, for the purposes of this rebate in the short term, we are expecting it to be of much greater use on trains than on other forms of transport. Marine transport is another issue. We have an aging world fleet as far as marine goes, and to be able to adapt to the use of biofuels, the mechanics of ships would need to be re-engineered. I hope in the fullness of time that that will begin to happen with other forms of transport, as it has done with cars—we all look forward to that—but it will not happen in the short term without re-engineering. We do not expect that the positive introduction of clause 12 and schedule 5 will drive that, although we hope to ensure that the carbon footprint of many trains can be reduced. Successful pilot projects running biofuel mixes have already taken place, and have demonstrated that with the existing engines it is possible for trains to reduce their carbon footprint considerably. In essence, that is what schedule 5 seeks to do.

The Government believe that biofuel policy should support only sustainable biofuels, which is why the Secretary of State for Transport announced that Professor Ed Gallagher would lead a study on the wider environmental and economic impacts of biofuels, including their impact on food prices. The review will publish its report in June. Members who have read the King report will remember that Professor King spent a great deal of time on the way in which we define the life-cycle costs of fuels, in particular biofuels. Understandably, that is an emerging focus, and we have yet to develop the right methodologies to ensure that we can assess whether biofuels are sustainable. Clearly, that work has to go on in parallel with the development of potential biofuels, particularly second-generation ones.

We can be absolutely certain that if we do a great deal of re-engineering of engines and infrastructure to accept biofuel mixes we will be doing good rather than bad, and that work is proceeding. Previously, a mixture of biodiesel and rebated heavy oil was liable to duty at the punitive heavy oil rate. As announced last year, we are amending the duty regime so that such mixtures become subject to duty at 9.69p per litre. That is the same as the rate for red diesel, which is the fuel commonly used in off-road applications. That is the point of the schedule. I hope that, given those explanations, the hon. Member for Taunton will withdraw the amendment.

Jeremy Browne (Liberal Democrat, Taunton)

This probing amendment was intended to give the Committee an opportunity to discuss the issue along those lines. I beg to ask leave to withdraw the amendment.

Jeremy Browne (Liberal Democrat, Taunton)

I beg to move amendment No. 65, in schedule 5, page 143, line 45, at end insert—

‘27 In Article 21 of the Renewable Transport Fuel Obligations Order 2007 (S.I. 2007/3072), after paragraph (11) insert—

“(12) The Administrator shall undertake an annual review of the effectiveness of the buy-out price level under sub-paragraph (7), including in particular its impact on the level of incentive provided to suppliers to invest in biofuels.

(13) Within two months of completing any review under paragraph (12), the Administrator shall submit a report of its findings to the Secretary of State.

(14) As soon as reasonably practicable after the Secretary of State has received a report on a review under paragraph (12) the Secretary of State shall lay a copy of the report before the House of Commons.”’.

The amendment deals with an issue related to that raised by amendment No. 66. It, too, refers to schedule 5, but it deals with the on-road use of biofuels. Because the wording of the amendment is fairly complicated, it may be helpful to take the Committee through its intention. Article 21 of the Renewable Transport Fuel Obligations Order 2007 allows fuel suppliers to pay a buy-out price to discharge their obligation to replace a certain percentage of their annual fossil fuel sales with biofuel. The so-called renewable transport fuel obligation, which has been in force since April, will be run by the newly formed Renewable Fuels Agency. At present, biofuels receive two forms of support: a 20p per litre rebate and a 15p per litre buy-out price. If a supplier has a litre of biofuel, he will get 20p off the duty rate, and avoid paying a another 15p for not hitting the biofuel target. That creates a total saving of 35p for the supplier.

The Government, however, announced in the Budget that from 2010-11, the rebate would be scrapped and replaced with a buy-out price of 30p a litre. Consequently, my amendment would insert three new paragraphs into the order. Proposed new paragraph (12) would require the administrator of the buy-out mechanism to undertake an annual review of the buy-out level, and its effect on incentivising biofuel investment. New paragraphs (13) and (14) would require the review to be presented to and approved by the House.

This is a probing amendment. Its purpose is to ascertain the Government’s motivation in respect of biofuels. How were the figures arrived at, and how will they be kept under review? Has the Treasury taken account of present and future rises in oil prices and agricultural commodities? Is 30p enough to incentivise a sustainable UK biofuel production industry? That area was touched on in the previous debate. How viable is biofuel production in terms of our total energy requirements? How sustainable is biofuel production, and how is its environmental value measured? Given the EU’s renewable energy directive, which means that 10 per cent. of transport-related energy must be renewable by 2020, I want to establish whether or not biofuel production is likely to make a significant contribution to that target.

Finally, scrapping the 20p per litre rebate and replacing it with a higher buy-out price is estimated, as I understand it, to net the Treasury a saving of £500 million a year. I suspect that this particular schedule and these amendments do not feature prominently on a list of the highlights of the Finance Bill Committee for most Members. However, by my estimate, the proposals in this schedule are the third-highest revenue raiser from the Budget after the changes to vehicle excuse duty and the revenue raised from increased alcohol duties. It is therefore worth the Committee examining these proposals in detail, first to see whether they will achieve the environmental objectives to which the Government aspire and claim that they will achieve, but also because, as I understand it, they are a significant method for raising additional revenue for the Treasury.

Peter Bone (Conservative, Wellingborough)

I should declare an interest at the start, as I drive a biofuel car. The Minister said earlier that it will take some time to get engines to adjust to the new biofuel, but the technology is here already; it is a very simple mechanism and a car can run on biofuel or petrol.

Angela Eagle (Labour, Wallasey)

The context of those earlier remarks was marine and aviation fuel, not car fuel. I absolutely accept that the technology is available for cars.

Peter Bone (Conservative, Wellingborough)

I am grateful to the Minister for making that point clear.

There is something that has not emerged in the discussion so far. We have been talking about the rebate and the fact that the rebate for biofuels will be raised in due course to a level such that petrol duty and biofuel duty will be the same. At the moment, a litre of biofuel is roughly 2p cheaper than a litre of unleaded petrol. Unfortunately, it is 50 per cent. more inefficient, so when someone drives a biofuel car, they are paying substantially more to drive it than to drive a petrol car.

At the same time, the Government are providing grants for forecourts to convert to biofuel stations. There are only 17 or 19 biofuel stations in the country, so we are talking about first-generation technology. We have already heard the remarks by the hon. Member for Bedford and he is absolutely right that second-generation biofuels will be much better. It is rather like video recorders; if the first video recorders were what we were going to end up with, we would never have had a video recorder at all.

In my opinion, the Government have got to make up their mind whether or not they want to go down the biofuel route. The amendment clearly raises that issue again. I do not want a detailed explanation; I just want to know whether or not the Government want to encourage biofuel.

Justine Greening (Conservative, Putney)

I rise to echo some comments I made in my first contribution, and also to echo some of what has been said by other hon. Members. We need to be very careful about what we are doing with the buy-out price. There is no doubt that the interaction between the buy-out price and the fuel rebate is absolutely critical to unlocking this market to its full potential.

As things stand, in 2008-09 we will have a 20p per litre rebate on biofuel, combined with a 15p per litre buy-out price if we do not meet the renewable transport fuel objectives. Effectively that means that if it costs companies less than 35p to produce a litre of biofuel, it will be economical to supply the biofuel, but if it costs more, it is cheaper for them to buy out of the obligation. When we reach 2010, however, the buy-out price will increase to 30p per litre, but the biofuels duty rebate will end. That means that companies need to produce biofuel for 30p per litre or less for it to be more profitable than buying out. Furthermore, without the rebate, all the cost will fall on the consumer. There is a real danger that if companies buy out of their obligation on biofuels, customers will pay for the policy, but we will not actually see the carbon savings. That would be a real double whammy, not only for the consumer, but for the environment.

How, therefore, does the Treasury go about setting the buy-out price? How does it arrive at a price of 30p per litre? To echo the comments of my hon. Friend the Member for Wellingborough, how does the Minister see this market developing? Are the Government doing enough to ensure that we unlock the demand, which I am sure is there, for biofuels and biofuel cars? At the moment, we are not really doing that.

Angela Eagle (Labour, Wallasey)

It is good to have such simple questions to deal with on a Thursday morning. Part of the issue in the re-engineering of economies to reduce our carbon footprint is that there is no utter certainty about the most sensible and carbon-efficient way through the process—as the hon. Member for Cities of London and Westminster said, this is a fluid situation. We are attempting to put in place analytical approaches to allow us to establish what a good or a bad biofuel is, and Professor Gallagher will do some of the work on that and on the effects on fuel prices.

The hon. Member for Wellingborough was right to say—as Professor King did in her extremely good report—that biofuels are less efficient in terms of the power that they give to the car, so it would need more litres to do the same number of miles. That is yet another complication that we must take into account when we analyse whether to incorporate biofuels into our fuel and what the effect will be. Clearly, the way in which the biofuel originated also has an impact on whether it is a positive or negative thing.

There are therefore many different variables—all potentially moving in different directions, but the analytical structure is only just coming into place. That is the background against which all advanced economies have to see what they can do to incorporate biofuels in the most environmentally sustainable way, without that leading to perverse results such as increased carbon emissions, and without putting food prices up to such an extent that there are food riots in different parts of the world.

If biofuels are produced—I used an extreme example earlier—by knocking a rain forest down, they will definitely not reduce our carbon footprint. Other sources of biofuels are almost certainly sustainable, and I mentioned sugar beet. People in academia are doing the work so that we can identify where different biofuels come in that regard, and we must try to develop policies in the light of developing knowledge and analytical capabilities. The road transport fuel obligation is a better way of taking account of different biofuels than a simple duty, which does not allow us to distinguish between different biofuels and the way in which they are produced.

Justine Greening (Conservative, Putney)

I fully understand what the Minister is saying, but the critical issue is the relationship between the buy-out price and the cost to manufacturers of producing a litre of biofuel. The Treasury must surely be talking with the industry, and it must have made some assessment of how much it costs a manufacturer to supply a litre of biofuel. That is the key question. If the buy-out price is set above the cost of production, it will create one incentive, but if it is set below it, it will create an entirely different incentive. The modelling has as much to do with the future costs to manufacturers of supplying biofuels as with anything else. What is the Treasury doing to understand what those costs will be?

Angela Eagle (Labour, Wallasey)

We do a great deal of work to understand what they will be, and to make the road transport fuel obligation buy-out price bite at the appropriate place, but again, prices move up and down all the time. The costs of alternatives to biofuel, as we can see from the price of oil, move up and down—mainly up, if we are talking about oil. The Treasury is keeping the price of the buy-out under review as evidence emerges of the environmental and economic impacts of biofuels. We will consider it with respect to the Gallagher report and make decisions on whether the buy-out price is too low or too high as we go on.

There are no easy answers to those questions. I can only reassure the hon. Lady that the buy-out price is meant to provide an appropriate incentive. The Treasury is not particularly interested in having a completely ineffective system. Nor, I suspect, is the Department for Transport, which is responsible for the road transport fuel obligation, so work is under way to set an effective buy-out price. If evidence emerges that it has been set wrongly, I am sure that the Renewable Fuels Agency will have some words to say about it. The Government will certainly be open to emerging evidence of that kind. I am not sure what else I can say, but I will give way to the hon. Lady if she wants to ask another question.

Justine Greening (Conservative, Putney)

I appreciate the Minister’s response. As this is an opportunity to discuss the issue in the context of the Finance Bill, I have a further question. It looks as if the tipping point will be reduced in two years’ time from 35p, which includes the rebate and the buy-out price, to 30p when the rebate is gone and the buy-out price has risen. That suggests that the Treasury suspects that the cost of producing biofuel will gradually decrease over time, and that the buy-out price therefore will not need to be as high, but that is set against a backdrop of rising food prices. There might be a different world view about the price inflation of many foodstuffs used to produce biofuels than when the Treasury first worked out the buy-out price. I wanted to put that on record. Does the Minister accept that it suggests that the proposed 30p buy-out price for 2010-11 will need to be carefully considered?

Angela Eagle (Labour, Wallasey)

I have said that we are keeping it under constant review as all those changes happen. The road transport fuel obligation provides much more scope for reflecting sustainability than a duty differential between different biofuels, and without the risk of fraud. That has an impact on the sustainability argument, which is why we want to shift the weight of delivering the policy to the road transport fuel obligation rather than having the duty differential.

The RTFO’s effectiveness will be monitored, as the hon. Member for Taunton rightly said, by the Renewable Fuels Agency, which administers the scheme. The agency will be responsible for providing regular reports to Ministers and Parliament on its implementation. Under the Renewable Transport Fuel Obligations Order 2007, the Renewable Fuels Agency is duty-bound to publish an annual report including details of the extent to which the obligation has been met by buy-out payments. The Government will take the reports into account when deciding on matters such as the future level of the buy-out price. Any change to the buy-out price will require a new road transport fuel obligation order, which will be subject to consultation and debates in both Houses of Parliament.

The hon. Gentleman is trying to put into the Finance Bill something that already exists in the order that set up the road transport fuel obligation. The arrangements will come back before Parliament in a report, not from Her Majesty’s Treasury, but by the agency. I would ask him not to press the amendment to a Division, because the arrangements that it would put in place already exist, albeit not in a Bill.

Jeremy Browne (Liberal Democrat, Taunton)

That was a useful discussion and I beg to ask leave to withdraw the amendment.

Clause 13

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss new clause 4—Fuel duty regulator—

‘In the HODA 1979 (c. 5) in section 6 (excise duty on hydrocarbon oil) there is inserted after subsection (1A)—

“(1AA) In every Budget Statement and pre-Budget Report the Chancellor of the Exchequer shall provide his forecast for the price of oil and set out anticipated yield from fuel duty and VAT on fuel for that price and for a range of prices up to 50 per cent. above his forecast.

(1AB) In the 2008 pre-Budget Report the Chancellor of the Exchequer shall bring forward a mechanism for—

(a) using additional revenue from VAT on fuel above forecast to offset fuel duty when the oil price rises above his forecast level;

(b) providing specific fuel duty reductions targeted at fuel sold in sparsely populated areas; and

(c) providing specific fuel duty reductions targeted at fuel sold to road haulage operators;

and the Chancellor of the Exchequer shall by order define “sparsely populated areas” and “road haulage operators” for the purposes of this subsection.

(1AC) Whenever international oil prices return to the level estimated by the forecast made in accordance with subsection (1AA), the offset described in subsection (1AB) (a) to (c) is suspended until the price rises again or the forecast price is amended by the next Budget or pre-Budget Report.”.’.

Stewart Hosie (Scottish National Party, Dundee East)

Before I speak on new clause 4, it is worth noting the context within which the debate is taking place. When I proposed a similar measure on 6 July 2005, I said that, according to the AA, the price of unleaded petrol had risen to 86p a litre, up 6p in the previous six months. Fuel is now priced at anything from £1.10 to in excess of £1.30 a litre.

I said then that Brent crude had touched $60 a barrel, up from an average price across the piece of $50. In the run-up to the recent Budget, the price was an average of $83.60 a barrel, an increase from the $68 forecast in the pre-Budget report. In the quarter before this year’s Budget, the price of a barrel averaged $94. In four of the five working days up to the Budget, we saw record closing prices for North sea oil, and the Red Book forecast £56 billion of revenue in the next six years, which was up from the previous six-year forecast of £38 billion. Oil has gone from $60 a barrel in 2005 to an annual average, up to the Budget, of $83.60 via a last-quarter score of $94 a barrel. I checked the spot price a couple of days ago: it was $123.97—nearly $124 a barrel. It is in the context of massively rising oil prices and high price spikes for fuel at the pumps that I am proposing the new clause.

The impact on people is also worth noting. When we debated that similar proposal in 2006, the AA estimated that the monthly increase in the cost of fuel for a two-car household had risen by £13.18—a 6p rise on the litre. By April this year, the corresponding rise for a two-car household was £32.97 a month—nearly £33. The measure has been proposed in the knowledge that the Treasury, not content with the normal indexed rises, has proposed in the Budget an additional, above-indexation escalator from 2010.

The new clause would do three things: it would oblige the Chancellor to publish a forecast yield figure at every Budget and pre-Budget for fuel duty and associated VAT for a range of prices up to 50 per cent. above his anticipated yield, and to develop a mechanism by which to use the windfall on VAT gain to offset the duty; and allow the regulator to be removed when the price drops back to the baseline, or when the new yield forecast is made in subsequent Budget and pre-Budget statements. The latter proposal is important because I have been criticised in previous debates that the proposal was for a one-way escalator and that it would not afford the opportunity to return. The proposal makes it clear that the new yield forecast can be set to take in qualitative rises in prices and not simply spikes.

The proposal is partly probing, but it may come back in another form at a later stage in the proceedings. I want to hear what the Government and the Opposition think of the three elements of proposed new subsection (1AB) to the Hydrocarbon Oils Duties Act 1979; namely, that an offset might be introduced universally, that one might be introduced to assist remote rural areas and, in particular, that one might be directed towards the haulage industry, which is of massive concern to me. That is probably why the Road Haulage Association is backing the new clause and calling on MPs from all parties to set aside political considerations and support that or a similar measure.

We will all have had representations from our constituents and from hauliers. We know, certainly in Scotland, that the cost of all goods is driven up as the cost of haulage increases. I know from my part of the country that the competitiveness of Scottish business has been reduced because of increased transportation costs. Even well known companies, such as Ramage, are going into administration, citing, among other things, the cost of fuel as a key factor. When a company such as that, which in parts of the country was as well known as Eddie Stobart—people would look out for those wagons—goes into administration citing fuel costs as a factor in that decision, something is seriously wrong.

I do not want to take up too much more time, but it is important that the Government understand that this is not all someone else’s problem. Of the average £37,000 that it costs each year to provide fuel for a 44-tonne truck, the Government already take £25,000—of course, they take more when the price at the pump rises. Therefore, the Government cannot abdicate responsibility for some of the problems. They will be happy to force a typical 20-vehicle company to generate £30,000 a year more to pay for a 2p rise in duty. They are happy to take the VAT windfall when the price at the pump rises and they are happy to take the £56 billion that it has been forecast will come from higher oil prices over the next six years.

Fundamentally, the new clause says that it is time for the Government to put something back when prices not only bite a little but tip companies over the edge, put too much pressure on remote rural areas and force ordinary families to find hundreds of pounds extra a year simply to do the basics. I cannot put it any better than Geoff Dossetter, the Freight Transport Association’s director of external affairs. He was quoted in the Sunday Herald on 13 April as saying:

“It’s barking mad. We’ve already got the highest diesel taxes in Europe.”

With that, I will conclude. I want to hear not only what the Government have to say but what the other parties have to say, particularly on the possibility of the fuel tax regulator concept being introduced to offer at least some assistance to the road haulage industry.

Nick Palmer (Labour, Broxtowe)

I have a couple of questions. First, although the hon. Member for Dundee, East has allowed for the possibility of fuel prices falling back to a level originally envisaged, he will be aware that current fuel prices are driven partly by the limited supplies of fossil fuels in the world but also by considerable political instability in countries such as Venezuela, Iraq, Iran and, potentially, Russia, and it is at least possible, and some serious analysts are suggesting, that there will be a substantial fall in fuel prices at some point. We may think that unlikely, but the new clause does not allow for any reaction at that point. It is still a ratchet: if prices go up, the Government are forced in effect to reduce the duty, but if prices go down, the beneficiaries simply pocket the proceeds.

To that extent, the measure seems slightly populist, because if there is a sustained rise in fuel prices, the terms of trade will have moved against Britain and there will be a collective problem for us all. If we attempt to protect only the people immediately affected—for instance, the road haulage industry—we are redistributing the impact of the oil price rise on to everyone else. In particular, I do not think that the hon. Gentleman’s proposal to protect rural areas will work. If garages in certain postcodes were subject to lower duty, there would be substantial fuel smuggling, as we see across the border between Northern Ireland and the Republic of Ireland. It is not possible, within one country or in a remotely open economy, to have selective duty in different areas.

Finally, let us consider the environmental impact of fuel duty. Many of my constituents, like those of the hon. Member for Dundee, East, are worried about the impact of rising fuel prices, but if our reaction to a real world problem with the supply of fossil fuels is always effectively to subsidise prices, in the long run we are avoiding dealing with climate change and the decline in fossil fuels. There is a tendency for all parties to talk the talk on these issues without walking the walk. We need to consider the impact of the crucial decision that is to be made on how world affairs affect the environment in Britain and accept that, sometimes, a change in behaviour is needed on the part of our consumers and our Government.

Stewart Hosie (Scottish National Party, Dundee East)

I shall answer some of those points at the end. However, on the latter point, I have no problem at all with managed price rises to tackle climate change. I have said that before. It is not the managed increases to tackle a particular problem that are of concern, but price spiking, which is so serious and damaging, must be addressed, as must the excessive increases that happen quickly.

Nick Palmer (Labour, Broxtowe)

I accept the hon. Gentleman’s point. However, if he refined his new clause to take account of circumstances in the unlikely event of a price dip, we would have a serious, rounded proposal to consider.

The new clause skirts around how we are going to tackle dwindling fossil fuels; it says, basically, that if there is a problem with rising world prices the Exchequer will help. In the long run, that will not be sufficient. Perhaps the Conservative spokesperson will confirm that the Conservatives are considering reintroducing the fuel price escalator. If that is done, the issue will arise even more acutely. I do not necessarily disagree with that, but it is controversial and needs serious discussion.

Justine Greening (Conservative, Putney)

I am conscious of what has already been said, so I will keep my comments brief. Obviously, we support the belated decision by the Chancellor to delay the 2p rise in fuel duty. We understand, from interested stakeholders, including the AA, that rising petrol and diesel prices have increased the total cost of running a small family car from 55p a mile to 58p a mile. As the hon. Member for Dundee, East said, that has an impact not just on families, but on people who use petrol to carry out their day-to-day business, including road hauliers.

We welcome the Chancellor’s drawing back from including his 2p duty rise in the Budget in April and his proposal to delay it until October. However, it was delayed not because of anything to do with road hauliers or families who cannot afford to pay more fuel duty, but mainly for self-interested political reasons.

Nevertheless, we welcome the deferral in itself and that is why we will support the clause. I understand that the hon. Gentleman has introduced a new clause to look at how we can perhaps have a more sensitive rate of tax on fuel, one that takes into account the ups and downs of oil prices, and that is something that we should consider.

Angela Eagle (Labour, Wallasey)

Is the hon. Lady saying that it is the Opposition’s policy to introduce a fuel duty regulator?

Justine Greening (Conservative, Putney)

I think that I had only said about 15 words before the Minister jumped up to intervene on me.

We are not saying that, actually. The point raised by the hon. Member for Dundee, East was that there is clearly an issue that the Government themselves have recognised, which is why they have had to delay the fuel duty rise. Fuel, by necessity, fluctuates in price in line with the oil price. That can mean that, at the same time as fuel prices are rising and fuel duty is rising, VAT on fuel is also rising. Therefore, there is clearly a double impact of the Treasury when fuel and oil prices go up.

I am just recognising that the hon. Member for Dundee, East pointed out the impact of all these price rises and he was making a suggestion to deal with them. I must say that it is not one that I agree with. None the less, he was making a suggestion that we should look carefully to see if there are ways to handle this situation more effectively than the way we have at the moment, whereby the Government have proposed a 2p rise in fuel duty and then, at the last moment, they have had to say that they want to delay its introduction. I do not think that that is good for families, but it is certainly not good for businesses.

Nick Palmer (Labour, Broxtowe)

Will the hon. Lady rule out the possibility of reintroducing a fuel price escalator?

Justine Greening (Conservative, Putney)

At the moment, we think that all these issues need to be kept under review. The difficulty is that we have dramatically escalating oil prices; as has been said, just six months ago they were at a much lower level. In fact, the range of estimates that experts have for what the price of a barrel of oil may be in the next six months is, I understand, between £80 and £150, even up to £160.

Clive Efford (Labour, Eltham)

In talking about the fuel duty escalator and rising petrol prices, the principle that the hon. Lady is discussing is that the increase in price is desirable because it alters behaviour and reduces the use of fossil fuels, and therefore it has a positive impact on the environment. That is the green taxes that her party has talked about.

Now we are getting to the nitty-gritty of the debate, because this is where we have to take decisions about whether to support policies that will change behaviour. Is it the basic approach of the Conservatives that the cost of petrol has to go up to change behaviour, whether that rise is as a result of the market or the use of the fuel duty escalator? Is that the Conservative position?

Justine Greening (Conservative, Putney)

The hon. Gentleman is asking a question that is not really appropriate, in the sense that he is asking if the cost of petrol has to go up to change behaviour. Well, we have just had a debate on biofuels, which is totally unrelated to the cost of petrol but is related to changing behaviour.

I must say that, if the hon. Gentleman and his party want to have a good debate about environmental taxes, one that the public can participate in, perhaps they can follow the polls that we have had recently and call an election, to give people the chance to elect their Prime Minister and have a choice on that matter.

Clive Efford (Labour, Eltham)

Does the hon. Lady think that she will have a policy by the time of an election?

Justine Greening (Conservative, Putney)

At the moment, the hon. Gentleman is talking about our policies, but I have noticed quite a lot of our policies sneaking into this Government’s agenda in recent months, so it is no wonder that he is so concerned to try to get even more policies out of us.

Clive Efford (Labour, Eltham)

I am in danger of testing your tolerance, Sir Nicholas, by pursuing this debate.

The reason for the similarities in policy at this time is that the Government are dominating the debate. [Interruption.] Impersonation is the best form of flattery, believe me. Attempts by the Conservative party to come up with green policies have been exposed as a sham because they are not prepared to take a principled position on what is needed to challenge people’s behaviour. They talk about a basket of green taxes that will change people’s behaviour, but when it comes to it, they do not have a principled position.

Nicholas Winterton (Conservative, Macclesfield)

Order. Justine Greening has the floor.

Justine Greening (Conservative, Putney)

Thank you, Sir Nicholas. I was thinking of intervening on the hon. Gentleman at one point, but I shall move on. [ Interruption. ] Well, we are discussing a clause that introduces a complete change of Government policy, so I do not think that Opposition Members need to take any lectures about who is dominating the debate. In fact, the clause backtracks on the rise in fuel duty. What I am saying—and the Government should welcome this—is that my party supports the decision to delay the fuel duty rise until October.

Jeremy Browne (Liberal Democrat, Taunton)

May I make a contribution, Sir Nicholas?

Nicholas Winterton (Conservative, Macclesfield)

I was going to suggest that the Minister reply, but the hon. Gentleman is persistent.

Jeremy Browne (Liberal Democrat, Taunton)

I shall not speak at great length, but as the Conservative and Labour parties have agreed that their policies have morphed into one, it seems reasonable that the Committee should hear an alternative view. In fact, if anyone is seeking an explanation as to why Labour has the worst poll ratings in living memory, it may be because it is adopting too many Conservative policies. That is clearly a way to go down the tubes very quickly. It is not entirely relevant to the matter before us, but only one party gained seats in each of the past three general elections, and I had the good fortune to be a spokesman for that party.

Nicholas Winterton (Conservative, Macclesfield)

Order. We are debating a clause in the Finance Bill. We are not on the hustings in Crewe and Nantwich. Please direct your remarks to the clause, Mr. Browne.

Jeremy Browne (Liberal Democrat, Taunton)

Thank you, Sir Nicholas. I am sure that it is a relief to everyone that we have an excuse—being in this Committee—for not being on the hustings for the Crewe by-election.

I am keen to speak specifically on the subject, because the claims made for postponing the 2p per litre duty are exaggerated. If somebody has a 50-litre car, for example, the saving from the postponement would be £1 every time they filled up. The saving to a motorist who drives enough to fill up such a car a couple of times a month would be £12, so we should not make too many extravagant claims about the financial benefits to consumers of delaying the rise.

There is, however, a wider point. When such proposals are postponed, politicians are quick, as the hon. Member for Broxtowe said, to talk the talk, but they are rather less quick to walk the walk. I direct these comments to all parties but particularly to the Conservative party: the party leader having photo opportunities with Zac Goldsmith or other people of that sort is not a substitute for proper policy. My concern is that we cannot have a serious conversation, and certainly not a general election, until the Conservative party makes some serious proposals on road haulage, duty on petrol, and environmental policy, full stop.

Mr. Bone rose—

Nicholas Winterton (Conservative, Macclesfield)

Order. I am afraid that the hon. Member for Taunton is going far too wide. Again, his speech appears to be a political one rather than one on a Government Finance Bill. Opposition policy may be peripheral to discussion of the clause, but we are not debating it. It is the clause in this Government Bill to which we should direct our attention. I believe that Mr. Bone is seeking to intervene.

Peter Bone (Conservative, Wellingborough)

The hon. Member for Taunton misses the point. When a Government prepare their Budget, they plan what they expect to receive in VAT on the current or predicted future prices of oil. If those oil prices go up enormously, there is a big windfall gain for the Government. That is what this refers to. It is not part of the plan of environmental taxes; it is a windfall gain and the clause seeks to deal with that. What do the Liberal Democrats believe should happen when the Government get a huge windfall from an increase in oil prices?

Jeremy Browne (Liberal Democrat, Taunton)

That is an entirely fair point. I would only answer in more general terms by saying that one of the main reasons that there is a lack of public confidence—

Mark Todd (Labour, South Derbyshire)

Will the hon. Gentleman give way?

Jeremy Browne (Liberal Democrat, Taunton)

Wait a second. I sympathise with you, Sir Nicholas, in trying to do your job and manage our proceedings.

I shall first deal with the intervention by the hon. Member for Wellingborough. One of the main reasons why there is public concern about environmental taxation is that there is a suspicion—justified, in my view—that the primary motivation is raising revenue, rather than trying to benefit the environment. I am keen that environmental taxes should be offset by reductions in taxation elsewhere. That means people will be disincentivised to use their cars, for example, but I hope that as a result they will be incentivised to do other things, including working harder.

Mark Todd (Labour, South Derbyshire)

Perhaps the hon. Gentleman might find helpful a little thought on the interaction between VAT and the price of fuel because he has been challenged on that point. Consumers have a finite amount of money to spend. If VAT has been increased sharply through an increase in the price of fuel, logic therefore says that they will spend less on other items in household expenditure that would otherwise attract VAT to the Government. The net effect may well be neutral.

Jeremy Browne (Liberal Democrat, Taunton)

I take the hon. Gentleman’s point. [ Interruption .] Well, he was not making a political point; he was making a consumer point. That would obviously depend on consumer patterns. The point has extra validity, because VAT has gone up so much in my adult lifetime. However, that is another matter, which is not directly related to our conversation.

I will finish by making this observation which is specifically and directly relevant. People are naturally concerned about petrol taxes: people who need their cars for work have a professional concern, and most leisure motorists would rather pay less than more. Very few people come up to politicians and say, “Please can I pay more for a service, please will you raise the taxes?” However, some people come to politicians and express an interest in our offering leadership. [Interruption.]

Nicholas Winterton (Conservative, Macclesfield)

Order. One speaker at a time.

Jeremy Browne (Liberal Democrat, Taunton)

As a politician, I offer leadership not just followership in attempts to try to reduce carbon emissions and help the environment. I make that observation in passing, because it is relevant to our deliberations. There will be a short-term benefit for politicians who try to follow public opinion but who are derelict in the leadership that they offer on environmental issues. There ought to be a reward for those who take a responsible attitude, and if we want a planet which is as enjoyable for future generations as it is for us today, we cannot continue backing off every time we see an adverse opinion poll on environmental issues.

Angela Eagle (Labour, Wallasey)

We have had a fascinating debate. I thank the hon. Member for Dundee, East for introducing this particular part of the Finance Bill. We have just heard the hon. Member for Taunton say that the role of politicians is not to listen to the people whom they represent but to lead them against the opinion polls. The hon. Member for Putney supported the hon. Gentleman’s new clause, but then said she did not support the introduction of a fuel regulator, which is what he was discussing.

Nicholas Winterton (Conservative, Macclesfield)

I regret I have to bring the debate to an end at this critical point. All papers will be secure in the Committee Room, which will be locked.

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

Nicholas Winterton (Conservative, Macclesfield)

I welcome Members back, following our adjournment at 25 minutes past 10. For those who are interested, I am advised by the Minister that there is no play at Lords.

Stewart Hosie (Scottish National Party, Dundee East)

What Lords?

Nicholas Winterton (Conservative, Macclesfield)

Cricket, I think.

Hopefully, we will make some fairly rapid progress, with co-operation across the Committee, because certain Ministers and shadow Ministers might well have to be on the Floor of the House for an important debate.

Clause 13

Nicholas Winterton (Conservative, Macclesfield)

I remind the Committee that with this it will be convenient to discuss new clause 4—Fuel duty regulator—

‘In the HODA 1979 (c. 5) in section 6 (excise duty on hydrocarbon oil) there is inserted after subsection (1A)—

“(1AA) In every Budget Statement and pre-Budget Report the Chancellor of the Exchequer shall provide his forecast for the price of oil and set out anticipated yield from fuel duty and VAT on fuel for that price and for a range of prices up to 50 per cent. above his forecast.

(1AB) In the 2008 pre-Budget Report the Chancellor of the Exchequer shall bring forward a mechanism for—

(a) using additional revenue from VAT on fuel above forecast to offset fuel duty when the oil price rises above his forecast level;

(b) providing specific fuel duty reductions targeted at fuel sold in sparsely populated areas; and

(c) providing specific fuel duty reductions targeted at fuel sold to road haulage operators;

and the Chancellor of the Exchequer shall by order define “sparsely populated areas” and “road haulage operators” for the purposes of this subsection.

(1AC) Whenever international oil prices return to the level estimated by the forecast made in accordance with subsection (1AA), the offset described in subsection (1AB) (a) to (c) is suspended until the price rises again or the forecast price is amended by the next Budget or pre-Budget Report.”.’.

Angela Eagle (Labour, Wallasey)

Sir Nicholas, I shall try to deal with new clause 4 and clause 13 in responding to what I thought was an interesting and revealing debate. The new clause, tabled by the hon. Member for Dundee, East, is in a state of evolution, as he was honest enough to admit when speaking to it. Finance Bills have a history of such new clauses, and I compliment him on the welcome way in which he has evolved his. I hope to persuade him, however, that although a fuel duty regulator might appear superficially attractive—I share his concerns about the cost implications, the pressures that high oil prices bring to bear on all drivers and the clear issue with hauliers—unfortunately, his approach, which he has been dutifully evolving over the years, has some major flaws.

My right hon. Friend the Chancellor demonstrated in the Budget that we are sensitive to the issues of high nominal petrol costs. Again, the hon. Gentleman was generous enough to point out that oil prices can be incredibly volatile. Since 1997, when the Government first took office, the price of a barrel of oil has continued to rise, but fuel duty has fallen—in real, not nominal, terms. Hon. Members on both sides of the Committee must bear in mind that there is no obvious connection between the price of oil in the barrel—let alone at the pumps—and the fuel duty level. To some extent, his idea for a fuel duty regulator, which he has brought before the Committee, tends to assume that there is such a connection.

Justine Greening (Conservative, Putney)

I just wanted to correct the Minister. Just before we adjourned after the morning sitting, she said that I had supported the new clause, but in fact I said that we did not. I said that we supported clause 13. I wanted to make that absolutely clear, before she continued.

Angela Eagle (Labour, Wallasey)

I thank the hon. Lady for that correction. In her remarks earlier, it sounded as if she was supporting the new clause, which is why I asked her whether she supported the concept of a fuel duty regulator. If that were so, it would be an interesting development in Conservative policy. I now see, from her intervention, that the Conservative party does not support the use of a fuel duty regulator, and she and I may be able to agree on a reason for that, as my remarks progress. There are some pretty difficult practical and design issues with the idea set out in new clause 4.

Clive Efford (Labour, Eltham)

The Leader of the Opposition said on 7 October that

“you can see the very strong commitment to the environment and yes, green taxes as a share of taxes do need to go up. That’s not necessarily popular, but I think it’s right.”

Can my hon. Friend reconcile that with the position that the Opposition have taken on—

Nicholas Winterton (Conservative, Macclesfield)

Order. I do not want the Minister to respond to that. We are not debating statements by the Leader of the Opposition, or any other member of the Opposition, for that matter. We are debating the Bill, clause stand part and new clause 4.

Angela Eagle (Labour, Wallasey)

Thank you, Sir Nicholas, for saving me from going wildly out of order. I have already been asked to justify certain statements by Sir Richard Branson, and I cannot possibly do so for comments by the right hon. Member for Witney (Mr. Cameron); I would not propose to do so.

Nicholas Winterton (Conservative, Macclesfield)

I am grateful.

Angela Eagle (Labour, Wallasey)

My pleasure.

It is worth putting into perspective the current duty rates on oil in the UK. As I was saying earlier, the graph that is available demonstrates that those are now 16 per cent. lower in real terms than they were in 1999, when the Prime Minister abolished the fuel duty escalator. The current fuel duty rate is 50.35p per litre. Had fuel duty gone up in line with inflation since 1999, the rate would be 61p per litre, and if it had gone up in line with the 3 per cent. escalator that we inherited from the Opposition, as it did prior to 1999, it would now be 79p per litre—close to 30p per litre more than it is now.

The overall cost of motoring has also fallen by 13 per cent. in real terms since 1999. There is a difference, in debate on statistics, between the real and nominal prices of motoring and fuel. The high nominal prices at the moment are clearly being felt in the pockets of the constituents of the hon. Member for Dundee, East, and he is doing the best he can for them, by way of his new clause, in response to that. We are all aware of the pressures and difficulties that the current high nominal oil prices present to our constituents.

It is important to consider the broader taxation picture. It is true that fuel duty rates are lower in other European Union countries, but our overall GDP to tax ratio is below the EU 19 average and other countries with lower fuel duty rates, such as Italy, France and Austria often have higher overall tax burdens, so there is an element of swings and roundabouts. EU regulations mean that the UK must charge VAT on fuel. However, the UK has one of the lowest VAT rates of any EU country.

To come to the nub of the new clause, I want to refer to the intervention by my hon. Friend the Member for South Derbyshire, which was so completely to the point that it should form the cornerstone of any response to the provision. I compliment him on the astuteness of what he said. He questioned the concept of the existence of a VAT windfall, for exactly the right reasons. The new clause assumes a VAT windfall, caused by high fuel duty prices, that increases receipts to the Treasury. That is rarely the case, as my hon. Friend pointed out. As fuel duty is a fixed rate, reduced fuel sales lead to reduced fuel duty receipts. In addition, the so-called VAT windfall does not materialise. In the context of the wider economy, people tend to have a fixed amount to spend. Therefore, if they have to spend more on one commodity they tend to spend less on others, leaving the overall level of VAT receipts largely unchanged. I might even say that the VAT windfall from higher nominal fuel prices is a myth. Part of the basis of the new clause is that that windfall exists and can be recycled, to give support to hauliers and those particularly affected by high nominal fuel prices. It is also important to remember that VAT-registered businesses are liable to reclaim the VAT that they incur when buying fuel for business purposes, so the VAT paid at the pump should make no difference to their overall tax burden.

Reducing duty would not guarantee a reduction in the fuel price at the pump. My hon. Friend the Member for Broxtowe pointed out that there are other reasons for the record levels of oil prices, none of which are to do with levels of fuel duty or taxation policy in the UK. He is right that the only way to deal with that is globally. My right hon. Friends the Prime Minister and the Chancellor are attempting to do that in the G7 and other international bodies, where work is going on to see whether the high oil prices caused by different global events can be reduced. Since those wider VAT effects can be taken into account, the lost fuel duty revenues are likely to outweigh any extra VAT, given that there is no windfall. As a result, the new clause, although it is presented as revenue neutral, would be likely to lead to significant revenue losses for the Exchequer. It would also lead to massive volatility in receipts.

The second part of the new clause would introduce a fuel duty reduction for sparsely populated areas. The Government recognise that fuel prices have risen in recent months to high nominal rates, and that people who have fewer alternatives to driving are particularly affected. However, while fuel prices have increased greatly over the past year, duty rates have not risen by the same amount. It is not feasible or appropriate to set a different duty rate for rural areas because it is unclear how those sparsely populated areas would be defined. There is agreement on that between the Government and the main Opposition party. The point was made when we debated the Bill in the Committee of the whole House. It is a difficult issue.

It is recognised that fuel prices are higher in some areas, for example the Western Isles and the Shetland Isles, but in other parts of the highlands they are closer to the national average. Scotland has lower average petrol prices than the rest of the UK. There are problems in particular areas, but it would be difficult to define and ring-fence such an area for the purposes sought by the new clause. Creating an exemption would be likely to involve drawing a line between areas with similar prices and therefore creating an incentive—rather like the Irish border incentive—for people to cross the border and fill up in lower duty areas. That would distort the market. It would also be difficult to ensure compliance, and the potential for fraud should be obvious.

Jeremy Browne (Liberal Democrat, Taunton)

The point that the Exchequer Secretary made about cross-border shopping between Northern Ireland and the Republic of Ireland may apply less in this case, because the cost of going to a sparsely populated area to fill up the car would tend to mitigate against the incentive of cheaper fuel.

Angela Eagle (Labour, Wallasey)

The experience of having differential duties so close to each other is the opposite of what the hon. Gentleman suggests. Perhaps he is being slightly naïve. Even if it were feasible to ring-fence and define areas in an appropriate way, we would need to receive a derogation from the EU energy-using products directive. There is certainly no guarantee that we would be successful. France holds a derogation, but it is not directly comparable, because in France the authority to set excise duties has been devolved to regional government.

The final part of the new clause would introduce a fuel duty regulator solely for road haulage operators. The Government recognise the road haulage industry’s concerns over the current high nominal cost of fuel and we understand the pressure that that puts on the industry. But requests for reduced duty rates for road haulage operators are often associated with the relative competitiveness of the industry compared with foreign operators which can fill up their fleet from abroad, due to lower fuel prices in other EU member states.

Studies, including one by the road haulage industry task group, have shown that duty differentials in many cases are offset by other costs such as lower labour and employment costs. Overall, operating costs in the UK are quite similar to those in countries such as Germany, Italy, Belgium and the Netherlands. A scheme such as the hon. Member for Dundee, East has suggested would require the introduction of an administrative system with potentially high costs. Any system would create significant compliance and fraud risks and consideration must be given to the incentive for fuel efficiency that the receipt of the reduced rate would bring, again a point admirably brought out by my hon. Friend the Member for Broxtowe.

The Government have continued to support the industry through other policy measures which are more achievable such as freezes to HGV excise duty rates, the reduced pollution certificate scheme and significant funding for enforcement to deal with some of the foreign competition points. I know that the road haulage industry is very supportive of the significant extra amounts of money that the Government have been able to bring to bear on enforcement.

While the Government accept that rising fuel prices are having an impact on families, we do not believe that the new clause provides a workable or sensible answer. We will continue to take steps to reduce higher oil prices through the international action that I mentioned earlier, working through the G7, to stabilise the volatility of the oil market. Those factors were taken into account by the Chancellor when we made the decision, set out in clause 13, to defer the planned fuel duty increase at the Budget, and any further steps at this stage would be counter-productive. While asking the Committee to agree that the clause should stand part of the Bill, I ask the hon. Gentleman not to press his new clause to a vote.

Stewart Hosie (Scottish National Party, Dundee East)

Before we adjourned, the hon. Member for Broxtowe made a number of points. He said that prices can rise and spike because of political instability. One of the purposes of the new clause is to smooth out those spikes. He also asked what would happen if oil prices fell. Given that most of his hon. Friends are talking about peak oil and the industry is talking about $150 to $200 a barrel, that should be less of a concern. However, this is not about tempering the way the market rises in general, but about moving the spikes that cause particular difficulties.

The Minister said that there was no obvious connection between the barrel price and the price at the pump. That is absolutely correct. That is why part of the new clause calls for a forecast of the fuel duty and VAT yield. I have used the barrel price as a trigger point. That might need to be finessed and I will come back to that. She also said that she shared the concerns, particularly those of hauliers. I welcome that. In her various criticisms of the new clause, she said that an expensive administrative system would have to be introduced if we were to deal specifically with hauliers. As we have the licensing scheme—the standard, the restricted and the standard international licence—and one cannot be a haulier without a licence, I suspect that the cost of an administrative scheme for hauliers might be rather less than she would expect. The question would be: how much of a rebate would be calculated, and on what basis? Fining the haulier and paying that rebate back might be rather straightforward.

I have heard the comments from the various parties and from the Ministers. I recognise that implementing the measure generally might be tricky and that implementing it in remote rural areas, although it is vital, does have its difficulties. Although I may wish to return to the issues in a more refined form in specific relation to hauliers at a later time, I beg to ask leave to withdraw the amendment.

Nicholas Winterton (Conservative, Macclesfield)

The hon. Gentleman does not have to withdraw the new clause, because it was merely being discussed with the stand part debate. Of course, that does not in any way prevent him from seeking to get a new clause or another amendment taken, and hopefully selected, on Report.

Clause 14

David Gauke (Conservative, South West Hertfordshire)

Sir Nicholas, I welcome you to the Chair this afternoon. I shall begin my brief remarks on clause 14 and schedule 6 on a note of consensus. I, too, agree with the Exchequer Secretary that it is a pity that the weather is so gloomy on the first day of the Test series, although I recall that the weather in the fine county of Cheshire yesterday was glorious.

Clause 14 and schedule 6 relate to the taxation of aviation gasoline, of the fuel used for private pleasure flying and of the fuel used in private pleasure craft. There are two areas that I would like to ask the Minister about. First, we recognise that the Government’s hand has been forced in the case of private pleasure flying, by the fact that various derogations held with the EU have not been extended. The Government, particularly with red diesel for private pleasure craft, sought to extend that derogation, and it is regrettable that that has not been achieved.

The Government have adopted a free-standing duty rate for avgas, which appears to be widely welcomed by the industry. The rate is 31.03p per litre and I would be grateful to know if that was the minimum level allowed under EU rules. I know also that representations were made that there should be exemptions, for flying emergency vehicles, for example, and that the Government’s position is somewhat restricted. In particular, will air ambulances pay the duty? Will vintage aircraft be exempt? There are still aircraft from the second world war flying. Will flight training be exempt? I would be grateful to know the Government’s position on those.

The Government are consulting on aviation duty. The proposals set out in schedule 6 and clause 14 will come into effect on 1 November this year, but new aviation duty may come into effect on 1 November 2009. Therefore, is it likely that we will revisit this area next year and that what we put in place now will only last for 12 months and then we will have a new regime?

I now turn to the issue of red diesel for private pleasure craft. I declare an interest in that the Grand Union canal runs through my constituency. This Saturday, I will be opening the Rickmansworth canal festival, an event that I can recommend to anyone who would like a fun day out. [Interruption.] Alternatively, one could watch the test match, but I will certainly be at the Rickmansworth canal festival.

Clearly, red diesel has been a concern for boaters, whether inland or otherwise. The Government’s original proposals suggested that private pleasure craft would be required to fit additional fuel tanks, but that is no longer the case. Although it is regrettable that the derogation was not extended, the Government have, in all fairness, taken quite a reasonable approach. If they had pursued their original proposals, one implication would have been that craft would have to have had two fuel tanks fitted. There was certainly an issue about whether operators would want to provide two sorts of fuel in more remote areas, with the result that private pleasure craft would not be able to visit such areas. The alternative approach is therefore welcome, but I would like to ask some questions about it.

Under the current approach, boat users must self-certify that they are non-commercial and they must distinguish between fuel for propulsion and fuel for heating, lighting and so on. On propulsion, the estimate in the Treasury’s impact assessment is that the price of gas oil could more than double. I would be grateful to know whether the Government still agree with that assessment, given the changes that we have seen in fuel prices in recent months.

I would be grateful for clarification of the distinction between propulsion and domestic use—heating, lighting and so on. Will that be made purely on the basis of self-certification, or will a standard percentage be used, as has been suggested?

I would also be grateful for confirmation that the European Commission has accepted the proposals and that the proposed route forward will not cause further difficulties. Similarly, will there be any difficulties with other member states not recognising the continued use of red diesel? That concern was raised in the consultation.

Her Majesty’s Revenue and Customs has made no estimate of the cost of increased enforcement. Given that we will rely heavily on self-certification, will there not be a need to enforce the arrangements and perhaps do spot checks? I would be grateful to know the Government’s position on that.

Finally, I want to raise a point that struck me as I read the impact assessment. The Exchequer will raise between £10 million and £15 million a year, depending on the balance between propulsion and domestic use, and I understand why there would be that range of uncertainty. However, there are also figures for the reduction in fuel used for propulsion for the purposes of calculating the carbon reduction. The figures range from 10 to 30 per cent., with the central forecast therefore being 20 per cent. In evaluating the carbon reduction, the Government appear, entirely reasonably, to be making a dynamic assessment—that if they put up the duty, less fuel will be used, with the central projection being a 20 per cent. reduction.

Have the Government undertaken the same assessment in calculating the Exchequer costs and therefore assumed a 20 per cent. reduction in use as a consequence of their proposals? If they have, that is entirely reasonable, although there is evidence of a dynamic effect. If they have not, why not, given that they have taken account of a dynamic effect in relation to the same tax in a different context? If the Treasury does take account of the dynamic effect on this tax, does it do so on other issues? I would be grateful if the Exchequer Secretary could answer those questions.

Angela Eagle (Labour, Wallasey)

I must confess to experiencing a slight tinge of envy when the hon. Member for South-West Hertfordshire talked about the great event on the Grand Union canal this weekend. I used to be the Minister responsible for canals. One misses some certain things about one’s previous jobs—certainly being able to leap on a narrowboat and steer it through a few locks, which I did on occasion. I am slightly envious of how the hon. Gentleman will spend his weekend.

I am happy to do my best to answer some of the hon. Gentleman’s perfectly reasonable questions on clause 14. He is right—and I thank him for acknowledging it— that it was not the Government’s wish to be in a situation in which we had to deal with the ending of derogation for such fuel, but we reached the stage at which the European Commission would not allow the derogation to continue.

Clause 14 introduces changes in response to the loss of the UK’s energy products directive derogation and provides for free-standing rate of duty for aviation gasoline which, as the hon. Gentleman rightly said, is known as avgas, with effect from 1 November 2008. It also introduces schedule 6, which makes provision for charging duty on

“fuel used for private pleasure flying or private pleasure craft”

and for a partially-rebated rate of duty on heavy oil other than kerosene, which is a nil-rated oil because it is used for heating—hence the issue of propulsion and heating about which the hon. Gentleman asked.

Under energy tax directive 2003/96/EC, which is also known as the energy products directive, fuel used for pleasure flying and in private pleasure aircraft must be taxed at the full rate that member states charge on the equivalent fuel, and waste oil that is re-used as fuel must be charged with duty at the rate that member states charge on the equivalent heating fuel. The UK held derogations—[Interruption.]

Nicholas Winterton (Conservative, Macclesfield)

Order. If the Government Whip wishes to negotiate with the Scottish National Party, he should do so outside the Committee Room.

Angela Eagle (Labour, Wallasey)

Sir Nicholas, I was trying to earwig on that conversation as well. It was rather intriguing.

The UK held derogations permitting the application of exempt or reduced rates of duty of fuels used for those purposes. Unfortunately, they expired on 31 December 2006, and our applications for renewal were turned down. Consequently, the new free-standing duty rate on avgas set independently from other duties will be the rate that applies when the free-standing rate is introduced on 1 November. The current rate for avgas, which is set at half the rate for leaded petrol, is 30.03p per litre. The date of introduction coincides with the implementation of schedule 6.

The hon. Gentleman asked whether it was the minimum level allowed under EU rules. I can confirm that it is. He also asked about exemptions, particularly for emergency flying vehicles and vintage aircraft. The new regime applies only to private flying, so air ambulances and so on are not covered. We are considering in more detail the position of training flights, which he mentioned. I cannot usefully add anything on that, but I am sorry to disappoint him that there are no exemptions for fuel used in vintage aircraft.

The hon. Gentleman asked how the new rates might interact with the planned introduction of the new aviation duty in November 2009. The interaction with the new aviation duty will be considered fully as the details of that new tax are finalised. That issue is under consideration by the Government. He asked about fuel use for domestic purposes, which does not have to be charged at the full duty rate. We are talking about the difference between the purpose of heating and the purpose of propulsion. An allowance will be made for fuel used for domestic purposes, which will continue to be supplied at the rebated rate, because there is a zero rate for heating. Her Majesty’s Revenue and Customs will discuss appropriate allowances with representatives of the boating industry.

The work done on designing and introducing the new rates has been accompanied throughout by consultation of all the industry bodies to ensure that we are as aware as possible of the details and the technical problems that may arise. I have the impression that there has been good co-operation between HMRC and the industry representatives during the consultation. We have tried to make the introduction of the rates as technically effective as possible, with the least number of unintended consequences, and I hope that we can show that we have done that.

On the possibility of the EU not being happy with the way in which we have ended the derogation and introduced the new rates, there is no reason for the Commission to challenge our new arrangements. The Commission always keeps a close eye on what member states are doing, so I cannot say that there will be no objections, but we are not expecting objections, as we have ended the derogation as it asked and put in place systems that enable us to comply with the appropriate directive.

The self-certification approach raised a few eyebrows, but HMRC’s enforcement effort has to be proportionate to the risk, and this is quite a small area for fuel sales. In the context of the total yield of £24 billion from oil, use in private pleasure craft would account for—get ready for this—0.06 per cent. of the total revenue. The chief risks arise both from pleasure craft owners misleading suppliers about the nature of their boat, whether it is commercial or domestic, and inflating their entitlement to fuel supplied for domestic purposes, and from those who supply the fuel failing to submit returns or pay the revenue that they collect.

For aircraft, the only risk is that flyers will fail to declare any duty on fuel use for private pleasure flying, but the revenue risk is considered negligible, as private pleasure flying use of avtur—aviation turbine fuel—is estimated to be a fraction of 1 per cent. of the avtur that is used in the industry. HMRC will not give a free hand, but it will approach the paying of duty according to a risk-based assessment. That does not mean that if there are obvious examples of deliberate evasion of the duty, action will not be taken, but I hope that it gives the hon. Gentleman an insight into our approach.

On the 20 per cent. reduction in use deployed in calculating the cost, which the hon. Gentleman also mentioned, it is difficult to project the impact, especially when taking into account the concession on fuel for domestic purposes, because we do not quite know how that will work out. It will mitigate the impact to some extent, but that is a best guess. Clearly, the way in which it develops will be taken into account in refining the assessments of cost in the future. I hope that, with those responses to the hon. Gentleman’s quite reasonable questions, the Committee will be happy to pass clause 14 and schedule 6.

Clause 16

David Gauke (Conservative, South West Hertfordshire)

It may benefit the Committee if I declare at the outset that it was expected that it was expected that my hon. Friend the Member for Putney, who has done a great deal of work on the clauses that we are debating this afternoon, would speak on behalf of the Opposition and that the Exchequer Secretary would respond. On behalf of myself and the Economic Secretary, I would like to say that we are to some extent performing the role of stand-ins. I know that a successful performance by the understudy in a theatrical performance or opera tends to result in standing ovations. I suspect that we will not receive them today—at least, not in response to my performance. I am grateful for the work of my hon. Friend the Member for Putney on the clauses.

I shall graze one or two matters regarding the landfill levy, which we are considering in relation to clause 16. There is an increase in the level of the landfill levy to £32 this year, which is the biggest jump in landfill tax from year to year since it was introduced in 1996. The levy was the UK’s first environmental tax, and it was introduced by the previous Government. It has been announced that in the following year, it will increase to £40 and the year after that, to £48. I would be grateful if the Minister explained why, given that it is an annual levy, it is necessary to make announcements in advance. I would be grateful for that clarification.

There are two points that I would particularly like to raise with the Minister. First, there has been a reduction in landfill during the years in which the landfill tax had been in place. No doubt, the landfill tax has played a part in incentivising industries, local authorities and individuals to be more efficient, but is the Minister concerned that one reason why there has been a reduction in landfill is fly-tipping? One of the unintended consequences of the significant increase in landfill tax may well be an increase in fly-tipping, which is of concern to all of us. I would grateful for the Minister’s views on that, and if she could tell us what steps will be taken to ensure that that does not happen.

My second concern is that to a large extent the big payers of the landfill tax will be local authorities and the public sector. Essentially, money will be circulated from local authorities, who will be paying more in landfill tax. That will, of course, need to be funded one way or the other—perhaps by increased council tax. The increase in landfill tax will place financial strains on local authorities. The Local Government Association has said that local authorities will face an equivalent of a £1 million rise to cover increased costs in 2008-09. Councils expect total landfill tax costs to be in the region of £2.3 billion over the next three years. That is a substantial additional cost, which will place a strain on local authorities. In my constituency, an attempt to find savings in recycling has resulted in an unpopular proposal to close the Tring recycling centre, which causes alarm to those who know the area well including, I think, the Economic Secretary—although I do not know whether she is aware of that particular issue.

There are concerns that these proposals may result in money being moved around different parts of the public sector and going from local councils to central Government. Local councils may find themselves paying an additional amount as a consequence of the proposals. There has also been a substantial increase in the revenue raised, although originally it was envisaged that it would be a neutral tax and additional environmental tax credits would be used in the circumstances. However, that does not seem comparable in any way with the amount raised in revenue. Is the landfill tax supposed to be revenue neutral? We return to the question, which has been raised a number of times, of whether landfill tax has two motivations: to raise revenue, and to change behaviour. Is it another way of raising revenue, or is it seen as revenue neutral?

Nicholas Winterton (Conservative, Macclesfield)

Order. I have to interrupt the hon. Gentleman. If two Committee members—namely, the two Whips—leave, the Committee will become inquorate, and I will have to suspend the sitting. I say to the Opposition and Government Whips that I have, uniquely, requested a Doorkeeper to bring an additional Member back into the Committee. The hon. Member for Ealing, North has obliged, and I see that two more hon. Members have done so. I suggest to both Whips that they should realise that as the Chair, I must see 11 Members in the Committee. If the number of Committee members drops below 11, I am obliged to suspend the sitting. If both the Whips now wish to leave, they may do so with impunity, but I hope that they will not do so for long.

Brooks Newmark (Conservative, Braintree)

I appreciate your guidance, Sir Nicholas. I stepped outside to try to figure out a way to communicate to Conservative Back Benchers and tell them to come here without calling them on the phone, which I know would be a breach of the rules. That was all I was trying to do.

Nicholas Winterton (Conservative, Macclesfield)

I assure you that I was seeking to be extremely helpful. I requested a Doorkeeper on duty to go into the corridor to ask one or more Committee members to return so that we could remain quorate. We have done so, but I ask both the Whips to take account of the need to remain quorate.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for your intervention, Sir Nicholas. We would certainly not want to suspend this sitting while addressing such matters, especially as, after looking out the window, I think it unlikely that play has resumed.

Jeremy Browne (Liberal Democrat, Taunton)

Thank you, Sir Nicholas, for ensuring that I have at least a small audience for my brief speech. I was wondering whether Committee members were leaving to check whether play had resumed in the test match, and whether it would be helpful for you to inform us if that happens, so that our minds could be focused entirely on proceedings in Committee.

I have a couple of brief points to make about landfill tax, which my party supports for obvious environmental reasons. The hon. Member for South-West Hertfordshire asked a moment ago why the increases had been anticipated for future years. The explanation is simple: it allows companies interested in developing new technology to plan ahead with some reasonable assumptions about their future revenue stream. New Earth Solutions and TEG have campaigned on that basis. Mr. Steve Lee, chief executive of the Chartered Institution of Wastes Management, said:

“Raising the tax by £8 per tonne per year to £48 by 2010 for ‘active’ waste will make a whole range of waste treatment technologies financially viable—for all wastes, not just municipal. The three-year plan for the escalator is good, too. Businesses need time to change and even the anticipation of a £48 per tonne tax—plus steadily increasing landfill gate fees—will be enough to influence many waste and resource management decisions.”

On that basis, the Government’s proposals seem to be eminently sensible.

I will put a fly in the ointment, however, as concerns have been expressed that councils are not managing to get the money recycled—probably the appropriate term—into their coffers. The incentive for the councils to do so is partly because, as the hon. Member for South-West Hertfordshire said, there is a cost to them of meeting their obligations on landfill tax, but also because they might often use, or be able to use, the money for environmentally helpful projects, including new recycling plants and rubbish reduction and collection facilities. I would be grateful if the Minister told us what steps are being taken by the Government to ensure that local councils gain the benefits of the additional revenue.

I will finish by citing an example from my constituency. Last year, Somerset Wildlife Trust—an organisation of which I am pleased to be a member—planted a new woodland just outside Taunton, with £100,000 contributed from revenue raised from the landfill tax. There are clear environmental benefits, both in carbon emissions and the natural environment available for the public to enjoy, if the money can be made available for such projects. I hope that the Minister will be able to say some encouraging words in that regard.

Kitty Ussher (Labour, Burnley)

May I say, Sir Nicholas, that it is an honour to make my Finance Bill debut under your chairmanship. It is true that I know the constituency of my fellow stand-in, the hon. Member for South-West Hertfordshire, although it was in about 1980 that I left the Tring vicinity. I am not sure that the recycling depot that he mentioned was in operation then, but I am deeply perturbed to find that the situation may change.

Turning to the matter in hand, the clause increases the standard rate of landfill tax, which applies to active waste disposed to landfill, by £8 per tonne to £40 per tonne next year, in line with previous commitments. We announced as long ago as the 2002 pre-Budget report that the standard rate would have to increase to encourage investment in alternatives to landfill. That approach has worked well, with the quantities of active waste going to landfill reduced by almost 19 per cent. between 1997/98 and 2006/07, while the economy grew by 28 per cent.

Turning to the points made by the hon. Member for South-West Hertfordshire, we are legislating for next year’s increases this year, because—the hon. Member for Taunton is entirely right—we wish to provide certainty and to achieve a behavioural impact on firms seeking to invest. It is consistent with the approach that we have taken in the Bill on other environmental taxes—the climate change levy and the aggregates levy—and with the approach that we took last year. Pre-announcing something as early as possible has a maximum affect on behaviour. On the issue of rate increases encouraging fly-tipping, we recognise that fly-tipping is a significant antisocial problem affecting communities, landowners and regulators alike. That is why my colleagues at Department for Environment, Food and Rural Affairs have been working with the Environment Agency to develop and implement a waste crime action plan, which aims to improve prevention, detection and enforcement with regards to fly-tipping. I understand that DEFRA will consult on proposals over the summer months this year to strengthen waste controls and to give enforcement authorities greater powers to stop and seize vehicles involved in illegal waste activity. In my constituency, it seems to be the determination and dedication of local authority staff, rather than the standard rate of landfill tax that makes a difference. We provide a programme of education and advice that encourages local authorities to do just that.

Revenue recycling is an important issue, which I am glad that hon. Members have raised. A number of local authorities have claimed that the increases have not been adequately factored in, adding pressure to council tax bills. The hon. Member for South-West Hertfordshire asked about that as well, but the answer is that that is not the case. The cost of landfill tax was taken into account when agreeing the sustainable settlement with local authorities. It is sufficient to ensure that excessive council tax rises are avoided. The local government settlement that provides continued real term increases with an average, annual increase of 1 per cent. above inflation takes into account local government’s landfill tax liability, including the increased costs that we are discussing today.

As for the question of whether the tax is intended to raise revenue, the answer is no. We are not seeking to increase landfill tax to raise revenue, although the initial introduction helped us to reduce corporation tax at the time. The tax increase is aimed at stimulating a behavioural change to reduce the quantities of waste sent to landfill and to encourage a move to more sustainable waste management practices. It is important to remember that the decision to increase the standard rate by £8 per tonne from 2008-09 was taken as part of the overall package of reform of business taxation.

The corporation tax cut announced in the Budget would not have been possible without increases in landfill tax. That does not mean that we are not investing in ways of improving resource efficiency, particularly among businesses. In the current financial year 2008-09, £155 million is being invested in that way. I hope that, having answered those questions, the Committee will accept the clause.

Clause 17

Jeremy Browne (Liberal Democrat, Taunton)

I beg to move amendment No. 57, in clause 17, page 8, line 40, at end insert—

‘(3) In sub-paragraph 2(1) of Schedule 6 to FA 2000 after “on”, insert “the level of carbon dioxide emissions emitted by”.’.

My party supports the climate change levy in the absence of a better alternative, but the amendment proposes the introduction of something that we regard as a superior alternative—a carbon tax. I shall explain briefly why we believe that to be the case. The climate change levy is too complex, it offers too many exemptions and suffers from a confusion of objectives. It does not apply at a standard rate to each tonne of carbon, and it applies only to business users. What is more, several confusing initiatives are used concurrently, such as the European Union emissions trading scheme, which is compulsory for heavy industry and the power sector; the United Kingdom emissions trading scheme, which is a voluntary scheme in which firms are incentivised by the Government to reduce emissions through trading; and other climate change agreements between industry and the Government. The amendment would consolidate the various initiatives and schemes into a more effective and efficient carbon tax.

The carbon tax would apply to all carbon fuels at a uniform rate per tonne of carbon at the point at which they enter the economy. Our party policy is to tax emissions from energy supplies, as is done in other European countries that we often regard as leaders in good practice, such as Sweden, Norway and the Netherlands, and it would enable us as a nation to reduce pollution. The proposal is to set the carbon tax to achieve a level of emissions reduction that is not otherwise achieved through the emissions trading scheme; to adjust the carbon tax to maintain progress towards our long-term target of carbon neutrality, with any changes to the tax notified well in advance to give investors time to adjust; and to use the revenues to cut other taxes when possible so that the overall net effect of the tax burden is neutral.

I enter one caveat. A reasonable objection has been made about the impact in the short term on domestic users and those who suffer from what is commonly called fuel poverty. Transitional measures would have to be put in place to ensure that people were not penalised unfairly in respect of their lifestyle when they could not afford to take an alternative approach. Nevertheless, for the reasons that I have set out as succinctly as I could, a carbon tax would be a superior way in which to reach the objective that we pretty much all share in Committee.

Being a realist, I do not anticipate that the Committee will be persuaded of the case for the amendment, however brilliant my speech may, or may not, have been. It is worth my saying, to save my rising to speak again, that we support the climate change levy, because it is better than not having such a levy, and we support increases in line with inflation. Until that levy is replaced with a more coherent carbon tax, we will support the arrangements advanced by the Government.

David Gauke (Conservative, South West Hertfordshire)

We have some sympathy with the objective outlined by the hon. Member for Taunton, but whether that is because of the brilliance of his speech or otherwise I leave others to decide. However, we share the view that the climate change levy is an imperfect tax. My right hon. Friend the Member for West Dorset (Mr. Letwin) once said, in a typically erudite allusion, that it reminded him of what history masters used to say about the Holy Roman empire: it was neither holy nor Roman nor an empire. The climate change levy is not really about climate change: it is a tax on energy. Although that might be an aspect of reducing carbon emissions, it is not the complete story, because if we want to reduce carbon emissions we need to distinguish between sources of energy that produce a lot of carbon and those that do not. The climate change levy does not sufficiently address that matter and is therefore flawed. I have a lot of sympathy with what the hon. Member for Taunton said and with the objective proposed in amendment No. 57.

Others have criticised the climate change levy: the Royal Commission on Environmental Pollution described it as a blunt instrument, and the Select Committee on Environmental Audit also made a number of criticisms. The levy is flawed and is not ideal, so there is accordingly a need to reform it into a carbon tax, which it is not at the moment, rather than an energy tax. Although I have expressed sympathy for the amendment, whether it does everything that the hon. Member for Taunton would like it to do is another matter. But as far as the objective is concerned, we hope that the Government will listen and reform the climate change levy and replace it with a genuine carbon tax.

Kitty Ussher (Labour, Burnley)

I hear what the hon. Member for Taunton says, but, unfortunately for him, his amendment will not work, regardless of how sophisticated his rhetoric is.

Jeremy Browne (Liberal Democrat, Taunton)

It is pretty sophisticated.

Kitty Ussher (Labour, Burnley)

The hon. Gentleman’s comment will go into Hansard. However, under his amendment, the levy would be based on emissions rather than on energy supply. There would be a technical problem with doing that—as well as legal problems—notwithstanding the fact that amending the introduction to the clause is insufficient to achieve the legal outcome that is required. However, I take his amendment in the spirit in which it is intended, so I will overlook that problem. The real problem is that the amendment would be contrary to European Union directive 2003/96, which requires a tax on energy supply rather than emissions.

The main problem that I urge Committee members to consider stems from the fact that our climate change levy has been incredibly successful as devised. An independent analysis by Cambridge Econometrics, published at the time of the 2005 Budget, estimated that it had delivered emissions savings of more than 16 million tonnes of carbon up to that point, that by 2010 it would save some 3.5 million tonnes of carbon a year—well above initial estimates—and that it would reduce energy demand in business and public sectors by some 15 per cent. a year. The hon. Gentleman’s amendment is therefore unnecessary.

Jeremy Browne (Liberal Democrat, Taunton)

I beg to ask leave to withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 68, in clause 17, page 8, line 40, at end insert—

‘(3) The Treasury shall publish, not later than the date of the Budget 2009, an estimate, audited by the Independent Committee on Climate Change (as established by the Climate Change Act 2008), of the carbon emissions savings resulting from the changes to climate change levy contained in this section’.

There is no need to repeat all the arguments that we have just heard about the climate change levy in general, although my amendment addresses one aspect of what we were considering: its effectiveness in reducing carbon emissions. Everything that the hon. Member for Taunton and I have said about the flaws in the climate change levy in that context should be borne in mind. The Minister quoted the Cambridge Econometrics report. I have a quote from Cambridge Econometrics—I believe it is from the same report, but I apologise if that is not the case—which observes that the relative decline in UK energy-intensive manufacturing sectors suggests that many of the energy efficiency and carbon saving targets would have been achieved without carbon change agreements. It says of the climate change levy:

“Only for one sector did we find that the CCA would have been missed had no climate change levy ever existed.”

It is also worth noting the observations made by the Environmental Audit Committee, which acknowledged that the tax is on course to save 12.8 million tonnes of CO2 by 2010, according to a Government report on the scheme’s impact. The Committee also viewed the tax as the second largest element of the Government’s climate change programmes in terms of carbon saving:

“the CCL significantly raised awareness of potential carbon savings in the business environment before implementation. This resulted in the majority of savings being made before the tax was actually introduced.”

Is the climate change levy as effective as it might be in reducing carbon emissions? If we wished to do so over the years ahead, a review would be helpful. The Government should consider that on an ongoing basis to see whether the climate change levy is working as effectively as it might. That is why we have tabled amendment No. 68, which requires the Government to make

“an estimate, audited by the Independent Committee on Climate Change...of the carbon emissions savings resulting from the changes to climate change levy contained in this section”,

so that we can see whether we are making as much progress as we should. That would inform the debate about whether the climate change levy should be replaced by a carbon tax, as two of the three major parties advocate.

Kitty Ussher (Labour, Burnley)

In a sense, we agree with the spirit of the amendment, although we are not prepared to accept it, for reasons that I shall explain. The hon. Gentleman was right to discuss the work by Cambridge Econometrics. I will go back and read the report again, but what Cambridge Econometrics said to us was that, in its analysis, the climate change levy would save 2.8 million tonnes per annum and reduce energy demand in the business and commercial sector by 22 per cent. by 2010. It is an independent, well-respected consultancy, and it used peer-reviewed econometric methodology, so one cannot get much better than that.

The amendment requires that we publish, no later than the date of the Budget 2009, our own estimate, audited by the independent Committee on Climate Change. There are two problems with that. First, now is not the time for a further review, as the independent study has just been completed. It is better to do such work independently. A lesser, but relevant, point is that the independent Committee on Climate Change was not set up to audit Government forecasts or assumptions, so it would not consider that to be in its remit. I have no problem with the general point that we should always keep under active review the effect of our policies. People would expect us to do that across all Government policies, and we will continue to do so in the medium and long term with this policy. However, the amendment will not achieve the spirit of what it intends to achieve.

David Gauke (Conservative, South West Hertfordshire)

This is one of those rare occasions when the Government do not support a review.

Jeremy Browne (Liberal Democrat, Taunton)

Or a Conservative policy.

David Gauke (Conservative, South West Hertfordshire)

Indeed. I know that the hon. Member for Taunton often has fun claiming that the Liberal Democrats are the real alternative. He has given a new definition to “alternative comedian” in the course of our proceedings.

Mark Field (Conservative, Cities of London and Westminster)

They are neither real nor alternatives.

David Gauke (Conservative, South West Hertfordshire)

Either that or the comedic alternatives—I am not sure. I am satisfied for the moment with the Economic Secretary’s remarks. I beg to ask leave to withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

I have one quick question. Should the climate change levy be seen as revenue neutral? Should money raised by the climate change levy be used to reduce taxes in other areas, or for items of expenditure of a related nature? I believe that when the levy was introduced it was supposed to be revenue neutral. At the time, employers were compensated for the levy with a reduction in national insurance contributions, but since then, their national insurance contributions have increased. Is it the Government’s policy that the climate change levy should be neutral, and that increases in that area would be offset by cuts elsewhere? There is a problem with the credibility of green taxes, which are viewed as stealth taxes. If it were clear that additional revenue raised in that area would be used to reduce taxes in other areas, the suspicion and cynicism would not be so strong.

Nicholas Winterton (Conservative, Macclesfield)

intervention; short.

Mark Field (Conservative, Cities of London and Westminster)

I shall try to ensure that it is both short and an intervention. You may have other views, Sir Nicholas.

My hon. Friend made an interesting point, and I would be interested to hear what the Economic Secretary has to say in that regard. Does my hon. Friend agree with me that if climate change and other environmental taxes are genuinely to do what we expect, they should not necessarily be revenue-neutral? They are there to change behaviour, and therefore any Government should be relatively open-minded about the revenue.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to my hon. Friend. There are two issues here. One is whether the use of an additional green tax will be offset in another area. The other is that in formulating financial projections of the revenue to be raised from a green tax there is the issue that it will alter behaviour. Depending on the circumstances, such a tax may ultimately result in reduced revenue over the years. My hon. Friend made an important point. I would be grateful for the Economic Secretary’s clarification as to the Government’s policy in that area.

Kitty Ussher (Labour, Burnley)

I shall briefly explain—because we have not yet done so—exactly what clause 17 does. Simply, it legislates for the revalorisation of the climate change levy rates announced in the Budget 2008. As stated in the Red Book at the time, that maintains the environmental effect of the tax after taking account of inflation.

I am delighted to be able to answer the hon. Gentleman’s point. When the climate change levy was introduced in April 2001, it was made clear that the purpose was to recycle the revenue back to business, primarily through the 0.3 per cent. reduction in employers national insurance contributions introduced at the same time as the levy.

The hon. Gentleman mentioned “stealth taxes”. Like the Exchequer Secretary to the Treasury, it always makes me laugh when people start talking about stealth taxes because, by definition, if they are talking about them, they cannot be very secret. Cab drivers have a particular habit of cornering me on that one, and I am always tempted to say, “If it is so secret, how do you know about it?”. I can reassure the hon. Gentleman that no extra revenues are secretly being siphoned off elsewhere. I do not know if this has been said before, but the levy has consistently raised less than the value of the national insurance contributions cuts that it was designed to fund, so quite the opposite is the case. I hope that that will be sufficient to reassure the hon. Gentleman.

Clause 18

David Gauke (Conservative, South West Hertfordshire)

I would like to raise a number of points on aggregates tax, which are part of clause 18. The first is on the issue of neutrality and what the funds raised by the aggregates tax will be used for, which continues from where we left off on the climate change levy and the landfill tax. The clause results in a small increase in the aggregates tax per tonne from £1.95 to £2, which we could say was broadly inflationary. Last year’s increase was more significant; I think that it was 30p per tonne.

Again, the issue when that was introduced was that there was an aggregates levy sustainability fund that was going to use the proceeds of the aggregates tax. My understanding is that in the fund’s first four years of operation, only 70 per cent. of the nominal £117 million allocation went into the aggregates levy sustainability fund. Can the Minister confirm whether that is right? Can she also provide details as to what the fund is there to achieve, and details of the funding formula?

We had this debate in the Public Bill Committee last year. The Minister for Local Government was Financial Secretary then. I asked him whether last year’s increase could be said to have been revenue neutral. Although it could be said that it was introduced alongside a 0.1 per cent. reduction in the rate of employers national insurance contribution, there did not appear to be an equivalent tax cut last year. He pointed out that business taxes were being cut last year, but he confirmed in a letter to me on 5 June 2007 that the increase in the aggregates levy last year, which we saw come into effect last month, was not part of that business tax package. What is the Government policy on recycling the aggregates levy?

Secondly, my hon. Friend the Member for Putney has met industry representatives and experts in this sector and it is a great pity for all concerned that she is not able to fully express all their concerns this afternoon. There are concerns about the precise workings of the aggregates tax. I put that to probe the Government. There are exemptions; for example, slate is not subject to the levy. A number of new slate quarries have opened up since the levy was introduced. They have a competitive advantage over granite quarries, which are closing down. Why is slate not subject to the levy? That is a genuine inquiry.

In addition, I understand that china clay aggregate is not subject to the levy either and nor is shale or aggregate that is exported. Are there any EU law implications, as there so often are, for the fact that exported aggregate is not subject to the levy and would that cause difficulties under the treaty of Rome? I understand that limestone for agricultural use is not subject to the levy but the same limestone if used in construction is. Equally, a limestone quarry that produces aggregates to make cement is not subject to the levy, but a limestone quarry that produces aggregate for concrete is. There may well be very good reasons for those distinctions and I look forward to hearing them.

Jeremy Browne (Liberal Democrat, Taunton)

I will be extremely brief. The hon. Gentleman raised many interesting questions. I am looking forward to hearing the Minister’s response, not least because it will help me to decide whether to refit some of my house with slate rather than granite surfaces, if I can afford either. My understanding is that the levy raises something in the region of £300 million a year, but only £35 million goes into the aggregates levy sustainability fund. I do not know whether those were the numbers that the hon. Gentleman used as I did not quite catch them. He used quite a few numbers in a short space of time. If that is the case, why does only 10 per cent. of the revenue raised go into the environmental fund and what is the Government’s thinking on the appropriate proportion of the revenue raised that should go into that fund?

Kitty Ussher (Labour, Burnley)

The clause increases the rate of aggregates levy from £1.95 per tonne to £2 per tonne. The new rate will apply to any aggregate commercially exploited on or after 1 April 2009. We have always said that we would make sure that the levy kept pace with inflation over time. That is broadly what we are doing today. There is strong evidence that the levy is achieving its environmental objectives. Between 2001 and 2005 sales of virgin aggregate in the UK fell by 8 per cent., while there was an increase of nearly 6 million tonnes of recycled aggregate.

I shall now deal with the types of material as it follows on from that point. Exemptions are granted to certain materials such as slate waste and china clay waste to promote their use as alternatives to so-called virgin aggregate. That policy stems from our broad minerals planning policy, which seeks to encourage the use of these materials as alternatives to virgin aggregate. I do not know whether either are available from John Lewis, and whether that will help the hon. Member for Taunton to decide how to redo his house. In terms of the fund, he is entirely right. The levy raises around £300 million a year. The budget for the sustainability fund is £35 million a year. The difference is used to fund roughly a 0.1 per cent. employers national insurance contributions cut, which was made when the levy was introduced. Even if one includes what we discussed on the previous clause, it still does not fund all the mixed concessions. Therefore, there were no stealth taxes involved in this.

The hon. Member for South-West Hertfordshire wanted to know a bit more about the sustainability fund. It is administered by the Department for Environment, Food and Rural Affairs and it aims to minimise demand for primary aggregates, to promote environmentally friendly extraction and to reduce the effect of local aggregate extraction. Outside England it is up to the devolved Administrations to decide how to spend their allocation. However, in the spirit of co-operation, the Government have helpfully suggested that it should be used in six areas: overcoming market barriers; promoting increased use of alternative materials as aggregates; funding and research into more sustainable construction and demolition; promoting conservation and increased biodiversity; restoring the natural landscape and promoting environmentally friendly quarrying practices; and supporting local community projects.

The value of the sustainability fund was set at its introduction and continues to offer value for money. Our internal estimates suggest that 10 per cent. of the total amount raised is the maximum scope for such spending. I hope that that is sufficient to encourage the Committee to agree to the clause.

Clause 19

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 69, in clause 19, page 9, line 10, leave out ‘in particular’ and insert ‘specifically’.

The amendment, which is probing, relates to the regulations that clause 19 authorises the Government to produce on the carbon reduction trading scheme. It would ensure that the list of matters on which regulations may make provision contained within clause 19(3) is exhaustive rather than illustrative. The clause contains a number of provisions concerning what the regulations may address.

The Exchequer Secretary sent me a letter yesterday—it arrived today—to clarify that the list of regulations that may be made under clause 19 is not yet complete and that we will therefore unfortunately not have the opportunity to debate them in the course of these proceedings. There is a limit to how much can be said about the clause in the absence of those regulations. I do not know whether you intend, Sir Nicholas, to allow a stand part debate on the clause, because I want to make only one point on that. Equally, I should be happy if you guided me to make that comment now.

Nicholas Winterton (Conservative, Macclesfield)

I am certainly happy, and I hope that the Committee will be, to allow the hon. Gentleman to make his point under this amendment, which would avoid a stand part debate.

Siôn Simon (Labour, Birmingham, Erdington)

The wisdom of Job.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for your guidance and wisdom, Sir Nicholas.

Kitty Ussher (Labour, Burnley)

You read the mood of the Committee, Sir Nicholas.

David Gauke (Conservative, South West Hertfordshire)

Exactly. You assessed the mood of the Committee as well as the appropriate requirements of the circumstances, Sir Nicholas.

My point is that the European Union’s emissions trading scheme has received a great deal of criticism. Some say that it has been ineffective in reducing carbon emissions, that it set carbon at the wrong price and that it has been used too easily. This is an important point for the development of the Government’s own carbon reduction trading scheme. How does the Government see the EU ETS? Does the Minister believe that the criticisms that it is deeply flawed are fair and accurate? If so, what will she do about it? I appreciate that this is not the time for a detailed debate on the matter, but in formulating the regulations under clause 19, how will the Government avoid some of the difficulties? How will the Minister distinguish between what the UK will do and what has happened under the EU to ensure that we are not left with an ineffective scheme that imposes a bureaucratic burden but does nothing to reduce carbon emissions?

Nicholas Winterton (Conservative, Macclesfield)

Before I call the hon. Member for Taunton, may I say that Solomon was known for his wisdom and Job for his patience?

Jeremy Browne (Liberal Democrat, Taunton)

Thank you for your wisdom and patience in calling me, Sir Nicholas. I hope to reward both of them in the next few seconds. It is worth putting on record the fact that I am extremely supportive of the principle of carbon trading. We need to explore the potential of market mechanisms for reducing carbon emissions. Simply banning more and more activities—or, in some cases, pricing people out of activities that they may need to undertake—is a blunt instrument. It is a necessary instrument for dealing with the problem of climate change, but it is quite limited. The theory of carbon trading is worth developing further.

I have a few brief questions for the Minister to answer. The first follows on from previous clauses but is directly relevant to this one. The Government’s overall approach lacks coherence. There is a little bit here and a little bit there, but it is difficult for somebody trying to understand the Government’s aim in their entire policy to work out why they have chosen to adopt such a confusing array of policies. Does she believe that they could be consolidated into something more coherent?

My second point was raised with me in representations from the Carbon Trust. As I understand it, the Government will produce a league table of the best and worst companies for CO2 emissions. Depending on where companies come in the table, they will receive payments from the Government. Assuming that I have understood that correctly, will the Minister expand on how much revenue will come in, how much will go out and what companies have to do to become financial beneficiaries of the scheme? To take an alternative approach, it may be possible that the incentive is to lose less, rather than gain financially, under the proposals. Obviously, that could have revenue implications.

Finally, why is primary legislation not being used to set the charge levels? I think that everybody in the House is a bit uncomfortable when we are asked to buy into a policy in broad-brush terms. We are reassured that the details will all be filled in later, when we will not necessarily be scrutinising matters in such detail, and told that we do not need to worry ourselves too much about them. As the Government have learned to their cost in many other matters, the details can be the most controversial aspect of any proposal. I should be grateful if the Minister explained why the Government cannot bring forward a full package of proposals so that Committee members can satisfy themselves that they have agreed to them in their entirety.

Siôn Simon (Labour, Birmingham, Erdington)

I want only 30 seconds to assure you, Sir Nicholas, that lauding you from a sedentary position for having the wisdom of Job was not biblical ignorance in my case—I pride myself on my biblical knowledge—but a Freudian slip.

Nicholas Winterton (Conservative, Macclesfield)

Before I call the Minister to reply, although not to that intervention, I thank the hon. Gentleman for his courtesy and explanation.

Kitty Ussher (Labour, Burnley)

I shall try to be Job-like and full of wisdom at the same time. I shall answer a specific point and then move to the more general ones. The Opposition’s amendment seeks to remove the flexibility that we have deliberately put into the clause, because we want to ensure that we have all the tools at our disposal to adapt to the market as it evolves in years to come without having to return to primary legislation. We will not necessarily use all our powers but, if we accepted the Opposition amendment, we might take away a power that we may need subsequently. That is why I encourage members of the Committee to resist it.

As for the general points about the EU emissions trading scheme, I do not accept that it is deeply flawed and is a disaster. In fact, as an economist by training—Lord, forgive me—there is a beautiful simplicity to carbon auctions and trading. I share the view of the hon. Member for Taunton about that. However, there is a consensus that, as a global leader of its kind, the EU emissions trading scheme perhaps started a little too lightly and will have more of an effect as it is ratcheted up—the position that we are now in. The hon. Gentleman asked what my colleagues at DEFRA are doing about matters. They are negotiating hard to achieve that precise result and simply to reach an agreement, because those innovative traders in the City who want to make a liquid market in carbon permits need certainty beyond the current time frame for that to happen and, obviously, the policy will be more successful if there are liquid secondary markets.

There is a fundamental difference between our proposal and the EU emissions trading scheme. First, it has been designed deliberately to apply to different organisations and, secondly, it will start charging for permits and thus will have a faster effect than the EU emissions trading scheme, even though that scheme is now proving extremely useful. I reject the suggestion that we are incoherent. We have a wide range of measures to combat climate change, and they reinforce each other in a positive way. As for the question of precisely how firms can apply for grants to offset the cost, the hon. Member for Taunton was right that they will be charged for the permits and will then receive grants to support the innovative changes that they will have to make to reduce their emissions. I do not have the precise details. I am not sure that it would be a good idea to set them out in the Bill, but I shall make sure that they are made publicly available to members of the Committee. Furthermore, setting out in the Bill the level of charges is neither necessary nor desirable. Since the power is a regulating one, I presume that there will be an opportunity for hon. Members to make their feelings known in the usual way.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Economic Secretary for her comments. I appreciate her argument for flexibility although, touching on the remarks made by the hon. Member for Taunton, certain important matters should be dealt with by primary legislation. I put to her the concerns expressed by third parties on the EU emissions trading scheme. I did not use the word, “disaster”. For example, Open Europe, of which I suspect the Minister is not overly fond, has expressed serious concerns about the scheme, and I noted her comments about regard to it, as I did her comments about distinguishing the scheme from what the Government intend to do. I beg to ask leave to withdraw the amendment.

Nicholas Winterton (Conservative, Macclesfield)

Does the hon. Member for Waveney wish to say something?

Mr. Bob Blizzard (Waveney) (Lab) indicated dissent.

Nicholas Winterton (Conservative, Macclesfield)

I was perhaps ill informed of the hon. Gentleman’s intention.

Clause 20

David Gauke (Conservative, South West Hertfordshire)

Thank you, Sir Nicholas. For a moment, you raised the hopes of some members of the Committee, given that play has now started at Lords.

The clause will increase the gross gaming yield bands for gaming duty in line with inflation for accounting periods starting on or after 1 April 2008. I draw attention to bingo as one particular gaming activity. My hon. Friend the Member for Putney has worked closely with the bingo industry. She has done a lot of research and had meetings with industry members. I am sure that she regrets her inability to raise her points in person. The bingo industry is struggling, for a number of reasons, but particularly because of the Gambling Act 2005, which I accept is going to be reviewed, and various changes such as the smoking ban and so on. Times are difficult for bingo halls, which play an important role in many communities. They have been very popular. I am sure that we would all agree that it would be a great pity if bingo halls started going out of business.

The Government will set out their policy on gambling, particularly on gaming duty, which covers bingo, so I would be grateful to know if the Minister recognises the concern about the bingo industry and the number of bingo halls going out of business. Secondly, in evaluating gaming duty, will the Government consider some reform or take any action to assist bingo halls? When considering clause 21, the Committee of the whole House addressed the issue of amusement machines, which is a similar area. A popular and traditional industry, which provides a great deal of pleasure to a lot of people, is facing difficult times. Perhaps we could use the opportunity to ask if the Government intend to do anything about rescuing an industry in trouble.

Jeremy Browne (Liberal Democrat, Taunton)

I want to support the brief, probing speech made by the hon. Member for South-West Hertfordshire. I had the great pleasure of calling the bingo numbers in Mecca Bingo in Taunton recently, and was congratulated both on the clarity with which I did it and on not allowing myself to stray into those colloquial terms with which we are all so familiar.

The point was made to me on that occasion, and has been made to me on many other occasions, that bingo is an industry that suffers from what is commonly known as double taxation. That is problematic, given that the industry faces other pressures as a business. I am the last person to think that businesses should be propped up if they are unable to attract customers. It is for the bingo industry to appeal to people to spend their leisure time playing bingo, rather than watching television or going for a walk in the countryside or whatever else people might choose to spend their free time doing, but there are pressures on the bingo industry as a result of the smoking ban, most obviously, and other considerations. The sector is important, as it employs significant numbers of people. Bingo is also enjoyed as a leisure activity by many thousands of our fellow citizens. The point is constantly made that the taxation arrangements are disadvantageous compared with other forms of leisure pursuits with a gambling dimension. I would be grateful if the Minister responded to those concerns.

Kitty Ussher (Labour, Burnley)

As the hon. Member for South-West Hertfordshire said, the purpose of the clause is to increase gaming duty bands in line with inflation for accounting periods starting on or after 1 April 2007. Such revalorising is in accordance with Government practice in recent years. I trust that that will be uncontroversial.

On the bingo industry, I, too, have had the pleasure of calling the numbers in my local bingo hall—congratulations to Gala Bingo Burnley, for giving me that opportunity. My constituents remarked that I was extremely bad at it, although I hope shortly to have the opportunity to practise further. I shall take lessons from the hon. Member for Taunton on style. I am intrigued, too, to know what type of research the hon. Member for Putney has undertaken on the bingo industry. The Committee should be told about her number-calling technique.

We are in close dialogue with the bingo industry. I congratulate the Bingo Association on the effective way in which it represents its members, with a strong voice. We very much hope that the dialogue will continue. In the Finance Act 2003, we made a point of reducing the average effective rate of bingo taxation from about 35 per cent. to nearer to 25 per cent. That was partly in response to the well-documented trend of bingo establishments closing. There are a number of factors behind that. Obviously the smoking ban—which is the right thing to do for the country—has played a part, producing that side effect. Demographic and social trends, too, are leading people to switch away from bingo, although many people still devote considerable leisure time to it.

The hon. Member for Taunton mentioned participation fees. The existence of those fees is not necessarily unfair, given the effective rates of taxation in comparable industries. Lottery operators face an effective tax rate of 24 per cent. For casinos, it is roughly 25 per cent., and the figure for bingo duty is similar. Amusement machine licence duty—discussed elsewhere—is about 21 per cent. Removing the participation fees would reduce to about 15 per cent. the effective rate for bingo, which would be out of line. There are other reasons why we have not bought the argument for removing participation fees, although we have considered it. When someone pays those fees, they are buying a service, and the fees should therefore be taxed at the appropriate rate. We have considered seriously all the points that the bingo industry raised, but we decided not to make any changes in the taxation of bingo in this Budget. The Bingo Association has made it clear that it will continue to lobby. We welcome that, and we welcome the conversation.

Nicholas Winterton (Conservative, Macclesfield)

I shall put the question on clause 20—blind 20.

Clause 24

David Gauke (Conservative, South West Hertfordshire)

I do not know whether you are able to enlighten us, Sir Nicholas, as to whether it is easier to chair a Finance Bill Committee or call the numbers in a bingo hall. I do not know whether anyone has done both, but I expect that if anyone has done, it is probably your good self.

Clause 24 is the first of four clauses relating to research and development relief and vaccine research relief. Clause 24 incorporates schedule 8, which makes changes to the rates of those reliefs. Given that the Government are changing the rates, I would like to probe their policy in that area. I am sure that there is common ground across the Committee on the belief that research and development are an important element of our economic policy and the way in which the UK will prosper in the coming years. The question is how we go about ensuring that that happens. The context in which the Government seek to increase the rates of research and development relief is one in which manufacturing is not having the best of times. I recently became aware of OECD figures that showed that in manufacturing growth in the past 10 years, the UK comes second from bottom, above only Norway. All other countries have done better.

I mention that, because if manufacturing is to prosper in the years ahead, it will do so in the highly developed value-added area. That will not be achieved by doing things on the cheap because of increased international competition. Research and development play an important role. The question I want to probe—I stress, “probe”—is how effective the Government’s approach to research and development is, and how effective taxation incentives are in developing research and development in the UK, given that manufacturing industry, which is presumably its ultimate objective, has not grown substantially.

We should be aware, and I do not want to digress, other than very briefly, that many other aspects of the taxation system have an impact on manufacturing. We have already debated the fact that the likes of Shire Pharmaceuticals appear to have been driven out of the UK by taxation matters and the headline rate. The Committee has already debated the balance between exemptions and reliefs, and the need for a lower headline rate. We all have to address that matter, but I should be grateful if the Minister told us what assessment the Treasury has made of the effectiveness of research and development reliefs and credits, as opposed to a policy of lowering rates.

There are a number of reasons why research and development reliefs and credits have not been as effective as they might have been, including administrative costs involved in making a claim. We will come back to this point in other clauses, but I am conscious that there are always issues of state aid in this context, which limit the actions that the Government may take. Do they consider that an impediment to the action that would be necessary for a more effective regime? To give one example, in the Finance Act 2007, we legislated for an extension of the small and medium-sized enterprise definition so that it would incorporate more companies. As of a few weeks ago, that had not come into effect. Has agreement now been received from the European Commission to do that? There are other examples too. In 2006, I think, we legislated so that payment to clinical trial volunteers was eligible for these reliefs and credits. Again, I should be grateful for an update from the Minister. I should like to hear what assessment the Government have made as to the effectiveness of this area, given that we are going to increase the rates available to businesses.

I wish to make a specific point about the circumstances in which large companies pay mainstream corporation tax. It perhaps relates to the detail in schedule 8, but it would prevent my having to make any further comments. We have seen a reduction in corporation tax from 30 per cent. to 28 per cent., yet for large companies, the relevant rate has gone up from 125 per cent. to 130 per cent. To save time, I shall not set out all of the numbers of a worked example, but an example I have seen suggests that to have retained the position regarding the amount of tax relief available for a large company, the rate would have had to increase to 133.5 per cent., because corporation tax has been reduced. I would be grateful for confirmation from the Minister that that is the case.

It is always necessary to consider these reliefs and credits critically, by which I mean assessing sensibly whether they are working. I wonder, given that UK businesses appear to be very critical of the tax system and a number of them are seeking to move abroad, because our headline rates are not as low as those of some of our competitors, particularly Ireland, whether the Government have looked at reducing some of these reliefs, which would enable them to fund a reduction in rates. I should say for the sake of clarification that I do not particularly advocate that policy. It was set out—and no doubt the Minister will refer to this—by the tax reform commission led by Lord Forsyth. It is a recommendation that he made, but it is not one that my party has adopted as such, and our policies will become clearer nearer the time of the next election. It is a legitimate area for debate, whether for the Opposition or the Government, to keep these matters under review and I would be grateful for the Minister’s assessment of where we are.

Nicholas Winterton (Conservative, Macclesfield)

Before I call the Minister, may I seek to be helpful to the Committee? A particular clause is linked to a particular schedule—clause 24 to schedule 8; clause 25 to schedule 9; and clause 26 to schedule 10. For the convenience of the Committee, I am sure that if hon. Members who are going to participate in the debate wish to refer to the schedule when dealing with the clause, that will be sensible and will remove the necessity of a separate debate on the schedule. Is that agreeable to members of the Committee? [Hon. Members: “Yes.”] Excellent.

Kitty Ussher (Labour, Burnley)

The 2007 Budget announced a package of reforms to the business tax system, including changes to the rate of corporation tax and the capital allowances system. As part of those reforms, the Government intended to promote innovation by increasing the generosity of enhanced tax deductions available to companies undertaking research and development that qualified for the research and development tax credits, which were introduced by the Government in 2000 for small and medium-sized enterprises and in 2002 for large companies.

That means making changes to the vaccine research relief, which allows companies to claim an additional tax relief on top of R and D tax credits. The small and medium-sized enterprises scheme and the VRR are both notified state aids and are subject to the requirements of the framework for aids for research, development and innovation. That is the combined effect of clause 24 and schedule 8.

I turn to the points that have been raised, including the more general point raised by the hon. Gentleman. We think and all the analysis shows—which I shall lay out to him as briefly as possible—that the R and D tax credits are having a positive effect on R and D spending. It is with some amusement that I listened to him waxing lyrical about the manufacturing industry, given what happened to it when his party was in power. If future manufacturing success depends on research, development and innovation, why was it that the previous Government slashed the science budget, which has now doubled under our Government? I am slightly resistant, in the friendliest possible way, to taking lessons from the Conservative party on these matters.

I am sure that the hon. Gentleman will be delighted to know that the 2005 independent survey of almost 1,000 R and D performing companies—the largest survey of its kind—showed that three quarters of companies that had claimed R and D tax credits found the process fairly or very easy. The survey found positive signs of the early impact of the scheme, bearing in mind that the legislation was introduced for large companies only three years previously, in 2002. Some 55 per cent. of the companies that had successfully claimed reported that they had been able to change the amount or type of R and D activity that they undertook as a result of claiming R and D tax credits.

Those results and the highly successful take-up of R and D tax credits to date suggest that the scheme was of sufficient value to influence R and D investment, and that is why we are expanding it. The full effects of the fiscal incentives are known to emerge only over the long term. The Institute for Fiscal Studies has said that it could be as long as 10 years, but the results have been encouraging so far, which is why we are proud of the policy. International work by the OECD has led to a general consensus about the positive relationship between R and D tax credits and the amount of R and D, and we are comfortable with that.

The hon. Gentleman made some broader points about competitiveness in taxation that, strictly speaking, are not within the scope of this part of the Bill. It is something that we are always extremely aware of, and that is why my right hon. Friend the Financial Secretary has set up a new group of people in industry to look at such issues more broadly. It is not our policy to raise R and D tax relief to fund a reduction in corporation tax, which is at an historically low level—indeed, much lower than it was in 1997. It has had a positive effect on our competitiveness.

David Gauke (Conservative, South West Hertfordshire)

The Minister made a point about competitiveness. Yes, corporation tax is lower than it was, but it is not as low as it was compared with our competitors, and it is that problem that the Government must address.

Kitty Ussher (Labour, Burnley)

As I have said, we are ever vigilant to make sure that our economy is as competitive as it can be, given our other public objectives. That is why we shall be examining such issues under the group chaired by my right hon. Friend.

Clause 25

David Gauke (Conservative, South West Hertfordshire)

I wish to ask some brief questions about the clause and follow the precedent set under the previous clause and address them equally to schedule 9. SMEs in difficulty will no longer be able to apply for R and D relief and vaccine research relief. The clause requires them to be going concerns. If a company is in difficulty, but has a legitimate expectation of succeeding, why should it not be able to claim R and D relief and vaccine research relief? Directors are personally liable for trading while insolvent, so why is that not sufficient to prevent companies from claiming if they are in difficulty? Within VAT regulations, there is already a regime that restricts what companies may do so that they are not insolvent or in liquidation. Why should the test be that they are a going concern, as opposed to not being insolvent or in liquidation?

Does the Minister consider that the clause will affect many companies? Perhaps she can give an historical analysis of any companies that have claimed R and D or VRR, when they were not a going concern. Having asked for an analysis, however, we must appreciate that the economic conditions might be somewhat bumpy, to use the words that the Governor of the Bank of England used yesterday. In a downturn in the economy, the provision might become increasingly important. The main point is that the last accounts show that the company is a going concern. Does the Minister anticipate that some companies may be seeking to make applications for R and D relief or vaccine research relief slightly earlier in the process than they would otherwise do in order to ensure that they put the applications in before accounts are published?

A point made, perhaps not surprisingly, by the Institute of Chartered Accountants in England and Wales is that the measure may create certain pressures on auditors, who may be placed in a slightly more responsible position than they were previously. Does the Minister think that that an issue of any concern?

My main concern is: why is the clause particular? Was there not an alternative formulation on the basis of companies not being insolvent or in liquidation that would have perhaps been clearer for companies and perhaps not distort behaviour, as there may be a danger that this clause and schedule will do?

Kitty Ussher (Labour, Burnley)

The hon. Gentleman gets to the point in his questions and I am grateful to him for that. Perhaps I can explain why these changes are being introduced, which will answer his questions. During the notification of changes announced in the 2006 and 2007 Budgets, the EU introduced a new framework for state aid for research, development and innovation. That has led to a longer notification process than might otherwise have occurred and the Commission has looked more at the fundamentals of the scheme and how they comply with the framework.

One of the requirements is that state aid should not be used to support firms that are in need of rescuing or restructuring, which this measure meets. Recent examples from elsewhere in Europe have seen illegal aids challenged and withdrawn. Therefore, it is obviously in our interest to make sure that we meet the requirements of the framework, which we are now seeking to do.

Tax relief is designed to encourage and support companies to invest in and undertake R and D. If a company is no longer a going concern any tax relief paid to it will be used to meet creditor liabilities rather than being used to invest in and undertake R and D. That is effectively British taxpayers’ money and should not happen. A company must make a claim for R and D relief in its annual tax return and in doing so must consider its eligibility, including the eligibility criteria around a going concern, in line with the scheme rules. If that places an extra burden on auditors, that is not necessarily a bad thing. I welcome my relationship with the ICAEW. Auditors need to exercise their duties with responsibility. We can keep talking about that perhaps.

I hope that that answers the hon. Gentleman’s questions.

Clause 26

David Gauke (Conservative, South West Hertfordshire)

Clause 26 places a cap of €7.5 million on research and development aid on particular projects. I have a few questions for the Minister, in order to understand the reasons behind the clause and also to ask whether it will impose an additional bureaucratic burden on firms. I will start with the second point.

I understand that there are different rules as far as the relief is concerned for research and development for small and medium-sized enterprises and larger companies. In calculating the cost of a particular project, as I understand it, under clause 26 it will be necessary for an SME to calculate the various reliefs and tax credits that it has received in respect of that project, both under the rules that apply to SMEs and those that apply to larger companies, to ensure that the cap threshold is not exceeded. Is that a correct interpretation of what clause 26 will require? Does the Minister think that that is a burden that may create difficulties?

I believe that the Treasury assessment is that this particular cap is likely to affect only 25 companies. However, given that the definition of SME is being extended—a point that I raised a moment ago—is it possible that it may apply more widely than that? In addition to the complexity, my other concern is with regard to clause 26(1), which states that:

“A company is only entitled to R&D relief in respect of expenditure attributable to a research and development project”.

It goes on to set out the limits. However, what constitutes a research and development project? I do not think that there is any further definition. If one can break up a project into different elements and define it in that way, the cap will be ineffective. Is there a commonly accepted definition of a project? If there is not, it is an ineffective clause, given what it is intended to do.

What is the Government’s intention in this area and why are they introducing the clause? I believe that it is to comply with EU state aid rules. That may not be a surprise to you, Sir Nicholas. Could we have some clarification as to precisely why the Government are introducing the cap? If relief for research and development is a good thing, why is it only a good thing up to a certain amount? I seek the Minister‘s clarification on those issues.

Kitty Ussher (Labour, Burnley)

In answer to the hon. Gentleman’s final point, as with clause 25 and schedule 9, clause 26 is concerned with ensuring that the SME R and D tax credit and vaccine research relief continue to meet the requirements of the European framework for state aid for research, development and innovation. The clause introduces a cap on the amount of aid that companies can claim under the SME R and D tax credit and VRR schemes in respect of any one R and D project. That is because the EU’s framework requires that aid of more than €7.5 million needs to be notified to the Commission separately and the incentive effect of the aid shown. The Government believe that that would place a significant administrative burden on businesses and seriously reduce their certainty. If the incentive could not be demonstrated, all the aid would be disallowed, not just the aid over €7.5 million.

A cap, which applies to each project, is administratively less burdensome and gives more certainly to claimants where their project is not close to reaching that level of aid. We do not think that the changes will affect many of the 5,000 companies that claim each year for the reliefs. An alternative to introducing the cap would have been to require companies claiming more than €7.5 million in aid in respect of a particular project to individually notify that aid and its effect on their R and D expenditure to the European Commission. I am sure that Opposition Members and, if I may dare add, perhaps even yourself, Sir Nicholas, would not have approved of that. It would have resulted in considerably less certainty and more administrative complexity for claimants. That is why we are proposing to do it in this way—precisely for the reasons that the hon. Gentleman mentioned.

No single claimant has yet come close to claiming €7.5 million. The estimate of the number of companies takes into account the extension to medium-sized companies. Companies would need to make a calculation only if they came close to that cap.

We have, of course, undertaken and published an impact assessment on that measure. The hon. Gentleman the Member for South-West Hertfordshire asked whether the measure was burdensome. I have explained that it is the most efficient way to do this. The impact assessment published with this year’s Budget estimated that the impact of the change would be an additional total cost of £12,500 per year, for all the companies affected. I am sure that the hon. Gentleman will realise that that is a small amount per firm. I hope that that answers his questions.

David Gauke (Conservative, South West Hertfordshire)

The definition of “project”?

Kitty Ussher (Labour, Burnley)

I will have to come back to the hon. Gentleman on that.

David Gauke (Conservative, South West Hertfordshire)

I do not know whether the Economic Secretary, with time to think further on the matter, will be able to enlighten the Committee a little more on the definition of “project”, or indeed whether her guidance could be written more slowly and therefore more legibly. My point is important, as that seems to be a way in which the cap—I accept her points—might be avoided.

Kitty Ussher (Labour, Burnley)

I shall ensure that my guidance is written slowly and legibly and sent to the hon. Gentleman.

Clause 27

David Gauke (Conservative, South West Hertfordshire)

Clause 27 requires claimants of vaccine research relief to make a declaration about the effects of that relief. That declaration would state that the relief resulted in more expenditure on research and development. I simplify, but that is the gist.

I would be grateful if the Economic Secretary confirmed the purpose of the clause. Again, I think that the answer is, to comply with EU state aid obligations. This point applies equally to clause 26. Will the Government provide some reassurance that the UK will not be at a competitive disadvantage, and that other member states either do not have the research and development regime that we have or are required to have in place the same restrictions and requirements that appear in clauses 26 and 27?

There is a curious requirement in the UK that a declaration must be made that research and development has increased as a result of the reliefs provided. I do not know whether there are any precedents, and whether recipients of tax reliefs in other areas are required to make a declaration. If there are, I would be grateful if the Economic Secretary informed the Committee. How such a declaration would be enforced and assessed raises one or two questions. Will recipients of tax relief for research and development have to produce evidence to support their declaration? What sort of evidence would be expected? Will Her Majesty’s Revenue and Customs police the declarations? Will HMRC seek to review whether the declarations are correct? If it does, how will it make that assessment, and what will happen if it comes to a view that is different from that of the recipient? Or will it be the case that as long as the recipient says the words that are required, that is the end of the matter and there will be no further investigation? Is the declaration intended to cause an increase in the amount claimed for vaccine research relief, or will it increase the amount of vaccine research carried out? In view of the declaration, will companies change their behaviour and do more research, so that we see greater spending?

I am not aware of other parts of the tax system in which recipients of relief make a statement of this sort. Do the Government consider this a precedent that could be used in other areas? Will future Finance Bills contain divisions whereby companies make such statements? It is not entirely clear what the purpose of such a declaration is other than, once again, satisfying the EU state aid rules, and I would be grateful if the Minister provided some clarification.

Kitty Ussher (Labour, Burnley)

Perhaps I can help the hon. Gentleman by setting out a little context. Vaccine research relief is a closely targeted scheme providing extra incentives, on top of R and D tax credits, for research and development into vaccines and medicine for the prevention and treatment of TB, malaria, HIV and certain types of AIDS, which occur predominantly in the developing world. Such a specialised scheme will, by its nature, have a small take-up. Because it is a new scheme, and given the time lags inherent in the tax system and the small number of large companies that make claims, there is insufficient evidence—we have only anecdotal evidence—to demonstrate the incentive effect of the scheme as a whole. We cannot demonstrate the necessary incentive effect to the European Commission at this point, because we are at an early stage.

That is why we have introduced this self-declaration system, which applies only to large companies. We presume that the additional administrative burden is miniscule, and we do not think that it will have an incentive effect for or against incurring the actual spend in the first place. We anticipate that in due course there will be sufficient time-series data to make our own evaluation, and it may be possible to return to the Committee and say that the measure is no longer required. For the moment, we feel that it is the simplest way to ensure that we do not end up in complicated proceedings against the European Commission.

That answers the point about whether this puts us at a competitive disadvantage—absolutely not. Every country is subject to the same framework. To give some context, the Spanish Government recently lost a case at the European Court of Justice because their R and D tax credit system was in breach of European rules. We think that by doing this simple thing, we can ensure that we are not in that situation with vaccine research relief. On the contrary, by having a European state aid-approved system like VRR, our companies will be at a comparative advantage, and that is obviously in the interests of all.

Nicholas Winterton (Conservative, Macclesfield)

May I express the hope that all members of the Committee will have a fulfilling and restful weekend, that the weather improves for the test match and that you begin next week refreshed? The Committee is adjourned until 10.30 am next Tuesday, when I will not be in the Chair as I shall be in Taiwan. My fellow Chairmen will be standing in for me very well as they always do.

Further consideration adjourned.—[Mr. Blizzard.]