Finance Bill

Public Bill Committee, 5 June 2008.

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

Philip Hammond (Conservative, Runnymede and Weybridge)

On a point of order, Mr. Cook. Is it not customary that it is the Government’s responsibility to ensure a quorum in the Committee, using Government Members? Is it not unusual to have a Committee dependent for its quorum on Opposition Members?

Frank Cook (Labour, Stockton North)

I am tempted to inquire how long the hon. Gentleman has been a Member of the House. He ought to know that there is no such responsibility. A quorum is a quorum is a quorum.

Schedule 27

Clause 85

Jeremy Browne (Liberal Democrat, Taunton)

I beg to move amendment No. 185, in clause 85, page 47, line 33, leave out paragraph (b).

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss amendment

No. 186, in clause 85, page 47, line 36, leave out from ‘(2)’ to end of line 37 and add

‘may not be made unless a draft of the regulations has been laid before, and approved by a resolution of, the House of Commons.’.

Jeremy Browne (Liberal Democrat, Taunton)

I will try to keep the pace as lively as it has been so far.

Clause 85 allows the Treasury to make consequential and transitional provisions in relation to clauses 68 to 84. That is a catch-all power, and it includes the clauses on the abolition of industrial and agricultural buildings allowances, which we discussed at length in the previous sitting. Amendment No. 185 would remove paragraph (b) from subsection (4), which allows any changes to have retrospective effect providing that the provision

“does not increase any person’s liability to tax”.

Amendment No. 186 would remove the negative resolution procedure and introduce the positive resolution procedure for any changes made under the clause.

I tabled the amendments to seek assurances on a couple of matters. First, I would like to ask the Financial Secretary whether paragraph (b) will allow the Government retrospectively to alter provisions to reduce allowances, for example by reducing the phasing-out levels for agricultural buildings allowances from those decided in clause 82. Will the right hon. Lady explain whether there is scope for changing the goal posts agreed in subsequent finance Bills? Secondly, do the Government think that it is appropriate to use statutory instruments and the negative resolution procedure to introduce retrospective provisions?

The context for this part of our deliberations is, as we discussed at length on Tuesday afternoon, the widespread concern that people who made planning assumptions about their business investments, in some cases dating back to the 1980s, as well as people who made those assumptions as recently as the middle of the current decade, will be adversely affected by the changes. However, at least they now know the scope of that adverse effect. They know that the tapering-out will leave them worse off, but they can make calculations about how much worse off they will be and make adjustments. Given the state of the public finances, I am seeking reassurance from the Minister that the goal posts will not be further moved in subsequent Bills; for example, that the tapering-out will not take place more rapidly than envisaged in the legislation.

Jane Kennedy (Labour, Liverpool, Wavertree)

It is a pleasure to serve under your chairmanship, Mr. Cook. It is a very fine day and I hope that we can bring that good atmosphere into the Committee, as has been our practice so far in our debates.

Given the scale of the reforms that we have been considering in the last few clauses—14 of the last 17 clauses having been part of the package business tax reforms announced in 2007—it is possible that some of the consequential amendments that need to be made to other Acts, which refer to legislation that has been repealed or changed significantly, have been missed. The hon. Member for Taunton has tabled a probing amendment to ascertain the purpose of the powers that we would take under the clause. I hope to reassure him by saying that they could be used only to relieve tax, but not in a way that would be detrimental to a taxpayer. The clause provides the power to make any transitional and savings provisions that are necessary as a result of the reforms. They allow such amendments to be retrospective only when the change does not increase someone’s liability to tax. The statutory instrument that deploys that power would be subject to negative resolution. I hope that that provides the reassurance that the hon. Gentleman was seeking. His question was a sensible one. Given my reassurance, I hope that he is prepared to withdraw his amendment.

Jeremy Browne (Liberal Democrat, Taunton)

I am grateful to the Minister for her reassurance, and I am happy to beg to ask leave to withdraw the amendment.

Clause 86

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 218, in clause 86, page 48, line 29, leave out subsection (4) and insert—

‘(4) Where this section applies—

(a) section 343(2) shall apply, but as if the words “and are subject to section 343A (company reconstructions involving business of leasing plant or machinery)” were omitted; and

(b) section 343A shall not apply.’.

This is a technical drafting amendment, the authorship of which I do not claim. It comes from the Law Society, which is concerned about the lack of clarity in the drafting of subsection (4). The amendment intends to clarify the intention of that subsection so that it is clear that in a case to which the anti-avoidance provisions of clause 86 apply, section 343(2) of the Income and Corporation Taxes Act 1988 would be omitted and, separately, that section 343(A) would not apply in a case to which this anti-avoidance section applies. There is no question about what the provision is trying to achieve, but the wording in the Bill is clumsy and is capable of more than one interpretation. The Law Society has proposed that subsection (4) be divided into two paragraphs, so that it says clearly where section 343(2) should apply, but as if the words,

“and are subject to section 343(A)”

were omitted, and, separately, that section 343(A) itself “shall not apply”. I hope the Minister can confirm that the Law Society’s interpretation is correct, and that the amendment does not change what the Government intended. If she will not accept our amendment, will she at least place on record an acknowledgement that the interpretation as per the amendment is correct for future guidance of Her Majesty’s Revenue and Customs decision-makers and the courts?

Jane Kennedy (Labour, Liverpool, Wavertree)

Amendment No. 218 does no more than seek to clarify the intention of clause 86 (4). I appreciate the way in way in which the hon. Gentleman moved it, and it may help if I explain how subsection (4) works. This will be quite a technical reply, but it is a proper and technical amendment, which has the same effect as the subsection that it seeks to amend. I will try to explain why we do not believe that it is necessary.

Subsection (4) of new section 343ZA applies section 343(2) of the Income and Corporation Taxes Act 1988 to transactions that fall within the scope of the new section. Section 343(2) is one of its main operative provisions, providing that a trade is treated as not ceasing and commencing for the purposes of the Capital Allowances Act. This is the effect that is needed for the new clause.

However, section 343(2) ends with words that ensure it normally applies subject to the provisions of section 343A. As section 343A ensures that section 343 does not apply in some circumstances, it could have the effect of allowing a trade to be treated as ceased. Therefore, in applying section 343(2) to new section 343ZA, it is necessary to ensure that section 343A does not affect the outcome. This is achieved by omitting the closing words of section 343(2). It is at moments like this that I wish I was next door in Committee Room 9 debating the Human Fertilisation and Embryology Bill.

This is the effect of subsection (4) of new clause 343ZA. The proposed amendment would have the same effect. We can debate the elegance of the wording, but our advice is that the wording in the Bill is what is required to have the effect I have described. I believe that new subsection (4) is unambiguous and there is no need to make the amendment. It would be interesting to hear the views of the Law Society after that explanation. I ask the hon. Gentleman to withdraw the amendment.

Mark Todd (Labour, South Derbyshire)

That is clear then.

Philip Hammond (Conservative, Runnymede and Weybridge)

As the hon. Gentleman says, that is clear. How the right hon. Lady can suggest that that is unambiguous is slightly beyond me. I am quite sure that it is fairly ambiguous. It emphasises how complex the tax code is. The important point is that although I do not pretend to have followed precisely the logic of her explanation, as she read it out, those who need to interpret this statute will not only have followed it, they will be able to refer to it. Therefore the matter is clarified for the future guidance of HMRC practitioners and, if ever necessary, the courts. The purpose of the amendment has been served, so I beg to ask leave to withdraw the amendment.

Schedule 28

Mark Hoban (Conservative, Fareham)

Welcome to the Chair, Mr. Cook.

I will say a few brief words about the schedule and raise a question about parity. The schedule should be regarded as being in honour of the right hon. Member for Normanton (Ed Balls), now the Secretary of State for Children, Schools and Families, who had a particular obsession with the ways in which people could inherit tax-relieved forms of savings. Comparatively simple sections of the Finance Act 2004 on alternatively secured pensions were amended in 2006 and 2007. Here we are in 2008 amending those same sections and extending to other types of pension schemes the measures used to discourage people from using alternatively secured pensions.

It is not entirely clear what mischief, if any, the schedule is supposed to tackle. I do not have any evidence that there has been widespread abuse of the pension schemes that are identified. I would be grateful if the Economic Secretary would provide clarification, because one of the consequences of the measure is the application of a tax charge of up to 82 per cent. to payments made from scheme pensions when there is an increase in the pension rights of one member following the death of another member who is part of the family or a partner. This is quite a complex measure.

I want to raise several issues with the Economic Secretary. As I understand it, a number of these small pension schemes have at their heart an asset that is relevant to the business. The pension scheme might own a factory, an office or a shop that is used in the business. When these measures were first discussed, I spoke to a number of pension advisers who were concerned that these changes could lead to the forced realisation for sale of those assets to fund pension charges. The responses to the consultation from organisations such as the Association of British Insurers suggest that those concerns have been allayed.

There are still areas where there is a lack of clarity for taxpayers in interpreting these rules. I refer the Committee to the concluding words of paragraph 7(3)(a), which state,

“but otherwise having regard to the circumstances of the member”.

Paragraph 9(2)(a) contains the words,

“otherwise having regard to the circumstances of the dependant”.

The explanatory notes are commendably brief on the topic, but they do not provide clarity for tax advisers or pensioners about what might be deemed to be the circumstances of the dependant. I do not know whether the intention is to produce guidance to supplement that paragraph and the explanatory notes, but it would be useful for people to have greater clarity on the purpose and the meaning of

“having regard to the circumstances of the member”

so that they can understand how these particularly complex rules should be applied.

Kitty Ussher (Labour, Burnley)

It is a pleasure, as always, to serve under your chairmanship, Mr. Cook.

The hon. Member for Fareham correctly summarised what the schedule is attempting to achieve. It will change current legislation to ensure that scheme pensions and lifetime annuities are used to provide a retirement income for life, and not as a means of diverting tax-relieved pensions savings into inheritance. It will make the treatment of scheme pensions and lifetime annuities consistent with that of alternatively secured pensions, which the hon. Gentleman rightly says have been considered by previous Finance Acts, and so create a level playing field for the different ways in which individuals aged 75 or over can use their pension funds to secure an income for the rest of their lives.

The hon. Gentleman asked why we are doing that, and it is really a point of principle. The purpose of giving generous tax relief on pension savings is to support savings that provide a secure income in retirement, so provisions allowing tax relief to be redirected and passed on to inheritance are contrary to that fundamental principle. In addition, mass-market providers of pensions told the Government that a level playing field between alternatively secured pensions and other types of pensions was required, and we agree. While the measure was not being particularly abused, according to our evidence, the failure to act would have left in place a perverse tax incentive for members of pension schemes to select pension options that provide the best opportunity to increase inheritances for their children and grand children, rather than maximising the income in retirement available to them and their dependants. There are other ways of saving for one’s children and grandchildren, rather than doing so through pension schemes.

The hon. Gentleman made a point about assets belonging to a scheme—a factory, for example—having to be realised as a result of this measure, but that is not our view. The measures apply only after the pension scheme has begun to pay a secure pension, and therefore will not affect the type of assets that the scheme must realise to provide that pension, so I hope that I can allay the hon. Gentleman’s concerns and those of the wider audience in that regard.

The hon. Gentleman questioned the precise meaning of the phrase

“having regard to the circumstances of the member”.

It is intended to ensure that account is taken of the fact that an individual may have a higher nil-rate band if a claim has been made to transfer the nil-rate band on the death of a spouse. However, we will shortly provide further guidance on that point, which I hope will allay any concerns.

Mark Hoban (Conservative, Fareham)

Why can we not either have that guidance now, or have those circumstances set out more clearly in the Bill? Having that guidance, or preferably having the amendments on Report to clarify what “other circumstances” actually means, would provide better parliamentary scrutiny.

Kitty Ussher (Labour, Burnley)

We are not convinced that it will require amendments on Report, but the hon. Gentleman has made his point. I hope that I have indicated in the debate broadly what the purpose of that phrase is, and I give him my undertaking that we will publish further guidance as soon as possible.

Schedule 29

Mark Hoban (Conservative, Fareham)

I want to ask some detailed questions that cover a number of different issues relating to the schedule. Paragraph 7(3) states that

“the individual is one of a class of at least 20 pensioner members”,

but that term is not defined. That is quite important, because there is an anti-avoidance provision in paragraph 7(4), which will insert new sub-paragraph (4) into the original legislation so that any increase within 12 months of a previous increase is not acceptable if the class of pensioner members is different between the two increases and if

“the purpose, or one of the main purposes, of the individual’s being included in the new class is”

to avoid being caught through an excessive increase.

Will the Minister confirm that the class will be defined by reference to criteria, and that it does not matter that the individuals within a class are different at two different dates? A class of pensioners is likely to change over time, because pensioners may die, but new pensioners will join that class. Hence, any second increase within a 12-month period may involve what is technically a different class, even if 90 per cent. of the individuals have remained the same. Is class defined by the individuals who are part of that group or by specific criteria?

Paragraph 8 discusses threshold annual rates and circumstances in which exemptions may be taken for relatively small increases. There is concern that, at times, Department for Work and Pensions legislation requires changes and there has been a suggestion that those increases may exceed the retail prices index. Therefore, it would be appropriate for an exemption from testing to apply to any increase required by legislation. Has the Minister given any thought to that?

Paragraph 18 deals with the inheritance tax treatment of non-UK pension schemes. In principle, the paragraph is widely welcomed by pension advisers. It corrects a situation that has arisen since A-day, when changes were made to the pension regime. Prior to A-day, a sponsored superannuation scheme was outside the scope of inheritance tax legislation , including overseas pension schemes. However, post A-day, only registered schemes and something called “section 615 schemes” have been outside the scope of IHT. All non-registered schemes, both UK and overseas, were within the scope to IHT and subject to the ensuing complexity.

Recognising that there are overseas schemes that should fall outside the scope of IHT is welcome to the industry. However, there is concern about the definition of the scheme as set out in the draft statutory instrument, which the Minister kindly circulated to members of the Committee. Because it reflects the way in which Her Majesty’s Revenue and Customs looks at UK tax schemes, it creates a slight problem. If a scheme does not qualify it imposes burdens. Pension schemes could be treated as a settlement and subject to significant IHT consequences, such as 10th anniversary charges. There are pension schemes designed to deal with expatriate employees or people who work overseas that could become liable to those charges, because they do not fall within the definition of qualifying schemes as set out in the draft statutory instrument. I shall give some examples.

First, some countries, such as the US, have limits on benefits in approved pension schemes, and management often has unapproved schemes on top of the approved schemes. While it may be reasonable for those schemes not to enjoy full UK income tax approval, because they will not qualify for the exemption, long-term inheritance tax burdens may be imposed on them. Secondly, some skilled mobile executives often end up in international pension schemes in cases in which individuals move from country to country a number of times and no particular country’s pension scheme can cover them. Those people often form part of a key group of senior management but, because of the mobile nature of their employment, their pension scheme is not often open to ordinary local employees, as it is geared to benefit mobile expatriates. According to the draft statutory instrument, such schemes would not qualify, so IHT burdens could be imposed on them with compliance and reporting obligations. Such complexity is not normally found in other countries. That has an impact on how business friendly the UK tax regime is seen to be, compared with other countries where businesses might think about locating skilled, mobile executives.

I would be grateful if the Minister considered that issue. Could amendments be made to the wording of the statutory instrument that would broaden the definition of a qualifying non-UK scheme? They could take into account situations such as those in which the benefits in one territory are capped and there are additional schemes, or situations in which a pension scheme can be set up to cover people working in a range of different companies. I would be grateful for the Minister’s comments.

Kitty Ussher (Labour, Burnley)

This is rather a hotch-potch of miscellaneous provisions, and the questions that the hon. Gentleman asked each refer to a different provision. I request the patience of the Committee, as I will describe what the schedule is attempting to achieve, before coming on to the points made by the hon. Gentleman.

Schedule 29 to clause 89 contains the details of a package of amendments that simplify the administration of the pension system. The amendments respond to industry lobbying, pre-announced consultation and clarification of the rules, following the enormous exercise that led to the changes at A-day. The amendments, while providing administrative easements, also preserve the key underlying principle that tax relief is given for pension savings, in order to encourage and support saving that will produce income in retirement.

The changes in the schedule fall into three categories. The first and by far the largest category simplifies the administration, bringing practice into line with intention and providing the deregulatory benefits that we could achieve. We became aware of a number of circumstances in which pension schemes make payments, often in innocent error, such as an overpayment of an ongoing pension, that would currently be treated as an unauthorised payment, and so are subject to a tax charge of up to 70 per cent. A change to the regulation-making powers, as we propose, would allow those payments to be taxed in the same way as authorised payments from pension schemes.

The second change that our regulations will provide are relaxations to the rules on trivial commutation, allowing occupational pension schemes to trivially commute pots of up to £2,000 and to help tackle the issue of small stranded pension pots. A further administrative change will ensure that the funds that migrant workers build up in non-UK pension schemes that have received UK tax relief are appropriately identified, to ensure that UK tax relief and charges for overseas pension schemes equate with those for registered pension schemes. That ensures that the legislation works as intended, simplifies administration and protects tax revenues by removing a potential loophole.

Two further administrative improvements resulted from proposals made by the pensions industry. The first change simplifies complexities for scheme administrators in the calculation of lump sum payments. The second ensures that the members of large occupational schemes are not unintentionally caught by the rules preventing tax-relieved investment in residential property. Finally, in the category of administrative improvements, the schedule includes a change to restore from April 2006 protection from inheritance tax charges to savings in certain overseas pension schemes, as the hon. Gentleman mentioned, which was inadvertently removed in changes made to the pension tax rules. The protection will apply where the overseas scheme is regulated and tax-recognised in the country in which it is set up. If the country has no system for regulation and tax-recognition, the pension scheme must provide for the savings to be used to provide a pension income for life. The hon. Gentleman queried whether that imposed burdens on schemes that are liable to IHT charges. The regulations have been published in draft, and are intended to give the same inheritance tax protections that apply to schemes broadly equivalent to UK-registered pension schemes, so we hope that there is not an additional burden. That is the purpose of the regulations, but we have only published them in draft, and my colleagues at HMRC are happy to accept and consider representations. If groups outside the Committee have made points to the hon. Gentleman, we are happy to take them on board and consider them to make sure that we get this right.

That is the first category of issues which the schedule covers. The second category is the change, following consultation, to rules preventing avoidance of the lifetime allowance charge. The pensions industry has welcomed those easements, which make the administration of the rule simpler and less costly. The third category is the clarification of the rules on employer contributions. The change confirms that during the period from April 2004 to April 2006, the only tax relief is the actual contribution paid in the year, which prevents any doubt about how the provision operates.

The hon. Gentleman made two other points. First, he asked about the increase of the threshold annual rate. It allows exemption from the test if the increase is below the higher figure of 5 per cent. or RPI, which we believe will account for all the circumstances that we envisage. It works in conjunction with the rule allowing exception if more than 20 members have the same increase.

Mark Hoban (Conservative, Fareham)

Is the Minister therefore saying that DWP payments will not be taken into account when calculating the threshold test, and that people will not need to calculate it if there is an increase due to changes in DWP requirements?

Kitty Ussher (Labour, Burnley)

I do not have the answer to that question, but I am sure that I will.

David Wright (Labour, Telford)

They are included.

Kitty Ussher (Labour, Burnley)

They are included, I am told by some strange telepathic force. I hope that that answers the question asked by the hon. Member for Fareham.

On the hon. Gentleman’s question about the class of pension members, the class relates to 20 people receiving pensions. It does not matter if the people in that class change, unless it is done for avoidance purposes. The test for avoidance relates to whether the people in the class have changed to avoid the charge. There is an intentional test. I hope that I have clarified those issues for the Committee, and I commend the schedule.

Clause 91

Kitty Ussher (Labour, Burnley)

I beg to move amendment No. 149, in clause 91, page 52, line 24, leave out ‘, other than any rent,’.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss Government amendments Nos. 150 and 151.

Kitty Ussher (Labour, Burnley)

These are small amendments to ensure that clause 91 and schedule 30 have the effect that we intended when we drafted them. The Government expected the changes introduced by clause 91 and schedule 30 to remove the need to notify HMRC of more than 270,000 transactions per year. It is a welcome deregulatory measure. Clause 91 introduces a rent notification threshold of £1,000, which applies to the grant of leases for a term of seven years or more and reduces the administrative burden of stamp duty land tax. Previously, one was required to notify HMRC of a grant of any lease for seven years or more, provided it was made for a chargeable consideration.

However, clause 91 also applies the same £1,000 notification trigger in respect of leases that are assigned or surrendered. The assignment of a lease refers to the transfer of rights to use leased property, which can obviously happen periodically as rents are renegotiated. The requirement to notify the assignment or surrender of leases when the relevant rent was £1,000 or more, regardless of the size of any other chargeable consideration for the assignment or surrender, was added to ensure that the data the Government collect on property transactions were not harmed by the measure.

However, since the Bill was published, we have received representations about the extra reporting that the additional requirement will create. We are, as always, keen to ensure that we can deregulate wherever possible and that we do not place additional burdens on business, so we think that we can collect the data in another way. We have re-examined the requirement and agreed that we can offset the deregulatory savings if we proceed as we originally intended.

We believe that the data collected from the notification of the granting of leases would not be unduly affected by an amendment that removed the requirement to notify HMRC of the assignment and surrender of leases when the relevant rent is £1,000 or more. I trust that the amendment is uncontroversial.

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to serve under your chairmanship again, Mr. Cook. The Financial Secretary said earlier that she hoped that the pleasant weather outside would be reflected in a pleasant environment in this room. I do not think there will be a great deal of controversy about this clause. Although we might take issue with the Economic Secretary’s characterisation of the Government as always keen to deregulate, this is, none the less, a deregulatory measure.

We welcome the intention behind clause 91, which raises the threshold of notification to HMRC of a land transaction for stamp duty land tax purposes. We also welcome the fact that the Government have listened to representations—particularly from the British Property Federation and the Law Society—that the original wording would not perhaps have been as successful in reducing the regulatory burden as was intended. We therefore welcome the fact that the Government have produced not only the clause, but the amendments. Indeed, we tabled an amendment on removing the £1,000 rent requirement that is identical to Government amendment No. 150. Hence, the entire Conservative Front Bench supports amendment No. 150—such is our enthusiasm for the measure. No doubt, the Liberal Democrats will make a statement that they are the real alternative by not putting their name to the amendment.

I have a couple of questions for the Economic Secretary. The first question is about the requirement of notification for the £40,000 threshold—chargeable consideration. Given that SDLT is payable at £125,000 or £150,000—I would be grateful if the Economic Secretary will confirm that—I assume that the £40,000 requirement exists to provide the Government with property-related information, as opposed to being for the assessment of SDLT. That would enable the Minister for Housing to share that information with the Cabinet and, indeed, with passing cartographers.

There are difficulties in filing a correct SDLT return under section 75A if the purchaser has no connection with the other parties to the transaction and therefore cannot obtain the information to complete the return and self-assessment. I know that representations have been made to the Treasury on that point, so I should be grateful to know whether the Government are considering the issue of filing SDLT returns and whether there are plans to address that concern. In conclusion, we welcome the clause and the Government’s amendments.

Kitty Ussher (Labour, Burnley)

The hon. Gentleman raises an important point because there is obviously tension between the need simply to acquire information about what is happening in the market for a variety of Government purposes and the genuine desire to deregulate in relation to the companies and individuals concerned. The implication in his question is why the notification threshold is not the same as the threshold for the tax itself. We need the information collected from notifications to help other Departments, such as the Land Registry and valuation offices, to make assessments based on data collected from returns. Even if no tax is collected on the transactions, there is a requirement in relation to that.

The hon. Gentleman mentioned filing under section 75A, and we will be issuing guidance on that shortly. We do not believe that a return form is needed; a letter setting out the main points will suffice. I hope that answers his question.

Clause 92

Kitty Ussher (Labour, Burnley)

I beg to move amendment No. 152, in clause 92, page 54, line 42, at end insert—

‘( ) In Schedule 9 to that Act (SDLT: right to buy etc), after paragraph 4A insert—

David Gauke (Conservative, South West Hertfordshire)

I thank the Economic Secretary for her clear explanation of the amendment. I have one question about the clause, which relaxes the £600 rule that prevents the manipulation of lease thresholds by entering into leases in which both rent and a premium are paid. Like many measures, the £600 rule was introduced as an anti-avoidance measure, and I should like to know what persuaded the Treasury that it is no longer necessary. What assurances can the Minister give that the consequence of its repeal will not be the avoidance behaviour that was the very cause of its introduction?

Kitty Ussher (Labour, Burnley)

The hon. Gentleman makes a valid point. We have decided that the risk of manipulation between premiums and rent to avoid paying SDLT is much greater for non-residential property than for residential property. The removal of the £600 rule for residential properties would bring huge benefits to those purchasing a property through a shared ownership scheme, by ensuring that in the vast majority of cases they pay stamp duty land tax only on transactions that take them beyond 80 per cent. ownership of the property. We were advised, for example, by the Chartered Institute of Taxation that retention of the £600 rule for non-residential property is disproportionate to the level of possible abuse. We are trying to balance the risks, and we are comfortable that there is no major incentive to abuse the provision.

Clause 93

Kitty Ussher (Labour, Burnley)

I beg to move amendment No. 153, in clause 93, page 55, line 36, at end insert

‘(but see sub-paragraph (6A))’.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss the following: Government amendment No. 154

Amendment No. 187, in clause 93, page 56, leave out lines 4 to 6.

Amendment No. 159, in clause 93, page 56, line 6, at end insert—

‘(8) The provisions of sub-paragraph (4) shall not apply unless, at the effective date of the transaction, there are arrangements in existence by virtue of which, at that time or some later time, a person has or could obtain, or any persons together have or could obtain, control of the purchaser but not of the vendor.’.

Government amendments Nos. 155 to 158.

Kitty Ussher (Labour, Burnley)

I shall speak to the Government amendments, which in many cases will resolve some of the issues raised by both Opposition parties. I assume that Opposition Members wish to speak to their own amendments, so I shall respond to them in detail when they have done so, rather than pre-empt them. I shall instead explain what we are trying to do with our amendments, which might lead us on to what other hon. Members wish to propose.

Clause 93 has been introduced to close a loophole that has been widely used to avoid paying stamp duty land tax. Following its announcement in the Budget, a number of representations were submitted by the industry detailing concerns about parts of the operation of the clause. In particular, there was uncertainty about how the legislation will be applied in practice and concerns that it might catch innocent transactions. The legislation is not intended to disadvantage genuine taxpayers, so the Government amendments have been introduced to ensure that the legislation operates as intended and to provide the certainty sought by the industry.

Some representations suggested that the clause is retrospective, which is not the case. It is not intended to penalise anyone who has acted on the basis of existing legislation, so Government amendment No. 158 has been introduced to ensure that the provision applies only to transfers of assets occurring after Budget day. Concern was also expressed about the meaning of “control” in the clause—this may relate to amendment No. 187, in the name of the Liberal Democrat Members. The word “control” has been used in this context for many decades, but it has been suggested that a change in control of the purchasing company might be inadvertently triggered resulting in a clawback of group relief. I would expect a property group to take the necessary legal steps to pre-empt such a possibility, without being caught by the legislation.

Having considered the representations, however, I wish to provide greater certainty in two specific areas, which might pre-empt some of the points that may be made. The first point relates to a change in control arising as a result of refinancing where the finance is not provided by a bank. Such a finance provider is defined in legislation as a loan creditor. In certain circumstances, financing obtained from a loan creditor would trigger a change in control, which might present difficulties to groups seeking refinancing. That is not the Government’s intention, so we have proposed an amendment to introduce an exclusion that will ensure that financing obtained from a loan creditor will not result in a change of control for the purposes of clawing back group relief. We have also proposed the introduction of a similar exclusion elsewhere in schedule 7 to the Finance Act 2003 to ensure consistency across the group relief legislation. Those two measures refer to Government amendments Nos. 153 and 154.

Government amendments Nos. 155 to 157 are consequential and address the second area of concern, which is that HMRC might construe the meaning of a change of control so widely that the change of one shareholder in a quoted company might result in a change of control and, therefore, trigger the clawback provision. Similar concerns were raised in relation to reconstruction relief. I can confirm that we intend to take the same approach—if control of a publicly owned company changes as a result of an ordinary market transfer of its shares, there will be no recovery, because we do not intend to interpret change of control so widely that simple day-to-day transactions by unconnected minority shareholders in the stock exchange could trigger a clawback. We will issue guidance shortly to confirm that view.

In conclusion, the Government amendments will provide the certainty sought by the industry, while ensuring that the loophole exploited by those seeking to avoid their share of tax will be closed. The amendments will have no Exchequer costs or revenue implications and will be welcomed by a wide range of practitioners and the industry. I shall stop now to allow others to speak to their amendments and then I will wrap up the debate.

Jeremy Browne (Liberal Democrat, Taunton)

I think the Minister dealt with the concerns raised in amendment No. 187 which stands in my name and that of my hon. Friend. I tabled the amendment after I received a letter from PricewaterhouseCoopers, which was no doubt also sent to the Minister and Conservative Members. The letter drew attention to a fictional case study, which was none the less a perfectly reasonable hypothetical case, and expressed concern that the wide drafting of section 416 would inadvertently lead to the withdrawal of group relief. I should be grateful if the Minister could confirm that the example would be addressed as my amendment would then have achieved its objective. PWC wrote:

“Where the top company in a group is owned by three unconnected shareholders (each holding 40 per cent. 30 per cent. and 30 per cent.), section 416(3) ICTA 1988 would treat them as together controlling the top company. If one shareholder leaves, they will no longer be considered as controlling the company ‘together with others’ and group relief withdrawal will be triggered.”

Three other examples were given in the letter. I appreciate that this is a complex area, but will the Government amendments address that concern? PWC also suggested creating a statutory definition of an SDLT group. Has that, too, been provided for by the Government?

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Economic Secretary for her comments. She will be aware that a number of representations have been made on the clause. It might be helpful if I briefly outline how it is supposed to work. I also have a number of examples where there may be an issue on which I seek reassurance.

Paragraph 1 of schedule 7 of the Finance Act 2003 allows companies to claim group relief on transfers of assets between group members. A restriction allows clawback when the purchaser ceases to be a member of the same group as the vendor. For perfectly obvious reasons, the use of group relief would otherwise be a rather easy way to avoid SDLT. The problem the Government are seeking to address is that if first the vendor and then the purchasing company leaves the group, it is no longer possible to make the clawback.

The clause allows clawback where the vendor leaves the group and then within three years there is a subsequent change of control of the purchaser. There was certainly concern about the possibly retrospective nature of that provision and I am grateful to the Government for tabling amendment No. 158, which addresses that concern. However, we are still left with a structure such that if the vendor transfers property to another group company, the vendor leaves the group and then there is a change of control of the purchaser, clawback may occur.

The Minister has addressed one of the concerns that was raised. If the purchaser was part of a public group, arguably any change in the shareholders could trigger these provisions, which is not the Government’s intention. None the less, given the comments made by the Economic Secretary, there could still be an issue in the event of the purchaser being part of a public group that is then taken over. In those circumstances, the effect of a change of control would be a three-year poison pill for companies that have carried out transactions of the sort to which we have referred. That may well have some significance for the liquidity of the stock market.

I would be grateful if the Minister could confirm that that interpretation is correct—that the amendments tabled by the Government will, as well as rightly addressing circumstances where there is a change of just one shareholder, address circumstances where the purchaser is part of a group that is taken over.

Similarly, where the purchaser is part of a group that is taken over and executive share options are exercised, could that conceivably trigger a change of control for these purposes? Equally, a corporate restructuring that would involve the insertion of a new holding company above the purchaser but below the top code, would not result in an ultimate change in economic ownership, but may well be a change of control for the purposes of clause 93. That is not an uncommon restructuring for a private company that is preparing for an initial public offering. In those circumstances, that change of control and therefore clawback may—perhaps unintentionally—be triggered.

There are also circumstances where the purchaser group’s majority shareholder is a partnership. That is common with regard to private equity arrangements, which are normally structured through partnerships, and if there is any change in the partners—the investors in a particular fund that may be a majority shareholder in the purchaser—a change of control would be triggered.

In such circumstances, I do not think that we are talking about the mischief that the Government legitimately seek to address. We are talking not about a tax scheme, or some sort of plan to avoid stamp duty land tax, but about something that is happening as a consequence of the ordinary workings of a business which may cause particular concerns. There is also an issue, if we are talking about an entirely legitimate series of transactions, if the vendor has left the group, no longer has any control over what happens with regard to the purchaser, and then finds itself ultimately liable when it was not expecting it. A degree of uncertainty is created here.

Amendment No. 159 tries to address the matter by limiting these provisions to arrangements that were made with a view to avoiding stamp duty land tax effectively, because they were all part of one particular plan. There are various ways in which that could be addressed, but we have tabled the wording proposed by the Law Society on the matter. The hon. Member for Taunton referred to the definition of an SDLT group, which is another way of addressing that particular matter.

We remain concerned that the provisions of clause 93—notwithstanding the Government amendments, which, in themselves, are welcome—are too limited. In particular, the reference to lone creditors does not, as far as we can see, address the circumstances that I have outlined. Perhaps the Economic Secretary can provide some clarification. Therefore, we are not yet satisfied that the concerns, which, I think the Government recognise, are legitimate, have been addressed.

Sadly, the hon. Member for Wolverhampton, South-West (Rob Marris) is not part of the Committee proceedings this year. He was for the previous two years. He was always keen to point out that he disliked beginning a paragraph with the word, “But”. He would consistently object to it. In his absence, I draw the Committee’s attention to clause 93(4) and proposed new paragraph 4ZA(4) of schedule 7 to the Finance Act 2003, which begins with that word. I am also not sure that Government amendment No. 153, which ends

“(but see sub-paragraph (6A))”,

is the most elegantly drafted. I make those points in honour of the hon. Member for Wolverhampton, South-West—people in my party quote him quite a lot at the moment—but I would be grateful if the Economic Secretary addressed my main concerns with clause 93.

Frank Cook (Labour, Stockton North)

Order. In paying that tribute, the hon. Gentleman has simultaneously, craftily, crept into a stand part discussion. I must warn the Committee that if there are any remarks to be made in a stand part debate, they should be made at this point.

Peter Viggers (Conservative, Gosport)

If I have appeared so far to represent the Trappist tendency of the Conservative party, it is not because I have not been following the debate with keen interest. On several occasions, I have been minded to table amendments similar to those tabled by Conservative Front Benchers, so I congratulate them on the solid and professional job that they are doing of criticising the Bill.

It is not frivolous to complain about the language. “But” and “see” are not very good lawyerly words—they are a little casual—so I hope that my hon. Friend’s comment will be fed into the well oiled Treasury machine.

Mark Field (Conservative, Cities of London and Westminster)

Given your point on stand part remarks, Mr. Cook, I should like briefly to say that the amendments would be quite sensible. In fairness to the Government, they have tried to deal with a number of concerns with the clause with their own amendments.

I wish to make this narrow point. We understand the Government’s desire to ensure that the changes come into play when there is a withdrawal of group relief. Equally, the notions of change of control and group relief in the modern commercial world are changing. As the Economic Secretary will be aware, the emergence of private equity funds and the way in which they operate are changing, and the welcome prevalence of executive share option schemes brings into play a range of new organisations within business that could fall foul of what might traditionally have been regarded as a change of control by group relief provisions.

I hope that the Economic Secretary will give a satisfactory answer even if she does not accept the Opposition amendment, and that she will be able to give a broader overview. Many of the professional advisers who have contacted us fear that the clause will go far wider. Will she assuage their concerns?

Kitty Ussher (Labour, Burnley)

I am grateful to all hon. Members for raising those important issues. I reassure the Committee that I shall personally send a copy of the Hansard report of this sitting to my hon. Friend the Member for Wolverhampton, South-West. I am sure that he will be delighted that his concerns have been raised by Opposition Members. Our lawyers will take account of the point, too. I am not a lawyer, so I am unable to judge whether the measure is in lawyerly language, but I presume that it is at least correct in law.

Mark Todd (Labour, South Derbyshire)

There are rather too many lawyers.

Kitty Ussher (Labour, Burnley)

I would not wish to repeat that and have it recorded in Hansard.

The answer to the two questions asked by the hon. Member for Taunton is yes. We are addressing both issues that were raised by PricewaterhouseCoopers. It is probably obvious from my earlier comments that the Government have benefited from a close dialogue with various industry bodies, and I place my thanks to them on the record.

The hon. Member for South-West Hertfordshire raised the commonly described concern that the withdrawal of relief will represent a poison pill for the property industry. That is why the clause will make amendments to the Finance Act 2003 to ensure that the legislation will affect only those transactions that occur after 13 March this year. Anyone using the exemption will now be aware of the potential consequences should there be a change in control of the purchasing company within three years of the transfer of the assets. I hope that that explanation answers the point.

The hon. Gentleman’s substantive question was: why are we seeking clawback of SDLT group relief in circumstances where there is no disposal of a property-holding company by the group? Without the vendor exemption, group relief would have been withdrawn at the point that the vendor left the group. We believe that it is reasonable that we should seek to withdraw where there is a change in control of the purchasing company. The asset within the purchasing company would then be owned by someone else. It is exactly the same if a group is sold. There is still a change in the ownership of the asset. To suggest that one scenario is acceptable and the other is not, ignores the reality of the situation. That is why our proposal is as it is. He is within his rights to oppose the clause if he thinks that we are handling the matter incorrectly.

I will discuss the arrangements test and amendment No. 159 that the hon. Gentleman tabled with text suggested by the Law Society. The Law Society also expressed concern to us that the clause will catch innocent transactions and create uncertainty for taxpayers who do not engage in tax avoidance. Amendment No. 159 deals with the involvement of such transactions. It is not clear to us, however, that the arrangements test would ensure that all the scenarios presented by the Law Society would be excluded, nor would we wish that to be the case in all situations.

The arrangements test has been suggested as a method of distinguishing between what are regarded as commercial transactions and tax-avoidance schemes. Indeed, many of the commercial scenarios presented use the same loophole that has been exploited for avoidance purposes. It has only been by exploiting the existing legislation that groups have been able to avoid the withdrawal of group relief in the past.

Amendment No. 159 would open potential avoidance possibilities. For example, it would require HMRC to demonstrate that arrangements are in place for the control of the purchaser, but not the vendor. It would be relatively easy for avoidance schemes to devise around that test, thus reducing the effectiveness of the clause. We also feel that arrangements tests are difficult to administer and create uncertainty in the industry. Clearance application requests to HMRC would also increase as groups sought to obtain certainty that they would not be caught.

We believe that we have already addressed the Law Society’s main concern with the Government amendment to ensure that legislation will apply only to transactions after 13 March. We have introduced a further amendment to exclude loan creditors from the changing control tests. The Government amendments were requested in representations and we feel that they will assist industry without traducing the effectiveness of the clause. Its effectiveness would be traduced if we accepted amendment No. 159 and I invite members of the Committee to resist it.

David Gauke (Conservative, South West Hertfordshire)

May I address the comments made by the Economic Secretary? On the issue of the poisoned pill, as in my earlier comments I acknowledge that this measure is not retrospective in the sense that it relates only to transactions after 13 March. However, there is still an issue of the poisoned pill. For example, it is still possible for a transaction to occur when the vendor leaves a group and there is a subsequent change in control of the purchaser. There would still be a poisoned pill event in that circumstance. The concern therefore remains.

The Economic Secretary stated that the asset will be owned by somebody else because there will be a change in control of the property. She did not address my example of a new holding company being inserted into a group. As I understand it, that will still constitute a change of control, even though the economic ownership will remain exactly the same. As far as I can see, the concern about private equity funds raised by my hon. Friend the Member for Cities of London and Westminster has not been addressed.

Kitty Ussher (Labour, Burnley)

I apologise for my oversight in not addressing the point raised by the hon. Member for Cities of London and Westminster, who was concerned that private equity would be adversely affected. We do not think that that is the case and would be concerned if it were. Like all groups in the property industry, private equity will need to consider the clause when a vendor leaves the group. To clarify the matter, we intend to work with the industry to produce guidance that we hope will put any of those concerns to rest and provide the reassurance that is sought. That will take place.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that intervention, although it was more of an assertion that the measure will not affect private equity firms rather than evidence that it will not. As we shall see later, the Government are relying on guidance rather than statute. I am not persuaded by the Economic Secretary with regard to flaws in amendment No. 159. An arrangements test would, I think, address the Government’s legitimate concern and would not cause the problems that I have identified. I am inclined to push amendment No. 159 to a vote and will not seek leave to withdraw it.

Clause 94

David Gauke (Conservative, South West Hertfordshire)

I have only one brief point to make about the clause, which aims to restrict the scope of the anti-avoidance measures introduced in the Finance Act 2007 by ensuring that when there is a transfer of an interest in a property within an investment partnership, there will be no charge to SDLT. The measure will be retrospective and take effect for transactions that occurred on or after 19 July 2007. The concern that the anti-avoidance provisions will apply more than the Government intended, with regard to an interest in a property within an investment partnership, was made at some length this time last year in Committee by my hon. Friend the Member for Chipping Barnet (Mrs. Villiers), and in an intervention by my hon. Friend the Member for Ludlow (Mr. Dunne).

The clause represents one of those occasions when the concerns that they and various professional groups raised have been recognised. On the one hand, I welcome the Treasury’s recognition of those concerns, but this time last year, it was apparent that the legislation in the 2007 Finance Bill was flawed and would have an unfortunate effect. As a consequence, there has been a period of uncertainty, and I just wanted to put on record that it is regrettable that clause 94 is necessary because of flaws in last year’s legislation. They were known to the professionals and to the equivalent Committee last year.

Frank Cook (Labour, Stockton North)

We could have done without the rationale—but I shall put the question.

Further consideration adjourned.—[Mr. Blizzard.]

(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 Members to this sitting of the Finance Bill Committee. I feel duly refreshed, having had a plate of spaghetti Bolognese and my hair trimmed. That was not a large job, I confess, but I was told by the young lady who dealt with me that what is left is quality. I am sure that we will make good progress this afternoon.

Clause 96

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to consider Government new clause 6—Gifts inter vivos.

I call Kitty Ussher—what a pleasure.

Kitty Ussher (Labour, Burnley)

The pleasure is all mine, Sir Nicholas. May I start by saying how nice you look with your new haircut?

Clause 96 contributes to the reduction of the administrative burden on business of complying with stamp duty legislation by exempting from duty a variety of instruments that transfer ownership of shares where there is not a sale and purchase for consideration. Those instruments will therefore no longer need to be stamped by Her Majesty’s Revenue and Customs and may be sent directly to the company registrar to change the share register. The detailed provisions are set out in schedule 32. This deregulatory measure has been widely welcomed and I am sure that all members of the Committee will agree that it is sensible.

New clause 6 ensures that clauses 95 and 96 will achieve their intended effect with respect to instruments executed to gift stock or marketable securities by removing the requirement for those instruments to be presented to HMRC for denoting as not chargeable with stamp duty. Approximately 900,000 instruments are executed each year to transfer ownership of shares and securities. Previously, a range of transactions not involving sales or purchases could be certified under Treasury regulations as exempt from stamp duty, meaning that some 550,000 instruments did not have to be presented to HMRC for stamping. Of the remaining 350,000 instruments that had to be presented, two thirds were stamped only with the minimum £5 stamp duty because either the consideration given was £1,000 or less, or the instrument was of a type that attracted a nominal fixed £5 charge. That places a significant cost in resources on business for a comparatively small amount of duty. KPMG assessed the costs to business of complying with the stamp duty legislation as £49 million, of which some £41 million was attributed to the need to present instruments to HMRC for stamping.

The Government are keen to drive down as far as possible the administration costs of complying with tax legislation, and have therefore decided to remove the need for instruments attracting only the nominal £5 fixed stamp duty to be stamped. In future, those instruments will be exempt from stamp duty and may be passed direct to the registrar to update the register of shareholders. Together with clause 95, the new clause will reduce the number of documents that need to be seen by the Stamp Office by around 230,000, reducing the administrative burden on business by £13.8 million annually, while simultaneously achieving efficiency savings for HMRC.

One category of instruments impacted by these changes is instruments gifting stock or marketable securities. Previously, where the gift was for no consideration, the instrument was potentially chargeable with a £5 stamp duty but could be certified as exempt under Treasury regulations. Where the gift was for inadequate consideration, an ad valorem stamp duty charge at the rate of 0.5 per cent. of the consideration provided was chargeable. Clauses 95 and 96 of the published Bill will remove both the £5 stamp duty charge and the requirement to certify the instrument of transfer and also disapply the ad valorem charge for instruments where the consideration was less than £1,000.

Since the Bill was published, however, it has been pointed out that those changes have activated another provision that would prevent such instruments being regarded as duly stamped unless they were formally adjudicated by HMRC as non-chargeable for stamp duty. That would mean having to present them for stamping even though no duty is payable. That would reverse the intended effect of reducing the number of instruments that needed to be presented to the tax authority.

New clause 6 will ensure that the original aim is met by removing the provision that would strictly require instruments gifting stock or marketable securities to be adjudicated. The new clause will therefore enable the full amount of the projected reduction of business costs to be realised.

Clause 98

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to consider clause 98 stand part, clause 100 stand part, and Government new clause 7—Abandonment expenditure: deductions from ring fence income.

Justine Greening (Conservative, Putney)

This important part of the Bill deals with oil, and specifically with North sea oil taxation. The background to this debate is obviously one of high oil prices. In 1999—ironically, the year in which production of North sea oil peaked—oil was $18 a barrel. At that time we were producing 2.8 million barrels of oil a day. Although oil is now well over $100 a barrel—it is in the region of $130—we are producing only 1.5 million barrels a day. That shows how important the oil tax regime has been to this country, and it continues to be so today.

The oil industry makes a significant contribution to our economy. It has done so since North sea oil first came on stream in the late 1960s. We have already extracted 35 billion barrels of oil, and latest estimates suggest that a further 30 billion barrels of oil remain on the UK continental shelf. We have seen in excess of £200 billion being spent on exploration and capital investment. The industry has of course generated significant employment opportunities, not least in Scotland; I understand that more than 100,000 people are employed there as a result of the oil industry.

We should not forget the Committee’s interest in the tax side of the industry. Tax revenues generated from North sea oil amount to well over £200 billion. That is an impressive contribution, and we should bear it in mind throughout our deliberations on this part of the Bill. Despite all those accomplishments, however, there is no doubt that these are challenging times for the industry. Rising oil prices bring opportunity, but it turns out that they also bring costs. There may be more opportunity because revenues are greater—ceteris paribus, that means that if oil can be got out of the ground then it is obviously worth far more—but costs have also become a greater factor for the industry for two main reasons.

First, because many of our larger North sea oil fields have been extensively pumped, much of the remaining oil that we seek to continue extracting is from much smaller fields. As a result, that oil is often more technically difficult to reach than the oil reserves that we have been pumping so far. It is an increasing challenge for the country and the industry to reach the remaining reserves, although the news is welcome that those reserves could be a fifth higher than expected.

The second thing that has pushed up the cost of producing the oil results from the fact that the price of oil has increased. Many producers are now looking at pumping oil out of fields that were previously uneconomic. As I said, some of those fields are technically challenging, which has resulted in an increased demand not just for a skilled work force, needed to operate in this area, but for the rigs and various pieces of kit that have to be used to get to the extra oil safely.

According to estimates by Oil and Gas UK, since 2003 the cost of extracting oil from the North sea has doubled to $10 a barrel, which has put pressure on the industry’s capital efficiency. As a result, in recent years North sea oil production has declined steadily: since its peak in 1999—two years earlier than expected—it has fallen by one third; and, worryingly, production has consistently been below forecasts, so it has declined at a faster rate than expected. That has gone hand in hand with a dramatic, real-terms reduction in investment in exploration and production, which in turn has had a bearing on the reduction in oil production.

Oil and Gas UK’s 2007 activity survey found that, in the past year, investment fell by about £1 billion in real terms, to about £4.5 billion—approximately a one-sixth reduction. Certainty about the tax regime is vital for all industries, and especially for oil companies whose investments are almost always long term. More than that, it is critical that the tax regime for North sea oil is simple, predictable and competitive. There is no doubt that the surprise rise in supplementary corporation tax will not drive business confidence in the tax regime, as has been highlighted by industry producers themselves. Only last week we saw further proposed tax changes, and one of the industry representatives who met the Prime Minister was reported to have said that the Prime Minister’s desire to increase oil production overnight slightly smacked of desperation—increasing production is a very long-term matter.

The changes in clauses 98 to 100 to petroleum revenue tax are largely welcome. As I understand them, they will amend the petroleum revenue tax legislation, so that if an existing licence holder defaults on its decommissioning obligations, and the former licence holder is therefore required to meet it, the former licence holder will still have access to PRT relief, as it would have done had it remained a party to the licence. That is a welcome change to previous legislation under which the industry had to operate. The industry had expressed concerns about who pays for the decommissioning of mature, offshore oil installations. Moreover, there have been concerns that the uncertainty has put off new entrants from coming into the market. Clearly, we all want the North sea oil reserves that we have to be fully extracted as far as they possibly can.

The Royal Bank of Scotland estimates that around 450 offshore installations will need to be decommissioned over time and that the cost of that could be between £15 billion to £20 billion up to 2030. Under current legislation, those licences in North sea fields that have multiple owners could still be liable for decommissioning, even if they receive no financial benefit from owning the licence. That and recent market changes—the shift down in the number of asset sales by large companies to new small and medium-sized players entering our UK market, who had been wanting to do that because they were encouraged by increased oil prices—have created a need to add some clarity to the whole area of decommissioning costs. It was incumbent on the Treasury to do what it has done and bring forward proposals on who should ultimately end up paying for the decommissioning of old oil installations, as well as introducing proposals on how that should work in the context of PRT relief.

Oil and Gas UK has welcomed that. In relation to the situation that we had before these proposals, it has said:

“It’s the uncertainty that’s the killer”.

Clearly, the matter needed to be addressed. Indeed, larger oil companies, such as Shell, have said that the present situation with uncertainty over decommissioning costs was slowing down asset sales. There is clearly an issue and it should be welcomed that the proposals will address it.

Clause 98 sets out what is meant by the term “participant”. I realise that clauses 99 and 100 outline the changes to the PRT framework regarding abandonment expenditure and the mechanism by which the share of the expenditure is to be attributed to the defaulter. The clause also refers to other aspects of the process by which the relief will be gained, including conditions regarding payment and liability in relation to the abandonment expenditure. I understand what the Government are trying to achieve in the changes contained in the clauses. I shall not go through the intricacies of PRT in detail, but I want to quickly pick up on a few points of clarification that I want to raise with the Minister. I will also ask a broader question about the future of PRT as a whole, given that there has been discussion between the Treasury and the industry on that matter.

First, under clause 99(1) of the Bill, proposed new paragraph 2B(4) of schedule 5 to the Oil Taxation Act 1975 refers to the condition that participators must have taken all reasonable steps by way of legal remedy. Will the Minister give some examples of what the Treasury considers would constitute a demonstration of having taken all legal steps? I am not especially concerned with the phrase

“all reasonable steps by way of legal remedy”,

but it might be worth clarifying what kind of legal steps we are talking about, so that the industry is left in no doubt about what that would constitute.

Secondly, the amendments to the existing PRT regime that are made in these clauses come into effect in relation to expenditure incurred after 30 June 2008. Will the Minister explain the significance of that date? I am sure it is perfectly straightforward, but some clarity about the rationale for choosing 30 June would be welcome.

On energy security, we have talked about the fact that we have gone past peak oil and I think over the past two or three years we have become a net importer, our oil production not meeting our oil needs. I would briefly like to ask about the framework of encouraging new entries into the tax framework. I understand that both the PRT section of the Petroleum Act 1998 and the ring-fenced supplementary corporation tax legislation of the same Act outline the use of what is called a linear model regarding the lifetime of North sea oil and gas assets. Does the Minister have any view on whether it might at some point be necessary to depart from that linear model outlook to improve our chances of maintaining our country’s future energy supply? Any insight she can provide in that area would certainly be helpful.

It would also be helpful to hear a little more about the Government’s assessment of how large a problem the Treasury feels that we have with decommissioning, in relation to the changes in clauses 98 to 100. How many participants does the Minister expect to take advantage of those extended provisions? What is the Treasury’s estimate of the relief that the extension will provide to the industry and businesses in coming years? Do the Government feel that there is already a problem with companies defaulting on decommissioning costs, or are they trying to head it off before it becomes an issue? Are they worried that some of the smaller companies that buy assets from larger oil companies might not be in a position to decommission properly?

Finally, I take the opportunity to raise the broader issues of petroleum revenue tax. Can the Minister shed any light on what the Government’s next steps are expected to be following the publication of the discussion paper, “Securing a sustainable future: a consultation on the North Sea fiscal regime” in December 2007? The paper contained quite a lot of debate on the future of PRT and its possible abolition. I return to my earlier comments about the importance of certainty in the industry. The changes in clauses 98 to 100 are welcome, as are other changes to PRT and to the capital allowances regime, which we will discuss shortly. However, the industry has flagged up much more fundamental concerns with me about the uncertainty of the future of PRT. After the surprise change to the supplementary charge in 2005, there is a concern that the Government will suddenly make more unexpected and similarly dramatic announcements on PRT. Will the Minister take this opportunity to provide the Treasury’s latest view on the long or medium-term future of PRT and North sea oil taxation? That would be very welcome.

Angela Eagle (Labour, Wallasey)

The hon. Lady is right to identify some of the issues that inevitably occur as oilfields mature. Some of the fields that we are talking about are more than 40 years old. The UK continental shelf contains many mature fields in one of the harshest environments in the world. It is an engineering marvel that they are exploited, which makes capital investment costly in comparison with fields in other parts of the world that have potential for exploitation. As the fields have matured, a series of specialist companies has emerged that have particular expertise in squeezing out the last drops of oil. As the big boys move on to more easily exploited fields, we have a more dynamic situation with the ownership of fields on the UKCS.

All the clauses that we are discussing today recognise that we are in a more dynamic situation, and begin to change the tax and capital allowances regimes that occur in the UK ring-fence trade on the continental shelf to reflect that reality. These are the first clauses to do that in relation to decommissioning. They seek to facilitate the switching of assets from large oil companies, which are off exploring new fields, to specialists who have a particular expertise that they continue to develop and who can profit from the more marginal bits of fields that have already been developed. That is the background to all the clauses, and it will help if hon. Members keep it in mind as we consider them.

The clauses provide for relief from petroleum revenue tax—I shall try to pronounce the term, after my lunch, Sir Nicholas, which did not include a haircut—where an ex-participator in an oilfield is required to meet all or part of the decommissioning costs of the field owing to a default by an existing participator in respect of their decommissioning obligations. As the hon. Lady knows, when an oilfield comes to the end of its productive life, those companies that are licensed by the Department for Business, Enterprise and Regulatory Reform to extract oil from a field are also responsible for the costs of decommissioning that field. If a licensee defaults on their decommissioning obligations, DBERR can require former licensees to meet the costs. Under the current petroleum revenue tax legislation, no PRT relief is available for a company if it is no longer a participator, because it has no licensed interest in the field.

Providing relief for ex-participators in default situations ensures that such companies are not unfairly penalised by the actions of other companies, which they perhaps sold their interest on to, but whose subsequent actions are clearly, by definition, beyond their control. The clauses therefore extend the definition of participator to include former participators in default circumstances, ensuring that they, too, have access to the appropriate PRT relief for the decommissioning costs that they have to meet.

In addition, if the former participators are subsequently reimbursed by the participator for all or part of the payment that they have had to make, such amounts received are also brought into account for PRT purposes. That mirrors current legislation applying to existing participators in default circumstances when payments are relieved and reimbursed once they are taxed. The oil industry, as the hon. Lady was gracious enough to accept, has welcomed the proposal as removing an anomaly that impacted on asset trade and led to tax-motivated behaviour in which companies held on to a licence interest solely to ensure that petroleum revenue tax relief remained available should a future participator default. It was not a particularly sensible situation. The Government’s new clause, to which I shall refer briefly as a technical clause that is consequential to the changes being introduced in the legislation, amends two sections of the Finance Act 1991, which apply the PRT provisions in order to ring-fence corporation tax and ensure that there is an effective read-over.

The hon. Lady asked some questions to which I hope I shall be able to give some answers. She asserted that investment had dropped by £1 billion in real terms in one year. In 2007, capital investment went down by £1 billion, but she did not say that operating expenditure went up by £500 million, or that exploration expenditure, which relates to today’s observations about the future potential of the UK’s continental shelf, also went up by £500 million. So, overall, investment is constant at £12.4 billion.

Justine Greening (Conservative, Putney)

We just need to be careful that we do not become complacent—that because we see spend continuing to hold up, we do not assume that the actual investment is the same. The industry says that because cost pressures are growing, although spend is holding up, what it will buy is not. Therefore, whatever the figures say, in reality there is a real-terms reduction in investment.

Angela Eagle (Labour, Wallasey)

I assure the hon. Lady that we are not complacent at all. We understand the competitive position that the oil industry is in and the resource and technical constraints on the global industry. That is why we are in constant discussion and communication with the oil industry—so that we can both understand what motivates its behaviour and see what we can do to maximise production from the UK continental shelf. I hope that she is under no illusions. We are not complacent about that issue at all.

The hon. Lady mentioned that production has been consistently below that which has been forecast, but that tends to be the pattern with oil companies: they tend to over-forecast and produce less. On clause 99, she asked what “all reasonable steps” might mean. In the circumstances, we would expect companies to take the normal steps that fellow participants would be required to take in any dispute to ensure that all reasonable due processes had been used. That would resolve the issue of “all reasonable steps”.

I agree that June 2008 seems an odd date. The reason for it is simply that that is the last day of the current chargeable period. The next chargeable period starts the day after, so there is a great deal of logic even if it is not discernable to those who do not know when chargeable periods begin and end.

The hon. Lady also talked about the next steps on petroleum revenue tax following the consultation document. Consultations are ongoing on some issues, one of which is the future of petroleum revenue tax. The current round of consultations finishes at the end of June like the chargeable period, although I am sure that that is a complete coincidence. The Government will consider the industry’s suggestions and proposals and if necessary will discuss the matter further with the industry to ensure that we have a fiscal regime that fully supports the Government’s stated objective of maximising the economic recovery of the UK’s oil and gas reserves.

Justine Greening (Conservative, Putney)

Does the Treasury expect to be in a position to come out with some stated outcomes from the latest discussion before the pre-Budget report? I understand that the consultation will reach a gateway point at the end of June, but how long will the industry be waiting before it gets some resolution about what are fundamental issues for it?

Angela Eagle (Labour, Wallasey)

The future of petroleum revenue tax is a fundamental issue for oil companies, but it is also fundamental for UK taxpayers. It is quite right, given that the UK owns the gas and oil reserves, that we should ensure that there is a reasonable return for their exploitation, especially if super-profits are made. That is why the petroleum revenue tax was legislated for in the first place. The balance that we are trying to strike through our ongoing consultations with the oil and gas industry is between having a reasonable taxpayer return on important UK assets and ensuring that we can enable and facilitate their exploitation rather than see them left in the ground.

Mark Field (Conservative, Cities of London and Westminster)

While along with any sensible person I accept what the Exchequer Secretary is saying about the importance of this asset, the concern that my party and the Scottish National party have is that all too often with oil and gas reserves, the Government have had a rather precipitate and uncertain approach, which is a barrier to longer-term investment in this area. I appreciate that that may also be true of Governments before 1997. It is all too easy to point the finger, as the Government do, at the super-profits of oil companies, but a significant proportion of the increased petrol prices that affect each and every one of our constituents goes directly into the hands of HMRC. That is the biggest beneficiary of such super-profits.

Angela Eagle (Labour, Wallasey)

The hon. Gentleman has described the exact balance that I said Governments have had to strike since the discovery of oil and gas reserves on the UK continental shelf. That period included Governments of at least two colours and persuasions that I can think of. That balance must always be examined. It would be less than sensible to create a circumstance where taxation rates were seen as so high and so difficult for the industry to operate under economically in what is a global market with limited amounts of kit, machinery and engineers, that the oil stayed in the ground. At the same time, our constituents would not thank us if we instigated a regime that did not give a proper and fair return for what is a UK asset. That is the balance that all Governments have had to strike as the UK continental shelf and its assets have been exploited both for profit by those oil companies with the expertise and for return for this country.

David Gauke (Conservative, South West Hertfordshire)

The Exchequer Secretary makes a good point about the need to achieve a balance. I think that she agreed with the point about uncertainty made by my hon. Friend the Member for Cities of London and Westminster. What views does she have on the implications of a windfall tax on oil exploration companies? Does she think that that would have a damaging effect on certainty?

Angela Eagle (Labour, Wallasey)

I cannot see any reference to a windfall tax in the clauses. Therefore, I will not be tempted down that very interesting path of speculation. Given the explanations that I have given the hon. Member for Putney, I hope that she will accept that clauses 98, 99 and 100 are drafted to facilitate the changes in structure in the oil industry. Hopefully, they will bring about a win-win situation for both the UK Government and the oil industry itself. However, I can see that she is about to leap to her feet.

Nicholas Winterton (Conservative, Macclesfield)

I call Justine Greening for a brief intervention.

Justine Greening (Conservative, Putney)

I am going to briefly ask the Minister to give us a date for when the Government will have finished their deliberations on the consultation paper. I notice that she did not give any time lines. Whether it is a year or six months, it would be helpful for us to know the process that the Treasury is going through and when it expects to get to the end of it.

Angela Eagle (Labour, Wallasey)

I apologise. I got dragged off to discuss with the Opposition how one taxes oil assets in general and I got distracted from the point that I was asked to talk about. We are in consultation with the oil industry, and we expect those consultations to continue. The date for the end of this particular round is 20 June. If interesting points are made or if evidence is given to us after that date, we will consider them. There is a pre-Budget report process in which we can come up with some other results from the consultation. There is also a subsequent Budget process. I do not see this engagement with the industry coming to an end for ever in June; it is ongoing. It is in both its interests and ours to keep the dialogue going to understand the structures of the industry and how it is changing. We also need to know what impact our tax regime is having on its decisions, particularly globally, to put investment into the UK continental shelf. We will keep searching for the right balance in those issues to maximise the production from the UK continental shelf for both the industry’s benefit and profit and ours. I hope that that satisfies the hon. Lady.

I hope that hon. Members will accept that these changes are wholly beneficial and have been widely welcomed by the industry, and that they will vote to get clause 98 and the whole group of clauses, including technical new clause 7, into the Bill.

None

Justine Greening (Conservative, Putney)

Briefly, the Conservatives welcome the clause. As I said, we want the North sea oil tax regime to have simplification embedded into it, and the clause aims to do that because, under it, only the returns of relevant sales of oil will need to be submitted to the Treasury. As I understand it, companies that used to have to report sales of all oil to HMRC will now have only to report sales of certain categories of oil, specifically category 2. The measure is welcome, and I hope that the Treasury continues to work with the industry to tackle burdensome and unnecessary paperwork and regulation, as clause 101 will do, and to find more opportunities for such action. In the meantime, the Conservatives support the measure.

Nicholas Winterton (Conservative, Macclesfield)

We can gallop through these quite quickly, and Opposition spokesmen need to be well and truly on the ball.

Clause 103

Justine Greening (Conservative, Putney)

Sometimes, shuffling one’s papers takes longer than a tenth of a second, even if I only intend to make brief comments, but I am pleased that I have caught your eye, Sir Nicholas, and that I can make such comments on clause 103.

Again, we welcome the clause, which is about expenditure on long-life assets and decommissioning. Without a banding, assets involved in mid-life decommissioning within the ring fence will now be treated the same as all plant and machinery in the ring fence. Those assets will now get 100 per cent. first-year allowances for corporation tax, rather than 24 per cent. as they did previously.

We welcome the clause because we hope it will address to some extent our concerns on encouraging investment. We feel that the measure will take us in the right direction, and that the Bill, as far as North sea oil is concerned, will encourage badly-needed inward investment—the long-term investment trend seems to be downward at the moment.

Angela Eagle (Labour, Wallasey)

I welcome the fact that the Opposition recognise that the measure is a beneficial change that will allow capital expenditure on long-life assets for use wholly in the ring-fence rate to qualify for 100 per cent. first-year allowances. That will ensure that there is no tax disbenefit of investing in plant and machinery that has a longer life—given that the fields are now mature, and that reserves might be more marginal, it will be an incentive.

The measure has been widely welcomed in the industry and I commend it to the Committee.

Clause 104

Justine Greening (Conservative, Putney)

We have already talked about decommissioning and the current uncertainty that the oil business has in that regard. Hopefully, some of that is addressed by clauses that we have already debated. However, I wish to follow up on the devil of the definition of “general decommissioning expenditure” in the clause. It raises the question of what can be considered “general decommissioning expenditure”, and what expenditure will remain outside its scope.

Specifically, I wanted to raise with the Exchequer Secretary the issue of financial security agreements for decommissioning liabilities. We recognise the need to take steps to ensure that we can extend the life of our North sea oil assets for the country’s benefit, as has been said. One way in which companies might cope with the risk burden of decommissioning costs is by entering a financial security agreement with a third party on the risk burden of the costs.

Because the costs that companies may incur in future in setting up financial security agreements are associated with creating finance facilities to deal specifically with decommissioning costs, will they be classed as costs associated essentially with decommissioning? Will they fall in the general decommissioning expenditure scope or will the definition of the scope in clause 104 be more restrictive and, therefore, those financial security agreement costs will not be classed as general decommissioning expenditure?

Clearly, such agreements, which are almost insurance agreements, may provide industry participants with a welcome tool to manage the risks of decommissioning costs. We have talked about the fact that the costs could be between £15 billion and £20 billion over the years until 2030. As the industry continues to innovate and to develop its ability to manage the decommissioning costs and the associated risks, it is important that our regime on PRT can similarly accommodate, and not hinder, that innovation in the fresh areas that the industry confronts as it develops. We want to see all sorts of innovative measures, whether on the fiscal side, with financing and risk sharing, or on the exploration side, to ensure that we remove the unnecessary barriers that may hold back our oilfields, which may not have been pumped because of an inability to successfully manage decommissioning risks, from being as pumped over the coming years.

Will the Minister provide me with some assistance on my question? Will any Treasury guidance that may be issued as a result of the Finance Bill cover such issues? Will such things be addressed specifically, or will we have a general decommissioning expenditure definition with enough examples that nevertheless gives the industry a clear understanding of whether such finance arrangement costs could be classed as part of general decommissioning?

Peter Viggers (Conservative, Gosport)

Financing offshore oil has played a large part in my life, so I know that the whole subject is important. I would like to ask a few general questions of the Exchequer Secretary. First, who polices the whole decommissioning operation? Someone must be responsible for ensuring that appropriate standards are met when decommissioning takes place, and I would like to know exactly how that works. The Exchequer Secretary referred to squeezing the last drop of oil from oilfields, but that is not the way that it works. Primary producers go in initially to start the field, they will probably move on and pass it on to secondary producers, who will use processes such as water flooding, and then there may be a third tier using steam flooding or something along those lines. There are techniques now that enable chemicals to be used to allow more and more oil to be produced. Nevertheless, the amount of oil taken out of a field is never more than about 50 per cent. So, it is a complicated process that involves a series of operators.

It is unusual for the primary operator to go in and still be there when decommissioning takes place. It will probably have passed its interest on to another company. To what extent is the primary producer still responsible for decommissioning costs many years later? Are there insurance or deposit arrangements, whereby the primary producer must ensure that the decommissioning costs are eventually met, whether the primary producer is there or not, or can the primary producer pass his decommissioning obligations on to subsequent operators? If that is the case, what happens if a subsequent operator cannot meet the decommissioning costs and the primary producer has perhaps gone out of business and wound up its operations? Who pays if there is a failure to pay decommissioning costs? What is the record in the North sea of failure to pay decommissioning costs? If the policeman decides that the decommissioning must be carried out to a certain standard, what happens if there is no one able to carry that work through?

How many cases have there been in which decommissioning needs to take place but no one can be found to take on that responsibility? Upon whom does that obligation fall? Does the taxpayer have to pay that cost, or is there a system whereby, perhaps through insurance, the industry pays? I should be grateful if the Minister could give us her thoughts. If it proves impossible for her to respond to my questions now, I should appreciate a written answer as this issue is of significant importance.

Angela Eagle (Labour, Wallasey)

The clause extends the availability of 100 per cent. special allowances to all expenditure incurred in decommissioning redundant offshore installations and equipment whenever incurred by a company carrying out a ring-fenced trade during the life of that field. That will amend the existing legislation whereby 100 per cent. special allowances are received only for decommissioning undertaken at the end of field life, with decommissioning expenditure incurred before that point receiving a 25 per cent. writing-down allowance, rather than a 100 per cent. allowance.

Analysis suggested that that discrepancy could lead to the fiscal regime acting to influence the timing of decommissioning, potentially increasing its cost. The measure will therefore allow companies to undertake decommissioning at the optimum economic point, which should have the effect of reducing the overall cost of decommissioning and therefore the cost to the Exchequer through tax relief.

The escalation of costs across the oil and gas industry is a concern, as it reduces the impact of investment. As I mentioned earlier, the North sea fields, given their maturity and the adverse conditions, have been particularly affected by cost inflation. The Government therefore believe that such measures, which can help to reduce costs both now and in future, are desirable. Again, the move has been widely welcomed by operators in the oil industry. The hon. Member for Putney asked about financial security agreements for decommissioning expenditure and whether they would be classed as decommissioning costs. The position is that such costs would normally fall within ongoing revenue expenditure rather than become decommissioning expenditure. She also asked about guidance and whether it would be available. Obviously, it would be, but we are still discussing that with the industry. It is in everybody’s interests for there to be as much detailed understanding as possible about the implications of any activities that are being considered.

The hon. Member for Gosport asked a series of questions. He is quite right: oil wells tend to get passed on. That was a point I made earlier, when I said that we needed to have a regime which facilitated in an appropriate way the passing on of those assets so that they can be exploited in what is usually a very long tail before decommissioning takes place. That is the principle behind many of the changes that we are debating today. He asked who policed decommissioning, and I can tell him that it is policed by the Department for Business, Enterprise and Regulatory Reform under its regulatory system. He asked about decommissioning security, which depends on a particular deal between companies on trading. Under DBERR rules and regulations, decommissioning can go back against previous, as well as current, owners.

If there is failure all round, the Government have to meet the costs. There is only one case in which a current operator has defaulted. In that case, costs were covered by previous asset owners and security agreements, so we have not had a disaster without anyone left to pick up the costs. In a final instance of total failure, with the loss of the original owner of a well and all the companies who subsequently exploited it, the Government would take the fall-back position, but we have introduced a series of robust policing arrangements and checks as the assets are passed on to ensure that we greatly minimise the risk that that will happen. With those explanations, I hope that Committee members will ensure that clause 104 stands part of the Bill.

Clause 105

Justine Greening (Conservative, Putney)

The Opposition welcome the clause, which essentially means that, after trading has ceased, the time during which companies can claim corporation tax relief for decommissioning will be increased from three years to whenever the field is properly decommissioned. The extension of that post-cessation period should in theory be a welcome change, because it provides more flexibility for the oil producer concerned.

I want to raise just one issue regarding the Secretary of State’s involvement. The clause says that the Secretary of State for Business, Enterprise and Regulatory Reform will make a judgment about whether the abandonment programme has been carried out satisfactorily. I want to understand how the Secretary of State will make that judgment in practice. Presumably, somebody will have to perform a site visit or do some kind of check. How will the Secretary of State reach a judgment about whether a programme has been carried out satisfactorily?

I have a couple of related questions, which are queries rather than concerns. Giving companies three years to decommission restricted them somewhat, but it encouraged them to be efficient and thorough during that process. Does the Minister think that there is any downside to extending that period and drawing out the process indefinitely, leading to a risk that environmental damage may increase? That is not a major concern on my part, but it would be helpful if the Minister outlined the thinking behind the provision.

Finally, does the Treasury have any evidence that companies were struggling to meet the three-year decommissioning limit, or is the change that will be brought about under the clause merely a way of giving them more flexibility in future over the time limit than they have had in the past? Was there a particular problem with the three-year limit, or is the provision viewed as an upside, providing even more time for companies?

Angela Eagle (Labour, Wallasey)

Again, the hon. Lady has made a correct observation. The current three-year period allocated for decommissioning costs is replaced by a period determined by the time limits and requirements imposed by the Secretary of State for Business, Enterprise and Regulatory Reform during an approved abandonment programme, in relation to the Petroleum Act 1998. The Secretary of State would be acting as the policeman, if we take on board the points made by the hon. Member for Gosport on the previous clauses. The allowable decommissioning costs for the period are then relieved either in the final period of trading or in the earlier periods under the corporation tax loss carry-back rules.

That change means that where in the past relief was available only on decommissioning expenditure that occurred within three years of cessation of production, the time period is now more sensible. During our discussions with oil and gas stakeholders over the past two years, it has become apparent that the processes and challenges of decommissioning are more demanding than either the industry or the Government previously realised. It is unlikely that many companies would be able to fully decommission their assets within three years of the cessation of their ring-fenced trade, and so obtain appropriate relief for those costs. Evidence suggests that the existing rules may drive up decommissioning costs—a perverse result—by causing companies to bring forward decommissioning programmes outside the optimum economic window. A proportion of that increased cost would in turn be borne by the Exchequer. Therefore, it is possible that the regime that is replaced by the clause may cause a company to decommission their final North sea interests earlier, to co-ordinate with other nearby fields, resulting in the loss of hydrocarbon production.

The measure was first proposed in December 2007, when we published the consultation document. It was originally proposed to increase the number of years for which relief would be available from three to seven. The proposal was welcomed by stakeholders, but following further discussions, consultation and evidence it was decided that the optimum solution was to create another link to the requirements set out in the Petroleum Act 1998.

The hon. Lady asked how the Secretary of State for Business, Enterprise and Regulatory Reform will judge that decommissioning has been achieved. I can assure her that it will not be by a personal visit or a trip in a diving bell to have a look at the ocean floor, but through advice from engineers, specialists and experts working for DBERR to ensure that all the work is completed to the required standard. That is part of the policing process.

The hon. Lady asked whether there are any efficiency downsides to the extended period. We would not have changed the period if we thought that there were. We were convinced by arguments that the decommissioning process takes longer than three years, and that standards are higher. We did not want to be as prescriptive as the old laws, and that is why we have changed the period. Again, the change has been widely welcomed by the industry. It could save both Exchequer and DBERR costs, and in some circumstances lead to a more efficient production of the assets, and potentially even more output. On that basis, I hope that the hon. Lady will support the clause.

Clause 106

Justine Greening (Conservative, Putney)

Again, we welcome this clause, which means that the time limit for the carrying-back of decommissioning costs for corporation tax purposes will be increased from three years to a fixed point of 17 April 2002. That is a welcome change, because it gives companies greater flexibility, and it will ensure broader access to corporation tax relief for decommissioning costs, which is a further step towards encouraging more investment. My only question is about the Treasury’s estimate of the revenue impact, following the introduction of clause 107. Has there been an assessment of that Treasury revenue impact, and will the Exchequer Secretary take this opportunity to clarify what it is?

Nicholas Winterton (Conservative, Macclesfield)

Order. Would I be right in asking the hon. Lady whether the question relates to clause 107, to which we will come in a moment? Or does she want to deal with that clause now?

Justine Greening (Conservative, Putney)

No, I think that I was dealing with clause 106, which allows the greater ability to set off profits against earlier periods. If I talked about the revenue impact of clause 107, I meant clause 106.

Angela Eagle (Labour, Wallasey)

The clause extends the carry-back provision relating to corporation tax losses incurred on decommissioning offshore oil and gas infrastructures, and it has been widely welcomed. The hon. Lady is right to point out that the provision is carried back to 2002. It became apparent during our discussions that the likely costs and complexities of decommissioning within a three-year limit, which I mentioned in the previous debate, are insufficient in most cases to give companies full tax relief for the cost of decommissioning installations and equipment in the North sea. If the current three-year limit was maintained, evidence suggests that some companies would be likely to decommission early.

We made the changes because of the undesirable consequences that flow from early decommissioning. As the hon. Lady has recognised, the foremost of those would be the non-recovery of otherwise economically recoverable oil and gas reserves. Evidence suggests that up to 10 per cent. of some fields would remain recoverable, so under the clause, companies will be able to carry back losses to 17 April 2002, the date from which the supplementary charge was introduced.

The measure will increase the total amount of oil and gas recovered form the UK continental shelf by allowing companies to operate to the point at which they become commercially economic rather than the point at which the available tax relief for decommissioning ceases to outweigh the expected remaining revenues from oil and gas production. Analysis supports the concerns of companies that they would have to give serious consideration to early decommissioning .

The hon. Lady asked for the Treasury’s prediction of the revenue from any extra oil production. The matter is too uncertain to provide a sensible prediction of oil revenue. It depends very much on the behaviour of individual fields. It is not sensible to make a prediction that is not robust. The only observation that I make is that the measure will not take our taxation receipts from oil production down. It will definitely be in the other direction, which is a good thing for oil producers and for the Exchequer.

Clause 107

Justine Greening (Conservative, Putney)

The clause will mean that it is no longer possible to deduct the expenses of investment management from ring-fenced profits that are liable for tax. I do not want to spend a long time talking about this, but I want to explore briefly the Treasury’s assessment of the problem, how big it is, and whether the Treasury is looking at further issues of this nature that it expects to bring forward more tax changes in future.

This measure is classed in the “Protecting tax revenues” section of table 1.2 on “Budget 2008 policy decisions” in the Budget book. It seems to have the somewhat large revenue impact of almost £0.5 billion over the comprehensive spending review period, so the Treasury believed that it was a large issue. Will the Exchequer Secretary tell the Committee a little about the views of the industry on the robustness of charging expenses from investment management back to ring-fenced profits from the discussions that she has had? What assessment has she made of the breadth of this issue? Is it something that is routinely done, but which the Treasury thinks it will stop happening, or does it have something to do with a particular kind of producer running its company in a particular way by taking steps to offset expenses against its ring-fenced profit?

Additionally, will the Exchequer Secretary say briefly whether the Treasury is looking at any other areas where it has further concerns of this nature? As someone who worked in industry before entering the House, I know that companies always look at ways of minimising their tax liability. It is perfectly reasonable to have sensible tax planning, but does the Treasury think that there are other areas where the way in which tax regimes operate in practice do not achieve the substance and spirit of what it is seeking to do by introducing the Bill and the North sea oil taxation regime? Will further such steps taken, or is this viewed as an isolated case to be addressed in this year’s Budget?

Angela Eagle (Labour, Wallasey)

The clause closes a loophole in the existing legislation that allowed oil and gas companies to offset the expenses of managing their investment business against their ring-fenced profits from oil extraction activities. The clause will protect the integrity of the North sea ring fence, as companies will no longer be able to offset those expenses as a deduction against their ring-fenced oil and gas profits. The current law that taxes the profits of a company’s oil and gas production in the UK and on the UK continental shelf puts a ring fence around the profits. Those profits are segregated from any other activities that the company undertakes, and losses arising outside the ring fence cannot be used to reduce ring-fenced profits. The purpose of the ring fence is to ensure that the Exchequer’s share of oil production profits from what is a national resource is protected against losses from other activities undertaken by the company or group.

In 2004, as part of the corporation tax reform programme, the rules regarding the expenses of managing an investment business were relaxed to allow such expenses to be relievable against a company’s total profits from all its activities. However, we then became aware that some oil and gas companies have arranged their affairs to offset the expenses of managing an investment business against their ring-fenced profits. Those arrangements seek to undermine the fundamental principle that ring-fenced profits should not be reduced by losses or expenses from any other activity.

The Government are committed to ensuring that the North sea fiscal regime supports activity in the North sea while ensuring a fair return to the UK taxpayer, and that is the balance that we have been discussing throughout our debate on the relevant clauses. The Government will not stand by and allow a small minority of companies to abuse the regime.

The clause closes the loophole by extending the scope of the ring-fence rules to ensure that, with effect from 12 March 2008, no deduction from the expenses of management and investment business will be allowed against ring-fenced profits. The hon. Member for Putney is perfectly right to draw attention to the potential revenue loss: plus £140 million in 2008-09; plus 175 million in 2009-10; and plus 175 million in 2010-11. She asked what the industry’s response is to the closure of that loophole, and it accepts that it is fair.

Clause 108

Jeremy Browne (Liberal Democrat, Taunton)

I beg to move amendment No. 189, in clause 108, page 68, line 8, at end insert—

‘(1A) The Chancellor of the Exchequer shall bring forward legislation to provide for any transitional provisions required in connection with Schedule 36.

(1B) That Schedule shall not come into force until the requirement under subsection (1A) has been fulfilled.’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment

No. 188, in clause 108, page 68, line 11, leave out subsection (3).

Jeremy Browne (Liberal Democrat, Taunton)

If the number of amendments are indicative of the importance of a particular aspect of the legislation, clause 108 and schedule 36 are clearly issues that will detain the Committee for some time, and quite rightly so. They delve deeply into the issue of the freedom of the individual, and the degree to which the Government should empower themselves to inspect the affairs of individual citizens.

Amendments Nos. 189 and 188 are fairly straightforward. Together, they would require the Government to produce primary legislation for transitional provisions before schedule 36 comes into force. They would remove the Government’s ability to introduce transitional provisions relating to schedule 36 by order of the House. It might help the Committee if I were to provide some background on my wish for such changes.

Clause 108 introduces schedule 36. It makes provisions giving HMRC the power to obtain information and inspect businesses relating to income tax, capital gains tax, corporation tax and value added tax. PricewaterhouseCoopers may not necessarily be the gospel, but it is certainly a respected organisation when it comes to commenting on such matters. It says that the changes that the Government envisage are

“the most fundamental changes to HMRC’s ability to enquire into direct tax returns since 1976.”

The Government are embarking on a process that happens once in a generation, or even less often, given the scope of the powers that they are taking upon themselves. They are replacing large amounts of legislation. All investigative powers under section 19A of the Taxes Management Act 1970 and paragraph 27 of schedule 18 to the Finance Act 1998 will be superseded. The first and third party information powers under section 20 of the Taxes Management Act will be superseded, and powers enabling PAYE and VAT auditors to check operations will be overtaken by the provisions of clause 108.

The merger of Inland Revenue and Customs and Excise meant that powers in relation to the acquisition of information and the right to inspect premises suggested in the “Modernising powers, deterrence and safeguards” review of 2005 could be put into place. The purpose of that review was to provide HMRC with a framework for a fairer and better operated tax system. No one is hostile to the objective of everyone paying the taxes that will be owed under the provisions being put in place by the Bill. The problem is the powers of scrutiny and searching that will be taken on board by HMRC in the process.

We are talking of five areas. The first three are compliance checks, debt management powers and taxpayer safeguards. I shall speak more about the next two: criminal investigation powers, which includes large parts of other legislation, such as the Serious Crime Act 2007—I remember spending a large amount of time in this very room debating HMRC’s power to investigate serious crime and the Government’s ability to embark on so-called fishing expeditions in pursuit of people suspected of withholding revenue—and civil financial penalties, which also come under the scope of this debate.

I hope that I have given the Committee a flavour of how fundamental those provisions are. Large parts of the Government’s legislative programme of previous decades will be superseded and overtaken by them. The Institute of Chartered Accountants, PricewaterhouseCoopers and other organisations are particularly concerned about the level of consultation on this aspect of the Bill. In their view, their opinions have not been heeded, or have even been ignored. As an illustration of that point, the consultation ended on 6 March, but the details of the proposed changes were announced in the Budget on 12 March. Most members of the Committee would accept that the details of the Budget—perhaps not all of it; I may be old-fashioned in that regard—would in the normal course of events have been put in place more than a week before being announced in the House. One is left with the impression that the consultation was designed to offer reassurance rather than genuinely seek ideas to improve the legislation.

Of course, there is considerable public concern about the competence and scope of HMRC, including security breaches—most famously, or infamously, those involving missing computer disks. My party is cautious about extending HMRC’s powers without extending the safeguards to monitor those powers effectively. That is the purpose of amendments Nos. 188 and 187.

Amendment No. 188 was tabled because my party believes that the Government’s regard, or disregard, for civil liberties and the absence of a genuine consultation process shows that, although it would not be fair to say that HMRC and the Government as a whole are not to be trusted, one ought to be cautious about granting them intrusive powers of scrutiny in this regard.

Amendment No.187 would replace negative procedure with positive procedure, as an attempt to improve scrutiny—

Nicholas Winterton (Conservative, Macclesfield)

Order. The hon. Gentleman has mentioned amendment No. 187, which is not being debated. We are talking about amendment No. 189, with which it is convenient to debate amendment No. 188.

Jeremy Browne (Liberal Democrat, Taunton)

Sorry, Sir Nicholas. I was just bringing my remarks to a conclusion anyway. We are counting down, rather confusingly. The effect of both those amendments would, as I said, make it harder for the Government to embark on the process of scrutiny through HRMC’s powers without seeking accountability for those greater powers from the House in advance.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship again, Sir Nicholas. Last time I served under you it was a grey day outside and it was the first day of the Lord’s test. Today is the first day of the Trent Bridge test and the sun is shining, although not necessarily on England’s batsmen.

Nicholas Winterton (Conservative, Macclesfield)

I call Mr. Jeremy Browne, if it is relevant.

Jeremy Browne (Liberal Democrat, Taunton)

I fear that it may not be, Sir Nicholas. I did not have an opportunity to see what the test match score was at lunch time and wondered whether the hon. Member for South-West Hertfordshire could tell me.

Nicholas Winterton (Conservative, Macclesfield)

If he does so in the course of his remarks, I will allow it.

David Gauke (Conservative, South West Hertfordshire)

Unfortunately, there has been a deterioration since lunch time: the last time I looked we were 86 for 5.

I have a couple of comments to make on the amendments. I should also like to talk more broadly in a stand part debate, but I will be guided by you, Sir Nicholas, because there are some points with regard to powers that it would be helpful to make at the commencement of this part of the Bill, before we get into the details in schedule 36 and the more detailed amendments tabled in respect of the schedule. I will happily be guided by you, Sir Nicholas, as to when I should make those points.

Nicholas Winterton (Conservative, Macclesfield)

If hon. Members range a little wider than discussing the specific amendments, and doing so will avoid the necessity of a stand part debate, I am quite happy for them to do so, because as the hon. Member for South-West Hertfordshire said, we get down to the nitty-gritty of the matter in schedule 36.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for your guidance, Sir Nicholas. I shall take this opportunity to address some of the larger themes that I think we all agree apply to schedule 36. I have no intention of contributing to a stand part debate, because discussing the matter now will allow me to address my concerns.

I should like to draw two broad considerations to the Committee’s attention: the first is on the process and the second is on the practical application of the legislation that we will be debating. On process, the hon. Member for Taunton has already mentioned the consultation process. We touched upon it in the Committee of the whole House. I do not intend to dwell on that point, other than to reiterate that the consultation came to an end about a week before the Budget and the announcement. To be fair to the Government, in the earlier stages of the consultation, the perception among professional bodies was that sufficient time was allowed. It was an adequate consultation process, but it got rather hurried at the end. There are probably good reasons for that. I suspect that there was a delay in the commencement of the consultation because of other pressure on HMRC around the end of last year.

What appears to be happening—we saw this in last year’s Finance Bill and I think we will see it in a future Finance Bill—is a sort of drip-drip effect of provisions relating to HMRC powers. That raises two concerns. First, the nature of the provisions that we shall debate today are rather different from most of the provisions that we have debated so far on this Bill. This is a money Bill. It is about the Government raising revenue. The provisions in part 7 are more in the nature of balancing the liberties and rights of individual taxpayers and advisers and efficacy for a Government Department to perform its functions. That is different from what a money Bill normally addresses. There is a point as to whether it is entirely right that we do this within a Finance Bill.

The Minister may well make the point that it has always been this way, including under Conservative Governments. That would be true, but this is a more fundamental and comprehensive reform of HMRC powers than we have seen for many years. We are seeing it bit by bit. The significance of it being a money Bill is that the other place does not get an opportunity to review and scrutinise it. That is not to say that the proceedings in this Committee Room are inadequate, but it is to some extent less scrutinised than most Bills are, because only one Chamber has an opportunity to look at it. Some of these provisions would fit more easily in a tax administration Bill than a Finance Bill.

I am well aware that there are always pressures on Government Departments and that Ministers fight for parliamentary time, but there is a legitimate concern that is widely held among the professional community. Related to that is a concern about quite where we are going. We are getting substantial bodies of provisions every year. We have seen it this year and we will see it again in future years. There is a slight sense of uncertainty among professional advisers about where we will end up. Is there a strategic vision of where HMRC’s powers will be in four or five years’ time, so that we can know where we are going and assess whether that is the right direction?

If I float this idea, it is not a commitment. One way of addressing both of those points is to work through the process and at some point when it is completed to see whether there is an argument for trying to consolidate all the provisions in various Finance Acts that have changed HMRC’s powers in one Bill, which is then looked at again. It will not be a money Bill and will be taken through both Houses and there will be an opportunity to review it in the other place. I float that idea without stating it as party policy or as an objective. I am conscious that this is likely to be relevant in about four years’ time, so it is a matter that both parties will have to look at closely. It is worth considering.

My second point concerned the practical application. We will go through in detail the various provisions and the issues that were touched on by the hon. Member for Taunton, but the perception—if I can put this in the broadest terms—is that there may be a need for some sort of harmonisation of powers, given the merger of Customs and Excise and Inland Revenue. There is a case for the provisions as a whole, but harmonisation has tended towards where a particular part of HMRC has the widest powers. I am sure that in the course of our debates the Financial Secretary will highlight exceptions, but that undoubtedly is the perception. In the consultation process, HMRC said that that was not its objective, but the impression that is widely held out there is that it is.

A further practical point is that the process is being referred to as powers, deterrents and safeguards. In the Bill, we have plenty about powers and deterrents, but precious little about safeguards. The Government say that guidance will be published and there will be a taxpayers charter, but those safeguards will not be statutory. Guidance can be changed; it is not set in stone. There is not the same parliamentary scrutiny, and that relates to one of the points made about the Liberal Democrat amendments on parliamentary approval for the transitional arrangements. Therefore, there are concerns. However, in this debate, we have an opportunity for some kind of reassurance.

I suspect that, out of the whole of Bill, the proceedings of this afternoon’s sitting may prove to be those that are read most closely by the professional bodies, the accountancy profession more widely and taxpayers. This afternoon will be important because there will be the opportunity—certainly Opposition Members will be keen to give the Financial Secretary as great an opportunity as possible—to address my concern that, although some of the powers in schedule 36 are widely accepted as being reasonable in some circumstances, when dealing with fraudsters, for example, if more widely applied—using a one-size-fits-all approach—they could be abused, or would be inappropriate. We will be looking for the Financial Secretary—she always adopts an emollient and reasonable tone—to reassure those who will read the proceedings that, in some of the specific cases, the powers in the Bill will be the limit but not necessarily the norm.

That is an important distinction because there is always a tendency—I spoke to a former senior Revenue and Customs official this week—to work to the limit of one’s powers. That is understandable; if one has particular powers one uses them. If one does not use the powers one has, one fears that they might be lost. Life seems easier if they are used. If some of the powers in the Bill are what HMRC can do in exceptional circumstances, they are entirely reasonable. If they are what HMRC does as a matter of course, they will cause concern. We will be looking for clarification from the Financial Secretary—for the official record—on precisely how the powers will be used. That would be helpful.

It is also worth saying that, as politicians, we have to appreciate how stressful it can be for business people to be investigated by HMRC. The process can take a long time. I spoke to the Federation of Small of Businesses yesterday and it estimates that the average inquiry by HMRC is 23 months long. I think that the HMRC target is for inquiries not to last more than 18 months. Within that average figure, there will be a large number of cases that count as inquiries but are opened and closed almost simultaneously, so I am sure that there are a lot of substantial cases that are longer than 23 months. That is an unofficial figure and if it is wrong, I am sure that the Minister will correct me, which will be helpful for the Committee. Those inquiries are a stressful experience and can last a very long time.

HMRC is under pressure. Reference has been made to the lost disks incident, which created its own pressures but is perhaps indicative of particular pressures that HMRC was feeling. There are many reports of how low morale is, and HMRC has had to face a lot of organisational challenges in recent years with a merger, the Lyons report, the Gershon savings and changes in senior management.

As a Member of Parliament and a Treasury Front Bencher, I have had queries from constituents and people who are dissatisfied with the treatment that they have received from HMRC. No doubt the Minister also receives plenty of complaints—they may well be exceptional but there is no doubt that they are out there. We need to be alive to the concerns that exist regarding HMRC, and handing substantial powers to that organisation creates other concerns. As I said, this is an opportunity for the Minister to address some of them.

Those are my general remarks and I hope that they set some sort of context for the debates that we are going to have. I shall refer briefly to amendments Nos. 188 and 189, which touch on two themes. The first is a sense of greater parliamentary approval, because, as I said earlier, the safeguards are not in the Bill—they are not statutory safeguards. There may be an argument more generally that Parliament should have greater control over what those safeguards are and that, for these purposes, can include transitional provisions.

There is also an issue with transitional provisions. It is one of those cases where it is easier to identify the problem than to come up with a solution. If in April 2009 HMRC is suddenly to have more powers than it does currently, the strong temptation for its staff involved in an investigation will be to soft-pedal until they get to April 2009 and then make use of the additional powers. A former senior Revenue man made that point and said that that was what he would have done as an investigator. It is not particularly discreditable, but it causes a concern as delay is in itself stressful.

The problem with transitional provisions is that, whether they are contained in legislation or in guidance, it is very difficult to run two different systems simultaneously. A particular case that started one day exists under one set of rules and a case that starts a week later is run under a different set of rules. I do not know if the Minister wants to address the practical concerns about that and whether it is in reality and in the view of HMRC particularly difficult to run two parallel systems.

I am grateful for your guidance, Sir Nicholas, enabling me to broaden the debate. I look forward to the debate this afternoon and to what the Minister will say to provide reassurance to the many people who will be reading the debate closely.

Peter Viggers (Conservative, Gosport)

We are here to discuss the detail of the Finance Bill, and I assume that the usual channels, when selecting Members to sit on the Committee, chose those who have some special knowledge or interest in financial matters. Basically, we are here to discuss the detail of raising tax for the Government. We have not been chosen for our special knowledge of human rights. Indeed, next week the House will discuss the right to detain individuals in custody for a certain period, which has attracted a massive amount of attention. The measure enshrined in clause 108 also needs to be given that degree of scrutiny and consideration, because it will affect human rights widely. The provisions of schedule 36, which the clause will implement, have a very general application. I support the amendment moved by the hon. Member for Taunton, which would have the effect of broadening the debate on the issue, so that it is not taken only as part of the considerations of a Finance Bill, here on a Thursday afternoon.

There are a number of fundamental rights involved in clause 108 and schedule 36, and detailed concerns have been expressed by a range of bodies, including the Chartered Institute of Taxation. There was consultation on schedule 36 provisions, which will implement these broad powers, but I have been advised that HMRC’s consultation period finished only days before the Budget, which led some to consider that it did not give adequate time for the issues to be properly considered. Indeed, that might lead cynics to think that the consultation exercise was not a genuine consultation in which the views of those consulted were taken into account and that those who made the consultation procedure available had come to a firm view in advance. The extent to which the proposals for inspection powers and record keeping rely on secondary legislation and HMRC interpretation through guidance is worrying, giving rise to a lack of protection afforded to the taxpayer.

I did not know that Customs, as it was then called, had such massive powers until I dealt with a particular constituency case. I will give some details about that case simply because they show how arbitrary HMRC can be, and I ask hon. Members to consider how different this is from the normal process of law. My constituency of Gosport had the second largest manufacturer of lifeboats in the world, second only to a Scandinavian company. It was a large company that employed a significant number of people in the constituency.

As part of a normal process, Customs was sent some plans for an export of fishing boats to Iran. On the plans for the fishing boats there appeared the three words, “machine gun mounting”, which led Customs to think that they were not genuine fishing boats and that perhaps a military purpose was involved. In quite an arbitrary manner, Customs decided to fine the company £0.3 million, and we have our own view on whether that should have happened. When I went into the detail on that with the company it became clear that a fine of £0.3 million would drive it out of business. I remonstrated with Customs, which said, “No. It is a fine of £0.3 million and there is nothing you can do about it. There is no appeal” Eventually, the fine was imposed and the company went out of business. We lost a significant employer in the constituency and the site is now a block of flats.

If HMRC is to be given such extended powers, as indicated by schedule 36, that is the manner in which it will be empowered to exercise them. Although I would not necessarily go into detail on the powers in that area in this debate, I believe that the detail of the powers needs to be widely considered, not just in Committee, but on the Floor of the House.

Jane Kennedy (Labour, Liverpool, Wavertree)

I am very interested in the point that the hon. Gentleman presents. Does he accept that the case that he has cited, helpful as it is, illustrates the powers that HMRC has at present? I hope to reassure him that, alongside a levelling down of the powers, we are introducing safeguards so that in many cases the taxpayers whom he describes will have avenues of appeal. In many cases, but not all, that will help companies such as the one that he describes.

Peter Viggers (Conservative, Gosport)

I am grateful to the Financial Secretary and I find her intervention reassuring. However, I think she would agree with me that the points of principle involved in this measure are sweeping, wide and important. A broader opportunity should be given to hon. Members to discuss these broad principles, not just in the Finance Bill Committee on a Thursday afternoon, but on the Floor of the House. In my opinion, these issues are very important. With those words, I support the Liberal Democrat amendment moved by the hon. Member for Taunton. This is an important point of principle and I welcome the opportunity that he has given the Committee to consider the possibility that we should expand the debate before these powers are implemented.

Mark Field (Conservative, Cities of London and Westminster)

I, too, agree with the amendment. The hon. Member for Taunton expresses many of the concerns that we have about the lack of consultation on what are, for some companies, potentially quite draconian new powers. There should have been a broader consultation process, but I appreciate what the Financial Secretary said about elements of that consultation playing a part in advance of the Budget announcement. They may also have played a part in the great number of Government amendments that have been tabled to schedule 36.

I agree with my hon. Friend the Member for South-West Hertfordshire in his broader consideration that the powers are similar to those of a general Home Office Bill. As he rightly points out, the deficiency of a Finance Bill debate is that there is no further scrutiny in the other place, which a Home Office Bill would receive. I hope that the Financial Secretary will give some considerable thought to that because some draconian powers are being put forward.

Anecdotally, I remember from running my own business before I entered this House that my accountant always used to say, “For heaven’s sake, whatever problems you might have with the tax authorities, never mess with Customs and Excise.” Joking aside, there was good cause for that. Traditionally, Customs and Excise has concerned itself with smuggling and with overseas nationals and has rightly had more draconian powers.

Notwithstanding what the Financial Secretary said in her attempt to assuage my hon. Friend the Member for Gosport, implicit in these measures is an element of the levelling down of standards. We will look at this matter bit-by-bit in the direct scrutiny of schedule 36. There must be a quite considerable concern that elements of this measure will inevitably not be levelling down, but will put up a range of new powers so that elements of HMRC’s powers are akin to those of Customs and Excise, rather than the old Inland Revenue.

With that in mind, there is great concern for many corporations that too many of these powers will be utilised in a somewhat draconian way. I am concerned that implicit in this measure is an extension of fishing expeditions by the authorities. This is particularly important for smaller companies. Large companies tend to have legal departments and an operation to ensure that they can fight their way through some of the bureaucracy that comes with large-scale investigations. It is smaller companies in particular that will be subject to the unintended consequences if we do not entirely think through what we are trying to achieve in schedule 36.

I also have concerns because the very first Bill Committee that I sat on when I came to this House was for the Proceeds of Crime Act 2002, which set up SOCA, the much maligned, perhaps unfairly, Serious Offences—[Interruption.] I mean the Serious Organised Crime Agency. I knew I would get it wrong. It shows how much attention I was paying when I was on that bloody Committee. SOCA has had a lot of bad press. There has been a sense that it has not quite achieved what it was hoped it would in relation to Mr. Bigs in ensuring that large sums of money would be sequestrated from criminal activity and come back to the state.

There is concern that if we give more powers through the Treasury rather than the Home Office, we may give draconian powers to HMRC, which will be utilised in lieu of the powers that it was envisaged that SOCA would be exert in relation to criminality. I worry that by levelling standards up in this way we are not giving sufficient protection to many companies. No one wants to see criminality being tolerated. No one wants to see large sums of money that should rightly go to the Treasury being taken way. By the same token, there is a big question mark over the nature of these fishing expeditions.

This is the only opportunity that we will have in Parliament to scrutinise precisely what these powers will be. The second worst scenario is to go down the SOCA route where many years on there is a perception at least that one has an impotent body that has not really achieved what was expected. It would be even more undesirable to find that draconian powers were being utilised by an arm of the state against many companies that are doing their very best to try to ensure that we have a successful and thriving economy.

Jane Kennedy (Labour, Liverpool, Wavertree)

It is a pleasure, Sir Nicholas, to see you back before us this afternoon in better health and looking so well with your new haircut. As you encouraged hon. Members to speak widely it would be appropriate for me to respond in a similar way. It may mean that there will be less need for longer discussion on some of the detail. I entirely accept the concerns that are being expressed. I know that those concerns are sincerely held outside Parliament. I accept how important it is that adequate safeguards are built into not just the legislation but the guidance, the training given to HMRC staff and the whole ethos within which HMRC carries out its responsibilities.

I can confirm that the review grew out of the merger of two quite distinct institutions. Bringing the two together was a sensible step and a step that was being mirrored around the world. A separate consultation was held on safeguards last year. Recognition of the importance of adequate and clear safeguards also lies behind a number of Government amendments that we will consider shortly. The legislation being debated today is in line with other OECD countries. It has more safeguards than most of those countries and more safeguards than the provisions it will replace.

Indeed, on a light-hearted note, I asked officials to check international comparisons so that I could be reassured that the work that we were doing was not providing HMRC with powers far in excess of other tax authorities in developed countries around the world. They were surprised to find how limited their powers were in many cases by comparison. The only example was of the guidance issued to tax inspectors in one eastern European member state on the circumstances in which guns should be deployed when tax officers went about their business. I hasten to reassure the Committee that I quickly doused any enthusiasm for such guidance here in the UK.

More seriously, VAT and pay-as-you-earn officers could previously call on anyone unannounced without the requirement for authorisation. In future, all unannounced visits must have the approval of a senior HMRC officer and visits cannot take place to purely private premises. There are also further safeguards in the interrelationship with other parts of the Finance Bill. I will say a little in a moment about the fishing expeditions about which there is genuine concern.

In other parts of the Bill the new limitations on assessing time limits that we will come to shortly in schedule 39 will limit the period for which it is reasonable to request documents to check a tax position. It would not be reasonable to check a tax position if no additional tax can be assessed. If there is no possibility of assessing now or in the future, then there is no tax position. So where a taxpayer is thought to have made a mistake, HMRC will be able to ask only for information that is four years old. In addition to those safeguards included in the primary legislation, further protections will be provided by regulations and by guidance upon which HMRC will consult. That was done on the penalties clauses in last year's Finance Bill, and I understand that it has proved very successful and popular.

The focus of the amendments that we shall discuss in a moment is that further safeguards have to be in primary legislation. I shall respond directly to the points about whether it should be in this Bill or in a separate Bill that could be scrutinised in greater depth—no, at greater length—in another place. Our scrutiny is quite deep. Legislation cannot cover every conceivable scenario. It is important that HMRC can react quickly where necessary to adapt safeguards to protect taxpayers.

For example, the definition of what constitutes business premises may need to change as the way in which people’s work pattern changes. It is for this reason that, where appropriate, safeguards are included in published guidance and codes of practice. That does not mean that they are paper tigers. In deciding whether HMRC is acting reasonably in any particular case, the courts already take account of what HMRC’s published guidance says, although it would be much better if disputes could be resolved before resorting to the law.

There needs to be a balance between those things that provide real and effective safeguards for taxpayers and those that create bureaucracy and delay. There is no point legislating measures that merely give an illusion of additional protection while making it unnecessarily complex and expensive for HMRC to ensure that taxpayers have paid the right amount of tax. It would be sensible to put this important package of measures in context to help understand some of the amendments that are proposed.

Schedule 36, which we will come to later in detail, is a vital part of HMRC’s modernisation programme. It would be impossible to deliver the full benefits of merger without it. HMRC has a responsibility to check that taxpayers are complying with their obligations. To do that there needs to be a statutory framework so that officers can check that people and companies are doing what they need to do. These checks reassure the compliant taxpayer that they are doing the right thing, but they also deter those who are minded not to comply.

The idea of aligning and modernising the powers and safeguards in this area has generally been applauded and described as sensible by those who responded to the two detailed consultations issued in May of last year and January this year. There are a whole range of quotes from organisations applauding the work that was undertaken. I have chosen one from the Low Incomes Tax Reform Group. Commenting on compliance checks, it said:

“We welcome the extended formulation to allow HMRC to correct ‘obvious’ errors, with its safeguard against inappropriate use, and see this as an important part of HMRC’s stated aims of offering support, in a non-threatening way, to taxpayers, particularly those who are unrepresented.”

There about 1.7 million VAT registered businesses which also pay income or corporation tax. Different rules for different taxes are confusing for taxpayers and their advisers. They also hamper checks that cover more than one tax.

It is clearer for everyone to have a single set of aligned rules in one place. The alignment means that some powers, such as the inspection power, are being extended. I understand the concern that if individuals or businesses have dealt mostly with corporation tax, capital gains tax or income tax issues, they will feel that some of the powers are being extended into their area. However, VAT officials within HMRC are seeing many of their powers reined back. That is seen as a welcome balancing of the powers.

As I have said, different rules hamper checks that cover more than one tax. The VAT and PAYE powers to visit homes are being curtailed. As is currently the case, many compliance checks can be carried out without invoking the powers formally. Formal powers are none the less needed to ensure that those who would otherwise not pay or would be unco-operative—believe it or not, there are some in that category—do not gain an advantage.

The new powers have a number of elements that can be operated in different ways to ensure that a taxpayer’s experience of HMRC matches the risk that they pose and their personal circumstances. The main elements include a right to visit business premises, a right to inspect statutory records and written information notices. Each of those can be used to support officers who need to ask a quick question, perhaps about an incorrect figure on a return, through to a full investigation of a trader in the shadow economy who has not notified their profits for many years.

Let me respond to some of the specific points raised by hon. Members. I would agree with the opening remarks of the hon. Member for Taunton in which he expressed concern if we were not building in the safeguards that I have referred to. I have heard the concerns expressed, so I know that there are those who would like the safeguards to be in primary legislation rather than in guidance.

Jeremy Browne (Liberal Democrat, Taunton)

Will the Financial Secretary respond specifically to the point made by the hon. Member for Cities of London and Westminster that it would be more appropriate to have these powers in a Home Office Bill so that they could be scrutinised by both Houses of Parliament rather than just by this Committee?

Jane Kennedy (Labour, Liverpool, Wavertree)

I will come to that point in a moment.

First, a number of hon. Members raised a question about consultation. This is the last stage of an extensive consultation process over two years involving 12-week consultations, workshops and dozens of meetings with interested parties. I know that the time between the closure of the most recent consultation and the publication of the measures was very short. However, I hope to reassure the Committee that, knowing that time would be tight in March, HMRC raised key issues in meetings with stakeholders and sought suggestions for improvements. Changes to the draft law were identified and action was taken before the consultation period closed. All written responses were considered in detail and several changes to the draft legislation were made before the Finance Bill was published on 27 March. As the hon. Gentleman and others have rightly noticed, there are a number of Government amendments that we will consider later that address some of the responses to the consultation.

The hon. Member for South-West Hertfordshire asked whether the Bill was the right legislative vehicle for us to consider these changes. This is the normal route. I simply say to members of the Committee that the changes that I hope we will make today and in the days ahead are sensible and proportionate. However, there is one incomplete review because one or two areas of work are still under way.

The hon. Gentleman rightly says that HMRC has had a traumatic year and as its Minister, I have shared every traumatic moment. He will know that it is anticipated that a new chair of HMRC will soon be appointed, followed shortly afterwards by a new chief executive. It would seem appropriate for a new leader, in these circumstances, to want to take stock not only of the work in response to the capability review and the work on the merger of two big organisations—a process which began only three or four years ago. So I would anticipate that a new chair and a new chief executive might want to look also at how powers are developed. There was a suggestion that there be a road map—that a more strategic view be taken. The chair would sensibly want to comment on that and might even wish to influence it.

I accept that using a Finance Bill has the drawback that it cannot be scrutinised in another place, but the use of Finance Bills has enabled us to break down a wide-ranging review into manageable chunks. The criticism of that may be—as the hon. Member for Gosport said—that there is no human rights scrutiny. I believe that Members of this House, whether lawyers or specialists or not, will have an acute awareness of human rights, because human rights legislation is often founded in sensible infringements, and in what any reasonable person could assume to be an infringement of their human rights. The Committee is well qualified to raise such concerns, and the hon. Gentleman has himself flagged them up.

The Finance Bill also allows for a staged approach to consultation, which is particularly important for those who have given much time to responding to the consultations. Having said all of that about the vehicle, I hear what has been said. I believe that the Finance Bill, as we have structured it today, is an appropriate vehicle for the powers that we are reforming in these clauses and this schedule. However, I will take on board what has been said, and will consider it in the event that future changes are necessary, although from a Government perspective the Finance Bill is a useful way of making those changes.

The hon. Member for Taunton made an important point, and I am grateful to have the opportunity to respond. He believes that it is important that HMRC should not be able to use the new powers to go on fishing expeditions. He is right. All the new powers must be used reasonably for the express purpose of checking someone’s tax position, and for that alone. HMRC has a duty to ensure that people understand and operate the requirements of the various tax regimes correctly. The Department also needs to validate its understanding of risk. To do that, there is a need to check by way of an audit, and there is a need for random programmes. HMRC has for many years targeted its checking where there is the greatest risk of underpaid tax. Effective risk targeting minimises the extent to which taxpayers who have already paid what is due are checked. For risk targeting to work, a small sample of taxpayers has to be checked at random, to see what risks are out there in any given year. If HMRC could not make random checks, it would not find out about new risks as they arose.

The hon. Member for South-West Hertfordshire asked me about the average time for such checks, and the fact that they vary from tax to tax. He is right, but he would accept, I am sure, that new powers will enable checks to happen more quickly. The average elapsed time for a full corporation tax check is 23.8 months, for a shorter corporation tax check it is 16.5 months, and for a full check on income tax it is 18.3 months. A shorter check on income tax can take 14.5 months, an employer compliance check takes 11 months on average and a VAT check can take 2.7 months.

In 2006-07, HMRC successfully targeted 35,000 of what it describes as “ghosts and moonlighters”, securing more than 4,000 new VAT registrations—about £37 million of additional VAT and £53 million in income tax. It does some very good work, and any Government would want to support the work that it is doing in that respect because it ensures that those who owe tax pay it properly. That is fair on the rest of the taxpayers, who pay in an appropriate and co-operative way.

Jeremy Browne (Liberal Democrat, Taunton)

On the point that the Minister has now moved on from, she said that she did not wish to see HMRC engaging in so-called fishing activities, but she went on to say that it should be given the power and authorisation to make checks on certain individuals without grounds for suspecting that that individual is offending or failing to comply in any way, just so that it knows the scope of any offending or non-compliance going on in the economy as a whole. If I were that particular individual and being subjected to the checks that she describes, with no grounds at all for suspecting that my affairs were out of order, I would regard that as entirely a fishing expedition.

Jane Kennedy (Labour, Liverpool, Wavertree)

Surely it is reasonable for an HMRC officer to ask a taxpayer to show on what they base their claim for tax relief or on what they base their tax return. I do not think that that is unreasonable. The hon. Gentleman may become satisfied that the checks are done in a reasonable and appropriate manner. I quoted the low pay tax unit because I want to see a culture in which HMRC does the checks, in many respects, in partnership with taxpayers. Where the risks are greatest, HMRC will have to adopt different approaches, but it will be risk-based. PricewaterhouseCoopers strongly supports HMRC’s risk-based approach and it was happy to have a quote used in that context:

“We fully support a risk-based approach to compliance checks but we accept the need for random checks.”

I acknowledge the concern, but I believe that HMRC will apply the powers, which we are giving a statutory framework to here today, in an appropriate way.

The hon. Member for Gosport rightly raised concerns about whether this was an appropriate place to consider the matter in detail because the powers might infringe on individual businesses’ and people’s human rights. I have touched on that point before but I wanted to reinforce it. I hope that it will reassure him to know that the review of HMRC’s powers has a consultative committee, which has been working closely with HMRC as the detail of what we were going to discuss has been brought forward. That committee contains experts on the Human Rights Act 1998, and proposals have been changed and developed using their expertise. Notwithstanding the forum that we have here, which can give that scrutiny, HMRC has opened up the detail of the measure to consideration on human rights grounds.

I would like to deal specifically with the amendment. I appreciate that I have spoken very widely and I am grateful to you, Sir Nicholas, for allowing that. Amendment No. 189 would require any transitional provision to be by primary legislation introduced by my right hon. Friend the Chancellor and for that to happen before the schedule came into force. The amendments taken together would mean that there was no facility to make changes by order at all. In Committee, we regularly debate whether it is appropriate to use an order-making power or to restrict that power of Government.

The amendments both concern how and when the new information and inspection powers in schedule 36 should commence, and how the transition from the old to the new powers should be managed. They stem from concern that if the new powers take effect from a fixed date, expected to be 1 April 2009, they will be used in inquiries that were already under way at that date.

For example, in a long-running transfer pricing inquiry, on 1 April 2009, HMRC might be able—this is a fear that the hon. Member for Taunton has—to visit a business to inspect records and documents that up until that date were required to be provided only by post. I make it clear to the Committee and reassure the hon. Gentleman that no new information can be sought under the new powers; it is just the mechanism that is changing. I know that our having guidance to back up the legislation is often dismissed, but reassurance on that point will be given in HMRC’s guidance. In a long-running inquiry, any access that is necessary to business records will usually have already taken place under the old powers, but in the event that it has not, I hope that the hon. Gentleman accepts my reassurances.

The reformed information and inspection powers do not alter the obligations for taxpayers to maintain adequate records, prepare accurate returns and provide information to HMRC to check that the right tax has been paid. Every time we receive our P45 or P60, it says, “Retain this in your records as it may be required in future.” The new framework modernises and aligns across taxes the way in which HMRC can undertake those checks and the safeguards for taxpayers. The simplest and clearest way to introduce the new framework is from an appointed day, so that taxpayers, their advisers and HMRC officers know that from that point onwards, the new rules apply. There is no need for complex transitional rules that would serve only to confuse.

A Treasury order is the most appropriate method of announcing such an appointed day. Schedule 36 already contains a substantial number of repeals as the variety of old powers are swept away and replaced with a single set of rules across the main taxes. If further changes are required, they will be minor in effect and are likely to remove separate information powers because the new framework makes them redundant. Any Treasury order under clause 108 will be published in draft form at least four weeks before it is laid, giving a further opportunity to address concerns about the detail.

Moving the commencement and transitional provisions from a Treasury order to primary legislation would delay the introduction of that central plank in HMRC’s modernisation programme. I discussed whether we should have a road map or more clarity about the direction in which HMRC is going, and I am conscious that we are having this debate amid concern among the business community that HMRC’s approach is becoming too onerous. I am very alert to the anxieties that have been expressed today.

Mark Field (Conservative, Cities of London and Westminster)

Given the Minister’s reassurances, surely the most important thing is that we get the new regime right rather than rush it through. I appreciate that, given the pressure and high profile of HMRC’s problems and concerns over the past year, the Minister wishes to get the new regime moving as quickly as possible. But surely, given the concerns that we have expressed today, it is even more imperative that we get the regime right, rather than allow for the prospect of HMRC getting a hell of a lot of bad news headlines and disrepute because of confusion about its precise powers in relation to many of the companies whose interests we are trying to defend in this debate.

Jane Kennedy (Labour, Liverpool, Wavertree)

If I believed that there would be a lot of bad publicity as a result of our passing the powers and the way in which they will be applied, I would share the hon. Gentleman’s concerns, but the issue has been thoroughly consulted on and discussed. I shall continue to listen to the representations that are being made, and as we come to some of the detail in a few moments I will hopefully be able to give further reassurance.

I know what the hon. Gentleman is saying but do not believe that this is the right time to stop the reform and hold it back. It is essential to HMRC to enable it to bring together coherently its work across all the tax structures. As the Minister to whom HMRC is accountable, it would be irresponsible of me to make it even more difficult for it to achieve the changes that it clearly needs to make if it is to retain its position as one of the paramount tax authorities in the world and the reputation that it rightly has for using its powers reasonably, notwithstanding the fact that examples can always be given where those powers have been excluded. With the proper safeguards that we are building into the legislation, the Committee can be assured that HMRC will conduct itself with those new powers appropriately.

My last point relates specifically to the question that the hon. Member for South-West Hertfordshire asked. There is a tendency to dismiss guidance as not having safeguards because it does not have legal standing and, therefore, the same standing in court. It is true that a court would be entitled to take account of published HMRC guidance either of its own account, or if its attention was drawn to it by either party. Such guidance would not be conclusive, but it would be persuasive. In a case involving the administration of tax, guidance would provide a court with a statement of how HMRC expected its officers to act in different situations.

While the law cannot set out safeguards in every possible scenario, as I have said, codes of practice and guidance provide more detail on how legislation should be interpreted in different circumstances. A criticism from a court that an HMRC officer had acted outwith their powers and in breach of a code of conduct would be considered very seriously indeed, not least by me as the Minister to whom they are accountable.

Given that lengthy response, I hope that the hon. Member for Taunton, whose amendment was moved in order to set the scene for the debate, will feel that it is not necessary to press the amendment and will allow the clause to move forward with a fair wind.

David Gauke (Conservative, South West Hertfordshire)

I will briefly make a couple of comments in response to the Financial Secretary. I welcome her comments on a road map and the need for a more strategic approach. I recognise that a new chairman and chief executive will be in place, which might provide the best opportunity to instigate that. I also noted her comments on the Bill being used as a vehicle for those measures and that she said that that is very convenient from the Government’s point of view—no one knows where we will be in four years’ time, so I will express myself carefully. However, there is an argument that it is too convenient on an annual basis. The Treasury has the privileged position of having a guaranteed Bill every year for good historical reasons, and I still question whether the Finance Bill is ideal. As a possible solution in the long term, perhaps some sort of consolidated Bill would be better so that it would not be done through a money Bill.

I noted the Financial Secretary’s point about guidance being persuasive to the courts, but there are two concerns with guidance. One is that it is not legally binding, a point that she addressed to some extent by saying that it is none the less persuasive. The other point is that it is not something that we in this place have a chance to review and consider in the same way that we do with legislation. She also drew the point that the powers might be diminished for some taxes, such as VAT, whereas for others they might be increased, such as corporation tax. It is worth saying that VAT, and to some extent PAYE, are continually paid and therefore need to be continually assessed. Some taxes are done on an annual basis so that a tax return is completed, and there are good historical reasons why slightly different regimes exist for those different taxes. There is a criticism to be made of a one-size-fits-all approach.

Finally, we welcome the Financial Secretary’s reassurance that no Government amendment will be tabled consisting of HMRC’s powers with guns. The Opposition welcome the absence of that amendment.

Jeremy Browne (Liberal Democrat, Taunton)

I tabled the amendments with the intention of kick-starting a proper debate on this important matter. Such is the importance I attach to the issues we are discussing that I would like to press the amendment to a Division.

Schedule 36

Jeremy Browne (Liberal Democrat, Taunton)

I beg to move amendment No. 162, in schedule 36, page 352, line 6, after ‘An’, insert ‘authorised’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 163, in schedule 36, page 352, line 14, after ‘An’, insert ‘authorised’.

No. 164, in schedule 36, page 352, line 18, after ‘is’, insert ‘in that person’s possession and’.

No. 170, in schedule 36, page 356, line 36, leave out from ‘(b)’ to ‘a’.

No. 171, in schedule 36, page 356, line 39, at end insert—

‘(2A) A taxpayer to whom a third party notice relates may also request a copy of the document, and an officer of Revenue and Customs must comply with such a request without charge.’.

No. 172, in schedule 36, page 357, line 3, at end insert ‘and any consequential losses suffered.’.

No. 183, in schedule 36, page 370, line 14, leave out from ‘who’ to end of line 15 and insert

‘holds the position of Inspector of Taxes within Revenue and Customs.’.

No. 263, in schedule 36, page 362, line 24, at end insert

‘and of the company or companies that the Officer believes are subsidiary undertakings and the notice shall be taken as relating only to the companies so specified’.

No. 268, in schedule 36, page 370, line 15, at end insert—

‘(2) The Commissioners shall publish—

(a) the criteria by which they determine who should be authorised for any particular provision, and

(b) for each provision requiring an authorised officer, the names of all officers who are so authorised.’.

Jeremy Browne (Liberal Democrat, Taunton)

I tabled the first seven of the nine amendments that you read out, Sir Nicholas. I will not reheat the broad principles of the debate with every group of amendments. [Interruption.] There has just been a sedentary intervention about the interest being shown by my colleagues in these proceedings. Meanwhile, huge numbers of Labour MPs are walking out of the room who seem to pop in periodically only when we need some useful idiots to prop up the Government. [Interruption.]

Nicholas Winterton (Conservative, Macclesfield)

Order. We have had a wonderfully sensible debate this afternoon and I am sure that it will continue. We can get a little bit more invigorated, but hopefully it will be totally in accordance with the content of the amendments.

Jeremy Browne (Liberal Democrat, Taunton)

I am grateful for your guidance, Sir Nicholas, and for the audience that I have before me, diminished though it is, since the vote took place, on the Opposition Benches. Let me run through the amendments. They are all quite specific, but if they are seen in isolation, their purpose can be hard to understand. I will explain briefly what each of the seven is trying to achieve. Amendment No. 162 restricts the power to a senior officer who is able to undertake the inspections. Currently, the inspection can be authorised by any HMRC employee, including those at quite a junior level. The purpose of the amendment is to put a floor under the seniority of the inspector so that there is some reassurance that the powers are exercised by someone with the appropriate level of authority and experience.

Amendment No. 163 effectively covers the same points, and there is nothing extra that I need to say. The point of amendment No. 164 is that a third party should not be expected to provide a document to which they have no access. As currently drafted, paragraph 2 says that if information or documents are “reasonably required”, they must be provided by the third party. However, that does not account for the likely situation in which the third party does not have access to the documents that HMRC wants. In that case, the amendment proposes to ensure that the person is not liable to produce a document that they do not possess.

Amendment No. 170 says that a person should rightly have full access to copies of their own documents. This amendment would delete part of paragraph 14(2)(b) so that a person does not have to “reasonably” require a copy of their own document before they are granted one. I apologise to the Committee if I slightly garbled my words. At the moment, there is a threshold that the person has to overcome of “reasonably” requiring a copy of their own document if they are to be given that document by HMRC. Amendment No. 170 seeks to delete that requirement.

Amendment No. 171 allows the taxpayer access to a document when it is given by a third party if it concerns them. The amendment proposes to insert additional sub-paragraph (2A), so that if a third party has obtained documents from HMRC when someone’s tax record is inspected, the taxpayer has a right to obtain a free copy of those documents. Amendment No. 172 is designed to compensate business losses arising from HMRC errors. That is an important point that would concern some businesses in some circumstances. Currently paragraph 14(4) provides for compensation to be made to replace documents lost by HMRC. However, as the Institute of Chartered Accountants has pointed out, it would not cover instances in which negligent behaviour by the HMRC resulted in the business losing revenue. The amendment requires HMRC to compensate for any “consequential losses suffered”, so it covers not just the documentation itself but the knock-on effects resulting from the actions of HMRC. Amendment No. 183 also covers the point about an authorised officer that I raised in earlier amendments.

Therefore, the overall theme of the amendments in this group is about trying to tighten and strengthen the powers of the individual citizen in their dealings with HMRC. For example, the amendments require HMRC to engage with them at a senior level, and make requirements about the documentation to which the citizen has access. Finally, they ensure that HMRC’s behaviour does not impact in a way that is unfair or disadvantageous to that individual or business. For example, they ensure that the individual or business does not lose out financially as a result of the Government’s enforcement actions. It is, of course, right and appropriate that HMRC and the Government should seek to take and collect the taxes owed to them, but the individual citizen or company has rights in their interactions with the state. My intention is to protect those rights as far as possible.

Mark Field (Conservative, Cities of London and Westminster)

The hon. Gentleman makes an important point in his amendments, particularly in pointing out the need to create a level playing field between the individual and the state. In so far as the state wishes to take upon itself particular powers through any of its agencies—in this case, HMRC—it is fair that the individual, too, should be able to benefit at a similar level. In this provision, we are considering the power to exact money from either a sole trader or a company, and there should be a balance.

I suspect that I am about to pre-empt what the Minister is going to say about the nature of the compensation that the hon. Member for Taunton has in mind, but I fully appreciate that unfettered economic loss, particularly for acts of tortious negligence, would be against public policy. That has been the case in the past and will be so in future. Although the level of compensation that the hon. Gentleman has in mind would be a step too far, that does not detract in any way from the importance of ensuring that we do not trample over individual rights, particularly those of small companies or sole traders, as the hon. Gentleman suggests in his amendment.

I hope that the Minister will consider this matter. I suspect that she will not be happy about the notion of unlimited economic loss in respect of the financial compensation is proposed in the amendment, but the hon. Gentleman makes an important point. All too often, an increasingly all-powerful HMRC is pitting its powers against the individual, and we need the balance to which the Minister referred earlier, albeit in a different context.

David Gauke (Conservative, South West Hertfordshire)

I shall speak briefly on the Liberal Democrat amendments and on those that I tabled with my hon. Friends. Amendments Nos. 162, 163 and 164 relate to paragraphs 1 and 2 of schedule 356, which are important because they contain provisions relating to the power to obtain documents from a taxpayer and from a third party. Although paragraphs 1 and 2 are widely drawn, as long as paragraph 3, which relates to the next group of amendments—I shall not go into it in any detail at all at this point—is adequately drafted, we broadly accept them.

The hon. Member for Taunton made an interesting point about the authorised officer. In schedule 36, and in other schedules, there is concern that sometimes powers are too widely dispersed within HMRC. Those powers need to be vested in people with sufficient seniority, training and expertise so that particular points may be addressed. That is the purpose behind amendments Nos. 162 and 163. If those amendments are to work, the definition of “authorised officer in paragraph 57 needs to be tightened, because at the moment an authorised officer is simply someone who is authorised by the commissioners. That is an incredibly broad definition—anybody could be authorised by the commissioners. I suspect that we could have a re-run of the debate on guidance, although I do not want to do so. Will the Financial Secretary provide clarification about who an authorised person will be and what level of training and expertise will be expected of them?

The Conservatives and the Liberal Democrats have sought to tighten the definition of an authorised officer in different ways. Liberal Democrat amendment No. 183 states that an authorised officer should be an inspector of taxes. Conservative amendment No. 268 would create a list of criteria for authorised officers for particular provisions. Under our proposal, somebody might be authorised for one power but not another, depending on their expertise and training in each field. It also states that their name should be published, which is a more accountable way of doing things. I suspect that the Financial Secretary will outline some of the practical difficulties with that proposal, which I have tabled in a slightly probing manner. However, the definition needs to be tightened, as the definition in paragraph 57 is too broad, as authorised officers who are simply authorised by the commissioners will not provide the necessary reassurance to taxpayers and third parties.

I will say a brief word about Liberal Democrat amendment No. 164, which relates to documents in the possession of third parties. I think that the Financial Secretary will make the same point, but I do not think that the provision is necessary. Paragraph 16 states:

“An information notice only requires a person to produce a document if it is in the person’s possession or power.”

Paragraph 6 defines an information notice as including anything under paragraphs 1 and 2. Unless the Financial Secretary corrects me, I do not think that amendment No. 164 is necessary.

Three Liberal Democrat amendments have been tabled to paragraph 14, which deals with the power to remove documents, and I am sympathetic to two of them, which make the point that if a document is removed, the person who produced the document may request a copy of it. I do not think that there is a need to qualify that by saying that it must be “reasonably required”. On amendment No. 171, I am sympathetic to the proposal that the taxpayer to whom the third party notice applies may receive, by request, a copy of the relevant document. I agree with my hon. Friend the Member for Cities of London and Westminster, with regard to consequential loss, that this is usually resisted by Governments in such circumstances for understandable reasons. It would put the taxpayer in a difficult position, so I do not support it.

I will make one further point about paragraph 14, which is slightly broader, and to which three amendments have been tabled. The explanatory notes state that paragraph 14

“does not amount to a power to seize documents.”

Looking at paragraph 14, that seems to be precisely what it is. Will the Financial Secretary explain why paragraph 14 does not provide a power to seize documents?

Stewart Hosie (Scottish National Party, Dundee East)

I have a question about documents produced or inspected that an officer may remove or retain for a reasonable period. An investigation could be concerned with transactions made with particular bank accounts that the Revenue believes to have been opened for some reason. If the proof of identity given to open the bank account is a passport or a driving license essential for running the business, could those documents be legitimately removed and, if so, for how long? This issue does not relate to being given a copy of one’s documents. Perhaps the Revenue would take a copy and allow the original to be retained because it is important for business reasons. I would like some clarity on that, because although such information might appear in the guidelines, it is not in the Bill, which could cause significant difficulties.

Nicholas Winterton (Conservative, Macclesfield)

I call the Financial Secretary to reply. I am sure we will get the answer to the last question.

Jane Kennedy (Labour, Liverpool, Wavertree)

Thank you, Sir Nicholas, I will do my best to do so.

Amendments Nos. 162, 163, 183 and 268 refer to the term “authorised officer” as a way of limiting who should exercise the powers contained in schedule 36. Taken together, the amendments would mean that all officers using the powers would have to be authorised inspectors of taxes and their names would have to be published.

I entirely accept that it is important to consider who should use the powers and how taxpayers can be assured that those HMRC officers who do so are suitably trained. Requesting information or documents to check a tax position is the bread and butter of the work of thousands of officers in compliance units in HMRC. The Department’s care and management responsibilities already require the assurance that officers are appropriately trained for the work that they do. A general authorisation requirement, particularly one using an outdated and inappropriate label, such as “inspector of taxes”, would simply create bureaucracy without providing any real additional safeguard.

Instead, schedule 36 differentiates the more intrusive powers, such as the power to visit business premises without prior warning, and states that those powers should be exercised only by officers authorised by HMRC commissioners who have had specific training. In that way, the law differentiates which officer may use which power, depending on the intrusiveness of that power. That is a more sensible and effective safeguard.

Two further points are relevant in relation to that. HMRC is already planning a major programme of training and guidance for this package, and publishing a list of authorised officers’ names would be potentially dangerous. Officers of HMRC engage in investigations that can be highly sensitive and I am sure that hon. Members have a mind to the need to protect the identities of individuals in those circumstances. However, quite rightly, there are concerns and reassurance needs to be provided. I would like to make it clear and put on the record just how seriously authorisation levels will be taken. As I have outlined, authorised officers will have an appropriate level of seniority, on which HMRC will consult, and they will have proper training.

Amendment No. 164 would restrict the power to obtain information or documents from a third party to those in their possession. That restriction already exists in relation to documents, but information is different—it includes explanations of facts or may involve creating a document. The concept of power and possession does not work in this case.

Amendment No. 170 would require HMRC to provide copies of all documents taken—and this brings me to the point made by a number of hon. Members, in particular that made by the hon. Member for Dundee, East—if requested to do so, rather than those that might be reasonably required. It is HMRC’s duty to administer the tax system in an efficient way and, in many cases, providing copies will not be a problem. I cannot imagine that there would be any problem with the sorts of documents that the hon. Gentleman has rightly mentioned. It would be completely unreasonable not to comply with such requests. However, there might be instances in which the request is vexatious or unnecessary. For example, it would be costly and cumbersome for HMRC to have to copy a full set of books and records for a closed year when HMRC needs only to review them for a short period.

Amendment No. 171 would require HMRC to give the taxpayer a copy of any document obtained from a third party. Information from third parties is a hugely important way for HMRC to establish the facts, particularly where the taxpayer is evasive or obstructive—that is remarkable, but it happens. Giving copies of all third-party documents to the taxpayer would undermine the ability of HMRC to investigate effectively, particularly in the more serious cases. It may also create confidentiality issues for the third party.

Amendment No. 172 suggests a requirement on HMRC to compensate the owner of a document for consequential losses, if HMRC loses or damages the document. I am grateful for the helpful comments made by the hon. Member for South-West Hertfordshire. The schedule already requires the Department to pay expenses reasonably incurred in replacing or repairing a lost document. That is sufficient recompense. HMRC officers take care to keep taxpayers’ documents safe. The hon. Gentleman asked what would happen if damage were caused during an inspection as a result of a negligent act by an officer. Where a document is damaged, the rules on reimbursing the costs of replacing that document would apply, and normal consideration would apply in other circumstances. That is not unusual; HMRC has been doing it for many years.

Amendment No. 263 would, if it were carried, seriously undermine the effectiveness of the improved approach to checking groups of companies, which has been welcomed in consultation.

David Gauke (Conservative, South West Hertfordshire)

Rather to my embarrassment, I am not sure whether I mentioned or explained amendment No. 263. It was wise of the Financial Secretary to do that, because I was going to intervene on that point. However, paragraph 33, without being amended, essentially will require a third party to provide information about all the subsidiary undertakings and the parent undertaking, even if it does not necessarily have that information. If we are talking about a bank or an accountant that is advising the parent undertaking, they might not necessarily know all the subsidiary undertakings. However, that appears to be the obligation under paragraph 33. I will be happily reassured, but if I have understood correctly, the requirement seems to be unreasonable.

Jane Kennedy (Labour, Liverpool, Wavertree)

The process by which documents and information are to be provided to HMRC is changing as a result of the reforms that we are making. For example, the documents that the hon. Member for Dundee, East mentioned, such as driving licences, would have to be provided as a result of an information request. HMRC would have to apply a formal procedure. It is possible for that to be challenged, and for a taxpayer in those circumstances to question why a particular document is requested. The context in which such documents are made available to HMRC is being changed. For some taxpayers who have dealt with certain parts of the tax system under HMRC, the new system will feel more intrusive, but my expectation is that the application of the new powers by HMRC will be done and carried forward in a completely reasonable way, which should be able to be justified at every step. We are providing safeguards so that taxpayers can challenge the process.

I was asked about the difference between removing documents and seizing them. The power allows an officer to take away, where necessary, a document that he has looked at as part of his visit. That power already exists for both VAT and PAYE, so it is not something that HMRC has to do often. Sometimes, however, there is a risk that during a visit an HMRC officer will see a document that contains vital evidence. That contrasts with the seizure powers, which have the feel of a dawn raid. That is not what this power is about, and I appreciate the spirit with which the issue was raised.

An officer would be able to remove the document if it seemed necessary to do so. That might be when there was a risk that the document could be concealed or destroyed later or when more detailed consideration might be needed. As for the reasonable conduct of the officer in carrying out such an inspection, it would be necessary for the staff to be supported with proper training so that appropriate powers are used in the right circumstances.

I have a final comment on the third party and the scope of amendment No. 263. The third party will have to provide replies to the specific questions only if they relate to particular subsidiaries. That will be made clear in the questions that are asked. I hope that I have dealt broadly with the concerns that have been expressed. The amendment would undermine the effectiveness of the measure.

Paragraph 33 provides a streamlined approach to checking groups that, among other things, removes the need to include the names of all subsidiary companies, of which there could be hundreds, as I am sure the hon. Gentleman knows, on information notices to third parties. His amendment would reintroduce a requirement that would increase the administrative burden on both taxpayers and HMRC. Indeed, it would negate many of the hoped-for benefits.

It has been suggested that we cannot trust HMRC’s view of what is reasonable. Legislation requires its checking to be reasonable. It is not possible for the law to define what is reasonable, as that varies from situation to situation. Ultimately, the courts will make final decisions about what is reasonable. However, it is possible to give more certainty by using guidance to set out examples of what is reasonable and what is not. There is a general duty on any public body, including HMRC, to act reasonably.

The civil service code also requires officers to behave sensitively in their dealings with the public. Those messages will no doubt be reinforced in the forthcoming taxpayers charter. I am pleased to see HMRC making progress on its development. One of the first things that I did in respect of HMRC was to suggest that we might start to call those who come into contact with it “customers”. There was a severe intake of breath. “Nobody wants to be a customer of the tax authority, Minister”, I was told. However, I believe that it is right and proper that we have the concept of customer care when dealing with people who interact with HMRC, the vast majority of whom comply thoroughly and want to comply with their tax liabilities.

I hope that I have demonstrated, in my brief response to the amendments, that great care has been taken to ensure taxpayer safeguards are woven into the fabric of the package. I believe that we have arrived at the right balance between individual liberties and giving HMRC effective powers to do its difficult and occasionally dangerous job. The amendments are therefore unnecessary. I hope that they will not be pressed.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the clarification and further explanation of paragraph 33, which was helpful. I am still not entirely convinced by the Minister’s argument, but I will not press my amendment to a vote. The position is similar with paragraph 14, although I note that—I think for the first time—she used the argument that the powers already exist for VAT and PAYE. Here we have our first explicit example of a case of levelling up. None the less, her comments were helpful. I will not be pressing that amendment to a vote, or the amendment on paragraph 57, on authorised persons, although I still think that there is an issue here. The Minister went some of the way, but perhaps during the debate she will go further about the emphasis on training and ensuring that the right staff, with the right experience and expertise, are in the positions of responsibility. I take the point that a lot of this is done by a lot of people, but that is an important point. I will not press any of my amendments.

Jeremy Browne (Liberal Democrat, Taunton)

I am grateful to the Minister for her constructive and detailed response to that series of amendments. My only observation is that a reasonable case can be made in every instance for granting greater powers to HMRC. However, in my three years as a Member of the House, we have had endless items of legislation before us, of which this is only one, where the state has increased its powers at the expense of the individual citizen. If I recall correctly, I have yet to have the opportunity to vote on a single instance when the individual citizen’s powers have been extended at the expense of the state. Nevertheless, that is the background within which we all operate. I do not wish to press any of the amendments to a Division this evening. I beg to ask leave to withdraw the amendment.

Nicholas Winterton (Conservative, Macclesfield)

May I wish all members of the Committee an enjoyable and eventful, but restful, weekend? I will see you back next week on Tuesday, at 10.30 in the morning.

Further consideration adjourned—[Mr. Blizzard.]