Finance Bill

Public Bill Committee, 17 June 2008.

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003) - Clause 147

Justine Greening (Conservative, Putney)

Since the clause was originally put into the Bill, we have been slightly overtaken by events on two fronts. First, we know that the air passenger duties that we currently have will be replaced by a per-plane duty at some point—I think in November 2009. We discussed that when we considered clause 146 last week.

Secondly, we know that, because of the rising oil price and other pressures on the industry, some of the key companies and business-only jets that the clause was aimed at are facing challenging circumstances. Some people would say that the Government are perhaps closing the stable door after the horse has bolted in that respect. Others may say that they are closing the stable door after the horse has died. Nevertheless, there are a few points I want to raise to get the Minister to talk a little more on record about the Government’s thinking and to clarify, in relation to the consultation document and the Government’s response to it, which option they are going for. My understanding is that it is option three, but it would be helpful for her to clarify that.

It seems a sensible step to amend the existing air passenger duty in this way, because the way in which the duty was structured meant that business-only flights were essentially able to have the duty charged at a reduced rate. The measure aims to ensure that they pay the standard rate.

I wanted to ask the Minister about the choice of 40 in for the seat pitch, at which seats can no longer be considered standard class. As she is aware, a number of airlines still have business class seats with pitches below 40 in. To give a few examples, Air Sahara, Aloha Airlines, Estonian Air, Icelandair, Jet Airways, Luxair—

Angela Eagle (Labour, Wallasey)

The big boys.

Justine Greening (Conservative, Putney)

The Minister says, “The big boys.” Nevertheless these are still airlines that have business class seats with a pitch below 40 in. I wanted to ask her what the thought process was for the cut-off at 40 in rather than perhaps 38 in, which would have captured the overwhelming majority. Can she also clarify what the revenue impact of the clause is? My understanding is that, if we are looking at option three being implemented—perhaps she can confirm that—the revenue impact would be small. Unfortunately, given the demise of some of the business-only airlines recently, it could almost be negligible. The Government’s response to the consultation, published back in January of this year, said in paragraph 4.34 that the impact of introducing option three would be negligible and that, currently,

“only two of the 290 registered airlines provide a business class only service.”

Perhaps she can clarify whether either of those two airlines are still operating—otherwise, the clause becomes entirely academic. Obviously, the provisions that it brings forward will last only for 12 months while the per-plane duty comes in.

Those are the main questions. Perhaps the Minister could clarify whether, in the Treasury’s assessment, those business-only airlines that remain will have to bear any undue bureaucracy and administration as a result of the provision. Obviously, they will pay more tax, and I understand why the Government are bringing the clause forward, but, in the conditions of rising costs and challenging economic circumstances which all companies are facing at the moment, we do not want to put any additional pressures on them unnecessarily. At the end of the day, they are employing people and generating work in our economy.

Peter Bone (Conservative, Wellingborough)

It is a pleasure to serve under your chairmanship, Mr. Cook. I would like to declare two interests: the first is recorded in the Register of Members’ Interests and the second is that I am rather tall. This measure is an attack on tall people and it will discriminate against them—if only my hon. Friend the Member for Shrewsbury and Atcham (Daniel Kawczynski) were here. This is a nasty tax. It has always been simply a tax and has never been a green or environmental tax. I know that the Government realise that and will abolish and change it, but it seems rather strange to alter the rules now for business-only carriers. As far as I am aware, business-only carriers have gone out of business in this country, so I would be interested to learn which of those businesses are still flying.

The intention behind this tax is to catch business-only airlines, but it will of course catch many others as well. If I want to fly and ask for an emergency exit seat so that I have more leg room, will I now have to pay double the airport duty tax because the seat immediately in front of me is more than 40 in away? What about occasions when an airline is overbooked and puts economy passengers in business class or premium economy? More passengers would get on the plane, which is what the Government say should happen, but will they be asked to pay double the air passenger duty?

Many economy airlines want to have a seat pitch of more than 40 in because one of the obvious ways of avoiding deep vein thrombosis, which is an important issue, is to have a larger seat pitch so that people can exercise while in their seats. Therefore, everything that the Government are doing with regard to this tax is wholly wrong. As my hon. Friend has said, it is closing the door after the horse is dead. It is an attack on tall people and it will discourage airlines from flying at full capacity and economy airlines from increasing seat pitch.

In America, some economy airlines have a larger seat pitch as a selling point because of the problems with cramped conditions and deep vein thrombosis, but we are discouraging companies such as EasyJet and Ryanair from doing likewise. This change cannot have any significant revenue implications, and it must have been thought up in an office in Whitehall by a bureaucrat who knows nothing about the aviation industry.

Peter Viggers (Conservative, Gosport)

I take an interest in flying matters, and I think that I am the only qualified fast jet pilot in the House. When I was a Minister in Northern Ireland, I flew 400 times between London and Belfast in three years, and I once worked out that I have spent six months of my life in the air. I do not understand how the clause came to be put forward, as it is remarkably unsophisticated to concentrate only on pitch. If one were genuinely trying to introduce environmental aspects into the cost of air travel, one ought to take into account the height and width of the cabin and the width, as well as the pitch, of the seat. If one were seriously trying to introduce an environmental aspect and cut back on air travel, one would have thought that it was possible to produce a far more sophisticated measure, such as a comparison between the weight of the passengers in an aircraft and the weight of the aircraft. I will be interested to hear how the Exchequer Secretary will explain and defend the clause.

Angela Eagle (Labour, Wallasey)

I will seek to deal with some of the issues that have been raised. We seem to be in an interesting situation. The hon. Member for Putney said she is broadly in favour of the clause, but complained about aspects of it. The hon. Member for Wellingborough, albeit that he is very tall, is in complete revolt against the clause and the hon. Member for Gosport gave a more measured contribution. He was quite right to ask some technical questions. Before Committee members get carried away with the idea that this is some bureaucrat’s plan gone mad and that somebody in Whitehall is thinking of ways to tinker with taxes just for the sake of it to justify their own existence, I tell them that this issue was raised by the industry as part of the 2006 pre-Budget report process.

The industry raised the issue with the then Financial Secretary, my hon. Friend the Member for Wentworth (John Healey), because it had concerns about the definitions of classes of travel. Those matched broadly the classes of travel marketed when they were introduced in 2001. Since then, developments in the industry have meant that definitions have created market distortions, particularly in the area of business class and premium economy class seating. The industry raised the issue with us, not the other way around. I hope that the hon. Member for Wellingborough will put away his rather crude caricature of where the provision might have come from and recognise that it came from the industry.

Current definitions stipulate that the lowest cost of travel available on an aircraft attracts the reduced rate of air passenger duty. On mixed-class flights, that means that travel on anything other than the lowest class attracts standard or higher rates of air passenger duty. On a single-class flight, only one class of travel is available. Consequently, that class meets the definition of being the lowest class of travel. Travel on those flights therefore attracts the reduced rate. The industry complained that under current definitions, on business class-only flights all passengers meet the definition of travelling on the lowest class available on the aircraft and receive the reduced rate of air passenger duty. In contrast, premium products on mixed-class flights attracted standard rather than reduced rates.

In response to the worry from the industry that classes of travel distorted decisions, the Government announced in the last Budget that they were open to changing the definitions, provided that doing so was broadly revenue neutral and that any change was transparent and simple for Her Majesty’s Revenue and Customs and the industry to operate.

The plans to move to a per-plane duty make it even more important that we do not impose a burdensome change on what is left of the current system of air passenger duty. As the hon. Member for Putney mentioned, a number of options were discussed in the consultation, which was launched on 1 May last year and closed on 1 July. Following the consultation, the Chancellor announced in the 2007 pre-Budget report that changes would be made to the class of travel definitions so that travel on business class-only flights would attract the standard rate, rather than the reduced rate.

In answer to the hon. Lady’s question, that was not the most favoured option by the industry, but it had the benefit of affecting only a small number of carriers. She rightly pointed out that they are not in existence. There were three such carriers at the time of the consultation. Since then, the business class-only carriers have ceased to operate. That may be a dead horse or only a temporary stay. One does not quite know what the market will do, but it is quite possible that business class-only flights will return at some stage. That was why it was felt reasonable to continue with these changes.

Peter Bone (Conservative, Wellingborough)

As air passenger duty is to be abolished and the possibility of new business class-only airlines starting up is extremely remote in these economic conditions, what on earth are we doing putting this measure in a clause and debating it?

Angela Eagle (Labour, Wallasey)

The industry raised the issue with us. It was thought that the different classes were creating distortions in decision making. It seems reasonable that we should level the playing field for air passenger duty even if it has only a year left to run before we move to per-plane taxation—

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the hon. Lady give way?

Angela Eagle (Labour, Wallasey)

If I can finish the sentence, I will happily give way to the hon. Gentleman.

It is important to realise that operators come and go in these markets. I agree that it is important that any change does not involve a huge burden in changing systems, which is why we went for the option that we did. It makes the least disruptive change, and the simplest and easiest change to the system in the circumstances, especially given the amount of time we have left before the proposed introduction of per-plane duty in 2009.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister mentioned the introduction of the per-plane duty in 2009 and referred to this arrangement as having only a year left to go. We are all aware of the hostility of the United States to the proposed per-plane duty. I wonder whether she is able to update the Committee on that issue, and whether there was any discussion of the difference of opinion between the UK and the US during the President’s visit. Has it been escalated to that level of attention, and does she expect that the 2009 change will be able to take place?

Angela Eagle (Labour, Wallasey)

I am flattered that the hon. Gentleman thinks I would be privy quite so quickly to the discussions that the Prime Minister has just had with the President of the United States. The hon. Gentleman has a flatteringly high opinion of me, but I am afraid that at this moment I am unclear as to quite what the Prime Minister and the President discussed during their tête-à -tête yesterday. I promise that I will try to find out for him.

In terms of the revenue impact, an additional £5 million is what was worked out, which, when one looks at the size of the revenues from APD, is broadly revenue-neutral. The industry’s favoured approach, which would have made changes that raised the APD liability of seats on business class-only flights and lowered the APD liability on premium economy seats, would have cost £60 million. That would have been extremely complex to implement and would have resulted in system changes which would have affected a large sector of the airline industry—clearly not a very sensible approach to take with only a year to go of this tax plan.

Justine Greening (Conservative, Putney)

The Minister said that the original estimate of the revenue impact was £5 million. I am assuming that that figure is now zero, given that she does not think that the provision will affect any airline companies that are currently operating. Is that correct?

Angela Eagle (Labour, Wallasey)

I am not certain, and it would be wrong of me to give the Committee a figure, given the changes that there have been in the airline industry. I think that the hon. Lady needs to bear in mind also the implications of the change of premier economy class, which is not completely out of the picture. I am happy to return to the Committee with an updated estimate of the revenue effects of that if one has been done. It is clearly not revenue-neutral to put into being the most popular option favoured by the industry, which would have cost £60 million and been very bureaucratic in terms of system changes.

Peter Bone (Conservative, Wellingborough)

I am grateful to the Minister for giving way; she is being extremely generous. I am a little worried about what she has just said, because there should be a zero revenue implication as there are no business class-only airlines now flying. However, I suspect that passengers who are flying economy—such as those people who are sitting in exit rows, or happen to be caught in a seat which has more than a 40 in seat pitch—will now be paying double duty. Can she assure the Committee that that will not happen?

Angela Eagle (Labour, Wallasey)

The hon. Gentleman used several particular instances of where he thought there might be difficulties, in terms of passengers being upgraded and such. I have to say that, if a passenger has been upgraded when they have not asked to be upgraded, it would be fairly churlish of the airline then to pass on the charge of the APD.

Air passenger duty is charged to the airlines and it is up to them whether they pass that cost on to the customers. I do not know what every airline in existence would do for passengers whom they upgraded in those circumstances, but it would be odd to upgrade and then demand an extra payment, if the individual had not asked to be upgraded.

Justine Greening (Conservative, Putney)

I do not want to help the Exchequer Secretary out too much, but can she confirm that the 40 in pitch is in relation to either the seat in front or the seat behind, and that if there is no seat in front it will be based on the seat behind?

Angela Eagle (Labour, Wallasey)

That is the case. In his approach to the tax, the hon. Member for Wellingborough has allowed himself to be carried away by the consciousness of his height.

Philip Hammond (Conservative, Runnymede and Weybridge)

My understanding is that the defining class is the class of travel that the passenger is contracted to have through his agreement for carriage, not the one that he travels in. Therefore, it seems clear that an upgrade would not necessarily result in a higher charge. Is the Exchequer Secretary aware that it is the practice of some airlines and some brokers or bulk agents of airline travel—or at least it used to be, I do not get much opportunity to travel these days—to enter into guaranteed upgrade arrangements, where one buys a ticket of a certain class on the understanding that it will be upgraded at the point of departure? Has she taken that practice into account, and is she certain that there is no potential revenue loss as a result of such practices being used to avoid the impact of the measures?

Angela Eagle (Labour, Wallasey)

I suspect that the answer is that there will be no loss, but I will certainly check that we did not miss in the consultation what the brokers might be doing.

There is not a lot else that I can say, especially as someone who is only 5 ft 3 in. [Interruption.]

Frank Cook (Labour, Stockton North)

Order. Members, please refrain from conducting conversations across the room while a Front-Bench spokesperson is addressing the Committee.

Angela Eagle (Labour, Wallasey)

I am only 5 ft 3 in, so perhaps Members did not realise that I was standing up. Maybe I should try to shout more to attract attention.

Eric Joyce (Labour, Falkirk)

I sense that the debate has been whipped into an exciting, high-pitched frenzy over the past five and a half weeks, and so I rise to help my hon. Friend. The exit point that the hon. Member for Wellingborough made was about the class of travel. I have worked out that for his knees to touch the seat in front on an aircraft with a 40 in pitch between the seats, he would need to be just a fraction under 8 ft tall. That strikes me as not quite what his height is.

Angela Eagle (Labour, Wallasey)

Size sometimes gets exaggerated. The hon. Member for Wellingborough is tall, but he is certainly not 8 ft. I thank my hon. Friend for the mathematics. He has done the Committee a great service.

Clause 148

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 358, in clause 148, page 90, line 25, leave out ‘paragraph (a)’ and insert ‘paragraphs (a) and (b)’.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss amendment No. 359, in clause 148, page 90, line 41, leave out ‘(6)(b),’.

Mark Hoban (Conservative, Fareham)

It is a pleasure to serve under your chairmanship, Mr. Cook, and to get these amendments out of the departure lounge and onto the runway. I said to my hon. Friend the Member for Putney that there were insufficient puns in her speech in spite of the ample opportunity, so I thought that I might get one of my own in. The amendments are relatively simple and I do not want to detain the Committee for too long. They relate to sharia-compliant sukuk products.

One of the principles of sharia law is that interest should not be charged on debt, but it is permissible for people to share in risk. In these bonds, there is often an agreement between the person who has issued the bonds and the purchaser of the bonds about the maximum level of return that someone can enjoy on the bonds. The concern raised with me about how those bonds are exempted from stamp duty is that, in some cases, the bondholder is entitled to all of the return on the underlying asset; we will talk about underlying assets in more detail, perhaps on schedule 46. The bondholder is entitled to all of the return, subject to a cap of, say, 7 per cent. My understanding is that bonds structured like that do not get the same exemptions as bonds structured in alternative ways and, therefore, some sukuk products are not treated in accordance with the other bonds. I am keen to understand why that is the case. Amendments Nos. 358 and 359 aim to tackle that issue. The Government amendments in the next group tackle a slightly different set of circumstances, but both groups have the same ends—to ensure that the treatment of these bonds and of more conventional products is comparable.

Kitty Ussher (Labour, Burnley)

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

I am grateful to the hon. Gentleman for his general understanding about what we are attempting to do. The problem is that the amendments he proposes go far wider than addressing the issue that he seeks to deal with.

The amendments remove the condition that the return must not be dependent on the results of a business where the instrument concerned falls within the definition of loan capital that we are discussing. The effect would be that alternative finance investment bonds would not have to qualify for exemption under the loan capital rule at all. Those types of bonds would be afforded more advantageous treatment than their conventional equivalents. They would have a more advantageous position than normal types of debt and loan capital raising, because the conventional equivalents would still need to qualify for exemption under the loan capital rules. Therefore, it is contradictory to Government policy. We are trying to ensure broadly equivalent treatment of sharia-type products and their conventional equivalents.

The amendments would extend the scope of the loan capital exemption to include bonds that have a return based on the results of the business. We think that that kind of return is closer in substance to an equity-like return rather than a debt instrument-like return.

Mark Hoban (Conservative, Fareham)

Although in principle the Minister is right that the bondholder would benefit from the full results of the business, in these circumstances the bonds are structured so the cap of, say, 7 per cent. prevents them from enjoying those full benefits. Therefore, it moves away from the traditional equity model in which the shareholders are entitled to full rights over the profits.

Kitty Ussher (Labour, Burnley)

The dividing line between us is that I think that having a cap involves a greater sense of risk sharing than is appropriate for this type of policy measure. If there is a cap, which is up to X per cent. it is more like an equity-type product than a conventional debt-type product. It is economically different from a product that has a fixed rate as opposed to a cap that can be up to that point. I understand that one member of our Islamic Finance Experts Group has raised that concern and we are happy to explore it in more detail.

We have fundamental reservations about allowing an exemption for products that are not economically a debt-type instrument, even though they are arranged in a sharia-compliant way. To go down the route suggested by the hon. Gentleman looks like a change to our policy. It would also tilt the playing field for sharia-compliant and conventional methods of raising finance to the advantage of sharia-compliant products, which is not fair, so that is another reason to resist the amendment. There is no reason why we cannot explore the fact that there are, we have just been informed, some types of sukuk that have a cap rather than a specified rate of return. We can then deal with the matter in a more appropriate way if we judge it necessary, but accepting the amendment would distort our policy. I therefore urge the hon. Gentleman to withdraw it.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for her explanation of why the Government oppose the amendment. She raises a very important principle as to how these products should be looked at. They are meant to mirror conventional products, not be given advantages over them. We will deal in clause 149 with the way in which the exemptions for sharia-compliant products have then been used for tax avoidance. We must be sure that we do not provide advantages that others can exploit. On that basis, and with the Minister’s reassurance that she will look at this issue, I beg to ask leave to withdraw.

Kitty Ussher (Labour, Burnley)

I beg to move amendment No. 309, in clause 148, page 90, line 41, leave out ‘and (7B)’ and insert ‘, (7B) and (13)’.

Frank Cook (Labour, Stockton North)

With this it will be convenient to discuss Government amendments Nos. 310, 311 and 312.

Kitty Ussher (Labour, Burnley)

These amendments are fairly technical so I will provide the opportunity for questions rather than go through them in detail, although I am happy to do so if there is a demand.

Mark Hoban (Conservative, Fareham)

It would help the Committee if the Minister gave a little more explanation about the amendment. I understand that it refers to situations in which the interest paid is below a certain rate where there are insufficient profits to generate the rate that people expect on their bonds. That would also suggest that it mirrors equity-like participation, rather than bonds.

Kitty Ussher (Labour, Burnley)

There obviously is a demand for more detail about the amendments, so I am happy to provide it. With your permission, Mr. Cook, I will describe the purpose of the clause, then go on to the technical amendments. If the Committee is in agreement, perhaps we can hold the clause stand part debate at the same time.

Clause 148 introduces stamp duty and stamp duty reserve tax rules for alternative finance investment bonds, sharia-compliant versions of which are commonly known as sukuk. The three most recent Finance Acts have introduced rules for direct tax treatment of a number of sharia-compliant alternative finance products. Such products, as we have heard, prohibit the payment or receipt of interest, but pay an alternative finance return instead. The broad principle of our tax rules is to ensure that where a return that is paid to, or by, an issuer or investor is economically equivalent to interest, it should be treated as if it were interest. For stamp duty purposes, that principle is extended so that where a financial instrument is economically equivalent to a debt instrument it will be treated as if it were a debt instrument. Where the arrangements are in substance the same as those for a company raising finance by issuing a conventional debt security, the stamp duty rules will treat the instrument as if it were loan capital, thereby enabling the instrument to be exempt from stamp duty on transfer in the secondary markets.

Some alternative finance arrangements, however, are closer in substance to holding shares in a company or to a profit-sharing arrangement, and the new stamp duty rules will not apply to those types of arrangement. The extension of the definition of loan capital for securities which are classified as alternative finance investment bonds that we are attempting to make will allow businesses and individuals to access a wider range of alternative finance products while helping to create a broadly level playing field between those products and their conventional equivalents for this important and growing market. We are in uncharted territory, and after the Finance Bill was published, we found that we needed to tweak the drafting, because the interaction of the rules in the clause with existing tax rules was not fully anticipated. Our amendments are not intended to change the substance of our proposal at all, but simply to make sure that it is completely watertight.

As for the details, Government amendment No. 309 amends clause 148 to ensure that alternative finance investment bonds may benefit from the stamp duty exemption provided by section 79(7)(b) of the Finance Act 1986 on an equivalent basis to securities raised on conventional terms. Amendments Nos. 310 to 312 amend clause 148 to ensure that alternative finance investment bonds may benefit from the stamp duty exemption provided by section 79(7)(b) of the Finance Act 1986 on an equivalent basis to securities raised on conventional terms. That is achieved by amending the definition of capital market investment and capital market arrangements where the loan capital concerned is raised under alternative finance principles. I regret that we have had to amend the Bill to make it completely perfect, but I hope we have the Committee’s support in so doing.

Clause 150

Greg Hands (Conservative, Hammersmith and Fulham)

May I welcome you, Mr. Cook, to the Chair? I shall speak at some length about clause 151, but first I wish to compare it with clause 150, and ask the Minister a question about one single word. Clause 150(4)(6) includes the words,

“involves the payment of interest, and...achieve a similar effect”.

In clause 151(8), the same phraseology is used, but instead of the word, “and”, the word, “but”, is used. I think that that may change the meaning of the clause significantly and I would be grateful for clarification as to why that is the case.

Kitty Ussher (Labour, Burnley)

I am extremely grateful to the hon. Member for Hammersmith and Fulham for raising that point, which appears to be a legal drafting point. If we are moving on to clause 151, with the Committee’s permission, since this question relates to both clauses, I shall answer his question during that debate.

Philip Hammond (Conservative, Runnymede and Weybridge)

On a point of order, Mr. Cook, the Committee will be asked to approve clause 150, and while I understand that the Minister will be better able to answer the question asked by my hon. Friend the Member for Hammersmith and Fulham at a later point, it will clearly not be much use to us if we find that the defect is in fact in clause 150. May I suggest that if the Minister is unable to answer the question that we adjourn for five minutes, to enable her to obtain an answer before we vote on clause 150?

Frank Cook (Labour, Stockton North)

The question is that the Committee adjourn for no more than five minutes.

Bob Blizzard (Labour, Waveney)

On a point of order, Mr. Cook. [Interruption.]

Frank Cook (Labour, Stockton North)

I stand corrected. I shall suspend the sitting for five minutes.

Kitty Ussher (Labour, Burnley)

I am somewhat emboldened now that I have no civil servants whatsoever in the room. I am delighted to be able to clarify the intention of both phrases, which is to achieve exactly the same effect—my understanding is that they are legally equivalent. I will go back and check, and if that proves not to be the case, we will introduce changes to make that intention clear. I hope that that is sufficient for the Committee to be able to agree to the clause, as the phrase in the clause will have the same effect as its equivalent in clause 151. We will make sure that they are the same before Royal Assent.

Greg Hands (Conservative, Hammersmith and Fulham)

I am not entirely happy with that, but we will have to accept it at face value and move on.

Clause 151

Mark Hoban (Conservative, Fareham)

I think the Minister may regret using the phrase, “completely perfect”, about the drafting of these provisions. The clause seeks to give the Treasury powers to facilitate the issue of government-backed sukuk bills. I think we are the first non-Islamic country to wish to go down this route. As debate on previous clauses has indicated, there is a grey market for sharia-compliant products for both the retail and wholesale markets, for which London has become a recognised centre.

A number of practitioners in the market have commented on the advantage that a Government-issued sukuk product would offer by providing a benchmark, keeping liquidity, and providing another asset class for investment. However, as we discussed in relation to clause 148, these are not straightforward products, which is reflected in the Government’s response to the consultation on the issuance of Government-backed sukuk products. Clause 150, and schedule 46, will facilitate the Government’s issuance of such products in future.

We identified the complexity of those products in previous clauses, so there is a need for proper parliamentary scrutiny of them. I am disappointed that the Government have gone down the route of secondary legislation, rather than introducing fuller legislation in the Bill, or a subsequent Finance Bill, because there are difficult issues that must be resolved. I would like to highlight them for the Minister, before the Committee considers giving the Government powers to facilitate the issuance of those bills.

The issues were outlined in a Government consultation paper, and the Minister has a copy of the response published by the Government at the beginning of this month, including the draft legislation we are debating today. Clearly, that paves the way for the Government to issue these products. I want to discuss a number of issues with the Economic Secretary so that I can understand the Government’s approach to the regulations, which we will debate in future.

An essential step for private sector companies developing sharia-compliant products is to seek approval from a board of Islamic scholars before they are marketed. The scholars will determine whether a product complies with sharia law. Will the Economic Secretary say whether the Government think that the issue of sukuk products by the Government depends on obtaining approval from those scholars? Do the Government have an alternative route that they could adopt to ensure that products pass the requisite tests in sharia law for the benefit of those interested in buying them?

As was identified in the debate on clause 148, sharia law prohibits the payment of interest, but it permits people to share risk and the returns that come from it. In a conventional bill, holders are paid a coupon, which is straightforward. As I understand this case, the Government envisage a sukuk bill with an underlying lease. In effect, the proceeds from the issuance of the bill will be used to acquire an asset, which will be leased, and the lease payments will provide the return for the bill holders. Will the Minister expand on the type of assets that will form the basis of the lease, given that those assets must be sharia compliant?

The Government’s preferred route for dealing with the issue is to provide sukuk bills, rather than bonds. Bills, by their nature, have relatively short maturities. The consultation paper suggested maturities of one, three and six months. What sort of assets does the Minister expect will be part of the leases? If the Government went down the route of issuing sukuk bonds with longer maturity rates, they might consider including in the lease assets, for example, for private finance initiative projects where, typically, the lease is for a period of 30 years.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am listening carefully to my hon. Friend, who has researched the subject in great detail. He has explained how sharia law prohibits the payment of interest, but allows the sharing of risk. As he has developed his case, I understand that the lessee in the leases will be the Government. Will he explain to the Committee what risk is to be shared when the lessee is a sovereign Government?

Mark Hoban (Conservative, Fareham)

My hon. Friend raises an interesting point. I will come on to the issue of risks and returns, because one of the challenges faced by the Government and the public sector in designing these products is securing a degree of equivalence. The point that my hon. Friend the Member for Hammersmith and Fulham highlighted under clause 151(8) deals with the point of equivalence.

For people who are seeking to invest, the bills must comply with sharia law, and there must be some risks, which is why the underpinning of the bills by assets is important. For example, on private finance initiative contracts, the operator of the hospital bears some risks on maintenance. The rental stream that they earn is offset by the costs that they incur, so there is some risk. The risk might not be in default—the point to which my hon. Friend the Member for Runnymede and Weybridge alluded—because, on the whole, Governments do not default on bills. However, some operational risk underpins the element of risk in a sukuk bill. If there is no risk, I am intrigued to find out why the Minister believes that the measure is sharia compliant? That is an important point, so I should be grateful if the Minister would make it clear and indicate what type of assets will underpin a sukuk bill issuance? Will she explain what control will be exercised over those assets? The special purpose vehicle will act as the issuer of the bill, as I understand it from the consultation document, and will use the proceeds to acquire the assets which are going to be leased. Who will control the assets while they are owned by the special purpose vehicle?

Philip Hammond (Conservative, Runnymede and Weybridge)

I am interested in the way in which my hon. Friend is developing his theme. The clause provides for money to be raised in sterling or in currencies other than sterling. Presumably, if money were raised in a currency other than sterling, payments made under the lease would have to be denominated in that currency. Is it his understanding that the Government already have the power to make such payments in a currency other than sterling, or are they taking such power? Does he see some dangers to the Exchequer and loss to the taxpayer in going down that route?

Mark Hoban (Conservative, Fareham)

My hon. Friend makes an interesting point. In their response to the consultation document, the Government deal with the issue of the denomination of the bonds and the payments under those bonds, and they opt for sterling, notwithstanding my hon. Friend’s comments. The enabling clause that we are going to debate in a moment gives them the power to vary between sterling and other currencies. If they make payments in other currencies, we are exposed to exchange rate risk, which would have to be managed.

Greg Hands (Conservative, Hammersmith and Fulham)

This raises a number of important questions. First, as it is likely that a large number of target investors for this type of instrument are based in the middle east, there will be a demand for a US dollar-denominated asset. It is by no means clear whether the UK Debt Management Office in the Treasury would want those dollar-denominated funds. I think we need some clarity as to whether the UK as an issuer would want to keep the US dollar proceeds, or might wish to swap them back into sterling. At the moment, as I am sure my hon. Friend agrees, the whole thing is unclear.

Mark Hoban (Conservative, Fareham)

My hon. Friend is right. We need some clarity on these matters, which is why I have taken the opportunity in our debate on clause 151 to raise them, as it is important that we know what we are going to approve later on.

The target market for these bills raises an important issue. Having talked to a number of people in the private sector who issue sharia-compliant products, I understand that there is a significant number of such products in the UK. They provide an alternative asset class in which to invest, with the security that comes from being, in effect, a sovereign issuer. There is a certain amount of such investment in the UK, and it may well be the case that there are investors elsewhere who will seek to take advantage of the market, including the City of London, which takes a close interest in these issues and is keen to see London develop as a wholesale market for those products, attracting money from other jurisdictions. It may well be the case that, as the bill issuance programme develops, there will be demand from people overseas. Returning to the issue of denominations, it would be useful if the Minister clarified the Government’s thinking, and explained whether they will seek to use the power to issue bills in currencies other than sterling, and what further obligations that imposes on the Debt Management Office.

Peter Viggers (Conservative, Gosport)

This clause gives the Treasury the power by regulation to make provision for raising money. Does my hon. Friend know how much further opportunity for debate there would be in the House of Commons, if the Treasury decided to take up the right to make regulations? How would the regulations be debated? Would they have to come before the House, or could the Treasury make them without further reference to the House?

Mark Hoban (Conservative, Fareham)

I understand that, through either the affirmative or the negative procedure, there will be an opportunity for the regulations to be debated in the House. Of course, that process includes a restriction, as the regulations are not amendable. As this brief debate on clause 151 indicates, there are important issues to be resolved, and different commentators have different views about the applicability of the rules and how they would work in practice. We would be prevented through either the affirmative or the negative procedure from tabling amendments to flush out the Government’s thinking, or to amend the regulations. In an area where there is so much uncertainty and complexity, primary legislation is far better that secondary legislation.

An issue I sought to raise with the Exchequer Secretary, and which came out of the consultation paper, was the cost of the bills to the taxpayer. With conventional products, if there is a big bill issuance programme, the liquidity of markets and people’s familiarity with those products help to reduce their price. However, unless there is a sufficiently large issuance of sukuk bills, there is unlikely to be sufficient liquidity in the market, thus the cost will increase. Government recognise that on page 23 of their response, but they take the view that the price differential would be short-lived. What assessment have they made of the scale of issuance required to bring the price of a sukuk bill in line with that of a conventional one? Will the Exchequer Secretary elaborate on the Government’s comments on the impact of a sukuk product on the conventional bill market? The Government suggest that the cost of that programme would build up to about £2 billion. Does the Exchequer Secretary think that that will reduce the attractiveness of the conventional bill issuance programme, and impair the liquidity of those markets?

I mentioned earlier, in the context of the asset that would underpin the sukuk bill, that there would be a special purpose vehicle, which would issue the bonds and hold the lease to the asset. The consultation paper rightly highlights the issue of who owns that vehicle. That goes back to the comment by my hon. Friend the Member for Runnymede and Weybridge that the shareholder would ordinarily bear the risk. There is a difficult interaction. Traditionally, shareholders bear the risk in that situation, but under sharia law, holders of sukuk bonds need to share that risk if the bond is to comply with sharia law. If the bond holders bear the risk, they expect a higher return, which would make the sukuk product more expensive for taxpayers than a conventional bill. That gives rise to a challenge, because we could find ourselves meeting the demand for sukuk products from retail and wholesale markets, ending up with a bill issuance programme that incurs additional costs for the taxpayer, because the rate of return is higher to reflect the higher degree of risk faced by the sukuk bond holder.

Philip Hammond (Conservative, Runnymede and Weybridge)

My hon. Friend has studied the Government’s response carefully. Is it clear that the motive for the programme is debt management? Is it clear that the Government will proceed only if they can reduce the overall average cost of debt, or is there some other motive that suggests that the Government might issue the bills even if the cost is higher than that of conventional finance?

Mark Hoban (Conservative, Fareham)

My understanding of the Government’s response is that it is clearly their intention to ensure that the cost of the sukuk bills is in line with that of conventional ones. It is important for the Committee to understand how the Government intend to get there, given the size of the bill issuance programme that they are contemplating, and the need to ensure that the bills are compliant with sharia law, which means that holders must participate in some of the risk. There is a different level of risk for people who invest in an asset and those invest in a sovereign issue, so I am keen to hear from the Minister on that subject. These are important issues.

Another risk arising from bills issued by the Government, as opposed to those issued by others, is that, at the moment, a Government-backed bill attracts a low-risk rating in terms of the capital resources required by a bank. I expect that the Government intend to ensure that the risk attached to sukuk bills is sufficiently low that any bank holding them is not required to hold additional capital. That creates another tension, because if these are meant to be risk-sharing bills to satisfy sharia law, they must therefore have a higher risk than sovereign-issued bills, and carry a greater capital requirement. I hope the Minister understands that tension and will respond to it in her remarks.

An earlier clause dealt with the way in which rules governing stamp duty were being used by companies to avoid paying that duty.As I understand section K of the consultation document, we are in danger of imposing a double stamp duty. Stamp duty will be paid on the acquisition of the asset underlying the lease, and when the lease is sold back to the Government, there will be a further stamp duty charge. That, too, will add to the cost of the measure. Will the Minister clarify the Government’s thinking? Are they content with a double hit for stamp duty, or are they seeking to create a situation whereby Government-backed transactions avoid that double charge? If they can avoid such a charge, does that leave a window open for others to exploit?

I am conscious that I have spoken at some length on an enabling clause, but I think it is an important topic for the Committee to debate. It raises some challenging issues about the cost to the taxpayer of issuance of this nature; about how it will be structured to minimise additional capital requirements placed on banks seeking to hold these issues; and about how we structure the measures correctly so that the right type of assets are included in the underlying lease. It is important to raise these issues now, when the Government are contemplating this as a matter of principle, rather than simply waiting until the introduction of secondary legislation, when we will get into the detail and the mechanics of the measure.

Greg Hands (Conservative, Hammersmith and Fulham)

May I echo many of the concerns raised by my hon. Friend the Member for Fareham and develop some of his arguments? I totally agree with his points about the complexity of the issuance, the potential cost to the taxpayer, and the question of what may, or may not, happen to the non-sterling proceeds of the issuance. With your permission, Mr. Cook, I should like to speak at some length, because I have almost a decade’s experience in Government bond markets and related activities such as derivatives, structured notes and so on, both in London and in New York.

I want to illustrate some of the dangers that the Government may face by providing some examples from past Government issuances of structured notes. There are two things at work in the clause. The first is the Government’s desire to encourage Islamic finance, which is partly a political issue, but it partly a general and laudable intention better to align investors and borrowers, which is part of the well-functioning financial system of a proper financial market.

Kitty Ussher (Labour, Burnley)

I am sorry to interrupt the hon. Gentleman when he is just getting into full flow. I look forward to the enlightenment he will provide the Committee from his expertise in this area, but I was just wondering why he said that a desire to promote Islamic finance was a political desire?

Greg Hands (Conservative, Hammersmith and Fulham)

I mean “political” not in a party political sense, but purely in the sense that, almost by necessity, what all Governments do is something political; it is an aspect of public policy.

The second question—and this should be a separate question—is whether the Government should propose that they themselves act as an issuer of a sharia-compliant security, which is effectively a structured note. Traditionally, the United Kingdom, in common with most other western G7 countries, has avoided becoming an issuer of this kind of structured note and finance for reasons which, as I shall explain, have absolutely nothing to do with sukuk or sharia law. I think we need to have a genuine debate about that: it is not just about Islamic finance, but whether the UK Government should become an issuer of structured notes in general, and of sukuk in particular.

I shall explain what a structured note issuer is in due course, but that is what we are proposing in the vaguely worded schedule 46. Although the Government’s intention is to legislate for sukuk issuance, the rules as they stand would allow the issuance of almost anything, as long as it did not have what the bond market calls a coupon, which is an interest payment. Many dangers arise for the UK, not just operationally, but for our standing as one of the world’s best-reputation borrowers in the market.

Sukuk, however we want to look at it, is a form of structured note issuance. It might not belong to the structured notes that grew up in the 1980s and 1990s, when coupons were linked to all kinds of exotic indices and so on, but it is nevertheless structured in a way that determines that those issues are highly unlikely to be liquid, or to be transparent in their pricing. Structured notes are tailor-made bonds or other securities tailor-made for the requirements of an investor, where the cash flows are not typically the kind of liability sought by the issuer. Clearly, Her Majesty’s Government and the Debt Management Office would not normally like to have such a liability on their cash flow. I am not an expert in the narrow, specialist field of Islamic finance, but know rather a lot about structured note issuance. It seems highly unlikely that the Debt Management Office would want to keep the sukuk cash flow on the books, as that would lead, almost inevitably, to a derivative transaction especially, as my hon. Friends the Members for Fareham and for Runnymede and Weybridge have pointed out, if the cash flow is denominated in another currency.

I urge the Minister to provide information and explain whether she expects the Debt Management Office to swap the proceeds. Typically, that would be into some kind of sub-LIBOR funding, which would provide cheaper financing for the Government in theory, but with a number of risks attached, which I shall discuss. So far, the debate on sukuk has focused largely on the needs of investors. I want to talk about the UK’s reputation as a borrower in the market, which is absolutely vital, especially at a time when our volume of issuance—our volume of borrowing—is going up all the time. The reputational risk to the UK could be considerable if we take the route that proposed in clauses 151 and 152, and in schedule 46.

While the Government have taken on the role of providing sharia-compliant investments, the UK’s interests as a sovereign borrower have taken second place in the debate. Sovereign borrowers behave in particular ways in the market. Generally, they behave in a conservative manner, and with good reason: they have reputations and triple-A ratings to preserve. Sometimes in the past they have got things wrong—not, thankfully, in the United Kingdom, but I shall use as an example the Kingdom of Belgium Ministry of Finance, which got into awful trouble about 15 years about by entering into all kinds of structured finance in which it really should not have become involved. It bet a huge amount of taxpayers’ money—tax proceeds—on further exchange rate mechanism convergence, at a time when Belgium was already dependent on ERM convergence. Essentially, it bet the bank on that, and the whole thing went pear-shaped in 1992 and 1993 when the ERM blew apart.

There was an enormous cost to the Belgian taxpayer—not just the pure cost but the damage to Belgium’s reputation as a borrower. I am using Belgium as an illustration, but the position is not exactly the same for the UK, because it will probably swap the proceeds from the sukuk issuance back into sub-LIBOR funding. However, a severely negative impact on one’s reputation as a borrower if one is careless, if not slightly cavalier, in one’s approach to the capital markets could be very telling. The people who made all the money out of the Belgian fiasco were not the Belgian taxpayers who were forced to foot the bill, nor the Kingdom of Belgium Ministry of Finance, which was the issuer, but the banks.

At the time, there were investment bankers in London who, at the end of each year, would calculate three figures: first, how much the Kingdom of Belgium Ministry of Finance had lost that year in its structured finance transactions; secondly—tongue in cheek—the cost that that caused to the Belgian taxpayer; and thirdly, the likely impact on their bonus for that year. I cannot remember the exact figures, Mr. Cook, but they were astronomical. It was the Belgian taxpayer who ended up footing the bill. The damage to Belgium continued for some time.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am listening with fascination to the story my hon. Friend is recounting. This is clearly in large part an issue of scale. Can he indicate what proportion of the Kingdom of Belgium’s debt is raised in this structured finance form? Will he suggest that the Minister might like to tell us whether the Government have any ideas about the proportion of sharia-compliant debt that would be safe to have in the overall mix to prevent the problems he is talking about?

Greg Hands (Conservative, Hammersmith and Fulham)

On the second question, I am unable to provide an answer. On the first question, it was not the Kingdom of Belgium that issued structured notes or raised finance in that way. The Kingdom of Belgium essentially betted the bank on off-balance sheet derivative transactions that were structured in a not dissimilar way to how the structured note market works, often with similarities to sukuk, which I shall come on to later. I was using that as an example to show how a sovereign borrower, not in this case in an example of borrowing, could suffer a very negative impact to its reputation and triple-A credit rating.

Another example at the time, perhaps even more relevant in the issuance of structured notes, was that of the US Government agencies. They were all effectively part of the US Government—Fannie Mae, Freddie Mac, the federal home loan bank system—which were all triple-A rated and going directly into the issuance of structured notes. A lot of these would have extremely exotic structures.

On the face of it, the investor would get a triple-A rated US Government risk, denominated in US dollars—all the same things that we are talking about here today with regard to the sukuk issuance to a UK domestic issuer. However, the coupon or payout on the bond would be linked to an exotic index, quite often a currency exchange rate. It might have been linked, for example, to the deutschmark-peseta exchange rate. Essentially, the investor would be paid a very high coupon in return for taking the risk on an exotic index. It might have been an index of commodity prices, for example. It might have been oil-linked bonds, which I think are going on today. My point is that structured notes have been around for a long time. The sukuk, although having a different motivation and philosophical basis, will have a similar structure.

What happened with the federal home loan bank issued bonds? They were all triple-A rated, issued by a sovereign or quasi-sovereign entity into the domestic market, denominated in US dollars. One could not imagine a more perfect and easy investment for a US domestic investor. Unfortunately, most of the bonds went wrong because the bet that was inherent in the structuring of the bond ended up being wrong. A large number of people in the United States in the early to mid-1990s thought that they had a perfectly safe, triple-A-rated Government investment that would pay a high coupon, but it ended up paying them almost nothing. One might even see parallels with CDOs and CMOs in the US. One could say, “So what? The investors should have been aware of what they were getting into and instead followed a buyer beware policy.”

My only point is that in this case it was not the damage to the reputation of those selling that kind of instrument—the investment banks—that was particularly severe, but the damage to the reputation of the issuer or borrower, which in that case was the federal home loan bank system, also known as the US Government. That reached a particular height in 1995, when an investor called the US army facilities management fund had been investing in a huge number of those securities, which were issued by a separate part of the US Government. The bonds that were issued ended up paying absolutely no coupon at all. The US army facilities management fund was at that time a short-term money market fund driven essentially by post-cold war base closures, and all that those responsible for it had to do was park the proceeds into the money markets until the end of the financial year. However, for reasons only known to them and the investment bank advisers, they decided to bet the proceeds of that on the market through structured note issuance generally issued by the federal home loan bank, which is a different part of the Government. When that reached the front page of The Wall Street Journal, the real damage was done not to the US army, but to the federal home loan bank system as an issuer of those notes, and that greatly concerns me.

Mark Todd (Labour, South Derbyshire)

This has been an interesting discussion of an area of policy with which, I must admit, I am not familiar, but I have still not found the relevance of the hon. Gentleman’s points to the issue. Is he suggesting that there is some risk that the British Government might use tools of this kind as a means of raising funds? Some of his examples suggest that that is his concern. Surely that is a matter of public policy, rather than a point about the precise content of the Bill. Or is he concerned about the damage to the reputation of the City and the availability of these products generally? I am not clear what his argument is.

Greg Hands (Conservative, Hammersmith and Fulham)

The hon. Gentleman raises some interesting questions. I think that it is a mixture of all of those. The Financial Secretary told us earlier that those products will be extremely complex—I think she described them as “uncharted territory”. I am suggesting that the UK, as a sovereign issuer of debt, should be extremely careful before getting into that uncharted territory. Secondly, I do not believe that the Islamic or Muslim communities in this country would be the real winners in this or that those lobbying for it have been purely from those communities. Among the biggest lobbyists for such issuance have been the banks, and I believe that that is because the products will be very complex, as the Financial Secretary has already agreed. The big winners from this kind of issuance are likely to be my former colleagues who work in activities related to the Government debt market and in structured derivatives.

Mark Todd (Labour, South Derbyshire)

The issue of the regulation of those products will be pursued separately, because that would be an obligation on the Financial Services Authority. We are debating the mere availability of products of this kind within the UK. I leave it to the Financial Secretary to respond, but I assume that, were they to be available, they would be regulated in the normal way so as to protect against any damage to the reputations of both the investors and the wider financial community. The hon. Gentleman, however, may have other assumptions.

Greg Hands (Conservative, Hammersmith and Fulham)

The hon. Gentleman makes a very good point, but history shows that it is extremely difficult to regulate structured note markets, partly because they are so lacking in transparency. It is difficult to price that kind of thing. Often a structured note could only be priced by three people in the world: the person at JP Morgan, the person at Morgan Stanley, and the person at the Union Bank of Switzerland. I have not been able to study the precise structure of sharia-compliant instruments, but, in my view, there is an extreme risk, because the banks are likely to be taking a large amount of money out of those products. Let me take you back to the example in the ’90s of the federal home loan bank system, Mr. Cook.

Stewart Hosie (Scottish National Party, Dundee East)

Does the hon. Gentleman agree that the vagueness of the regulations and the schedule associated with them allow very few people, and yet almost anybody, to be involved? The clause may provide for the involvement of people and for a person to be able to be specified as a body corporate—a company possibly formed only for the purposes of raising money through alternative finance arrangements and maybe independent of the Treasury.

Greg Hands (Conservative, Hammersmith and Fulham)

Absolutely. The hon. Gentleman makes a powerful point about some of the dangers. As he rightly pointed out, both the clause and the schedule are extremely vague. It sounds like the sort of company that might be set up under the regulations would not be dissimilar to a special-purpose vehicle, the like of which has been in the news a lot in the past year. Such a vehicle could issue things like collateralised debt obligations or collateralised mortgage obligations, a large number of assets are parked into a vehicle and the ensuing cash flow out of the other side is what the investor gets. To my mind, there are a lot of similarities between the two products.

With the federal home loan banks’ issuance in the 1990s, there would typically be a small issuance—which I think we are likely to be talking about with these sukuk bonds——of, say, $25 million in principal. I clearly recall being on the trading floor when one of those $25 million structured notes was issued. The bank in question, which I worked for, was proud of itself for having taken a million dollars out of the transaction. That was, and still is, a very lucrative part of finance, and the bank did incredibly well.

Finance profits from complexity, especially from instruments of extreme complexity, where the number of people who can price them can be counted on one hand. Who were the losers in that? After the ensuing swap transaction, the federal home loan banks ended up with sub-liable funding—quite nice funding—of probably liable minus 25, which was very attractive compared with the plain vanilla bond that the federal home loan banks could have issued. The real loser was, of course, the investor.

If the investor had been in a position the next day to put a call in and seek evaluation of that bond independently—regrettably, for the bank concerned, years later that happened—they would have been surprised to find that the valuation the next day, even before the bond had settled, was only 96 instead of their principal of 100, because the bank had taken 4 per cent. out of the transaction. I think that that is the kind of thing that we have to be extremely careful of with structured notes. We may say “buyer beware”—whoever bought that bond should have been aware—but here we are talking about the issuer being the United Kingdom Government, which is where my major concerns come in as a politician rather than as a banker.

We face a reputational risk if we are the issuer of this kind of financial instrument. Sukuk bonds are fine in principle and we want to encourage Islamic finance. As I mentioned earlier, the Government should have an interest in combining matching investors with issuers. Nevertheless, if it would lead to reputational risk for the United Kingdom Government as the issuer of the securities, we need to debate this more clearly. Bear in mind, sometime afterwards the investment bank, or whatever it is that sold the security in the first place, will have long disappeared, but the name left on the piece of paper—that sukuk bond—will be the United Kingdom Government.

It is worth pointing out that there are not that many triple-A sovereign borrowers left: the United Kingdom, Germany, France and, despite the problems in the ’90s that I described, the United States, are all triple-A sovereign borrowers. It is not impossible for a sovereign borrower to be downgraded. Fifteen years ago it would have been inconceivable that Japan could be rated anything lower than triple-A, but it is now a double-A minus rated sovereign issuer.

Brooks Newmark (Conservative, Braintree)

I have listened to my hon. Friend and it has been hugely instructive, but his examples were, in many cases, assets that were sub-prime, so the underlying assets were at risk and the Government were effectively layering their triple-A security on top of sub-prime assets. What I am not clear about in what the Government are doing and where their argument is going is in respect of where the risk lies with the underlying assets such as with the Federal Homes Association—Fannie Mae, Freddie Mac and so on—and as we have seen recently in the sub-prime market.

Greg Hands (Conservative, Hammersmith and Fulham)

The answer is twofold. First, at least according to the Bill and the two clauses with the schedule, it is impossible to know. It sounds like property might be implied. It says it includes land, but it is not any clearer than that. It sounds to me as though almost anything could be put into that vehicle. The bigger risk, in my view, is that the investor will end up with a pretty raw deal because the bank is highly likely to take out a large amount of money in the middle and we could end up with investors who are very angry with the UK Government, which is something we ought not enter into lightly.

Traditionally, sovereign issuers such as the UK and the Debt Management Office, have been very conservative borrowers. There is a good reason for that. Reputational risk is extremely important in the markets, especially with an issuer like the UK Government, who are about to start issuing rather a lot more gilts and other instruments than in the past. It is vital that we preserve their reputation. The reputation of the UK Government as an issuer in the sovereign bond market is likely to be at risk if we go down the road of issuing structured notes in general and sukuk bonds in particular. The clauses in the schedule in front of us allow us as a Government not only to issue sukuk, but to issue pretty much anything, so long as it does not pay a coupon and does not pay interest. It may even be collateralised on sub-prime assets, which was another point made. I think we should pause, debate what we are looking at here and be careful that what we are getting into is in the best interests of the United Kingdom.

Kitty Ussher (Labour, Burnley)

I found that extremely interesting and I defer to the hon. Gentleman’s expertise. I was for some years a country-risk analyst and sovereign-debt analyst for the Economist Intelligence Unit, so I am very aware of mistakes that Governments can make across the world and I can assure him that it is not our intention to do anything remotely similar to the examples he gave. We have not decided whether to issue a sovereign sukuk, we will only do so if we think it is in the overall interests of the UK, including value for money for the UK taxpayer. We would not issue something that we knew had a significant risk premium or had any likelihood of affecting our credit rating—we would have no interest at all in proceeding down that route.

Jeremy Browne (Liberal Democrat, Taunton)

During the speech by the hon. Member for Hammersmith and Fulham, the Minister intervened to ask what he meant by the Government having a political motivation, which he then clarified. Is there a political motivation in what the Government are seeking to do in this field? Do they see potential diplomatic or cultural benefits from going down this path?

Kitty Ussher (Labour, Burnley)

No, not necessarily, and that is not the reason we are doing it. I was going to come on to our motivation, because it is important. There are two motivations, one more important than the other. The first and most important is that entering these uncharted waters, as I happily said previously, will enshrine the City of London as an international centre of expertise in issuing sukuk, both sovereign and corporate.

Greg Hands (Conservative, Hammersmith and Fulham)

Does the hon. Lady at least concede that the question of whether the City of London takes a lead on Islamic finance is a different question from that of the UK Government as an issuer of sukuk bonds?

Kitty Ussher (Labour, Burnley)

Of course, and it is because the City of London already has a comparative advantage in this area and because deals originating from all over the world are being done through London in this area in the entirely private sector that we wish to give a fillip to that, to the greatest extent that we can, by making the very clear PR and economic point that this is something that the UK Government recognise as important. We want to send out a marker that we wish it to continue.

There is also an extremely important point here about the learning curve that we are rightly being forced to climb to see whether this is in the national interest. We are uncovering little issues here and there around the tax and regulation system that affect not only a potential UK sovereign issuance, but also the corporate issuances that routinely take place. We feel that by working with the industry to address each of these issues as they arise, we will create a more conducive atmosphere for entirely private sector activity that leads to more jobs and greater prosperity in the City of London.

Greg Hands (Conservative, Hammersmith and Fulham)

The Minister mentioned that she was an analyst of sovereign risk, so perhaps she might think back to the origins of most of the important markets in London at the moment, such as the euro bond market. All those are now centred in London and do extremely well. In none of those cases was the UK Government the very first issuer of a new product. Surely, she must see that we can easily separate the future of the City of London from the role of HMG as a borrower.

Kitty Ussher (Labour, Burnley)

Of course, an enormous number of things happen in the City of London that have not been done by Government, and we welcome that. But there are other examples of innovative practices that have started off in the public sector, such as methods of trading, for example, IT systems. The point I would make to the hon. Gentleman, and more generally to his party, is that we feel—and there seems to be an extremely broad consensus out there—that the road we are currently travelling, which may or may not eventually lead to a sovereign sukuk issuance, is likely to help entrench London as the world’s leading place for Islamic finance. Given that a number of Islamic countries are currently perceived as emerging markets, and so developing quite rapidly their ability to issue corporate sukuk, we think there is huge potential here to be tapped by London, and now is the time to do it, when our actions could potentially help.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank the Minister again for giving way. She is being generous. Surely she must see that it will not enhance the City’s reputation at all if the bond issuance goes wrong and investors end up out of pocket because the banks have taken too much out of it. If investors have instruments priced at 98 or 99p in the pound the next day, that is likely to do great damage to the reputation of the City of London and that of the Government.

Kitty Ussher (Labour, Burnley)

By definition, if a policy goes wrong, it is not a good thing for the Government who have proposed that policy. That is why we have not made a final decision. We will only do this if it is in the broad interests of the British economy and the taxpayer and demonstrates sufficient value for money. If we feel that, once launched, a sovereign sukuk would not be able to attract a return that was in our interest, we would not proceed. We have not got to that point yet, and we need to get as far as we can before making that final judgment. I have an enormous number of points to deal with, and would like to make progress.

I said that there were two main motivations for proceeding in this way, and that the first and main motivation was the boost we felt it would give to jobs and prosperity in the City of London. The secondary motivation is that we feel it may indirectly help the development of Islamic retail products—for example, sharia-compliant high street savings accounts—if the outlet on the high street were able easily to invest in sharia-compliant Treasury bills, therefore ensuring that the entire investment chain is sharia compliant.

That would be an indirect effect, based only on anecdotal evidence, but it fits with our broader policy objective of ensuring that nobody in this country should be denied access to conventional financial products—savings, insurance and so on—simply because of their faith. It is about having a level playing field for the relatively small number of people who currently feel excluded because of their faith, which is by no means all Muslims, it is important to say. I hope that that answers the hon. Member for Taunton’s question. It is not our intention to attract a different class of investor, or—although there may be spin-off effects—to curry favour with a certain sector of society or certain countries around the world. We have two aims and the first and most important is economic, for the City of London.

On the time scale, as the hon. Member for Fareham made clear, we published on 2 June the response to a consultation which did not include a final decision on whether to proceed. There are a number of issues that have not yet been resolved and some of the questions raised today involve issues that have not yet been resolved, so while it is important to take the power in the legislation that is before us, we will not proceed until we have been able to discuss these issues more widely. The final regulations that are brought in, if indeed we decide to proceed—and I think this answers another point that was raised—will be subject to affirmative procedure and so will be debated at that point.

Philip Hammond (Conservative, Runnymede and Weybridge)

To take the Minister back a moment, I have not been following the emergence of this market as closely as my hon. Friend the Member for Hammersmith and Fulham has, but she just said that one of motives of the Government was not that of attracting a different class of investor to UK Government securities. That surprises me. I had always assumed that one of the motives for looking at this initiative was the assumption that there was a class of potential investor, potential buyers of UK Government securities, who felt excluded from that market at present because of faith-based restrictions on the products they could be involved with. That could include domestically based investors as well as potential overseas buyers of UK Government paper. Why does she not regard that as a potentially beneficial avenue, a potentially beneficial source that could be tapped by this initiative?

Kitty Ussher (Labour, Burnley)

That is a very important point. As I said when I discussed the indirect effects that could be positive and affect the sharia-compliant retail market, it may be, for example, that a sharia-compliant bank, or a bank offering sharia-compliant current accounts or savings accounts to the British population might find it useful to have the whole investment chain sharia-compliant. In that sense, it will attract a different type of investor. I was thinking more of whether we are trying to tap funds from the middle east and extremely wealthy people who want to invest in sharia-compliant securities. I would be delighted if they wanted to invest in UK plc and they would be welcome to do so, but our research suggests that a slightly higher return is required to guarantee that we would attract that type of investor and we do not think it is in the UK taxpayers’ interests to arrange a product specifically to provide that kind of return. Of course, there is nothing in a sharia-compliant sovereign issue that implies that one has to be a sharia-compliant investor in order to buy it; we did not think it would work because, if we had to offer a higher return in order to attract some of the individuals I just referred to, everybody would want it and so there would be distribution problems.

The most important point is that we aim to ensure that when these products are launched on the market, as far as the end user is concerned, they look the same as any other T-bill. They are obviously structured in a very different way, but we hope to structure it in the least complicated way so that the sukuk, to the end user, does not look any different in risk from a conventional T-bill. That is why we are not going to go for extremely complicated products. I should clarify what I mean by “uncharted waters”. We are in uncharted waters because we have not done a sukuk sovereign issue before, but the actual products we intend to launch, if we decided to proceed down this route are not uncharted waters at all—we are proposing a plain-vanilla ijara structure of the kind that is widely traded internationally and so would not have the potential for margin-grabbing from the institutions and banks that, as the hon. Gentleman mentioned, could take an enormous amount out of it. Our intention is that the products should be completely understood by the market and should have the same risk rating as any other sovereign issue. The British Government are rightly proud of their triple-A rating in that regard.

Greg Hands (Conservative, Hammersmith and Fulham)

I wish I could share the Minister’s confidence that she will avoid banks trying to take out too large a margin from these transactions. The language she is using highlights the dangers here. She was talking about how the bills would look conventional. That is what has happened in the past: people have bought into products where the issuer was a triple-A rated Government. Denominated in their own currency, they looked as safe as houses, but turned out to be anything but. The Minister talked about easily tradable securities. The Government expected a rolling market of about £2 billion in principle of those securities. One of the answers to their consultation said that in order to guarantee a liquid issue, they would need a principle probably in excess of £1 billion. Is she envisaging a large number of pieces of £25 or £50 million, or does she envisaging one or two big benchmark issues of £1 billion? That will make an enormous amount of difference to the likely success of the measure, and especially—to return to a point that I made—to the reputation of the UK as a borrower.

Kitty Ussher (Labour, Burnley)

We have not decided precisely the nature—

Greg Hands (Conservative, Hammersmith and Fulham)

Will the hon. Lady give us an indication?

Kitty Ussher (Labour, Burnley)

I cannot give an indication, because we have not decided. We are holding a consultation about the nature of a programme of issuance. We think that it would be about £2 billion in total. We want to make sure it is as successful as possible, and we are taking advice on these points. We have not decided whether to proceed, but all those points will become clear if and when we do so.

Peter Bone (Conservative, Wellingborough)

The Minister is working hard to explain the Government’s position, but there are many ifs and buts, and a great deal of uncharted water. She has said: “We have not made a decision on that; we are delegating it to regulations and we will bring it in when we think it is in the national interest.” Would it be better not to introduce anything at this stage, and come back next year when Ministers have made a decision? The measure could be debated in Parliament before we go into action. It is not clear why there is a rush to do this now, in such a confusing way.

Kitty Ussher (Labour, Burnley)

I am sorry if the hon. Gentleman thinks that I am confusing him. I am attempting to create some clarity and light amid some rather large questions that were raised this morning, and I will do so for as long as it takes. We thought it was simply sensible government to take the power in this year’s Finance Bill. Obviously, if we decide not to proceed with a Government sukuk issuance, that power will not be used. We have not yet decided whether to proceed; we have said that we will decide—or at least give an update—by the time of the next pre-Budget report. If the Opposition wish to oppose the taking of that power, I advise them not to do so, given the huge consensus of support in the City of London for our proceeding as fast as possible. I will continue to attempt to shed as much light as possible on the matter, in the hope that that will reassure the hon. Gentleman.

Peter Bone (Conservative, Wellingborough)

I was not trying to imply that the Minister was confusing; I was just saying that the legislation is confusing. I understand that, if the measure is put into practice, it will go through the affirmative statutory instrument process. The problem with that is that we cannot amend it: we have to accept or reject it. That is one of the disadvantages of not doing this through primary legislation.

Kitty Ussher (Labour, Burnley)

If the hon. Gentleman thinks, either at this stage, or at that later stage, that we are not doing the right thing for Britain, he is within his rights to reject it. I must say, however, that given that the Debt Management Office routinely issues Treasury bills, on a minute-by-minute basis—that is a completely standard procedure—the idea that we have to debate every single change on the Floor of the House in great detail, together with the ability to amend the measure, could be destabilising. We think that we have done it right: we are having a debate now, and if we decide to proceed, the regulations will be laid according to the affirmative procedure. We are consulting in the open as fully as we possibly can.

Mr. Hobanrose—

Kitty Ussher (Labour, Burnley)

I am conscious of the fact that I have an enormous number of questions to answer, so I will give way to the hon. Gentleman, then move on to another question.

Mark Hoban (Conservative, Fareham)

The Minister referred to the importance of the issuance for the development of the retail market in the UK. What assessment has she made of the appetite for a £2 billion issuance? Are there enough savings in the UK market to absorb bills of that extent, or does she expect that some of these bills will be sold to overseas investors?

Kitty Ussher (Labour, Burnley)

We do not mind who buys Treasury bills. We do not think that there will be any lack of appetite for them, compared with other products. One reason why we decided to proceed with a consultation on T-bills, rather than larger gilts, is that we believe that they will be even more liquid, and that demand is extremely well established. I do not know whether that answers the hon. Gentleman’s question.

Mr. Hobanrose—

Kitty Ussher (Labour, Burnley)

I feel as if I am going up and down like a yo-yo. I will give way to the hon. Gentleman one last time, and then I will make progress.

Mark Hoban (Conservative, Fareham)

The Minister has not answered my question. What I seek to understand is what appetite there is among existing UK-based Islamic retail financial organisations for an issuance of about £2 billion. Is there £100 million in savings out there to be invested in the bills, or is it £2 billion, £3 billion or £4 billion? The Government talk about a £2 billion issuance programme. It is important to know what appetite in the institutions the measures aim to help and develop.

Kitty Ussher (Labour, Burnley)

It is entirely up to those institutions whether they wish to purchase Government Treasury bills and invest in them. We have not taken the £2 billion and disaggregated it; it is entirely up to the market, which is extremely liquid. We have examined the amount of issuance required to achieve sufficient liquidity to ensure that the bills can be traded easily, as well as demand among investors, which is how we came up with the figure £2 billion, but it would not be right to set a target for the proportion that should come from Islamic retail institutions as opposed to the broader investor base which, thankfully, would happily invest in a large number of Government securities whether they were sharia-compliant or not. [Interruption.] I am going to make progress.

I was asked about foreign currency issuance. It is right that we have taken powers to make payment in foreign currency, but we have no intention of issuing any sukuk not denominated in sterling. We are taking the power more broadly, simply to mirror the provision in the National Loans Act 1968 that gives the Treasury the power to borrow in foreign currency. To put it in context, the Treasury issued a five-year US dollar bond in 2003, but it has not issued bonds denominated in a foreign currency since then, and we have no intention of doing so in that area. It is simply a matter of legal consistency.

The original question posed at the beginning of this debate was how we would ensure sharia compliance. As our consultation document says, there are a number of ways for institutions to ensure the sharia compliance of similar securities. They can use a board of internationally recognised scholars appointed by a bank or other institution; their own board of internationally recognised scholars; or an internationally recognised Islamic standard-setting institution such as the Accounting and Auditing Organisation for Islamic Financial Institutions or the Islamic Financial Services Board.

We have not decided which of those that we will use, but it is obviously in our complete and manifold interest to ensure that the security, if and when we launch it in the market, is perceived as sharia compliant. We will take advice from legal firms and investment banks if we pursue that route on issuance. It is standard practice for advisory firms to approach sharia scholars on behalf of their client, which in this instance would be the Government. We will make our procedure entirely clear.

Greg Hands (Conservative, Hammersmith and Fulham)

What happens if the underlying asset in the vehicle or company referred to in the schedule changes? Surely, that would prompt another assessment of sharia compliance. What would happen if the new assessment said that the bills were no longer sharia-compliant? Presumably, the market would tank and the UK’s reputation as a borrower would again suffer a severe negative impact.

Kitty Ussher (Labour, Burnley)

I sometimes get the impression that the hon. Gentleman is trying to talk the measures down. I am not sure that that is in the national interest. I would be interested to know whether, if we solve the problems that he identifies, he would be in favour of proceeding—[Interruption.] The type of asset has not been decided; it will be made publicly known once it is. It will be sharia-compliant, so if we decide to rotate what is in the special purpose vehicle, we will not put anything into it that is not sharia compliant, for precisely the reason that he mentioned. We have no incentive to get into that situation.

On the issue of assets, there has been understandable uncertainty about who will own the asset in the ijara structure if we decide to issue a Government sukuk. The asset will remain on the Government’s balance sheet, and we will keep full control over whatever asset it is. We are simply designing a legal construct that is sharia compliant. Ownership or control of the asset will not be passed over to anybody outside Government. It would not be in our interests to do so.

That point relates to some of our earlier discussions about risk. The measure involves risk sharing, in the sense that an asset is subdivided and used to launch Treasury bills in the market that are backed by that asset. We will not proceed if there is any additional risk. The risk will be exactly the same as that for any other sovereign security that is issued. The sharing comes from using a special purpose vehicle to securitise and subdivide the asset so that there is more than one holder. That is where the sharia-compliant sharing notion comes from. I hope that that answers the questions asked by Opposition Members.

The issue of a double charge for stamp duty land tax was raised. We are aware of that issue, and we announced in the Budget that we will address the problem in next year’s Finance Bill after consultation. The consultation document is due to be published on 26 June.

Mark Hoban (Conservative, Fareham)

If that issue, which is important in structuring the product, is to be addressed in next year’s Finance Bill, why can we not debate the measure in next year’s Finance Bill?

Kitty Ussher (Labour, Burnley)

Because we thought it sensible to take the power now. We wanted to demonstrate to the constituency with which we are working that we are serious about doing this. We also wanted to increase the opportunities for debate, which I would expect the hon. Gentleman to favour.

A point was raised about whether the Debt Management Office will swap the proceeds that it receives from any potential sukuk issuance. I have said that we will undertake only sterling issuance, so the question of swapping the proceeds back into sterling does not arise. I am advised that the issuance of a sukuk will not require the use of swaps or other derivatives. I hope that that reassures the hon. Member for Hammersmith and Fulham even further. While we are in uncharted waters with the possibility of the Government issuing a sukuk, it is not perceived as a complicated product by the end user.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank the Economic Secretary for her generosity in giving way, and I accept her assurance that no swap or other derivative transactions will be involved. May I take her back to some of the costs of the issuance? I think that we are talking about one-month, three-month and six-month Treasury bills, but there has been no appreciation of the cost of setting up those issues. There is presumably a certain cost in ensuring that they are sharia compliant. There is a certain cost to the banks in structuring the issue. A fair amount of cost will be involved in marketing the issues, at least for the first few times. How can all those costs be built in, while still making competitive one-month, three-month or six-month Treasury bills?

Kitty Ussher (Labour, Burnley)

If we think that proceeding with this matter is not in the overall interests of the taxpayer, we will not proceed. However, I point out to the hon. Gentleman that there will be huge reputational advantages if we manage to achieve this proposal. It will attract significant business to the City of London, which will lead to increased taxation revenues.

I return to the fundamental point that I made at the beginning of my remarks: we will do this only if we feel that it is in the national interest. We will proceed up to the point where we can have a full understanding, both of all the benefits and costs and of any regulatory changes that are required. When we have the legal basis for proceeding, we will take a final judgment about whether it is something that a sensible Government would do in the national interest. A preliminary indication shows that the potential wider economic benefits are substantial, which is why we are pushing this as far as it will go.

Mark Hoban (Conservative, Fareham)

At what point does the Economic Secretary believe that the cost to the taxpayer of this issuance, compared with other issuances, becomes so great that it is not worth proceeding down this route? There is a premium to be paid for these bills, which will fall on the taxpayer. At what point does she think that it is not worth proceeding, if there is a premium over conventional bill issuance?

Kitty Ussher (Labour, Burnley)

As I have already said, we intend the bills to be perceived by the market as conventional products or as near as possible to that. As I have just said, we will make the value-for-money judgment at the appropriate point and provide an update in the pre-Budget report. I cannot quantify exactly what the relative cost-benefit analysis is because we have not done it yet.

Mark Hoban (Conservative, Fareham)

I am rather pleased that I have triggered a debate on this issue. It has been interesting.

The Minister’s response troubles me, because a large number of areas have yet to be resolved, but the Minister is seeking in the Bill powers to enable the Government to introduce resolutions to implement a sukuk issuance programme. The work does not appear to have been done to justify the economic benefit of such an issuance.

The Minister began by saying that there were two benefits. The first was to signal clearly to the wider market the importance of developing the UK as a centre for sharia-compliant products. It would be good to see London continue to lead the way, but I am not sure that the Government should driving that through the issuance of products. I accept that the Government have taken steps by presenting the third Finance Bill to create a level playing field on tax matters. That is important, and the Government can continue to take the lead by enabling such change, but that does not necessarily mean that we need to issue sukuk bonds.

The second argument made by the Government was about developing retail products, but the Minister gave no indication that there is a significant retail demand to justify a £2 billion programme of issuance. She made some important points about how we can review all sorts of regulatory and tax issues along the way. I am sure that it will help to facilitate the development of wholesale markets, but I do not think she persuaded the Committee of the economic rationale and the benefits for the taxpayer of pursuing that route. However, she expects us to give the Government powers under this clause and schedule 46 to introduce secondary legislation to facilitate the issuance.

There are important points to be made about the structure and the use of scholars. This is a fraught issue, and I have spoken to a number of private sector providers who have tried to structure products with the help of scholars. They got quite a way down the route, but were then been refused permission, or did not receive agreement from the scholars that those would be sharia-compliant products. It is important to understand how the Government will seek to validate these products as sharia-compliant, as significant issues are attached to the measure.

I am uncomfortable that the Government have not made much progress. The Minister spoke about using legislation in the Finance Bill 2009 to correct the issue of double-hitting stamp duty, which suggests that the Government could have waited until 2009 to introduce the provision and have a proper detailed discussion in advance, so that we, as Parliamentarians, knew what it was we were going to pass into law.

Clause 152

Philip Hammond (Conservative, Runnymede and Weybridge)

One might say that we are going from the sublime to the ridiculous. This part of the Bill is entitled “Miscellaneous”, and now we discover why. Clause 152 is headed “Power of Treasury to make payments”. Some of us might have thought that the Treasury already had power to make payments; it certainly seems to have been doing so for some time. It is a parliamentarian’s delight: wonderfully obscure language. We are going to deal with a situation

“where a financial claim relates to...a case where money is paid into a government account, but the money should not have, or need not have, been paid into that account, or...a case where money should have been, or needed to be, paid out of a government account, but the money...was not paid out of that account, or...was paid out of that account, but not as it should have been, or...needed to be, paid.”

Justine Greening (Conservative, Putney)

Might one of those examples be when all those pensioners sent the then Chancellor, now the Prime Minister, cheques in the post for 74p, or however little the rise in pension was that year?

Philip Hammond (Conservative, Runnymede and Weybridge)

My hon. Friend makes an interesting point, and I was going to go on to ask the Minister to explain just what the issue is here. One can easily conjure up visions of somebody discovering in the Treasury that decades—perhaps centuries—after practice began, payments were made that were not properly authorised to be made, or receipts were paid in that should not have been paid in. This is billed as a tidying-up exercise but we clearly need to understand what lies behind it. We are told that there have been cases where types of claims could not be paid under the Treasury’s existing powers, and we are invited to believe that amounts that might have been paid out were not able to be paid out. Clearly something has triggered the clause; something has happened that has drawn attention perhaps to a problem that has existed for a very long time but has only now become apparent.

It does slightly conjure up the tantalising suggestion that amounts that have been paid erroneously into Government accounts have been trapped there for very long periods. Is there some huge pot of money that we are not aware of, indeed perhaps comprised of all the pensioners’ cheques—[Interruption.] The hon. Member for Taunton is right. I do hope so. I spend a great deal of my time looking, largely in vain, for huge pots of money hidden somewhere in the Government accounts. Generally what I find is that detailed exploration yields huge black holes that were previously undiscovered, rather than huge pots of money.

Jeremy Browne (Liberal Democrat, Taunton)

I wish the hon. Gentleman well in his ongoing searches, but I invite him to speculate that the clause may be helpful for the Government as they seek to untangle the mass of tax credits that have been erroneously paid in or out of the various accounts of private individuals.

Philip Hammond (Conservative, Runnymede and Weybridge)

The hon. Gentleman may be right and it may be that the Economic Secretary will tell us that it is the tax credit debacle and fiasco that is at the root of the problem. It might be better if I now listen to her and then respond.

Kitty Ussher (Labour, Burnley)

I am sorry to disappoint both the hon. Member for Taunton and the hon. Member for Runnymede and Weybridge, but the need for the legislation is not as a result of either of the issues that they have raised. The best way to characterise it is possibly as “a bank error in our favour” which can then be returned, but the issue does not relate to an amount of money that is in error transferred into a Government account, or indeed in error transferred by anyone to anyone involving the Government estate, which can be returned. There has simply been an odd anomalous historical situation where, let us say, due to a processing error, a large amount of money has been transferred into a Government account by mistake, noticed, rectified and sent back perhaps the next day. If it is a large amount of money, obviously we would have garnered some interest as a result of it remaining in our account overnight. In some circumstances, there has been no mechanism for that interest to be paid back to the person it belongs to. The reason we are addressing the matter now is that—

Jeremy Browne (Liberal Democrat, Taunton)

Will the Minister give way?

Kitty Ussher (Labour, Burnley)

Mid-sentence? All right, go on.

Jeremy Browne (Liberal Democrat, Taunton)

I am sorry, I thought it was a semi-colon. The example the Minister just gave may not be a vast amount of money for an individual citizen, but it would nevertheless impact on people who have wrongly had their tax credits transferred to the Government in a way that has been unfavourable to them and who have had to wait before being reimbursed.

Kitty Ussher (Labour, Burnley)

I am not in any way implying that the amounts involved in tax credit overpayments are insignificant for the individuals involved. The complete answer to the hon. Gentleman’s question is that the normal HMRC revenue-raising and disbursement operations are not covered by the proposal before us today; it tends to be large institutions or anything involving a bank transfer that we are dealing with. It goes potentially wider, but the proposal does not cover the individual benefit payments that he rightly raises.

The measure before us is simply to create for the public sector an arrangement that already exists in the private sector. If there is “a bank error in your favour” between banks, there is a protocol between banks for resolving the interest payments that land in one institution when they should be in another. There is not a similar protocol within the public sector for simple historical reasons. I was asked, “Why now?” We have had a number of ad hoc cases. By definition, the problem is arising in the private sector—it is giving us money by mistake. It is simply a clerical error and we are giving it back immediately.

I would love to go into details, but obviously it is commercially confidential and would lead to all sorts of excitement if I start explaining which bank has done what. It is not an enormous amount. A couple of cases recently have prompted us to see whether we can work in a more sensible way. There is no Exchequer cost, because, by definition, we were not expecting those amounts to come into the public sphere, so there was no budget for them. The measure before us simply enables us to have a vires for making payments from central funds in order to solve those problems, rather than opening ourselves up to the risk of having to resolve the matter in court, which would lead to an unnecessary legal cost and be a waste of taxpayers’ time. We can do that relatively simply by updating our provisions here.

Philip Hammond (Conservative, Runnymede and Weybridge)

I have two questions. First, implicit in what the Economic Secretary is saying is that this situation has existed for a long period, it was not considered to be material such that it needed to be addressed, and now it has come to be considered material. Does that imply a change in the frequency or magnitude of such errors, because clearly that is the implication? Secondly, although she gave a clear explanation, I think that the whole Committee—I hope it is not only me—will be dependent upon her explanation, because what is written in the Bill could have much wider ramifications. Will she confirm that this is only about the repayment of interest on amounts inadvertently or erroneously transferred and that it goes no wider?

Kitty Ussher (Labour, Burnley)

Yes, I can reassure the hon. Gentleman that it goes no wider than that. With regard to why now, I do not know, but it happens that there have been a cluster of occasions when we have had to consider how to pay back the interest from erroneous bank errors in our favour. We have been able to resolve each of them case by case in rather convoluted ways, but the energy required to do so made us think that we should perhaps make life easier for ourselves, so there is no secret agenda to pay money to anyone. With regard to HMRC, I should probably add that it has ex gratia powers to settle such claims, and it is only the central Exchequer accounts that do not.

Peter Bone (Conservative, Wellingborough)

Will the Economic Secretary explain the scale of those recent errors? There might have been only a few, but if they are due to IT failures it is important to know whether massive amounts of money were transferred. I know that she mentioned commercial confidentiality, but surely she could tell us how many millions of pounds are involved.

Kitty Ussher (Labour, Burnley)

I want to respect commercial confidentiality, but it is probably all right for me to say that the amounts transferred are potentially very large and the interest tends to be tens of thousands of pounds in the recent individual cases.

Philip Hammond (Conservative, Runnymede and Weybridge)

I cannot let that pass without commenting that an amount that has been transferred cannot be potentially very large: it is either very large or it is not. It is probably fair to record that the Economic Secretary has given the Committee the critical assurance that this is narrowly focused and deals only with the specific issue of interest in erroneous payments. That having been clarified, we have no further concerns.

Clause 153

Philip Hammond (Conservative, Runnymede and Weybridge)

The clause is linked to clause 152 and provides, among other things, that any issue made under subsection (2) in respect of a payment to be made under clause 152

“shall be recorded in the daily account under section 15(5) of the Exchequer and Audit Departments Act 1866”

—one wonders whether it shall be recorded with a quill pen.

I wonder whether there is something more significant here. The clause seems rather long and detailed if all it does is tell us that any payments made under clause 152 shall be recorded in the books of accounts. Perhaps the Economic Secretary will clarify why it is necessary to have this complicated mechanism set out in half a page for what I would have thought could be done with three key strokes on a computer somewhere.

Kitty Ussher (Labour, Burnley)

The lesson that I have drawn from today’s debate is that while it was probably useful to have been in a former life a sovereign risk analyst, perhaps I should also have had some training in parliamentary counsel so as to be able to answer the specific legal and drafting points that have arisen. Thankfully, we have people to advise us, and I can reassure the hon. Gentleman that all that clause 153 does is ensure that any payments that are made under the new power to simplify things, as I have previously described, are subject to audit by the Comptroller and Auditor General, as indeed are any payments made by Government. Payments from these funds can generally be made only for services specifically authorised by Parliament via primary legislation, but the Treasury is obviously not required to seek Parliament’s separate approval for every single payment made under the powers.

Philip Hammond (Conservative, Runnymede and Weybridge)

There’s an idea.

Kitty Ussher (Labour, Burnley)

We would be here for some time if that were the case. Instead, the Treasury is required to seek the approval of the CAG and his team, who check on Parliament’s behalf that the Treasury is making proper use of the powers to provide the right checks and balances before payments are made, to enable the Treasury to make the payments needed to meet the Government's obligations without undue delay while ensuring that parliamentary control is not jeopardised. Since it is the avoidance of undue delay in the accumulation of interest that we are trying to achieve here, this is a sensible thing. I am sure that the writing of things in a book is now being done electronically, and if the hon. Gentleman wishes to know the exact details, I will be happy to let him know.

Clause 154

Philip Hammond (Conservative, Runnymede and Weybridge)

This is a more substantive issue. The clause introduces legislation enabling existing HMRC extra-statutory concessions to be made into statutory provisions by the issuing of a Treasury order. In other words, tax law will be made by statutory instruments rather than by primary legislation. While statutory instruments are extremely useful and have a role to play, particularly in this kind of detailed, technical legislation, as my hon. Friend the Member for Wellingborough pointed out this morning, they have the major disadvantage of being unamendable. The clause proposes that the Treasury or HMRC will be able to propose that an existing extra-statutory concession be given statutory effect with such amendments as they see fit, but Parliament will not have any opportunity to add its own amendments, even, for example, to remove Treasury or HMRC amendments so that the extra-statutory concession is given statutory effect in the form in which it has in fact operated for many years.

Existing extra-statutory concessions normally give relaxations in tax liability to which taxpayers would not be entitled under a strict interpretation of the wording of the legislation. They are usually introduced on the grounds of fairness, where it has been discovered that an unintended consequence arose, or for administrative simplicity, for example where a class of taxpayer would have to be pursued for a trivial amount of tax in a way that does not make any sense for anyone, or for clarification of poorly drafted legislation.

There has been effort in recent years increasingly to put extra-statutory concessions into statute, mostly through the tax law rewrite process. I am told that the famous example, much beloved of accountants, is the Christmas party exemption, which is now enshrined in section 264 of the Income Tax (Earnings and Pensions) Act 2003, but previously had effect as an extra-statutory concession. It could be called the “anti-Scrooge” concession, and waives the usual prohibition on tax-deductibility of entertaining expenses in the case of reasonable entertainment of staff at Christmas.

During the case in the House of Lords of R v. Her Majesty’s Commissioners of Inland Revenue applied for by Adrian John Wilkinson, it became apparent that HMRC’s powers to make extra-statutory concessions on the strict application of the law were not as wide as had been understood. The case established that HMRC has discretion under section 1 of the Taxes Management Act 1970

“to formulate policy in the interstices of the tax legislation”.

Although it is not for me to criticise the judgment, I would have thought that it would be for HMRC to interpret rather than to formulate policy in the interstices of the tax legislation. The judgment goes on to say that HMRC can formulate policy

“dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of Parliamentary time.”

One sometimes sits in Committee and is moved to wonder what a disproportionate amount of parliamentary time would be. The judge clearly thought that there was such a concept. Crucially, the judgment established that HMRC’s powers under section 1 of the Taxes Management Act 1970 could not be construed

“so widely as to enable the commissioners to concede, by extra-statutory concession, an allowance which Parliament could have granted but”

had not granted. Since Parliament could have granted anything, I take that to mean that an extra-statutory concession cannot be used to give a concession to a taxpayer that Parliament could reasonably have anticipated could have arisen and that Parliament could have given but chose not to, because either the Government or the Opposition of the day chose not to bring forward such a concession. My layman’s understanding is that HMRC’s powers are thus restricted to dealing with the unforeseen, the unenvisaged, the trivial and the minor, rather than creating any new significant provisions.

Hopefully the Minister will be able to give us an update, but I understand that HMRC is reviewing the legality of all currently operational extra-statutory concessions. The Committee will be interested to know how many of them there are and whether HMRC still expects to complete that review in autumn 2008. Since seasons in Government-speak often have a non-intuitive meaning, for example the spring normally ends when Parliament rises for the summer recess and the autumn has been known to run till the Christmas recess, could the Minister clarify, in calendar-speak, when we can expect that process to be completed?

In summary, the point is that extra-statutory concessions had become a lazy answer to the problems of slack drafting and gaps in tax legislation. To that extent, we acknowledge that clause 154 is a practical measure to ensure that concessions relied on by taxpayers and HMRC can be preserved. That is proposed to happen through a Treasury order to give the concessions statutory effect. Therefore, they cease to be extra-statutory concessions and become statutory provisions. Will an extra-statutory concession that falls foul of the Wilkinson judgment be able to be enacted under the clause? Clause 154 (2) defines an “existing HMRC concession”. What if the concession was ultra vires ab initio? I assume that that is the effect of concluding that a concession contravened the provisions of the Wilkinson judgment.

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new Clauses amending section 74 of the Finance Act 2003) - Clause 154

Nicholas Winterton (Conservative, Macclesfield)

I am delighted to be back in the Chair. I am sorry that I could not be with you this morning. I was attending a thanksgiving service for the late right hon. Lord Pym, who had been a Conservative Government Chief Whip, Foreign Secretary, Secretary of State for Northern Ireland and Secretary of State for Defence. If you can have a thanksgiving service that is enjoyable, it was indeed enjoyable.

I regret to say I have been advised that somewhat slow progress was made this morning. I am not looking at either party when I say that, because clearly debate and discussion is important, but I have a feeling—I hope—that some progress will be made this afternoon. We were dealing with clause 154 stand part, and I believe that the spokesman for Her Majesty’s Opposition was on his feet, and I ask him to rise again and to be succinct in his comments to the Committee. I call Mr. Philip Holland.

Philip Hammond (Conservative, Runnymede and Weybridge)

Hammond. We have been colleagues for only 11 years, Sir Nicholas. I think that I can assure you that progress will be made this afternoon, as you require. I am trying very hard not to take the situation before the start of the sitting regarding the quorum as being any reflection on the gravity of the matters we are discussing.

This morning, I was asking the Minister whether the provision was designed to deal with all extra-statutory concessions—in other words, the ending of the extra-statutory concession regime—or whether it was designed to deal only with those extra-statutory concessions that fall foul of the Wilkinson judgment. No doubt the Minister will explain precisely the circumstances in which it will be used in due course. I was making the point that the definition of an existing HMRC concession under the clause is

“a statement made by the Commissioners...and having effect at that time, that they would treat persons as if they were entitled to...a reduction”.

The essence of the Wilkinson judgment is that some of these statements clearly were ultra vires, and I am asking whether extra-statutory concessions that have operated, but have now been demonstrated to have been ultra vires from the beginning, can be the subject of the powers in this clause to turn them into statutory concessions. Following that thought process, why it was not decided to use primary legislation—perhaps a clause in the Bill—to legislate on the extra-statutory concessions that are in use, but that are thought perhaps to fall foul of the Wilkinson judgment, in a way that would be rather more transparent than this order-making power. Why cannot we just have a clause in the Bill that lists the various provisions so that we make proper primary legislation to give effect to them? Could it be that Ministers fear attempts to amend them, given that the orders will clearly not be amendable? Will the Minister clarify the process that is being used?

Are there any circumstances in which the fact that an extra-statutory concession has been unlawful—that it was operated ultra vires—could give rise to a demand on a taxpayer? I do not claim to be an expert on tax law, but I have at the back of my mind the case of a well-known proprietor of a famous grocery store in which the courts held that an arrangement that the Revenue had made with regard to the tax payable was unlawful and ordered that the Revenue essentially negate the arrangement.

I wonder whether the process of identifying extra-statutory concessions as possibly being without foundation in law until such time as the processes set out in the clause are used to determine statutory concessions could give rise to a taxpayer finding the concession effectively withdrawn retrospectively because it had never been lawful, with an additional liability thus arising on the taxpayer. If the Minister is able to confirm that there will be no such circumstances, that would reassure a great many people who have benefited from extra-statutory concessions.

John Penrose (Conservative, Weston-Super-Mare)

If the Minister is not able to give that reassurance, perhaps she will indicate that if she does discover any circumstances of this kind, she will extend a retrospective amnesty to anybody affected so that they are not required to come up with a retrospective payment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I like to push the envelope, but I suspect that asking Ministers to grant retrospective amnesties might be pushing the envelope a bit too far. I am sure that everyone on the Committee is anxious to hear the Minister’s response.

Will the Minister clarify something about the way in which the clause will be operated that is not clear from reading the Bill or the explanatory notes? Is this a one-off provision to deal with the stock of unlawful ESCs?

The Financial Secretary to the Treasury (Jane Kennedy)indicated assent.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister nods, which implies that that is the case. Can we therefore take it as read that once the backlog is cleared, there will be no use of a procedure whereby something is delivered as an extra-statutory concession and then formalised into a statutory concession through the processes set out in clause 154? Is this exercise a one-off clearing of the backlog?

Will the Minister tell us about the consultation process? Presumably there will be consultation over the ESCs that are proposed to be enshrined in statute. The clause gives a power to introduce them in a form that is amended as HMRC thinks fit. This is not simply a question of the industry and Parliament rubber-stamping existing concessions. There is clearly an opportunity for HMRC to tweak the concessions that have operated and to enshrine them in statute in a slightly different form. I understand that it is intended that there will be consultation with tax professionals on any proposed orders to be made under this clause. Will the Minister give a sense of the time scale and the period of consultation that would be allowed?

There will be some important issues to consider because, almost by definition, an extra-statutory concession is more flexible than a piece of statute. If these rules from the Revenue practice manual, as operated without statutory basis, are to be enshrined in statute, they will have to be defined, perhaps in a language and in a way that is more formal and prescriptive than the manual requires. Therefore, when the drafts are published, there will be issues at the margin about the extent to which the concession is being extended, or the scope to which it is being reduced. There will be considerable desire within the profession for an opportunity to study and comment on them.

The Minister has indicated that she will be able to say something about the number of extra-statutory concessions and the timetable for reviewing them. That will give the Committee a sense of the operation’s scale. Will she tell us how many of them are expected to be enacted into statute through the use of this clause?

Nicholas Winterton (Conservative, Macclesfield)

Before I call the Financial Secretary, I apologise profusely and personally—yet again—to the hon. Member for Runnymede and Weybridge for my error in respect of his surname. I give a commitment that I shall do my best not to make the mistake again during this Public Bill Committee.

Jane Kennedy (Labour, Liverpool, Wavertree)

It is a pleasure to be under your chairmanship this afternoon, Sir Nicholas, and I look forward to scampering through the clauses with you. You should not apologise too profusely; it keeps the hon. Member for Runnymede and Weybridge humble if he has to respond to other names occasionally.

The hon. Gentleman’s description of the clause was absolutely right. A decision of the courts in the Wilkinson case made clear that the scope of HMRC’s administrative discretion was somewhat narrower than had previously been supposed. That decision triggered the review of the extra-statutory concessions that have been a feature of the tax system for decades. In the course of the review, HMRC has identified approaching 500 extra-statutory concessions, the vast majority of which, I am advised, are within discretion, as the law defines them, and which the Wilkinson court case allowed. They are perfectly okay. They will continue and do not need the clause we are discussing.

This clause enables us, in a relatively short period of time, to come forward with the remaining extra-statutory concessions that can be brought back within the law using this procedure, but it is possible that we will not be able to bring a small number of extra-statutory concessions that remain on to a statutory footing. We need to consider what we will do in the event of those concessions being considered to be valuable and of benefit to the taxpayer and to the Government.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Minister tell the Committee the status regarding current practice for the small number to which she referred? What is the message to taxpayers who are benefiting from them at the present time?

Jane Kennedy (Labour, Liverpool, Wavertree)

I hope that you will allow me, Sir Nicholas, to ask—forgive me for doing so—for support for this clause without being drawn too far into the detail because the review is ongoing. I will want to think very carefully about some of these concessions and the way in which we respond, particularly regarding those that appear difficult to fix, in the sense of putting them on a statutory footing. Some concessions will be widely supported among the public, and we will need to think about how we respond to the effect of the court judgment. There are about 20 or so for which that might be the case, and there are tens of others that we think need to be brought back on to a statutory basis as a result of this clause.

Philip Hammond (Conservative, Runnymede and Weybridge)

I understand that a review is in progress, but it is clearly important for taxpayers to know whether they can rely on an extra-statutory concession on which they have been advised in the past. It would have been very easy for the Financial Secretary to say, “I assure taxpayers that they will be safe; they have nothing to worry about.” However, she did not say that, so I wonder whether we should read anything into that.

Jane Kennedy (Labour, Liverpool, Wavertree)

I was going to come to that point. The concessions that have already been given will stand. No tax decision that has already been taken is affected by this, but going forward, we need to put on a statutory basis those concessions that need to be put on to a statutory basis, and we will then need to consider what we do about the others. The normal concessions that HMRC can make—this has been clarified by the court case—are very small in monetary terms, but they might be of significance to the individual. For example, HMRC would normally not be expected to pursue £100 of tax if gathering the revenue was going to cost £200. It is perfectly lawful for HMRC to make those sorts of concessions. We will need to consider how we deal with others that have become the practice and for which I think there may be public support.

Philip Hammond (Conservative, Runnymede and Weybridge)

I think that the Minister is telling the Committee that, regarding those familiar concessions that might fall foul of the Wilkinson judgment, the message to taxpayers is that they will not lose out as a result of this obscure process. Nobody is going to find that they suddenly have a tax bill when they thought that they had a concession. If the Minister can confirm that, that would be very helpful, but can she explain to me—I am sorry, but I am not a lawyer—how, if a court has effectively struck down HMRC’s practice and found that unlawful, HMRC is able to carry on operating these extra statutory concessions in the meantime, given that I gather that the judgment was made some time ago? On what basis can that happen?

Jane Kennedy (Labour, Liverpool, Wavertree)

The hon. Gentleman makes several points. First, there will be no retrospective element regarding the decisions around Wilkinson and their effect. Secondly, he should never apologise for not being a lawyer.

Thirdly, in response to a serious point that the hon. Gentleman makes, HMRC has been working since the court case to identify the extra-statutory concessions and to then analyse which are within the law and which are ultra vires. That work is ongoing. Although I take the point that the hon. Gentleman makes, HMRC has taken this opportunity to bring forward a piece of amending legislation that will allow it not to have to wait until the next Finance Bill to introduce a change that will help people who rely on concessions regarding the concessions that can be brought on to a statutory basis.

The hon. Gentleman said that such a statutory instrument would be unamendable. We have this discussion about statutory instruments regularly, but I think that it would be an inefficient and wasteful use of parliamentary time to enact individual concessions in primary legislation merely to formalise existing and often long-standing tax treatments. The enabling power will allow only concessions that are already part of the fabric of the tax regime to be put on a statutory footing by the Treasury, so it would not be appropriate for them to be amendable anyway.

Philip Hammond (Conservative, Runnymede and Weybridge)

I think that the Minister’s colleague, the hon. Member for Islington, South and Finsbury, might have something to say about the Minister’s comments about lawyers in due course.

Is the Minister saying that when the powers in clause 154 are used, the effect will be to treat the extra-statutory concession as having always been a statutory arrangement? In other words, is the legal effect of the clause retrospective? Does it provide legal underpinning to the terms of the extra-statutory concession? I have to confess that, in practical terms, I like what the Minister is saying. She is, I think, telling us that no taxpayer will suffer retrospectively and that no one will find out that their extra-statutory concession for last year has been withdrawn because it was never valid. Although I am glad that that will be the effect, I do not understand the mechanism for achieving that. Ministers cannot wish away the fact that HMRC has been acting unlawfully. They either have to make HMRC’s actions retrospectively lawful, or they have to find another way of underpinning the concessions.

Jane Kennedy (Labour, Liverpool, Wavertree)

I absolutely hear what the hon. Gentleman is saying and, intuitively, I think he is right. However, my advice is that the court decision does not strike down the concessions. A concession exists until the legislation takes over but because that seems so counter-intuitive to me, too, I would like to examine that in more detail and write to him with an absolute answer, for the avoidance of all doubt, about exactly what the legal position is and has been since the court made its decision.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am somewhat reassured that Ministers are as confused as we are about exactly what is going on here. I think that we share an objective. These extra-statutory concessions are useful. They are a part of the furniture. The most important thing about them is that they work in practice. I entirely accept her point that the great majority of them will continue to operate as extra-statutory concessions. Will she undertake to write to members of the Committee in due course? This might not be until the review is completed, but we need to understand which of the concessions are not lawful, which ones in that group will be dealt with immediately by clause 154, and how the effective underpinning of their status—their operation over the period between the judgment and the new legislation coming into force—will be provided. Which of them are not going to be enshrined in statute, perhaps because although they are nice to operate as extra-statutory concessions, they would not be appropriate to operate as statutory provisions? How are we going to deal with the situation that arises in that case?

I do not think there are any huge political axes to grind. We are discussing the administration of the tax system, but I have no idea how many individuals receive each of these extra-statutory concessions. If any of the concessions are widely used, leaving aside the question of retrospectivity, the arrangements and plans for the future of a significant number of taxpayers could be thrown into doubt. If the Minister would write to members of the Committee before Report, it would give us an opportunity to come back to this, should we need to do so.

Jane Kennedy (Labour, Liverpool, Wavertree)

I will, of course, undertake to write before Report, and although I will not be able to give details, I can certainly clarify whether HMRC can withdraw an unlawful concession. I understand that HMRC must give notice before any concession can be withdrawn.

Clause 155

Justine Greening (Conservative, Putney)

It is a pleasure to see you back in the Chair after our lunchtime break, Sir Nicholas.

We should pause and read this important clause carefully. The Treasury’s explanatory notes tell us that the clause is intended to help oil companies to ensure the supply of sulphur-free diesel—an important fuel in helping to improve vehicle emissions. When that is combined with ultra low sulphur diesel, the duty rates paid at the moment, which are in line with those for heavy oil, are unfair. There should thus be amendment so that combining sulphur-free diesel and ultra low sulphur diesel does not lead to rates of duty than are higher than they should be.

It might be helpful to put the clause in a wider context. The Department for Transport brought forward statutory instrument 2007/1608, which said that oil companies had to supply sulphur-free diesel to garages that sell more than 3 million litres a year, and ultra low sulphur diesel to garages selling less than 3 million litres a year, with effect from 4 December 2007. I understand that this was part of a broader attempt to help to move the industry towards the UK and European Union deadline of petrol and diesel at all garages being sulphur-free by 1 January 2009. However, there is an anomaly regarding ultra low sulphur diesel and sulphur-free diesel because, for various reasons, oil companies sometimes have to combine the two fuels. Rather than continuing to pay a duty in line with that for ultra low sulphur diesel, or for sulphur-free diesel, duty is charged at the rate for heavy oil—regular diesel—because the mixed fuel does not meet either definition of the two diesels.

Clause 155 amends the definition of what constitutes ultra low sulphur diesel by removing density and distillation requirements for the mixture to qualify as ultra low sulphur diesel, which means that the correct rate can be charged, rather than the rate for heavy oil. We do not necessarily oppose this attempt to correct an apparent unfairness in the duty rates, but I want to clarify a couple of points.

First, the clause provides that the provision is treated as having come into force on 4 September 2007. I want to check that, because statutory instrument 2007/1608 introduced a requirement to supply sulphur-free diesel to garage forecourts with effect from 4 December 2007, as was confirmed in a written ministerial statement on 26 July. The key date thus seems to be 4 December 2007.

I challenge that, because the background note to the clause in the explanatory notes states:

“The Government introduced a measure requiring oil suppliers to supply sulphur-free diesel...to garage forecourts from 4 September.”

However, the ministerial statement said that the requirement would come into force on 4 December. Will the Minister clear up the confusion about which date should be included in the clause? Should it be 4 December, which was when the SI came into force, or should it be 4 September, the date in the Bill? It is not clear why there should be a three-month difference.

It is a somewhat retrospective move to allow oil companies to get a rebate for oils that they have mixed in the past. Will the Minister tell us what calculations the Treasury has made about the revenue impact of clause 155 and the fact that oil companies will now be able to get a rebate for those blended fuel mixes for which they have paid at the standard rate rather than the reduced rate? The latest HMRC statistics show that about 12 million litres of sulphur-free diesel was released for consumption in 2006-07. What is the Treasury’s assessment of the amount of diesel that was blended that would qualify for that retrospective rebate?

We understand why the Government want to clear up what could be called an unfairness in the way in which the oils duty has worked for oil companies, but what about those who buy the fuel? With road tax, they are hit by retrospective tax rises that they cannot undo or avoid, yet the Government seem happy to tackle retrospectivity for oil companies. We do not disagree with the measure, but I take this opportunity to urge the Minister to consider the unfairness of retrospectivity in other areas of motoring, such as vehicle excise duty.

I shall make one more brief point. On broader issues, such as on vehicle excise duty, I am still waiting for answers to parliamentary questions that were due to be answered by 8 May. That was well over a month ago. I would appreciate it if the Minister would finally provide me with answers to those important questions, alongside her response to the issues that I have raised about the clause.

Nick Palmer (Labour, Broxtowe)

This clause, unlike some of the more abstruse ones, deals with an issue that we often get correspondence about. I would like to ask the Exchequer Secretary whether the difference in the price of diesel—there is no difference for unleaded petrol—between Britain and the continent reflects the standards of sulphur reduction in Britain, or whether other factors are involved, and whether that has influenced the setting of the duty.

Peter Bone (Conservative, Wellingborough)

I have probably got this wrong, but if the forecourt sells the diesel at a higher price because it expects to pay duty at a higher level and is therefore passing that on to the customers, that duty should go to the Treasury and the company should not get a rebate. I am not entirely sure that that has happened, but if it has it seems wrong that the Treasury is giving effectively a profit to the oil company.

Sir Peter Viggers (Gosport) (Con) rose—

Nicholas Winterton (Conservative, Macclesfield)

Before I call Peter Viggers, perhaps it would be appropriate to congratulate him on the award of a knighthood in the Queen’s birthday honours list. It is richly deserved and we all congratulate him.

Peter Viggers (Conservative, Gosport)

Thank you, Sir Nicholas. Praise from you is praise indeed.

When the Exchequer Secretary responds, she owes us another sentence or so of explanation. The explanatory note on the clause uses the passive, which is always used when someone is trying to obscure an issue. It says:

“The Government introduced a measure requiring oil suppliers to supply sulphur-free diesel (SFD) to garage forecourts from 4 September 2007. It was recognised that occasions might arise when SFD and ULSD need to be mixed to guarantee the supply.”

It was recognised by whom, and when? We would like to know the chronology, because a mistake has been made. There has been a failure to realise the full implications of mixing the two kinds of diesel. I do not fully understand that note, and I hope that the Exchequer Secretary will be able to make it clear.

Angela Eagle (Labour, Wallasey)

I hope that I can clear up the confusion, which has grown as the debate has progressed. This is a modest technical issue, which should not worry people too much. I will explain how it came about.

Clause 155 amends the definition of ultra low sulphur diesel with retrospective effect from 4 September 2007. The hon. Member for Putney is right about the wider issue of the Department for Transport issuing regulations for the provision of sulphur-free diesel. That is a good thing—let us get that on the record. Moving from ultra low sulphur to sulphur-free diesel is of benefit to air quality and lowers emissions. We all ought to recognise that that is progress. The Department for Transport made that mandatory from 4 December, and set the duty rate at the same level as for ultra low sulphur diesel, namely 50.35p per litre.

As the hon. Lady hinted, there is a higher duty rate for heavy oil of 56.94p per litre. Due to the distribution mechanisms, which get the different forms of oil and petrol mixed and then out to distribution centres and thenceforth on to the forecourts, there was an issue with the changeover period and with the run-in to sulphur-free diesel supply becoming mandatory. The problem that it caused was that under existing legislation, although sulphur-free diesel and ultra low sulphur diesel have the same duty rate, mixtures of the two did not meet either of the definitions in place from earlier times, and the law said that an oil that did not meet those definitions would automatically qualify for the higher rate.

Members of the industry suggested that there were practical problems in the transition from the old duty rate to the new mandatory regime with sulphur-free diesel and that, as a result of how the pipes and distribution systems work, if they happened to mix ultra low sulphur diesel and sulphur-free diesel in order to get supplies to the pumps in an appropriate way, the resulting oil, which would sometimes contain a tiny residue of other oils, would not meet either definition. We therefore created a circumstance for that period. Retrospectivity applies so that they could gear up to supplying sulphur-free diesel. Retrospectively, we will not charge them the higher rate if there happen to be traces of oils from the mixing necessary for their distribution. It is all perfectly simple, as hon. Friends and Opposition Members can see.

Because the industry was moving toward supplying sulphur-free diesel in a timely fashion for the mandation on 4 December, and in order for members of the industry to get their distribution mechanisms right, we gave the industry assurance that we would not charge a higher rate of duty for three months before, as any inadvertent mixing might put industry members outwith the definitions then in law. It is a transitional measure to facilitate getting supplies of sulphur-free diesel where they needed to be in a timely fashion for the mandation to come into effect appropriately on 4 December. I see that the hon. Member for Putney is itching to get to her feet, so I will gladly give way.

Justine Greening (Conservative, Putney)

Can the Minister confirm that the background note to the clause is wrong when it says:

“The Government introduced a measure requiring oil suppliers to supply sulphur-free diesel (SFD) to garage forecourts from 4 September 2007”,

and that it should read “4 December 2007”? That is where the confusion on our part arose. It is different from the ministerial statement, and I think that it is wrong. Can she confirm that?

Angela Eagle (Labour, Wallasey)

It sounds to me like it is wrong. I suspect that in the explanatory note, the two dates are simply mixed up.

I was asked about the revenue impact. It is nil. Ultra low sulphur diesel and sulphur-free diesel are charged at the same rate; it is only when they were mixed that the rate would have been higher. Mixing would not have happened if we had not given comfort that in the event of a technical breach we would not charge the higher rate, but then it would not have been guaranteed that supplies would be where they were meant to be in time for the mandation of sulphur-free diesel. It is purely a technical clause to shift from one system of defining fuel and fuel mixes to a more regulatory system under which sulphur-free diesel is mandated. It deals with the transition between the old regime and the new. I hope that hon. Members will be happy with those reassurances.

My hon. Friend the Member for Broxtowe is right to mention that fuel duty on petrol and diesel are the same. Differences in price, as I understand it, are due to bottlenecks in supply and slightly different ways of creating petrol and diesel, but I confirm that there is no tax differential between what the Government collect on petrol and what we collect on diesel. The price differences have to do purely with distillation, bottlenecks in supply, shortages of supply in the industry and so on, and have absolutely nothing to do with tax rates.

I hope that hon. Members will be happy to see clause 155 stand part of the Bill. It is wholly beneficial and will mean that there are less sulphur emissions, which we all want to see.

Clause 156

Philip Hammond (Conservative, Runnymede and Weybridge)

I read the clause and thought that I understood it. I then read it again and thought that I did not, so I looked at the explanatory note, which told me absolutely nothing. To be fair, that is what most explanatory notes do. They simply repeat what a person who can read will have discovered from reading the Bill. The clause will remove section 137(4) from the Customs and Excise Management Act 1979, a provision that says:

“For the purpose of calculating any amount due from or to any person under the customs and excise Acts by way of duty, drawback, allowance, repayment or rebate any fraction of a penny in that amount shall be disregarded.”

The explanatory note says that that is redundant because the halfpenny has

“ceased to be legal tender”.

It seems to me that that would reinforce the requirement for fractions of a penny to be disregarded. As I recall, the halfpenny ceased to be legal tender about 20 years ago so it seems rather odd that we are now taking the trouble to remove a subsection from the 1979 Act.

I got to thinking about the clause and realised that there is perhaps more to it than meets the eye. Rounding down to get rid of fractions of a penny in a total amount is perfectly sensible and we all understand the reasons for it. However, for amounts per litre, kilo or gram of a dutiable payment, which will be multiplied by many thousands or millions, the case for removing, eliminating or ignoring fractions of a penny becomes rather less obvious.

I remind the Committee that we are not introducing a disregard of the fraction, but removing the provision for the disregard of the fraction. When there is a fraction of a penny per unit and the person paying may pay for many thousands or millions of units at a time, there is a potential revenue implication from this measure. If the Exchequer Secretary can explain precisely what this is all about and why it is happening now, perhaps my concerns will be shown to have been unnecessary, but perhaps not.

Nicholas Winterton (Conservative, Macclesfield)

And I am interested too.

Angela Eagle (Labour, Wallasey)

Thank you, Sir Nicholas. It would perhaps have been tidier had these changes been made in 1984 when the halfpenny ceased to be legal tender. I was not in the Government then and from a quick look around, I suspect that nobody in the room was. Sir Nicholas, you are a long-standing Member of the House and I do not know whether you served on the 1984-85 Finance Bill.

Nicholas Winterton (Conservative, Macclesfield)

I am not sure.

Angela Eagle (Labour, Wallasey)

I note that you cannot remember, Sir Nicholas. Perhaps it would have been tidier to pass this measure in 1984. We decided to do it now because we got wind recently that businesses have been looking to manipulate their duty calculation methods to reduce their duty liability. Removing the subsection may increase revenue slightly, although we do not think that it will be by very much. It ensures equity and consistency. When the measure becomes law and removes fractions, HMRC will need a common calculation method to ensure equity and consistency between all those who pay.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister just made a slip of the tongue. To clarify, when she said that when the measure becomes law it will remove fractions of a penny, I think she meant that it will remove the disregard of fractions of a penny. It is the other way around.

Angela Eagle (Labour, Wallasey)

Clearly that is what I meant to say—my apologies for getting it the wrong way around. It shows what happens when one tries to extemporise rather than read boring speeches that have been written—[Hon. Members: “Harsh.”] Clearly the issue is the need for equity and consistency and for there to be no particular advantage, even if it is of a fraction of a penny, in people arranging their affairs to lessen their liabilities, albeit slightly. It is simply a tidying-up measure. We do not expect much revenue. I suspect that it should have been done 20 years ago.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am not sure whether the Exchequer Secretary has given way or finished—I shall go on as if she has given way.

I think that she is confirming that the rounding of fractions of the penny applies to the levyable unit of duty.

Angela Eagleindicated assent.

Philip Hammond (Conservative, Runnymede and Weybridge)

She is nodding her head, and the measure makes a lot more sense. I cannot understand why one would want to disregard a fraction of a penny when it may be multiplied by many thousands or millions.

Does the Exchequer Secretary agree that the explanatory note, once again, is highly misleading? If what she said is the case, the measure has absolutely nothing to do with the halfpenny ceasing to be legal tender, as the note says. It is perfectly possible—it is done in financial transactions every day—to calculate to many decimal places of a penny. It is worth doing so if one is multiplying by a big enough number. The explanatory note, which suggests that the abolition of the halfpenny is behind the measure, is simply not right, if I understand her explanation. Although there would be a necessity to disregard the halfpenny from a global duty bill of, say, Diageo plc, of £28,243,392.285, there is no reason to disregard the fraction of a penny per unit in calculations.

Nicholas Winterton (Conservative, Macclesfield)

In order to help Hansard, I personally took it that the Exchequer Secretary had sat down, and that the hon. Member for Runnymede and Weybridge had another innings. Does the Minister wish to reply?

Angela Eagleindicated dissent.

Clause 157

Philip Hammond (Conservative, Runnymede and Weybridge)

I remember fondly from my childhood saving stamps, which is what this measure is about. I do not know whether you shared that experience, Sir Nicholas. When I was preparing for this debate last night, it occurred to me that I was destined to be a shadow Chief Secretary because I can remember eagerly going to the post office to buy national savings stamps for which I had saved up. If I remember correctly, we used to get them in various denominations with pictures of Prince Charles on the ninepenny and Princess Anne on the one and sixpenny coin. I might be wrong.

Mark Todd (Labour, South Derbyshire)

The hon. Gentleman does not look that old.

Philip Hammond (Conservative, Runnymede and Weybridge)

I can assure the hon. Gentleman that I feel it.

My nostalgia is because the provision deals with the legacy of the era of savings stamps. I used to collect my saving stamps. When they had amounted to a worthwhile sum, which in those days was about £1, I would go into the post office and pay it into another defunct institution, the Post Office Savings bank, RIP.

Apparently, as national savings stamps and national savings gift certificates have been withdrawn, a relatively small sum of money—a few million pounds—remains stranded. I take it—I would be grateful for ministerial confirmation—that that sum represents money that was paid over and is represented by stamps that have effectively been lost or destroyed and will never be redeemed. The provisions give the Treasury a new power to make regulations which would require the Commissioners for the Reduction of the National Debt to transfer these monies—I think, in total, about £7 million—to the national loans fund. The explanatory note says, rather curiously:

“The tradition of using such funds to help defray the National Debt is no longer appropriate in today’s financial services environment.”

It is interesting that Parliament as a whole is dealing with the issue of dormant accounts and unclaimed assets in the dormant accounts legislation, which we still await in this House—the Minister might be able to give us some news on that. I was moved to wonder, and I was able to wonder aloud, because I found myself seated next to the chief executive of National Savings and Investments at a dinner last week—very convenient—why the unclaimed assets, or dormant accounts, as they effectively are, in National Savings and Investments are treated differently from the dormant accounts in the rest of the banking and building societies sector. As we know, the Government’s decision is that the assets that are stranded because accounts have gone dormant, people have lost their records or they have died without anybody becoming aware of it, and the money that is in those accounts will be dealt with through a statutory procedure that the Government are laying down, initially on a voluntary basis, and will be used for certain specified causes.

I am curious to know why the Government feel that money that to my mind is entirely analogous money—money that has been handed over by a saver and then, for whatever reason, not redeemed—should not be treated in the same way and be subject to the same regime that the Government have put in place for other unclaimed residual assets. Can the Minister answer that and perhaps throw some light on the progress of the Bill that is currently awaiting its Commons stages, and whether we are going to get the Bill before the summer recess? I am sure that members of the Committee, who might have the privilege of serving on the Public Bill Committee for that Bill—I know my hon. Friend the Member for Fareham is extremely interested in the issue—would find that of interest.

Nicholas Winterton (Conservative, Macclesfield)

I have to say, before the Minister replies, that it may be of interest, but not to this debate. The hon. Gentleman speaking for Her Majesty’s Opposition is anticipating the Second Reading debate on another piece of legislation. I hope that the Minister will take my guidance in dealing with the matter.

Kitty Ussher (Labour, Burnley)

It being the first time that I have risen this afternoon, may I say what a pleasure it is to do so under your chairmanship, Sir Nicholas. May I be so bold as to speak on behalf of the entire Committee in saying that perhaps we should pass our thanks to the maintenance department for fixing the light bulb, which seems to be somewhat quieter than it was last Thursday, although I notice that one of them has expired, but at least it has done so silently.

The hon. Gentleman who speaks for the Opposition rightly described the general purpose of the clause. It is not so much a policy issue as an accounting issue, as I shall explain. There is a residual amount of money of around £7 million from national savings stamps that have not been redeemed and also gift tokens. The former were first issued in 1917 and withdrawn in 1976 and gift tokens were introduced in 1947 and withdrawn in 1989. Those were managed by the Commissioners for the Reduction of the National Debt. The proposal is simply to give us a power to make regulation to provide for the transfer of funds held by the commissioners in those two examples to the national loans fund. There is no economic impact, but it is a sensible policy for a number of reasons.

First, the National Audit Office has rightly expressed concerns on the security and access controls of such out-of-date systems. We wish to develop a new National Savings and Investments residual account as the single secure repository for all funds remaining in such closed products where National Savings and Investments has not been able to make payment to its customers. We also want through that new product to make sure that we provide equality of interest rate treatment on all closed product holdings in line with the Financial Services Authority guidelines for treating customers fairly, which were not in operation when the initial products were developed.

Philip Hammond (Conservative, Runnymede and Weybridge)

I saw that point in the explanatory notes but, as I recall, national savings stamps did not bear any interest. They were non-interest bearing instruments, so what does equality of treatment in terms of interest mean? As I understand it, neither of those two products was interest-bearing.

Kitty Ussher (Labour, Burnley)

My understanding is that that is correct but, since those products were issued, National Savings and Investments has voluntarily adopted the banking code and advertising standards code and moved from having its own adjudicator to using the Financial Ombudsman Service to deal with customer complaints. It is working to comply on a voluntary basis with relevant FSA regulations. It would be more appropriate to review all those products.

I will answer the hon. Gentleman’s points in general terms. We feel that it would be better to set up a residual account to look at all these issues in the light of National Savings and Investments’ correct commitment to look at them alongside the new guidelines developed in that area.

The hon. Gentleman made points which I am now advised are outside the scope of this discussion.

Philip Hammond (Conservative, Runnymede and Weybridge)

I take your guidance, Sir Nicholas, that it would be improper for the Minister to refer to another Bill but what I asked her was why the Government do not consider it appropriate to treat these residual stranded assets in National Savings and Investments in the same way that they are proposing to treat similar assets in banks and building societies?

I am sorry to press the point but it is not good enough to have Ministers saying the reason we are doing this is because of equality of treatment with regard to interest and then when it is pointed out that the products in question do not bear interest not to have an explanation as to why they are proceeding in this way. Surely the code to which the Minister referred, admirable as I am sure it is, cannot have any relevance to a product that has no interest payable on it.

Nicholas Winterton (Conservative, Macclesfield)

If I can help the Committee and perhaps give the Minister a little time to sort out an answer for the hon. Gentleman, this clause is not about stranded assets. That is my advice and I believe it is correct. Perhaps the Minister will seek to respond to the hon. Gentleman as far as the question relates to this clause.

Kitty Ussher (Labour, Burnley)

Thank you, as ever, for your clarification, Sir Nicholas. It does of course relate to assets held by National Savings and Investments as a result of the savings schemes which have not been claimed. We are not discussing what they should be spent on, which will come under future legislation. It is simply an accounting change. It moves them from one bit of the Government estate, to use that phrase broadly, to the national loans fund. It updates, modernises and consolidates such pots within the national loans fund, as opposed to their being administered by the Commissioners for the Reduction of National Debt, which tends to involve portfolio management services. I hope that that provides clarification. I seem to have caused some discussion among my advisers regarding the hon. Gentleman’s point about the interest rate, so perhaps he will permit me to write to the Committee at a later date.

Philip Hammond (Conservative, Runnymede and Weybridge)

I will pay those who are not in the room the compliment of saying that none of them looks old enough to remember national saving stamps, so they might not know off hand whether they bore interest or not.

The Minister has not addressed the question of what ultimately happens to the money. I accept that this is an accounting transfer and I had hoped that she would have felt able to explain what the ultimate treatment would be. I am advised by my hon. Friend the Member for Fareham, who has been closely involved with the other Bill, which we shall not mention, that national savings are not included within it. If I may say so, I think the Minister is being a tad disingenuous in suggesting that this has nothing to do with that issue, because it is still unclear to us why national savings are treated differently. If it is more appropriate, I am happy for my hon. Friend to pursue that question when that other Bill, in due course, comes before the House.

Clause 158

Philip Hammond (Conservative, Runnymede and Weybridge)

It is perhaps unusual to have something so controversial so near the chronological end of a Bill of such a size, although, of course, we still have to deal with clauses that have been taken out of chronological order. Unless the Minister gives us some concrete assurances on this issue, we could have the last vote that we need to press in the chronological sequence of the Bill’s text.

The clause enables the Treasury to create, by regulation, criminal offences in relation to the allocation for payment of EU emissions trading scheme allowances. The background to the measure is that, in August 2006, the UK submitted to the European Commission its national allocation plan for phase 2 of the EU emissions trading scheme, which runs from 2008 to 2012. That plan sets out the basis by which allowances are allocated by the Government to firms participating in the scheme. The national allocation plan committed the Government to allocating 93 per cent. of the total available without charge, and to auctioning 7 per cent. The scheme is expected to continue after 2012 with a third phase, and I understand that the Government would like a higher level of auctioning in future allocation rounds.

The Government apparently envisage the need for provisions to create criminal offences relating to wrongful disclosure of confidential information in allocations for payment—that is, I assume, the disclosure of bid information at auctions. One is bound to ask, “Why now?” We are amending a provision that was passed only in the Finance Act 2007. What has changed in the meantime to lead the Government to think that criminal offences are required when they were not introduced in the 2007 Act or the draft regulations published under it? On the surface, this might seem like a tidying-up exercise, and the tucking away of the clause at the end of the Bill tends to reinforce that view. However, we know that we always have to read the small print, and we are 100 per cent. with the Government about trying to ensure that the emissions trading process operates well and that the allocation mechanism is effective.

Leaving aside the incompetence issue—why the Government are doing this now when the principal legislation was passed only last year—the clause actually gives rise to serious concerns of principle. How can it be acceptable for the Treasury to be given powers to create, by statutory instrument, a new category of criminal offence?

The explanatory notes talk in terms of a quite narrow category of offence:

“wrongful disclosure of...information in allocations for payment.”

However, that is not reflected in the open-ended power in the clause that we are being asked to consider. The Financial Secretary circulated a note to members of the Committee in which she said that the Government “currently intends” to use this power for an offence of wrongful disclosure. However, she very pointedly did not rule out using the power to create other offences. Nothing in the Bill limits the use of the power to the creation of an offence of wrongful disclosure.

The only limitation on the power to create new offences by statutory instrument relates to the maximum penalty that could be imposed in respect of such offences, which is the maximum penalty set out in the European Communities Act 1972. Incidentally, it would be interesting if the Minister could tell the Committee what those maximum penalties are. Are they turnover-related penalties?

Why does the wording of the clause not reflect the narrow category of offence that the Government are apparently envisaging? I do not want to sound too pompous or parliamentarian about this, but it really is not good enough for the Government to come along with enabling clauses in a Finance Bill that allow the creation of new criminal offences by statutory instrument.

Much as we have all appreciated the Financial Secretary’s guidance in the now significant number of letters and notes to members of the Committee during our consideration of the Bill, that does not limit in any way the Government’s ability to use the provision to create new offences at a later stage. We have, in fact, a catch-all clause, and there is no excuse for Parliament to sanction granting the Government such wide new powers to create new classes of criminal offence.

I have not been able to identify any safeguards, and we do need assurances about the provision’s scope. If the Minister reads into the record at this stage of the Bill’s progress that these powers will be used only in respect of offences related to unauthorised disclosure, we might be satisfied. However, we must have a clear commitment that these powers will be used in only that way. Perhaps the Government will be able to tell us that they are confident that they do not need to use these powers any more widely, in which case I will ask them to consider whether they could bring forward an amendment on Report to limit the scope of the powers to only the disclosure of information. If they do not do that, we will certainly want to do so.

Before I ask a question about the draft regulations, I draw my hon. Friends’ attention to the fact that the clause covers offences committed by not only companies—those in the marketplace will mainly be corporate players—but officers of companies or members of partnerships, including limited liability partnerships. Therefore, individuals could find themselves on the receiving end of this provision.

I have to admit to being slightly perplexed by the draft regulations that have been circulated. The Financial Secretary was kind enough to circulate draft emissions trading scheme regulations for 2008, which I take it have not been laid—I cannot find any record of them having been laid. We also have in front of us draft regulations amending those draft regulations. Why have the Government not simply withdrawn, or not laid, the initial draft regulations and incorporated into them the provisions of the second draft regulations? Instead, they have tabled the second draft regulations, which say:

“These Regulations may be cited as the Community Emissions Trading Scheme (Allocation of Allowances for Payment) Regulations”

and they go on to amend the first draft regulations.

I do not know of a precedent for presenting a statutory instrument, even in draft form, that amends an existing draft. Surely it would be more sensible—I will be very happy if the Minister is able to say that she will do this—to take both drafts away so that before the principal regulations are laid before the House, the provisions of the amending draft regulations are incorporated so that we have to deal with a single measure. Otherwise, as I understand it, the first substantive draft will be laid before the House and go through all the processes to become regulations, and immediately thereafter the Government will have to lay the second draft regulations to amend the first regulations. If it would help the Minister, I can probably find something else to say for a few moments—[Interruption.] I am trying to help the Committee.

Peter Bone (Conservative, Wellingborough)

Since I have served on the Joint Committee on Statutory Instruments, I have never seen such a procedure. Such a measure would normally be withdrawn, so I think that we do need clarification on that point.

Philip Hammond (Conservative, Runnymede and Weybridge)

My hon. Friend reinforces my point. I have been a Member for only 11 years but I have never seen such a procedure. I was completely startled by it, so I look forward to the Minister’s clarification.

Angela Eagle (Labour, Wallasey)

The hon. Member for Runnymede and Weybridge implied that this was somehow a hidden clause. It is in the miscellaneous part of the Bill simply because there is not a large amount of the Finance Bill taken up with emissions trading at the moment, so it fitted in the miscellaneous section. Miscellaneous does not always mean not important. I suspect that the clause is towards the end of the Bill partly because of the novelty of the area that we are in. Finance Bills have been going on for years and have taken on particular forms, but emissions trading has not been going on for years. It is a new and developing area of Government policy both domestically and at EU level—and, soon, internationally. Given that emissions trading and the issues surrounding it, particularly when it comes to raising revenue, are relatively novel arrivals on the scene, I suspect that hon. Members on both sides of the Committee will have to get used to the evolution of this particular area of activity, because it is set to grow in importance in the future. Part of the issue with which we are dealing is the novelty of the circumstances that we are in. We are trying to design regulations and legislation for a trading system that is in the middle of developing and of being negotiated, so there has to be a certain amount of flexibility as the process develops.

This clause will amend the legislative framework for EU ETS auctions with regard to the creation of criminal offences for the wrongful disclosure of confidential information relating to bids. The Government will create the offence through secondary legislation. As the hon. Gentleman rightly said, draft regulations were sent to Committee members to assist today’s debate.

The EU ETS was established with a strong lead from the UK, and it is the world’s most significant international emissions trading scheme. It is an important step towards establishing a price for carbon, with a view to ensuring that negative externalities are reflected in investment and consumption decisions. As the hon. Gentleman pointed out, the UK’s national allocation plan for phase 2 of the EU ETS set out the Government’s intention to auction 7 per cent. of UK emissions allowances. As set out in the UK Government’s vision for emissions trading, published on 30 October 2006, greater use of auctioning will help to strengthen the long-term integrity and efficiency of the EU ETS. It is essential to ensure that the auctions of EU emissions trading scheme allowances are robust and support the integrity of the scheme and the carbon market. It is essential to avoid windfall profits for power generators, which tend to make windfall profits if they do not have to pay for emissions. That is partly because we are trying to put in place a scheme in circumstances in which power generation has been going on before carbon trading or carbon prices were important. Those circumstances may not be ideal, but that is another novel part of what we have to do.

The hon. Gentleman is right that it is unusual to introduce criminal offences in this way, but it is not unprecedented. There are precedents for introducing criminal offences in the Finance Bill and in secondary legislation. The Finance Bill precedent is schedule 22 to the Finance Act 2000, which introduced such criminal offences with respect to the tonnage tax.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am not sure whether the hon. Lady is saying that the Finance Act 2000 introduced criminal offences or the power to make criminal offences by statutory instrument. Will she clarify the position?

Angela Eagle (Labour, Wallasey)

The 2000 Act introduced the power to make criminal offences in secondary legislation, and that is the precedent for which the hon. Gentleman asked. That is not a usual thing to do, but it is not unprecedented in Finance Bills. There are precedents for introducing criminal offences by secondary legislation, which the hon. Gentleman should take into account, including section 47 of the Transport Act 2000 and section 468 of the Companies Act 2006. There are also precedents for introducing criminal offences for inappropriate disclosure of information, which is what we are dealing with, such as section 206 of the Water Industry Act 1991 and section 393 of the Communications Act 2003. A more recent precedent that more of us will remember is section 39 of the Statistics and Registration Service Act 2007. There are therefore precedents for the measure, which is unusual, but it is not unheard of.

Peter Bone (Conservative, Wellingborough)

I am grateful to the Exchequer Secretary for those examples. Do any of them apply to EU-wide provisions? What discussions have we had with our European colleagues to ensure that the penalties for disclosure are the same across the EU?

Angela Eagle (Labour, Wallasey)

My understanding is that that is why the penalties for disclosure quote the EU legislation, which the hon. Member for Runnymede and Weybridge pointed out in his comments on the clause. As for the size of the penalties, I understand that the maximum allowed at the moment is a £5,000 fine, so we are not talking about huge amounts of money.

I want, however, to make the case for introducing criminal offences for the inappropriate disclosure of information. The auctioning of emissions and the robust nature of the carbon price will rely on confidentiality in respect of information in bids, especially if agents are used. The auctions are designed to allow the use of agents and intermediaries, and it is important, if the carbon price is not to be compromised or destabilised by the inappropriate disclosure of information, to introduce criminal offences, which act as effective deterrents to destabilising behaviour.

Philip Hammond (Conservative, Runnymede and Weybridge)

I do not disagree, but the Minister could have reassured the Committee hugely and avoided this debate if the clause had referred narrowly to the creation by statutory instrument of criminal offences related to the disclosure of confidential information. The purpose would then have been clear and narrowly defined. Whatever she tells us today, I have not yet heard a clear statement from the Government Dispatch Box that the legislation will not be used to create offences other than those relating to disclosure of confidential information.

Angela Eagle (Labour, Wallasey)

It is important to say that the auctioning of emissions allowances is novel, and that the framework needs to be flexible to allow the Government to learn from experience. I am not in a position to say that the measure will not be extended into other areas, but the issue about which we are most concerned is the inappropriate disclosure of information. Given that the situation is evolving, it is important not to cut off attempts to put flexibility into the Bill so that we can evolve structures as our understanding of how the markets work and what would destabilise them evolves.

The Government will clearly not do outrageous or unreasonable things, and the law requires that measures must be reasonable. The hon. Gentleman should take some comfort from that. At this stage in a fast-moving situation, I am reluctant to close down the Government’s options so that we have to keep coming back to primary legislation. Things move quickly, and measures will be subject, too, to multilateral negotiations at the EU and international levels.

Nobody has auctioned carbon or carbon permits before in that manner, and we are developing our approach and policy as we go along. We think that it is important that the carbon market should be robust and liquid, and that it should not be subject to the risk of being laid low by the behaviour of people wishing to profit from the inappropriate disclosure of confidential information. That might well have other detrimental effects from a wider public policy view.

I agree that we are in a rather odd situation with the statutory instruments—the hon. Member for Runnymede and Weybridge was right to point that out. The main regulations for auctioning permits were laid on 3 June. They set a flexible framework to accommodate a number of different auction designs, because we had not made final policy commitments to a design. However, we have set a deadline for the first UK Government auction by the end of the year, so we want to signal how we will proceed to those who are ready and willing to involve themselves in the first auction of permits some time this year. At the moment, the main regulations for auctioning, which were laid on 3 June, deliberately set a flexible framework to accommodate a number of different auction designs.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful to the Minister for that clarification. I have to say that my search—I should say my researcher’s search—this morning did not turn up the fact that they had been laid, and the copy that has been circulated is a draft copy without a statutory instrument number. Has it occurred to the Minister that people’s willingness to participate in the process might be affected by the knowledge that another statutory instrument will be introduced that will create criminal offences that could apply to them personally?

Angela Eagle (Labour, Wallasey)

I expect that they might be put off engaging in the auction if they intended to leak inappropriate and commercially confidential information. However, most of the people whom I have met to discuss the design of auctions and approaches to them do not intend to do that. I believe that those who want to become involved in the auctions, at least the vast majority of them, do not intend to do so by cheating. I have not heard it said that it would put them off. Emissions trading is novel. The Government must be able to respond to the experiences of those people and of the market. Any new offences created by the regulation—there may not be any—would be considered by Parliament. We would not just be writing them in Her Majesty’s Treasury.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Minister says that there may not be any new offences, but a draft has been circulated. Unless the Government manage to lose their majority in the statutory instrument Committee that considers the matter, she surely is not signalling that it is not their intention to proceed along the lines of that draft.

Angela Eagle (Labour, Wallasey)

No—the hon. Gentleman may not be a lawyer, but he is taking me very literally.

The hon. Gentleman spoke earlier about further extensions, and I tried to reassure him. The clause seeks, through secondary legislation, to make it a criminal offence inappropriately to disclose information that might destabilise the carbon market or compromise an auction unfairly, which may also lead to profit being acquired in a way that no one in Committee would approve. That is the behaviour that we are trying to prevent. The Government clearly intend to use regulations to make it a criminal offence to compromise an auction by the inappropriate release of confidential information. I hope that that is clear.

The hon. Gentleman is worried about widening the range of criminal offences. We may not wish to widen them, but given the novel nature of the process, and the fact that it is a new market in an area of which we have little experience, we have finally to decide on the form that the auction should take. By definition, it is in the public interest for us to be as flexible as possible and not to close our options too early, and we have a legislative system that does not easily allow us to do so. Parliament would have to consider any further extensions. I suspect that it will not have to do so, but I hope that I have reassured the hon. Gentleman about our intentions.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful to the Minister for clearing up the issue over the two draft regulations. I shall go back and check why it was not possible this morning to establish that the first set of regulations had been laid.

The Minister argues for flexibility. I am sure that Henry VIII would have argued for flexibility, and the Government, particularly on Treasury matters, have quite a lot of legislative flexibility. The Finance Bill has high priority, and it takes precedence in the legislative timetable. The longest that a Government could ever wait to cast legislation on the subject is one year. No other Department can be as confident. I am afraid that I take a rather old-fashioned view, despite the fact that I accept at face value the Exchequer Secretary’s clear assertion she is concerned about disclosure. The clause allows the creation of offences in any area. I remain firmly of the view that the creation of criminal offences is the stuff of primary legislation. Notwithstanding the relatively limited number of examples that she gave, all but one of which were enacted by this Government, we should not cede to the Government the power to create new criminal offences by statutory instrument, certainly not when they are ill-defined. If it was simply a question of offences on disclosure, and if the Government had given us a clear indication of what they were doing, the situation might be different. However, the Exchequer Secretary has been unable to give us the reassurance that we seek, so I will press to a Division.

Clause 22

Jeremy Browne (Liberal Democrat, Taunton)

I beg to move amendment No. 47, in clause 22, page 12, line 4, at end insert—

‘(1C) Subsection (1) does not apply to an individual who is enrolled in a higher education institution in the United Kingdom.’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 48, in schedule 7, page 153, line 19, at end insert

‘(excluding each year the individual was enrolled in full-time higher education in the UK)’.

Jeremy Browne (Liberal Democrat, Taunton)

Good afternoon, Sir Nicholas—[Interruption.] Indeed, the room is emptying. I thought that the Conservative spokesman was going to resign his seat as a matter of principle on the last clause, but we had to content ourselves with a mere Division.

The purpose of Amendments Nos. 47 and 48 is to exempt students from the Government’s new definition of residents. It may assist the Committee if I explain how the amendments seek to achieve that. The Russell group, which consists of about 25 of the leading universities in the United Kingdom, has provided me with background information, which the Committee may find useful. It explains the scale of overseas students’ contribution to higher education in this country. In 2006-07, there were 239,210 non-EU students studying in the United Kingdom—almost 250,000—and 112,260 EU students. International students’ fees amount to £1.5 billion a year, which is a sizeable amount of money. About 15 per cent. of students at Russell group universities are from overseas, but some universities have a much higher proportion. The London School of Economics derives one third of its total income from overseas students’ fees.

In 2005-06, the most recent year for which numbers are available, there were 31,477 overseas academics teaching at UK universities. Higher education in this country is extremely diverse. We operate in an international marketplace and many of our universities have partnership arrangements with universities in countries such as China and Malaysia. We cannot divorce the issue of students from that wider international set of considerations.

Steve Pound (Labour, Ealing North)

It will come as a considerable surprise, not just to the Committee but to anybody who knows me, to learn that I am a graduate of the London School of Economics. I take the hon. Gentleman’s point, but the amendment does not refer to an individual who is enrolled in a Russell group higher education institution; it refers to “a higher education institution”. We must bear in mind the vast number of highly suspect bucket shops, which exist the length and breadth of this land, that call themselves higher education institutions, frequently to allow people to avoid immigration regulations. Would the hon. Gentleman consider tightening the wording to the elitist definition that he and the Liberal Democrats have used, or would he spread the measure far and wide?

Jeremy Browne (Liberal Democrat, Taunton)

I think that I am grateful to the hon. Gentleman. I am very pleased to say that I attended a Russell group university as an undergraduate. I shall only observe that every hon. Member becomes rather less snobby in this regard when a new institution is proposed for their constituency. I would not wish the definition to be drawn too narrowly. The figures that I gave were relevant to the UK higher education sector as a whole—they were merely provided to me by a representative of the Russell group.

Amendment No. 47 is a minor amendment and would insert new subsection (1C ) into the clause, with intention of expressly excluding foreign students enrolled in UK higher education institutions from liability for the 183-day test for residency. There is some HMRC guidance on the matter, but it is not legislation.

Greg Hands (Conservative, Hammersmith and Fulham)

I am sympathetic to the hon. Gentleman’s argument. How much potential might there be for people trying to avoid taxation by signing up to additional courses? Let us take the example of bankers in London who decide to sign up to an evening course, which might be at an institute of higher education and might be linked to their jobs and justifiable to their employers, but who would then, seemingly, be exempt from taxation.

Jeremy Browne (Liberal Democrat, Taunton)

I am genuinely grateful for that contribution. My honest answer is that there probably is scope for abuse and the Government would need to consider how they framed the legislation carefully to try and prevent it. If the Exchequer Secretary were to get to her feet and suggest that the intentions behind my amendments were honourable and that she agreed with them but that the Government needed to produce more watertight versions, I would regard that as considerable progress.

I say that because the current proposal is for a seven-year threshold before the £30,000 levy kicks in for people who are non-domiciled and working in this country. Longer courses such as medicine, engineering and other vocational courses may in themselves last five or six years. For example, people who come here to study medicine—that is increasingly common—do a five-year course and are then fully qualified doctors. There are then shortages in the national health service in the area in which they have specialised, they apply for a job and make an important contribution to the well-being of our citizens. However, they already have five of the seven years on the clock. That is a serious disincentive to continue to serve people in the national health service for more than a year or two, before they choose to go home or to another country.

We are talking about a fluid marketplace and somebody with such skills and qualifications may be able to find alternative employment in another country. They have already demonstrated a willingness to travel by being in the UK in the first place. There is a danger that that person’s skills will be lost to our country and there will be no mutual benefit. There is also a perhaps even greater danger, which is that the potential student sitting in their country of origin and considering where to do their higher education course, would look at Britain and consider the incentive to study here as less strong than it was, because they will fall foul of this test if they choose to work here after gaining their qualification, and as a result be much poorer. The purpose of amendments Nos. 47 and 48 is to address that serious point.

The hon. Member for Wirral, South and I were part of an extremely informative delegation to China about three weeks ago. We visited a joint university venture with the university of Liverpool, and had a meeting with a representative of the university of Nottingham which has three campuses, one in Nottingham, one in Malaysia and one in China. That is indicative of the desire of higher education institutions in the United Kingdom to operate on a global stage, and to attract the best-qualified students and potential students from across the board, particularly in the disciplines that I mentioned such as science and engineering. We do not want to put that international leadership and the reputation that British universities enjoy at risk.

Steve Pound (Labour, Ealing North)

On the subject of a fluid economy, the record holder in my constituency is a student who came here 14 years ago to study hospitality and catering and is still studying. She is legally here by constantly renewing her student visa. The hon. Gentleman is talking about a specific group of people. At present, overseas students cannot work for more than 16 hours a week if they are here on a student visa. Would his amendment make an enormous difference, or is it—I hesitate to say it—perhaps a little too loosely drawn?

Jeremy Browne (Liberal Democrat, Taunton)

I have already conceded that I did not anticipate that the Committee would support my amendment. I do not think that the Government have supported a single non-Government amendment yet. Actually, I think that there was one. However, I was keen to make the points and it would be to the good if the Government chose to accept the amendment. If the Government concede the thrust of the argument, I would regard it as significant progress.

Greg Hands (Conservative, Hammersmith and Fulham)

The hon. Gentleman makes an interesting case. It seems that there is a good chance that that sort of overseas student, especially if they go back to their country of origin or any other country, could earn more than £2,000 during that year. They would therefore be caught under these regulations, in my understanding.

Jeremy Browne (Liberal Democrat, Taunton)

Mine, too. We will get on to a greater deliberation of these matters, I anticipate, under schedule 7. However, this is important, because we are talking about £1.5 billion of income to British universities per year. There are large numbers of British universities now that would not function in their current, recognisable form without that. Indeed, it is an under-appreciated fact among domestic students that a lot of the activities of British universities are effectively subsidised by the fees of overseas students. We do not wish to put that revenue at risk, and that is the fear I am touching upon.

Before I conclude, it is relevant to, but not directly encapsulated in the amendment, that I received a representation from the City of London. I will just quote two sentences from its letter to me:

“Although it is not dealt with in your amendment, it is apparent from the Bill as currently drafted that a non-domiciled child who turns 18 by the end of the tax year, 5th April, and has then been resident for at least 7 of the past 9 years, will be required to pay the charge in full on the same basis as any other adult non-domicile. Thus a sixth-former who turns 18 before 5 April of his or her final year at school could attract the charge.”

It would be very interesting to hear the Minister’s response to that point.

I have made the specific point that there is a big market in higher education for attracting overseas students to this country, and of course they make a big contribution by enriching our institutions in ways beyond the merely financial. However, there is also, particularly with relation to independent schools, an important market in attracting students from elsewhere—or more specifically their parents—because of the high reputation that British independent schools enjoy in many parts of the globe. That too is an important feature of their income, so we would not wish to jeopardise that either.

Ben Chapman (Labour, Wirral South)

Has the hon. Gentleman been able to put any figures to the suggestion that students may not come or may not stay in the United Kingdom? These students are often paying their own way, and are not on scholarships. They often have wealthy parents and make not just a contribution to the university, but a considerable contribution to the UK economy, both locally and more widely.

Jeremy Browne (Liberal Democrat, Taunton)

I have not made an estimate of the potential losses. It would be hard to do so, because people come from so many different parts of the world, for different reasons and motivations. I just observe that they are trying to make rational decisions about their prospects, both educationally and economically, and that these matters are one factor that they surely take into account before embarking on an expensive course on the other side of the world. I do not doubt for one moment that there would be a damaging impact, although I do not know on what scale.

Peter Bone (Conservative, Wellingborough)

I am grateful for the hon. Gentleman’s points. I remember when I was on the former Trade and Industry Committee, there was an inquiry and we were very concerned about the fact that other countries were more successful than us at getting students and that we were declining in relative terms. The detail of this proposal does not matter too much, but, if it gets around that students who go to the United Kingdom will be hit heavily for tax, they will not come, will they?

Jeremy Browne (Liberal Democrat, Taunton)

That is precisely my fear. I am generalising, inevitably, but students coming to this country take into account a range of factors. There are some British educational institutions—most notably Oxford and Cambridge universities—that enjoy a worldwide reputation for excellence. Being in a country where the main language spoken is English is no doubt attractive to many people, so there are also factors beyond the immediate control of the Government. No doubt, one of the calculations in the minds of the potential students is a financial one. That is quite right, because they pay hefty fees to attend British universities and one would expect them to make such a calculation.

Stewart Hosie (Scottish National Party, Dundee East)

The hon. Gentleman will be aware that, some years ago, the Fresh Talent initiative in Scotland allowed graduate students from overseas to stay in work for two years, something which has now been undertaken in the whole of the UK. Do measures such as this risk undermining the potential of those initiatives to grow the population and keep skilled people who have been educated here? Does he agree that instead of using the word “enrolled”, his amendment should have specified being engaged in full-time education, as his new clause 5 did, and also in part-time education up to a minimum number of hours? I am sympathetic to the argument but not sure that the wording is as tight as it might have been.

Jeremy Browne (Liberal Democrat, Taunton)

I am grateful for that intervention because I am willing to concede that my skills do not lie entirely in the area of drafting Parliamentary amendments. Others can conclude where they do lie. I hope that this has been a useful debate for the Committee. It would be helpful to have the Minister’s response to the amendments about the status of students in higher education. It would also help if she could respond to the point raised with me by Mr. Double from the City of London about whether the clock starts ticking on overseas residents who are in school-level education but turn 18 in the last year of their sixth form before 5 April and whether that entire period they have spent in school—not just the last few weeks before they do their A-levels—counts towards the regulations that the Government are bringing in. If so, that would obviously have a very damaging impact on school-level institutions that attract overseas students.

The rest of the debate is in Hansard.