Finance Bill

Public Bill Committee, 21 May 2009.

(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92)

Nicholas Winterton (Conservative, Macclesfield)

I welcome all Members to the Committee on this somewhat dull Thursday, after a fairly traumatic and difficult week for the House. The Speaker has appointed me as an additional Chairman—[Hon. Members: “Hear, hear!”] I am grateful to be able to help out in the unavoidable absence of both Mr. Hood and Mr. Atkinson, but I am happy to tell you that Mr. Atkinson will be back in the Chair this afternoon, so you will have to suffer me for only one hour and 25 minutes.

I remind Members that amendments may be tabled during the recess. Any amendments received in the Public Bill Office before 4.30 pm on Thursday 28 May will appear in print on Friday 29 May and will be unstarred and eligible for selection by the time the Committee resumes on Tuesday 2 June, after the brief Whitsun recess. I remind the Committee that when you adjourned earlier this week on Tuesday, you were, and therefore still are, debating clause 6. I think that the hon. Member for Hammersmith and Fulham had just completed what he had to say—

Bob Blizzard (Labour, Waveney)

The hon. Member for Taunton had also completed his comments.

Jeremy Browne (Liberal Democrat, Taunton)

I will make the speech again, if you would like, Sir Nicholas.

Nicholas Winterton (Conservative, Macclesfield)

It is a great pleasure to hear the hon. Gentleman speak—one that I have had many times in the past, and I suspect that in the next hour and 25 minutes he might gift me again with his eloquence. Both the Conservative and Liberal Democrat Opposition Front Benchers have spoken.

David Gauke (Conservative, South West Hertfordshire)

On a point of order, Sir Nicholas, I think that I speak on behalf of the whole Committee when I say what a great pleasure it is to have you here today. Would it be possible for you also to chair the final sitting of the Committee, as you did so well last year?

Nicholas Winterton (Conservative, Macclesfield)

I am most grateful—as we come up to the selection of Speaker, such comments are welcome indeed. Unfortunately, the matter does not rest with me. I am merely a temporary and additional Chairman for this sitting. If there are further problems and I am asked to chair the Committee again, I shall readily accept. I am grateful to the Government Whip for bringing me entirely up to date, because I am clearly at a disadvantage, the Committee having sat twice already.

Clause 6

John Howell (Conservative, Henley)

Allow me to add my congratulations on your appointment as our additional Chairman, Sir Nicholas. Unfortunately, not having been here on Tuesday, you missed the magisterial way in which my hon. Friend the Member for Hammersmith and Fulham explained the whole of clause 6 in great detail, including a large measure of the economic thinking behind it. You missed the delights of Laffer curves and the precision of the calculations of tax rates and their impact on people.

Having reflected since Tuesday’s sitting, I think that, inevitably, it all comes back to the adequacy and quality of the modelling used to underpin the assumptions within the 50 per cent. tax rate. The adequacy of the modelling is a topical subject. The Government will be aware of the wish of the TaxPayers Alliance for more dynamic modelling. I have some problems with that not being comprehensive enough; nevertheless it shows that the idea of modelling is very much on the table. That was recognised by the Institute for Fiscal Studies. One of the other things that seemed obligatory on Tuesday was quoting the IFS, and I have one such quote today. I must put down my glasses because, in my efforts to be frugal these days, I print things with two sides on the same page, so as not to increase expenses. The Committee will therefore have to excuse me if I peer somewhat as I read. The IFS says that, in its initial reaction to the Budget, it seems that the Treasury has

“not accounted for consumer spending falling as a result of this change. If these effects are taken into account, the Government could lose up to £1.5 billion in indirect tax revenues, even if the Treasury is right”.

There is a lot of concern about the underlying modelling that took place to justify the 50 per cent. tax rate—if, indeed, it was done to justify it. Given that it goes to the credibility of the tax system, it is important that it is based not only on political will in the United Kingdom but on analysis.

Matters are made even worse by the abandonment and the absence of the fiscal rules. I did not believe in them very much and nor, it seems, did the Chancellor or the Prime Minister before him; nevertheless, they were at least useful in pointing to a direction in which the Government would go.

I shall not go through the issues that we spoke about on Tuesday in detail, but it is important to understand where the tipping point is in each of the Laffer curves, depending on the range of behaviours. We heard my hon. Friend the Member for Hammersmith and Fulham talk about data on average taxpayers being used to inform decisions about specialist groups, which again goes to the heart of the credibility of the underlying modelling that took place.

The Institute of Chartered Accountants expressed concern about such matters in its pre-Budget submission to the Government and in its post-Budget assessment, in which it called for a detailed economic analysis to be undertaken. It used the same words in its pre-Budget statement, and the fact that it used the same words suggests strongly that it is not happy with the economic analysis done.

We heard about the confusion in the Treasury Committee about the adequacy of the modelling for the 50 per cent. tax rate. My hon. Friend the Member for Northampton, South, who is not here today, quoted question 335 from the proceedings of that Committee. The Chancellor was talking about the £150,000 limit and the 50 per cent. tax rate and said:

“There is no science behind it, it is just simply my judgment that I thought that figure was an appropriate figure. It is the top 1%, as it happens, of earners in this country and I decided that that was the right level”.

Again, there is some confusion.

David Gauke (Conservative, South West Hertfordshire)

Does my hon. Friend infer from that quotation that the figure of 50p was perhaps selected on political rather than economic grounds?

John Howell (Conservative, Henley)

That is a pertinent remark, and it is a pertinent conclusion to draw. In the morning sitting of the Treasury Committee, Mr. Williams, who is the director of personal tax and welfare reform at the Treasury, said that some modelling had taken place. There is therefore confusion about whether the modelling was scientific. Was the Chancellor criticising the modelling that had taken place, which he would have been aware had been described in a little detail in the earlier sitting? Did that modelling take place before he reached his decision on a 50 per cent. tax rate? Was that modelling to justify a decision that had already been taken, or was it modelling that was used to inform a decision before it was taken? We simply do not know the answer to that.

I should also like the Minister, in summing up, to comment on the points raised both by the IFS and the Institute of Chartered Accountants. The Committee would benefit from a much better explanation—perhaps an explanatory memorandum on modelling.

Mark Todd (Labour, South Derbyshire)

I listened with care to the hon. Gentleman, who clearly has concerns about the clause. Maybe he is going to depart from the fence on which his Front-Bench team has sat so far and call a vote on it. Would he like to tell us more about his practical thinking on this day, on this matter?

John Howell (Conservative, Henley)

I thank the hon. Gentleman for exposing the bear trap in front of me with such clarity. [Laughter.] I will not take insults, Sir Nicholas. Perhaps he feels that because I have not been here as long as other Members sitting here today I am going to walk straight into it. I am politically astute enough to realise that the bear trap is there and tiptoe around it, which is precisely what I am going to do. I am not going to depart at all from the comments that have been made by my hon. Friends on the Front Bench.

Peter Bone (Conservative, Wellingborough)

I will almost jump into the bear trap because, let us face it, our party has made it quite clear that it is the wrong measure and is against the interests of the nation. Does my hon. Friend agree with me that, because of the fine mess the Government have got us into, we cannot make any promises until we see what the books are like?

John Howell (Conservative, Henley)

My hon. Friend is completely right. It really is quite outrageous to expect us to make those sorts of promises.

Mr. Toddrose—

John Howell (Conservative, Henley)

Just let me finish my sentence. [Laughter.]

James Duddridge (Conservative, Rochford and Southend East)

Make him a Minister.

John Howell (Conservative, Henley)

Him or me? We need a change of Government before there is any possibility of me becoming a Minister, and I look forward to it. Go on, I will give way now—I have forgotten where I was. [Laughter.]

Mark Todd (Labour, South Derbyshire)

It would be helpful if the hon. Gentleman described what this bear trap is. If it is a matter of principle and this is the wrong policy for the country, then surely his party should vote against it—as indeed should the party of the hon. Member for Taunton, who likewise declined to tell us how he intended to vote on the matter. If it is the case that the measure will not actually raise any money, then surely the point raised by the hon. Member for Wellingborough is irrelevant. It is not going to make the circumstance of our economy any better or worse, so his argument appears confused at the very least.

Nicholas Winterton (Conservative, Macclesfield)

Before the hon. Member for Henley replies to that entertaining intervention, I remind the Committee that we are debating the Government’s Finance Bill and not the alternative Finance Bill of Her Majesty’s Opposition. If the hon. Member for Henley would care to very briefly respond to the hon. Gentleman’s intervention, I will use my discretion and allow him to do so.

John Howell (Conservative, Henley)

I thank you, Sir Nicholas. We see the Speaker’s wisdom in placing you as additional Chairman to the Committee this morning.

The comments from the hon. Member for South Derbyshire follow similar interventions made on Tuesday, and he has the answer there. He is not going to get anything new out of me on that point.

I had better conclude because it is the last day before the Whitsun recess. This is a serious matter, and in some ways I regret the levity with which we have started. In response to the intervention that I made on Tuesday, the Minister said that the extent of worsening in the global downturn that had occurred between the pre-Budget report and the Budget was down to political judgment. Of course political judgment needs to take place—I do not deny that, that is what we are here for—but it cannot be all political judgment. The concerns raised by my hon. Friend the Member for Hammersmith and Fulham, by me in commenting on the modelling, and by the various organisations that I have mentioned today, illustrate the need for the Government to come clean and detail the modelling that took place to make this decision and the timing of it.

Mr. Mark Field (Cities of London and Westminster) (Con) rose—

Mr. Bonerose—

Nicholas Winterton (Conservative, Macclesfield)

I call Mr. Mark Field, the hon. Member for Cities of London and Westminster. The hon. Member for Wellingborough need not worry, he is at the forefront of my mind.

Mark Field (Conservative, Cities of London and Westminster)

And of your eyeline, Sir Nicholas. Thank you for allowing me to contribute briefly to what has been a wide-ranging debate.

One of the more interesting elements of the Minister’s introduction to the clause was when he said that, “The higher band reflects the fact that the wealthy have reaped benefits in past years from the growing economy”. I understand that significant debate took place on Tuesday afternoon about that sentence, not least with the hon. Member for Taunton. It brings into play a worrying precedent: we could have ever more retrospection and an element of or a desire for clawback within the system. The hon. Member for Taunton was right, there are a lot of people who have not necessarily reaped tremendous rewards; they have found it difficult to get on to the housing ladder, despite earning multiples of the national average salary. As the hon. Gentleman is aware, in central London that is often the case.

People in their late 20s and early 30s suddenly earning significant sums of money will, before too long, get caught by the higher tax rate, assuming that it stays at 50 per cent. for incomes of £150,000 or more. Those individuals have not reaped any great benefits from the past, but will pay the price going forward. Therefore, it is worrying that the Government’s justification is couched in those terms. If that is the justification for a 50 per cent. band, it leaves the door open for significant clawback of past gains.

To avoid stepping into the bear trap in South Derbyshire or elsewhere, it comes as little surprise that early opinion polls suggest that an overwhelming majority supported the Government’s plans to impose a higher tax band on those earning over £150,000. One should not give too much credence to opinion polls, which are academic until the tax comes into play. My party leadership has correctly identified the blatant political gauntlet that has been thrown down and is designed to embarrass us. After all, as many have said, the tax band stands to raise negligible additional income. Even the most ambitious thoughts—income compared to borrowings of £175 billion or more—suggest that the income will be fairly tiny. Accordingly, my party is entirely justified in declining to play to the Government’s line. The most urgent priority of any incoming Conservative Government—assuming that happens in the next year—will be to stabilise public finances.

As someone who was a businessman before I entered Parliament, I want low tax. Low tax is phenomenally important, particularly for the entrepreneurial class. Equally, as I have frequently observed in debates and speeches over the past couple of years and in an intervention in this debate, there is an increasing sense of insecurity among an ever larger proportion of the UK work force about the spoils of globalisation being spread inequitably. In many ways, that is a particular danger for the political class because the sense that the spoils of globalisation are unequal no longer comes only from the folk on the traditional left, increasingly, middle-class Tory-voting people have those concerns, with some justification. They see property prices rising astronomically and private education, something that they may have taken for granted, now outside their reach, particularly if they have several children. It is important for the whole political class. I fear that that sense of unease will grow, especially among middle-class professionals, or at least among those who are outside the once gilded corridors of financial and associated services.

However, the predictable truth of the imposition of clause 6 is that the super-rich will not pay a penny more in tax. They are either non-domiciled or in the privileged position of being able to characterise much of their income as capital gains, which will be subject to the unchanged 18 per cent. tax rate. My hon. Friend the Member for Hammersmith and Fulham made that point extremely well. I was an entrepreneur with a relatively small business that turned over about £2 million at its height. There is an opportunity to have a lot of what is effectively income as dividends, taxed through the capital gains regime, or one can sell off a business at some point in the future for the equivalent of an income stream, because that will be charged at only 18 per cent. It seems that such additional revenue that would be obtained through the provision will come only from modestly successful small business people who, I fear, will then have even less incentive, or indeed collateral, to expand their enterprises, as well as from salaried workers who are unable to avoid the increase and who frequently earn sums not wildly in excess of the £150,000 threshold. Their instinct to do the right thing on savings and pensions would be blunted as their disposable income falls significantly.

My party is right to express concerns. We understand the critical importance to our national economic health of promoting small start-up businesses. Competitive tax rates are essential to encourage entrepreneurs, especially as we make our way out of this deepest of recessions. Conservatives appreciate that raising tax now, even on the wealthiest in our communities, risks prolonging the UK’s economic downturn.

A decade or so ago the decision of the then Labour Opposition to stick to the Tories’ tax and spending plans was an explicit recognition that our economic strategy in the mid-1990s was right for the nation. That is in stark contrast to the situation today. Even in these turbulent times the public should not be taken for fools. No one out there believes that the Government's recklessness with the public finances is worthy of emulation.

The Financial Secretary will understand why the Conservatives wish to make much of the mandate for change, as indeed the Liberal Democrats have. In spite of its being a popular measure, there is no mandate to change the tax rates. It is possible that we will have an election before 5 April next year, in which case this is somewhat academic. The Financial Secretary did not make the same case when he was a young Back Bencher in opposition from 1994. He was happy not to make that case about 22 Tory tax rises when there was an argument after the 1992 election and we clearly did breach an election pledge on tax, because of the terrible economic circumstances when we went into a double-digit recession during the early 1990s. It was never put from the Labour Benches at that time that there was an understanding that, given the economic circumstances, the right thing for the nation, which it eminently proved to be in 1993 and 1994, was to put up taxes. Indeed, his Government, particularly in their first and second terms, reaped the benefits of that stable economy. It is difficult to look at the issue of the mandate without saying that there is some force majeure that comes into play.

Stephen Timms (Labour, East Ham)

The hon. Gentleman makes an interesting case. I wonder whether he thinks there is a difference because the recession in the early 1990s was home-grown, a consequence of Government policy, whereas what we are seeing at the moment is the biggest global economic downturn in 70 years.

Mark Field (Conservative, Cities of London and Westminster)

The right hon. Gentleman makes a well-rehearsed case. Elements of the recession in the early 1990s were worse than in other parts of the world. It was a global recession as well, albeit with a less globalised economy. China and India, for example, were barely coming out of decades or centuries of relatively quiet economic activity. In the past 15 years matters have been transformed. Our argument has been—the proof is in the pudding according to the International Monetary Fund and other independent global forecasters—that in many ways we have a more serious situation simply because we racked up huge debts during a time of plenty and were not putting reserves aside. I accept that we are in a very different stage.

I know that the Financial Secretary shares with me an interest in international affairs. It is very evident that we are still at a relatively early stage of this recession. Only six or seven months ago there was a sense that we were going to be appallingly badly hit as a result of our reliance on financial services. But one effect of the rapid depreciation of the pound has been that we have perhaps got off slightly more lightly than other countries, such as Germany, which only six or seven months ago were seen to have a very stable financial situation with no Government debt. But as the trade situation globally has imploded, such countries’ massive reliance on international trade has made them more vulnerable to what I would call the second stage of this downturn.

Although tactics have been involved, I suspect that my party has been slightly more soft-pedal on this issue than my hon. Friends the Members for Wellingborough and for Northampton, South would have liked. However, there is a sense that we are all in this together. It will take time for us to get out of the downturn and its effects. I will not make any suggestions about how I think that the public finances will be corrected, but clearly, a range of areas of public spending will have to be seriously considered. Nobody denies that. I know that the retort from the Labour Benches will be, “Which hospitals and schools are you going to cut?” However, I suspect that that will land on deaf ears in the electorate.

Even the Government’s own figures, coupled with their ambitious growth figures, leave little doubt that public spending rounds for some years to come will be less generous than they have been over recent years. If there is to be a slowdown or even cuts in public expenditure, it will be the less well-off in our communities who suffer the most. There must, therefore, be a sense that the burden of the overall downturn has been applied across the board. For that reason, at least in the immediate term, I suspect that it is unlikely that a Conservative Government would be in a position to reduce the 50 per cent. tax band, although we would hope to do so as quickly as possible, as we need to encourage entrepreneurs.

My last point is about the importance of the City of London. As a representative of the City, I hope that we can get it back to a strongly competitive state. As I mentioned last Tuesday, it is important to recognise that the City is not made up only of big banks, but provides a range of other financial services. Many of those have thrived in recent months and continue to do so because they have international competitive advantages compared with other parts of the world.

Insurance is a tremendously successful sector, and there are many lessons to be learned from the appalling disasters that beset Lloyd’s only 20 years ago. The setting up of Equitas was an important model for the ways in which we can get out of many of the problems with our banking system. Lloyd’s now goes from strength to strength, which is a great joy to us all.

However, we are clearly reliant—perhaps in all honesty, slightly over-reliant—on the financial services industry. A Faustian bargain was made with our European partners when the big bang took place in 1986. London was, is, and thankfully for some years to come will remain, the great European financial centre. That Faustian bargain probably meant that more industry went out to Germany, agriculture and other advantages went out to France, although we had the financial services.

My instinct is that financial services will remain important. Even during these recessionary times, 30 or 40 million people a year in India and China are joining the middle classes. They are instinctively savers and investors for the future, and will require financial services products in order to save in an effective way. In the immediate and the medium term, the overall cake for financial services will be smaller, and we must do our best to ensure that London’s slice of it is at least maintained if not enlarged. Nevertheless, this issue illustrates the fact that we need to have a slightly more balanced economy. That is not to say that we do not have strength in other areas—we have tremendous success in a range of creative industries such as computer games, where we are global leaders making a terrific amount of money.

Let us be honest—we still have a very successful manufacturing sector. It is smaller, but it is high resolution and high value-added. In this world where we expect high wages in the economy, we should thrive on that and try to ensure that we get the best out of our research and development. That might be in luxury products—we are going to get big markets from China and India in the future, with 2.5 billion people there.

Nicholas Winterton (Conservative, Macclesfield)

Order. I hesitate to intervene on the hon. Gentleman who represents the City, but this is about the higher rate of tax, not the general economy in this country and on what it depends. I have been generous—as I always will be—to members of the Committee, and particularly the hon. Gentleman. Perhaps he would return to the clause stand part debate and the higher rate of tax.

Mark Field (Conservative, Cities of London and Westminster)

Sir Nicholas, you have not only been generous, you have been over-generous. [Laughter.] I shall criticise you with great praise, of course. This is perhaps a point at which I shall bring my comments to a conclusion. I hope that the Minister takes on board much of what we say. There are grave concerns about what is being proposed. It appears to us ever more to be a political rather than an economic measure, and that cannot be good for this country.

Nicholas Winterton (Conservative, Macclesfield)

I call Mark Todd.

Peter Bone (Conservative, Wellingborough)

rose—

Mark Todd (Labour, South Derbyshire)

If I may give way to the hon. Gentleman first. He has been waiting.

Nicholas Winterton (Conservative, Macclesfield)

I called the Member to speak. I am sure that the hon. Member can make the point in a speech, but briefly.

Mark Todd (Labour, South Derbyshire)

Briefly indeed. First, I thank you, Sir Nicholas, for that gesture and express my enthusiasm for your chairmanship, however brief it is. I recall the last session of last year’s Finance Bill Committee and I can understand your diffidence in not necessarily volunteering to take charge this time.

I want to depart from my gentle probing of the Opposition on this subject and state something of my own view, which is actually in sympathy with some of the arguments expressed. My main reason for supporting this measure is not that I believe it will deliver any substantial revenues. The points made that the sums involved will be relatively small are perfectly reasonable. I see it more in terms of conveying to our nation the importance of equity in our response to this crisis and of stating that those who are best off and best able to bear some burdens should at least contribute some more towards the solutions that we must find.

David Gauke (Conservative, South West Hertfordshire)

As always, the hon. Gentleman is making a thoughtful point. He accepts some of the arguments that this will not raise huge amounts of revenue and he justifies the increase on the basis of equity. I understand the point he is making, but does that argument justify breaking a manifesto pledge? The Government’s justification is that we are in a financial mess which changes things, but it does not change the argument over equity in the same way that it does the argument over the public finances.

Mark Todd (Labour, South Derbyshire)

That is a fair challenge. My answer is that the circumstances could not have been predicted in 2005—certainly not by me—and I do not think informed economic observers thought that we would face anything like these circumstances at the time of the last election. I do not lightly set aside pledges made; but when faced by facts and evidence one must adapt to the circumstances regardless. The electorate will shortly have an opportunity to make a judgment on the realism or otherwise of that argument.

Let me turn to the measure itself. Although I do not think that it will produce substantial revenue, we should ensure that it does no harm. I am worried—I look forward to the Minister setting my mind at rest—that in the haste of preparing this measure, little thought was given to the relative advantages of the various means by which people might choose to avoid paying. There is a variety of ways—there have been references to informed newspaper pieces about what to do if one is hit by this tax. Some have economic benefits; others have none. Bearing it in mind that our purpose is not substantially to raise money, we ought to be ensuring that those who seek advice on how to evade the tax do so in a way that is least harmful to our revenues and most beneficial to our economy at large. We need to look at how to incentivise investment in small businesses and we shall come later to clauses that will cover that and the tool sets that are applied to venture capital trusts, enterprise investment schemes and so on. Worthwhile thought is to be given to how to ensure that those who are seeking to manage their tax affairs do so in ways that help our economy and our Exchequer over time, rather than simply losing that revenue and entrepreneurial spirit to our country.

I will, of course, support the Government in this for the reason that I gave, but more thought needs to be given to how we make this change work. Fortunately, this is a change that will occur in 12 months’ time, and there is plenty of opportunity—

Graham Stuart (Conservative, Beverley and Holderness)

The hon. Gentleman said that he did not expect the measure to produce much in the way of revenue. Without an effective dynamic model with cross-party consensus on its effectiveness, we cannot know for sure what it will do. The hon. Gentleman suggested that equity made it right. If it lost the Exchequer money, would equity still trump effectiveness? At which point would he draw the line? I respect the hon. Gentleman, as do many on both sides of the House, for his integrity in dealing with these issues, but on this point he seems to be doing a number of somersaults in order to support the Government.

Mark Todd (Labour, South Derbyshire)

At times like this, I take references to integrity with care because they are easily trumped. This is a delayed measure. We are not implementing it this year. If we were, I would have been rather more forceful in my criticism. We have some time to reflect on exactly how to design this in a way that does least harm to our revenues and does most benefit to our economy, or at least loses us least, to balance the equity effect, which is important. The hon. Member for Cities of London and Westminster was quite right here; public perceptions are rather important in this. Most people recognise that we face an unprecedented crisis, certainly unprecedented in most people’s lifetimes. Equity is an important dimension. We should respect that, but we need to make sure that in the design of this we provide tools that are of value to our economy and our Exchequer over time, because there are plenty of very expensive people who will be working on this with great care to ensure that they advise their clients properly.

Peter Bone (Conservative, Wellingborough)

It is a great pleasure to serve under your chairmanship again, Sir Nicholas. It is also a great pleasure to follow the hon. Member for South Derbyshire. He made some good comments and made the first real defence I have heard for the increase to 50p. Had I spoken first, my worry would have been that the hon. Gentleman would rise like a phoenix from the ashes quietly to intervene. It is rather like the umpire’s finger going up in a cricket match and one thinks, “Gosh, I am about to be bowled a bouncer here.” So I am very pleased to have spoken after him.

We need to look at the history of how this has come about and why there is so much debate. Unfortunately, there is not enough debate from the Government side. I would have liked to hear more from Government Members on this issue. But here we are. Clearly Tony Blair made a pledge that income tax rates would not go up. That was signed up to by every Labour candidate. There has to be a very significant reason to depart from that. The hon. Gentleman started to make a defence of it, but I do not believe that it was a strong enough defence. I hope that it will be put to a vote and that the Government Back Benchers who have not spoken will call for a Division, because they clearly want to support their manifesto’s original pledge and vote against the rise to 50p. Nobody on their side, apart from the hon. Member for South Derbyshire, has demurred from the proposal.

Greg Hands (Conservative, Hammersmith and Fulham)

By the same logic, the hon. Member for Taunton should fulfil his party’s manifesto pledge by voting for the new 50p tax rate.

Peter Bone (Conservative, Wellingborough)

I know that the hon. Member for Taunton will vote for the 50p tax rate—it never crossed my mind that he would not. I was impressed with the contribution made by my hon. Friend the Member for Cities of London and Westminster, and I agreed with almost everything that he said. He was wrong on one point, however; there is not a wafer of difference between myself and my right hon. Friend the Member for Witney (Mr. Cameron) and my hon. Friend the Member for Tatton (Mr. Osborne). I agree entirely with their analysis; we should fix taxes for the many and not for the few as soon as we are in power. Other than that one caveat, I agree entirely with my hon. Friend the Member for Cities of London and Westminster.

The hon. Member for South Derbyshire made the case that there was not much economic merit to the matter under discussion. I warn the Government—perhaps this will also help them in terms of the next general election—that, in the past, when Governments have moved away from their manifesto pledges on tax, disaster has befallen them. That was true of John Major, for example. A Government should be for all the people, including the middle classes. That was Tony Blair’s great success—he realised that Governments need everybody on board. To turn to a core vote dog-whistling strategy is very dangerous for the country and for the Government. Whatever happens at the next election, we want some Labour Members in Parliament to form an Opposition; it would be very dangerous if we only had Conservative Members.

On the policy details, I am struggling with the figures in the Red Book. In table 1.2, entitled “Budget 2009 policy decisions”, on page 11, I think that the 2010-11 figure is the only one that does not include any assumption of the 45p tax rate, because that rate was already built into the original forecast. If I am reading the 2010-11 figure correctly, the increase to 50p in the pound will raise £1.13 billion. I think that that is what the Red Book tells us. As many members of the Committee have said, that is not a significant amount of money, and my hon. Friend the Member for Henley has pointed out that we might lose money elsewhere in the tax programme. I agree with those analyses. If the figure is £1.13 billion, may I suggest a pain-free way in which the Government could get rid of the 50p tax rate without impacting on public spending? In fact, my proposal would enable the Government to increase public spending on schools and hospitals, and it would not damage the domestic situation in any way.

This year’s proposed contributions to the European Union are £3 billion, and the latest estimate is that they will increase to £6.5 billion next year, which is an increase of £3.5 billion. Tony Blair said that that would happen only if there was reform to the common agricultural policy. That has not happened, so the Government have an easy way of saying that they have found the money and do not need to implement the 50p tax rate, and none of their Back Benchers would have to vote against them in the Division that will follow this debate. It would be a pain-free solution. Furthermore, it would do the Government an enormous lot of good during the European Union elections. I hope that my contribution has been helpful and constructive for the Government.

Stephen Timms (Labour, East Ham)

I start with a warm welcome to you, Sir Nicholas, our Chairman for the morning sitting. Clause 6 is necessary to ensure that those with the very highest incomes contribute their fair share towards the consolidation that is now required.

David Gauke (Conservative, South West Hertfordshire)

I apologise for jumping in quite so early and am grateful to the Minister for giving way. I noticed his first words—“Clause 6 is necessary”. Is clause 6 necessary for the Government to fulfil their stated policy objective of raising the top rate of income tax to 50p? The new rate is not coming into effect until next year, so why is it necessary to have clause 6 in this year’s Finance Bill?

Stephen Timms (Labour, East Ham)

It is here because it was important to set out in the Budget how we should achieve the fiscal consolidation required. That is the announcement that we made in the Budget, and the Bill is rightly enacting the Budget decisions. If the hon. Gentleman is suggesting that we should defer the measure until after the election, my view is that we should not. We should be up front with the British people in how we shall achieve the consolidation that everyone can now see is necessary.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the reply, but I ask again why the new rate is necessary in the Bill? If the Government have stated what their objective is, that is indication enough, is it not? When the Government say that they will do something, they will do it, surely. Why is putting the provision into legislation necessary? I do not see anything in the Finance Bill to raise the level of national insurance contributions, although I acknowledge that that is a different set-up. The provision is here for political reasons, and for political reasons only—there is no need for clause 6.

Stephen Timms (Labour, East Ham)

It is not here for political reasons. It is here so that the Government have a clearly credible consolidation strategy that will achieve our objectives over the medium term, as we set out. If the hon. Gentleman wishes to vote against the clause, he is perfectly entitled to do so. Indeed, given what we have heard from the Opposition, at one point I thought that they would vote against it, although the implications appear to be that that is not the case.

Mark Hoban (Conservative, Fareham)

Part of the problem, although we talked about it in the context of the 50p rate, is that the clause did not mention the 50p rate, but an “additional rate”. We know from the PBR last year that a 45p rate was to be introduced in 2011; in this year’s Budget the Government said that a 50p rate would be introduced in 2010. Who knows what the Budget decision will be next year, when the Chancellor gives his final Budget? We are discussing a clause in which no rate is defined or set, and we shall not know until next year whether the Government are prepared to carry through their commitment.

Stephen Timms (Labour, East Ham)

We shall carry it through. The point that I want to emphasise to the Committee is the importance of having a clear strategy, which everyone can see, for fiscal consolidation over the next few years.

Peter Bone (Conservative, Wellingborough)

Will the Minister give way on that point?

Stephen Timms (Labour, East Ham)

No. I shall make a little progress before I give way again, but I shall look forward very much to the hon. Gentleman’s intervention a little later.

The hon. Member for Hammersmith and Fulham gave the Committee a long list of objections to the clause, but his case is flawed by the fact that he is not going to vote against clause stand part. If he is not persuaded by his own arguments, I shall not detain the Committee long responding to them. However, I shall respond briefly to some of the arguments.

First, on the estimate of the revenue from the measure, the hon. Gentleman asked some questions about elasticities and the figures used. The behavioural estimates that underpin the figures in the Red Book are based on taxable income elasticities—how much declared income reduces, for whatever reason, for each percentage point decrease in post-tax income. We have chosen to use a figure for taxable income elasticity, as the hon. Gentleman acknowledged, of 0.35. We looked at all the evidence available for the UK—including the IFS figure of 0.46, as he said—most of which consists of studies looking at the 1980s and the 1990s, and at the academic evidence available for a range of other countries, the USA in particular.

Greg Hands (Conservative, Hammersmith and Fulham)

The Financial Secretary seems to be arguing that the IFS figure of 0.46 is outdated because it was derived from behavioural observations from the 1980s. However, surely it is far more likely that higher rate earners will be much more able to avoid tax today than in the 1980s, due to greater international mobility, the greater ability to conduct business from a different home country and the greater ability of such people to tap into expertise in tax and accounting. For all those reasons, he is surely making the wrong assumption about behavioural changes in the last 20 years.

Stephen Timms (Labour, East Ham)

The hon. Gentleman is absolutely right that the judgment needs to be based on the present circumstances and not those of previous decades. The Government have taken a number of policy measures, for example those announced in the 2004 statement by my predecessor, my right hon. Friend the Member for Bristol, South (Dawn Primarolo)—

Mr. Handsrose—

Stephen Timms (Labour, East Ham)

The hon. Gentleman must let me respond to his point before I give way again. That 2004 statement by my right hon. Friend was about anti-avoidance measures and the regime requiring anti-avoidance products to be disclosed. All those measures are likely to have had a downward impact on taxable income elasticity in the UK. Also, structural differences between the tax systems in the US and the UK mean that it is likely that taxable income elasticity is lower here.

Laura Moffatt (Labour, Crawley)

It is a pleasure to serve under your chairmanship, Sir Nicholas.

We are having an interesting debate about who might avoid paying tax. Will my right hon. Friend restate to my constituents just what the money raised will be used for in these very difficult times—extraordinary times, globally?

Stephen Timms (Labour, East Ham)

My hon. Friend is absolutely right to draw the Committee’s attention to that fundamental point. What we need to do is support families and households through this difficult time in the economy—the degree of difficulty is unprecedented—to maintain investment, in the way that we set out in the Budget. We must do so to protect the economy, individuals and particularly employment, which was the highest priority of all in the Budget, to get through the downturn in the best possible shape—indeed to make the downturn shorter and shallower than it would otherwise have been—

Peter Bone (Conservative, Wellingborough)

Will the Minister give way?

Stephen Timms (Labour, East Ham)

And to protect the nation’s interests in that way.

Having resisted the hon. Gentleman’s attempt to intervene earlier, I feel that I owe it to him to give way now. In fact, it is a pleasure to do so.

Peter Bone (Conservative, Wellingborough)

In my original attempt to intervene, I was going to say that if the measure is not necessary, it should not be in the Bill because that is bad drafting and that would be a real reason for everyone on this Committee to vote against it.

My intervention now is different. The measure is supposed to protect employment. Unemployment in my constituency is 84 per cent. higher than it was when John Major left office. How can the Minister possibly say that anything the Labour Government do will protect employment in Wellingborough?

Stephen Timms (Labour, East Ham)

The record on unemployment is extremely clear, as the hon. Gentleman knows. The steps that we have taken in the Budget will be particularly effective in tackling the problem of unemployment. Perhaps the most important step was the jobs guarantee, which will ensure that, from next January, anybody under 25 who has been out of work for 12 months will be guaranteed a job or training place. There is funding for 100,000 new socially useful jobs, to allow that guarantee to be discharged.

Mark Field (Conservative, Cities of London and Westminster)

If I may, I want to assist the Minister to answer the question put by the hon. Member for Crawley, who asked where all the additional money would go. About £2.75 billion—perhaps as much as £3 billion—of the money that is raised will go to pay off less than one tenth of the money that this Government will have to borrow because of the mess and debt that they have stacked up. That is the true answer. It will only make that much difference; a tiny element of the borrowing will be paid off on the debt interest.

Stephen Timms (Labour, East Ham)

The measure will yield £6 billion over the forecast period. Opposition Members may not feel that that is a large sum, but £6 billion is an important element in our consolidation of the strategy, which is needed and must be in place in the period ahead.

Greg Hands (Conservative, Hammersmith and Fulham)

The Minister is most generous in giving way so often. Can I take him back to the point about the modelling? Going back to the dispute this week between the Treasury and the IFS about different rates of tax avoidance, the Minister seems to be saying that the assumption in the Treasury model is a rate of 0.35 for those earning more than £150,000. Will he tell us what the Treasury’s assumption is for the general population?

Stephen Timms (Labour, East Ham)

The measure will not apply to the general population, but will apply to, as I have emphasised, the highest-earning 1 per cent. of taxpayers.

Greg Hands (Conservative, Hammersmith and Fulham)

I should explain myself a little more clearly. I talked about the matter at some length in my contribution on Tuesday.

Mark Hoban (Conservative, Fareham)

Not long enough.

Ian Pearson (Labour, Dudley South)

It obviously was not clear.

Greg Hands (Conservative, Hammersmith and Fulham)

It may have been unclear—or perhaps not great in clarity. I think the point made by the IFS is that the 0.35 ratio is roughly the same rate that is used for the general population. Why should higher earners be held to have exactly the same propensity to avoid tax as the general population, when precisely the opposite appears to be the case?

Stephen Timms (Labour, East Ham)

The figure that the IFS suggested, to which the hon. Member for Hammersmith and Fulham referred to in his lengthy contribution the other day, was 0.46, which is an elasticity, rather than a rate. However, the IFS acknowledged in its report of 20 April that that is a tentative estimate. It also made it clear that the estimate was subject to uncertainty about the extent to which growth in top incomes was due to structural changes rather than tax reductions. The assessment made by our experts is that 0.35 is the right figure to use.

Graham Stuart (Conservative, Beverley and Holderness)

I am extremely grateful to the Minister for giving way; he has been astonishingly generous. Will he share with us what the range of estimates is? The Treasury must have picked an elasticity figure to go on, and I am interested to know what were the risk factors, what were the lowest figures given in Treasury advice to Ministers, what was the smallest elasticity attributed to that highly mobile, high-earning group, and what was the greatest elasticity—the greatest risk. Secondly, given the importance of the matter, will the Minister share the advice that was given to allow the general public to have a better understanding of the impact? Like the hon. Member for Crawley, I am concerned about the impact on public services, on which ordinary people in my constituency depend.

Stephen Timms (Labour, East Ham)

We produced not a range, but a figure for the modelling to be carried out, and that figure was, as I have said, 0.35. [Interruption.] I am grateful to Opposition Members for their acknowledgment of my extreme generosity, but I must make a little more progress before I give way again.

We are talking about £6 billion being raised in the first three years of the measure, which is an important contribution to consolidation. It is right that that part of the consolidation comes from those most able to pay, rather than hitting those on low or middle incomes. There is an important dimension of fairness, and 98 per cent. of taxpayers will not be affected by the measure.

On the changes that we will make to national insurance contributions as part of the consolidation, which was also mentioned in the debate, we raised national insurance because it is broad based. The changes will apply to employees, the self-employed and employers, spreading the burden across the economy and across all sectors. It will protect those who do not pay national insurance, including those who rely on savings and those of state pension age.

David Gauke (Conservative, South West Hertfordshire)

I am grateful that the Minister is maintaining his reputation for his generosity. When will we see some legislation implementing the increases in national insurance contributions, on the basis that his argument is that we need to show—to use his phrase—a credible fiscal consolidation?

Stephen Timms (Labour, East Ham)

Separate legislation will be needed because that measure cannot be set out in the Finance Bill. Those responsible for the legislative programme will set out the details at the appropriate time.

David Gauke (Conservative, South West Hertfordshire)

Will the right hon. Gentleman give way?

Stephen Timms (Labour, East Ham)

I am not in a position to make any announcements on that subject today, but I will of course give way again to the hon. Gentleman.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the Minister’s comment about how that will be done at the appropriate time, but will it be in this parliamentary Session? Given that he is so anxious to set out legislation that demonstrates a credible approach to the fiscal crisis, why have we got one measure now, but the national insurance contributions stuff perhaps after the elections?

Stephen Timms (Labour, East Ham)

We have the income tax measure now because we have the Finance Bill, in which it appropriately sits. I am sorry to disappoint the hon. Gentleman, but as I have said, I am not able to make an announcement on national insurance legislation.

We have had an interesting debate. We have discussed the important subject of the UK’s international competitiveness and carefully considered the impacts both on individuals and on the UK economy. Our conclusion is that with the 50 per cent. rate the UK will continue to be a competitive place for business, with a tax burden that compares well internationally. I referred on Tuesday to the international benchmarking work that has been done on that subject. We have taken the lead in announcing our future plans for fiscal consolidation, which is part of the boldness to which the International Monetary Fund paid tribute in its report yesterday. We have been absolutely right to do that, and other countries are also considering ways of doing it, most notably the USA.

I enjoyed the comments made by hon. Member for Cities of London and Westminster, but I say to him that the US budget has proposed taxes on high-income Americans totalling some $637 billion over the next 10 years. I enjoyed attending the reception for the City of London that he hosted on Tuesday evening in the House, and I remain confident—he affirmed this as well—that the City and the UK as a whole will continue to be strongly competitive in the years ahead.

Graham Stuart (Conservative, Beverley and Holderness)

Does the right hon. Gentleman believe that high earners in the UK are a more internationally mobile group than those in the United States? Comparisons are often made between this country and Sweden, which has a higher tax rate. Does he accept that if an economy depends on internationally mobile people to a larger extent, greater care has to be taken with the higher tax levels?

Stephen Timms (Labour, East Ham)

There certainly is a competitive world market for talent; we need to factor that into our considerations, and we have done so. On that basis, we are confident that the measure is the right one. The 50p tax rate has a job to do. It will make an important contribution to the medium-term fiscal consolidation of the economy.

My hon. Friend the Member for South Derbyshire was right to highlight the concern about fairness. The question has been asked whether the measure will be permanent or temporary. The fiscal consolidation that we need will take some time, as the Red Book set out. All I can say to the Committee about that is that we will, of course, keep all taxes under review.

The hon. Member for Hammersmith and Fulham has also made some important comments on the trust rate of tax and concerns about the effect of the changes to the trust rate on vulnerable people and those on low incomes; he also referred to dividend taxation. The trust rate of tax will be increased in line with the higher rate of income tax of 50 per cent. to prevent people from using trusts to benefit from the difference between the trust rate of tax and the additional rate of income tax. However, income paid to beneficiaries who receive income from discretionary or accumulation trusts carries a credit at the trust rate, which from 2010 will be 50 per cent., so those who do not pay income tax of 50 per cent. will be able to set the tax credit against their total chargeable income and claim back any surplus income tax, as they can now. The standard rate band also taxes the first £1,000 of trust income from a discretionary trust at only 20 per cent., which benefits a large number of small trusts, as many of them have income under that figure.

The hon. Gentleman mentioned in particular the special tax regime that applies to vulnerable beneficiaries. Those rules, including the definition of disability, were consulted on in detail during the trust modernisation programme, which ran between 2003 and 2006. The special tax regime is for trusts used by vulnerable people who are unable to look after their financial affairs. More general support for disabled people is provided elsewhere in the tax and benefits system. I understand his point that the definition of disability is a sensitive issue and that the understanding of what constitutes disability is continually evolving. Officials have recently discussed with groups such as the Disability Benefits Consortium the definition of disability in relation to trusts.

Greg Hands (Conservative, Hammersmith and Fulham)

That is an important point. The Minister has confirmed that he has been in discussions with the DBC, but my information is that it remains unsatisfied with the set of provisions. Can he confirm that that is correct? What is his impression from the discussions he has had with the DBC and the Low Income Tax Reform Group?

Stephen Timms (Labour, East Ham)

I can confirm that those discussions are continuing and have not yet reached a conclusion. I have no doubt that those groups will continue to press their case. The issue is not the rate of tax ultimately paid, but whether it is necessary for reclaims to be made against the higher rate of tax. That is an important question, so those discussions will continue.

The hon. Gentleman claimed that the additional dividend rate would discourage investment in equities. The tax rate is to be 42.5 per cent., which is 10 percentage points above the existing higher rate on dividends, so matching the changes to the income tax main rate to keep things as straightforward as possible. I put it to him that the changes strike the right balance between raising revenue as fairly as possible and encouraging wealth creation. No only are dividend rates lower than the tax rates on other income, but they are reduced further by the dividend tax credit available to almost all investors. The existing credit will remain in place and at the same size—one ninth of the value of the dividend—which encourages investment by individuals and reflects the fact that tax has already been paid by the company.

Greg Hands (Conservative, Hammersmith and Fulham)

May I come back to the intervention I wanted to make earlier, which was about the Chancellor’s comments on the justification for the 50p rate? In an interview with the Daily Mail on 23 April he said that he would be calling on people with higher earnings

“to contribute a bit more while we resolve this situation.”

I appreciate that it is difficult for the Minister to say when the situation will be resolved, but can he at least tell us to which situation the Chancellor was referring? Was he talking about the financial crisis or the position of our public finances and the ongoing budget deficit?

Stephen Timms (Labour, East Ham)

He was speaking about the need for a period of consolidation. As I said a few moments ago, the consolidation will take some time to be concluded, as we set out in the Red Book. Our assessment in the Budget is that the public finances will be back in balance by the later part of the coming decade.

David Gauke (Conservative, South West Hertfordshire)

If the rate is to be increased to 50p until the situation is resolved and the Minister anticipates that it will be resolved around the later part of the decade—I do not know whether he is referring to 2017 or 2018—when the Government project they will have a balanced budget again, is he saying, without making a commitment, that the broad intention would be to lower or abolish the higher rate and return it to the current 40p rate? Is that what the Government have in mind?

Stephen Timms (Labour, East Ham)

I am saying that my right hon. Friend the Chancellor will make assessments of the right rates of tax in each Budget. The hon. Gentleman no doubt envisages my right hon. Friend making that assessment again in 2017, and he is probably right about that. The Chancellor will make the assessment at the time.

I want to respond to a couple of points made by other hon. Members in the debate before I conclude. The hon. Member for Henley was concerned that the VAT impacts were not accounted for, but they are, in the normal way. The economic forecast reflects the 50p rate—the rate was input into the Treasury model; the economic forecast was the output of that and VAT receipts were then computed in the normal way.

The hon. Member for Cities of London and Westminster made the point, which others have made, about how diversion into capital gains could be more attractive. Differentials between tax on capital and income are not new in the UK tax system. In the 1970s we had a substantial gap and it has been a familiar feature of the UK tax system, which is why the statute book contains a significant amount of anti-avoidance legislation. Indeed, clause 49 has further provisions, so that can be dealt with as well.

Graham Stuart (Conservative, Beverley and Holderness)

Will the Minister give way?

Stephen Timms (Labour, East Ham)

No, I shall now conclude. By way of summary, the Government have thought carefully about how the further money required for the consolidation should be raised. It is right that those who are in the best position to do so should be asked to make a contribution, which is what clause 6 achieves.

David Gauke (Conservative, South West Hertfordshire)

On a point of order, Sir Nicholas.

Nicholas Winterton (Conservative, Macclesfield)

I shall take it, but I cannot think what the point of order is. I shall listen and judge accordingly.

David Gauke (Conservative, South West Hertfordshire)

It is the convention that income tax rates are set on an annual basis for the year ahead. Despite the Minister being pressed, we have had no justification for the necessity of the clause or what its legislative effect is. Sir Nicholas, can you advise me whether the clause would therefore appear to be fairly harmless and to have no impact, and could therefore be enacted next year? Is it appropriate that such a clause is included in the Bill, when it does not appear to have any legislative effect?

Nicholas Winterton (Conservative, Macclesfield)

The answer to the final part of the question, in my opinion, is yes. It appears to me, and I have taken a little advice, that the clause deals with setting a framework for a higher rate of tax. The level of that tax can be set in a future Budget. I hope that that deals with the hon. Gentleman’s point of order. I understand his point and clearly there is some confusion. The clause, in my estimation and on the advice that I have taken, is the setting of a top rate of tax, without specifying that top rate of tax, which could come in future legislation.

Schedule 2

Nicholas Winterton (Conservative, Macclesfield)

I am permitting a debate on the schedule, although the broad idea and the content were discussed in the last debate and on the Floor of the House. However, the hon. Member for Hammersmith and Fulham wishes to deal with some technicalities and this is the right opportunity.

Greg Hands (Conservative, Hammersmith and Fulham)

Some important technical issues arise from the way in which schedule 2 amends the Income Tax Act 2007. They stem from the decision to add the definition of the higher rate limit or the new additional rate of tax to section 10 of the Act, rather than to section 20. Section 20 defines the starting rate and basic rate limits, which are not defined under section 10. I think that the Government are amending the wrong section of the 2007 Act.

For example, paragraph 9 of schedule 2 alters the definition of the “basic rate limit” under schedule 4 to the 2007 Act so that it now refers to section 10, even though the limit remains specified under section 20, not section 10. Paragraph 4 of the schedule tries to amend subsection (6) of section 10 of the 2007 Act when—to judge from a copy of the 2007 Act that I printed from the website of the Office of Public Sector Information—there is no subsection (6) of section 10. I should be grateful for clarification from the Government. In my copy of the Act, the section ends at subsection (5) not subsection (6), so I am confused about precisely what is being amended.

Paragraph 6 of schedule 2 adds the higher rate limit to the scope of section 414, but leaves the parenthesis referring to section 20 alone rather than including section 10, where it seems to be more appropriate. In other words, if schedule 2, which will amend the 2007 Act, is to have validity, it should refer to both sections 20 and 10. Those are important points, and it is necessary to have this slightly separate debate so that such matters do not get lost in the overall political discussion about the 50p tax rate. For the sake of tidiness, the Minister might want to consider specifying all the limits under one section because, at the moment, it seems that the parliamentary draftsman had a little change of heart and left a few loose ends in the important provision that amends the 2007 Act.

Stephen Timms (Labour, East Ham)

The hon. Gentleman has raised an interesting and thoughtful point. I reassure him that the drafting is technically right. Section 20 of the 2007 Act was repealed by the Finance Act 2008, which was passed after the 2007 legislation to which he referred.

Greg Hands (Conservative, Hammersmith and Fulham)

I was hoping that the Minister would answer my question about subsection (6). It does not appear to be in the Act, yet it is being amended by the schedule. How can that take place?

Stephen Timms (Labour, East Ham)

As I said, I reassure the hon. Gentleman that the drafting is technically right. I would be happy to drop him a line on that specific point and, indeed, copy my response to each member of the Committee.

Greg Hands (Conservative, Hammersmith and Fulham)

On a point of order, Sir Nicholas. Excuse my lack of familiarity with the situation—I do not come from a legal background—but surely we cannot just accept an undertaking that the drafting is correct when we are referring to a subsection that does not exist. Perhaps we could adjourn so that the Government can come back with a correct explanation of the whereabouts of the relevant subsection (6) in the 2007 Act that the schedule is supposed to be amending.

Stephen Timms (Labour, East Ham)

I will attempt to help the hon. Gentleman a little further. I am at a slight disadvantage because I do not have the same piece of paper in front of me that he has in front of him. I think that he was describing the 2007 legislation that he had copied off the internet. The whole of section 20 of that Act was repealed by the Finance Act 2008.

Greg Hands (Conservative, Hammersmith and Fulham)

The Minister says that section 20 was repealed, but the relevant subsection (6) is part of section 10, not section 20. Is the right hon. Gentleman saying that section 10 has been repealed? If it really has been repealed, whatever happened to subsection (6) of the section that was repealed?

Stephen Timms (Labour, East Ham)

I have difficulty as the hon. Gentleman is referring to the 2007 Act, which does not reflect the amendments made under last year’s Finance Act. If he had in front of him a version of the legislation, together with all of the amendments made under last year’s Finance Act, he would see that the drafting was indeed technically correct.

Greg Hands (Conservative, Hammersmith and Fulham)

I hope that the Minister is right, but I took the copy of the Act from the OPSI website. Perhaps as a result of this discussion he might ensure that that website is updated immediately, if he is right about the amendments to the Income Tax Act 2007 resulting from last year’s Finance Act. Obviously a number of us are looking at something that is out of date.

Peter Bone (Conservative, Wellingborough)

I sit on the Joint Committee on Statutory Instruments. Only yesterday we reviewed regulations relating in part to this Bill. There were potential errors that needed correction, so the Minister should be careful when saying that all the drafting is correct on this.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank my hon. Friend for that intervention. We are now awaiting an answer from the Minister and also an undertaking that the OPSI website will be updated with due speed.

Nicholas Winterton (Conservative, Macclesfield)

Order. I do not know whether the Minister wishes to reply, but I have just had whispered in my ear, “It’s a website thing.” May I suggest that the Minister seeks to clarify that and perhaps then we can move on?

Stephen Timms (Labour, East Ham)

If the hon. Gentleman looks at last year’s Finance Act on the same website and takes account of the changes that made to the draft that he has in front of him, he will get the answer to his questions.

Nicholas Winterton (Conservative, Macclesfield)

I repeat that there appears to be some clarification on a website. No doubt what has occurred here will be noted and, if the Opposition are not satisfied, there will be later stages of this Bill when the matter can be raised again.

Nicholas Winterton (Conservative, Macclesfield)

Clause 9, which is on value added tax—the title is “Extension of reduced standard rate and anti-avoidance provision”—was agreed to in the Committee of the whole House on Tuesday 12 May, as reported in columns 743 to 774 of Hansard. We will not be having a rerun of the stand part debate in this Committee. Schedule 3 contains detailed provision on a supplementary charge on supplies spanning the date of the VAT change and minor amendments about orders changing the standard rate of VAT.

Schedule 3

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 5, in schedule 3, page 75, line 7, at end insert—

‘(10) Paragraphs 2(3) and (4) shall not apply where the supplier can demonstrate that the terms of its contract does not permit additional VAT to be charged (i.e. if the contract provides otherwise for the purposes of paragraph 21(2) of this Schedule) and that at the time the contract was entered into the supplier had no intention or knowledge that it would become connected with the person to whom the supply is made.’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following: amendment 6, in schedule 3, page 77, line 8, after ‘persons)’, insert ‘save for section 839(5)(b)’.

Amendment 7, in schedule 3, page 77, line 19, at end insert—

‘(c) may only apply to supplies made after the date of such order or where supplies have been contracted to be made prior to such order and the contract allows for additional consideration to be paid’.

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to be called by you, Sir Nicholas, to serve under your chairmanship, and to move our debate on from the perils of the interweb thingy.

As you said, Sir Nicholas, clause 9, which relates to the temporary VAT reduction, was debated in the Committee of the whole House. We discussed when we should return to a rate of 17.5 per cent. I have no intention, as you have already guided us, Sir Nicholas, to run over the discussions that we had about the effectiveness or otherwise of the reduction, nor about whether 1 January is the appropriate date to return to 17.5 per cent, as we had a full and interesting discussion about that subject on the Floor of the House.

Schedule 3 contains a number of detailed provisions required by the structure created and the Government’s policy of reducing VAT and then returning it to a higher level over time. I look forward to debating the details this afternoon, Sir Nicholas.

(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92) - Schedule 3

Peter Atkinson (Conservative, Hexham)

I remind the Committee that with this we are taking the following: amendment 6, in schedule 3, page 77, line 8, after ‘persons)’, insert ‘save for section 839(5)(b)’.

Amendment 7, in schedule 3, page 77, line 19, at end insert—

‘(c) may only apply to supplies made after the date of such order or where supplies have been contracted to be made prior to such order and the contract allows for additional consideration to be paid’.

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to welcome you back to the Chair, Mr. Atkinson. As I am sure you would expect, Sir Nicholas Winterton kept us in order this morning in his inimitable way, but we are delighted to see you back.

As I stated this morning, and as Sir Nicholas pointed out, we debated clause 9, which deals with the temporary cut in VAT from 17.5 per cent. to 15 per cent., on the Floor of the House, and I have no intention of running through all those arguments again. I will merely add that those of us who were concerned about the state of the public finances take no reassurance from this morning’s news that public sector net borrowing has increased substantially for April and is at record levels, and that the ratings agency Standard and Poor’s has revised its outlook for the UK to negative, due to borrowing concerns. The agency has said that Britain’s triple A rating for its Government bonds was at risk if the next Government did not produce a credible plan to put Government debt on a “secure downward trajectory”. Our concerns about a discretionary fiscal stimulus appear to be further vindicated.

Stephen Timms (Labour, East Ham)

The hon. Gentleman will know that Standard and Poor’s has reaffirmed the triple A rating for the UK, but has he also seen that, since the publication of the Standard and Poor’s view, both Moody’s and Fitch Ratings have also reaffirmed their view of a stable outlook for their triple A rating? Standard and Poor’s is on its own on that.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that intervention; none the less, the announcement from Standard and Poor’s this morning is a timely warning that the public finances are in a perilous state and that the current level of borrowing is clearly unsustainable. I know that you do not want me to dwell on whether the VAT cut was wise, Mr. Atkinson, so I will turn to schedule 3.

Given the changes in VAT and the fact that it will return to 17.5 per cent. on 1 January, we accept that the Government’s concern about potential forestalling and their desire to prevent the advancing of the time of supply on standard rated supplies are legitimate. Consequently, and given where we are, we have no objections to the measures in schedule 3, as they are perfectly reasonable.

However, the Law Society has brought a couple of concerns to our attention, and it might help the Committee if I outline them. We have sought to bring the Committee’s attention to those concerns by tabling amendments 5, 6 and 7. If the anti-forestalling provisions in schedule 3 are to apply, certain conditions that need to be fulfilled, which are set out in paragraph 2. The first condition is that

“the supplier and the person to whom the supply is made are connected”.

The second condition is that the relevant considerations come to more than £100,000. The third condition is that

“a prepayment in respect of the supply is financed by the supplier or a person connected with the supplier”

I am simplifying the matter a little, but that probably serves the purposes of the Committee. The Law Society’s concern relates to condition A. It says that the test of connection, already wide, has been extended by a recent case, Kellock Brown. Indeed, the society has raised the possibility that some banks in partial public ownership and indeed, the state may be connected for the purposes of the test. I will be grateful if the Minister can respond to that point.

There may be a danger of condition A applying more broadly than is intended. Our amendments are intended to solve the potential problem of the provision applying where the supplier had no intention or knowledge that they would become connected to the person to whom the supply is made—people may find themselves caught up in the provisions when that was not the intention. We tabled amendments 5 and 6 to highlight that issue and obtain the Government’s response.

Our second concern relates to paragraph 10 of the schedule. Our first point is that we are back in the era of Henry VIII clauses, in that it will be possible to amend primary legislation by order. That is something about which, traditionally, the House as a whole has always been concerned. Those of us who served on the Committee on the Banking Bill will remember similar concerns being expressed, and the Economic Secretary and I debated Henry VIII clauses at some length. There is recognition of the potential problem with parliamentary scrutiny arising from any Henry VIII clause. In the case of the Banking Bill, the Minister set out his reasons for why there might be a need to amend legislation to deal with particular cases—indeed, if I recall correctly, that section of the Banking Act 2009 is now being used quite extensively in relation to the rescue of Dunfermline building society. The use of Henry VIII clauses is, none the less, a concern that hon. Members on both sides of that Public Bill Committee raised, and I raise it again here.

The second element of concern about paragraph 10 is that there is nothing in the paragraph that would prevent the Treasury from making an order that is, to some extent, retrospective—nothing that would prevent an order from applying to a supply that occurred before the date of the order. That concern was also raised by the Law Society, which we attempt to address in amendment 7, which provides that any order made under paragraph 10 should apply only to supplies made after the date of the order, or where there is a contractual provision enabling it to be varied subsequently. We think that that answers the concern. It may well be that the Government would not, in any circumstances, use the order in a retrospective manner, and we would welcome an assurance to that effect. Otherwise, I would be grateful if the Minister outlined the circumstances in which the Government would make an order that was not in compliance with amendment 7. That would be helpful to the Committee.

Subject to those technical points, we have no particular objections to schedule 3, for the reasons that I outlined earlier. However, we think that we have expressed legitimate concerns that we hope the Minister will be able to answer, perhaps by accepting the amendments.

Jeremy Browne (Liberal Democrat, Taunton)

I shall not speak at length, Mr. Atkinson, because the points that I had wished to make were either made in detail in the main Chamber of the House, or made a few moments ago by the hon. Member for South-West Hertfordshire.

My party also did not approve of the temporary VAT cut. We did approve of a fiscal stimulus, but we thought that the money could be better spent than on a reduction in sales tax. That reduction is worth approximately £1 billion a month, depending on what people choose to buy. That is a substantial amount of money, which, as I have said, we felt could have been spent more constructively. Having said that, we are where we are. The Government have implemented that policy of a reduction in sales tax and it seems reasonable to us that the anti-forestalling measures outlined in schedule 3 be put into effect to ensure that people pay the tax that they are expected to pay.

The Conservative amendments strike me as reasonable, but I would be interested to hear the Minister’s response to them. He may feel that there are practical difficulties and that the amendments are too loosely defined in their scope. If that is the case, they may not be appropriate. I look forward to hearing what the Minister has to say on those amendments, but my party supports the schedule as a whole.

John Howell (Conservative, Henley)

I only have a couple of questions for the Minister. My hon. Friend the Member for South-West Hertfordshire mentioned the concerns of the Law Society. I would like to mention the concerns of the Institute of Chartered Accountants in England and Wales.

Some of the institute’s concerns overlap with those of the Law Society, such as the wide definition of “connected persons”. However, the ICAEW raised another question that is valid to ask here. What is the basis of the assumptions underlying the schedule about the potential scale of abuse? The ICAEW makes a very good point that, without that type of evidence, the nine pages of anti-avoidance legislation that are before us seem a disproportionate response to what is only a 2.5 per cent. adjustment.

Stephen Timms (Labour, East Ham)

Welcome back to the Chair of our Committee, Mr. Atkinson.

I am grateful to all the hon. Members who have spoken today to express general support for the measures in the schedule. As we have discussed, the reason for the temporary reduction in VAT was to deliver a fiscal stimulus to the economy in a timely, targeted and temporary way, and that stimulus is working. The hon. Member for South-West Hertfordshire drew attention to some economic news this morning. He may also have noticed the Office for National Statistics’ retail sales figures published this morning showing continuing—indeed, I would say remarkable—strength. Retail sales volume is up 2.6 per cent. on the year. In very stark contrast to what happened to retail sales figures in the last recession, over the past six months retail sales volume has grown by almost 2 per cent. In the last half of 1991, which is a comparable period to now, that figure fell by 2 per cent. So that 4 per cent. difference in retail sales volume over a six-month period is the difference.

Mark Field (Conservative, Cities of London and Westminster)

Will the Minister give way?

John Howell (Conservative, Henley)

Will the Minister give way?

Peter Atkinson (Conservative, Hexham)

Order. I have extended a certain amount of latitude, but we are in danger of going back over what was said before. Perhaps the Minister could move on to the schedule.

Stephen Timms (Labour, East Ham)

I am delighted to do so, Mr. Atkinson.

In introducing a temporary VAT reduction—the benefit has been explained—businesses would have advance notice of a rate rise, so they could attempt to arrange their affairs so that they paid VAT at the reduced rate on goods and services provided after the rate goes back up. Hon. Members have rightly acknowledged that that is what the schedule addresses.

To respond to the hon. Member for Henley, on previous occasions when the VAT rate changed, we saw arrangements providing for prepayments of well over £100 million covering future supplies over many years. Recent comments from businesses and tax advisers made it clear that anti-avoidance rules were needed to thwart those arrangements. We estimate that £400 million of revenue could be at risk if such measures are not taken. On 25 November, I announced that legislation effective from that date would be introduced in the Finance Bill to protect the public finances from such artificial avoidance. We intend to stop arrangements designed to avoid payment of tax, but to leave genuine commercial transactions unaffected. I hope that I will be able to persuade the Committee that we have achieved that.

John Howell (Conservative, Henley)

Can the Financial Secretary tell us what consultation took place with various professional bodies to ensure that the schedule captures the problems that he wanted to address and is not disproportionate?

Stephen Timms (Labour, East Ham)

What the schedule does is enact what I said in my statement of 25 November. Our intentions and approach were set out in that statement. The draft of the schedule was published, I think, a couple of weeks before the Budget, so there has been ample opportunity to respond, and so far, as far as I know, no one has come forward with alternative proposals. Of course, if there were some alternative ideas, we would be interested in seeing them. The schedule contains the distillation of learning from 20 or more years of experience, and I think the judgment has been got right.

We listened to a number of comments that were made and we have made some changes as a result.

David Gauke (Conservative, South West Hertfordshire)

Will the Minister give way?

Stephen Timms (Labour, East Ham)

Let me just underline this point because it helps to deal with the concerns raised. As a backstop safeguard, there is a power in paragraph 15 of the schedule to remove transactions from the scope of the provision by order, so that unintended effects can quickly be rectified. If someone came forward with a particular kind of perfectly legitimate commercial transaction that would be impeded by the schedule, we could use that power to remove such transactions from the scope of the schedule.

David Gauke (Conservative, South West Hertfordshire)

I have a genuine query. The Minister talked about experience in this area. The focus is principally on the return of VAT to 17.5 per cent., but did any problems arise when VAT was reduced from 17.5 per cent. to 15 per cent.? Was there a loss to the Exchequer because the equivalent of that type of provision was not in place at the time?

Stephen Timms (Labour, East Ham)

I do not think that there were difficulties—certainly not along the lines referred to—when the rate was reduced. When tax is going to go up, opportunity arises, and there is clearly a benefit for people who can organise their affairs artificially so that they can do the transaction now, rather than after the tax increase. The difficulty arises in cases where the base of the tax is expanded, which is what happened at the end of the ’80s when there was quite a lot of forestalling. As I said, some £400 million of revenue could be at risk, and the Committee will accept that we would be negligent if we allowed loopholes to be created, or doors to be opened to avoidance.

Let me pick up the point that the hon. Member for South-West Hertfordshire raised about whether there would be an impact on banks part-owned by the Treasury. We are not aware of any prepayment or similar transactions between the banks now partly in public ownership that could fall within the scope of this legislation, nor is there reason to think that such transactions are likely. His point about connectedness might arise, but there is no transaction that is likely to cause any difficulty and, as I said, if there were we could use paragraph 15 of the schedule to deal with it.

Amendments 5 and 6 would limit the connected parties test in certain circumstances. It would not be difficult to set up prepayment arrangements, particularly between connected parties, to enable large amounts of transactions to escape the effect of the VAT rise. When parties are connected, it is not clear in which circumstances there would be a need for prepayments as opposed to any other method of financing that they might arrange between themselves, so the legislation needs to provide a robust defence against such artificial arrangements. I suggest that the amendments would weaken the protection of the connected parties test and could open the door to avoidance.

Amendment 5 would introduce an intention test into the legislation. I understand the reason and the fairness argument for that, but in practice it would be very difficult to assess intention. For obvious reasons, we cannot be sure that tax avoiders would be wholly frank about their intention if the success of some tax avoidance depended on it. Introducing such a test would create uncertainty for taxpayers and for Her Majesty’s Revenue and Customs, and the circumstances for which the amendment is designed are unlikely to be common. I hope that the Committee accepts that it would not make sense to introduce uncertainty when the number of transactions is small. In any case, as I have said, the schedule allows transactions to be excluded by order if we come across transactions that would be effective.

Amendment 7, as the hon. Gentleman has set out, prevents retrospective orders from extending the scope of the measure. I think that I can give him the reassurance that he seeks, making the amendment unnecessary. Paragraph 10 does not permit retrospection—it would not be possible. To have the power to amend legislation by order retrospectively, the primary legislation needs to give a power of retrospection which the paragraph does not explicitly give. We do not intend to apply such orders retrospectively. Perhaps the fact that I have said that might help the hon. Gentleman.

I hope that I have covered the issues raised by the three amendments, and that I have persuaded the hon. Gentleman that he can safely withdraw the amendments.

David Gauke (Conservative, South West Hertfordshire)

I thank the Financial Secretary for his response. I note his remarks about connectedness and about how amendments 5 and 6 might weaken the provisions, although proponents of the amendments might say they would “narrow” the provisions. I recognise his point about an intention test resulting in some uncertainty, but the amendments have helped to flesh out the Government’s position.

I am also grateful for the right hon. Gentleman’s remarks about paragraph 10, for his comments that it is implicit that there is no retrospective right to amend unless the primary legislation allows that, and his assurances that the paragraph will not be used for retrospective purposes. I am still uneasy about such a Henry VIII clause, but the argument that presumably he would make—that it could only apply in narrow circumstances—may be reasonable here. Consequently, I beg to ask leave to withdraw the amendment.

Clause 10

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss new clause 3—Thresholds for residential property—

‘(1) A land transaction is exempt from the charge to stamp duty land tax if—

(a) it is a relevant acquisition of land which consists entirely of residential property,

(b) the relevant chargeable consideration for the transaction is not more than £250,000, and

(c) the purchaser is a first time purchaser.

(2) In paragraph (1)(a) a “relevant acquisition of land” means an acquisition of a major interest in land other than—

(a) the grant of a lease for a term of less than 21 years, or

(b) the assignment of a lease which has less than 21 years to run.

(3) In paragraph (1)(b) the “relevant chargeable consideration for the transaction” means—

(a) the chargeable consideration for the transaction, or

(b) where the transaction is one of a number of linked transactions, the total of the chargeable consideration for all those transactions.

(4) The Treasury shall by regulation define the meaning of “first time purchaser.”’.

Ian Pearson (Labour, Dudley South)

It is a pleasure to serve under your chairmanship this afternoon, Mr. Atkinson, and to make my first contribution to the Committee stage of the 2009 Finance Bill.

On 2 September last year, the Government introduced a one-year stamp duty land tax holiday applicable to all residential purchases worth £175,000 or less. The holiday was introduced at a time of falling house prices and a volume of transactions far below that seen in recent times. The holiday is a short-term measure to support home buyers many of whom, despite falling prices, are finding it harder to enter the housing market. The holiday ensures that more than 60 per cent. of all residential purchases in the UK are currently exempt from stamp duty. Approximately 90,000 transactions have already been exempted from stamp duty over and above those falling below the original £125,000 starting threshold. We expect that a total of 210,000 transactions will be exempted from stamp duty because of the holiday.

Budget 2009 announced an extension of the holiday to 31 December 2009, to coincide with the end of the temporary VAT reduction and provide further support for home buyers. We expect that approximately an extra 60,000 transactions will be exempted from stamp duty as a result of the extension of the holiday. The decision to extend the holiday reflects the continued difficulties facing the housing market since it was introduced in September 2008. For example, transaction volumes are down by two thirds from their peak in mid-2007 and prices have fallen considerably in the last year.

Clause 10 provides for the extension, which should be seen in the context of the other action taken in the Budget to support home owners, home buyers and the housing supply. Those measures include continued support for home owners in difficulty, through maintaining the standard interest rate for support for mortgage interest at 6.08 per cent. for a further six months; support for housing supply through a £600 million fund to stimulate or kick-start development in the short-term and boost capacity in the house building industry for the recovery; and support for home buyers with the extension of HomeBuy Direct and the launch of a guarantee scheme for residential mortgage-backed securities.

Against that, new clause 3 appears to exempt first-time buyers from stamp duty land tax when they purchase a residential property worth £250,000 or less. The Government do not believe that raising the stamp duty land tax starting threshold to £250,000 for first-time buyers would be an effective use of public money. The new clause does not indicate an effective date or give an indication of whether the measure is intended to be permanent. A permanent increase, which I understand is Conservative policy, would cost the Exchequer approximately £290 million in 2010-11, rising to £430 million in 2012-13. A temporary increase in the threshold for first-time buyers, extending only until the end of December this year, would cost £50 million on top of the £340 million cost of the existing holiday.

The Government also estimate that, as a result of the existing stamp duty holiday applying to transactions worth less than £175,000, some 75 per cent. of first-time buyers are already exempt from stamp duty land tax. In addition, on 2 September 2008 we launched HomeBuy Direct, which offers first-time buyers an equity loan of up to 30 per cent. of the value of a new home to assist them in getting on the housing ladder. Budget 2009 announced an expansion in the provision of HomeBuy Direct as part of the wider kick-start housing delivery programme to unlock sites that have stalled. We estimate that the shared equity and shared ownership products being offered as part of that delivery programme, including HomeBuy Direct, will provide approximately 5,000 properties to help first-time buyers get on the property ladder. Given the action that we are already taking, we do not see a need to raise the threshold further specifically for first-time buyers. Existing measures, including the holiday at its current threshold, are a more appropriate and targeted use of public funds.

I should add that new clause 3 does not provide a definition of a first-time buyer. That introduces problems that themselves mean that we cannot accept the amendment. Defining a first-time buyer is not straightforward, and an exemption explicitly for first-time buyers may give rise to new avoidance opportunities. For example, is an individual who has previously purchased a property overseas to be considered a first-time buyer? If such individuals are not to be treated as first-time buyers, the definition of a first-time buyer could be difficult to enforce or open to exploitation.

In light of the difficulties of defining a first-time buyer, the potential avoidance risks and the help that the Government are already offering first-time buyers, raising the stamp duty land tax threshold to £250,000 would not be an effective use of public money. The action that we are taking, as reflected in clause 10, is important.

David Gauke (Conservative, South West Hertfordshire)

I welcome the Economic Secretary to his first participation in this year’s Finance Bill. As he has stated, clause 10 raises the stamp duty threshold from £125,000 to £175,000. More precisely, it extends the existing holiday to 1 January 2010, rather than 2 September 2009. It is not a dishonourable action for the Government to try to help the housing market, so our criticisms are not of the proposal’s intention. However, I wish to voice a number of concerns before discussing new clause 3.

We must highlight how the policy of a stamp duty holiday emerged. The Sun headline on 5 August read, “Brown to scrap stamp duty”. It was very clear that the proposal was a personal initiative of the Prime Minister’s, and I am sure that the story caused much delight in No. 10 Downing street, if not in No. 11 too. One suspects that Mr. Damian McBride may have been involved in the story’s publication, as it was written in a way that reflected well on the Prime Minister. Unfortunately, however, the policy had a disastrous effect on the housing market that August; a number of transactions collapsed throughout the country. An estate agent in Berkhamsted in my constituency told me of a number of transactions that had collapsed. Why would people have wanted to enter into a transaction when house prices were already falling and when they knew that a more beneficial stamp duty regime was just around the corner?

The details were not very clear at that point. The Sun headline, as I have said, read, “Brown to scrap stamp duty”, which seems exaggerated to say the least. I did not buy a copy of The Sun that day, but I recall listening to the Chancellor of the Exchequer being interviewed by James Naughtie on the “Today” programme on the proposal for a stamp duty holiday of some sort. The Chancellor, for understandable reasons, gave a non-committal answer and, as a consequence, there were criticisms of the confusion within the Government.

Jeremy Browne (Liberal Democrat, Taunton)

On the logic of what the hon. Gentleman has just said, should people who anticipate the Conservatives winning the next general election delay buying a house valued at between £175,000 and £250,000? If the Committee does not agree on it this afternoon, will new clause 3 be introduced if the Conservatives win the general election?

David Gauke (Conservative, South West Hertfordshire)

We would hope to be able to move quickly in addressing that and we will be clear as to our intentions. It was unhelpful for the Prime Minister to indicate at that point that a policy to raise thresholds, or even to scrap stamp duty, was about to be implemented, when the Chancellor appeared to give a different message. When the housing market was as fragile as it was in August 2008, there was not only confusion but an indication that there was going to be a change in the regime. That created a number of difficulties that I experienced as a constituency MP, and at a national level I know that concerns were raised by the Council of Mortgage Lenders and so on.

Mark Field (Conservative, Cities of London and Westminster)

Obviously, it is flattering that the hon. Member for Taunton is so assured that the Conservatives are going to win the next election that he is looking forward to it as a possibility. Ultimately, there is an understanding that a change of Government will bring a change of tax regime in a range of different ways, whether in a manifesto or in some of the small print of the first Finance Bill. That is a fundamentally different situation to the one that we experienced last August, when the Government were making grandstand headlines that had an effect on a fragile housing market.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend makes a good point. Governments can immediately implement their policies, but in opposition it is a question of arguing for ideas. I will argue for the best parts of our policy this afternoon.

There is no doubt that the Treasury was deeply wounded by what happened on 5 August. I raised that concern with the Economic Secretary when we debated the orders that are being repealed as part of the clause. On 22 October, he referred to, “Unhelpful press speculation”, and added:

“The speculation in August was unhelpful, and we worked hard to discourage it.”

He went on:

“Speculation in the press did not help our deliberations, and we worked actively to discourage it.”

I put it to him that the speculation was started by an article in The Sun that was clearly informed by a briefing from the Prime Minister’s office. The Economic Secretary responded

“I repeat that that speculation was unhelpful.”—[Official Report, Third Delegated Legislation Committee, 22 October 2008; c. 7.]

It is worth noting that the Economic Secretary has a mild manner, but can be quite gutsy when he needs to in standing up to No. 10 Downing street. I commend him for doing that in a rather subtle way during our debate of 22 October.

My second area of concern is that when this measure was finally announced on 3 September last year, the Prime Minister stated that it was going to save taxpayers £600 million. At the time, that number was questioned significantly. Robert Chote of the Institute for Fiscal Studies questioned its plausibility and said:

“It would be interesting to see why the Treasury thinks it is going to be as expensive as this.”

He went on to say that he thought that the figure would be nearer £200 million. Indeed, the sums suggest that if the cost to the Exchequer is going to be £600 million, it would need to involve 400,000 house transactions of £150,000 on average.

We have heard the numbers from the Economic Secretary. He has updated the Committee as to the number of transactions and said that there have been 90,000 so far. He gave a figure of 210,000 transactions in total, but 60,000 of those are as a consequence of the extension from September to January. The number has actually turned out to be 150,000 transactions. I think that £270 million is the cost of the overall package, including the extension. The Economic Secretary will correct me if I am wrong, but the estimate given by the Treasury at the time was clearly wide of the mark. The figures given by the likes of the IFS appear to be much closer to reality—they may be slightly exaggerated, but the IFS has pretty much got them right. I return to the question asked by Robert Chote last September: why did the Treasury think it was going to be as expensive as it was? It clearly got the number significantly wrong, and it would be helpful for the Committee to know how that mistake happened.

It is also worth considering how effective the policy has been. When the Prime Minister announced the measure in September, he told the BBC:

“Home owners need to know that we will do everything we can to keep the housing market moving”.

It is worth taking a moment for a small amount of textual analysis. It was not that it was important to keep the housing market moving or to do everything to keep it moving; rather, the important thing was that home owners needed to know that the Government would do everything to keep the housing market moving.

The consequences have not, it is fair to say, been a dramatic success in terms of turning the housing market around. To be fair, by way of a test, we could ask what the policy would have been otherwise. However, Nationwide says that, following the announcement, house prices fell by 1.7 per cent in September., by 1.5 per cent. in October, by 0.5 per cent. in November, by 2.6 per cent. in December, which was a record fall, level with that of May last year, by 1.3 per cent. in January and by 1.9 per cent. in February.

Halifax’s numbers show a similar pattern: a fall of 1.3 per cent. in September, of 2.4 per cent. in October, of 2.7 per cent. in November, and of 1.6 per cent. in December. January appears to be the outlier here—there was an increase of 2 per cent.—but that was followed by a fall of 2.3 per cent. in February, of 1.9 per cent. in March and of 1.7 per cent. in April. As I said, it would be unfair to say that the policy is therefore a bleak, dismal failure, but if the intention was to turn the housing market around—given the Government’s assumptions on how much the measure would cost, that seems to be what they anticipated—it has failed to deliver.

I wish to return to a technical issue on the stamp duty provisions that I have raised before with the Economic Secretary—we debated it in October—on disadvantaged areas. For some time, certain parts of the country have been designated “disadvantaged”. In those areas, there was a higher stamp duty threshold of £150,000 as opposed to £125,000. Presumably, the intention is that the higher threshold in those areas will encourage and provoke more economic activity. My point to the Economic Secretary in October was that Her Majesty’s Revenue and Customs website stated that the stamp duty threshold was £175,000 except in disadvantaged areas, where it was £150,000. He provided assurances that that was a mistake and, indeed, the HMRC website has been updated and my point has been addressed. The website currently states that disadvantaged areas relief will not apply for residential-only property purchases between

“3 September 2008 to 31 December 2009 inclusive”.

I am grateful for that clarification. It appears to address the concern that I raised last October. However, I would be grateful if the Minister could explain why that is the case. Why does the legislation on disadvantaged areas relief not apply? There does not appear to be any instrument that disapplies it. Is this merely something that can be done at the discretion of the Government and HMRC? I do not argue that there should be a different regime for disadvantaged areas and that disadvantaged areas should have a lower stamp duty threshold, but it would be helpful to have the legal justification. Why have we not seen an order? Why is there is no reference in clause 10 to that point?

New clause 3 represents our proposal to increase the stamp duty threshold for first-time buyers to £250,000. As I am sure the Committee will recall, this was part of the announcement made by my hon. Friend the shadow Chancellor in his 2007 party conference speech. He set out the argument for raising the threshold to take nine out of 10 first-time buyers out of stamp duty. The anticipated cost was £400 million, which was going to be paid for by a charge on non-doms. I note the comments from the Minister and I anticipated that he would be able to provide the figure. The cost of the policy has since diminished to £290 million, but it is fully funded. I also suspect, and the Minister did not give these figures, that the proportion of first-time buyers who will be taken out of stamp duty will be greater than nine out of 10, given the changes in house markets. It would be fair to say that the economic situation has changed substantially since October 2007, but the argument for this policy remains valid.

The concern that my hon. Friend the Shadow Chancellor expressed in October 2007 was about how difficult it was for first-time buyers to get on to the housing market because house prices were very high. They are lower now, but it has continued to be difficult for many first-time buyers. As a result of the credit crunch, it is generally necessary to have a much larger deposit and the up-front costs of acquiring property can deter many potential first-time buyers. One of those up-front costs is stamp duty. An attempt to address that is a well-targeted policy to assist first-time buyers and also to get the house market moving. I come back to the intention behind the policy, which we do not criticise. At a time when the housing market has been very slow and when stabilisation in the housing market may well be a pre-cursor to increased confidence in the economy as a whole, we think this remains a timely, appropriate and beneficial policy.

I note the Minister’s comments about there being no definition of a first-time buyer in the new clause. We accept that this is a complicated matter, but we do not accept that it cannot be addressed within regulations. The Treasury could and should look at ways in which first-time buyers can be helped through use of the stamp duty regime. It is not included in the clause, but nor would one expect it to if the Government were proposing it. It is the sort of matter routinely dealt with in regulations.

In conclusion, we will not oppose clause 10. We have concerns about the way it has been presented as a policy by the Government. We rightly question how effective it has been. We are doubtful about the way the Government have made projections as to the cost of it, but its purpose is admirable. However, it is not as effective and beneficial as our proposal in new clause 3, which could provide an opportunity for a first step on the housing ladder for hundreds of thousands of first-time buyers. I commend new clause 3 to the Committee.

Jeremy Browne (Liberal Democrat, Taunton)

Before I talk about clause 10 as a whole, I will address a few comments to new clause 3, which has just been introduced by the hon. Member for South-West Hertfordshire. We all wish to help people who aspire to own a property, as so many in this country do. It is a great rite of passage for many people; they regard it as important not only as a financial investment but as a way to establish themselves and their families in society as a whole.

There are genuine anxieties about how we define a first-time buyer. At the moment, public finances are extremely stretched, to put it mildly. We are borrowing roughly half a billion pounds every single day. Although the Conservative party says that the policy is funded, it is reasonable to consider whether we are achieving value for money with any tax proposals. Without a definition of a first-time buyer, there is a concern that people will exploit the opportunity entirely legally. I do not mean that they will exploit in a bad way, but they will exploit it in a way that is not beneficial to the taxpayer. The Minister gave a possible scenario in which the beneficiaries were not those for whom the clause was intended.

I also fear that there might be couples—in middle age, for example—who bought a house in the man’s name and who then buy a second house in the woman’s name, and she is a first-time buyer. Unless I misunderstand the clause, she would be eligible to buy a house under those criteria and, having never bought a house before, would benefit. The couple could use the opportunity to buy a second property, which might supplement a large first property that was in the husband’s name, in the scenario I have just outlined. It is not clear that the beneficiaries would be people trying to get on the housing ladder for the first time. They might, for example, be people who live in multi-million pound houses for which the mortgage is paid off but who fancy a second property—perhaps a holiday home—and would benefit from the clause. That might be a desirable way to spend public money in the view of other members of the Committee, but I am not sure that it is the political pitch that is being used to sell the clause to the wider public.

Graham Stuart (Conservative, Beverley and Holderness)

The hon. Gentleman is a resourceful and intelligent man. It is not beyond him to conceive of rules that would ensure limitations on this proposal in order to target it more precisely at—as he would say—those for whom we would most like to see that benefit. If he acted more constructively, he would not oppose efforts to help first-time buyers. He would help those of us who wish to help them in the best possible way.

Jeremy Browne (Liberal Democrat, Taunton)

I am grateful for the hon. Gentleman’s flattering comments. Even with all my wisdom, I do not think it is my task to try to plug the holes in a Conservative party policy that was dreamt up to try to put off the general election and win a round of applause from an audience which was never invited to think how this measure might work in practice. It is entirely reasonable to ask whether the beneficiaries will be the people this policy is being pitched at. It may well be that a large number of them are not. I do not know whether there is an age threshold. If I, for example, had five children, would I be able to buy each of them a new property at just under £250,000 each? Or does the person buying the property have to be of a certain age? Would it be appropriate if they were adult children? There are questions.

Greg Hands (Conservative, Hammersmith and Fulham)

Will the hon. Gentleman at least concede that there are international precedents for discount on stamp duty for first-time buyers? I cannot recall whether it is on a federal basis in Australia, but some of the states certainly operate or have operated that system. If it can work in Australia in terms of the definitional questions that he raised, it should work here.

Jeremy Browne (Liberal Democrat, Taunton)

I suggest that the lesson to be drawn is that, before he announces policy, the Conservative shadow Chancellor should do his homework and speak to people in Australia and then we would not be in the difficulties that we have talked about. This is all extremely vague. I will move on to clause 10 in a moment.

We know—because the leader of the Conservative party tells us—that the 50p tax change is low in the list of priorities if the Conservatives win the general election. What we have yet to find out is where this item is in the list. It may be even further back in the queue than the reversal of the 50p rate. I earlier asked a serious question of the hon. Member for South-West Hertfordshire about someone anticipating a Conservative win at the next general election—Conservative party members seem to think and behave as if it were in the bag already. As there is only a year to go, someone looking to buy property—of course calculating whether the property would change in value in the interim—may delay the purchase on the basis that they expect new clause 3 to be introduced very soon after the general election. There is now uncertainty about whether it will be so because these schemes and policies seem to be revisited depending on how much scrutiny they are subjected to. It is laudable for the Conservative party to try to help people in these circumstances, but I fear that a little more rigour is required before the party is judged worthy of office.

In terms of clause 10 as a whole, the hon. Member for South-West Hertfordshire made the reasonable point, though with a generous caveat, that the policy has not been a spectacular success if its purpose was to encourage more people to buy properties for the first time at the lower end of the market and so stimulate the housing market as a whole. One could argue, in the shoes of a Government Minister, that the fall in house prices would have been worse still had this measure not been introduced last summer. Certainly, some very bold claims were made for it. After that disastrous period when every estate agent in the country suffered severe cash-flow problems while people waited for the Government to introduce the policy which had been flagged up, there was still a period when it was claimed that the policy was likely to be successful; it was not.

There is one big question we have to ask ourselves. There may be many people on this Committee who own houses—dare I say, more than one—but is it in the country’s interests to keep an overheated housing market overheated? The ratio of average salaries to average house prices is big by any historical precedent. There is a strong case to be made in the interests of people who do not own property but aspire to do so and in the interests of the economy as a whole for that ratio to be brought closer to traditional historical levels. We are a lot closer now than we were seven or eight months ago. Is it good use of taxpayers’ money to keep those ratios higher than they have been historically and to encourage people to invest in property rather than, for example, in innovative new businesses?

Graham Stuart (Conservative, Beverley and Holderness)

I am grateful to the hon. Gentleman for being so clear, because he has laid out, as we approach a general election, whenever it is, two policies that will obviously form part of the Liberal Democrats’ manifesto. One is that they oppose support for first-time buyers to get on the housing ladder and, secondly, that they support measures that will lead to a collapse in the already fallen state of the property market, in order to close the ratios to something that better fits the hon. Gentleman’s ideal of the right mathematical calculation.

Jeremy Browne (Liberal Democrat, Taunton)

Oh dear—if that is the best that the Conservative party can do, I fear that they are even further from office than I had anticipated when I read new clause 3. I believe in free market economics—a shocking concept for Conservatives. I break the news to the hon. Gentleman that the reason that house prices are where they are is not that there is a man in an office in Whitehall who comes up with all the prices; it is because of supply and demand, and people deciding how much they will pay for a house. The person who owns the house typically sells it to the person offering the most money. That is how the system works. It is not decided by the Liberal Democrats. We decide lots of things in this country—

Graham Stuart (Conservative, Beverley and Holderness)

Name one.

Jeremy Browne (Liberal Democrat, Taunton)

For example, the status of Gurkhas in the United Kingdom—many things. We set the pace in politics, as all members of the Committee know.

My point—a serious one—is whether the policy of Government should be to spend money on protecting the value of one type of asset over another type of asset. Should money be taken from people who do not own a house at all, in order to put an artificial floor under an asset belonging to people who are in many cases far more prosperous? I do not say that as Liberal Democrat policy. It is a reasonable question for anyone to ask, and without asking it, proper consideration of the clause seems impossible.

Graham Stuart (Conservative, Beverley and Holderness)

I put it gently to the hon. Gentleman that not taxing someone who is trying to get on the housing ladder for the first is not the same as spending taxpayers’ money. Perhaps the Liberal Democrats need to recognise that it is the people’s money that the Government tax and not the other way around.

Jeremy Browne (Liberal Democrat, Taunton)

I take that point and understand what the hon. Gentleman is saying. Equally, however, one could make the same point about abolishing VAT on cars for people buying their first car—an aspiration that many young people have. In rural areas, such as I represent, many people regard owning a car not just as an aspiration, but as a social and economic necessity—I shall not go too far down this track, Mr. Atkinson—after they pass their test when they are 17 years old. One could say that that would be a legitimate forfeiture of tax revenue. On the other hand, the duty of people who cannot afford to own a car at all is not to subsidise the cost of someone who is buying their first car. That was my only point.

My wider point was why first-time buyers are not buying property in the numbers that clause 10 induces them to do—new clause 3 seeks a similar inducement. Is it because they are deterred by stamp duty levels? My answer is: perhaps, to some extent. Clearly there is a marginal effect, although in the overall scheme of things, when buying a new property, it is not, I would contend, the biggest factor. I think that there are three factors that cause more problems for people seeking to enter the housing market than the deterrent effect of paying stamp duty at the levels that we are talking about.

The first factor is the unwillingness of banks to lend money to people, particularly those who do not already have a big asset. Under new clause 3, the bank might be quite generous in its lending terms to a person who has never bought a house and wishes to buy a holiday cottage, but whose spouse owns outright a house worth £1 million. However, what about first-time buyers, say, in their twenties, who have managed to save up a bit of money? It is hard for people who have left university and who are trying to establish themselves in a place of work to accrue more than a few thousand pounds, unless they inherit money or are given it as a gift. If they are looking to buy a property for, say, £150,000, they might need a deposit of about 20 per cent. of that sum—£30,000. I venture that the inability of a person on typical wages or perhaps even double typical wages to raise a £30,000 deposit would be a much greater deterrent to that person entering the housing market than a saving on stamp duty. That is one reason why I fear that the provision will not have the impact for which some might have hoped.

I think that I said I wanted to outline three factors that cause problems, but I actually want to mention four. The second factor is that the market is falling. Many people say that they aspire to get on the property ladder—they regard it as a rite of passage and something that would be economically and socially beneficial to them—but that now is not a good time to buy because the properly market is falling on average by the figures given by the hon. Member for South-West Hertfordshire. The fall in the prices of some types of property, such as one-bedroom or studio flats that might be particularly attractive to first-time buyers, might often be greater than the average.

Quite a few people are choosing to rent until the market has picked up or at least turned a corner, or they could be trying to save up a bit more of a deposit. They would not be induced to buy a property because of the stamp duty holiday. In fact, we could ask ourselves an interesting moral question: should we want them be? I was citing the example of a £150,000 property. When the policy came into effect in the late summer last year, the Government were trying to induce people to buy that £150,000 property. What is that property worth today? Perhaps £135,000. People were given a nominal incentive to buy the house and their losses far outweigh the inducement they were given by the Government to buy the house. I am not claiming that that is a false prospectus, but if I had been lured into the housing market just as it was falling rapidly, I might consider that the Government had not done me such a big favour as they claimed to be doing at the time.

David Gauke (Conservative, South West Hertfordshire)

I am tempted to dwell on the hon. Gentleman’s point about the influence of the Liberal Democrats, which suggests that they might be almost as influential as Joanna Lumley—but by no means as pretty. He is making an interesting observation, but it is very much a paternalistic one, given his early remarks about belief in the free market. He now seems to be arguing against individual responsibility for people making house purchases.

Jeremy Browne (Liberal Democrat, Taunton)

I am not doing anything of the sort. Anyone who has the money to buy property should be entirely free to do so. If they judge for themselves that now is the time to make the purchase, that is their decision. The question is whether our taxes should be used to induce people to buy property, when we know with almost complete certainty, as we did in late summer last year, that the value of their asset would fall. People may think that it is up to the individual to make that calculation, and it is. I was not saying that people should be prevented from buying houses in those circumstances. They might take a longer view and think that, in a 10 or 20-year scheme of things, that is an intelligent purchase.

To return to my original point, I do not think that people were necessarily deterred from buying houses primarily because of the level of stamp duty. They were deterred, first, because they could not borrow enough money to cover the mortgage costs and, secondly, because they were wary of a falling housing market. I have two more reasons.

Graham Stuart (Conservative, Beverley and Holderness)

No one is suggesting that stamp duty is the key component of anyone’s decision not to buy a house at the moment. As my hon. Friend the Member for South-West Hertfordshire pointed out, the hon. Gentleman contradicted himself by talking one minute about the free market, and the next about inducements owing to the removal of tax. If he were to accept that the forgoing of tax from first-time buyers is a suitable policy instrument, would he not agree that the time to implement it is when the housing market is in the doldrums, in order to help to turn it around and to minimise the barriers to getting on the housing market, rather than when prices are rising? Would he introduce such an instrument then to further inflate a bubble?

Jeremy Browne (Liberal Democrat, Taunton)

I apologise for my lack of clarity, Mr. Atkinson. I was saying that I thought that the volume of sales and the price of property are determined by supply and demand, not by the state. The state can nibble away at the edges by giving tax inducements, but primarily the factors governing price and turnover are not in the gift of the state. Anyone can buy a house if they meet the legal criteria and have the money. However, is the highest priority for the taxpayer, at a time when the nation is borrowing £20 million every hour, to try to induce individuals to stretch themselves to buy a property when the market is falling? Is that the best use of taxpayers’ money?

That is a reasonable question, because someone is likely to have stretched themselves a lot if the inducement of this stamp duty measure makes the difference between making the purchase and not. We are talking right on the margins—those for whom that marginal benefit is sufficient to make that decision. We are talking not about people putting down a 65 per cent. deposit and who are pretty secure in the housing market, but about people who might have been lured into the market in late summer last year and now might be facing repossession. That is a perfectly plausible scenario. Those facing repossession might wonder why their money, as taxpayers, was spent on luring them into those circumstances. My point was not about the free market.

My third reason is this: quite a lot of people are not only fearful about the direction of the housing market—indeed, some think that it is beginning to turn a corner, although it is difficult to make that judgment. One wants to be just ahead of the pack when coming to that conclusion. However, there is a wider concern about the economy as a whole and, specifically, about unemployment. Historically, there has been a correlation between confidence in the housing market and levels of unemployment. That correlation is stronger than the actual percentage of the work force in unemployment would suggest.

Of course, the unemployed are not normally in a position to contemplate buying a new property. However, people’s fear of unemployment is often disproportionate to the statistical likelihood of their becoming unemployed. For example, if one worked in a company with 100 employees and it became evident that it was about to shed 10 per cent. of its work force, all 100 employees might modify their behaviour accordingly and hold back until they found out whether they were one of the lucky 90 or one of the unlucky 10. Of course, the reason that the Government have temporarily reduced VAT is to try to give some sort of inducement to people not to hold back because they are fearful of their future economic prospects. In an earlier clause, the Government recognised that there is that fear of the future in the population as a whole. I contend that that fear is more likely to deter people from buying a property, particularly at this level, than any inducement on stamp duty that may or may not be given is likely to persuade them to buy.

My final argument is more contentious, because it relates to what MPs often say in their constituencies. They often say that, if we wish to see property prices that are more affordable for more people who are trying to get on the housing ladder, we need to see whether or not prices will return closer to their historical ratio to average earnings. However, in many parts of the country there is a shortage of supply of housing. The reason why I say that this argument is controversial is that a lot of MPs, of all parties, accept it in broad terms, but then rush back to their constituencies to have their photograph taken next to the site of any proposed housing development on their patch, saying how hostile they are to any changes in their constituency.

Mark Todd (Labour, South Derbyshire)

I was just wondering if the hon. Gentleman would expand on what he said to his constituents in Taunton, because he recognises the difficulty that exists.

Jeremy Browne (Liberal Democrat, Taunton)

I shall not turn this into a very long speech about Taunton—unless people wish me to do so. However, Taunton is quite a good case study, because the town is on a motorway and an inter-city train line, with a population measured at 63,000 in the last census. [Interruption.] Stick with me. Taunton has been identified by the Government as an area for potential extra development, because it has some of those key transport infrastructure requirements.

I think that there is scope for extra development in Taunton. What I am uncomfortable about is the type of top-down command view of housing development. Because of the free market instincts that I talked about earlier, I am not sure that what we need is not something a bit more organic and incremental than an imposed target of 20,000 houses. However, I do not doubt that there is a shortage of housing supply in my constituency. People come to see me frequently to say that they would like to see what we now call social housing, that they feel that there is not enough of that type of housing and that they would like to get on the housing ladder for the first time.

The ratio of wages to property values is particularly big in the south-west. Although property values are quite a lot lower than those in London, wages are a lot lower too. I think that the south-west may even have the worst ratio of any region in the UK, in terms of the ability of people who on typical pay to afford a typical property. Some people may think that it is politically unwise of me to do so, but I often say to residents in my constituency that I support some extra housing development, which should be mixed; it should not consist of one type of property. There also needs to be an emphasis on property that is realistically affordable for people who are seeking to get on the housing ladder for the first time.

Apart from in some marginal cases, stamp duty is not a consideration that is the determining factor for those people when deciding whether or not to acquire a property. In many cases, it may be that the sheer shortage of supply means that there are very few of those affordable properties on display in the estate agent’s window in the first place.

Greg Hands (Conservative, Hammersmith and Fulham)

I think that the statistic that the hon. Gentleman cited is quite right, and that the south-west does have the widest disparity between house prices and income levels. Does he therefore agree with many of his parliamentary colleagues who campaign on banning people from owning second homes in the south-west? Does he think that such a ban might be a solution?

Jeremy Browne (Liberal Democrat, Taunton)

I am not in favour of the state telling people where they can live. I suppose that the only caveat that I may add to that statement is that there are some particularly unusual circumstances, for example in national parks—

Peter Atkinson (Conservative, Hexham)

Order. We are going a little wide of the clause.

Jeremy Browne (Liberal Democrat, Taunton)

I shall not do a tour of national parks, Mr. Atkinson. My central point is that in towns such as Taunton many people seeking to become home owners for the first time face the problem of a severe shortage of the types of property they might regard as being in their price range, and that overrides any considerations about stamp duty.

Those are my four concerns: the difficulty of borrowing enough money; the falling value of property, which means that the decision not to buy property being taken by many people is quite rational; the uncertainty about the future of the economy, specifically with regard to unemployment, which deters some people from buying property, and; the shortage of supply in many parts of this country, particularly of the type of housing that is attractive to first-time buyers. I maintain that those reasons weigh more heavily with people trying to decide whether to buy than any stamp duty holiday, be it that envisaged in clause 10 or that in new clause 3. We are having a perfectly interesting and worthwhile discussion, but I fear we are labouring under the delusion that all those considerations across the population as a whole can be influenced heavily by tweaking a few of the knobs and pulling a few of the levers available to the Government.

My view is that entirely rational decisions being made by millions of people, combined with a free market in housing, are much more likely to make a difference, and that is why I fear that some of the claims being made by both Labour and Conservative politicians in that debate are rather exaggerated.

Mark Field (Conservative, Cities of London and Westminster)

That was an interesting contribution from the hon. Gentleman. I, too, shall be a little more candid than perhaps is entirely wise. I hope that no one on this side of the Committee will be too hard on me.

Luckily, some of us do not have second homes—well, actually, I do have a second home, but it was paid for entirely out of my own resources rather than anyone else’s. About eight years after becoming a Member of Parliament, I have discovered that there are some benefits in representing an inner-London constituency that were not immediately apparent when a variety of scams were being operated outside the public gaze.

I agreed with much of the hon. Gentleman’s contribution, and if the under-30s were twice as likely to vote as the over-55s, rather than the other way round, I would bet that all Governments would do a lot more to tackle the problems of housing supply. The reality is that it has been a political issue, as much as anything else, to maintain a relatively buoyant housing market, not least because those who are twice as likely to vote—the over-55s, rather than the youngsters—also tend to be home owners and their wishes have to be considered to a large degree.

I also agree with the main thrust of the hon. Gentleman’s argument: realistically, there is not much that most Governments can do. We have a ludicrously complicated system of property in this country, and adding layer upon layer of complication does not make things any easier. I agree with our new clause 3 and think that it is fine, but it would work only slightly, at the margins.

We already have in this country a capital gains tax exemption for main homes. That ludicrous distortion has a knock-on effect, as the hon. Gentleman rightly pointed out, in relation to investment for small business, and it is in great contrast to the regime in many European countries. Many elements of stamp duty land tax further distort the distortion, and that is regrettable in many ways. For many people, property has become the most important asset. I do not want to see peoples’ aspirations cast aside, but let us be absolutely honest about it: home ownership, given the chaotic lifestyles and earning patterns of many people, should not necessarily be regarded as a right.

Mark Todd (Labour, South Derbyshire)

The hon. Gentleman is making an extremely interesting speech, which I have to assume does not reflect current Conservative policy. I am sure that he has read about extraordinarily advanced societies in western Europe where home ownership is far less prevalent and less sought after—for example, Germany and Switzerland—and of very poor societies where home ownership in is sought after but to no effect. We seem to have an unusual fixation.

Mark Field (Conservative, Cities of London and Westminster)

We do have that fixation. Let us be honest, home ownership provides stability and, potentially, collateral for doing other things—or it has done in the past. The crux of some of the present financial problems is in the sub-prime market and the idea from the mid-90s in Clinton Democrat America that home ownership should be encouraged. The financial services industry in the United States created products for people who should never have owned property, given their chaotic earning patterns, and I sense that we risk the same happening here.

An Englishman’s home is his castle—a great aspiration. As someone who bought their first property at the earliest opportunity, at 23, I would not say that people should not aspire to it, but we have to realise that for many people it can be a mirage. They go down a path to property ownership and quickly find that it is more of a shackle than a benefit. Part of the difficulty has been that miss-selling and poor returns has shattered the savings and pensions industry’s reputation, so it was logical for many people—

Peter Atkinson (Conservative, Hexham)

Order. I apologise for interrupting the hon. Gentleman. He is making a very interesting speech, but it is meant to be about stamp duty land tax.

Mark Field (Conservative, Cities of London and Westminster)

It is fair enough that you pulled me up, Mr. Atkinson, but the point I was trying to make was that there has been a herd-like mentality—a logical one, particularly for those in their 20s and 30s—to aspire to own property. I am not apportioning blame—this is about the political establishment, although probably not as far back as the last Liberal Government. Even the hon. Member for Taunton will acknowledge that successive Governments have found ways to complicate the system ever more. I am not suggesting that we can start with a blank sheet of paper, because that, inevitably, is difficult. We have a crazily complicated system for housing. The notion that a main home is a capital gains tax-free investment is not prevalent around the world and is perhaps peculiar to this country. It has been a huge distortion, which has, obviously, led to tinkering with stamp duty land tax.

I wanted to make only a brief contribution. I am comfortable agreeing to new clause 3, but ideally we, the whole political class, would have the benefit of a more open and broad debate which considered the distortions, the public’s aspirations and why our system is different. I suspect that historical reasons surround the disparity between the situation here and that which pertains in other European countries, as the hon. Member for South Derbyshire points out.

Jeremy Browne (Liberal Democrat, Taunton)

The hon. Gentleman is making an interesting speech about not assuming that owning a house is a right and about downsides as well as upsides to property ownership. However, I would not wish anyone to infer from what I said that I was hostile to people’s aspirations. I observe only that those who say how desirable it would be for more people to rent rather than own property almost invariably own property themselves.

Mark Field (Conservative, Cities of London and Westminster)

I agree, and I am not downplaying people’s aspirations. If one reads The Sunday Times money pages, as we all do, every week people say that their best investment has been property, and over a 30 or 40-year period that seemed to be the case. With lower interest rates and political pressures, which make bringing supply and demand together difficult, that may not be the case for years to come. For the first seven of the 20 years that I have owned property, between 1988 and 1995, there was no capital gain, and of course since 1995 up until the last year or two, property has been a terrifically good investment.

We are tinkering at the edges and there needs to be a more sensible debate, beyond a slanging match between political parties that suggests that one side does not look to help first-time or aspiring buyers. Such a slanging match takes out some of the real problems that we all face with planning applications in our constituencies—well, I probably do not. Many more properties need to be built, but ideally some five or 10 miles outside my constituency, from where we will reap the benefits but not get any of the downside. I hope that we can have sensible debates on the matter in the future, and that sense will prevail and new clause 3 will be added to the Bill. However, I suspect that that will be another hope and aspiration that will not be fulfilled, at least not now.

Ian Pearson (Labour, Dudley South)

I shall respond briefly and try to focus my remarks precisely on new clause 3 and clause 10. I do not want to go over old ground with the hon. Member for South-West Hertfordshire, regarding some of the comments that appeared in the press last August. However, I want to emphasise that, although the press speculate daily on many aspects of Government policy, that does not make them right. As I said at the time, the press comments were unhelpful. I do not feel the need to say anything more on the matter, but I would like to respond to some of the hon. Gentleman more substantive points.

I confirm that the estimated impact of the holiday on the Exchequer is £340 million, which includes the cost of the extension announced in the Budget. It is right to say that we have looked closely at the costs. It is not possible to estimate precisely the impact on transactions because we are dealing with a counter-factual situation—what would have happened in the absence of a stamp duty land tax holiday. In the pre-Budget report we said that the figure was £280 million and we revised that down in the Budget to £250 million plus the extra £90 million for the September to December 2009 extension. On the hon. Gentleman’s comments on disadvantaged areas, there is no need to disapply the £150,000 figure because the £175,000 threshold makes that unnecessary. However, once the holiday ends, policy will go back to what it was, and the limits will be £125,000 generally and £150,000 in disadvantaged areas.

The hon. Gentleman also made some significant play of saying that it was simple to define first-time buyers in regulation. That is not the experience in Ireland, where we have been told that rules defining a first-time buyer run to more than seven pages. There are some complex issues here, a number of which were pointed out by the hon. Member for Taunton. There are issues regarding divorcing couples, there is the overseas example that I gave in my initial remarks, and there are issues regarding the administrative burdens of potentially implementing this as a policy.

Greg Hands (Conservative, Hammersmith and Fulham)

Has the Economic Secretary looked at the example of Australia? He mentioned Ireland, but I understand that Australia successfully introduced a similar scheme.

Ian Pearson (Labour, Dudley South)

My officials are certainly aware of the Australian scheme and have looked extensively at a number of issues.

Greg Hands (Conservative, Hammersmith and Fulham)

Will the Economic Secretary give way?

Ian Pearson (Labour, Dudley South)

I am not saying that it is impossible to do so, but I am pointing out that it is not as simple and straightforward as was perhaps suggested by the hon. Member for South-West Hertfordshire when he moved the new clause.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank the Economic Secretary for giving way again; he is being most generous. He says that his officials looked at the Australian example extensively. Surely after such a considerable look, they must have come up with some conclusions or lessons that could be learned.

Ian Pearson (Labour, Dudley South)

We believe that the policy of the holiday that we introduced on 2 September is targeted, temporary and timely. It was right in the circumstances not to favour first-time buyers over other buyers of properties with a value lower than £175,000.

The hon. Member for Taunton’s interesting speech covered many areas and not just his concerns over first-time buyers. He spoke of other factors that people take account of when buying a home. Everybody recognises that people take many circumstances into account when considering a house purchase. Even following his lengthy speech, I am not sure whether he is in favour of the principle of a stamp duty holiday or even of a stamp duty threshold. The Government have made it clear that we see this measure as temporary and targeted.

I will respond briefly to the hon. Member for Cities of London and Westminster. I do not wish to speak about his comments on capital gains tax, but I do want to rebut his implied criticism of Government policy. It has not been an instrument of Government policy, as he seemed to suggest, to keep house prices high to help over-50s because they are more likely to vote than under-30s. On the contrary, the Government have set extremely ambitious house building targets, which have been alluded to. We want those targets to be met. We want people to be able to rent or buy the roof over their heads. That is Government policy.

Graham Stuart (Conservative, Beverley and Holderness)

I am surprised that the Liberal Democrat spokesman did not leap to his feet. Just for the elimination of doubt, it was clear to me from what he said that he was utterly opposed to special relief for first-time buyers. He thought that it was impracticable and we seem to be opposed to it in principle.

Ian Pearson (Labour, Dudley South)

The hon. Member for Taunton has put his comments on the record. I happily give way to him.

Jeremy Browne (Liberal Democrat, Taunton)

For the avoidance of doubt, if the Conservative party comes up with coherent, well-researched, thought-through and practical policies that would be of benefit to my constituents, I will be sympathetic to them. However, it would be embarrassing for the Conservative party and the country if policies such as new clause 3 were included in the Finance Bill.

Ian Pearson (Labour, Dudley South)

For the reasons I explained in my introductory remarks, I do not believe that new clause 3 should be supported. It would not be effective. If the hon. Member for South-West Hertfordshire presses it to a vote, I invite my colleagues to oppose it and to support clause 10.

David Gauke (Conservative, South West Hertfordshire)

I do not intend to go over the debate again. I appreciate that we will not vote immediately on the new clause. I am not persuaded by the Minister’s comments. I note he said that it is not impossible for first-time buyers to be defined. When there is an opportunity, we will press new clause 3 to a vote.

Clause 12

Greg Hands (Conservative, Hammersmith and Fulham)

May I begin by welcoming you back to the Chair, Mr. Atkinson?

Clause 12 relates to the levels of tobacco duty, which are superficially not particularly controversial. We do not oppose the increases in duty. However, a number of questions need to be asked about the Government’s approach to the structure of tobacco duty andI hope the Minister will provide some answers in her response. The effect of duty increases on illegal supplies is also a concern, particularly if sterling recovers ground against the euro.

For those less familiar with the structure of tobacco duty, I will briefly run through it—partly because it is more complicated than one might initially expect. I was a smoker for some years and used to await the announcement of the Budget and the number of pence it put on a packet of cigarettes. I imagined that the way it was arrived at was very simplistic; it is actually quite complicated.

There are two specific parts to tobacco duty. The first is called a specific duty, which is a set amount of duty. It translates into duty on a per-packet basis, but is assessed on a number of pounds per 1,000 cigarettes. As we see in clause 12, that is to rise to £114.31 per 1,000 cigarettes, up from £112.07 prior to 22 April. That is a rise of two per cent., which translates to the average packet of cigarettes—an interesting concept that I will come back to—to approximately £2.29 of specific duty.

Added to that is the ad valorem element, which is a percentage of the total price of the retail price of a packet of cigarettes. That was increased in the pre-Budget report from 22 per cent. to 24 per cent. That is important for our considerations, because that percentage is calculated after that has been applied to a packet.

As with the alcohol duties that we debated a couple of weeks ago, the context of clause 12 is last November’s pre-Budget report and the Government’s late-in-the-day efforts to offset the revenue they were going to lose through the cut in VAT by increasing tobacco duties. In the case of tobacco, it raised the ad valorem element of the duty on cigarettes by 2 per cent. to a total of 24 per cent.

The two figures were designed to be roughly equivalent, with the fall in VAT and the rise in ad valorem more or less offsetting each other when fed through to a change in the retail price of a packet of cigarettes. The pre-Budget report left the specific fix element of the duty unaltered and that change corresponded quite well to the VAT loss. However, like the alcohol duties when VAT returns to 17.5 per cent. in January 2010, there will be some important and significant effects on the overall pricing level of cigarettes.

It corresponded with the pre-Budget report because the ad valorem duty, as I have explained, is a proportional tax on the retail price of cigarettes. However, it has a unique feature: because it is a tax on the price of a packet of cigarettes, including the margin for the specific duty under VAT, this is a tax that taxes tax. In other words, the percentage of ad valorem is applied to VAT and other charges. There is therefore a consequent multiplier effect on the amount of tax paid as the cost of a packet of cigarettes increases.

That might seem esoteric, and perhaps not particularly relevant, but it has important consequences for the market price of a packet of cigarettes: the ad valorem duty widens the differential between the tax on cheaper brands and the tax on premium brands. That was true, of course, well before the pre-Budget report came along. The price gap between the cheapest cigarettes and premium brands, such as Marlboro or Rothmans, has increased from less than a pound to nearly two pounds in the last six years—a considerable change so far this decade.

The increasing element to the ad valorem tax has incentivised the new super low-priced brands that have either been around for many years, or those that have entered or re-entered the market, such as Pall Mall.

Mark Field (Conservative, Cities of London and Westminster)

Is it also the case that the issue has probably incentivised organisations that want counterfeit tobacco, which is so prevalent on our streets, to focus on some of the higher priced brands so that there is more value in getting their counterfeit product on the market?

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend is right. I will talk about counterfeit brands later, because the huge rise in counterfeit or fake brands, which are designed to look like real brands, is an important part of the whole equation.

A packet of Pall Mall cigarettes retailed at around £4.20 before the increases in the Budget, and a packet of Marlboro cigarettes retailed at around £5.80. That was after the increase in ad valorem, but before the increase in specific duties. The sales figures show that there appears to have been a general shift in consumption towards cheaper brands, which may be expected because the tax regime changed, and people react against duty rises that disproportionately affect mid-priced and premium cigarettes.

Interestingly, the Government appear to recognise that ad valorem duty has ratcheted up the differential, which is where their problems begin. Members of the Committee may be aware—as a member of the European Scrutiny Committee, I am certainly aware—that the European Commission recently consulted on the structure and rates of excise duty that are applied to cigarettes and other manufactured tobacco. It subsequently published a draft directive, which I will address in due course. The Government submitted quite a lengthy document in response to the consultation, which can be downloaded from the European Union website. I think that it is also available on the European Scrutiny Committee website.

The document is called, “Response to the Commission’s Consultation Paper on the structure and rates of excise duty applied on cigarettes and other manufactured tobacco”, and it is a detailed and very well reasoned response. Referring to the problem that I have just outlined, the Government’s paper states:

“Under an ad valorem regime, this multiplier effect makes it more costly for producers to raise the pretax price, which has implications on the behaviour of producers in imperfectly competitive markets such as tobacco, which is characterised by small numbers of large firms. The multiplier effectively increases the marginal revenue a supplier in such a market perceives and this means it is then profitable for the supplier to lower prices and raise output.”

In other words, the Government’s position is that a large amount of ad valorem incentivises producers to raise profits by lowering prices and raising output. That raises an interesting question as to whether we want Government policy to make tobacco manufacturers lower prices and raise output. That is exactly what is happening, which is surely contrary to the health objectives of the tobacco duty policy.

Of course, the ad valorem element of duty is an EU requirement. This is not a speech against the ad valorem element, but raising it is not an EU requirement. Taxing the tax on cigarettes increases the price advantage of cheaper varieties without any convincing rationale from the Government in either revenue or health terms. Indeed, in revenue terms, the sale of cheaper brands is, on the face of it, negative for public finances, as less ad valorem will be brought in.

So did the Government think that the higher ad valorem duty that they introduced in November was a good idea? Reading their response to the EU consultation, one would think not, because they made it clear that they believed that

“there is a strong case for specific duties as the only option for taxing tobacco products.”

So suddenly the Government were saying that we should only have the specific duty and get rid of the ad valorem duty, just months before they bumped up the ad valorem duty in the PBR. That makes no sense. Specific duties are, of course, the other element of the tax on cigarettes and are based on the weight of tobacco involved, not the price of any particular brand.

To spell it out, by arguing for specific taxes as the only option in their response to the EU, the Government argued that the ad valorem tax should be scrapped altogether when the EU approves a new directive on this subject. But in the PBR, the Government went in completely the opposite direction, raising the ad valorem part of the duty and leaving the specific part where it was. I accept that the PBR was neutral on revenue and prices. However, following the Budget, November’s change to the ad valorem rate has proved to be far from neutral. It altered the structure within which other changes are now occurring like the changes in clause 12.

The increases in specific duty will now widen the gap between cheap and expensive cigarettes by far more than would have been the case due to the November steep increases in ad valorem. This will hold true for any future increases in specific duty or in other matters such as production costs. When VAT returns to 17.5 per cent., the gap will widen again because the ad valorem duty taxes the tax on cigarettes. So the VAT increase will lead to an even larger rise in the price of a packet of cigarettes because of the increase in the ad valorem as it is assessed on the VAT.

It is not clear to me why the Government are set to take this course. There are no apparent health benefits associated with cheaper cigarettes. I have even seen arguments that cheaper cigarettes may be less healthy than premium brands. The justification for having the duty in the first place ultimately rests on health grounds. When the Exchequer Secretary to the Treasury justified maintaining prices in line with inflation last year, she said that it was because it would

“continue to encourage people to smoke less or to give up”.——[Official Report, Finance Public Bill Committee, 15 May 2008; c. 221.]

In my view, increases in ad valorem duty encourage people to trade down in terms of what they spend on a packet of cigarettes by changing brand, as much as they encourage people to smoke less or to give up. That is not just my argument. The Government even argue that the change will encourage trading down more than it will encourage smoking cessation. This is another line from their response to the EU consultation. They said:

“Specific duties are the most effective way of maintaining high prices for tobacco products and thus encouraging people to reducing smoking or quit”.

Therefore it is quite extraordinary that since the PBR the Government have done exactly the opposite of what they themselves told the EU that they regarded as being effective. This was not that long ago. It is just over a year or a year and a half ago that they made this submission to the EU. So the only charitable conclusion is that the PBR changes were as hurried and botched in relation to tobacco as they were in relation to alcohol. It may have seemed to make sense to offset the Chancellor’s cut in VAT by hiking ad valorem duty because as a one-off short-term measure the correlation was close, but in the medium term it simply is not and its main impact has been to widen the duty differential between cheaper brands and premium ones.

The Government stand condemned by their own words. As they said in their submission to the EU:

“Substantial evidence shows that younger smokers are more price sensitive, and the existence of cheaper cigarettes tends to make individuals more likely to smoke, and to make smokers less likely to give up. Specific duty, in increasing the price of all cigarettes, deters the taking up of smoking, and encourages smokers to reduce their consumption and quit.”

That is an absolutely clear-cut case for raising specific duty, rather than ad valorem, a regime that the Government wanted to see abolished in their response. Specific duty is the one most likely to lead to smoking cessation, not ad valorem.

Graham Stuart (Conservative, Beverley and Holderness)

I wonder whether, like me, he hopes that the Minister will be able to reassure us that lower price cigarettes do not have a higher tar content on average than higher price cigarettes, because that would certainly compound the already powerful case that my hon. Friend is making against this obviously ill-thought-through measure.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank my hon. Friend for that intervention. With the huge variety of brands out there—some of them new, others counterfeit or fake—I expect that it might be difficult to make that generalisation. However, I think that that is an important point. Another relevant point is the example of revenue—certainly, lower priced cigarettes generate less revenue for the Treasury.

Angela Eagle (Labour, Wallasey)

I am happy to deal with the issues when I respond to the debate, but I say now that it will be helpful for all of us, for all sorts of reasons, if we did not mix up counterfeit with genuine, legally available cigarettes—the two need to be thought about separately. That would help us deal with some of the issues raised by the hon. Gentleman.

Greg Hands (Conservative, Hammersmith and Fulham)

The Exchequer Secretary raises an important point, but to be fair, neither my hon. Friend nor I were mixing up the two. In terms of the actual impact of the amount of tar, I was saying that it would be difficult to effect some kind of generalisation because some fake brands do not tell us on the packet how much tar there is.

Angela Eagle (Labour, Wallasey)

The fake brands do not always contain what they say they do, which is why it is important to separate the cigarettes made and sold legally from the counterfeit products. They are totally separate, and we will have a much clearer and more focused debate if we do not mix the two up.

Greg Hands (Conservative, Hammersmith and Fulham)

Of course the Minister is right, but she is making my point for me. In response to my hon. Friend, I pointed out that it was difficult to effect some kind of generalisation about the overall tar content for all the cigarettes that are consumed in the UK. Due to those varied considerations, she is helping me to make my own point.

The nub of the matter is that the Government could have addressed the weaknesses of the pre-Budget report in the Bill. The Budget was an opportunity to replace a temporary measure with a sensible, overall structure. Unfortunately, they appear to have missed the chance. The Government can still consider re-balancing the structure of taxation in January 2010, when the VAT rise kicks in. I will be grateful if the Minister can confirm whether the Government intend to leave the ad valorem duty at 24 per cent. in January 2010. As I said, the rise in VAT will increase the tax on cigarettes by more than the VAT itself.

An argument could be made for that position, but why would the Government want to nurture super-low price brands at the expense of premium brands? I am interested in the Minister’s argument as to why she thinks that that should be the case in our tobacco duty structure.

It also, as I said, conflicts with the Government’s own reasoning in their response to the EU consultation. There is already a significant move in this country to low and super-low price brands from premium ones. According to ACNielsen, the market research company, the market share of premium brands has fallen from 28.5 per cent. to 25.9 per cent. in just the past two and a half years, between 2006 and 2008. Meanwhile, the super-low market share has gone from 41.6 per cent. to 45.1 per cent. in the same period—a pretty big increase in less than three years. That is most likely due to the changes in tax. Indeed, the tax differential between premium and super-low brands has increased from just 10 per cent. at the beginning of that period to 14 per cent. now—quite a significant change in a tax differential.

It is worth thinking about the impact that all that has on tax yields. For every 1 per cent. of consumption that trades down from premium to super-low brands, the Government lose approximately £11.5 million in tax revenue.

It is worth looking at the EU consultation and directive again in more detail because it will dictate the future of the tobacco duty regime in this country. The Commission, when setting out its consultation, broadly suggested four areas that it might pursue. The first one is replacing the most popular price category—the MPPC—with weighted average prices as a reference point for the whole European Community, claiming that it would address health objectives in a more efficient manner. It is saying that there should be higher specific duty, which is the point I started with. Secondly, it talks about aligning the taxation of cigarettes and fine cut tobacco or roll-your-own or hand-rolling tobacco—HRT as I believe it is called—to reduce the substitution effect. In other words, people give up smoking ready-rolled cigarettes in favour of hand-rolling tobacco. Thirdly, it talks about increasing the minimum rate requirement for cigarettes and fine cut tobacco to combat illicit trading—which we have already talked about—and to address health concerns, and finally amending the existing definition of cigarettes, cigars and pipe tobacco to deter tax avoidance and evasion.

In the light of the EU consultation, there are broadly seven proposals in the draft directive—indeed, abolishing the MPPC as the reference point, which is good news for those who prefer a higher rate of specific duties, with the alternative of a cash minimum to be applied to all cigarettes, not just to those in the MPPC, of around £50.50 for 1,000 cigarettes. It would not affect the price in this country because we are already above that. There are various other suggestions. I would be grateful to hear from the Minister what response the Government had made to the draft directive, which was cleared by the European Scrutiny Committee last autumn.

On a related topic, I wonder whether the Minister has looked at what various EU members do and what consideration she has given to a minimum duty on tobacco products. That is not a minimum price but a minimum level of duty. Twenty of the 27 EU countries already have such a scheme. Ireland, for example, has a minimum duty. What consideration has she given to the Irish experience? In Sweden and Denmark, having a minimum level of duty actually raised tax revenue because it made cheaper brands more expensive, thereby increasing the overall tax revenue because the ad valorem part, the specific duty, would take in more—and indeed the ad valorem. It closes the differential between the cheaper brands and the premium brands and, in Sweden and Denmark at least, it showed an increase in tax revenue. It might also curb the increase in lower-priced tobaccos and thereby raise more duty. I would be grateful to hear whether the Minister had looked at the experience, in particular in Ireland, but also in the other 19 EU countries that have such a system.

Turning from the structure of tobacco taxation—although the structure does bear on my next question—we need to ask how close further duty increases will take us to the revenue maximisation point with tobacco duty. The Minister admitted in last year’s Finance Bill debates that we were close to this point, and I think she said the same in relation to the PBR and the debate on the statutory instrument in January this year that resulted from the PBR. In the Committee of the whole House the Minister talked about whether we might have reached the tax maximisation point with tobacco. We now have another increase, with a further increase in prices expected as a result of the VAT rise in January 2010. It would be helpful to have her current view on revenue maximisation. Discussing the PBR changes in the debate on the statutory instrument in January—which raised the ad valorem element from 22 to 24 per cent.—she said:

“If we are close to revenue maximisation, we might go closer to or just beyond that point and, in that context, there is a risk that smuggling might undermine the helpful revenue benefits of the real increase in tobacco taxes.”—[Official Report, Second Delegated Legislation Committee, 13 January 2009; c. 22.]

We acknowledge that progress has been made on smuggling. HMRC and UKBA have a joint strategy, although the tone of last year’s launch document was perhaps a little self-congratulatory given the levels of illicit tobacco that remained in this country. For example, when discussing hand-rolling tobacco, as loose tobacco is normally termed, the document put the illicit market share at a huge 53 per cent. Its estimate of a 13 per cent. illicit share for the much larger cigarette market also needs to be placed in context.

Imperial Tobacco, for example, suggests that 37 per cent. of the cigarettes smoked in the UK fall outside the UK duty regime. When we are debating the amount of duty that we might be taking in, that is an incredible amount. Imperial Tobacco, which is, I think, one of the largest three or four tobacco manufacturers, suggests that 37 per cent. of what is smoked in this country does not have UK duty paid on it. In other words, for more than one in every three cigarettes, the Treasury gets absolutely nothing. Clearly many of those are not illicit—the Minister was right to draw that distinction—but they all represent lost revenue to the Treasury.

We should also consider the effect of the exchange rate. Some of the pressure on tobacco imports of all kinds—illicit and legal—has been eased by the fall in sterling, which has meant that super-low brands have become cheaper in the UK than in France. That must be the first time that that has happened—certainly for 20 years, but perhaps ever since tobacco was discovered in the 17th century. Thinking about all-time historic changes, it is worth remembering that, at the moment, sterling is very close to its historic low against the euro and its predecessor currencies, such as the French franc.

We are living in interesting times, but we cannot rely on sterling remaining very low against the euro to reduce tobacco importation over a long time. I do not think that smuggling has been stopped or eliminated. We have to be aware of that. I would be interested to hear the Minister’s views about what the Government are doing. It would also be interesting to know what effect the Government think any significant recovery in sterling would have on the joint smuggling strategy and wider policy.

Another area of revenue loss that we should examine is the new threat of so-called non-domestic brands—or “cheap whites”—which we mentioned earlier. Those are brands that are not counterfeits, but that resemble those available in the UK. They are what I call in vernacular terms fake brands, which are ostensibly manufactured for the home markets of the countries in which they are produced—eastern Europe, Russia, China and elsewhere. Duty is often paid in those countries, even though it is never intended that those products will be consumed there. Anybody who knows anything about tobacco duty will know that it is very low in countries such as Russia and China. It can still make sense to produce the product there, even though it is intended for export from the very beginning. However, instead of being smoked there, after manufacture, the cigarettes are either smuggled directly to countries such as the UK, or moved legitimately via other hubs—particularly Poland, but also Germany—from where they find their way here.

Last November, which is the most recent month for which I have data from HMRC, interestingly, 47 per cent. of seizures were of those “cheap whites”. They are a significant part of the non-UK duty paid part of the cigarette market. I do not know whether other members of the Committee have come across those fake brands, but the industry is finding an ever-increasing number of those “cheap whites” when it conducts pack sampling of the rubbish left behind at events such as football matches and concerts. That might sound like an obscure thing to refer to, but it is standard practice in the cigarette industry to do pack sampling exercises. People from the industry go to somewhere where there has been a big assembly of people and look at the detritus left behind.

Graham Stuart (Conservative, Beverley and Holderness)

My hon. Friend is giving a fascinating exposition on a subject on which he is clearly an expert—doubtless he will build on his expertise. Has he ever considered or will he consider joining one of those pack expeditions, so that he can see for himself how it is done?

Greg Hands (Conservative, Hammersmith and Fulham)

I have left my smoking days behind me, but I think it would be quite interesting. I have seen—as I am sure those involved in the issue and the Minister have—examples of what those packs look like. Superficially, they appear convincingly like a real brand of cigarettes and I suppose, in a sense, they are a real brand of cigarettes. Nevertheless, one packet in particular seems to be deliberately designed to look a little bit like Benson and Hedges Gold. If I were given the option, I would take up the offer of joining such a visit.

Jeremy Browne (Liberal Democrat, Taunton)

Further to the previous intervention, has the hon. Gentleman done any research on the propensity of supporters of different football clubs to smoke non-branded or misleadingly-branded items? Indeed, if he wishes to cast aspersions on organisations other than football clubs, does he know whether those people who go to pop concerts are more or less likely than football supporters to smoke cigarettes that are inappropriate?

Peter Atkinson (Conservative, Hexham)

Order. May I ask the hon. Member for Hammersmith and Fulham not to be led down that path?

Greg Hands (Conservative, Hammersmith and Fulham)

Thank you, Mr. Atkinson, for what I am sure is very correct advice.

I was interested by a piece in the Manchester Evening News last week about myself and the hon. Member for Taunton. Some journalist on the newspaper does a count of the number of words that MPs use that might be used by people in Manchester when talking about their everyday lifestyles; I think that that is the point. There is a word count of the use of words such as “beer” and “football”. I must say that the hon. Gentleman did extremely well. Normally, he features quite heavily in the newspaper. On this one occasion, however, thanks to my marathon speech on beer during a Committee of the whole House he was trumped completely.

I know that I am testing your patience, Mr. Atkinson.

David Gauke (Conservative, South West Hertfordshire)

For clarification, it might be useful to say that, as I understand it, the Manchester Evening News word count process applies only to the main Chamber.

Peter Atkinson (Conservative, Hexham)

Order. The hon. Gentlemen are testing my patience now.

Greg Hands (Conservative, Hammersmith and Fulham)

I will not respond to that last intervention.

Returning to the issue of “cheap whites”—

Mark Hoban (Conservative, Fareham)

Will my hon. Friend give way?

Greg Hands (Conservative, Hammersmith and Fulham)

Yes, of course.

Mark Hoban (Conservative, Fareham)

I know that my hon. Friend is just limbering up on this topic. [Laughter.] However, can he clarify whether the sale of these fake brands or “cheap whites” is legal or illegal in the UK?

Greg Hands (Conservative, Hammersmith and Fulham)

That is a very interesting question, which I hope the Minister will respond to in due course. It is a very interesting question about how we control this level of activity. The person who has imported the produce is almost certainly committing an offence. However, it is unclear if the person at the point of sale is also committing an offence. I am told that most of the sales of these goods happens in places such as pubs or street markets. I would be grateful if the Minister gave a precise explanation of what illegalities have been committed in the sale process and, if there have been any, when and by who?

Returning to the issue of “cheap whites”, I am told that a brand called Jin-Ling is the most prevalent, but there are dozens of different brands. Oddly enough, it appears that smokers who buy their cigarettes on the black market still appreciate a bogus aura of authenticity, which I have already referred to by giving the example of the lookalike B&H product.

Some of the eastern European manufacturers of these products oblige their customers by replicating the UK health warnings on the packet. I am not sure what that says about the effectiveness of the health warnings. However, it will be interesting to see if these manufacturers stop copying the health warnings when they start to include images, which I think will be used in due course.

So, non-domestic brands are a serious problem. They cannot be tackled through the agreement of the big UK suppliers that has helped to bring down the quantities of illicit tobacco in recent years. Getting the Governments who host these non-domestic brand manufacturers to take action is difficult, but it will be crucial.

Again, I will just give the example of Jin-Ling, which I think is manufactured in Kaliningrad. That itself raises an interesting question. Kaliningrad is part of the Russian Federation but it has a very interesting legal structure. I know that, having been there. I will not stray into the realm of discussing my wife’s family, but I happen to know a fair bit about Kaliningrad. Consequently, I would be interested to know what representations the Minister, or the Foreign Office on her behalf, have made to other countries—not only Russia but Poland—about strengthening the border controls near Kaliningrad, with reference to tobacco smuggling.

There is another interesting question. Which Governments have duty receipts that far outstrip the domestic consumption of these brands? That should certainly act as a warning signal for those countries; they will know at that point that they have a problem.

I know that the Treasury is aware of this issue and the joint smuggling strategy, published by HMRC and the UK Borders Agency in November, identified it as the key threat in the future. It would be helpful if the Minister could outline what steps have been taken since November in relation to the products’ countries of origin.

Returning to the structure of tobacco taxation, there are important questions outstanding to which we are owed a response. First, why have the Government seemingly reversed their own policy on ad valorem duty? Secondly, do they recognise the problems that has caused and which, in effect, they predicted in their submission to the European Commission? Thirdly, why did they not address them in the Bill? Fourthly, will they re-band the structure of cigarette taxation in January 2010, when VAT is raised again?

Ironically, the Commission’s draft directive supports the shift towards specific duty that the Government outlined in their submission. The draft calls for minimum rates of taxation to be increased and proportional rates to be lowered. In conclusion, do the Government still want what they asked for when they made their submission to the EU as part of their consultation in 2008?

Jeremy Browne (Liberal Democrat, Taunton)

I feel there is not much that I can add to that rigorously researched contribution, although I thought it was thin on the different types of tobacco manufacturing in different parts of the Russian Federation. I would have appreciated greater detail before deciding whether I wish to support clause 12, but I will have to operate in the dark, so to speak, and make that decision less well informed than it might otherwise have been.

I will ask three brief questions. The first is on the issue drawn out at length by the hon. Member for Hammersmith and Fulham: differentials between premium brands and lower-price brands. He put figures on them, but—anecdotally—one can see displays of cigarettes in shops and the prominence afforded to the lower-price brands compared to 10, 15, or 20 years ago, when the big household name brands such as Marlboro would have been more prominent and consumed more space on retailers’ shelves. That is a serious problem, partly because young people who wish to smoke more are likely to be drawn to the lower premium brands for price reasons, and partly because the Government are losing revenue even if the total number of cigarettes sold is the same. The Minister needs to address that.

The second issue is smuggling. The hon. Member for Hammersmith and Fulham estimated that 37 per cent. of cigarettes smoked in the United Kingdom had not had UK duty paid on them. Some of those cigarettes would have been entirely properly brought into this country by someone returning from holiday, for example, but it is well known that a large number of cigarettes are smuggled into the country. A number of problems associated with that. One is that the Treasury makes no revenue on those cigarettes at all. The other problem is that smuggling penalises legal retailers of tobacco.

It must be extremely galling to sell cigarettes and comply with the law only to have someone outside the shop or round the corner selling the same cigarettes, or a very good replica, at a substantially reduced price, which risks putting the conventional retailer out of business. Even though it ought not to be a temptation, the inducement is for legal retailers to sell non-legal smuggled products under the counter. They might conclude that they would like to have a share of that market. If all the people in that locality buy cigarettes illegally, the only way that retailers can remain viable as a business is to seek to move into that illegal part of the market. That puts them in a severe moral quandary, and I do not want people put in that position.

If the Government decide that all cigarette displays are illegal, all cigarettes will be sold under the counter. There will probably be even less differentiation between smuggled, illegal cigarettes and legal cigarettes, when all are being bought in such a surreptitious way. The inducement to behave improperly, however regrettable, will probably be greater.

I note that the Minister and the Government talk—always—about measures to strengthen border controls, inspections and so on. That is important, but it would be interesting if the Minister also engaged on the question of price, because the biggest inducement for anyone to smuggle, or to behave improperly in any other area, is the financial incentive for doing so.

I would be interested if the Minister touched on what was not covered by the hon. Member for Hammersmith and Fulham, who had to cut short his remarks and was therefore not able to cover all the ground—the impact of the duties in clause 12 on different income groups. The Minister touched on young people, who tend to have less money than middle-aged smokers, but I would be interested to know his assessment of the impact of clause 12 on the top decile by income, as opposed to the bottom decile.

My suspicion is that the duty brought about by clause 12 and similar clauses in previous years has a much more profound effect on people in the bottom decile, certainly in terms of the percentage of their overall disposable income, but I suspect even in absolute terms. That has a social impact on those people. It may be that the Minister regards the adverse impact on people’s finances to be justified in terms of the beneficial impact on their health, but there are problems with trying to effect behavioural change through pricing. Everyone recognises that, whether the attempt is made through congestion charges in London or the pricing of tobacco products, the economic impact on people with low incomes can be profound. I would be interested if the Minister touched on that point as well.

Angela Eagle (Labour, Wallasey)

Albeit late in the day, as it has taken a day or so to get to my first response in the Finance Bill Committee, I welcome you to the Chair, Mr. Atkinson, probably just as you are dreaming of getting out of it as quickly as possible after a day of duty.

Clause 12 increases the duty on cigarettes and all tobacco products by 2 per cent. Together with VAT, that will add 7p to the price of a typical packet of 20 cigarettes and 3p to a pack of five cigars. The clause also puts into legislation the increases in tobacco duty announced in the pre-Budget report. Tobacco rates will remain unchanged after the VAT rate returns to 17.5 per cent. in January 2010.

Before I go on to answer some of the specific points made in the debate, it is wise to put on the record that smoking is the biggest single cause of preventable illness and early death in the UK. It contributes significantly to inequalities in life expectancy, which the hon. Member for Taunton may take as a signal of my response to the last of his points. Maintaining high levels of tobacco duty, alongside continuing action to clamp down on the threat of smuggling, is a proven part of the Government’s strategy to reduce smoking prevalence. Tobacco is also an important contributor to public finances.

Graham Stuart (Conservative, Beverley and Holderness)

We have heard varying figures, such as Imperial Tobacco’s that 37 per cent. of the UK market consists of cigarettes on which duty has not been paid in the UK. Have the Government looked at where illegal cigarettes—in the social deciles that the hon. Member for Taunton referred to—tend to be bought and sold? In other words, could it be that illegal cigarettes are going to a particular area of society and perhaps exacerbating the health impacts and social injustices?

Angela Eagle (Labour, Wallasey)

There is more than one sort of illegality. There are counterfeit cigarettes and those that have been smuggled in, and they are not always the same. Legally produced cigarettes are smuggled but they are also brought into the country legally through cross-border shopping. There are also counterfeit goods, which, given the lack of assurance about what has gone into them, we would prefer were not available at all. There is a range of issues.

The only way of knowing in detail where the illegal product ends up is by undertaking the surveys that the hon. Member for Hammersmith and Fulham talked about earlier, and some spot checks. There are various ways to attempt to get a handle on what by its essence is an illicit phenomenon and come up with a reasonable idea of its scale, but there are no Office for National Statistics figures on counterfeit products.

Graham Stuart (Conservative, Beverley and Holderness)

Can I come back again?

Angela Eagle (Labour, Wallasey)

When I have finished answering the hon. Gentleman’s initial question, I shall of course let him intervene again.

There are no rigorous official statistics about such things simply because the phenomenon is illegal and underground. All we can do is have surveys carried out. We all probably have our own view, because we have had particular experience of what is going on in our constituencies or what is available in the communities in which we live.

Graham Stuart (Conservative, Beverley and Holderness)

The Minister is making a very fair point. If smuggled cigarettes were being used more extensively by the lower income decile groups, putting up duty could, in fact, exacerbate that tendency and thus the likelihood of such people, who are particularly vulnerable to all sorts of other social and health problems, to increase their smoking. It is a matter of teasing out whether the Government have looked at the matter seriously and whether it could be an issue, because it would go against all policy if it turned out that the most vulnerable in our society were ending up more likely to smoke as a result of the Government’s policy, which all of us here were thinking did the opposite.

Angela Eagle (Labour, Wallasey)

That point overlooks the overall fact that all smoking is dangerous to health, whether one smokes premium brands, cheap brands or counterfeit brands. The Government’s policy is designed to reduce and minimise the number of people who smoke.

Jeremy Browne (Liberal Democrat, Taunton)

The previous intervention was good. People in higher income deciles might carry on smoking premium brand cigarettes, and that would be easily measurable through official statistics. However, if cigarettes bought legally—even lower premium brands—became prohibitively expensive for people on low incomes, there may seem through official statistics to be have been a reduction in smoking propensity in low income deciles, but those people may actually be smoking more because they are financially induced to buy smuggled or illegally produced cigarettes that are not showing up in official statistics. That is the point that was being made, and it is worthy of a reasonable answer.

The rest of the debate is in Hansard.