Finance Bill

Public Bill Committee, 2 June 2009.

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

Peter Atkinson (Conservative, Hexham)

I welcome members of the Committee back. I hope that they had an interesting recess.

Clause 17

Greg Hands (Conservative, Hammersmith and Fulham)

Thank you, Mr. Atkinson. Will it be convenient to discuss schedule 5 at the same time as clause 17?

Peter Atkinson (Conservative, Hexham)

No, we were going to debate schedule 5 separately. However, if it would assist the Committee, I propose to employ considerable latitude and allow mention of schedule 5 on the basis that we do not have an extended stand part debate on it. Is that acceptable?

Greg Hands (Conservative, Hammersmith and Fulham)

I thank you for that guidance, Mr. Atkinson. That is most acceptable, and I will refer to schedule 5 in the course of my remarks on clause 17.

The Government have given us quite the runaround on air passenger duty. At the beginning of last year, they appeared to agree with the Opposition that taxing on a per-plane basis would be a better option than the existing tax on a per-passenger basis—in the name of penalising flights that run near empty. In fact, they proposed to go further than some were suggesting at the time and extend their new per-plane tax to freight and non-commercial civil flights. Then they got into problems of their own making on questions of definition and administration. Finally, they gave up altogether and decided to stick with the current tax on passengers, which is generally paid, as we know, at the point of ticket purchase.

So the 2008 pre-Budget report ran up the white flag, but with some diversionary reforms that will hit existing passengers quite hard. Here we see a story that is similar and familiar to other aspects of the Budget and Finance Bill: a number of elements that the Government tried to introduce, to increase predictability and durability in the tax system, have been completely blown out of the water.

Currently, two levels of APD are applied, according to the distance flown. Roughly speaking, there is one rate for flying to an EU destination and another rate for flying elsewhere. The pre-Budget report proposed replacing those two rates with four rates, making all flights more expensive, but with big duty increases especially on long-haul flights. Despite protests from the industry, this time the Government have not changed their mind and clause 17 and schedule 5 aim to put the pre-Budget report plans into effect.

It is worth taking a moment to examine the scale of the changes. The existing two-band regime, as I said, becomes a four-band version as laid out in schedule 5, with all rates significantly higher than those at present. The two existing bands are, first, the UK-EU and other qualifying territories such as Switzerland and Turkey, and, secondly, everywhere else. That is the status quo. At present, the first band duty is £10 per passenger for economy and £20 for all other classes; the long-haul band is £40 and £80 respectively. That is fairly straightforward at the moment.

However, the four new bands, which will come into effect from November 2009, start again with a similar band. Part 1 in schedule 5 is very similar to the present short-haul band, but with the rates charged going up by 10 per cent. to £11 and £22. It now includes the Maghreb countries and Russia west of the Ural mountains. The new part 2 territory, as outlined in schedule 5, includes North America, Egypt, the middle east, eastern Russia and Pakistan. Duty rates from November will be £45 for economy and £90 for other classes, which represents a 12.5 per cent. rise.

Part 3 is banded at £50 for economy and £100 for all premium classes. That includes India, China, Japan and much of Latin America and is a 25 per cent. rise. What I shall call part 4, but which is defined legally as all those territories which are not in parts 1 to 3, comprises Australasia and various parts of Latin America, including Argentina, Chile, Bolivia, Peru and some other smaller South American countries and the Falkland Islands. Duty will be £55 and £110 pounds, which represents a huge 37.5 per cent. increase on the status quo.

What is more, the Government are programming big rises again in 2010, far bigger than the rises I have just mentioned which come in this November. Part 1 charges will rise to £12 and £24. In each of these figures, the first is for economy and the second for premium classes. Part 2 will be £60 and £120; part 3 will be £75 and £150 and part 4 will be £85 and £170. These are huge increases. Those in the second wave were a little bit hidden in those figures, but by combining the November 2009 and November 2010 increases, we see the full magnitude of what is proposed. Looking at economy class passengers only, those flying to popular destinations such as France or Spain will face a 20 per cent. tax hike in the next 18 months. Those flying to Florida and all other destinations in the States will face a 50 per cent. hike. Those flying to India will face a huge 88 per cent. increase in the tax element of their ticket and those flying to Australia and New Zealand will face a whopping 113 per cent. tax hike.

We have a few questions on the methodology used in schedule 5A, which sets up the four new bands. First, all territories not named in the schedule are assumed to be in with Australasia and most of South America. As we know, the world has seen significant changes in boundaries since 1989, perhaps bigger than any seen since 1919. We cannot rule out future boundary changes and, indeed, the creation of new states. Yet it would appear that any new state would be thrown automatically into the band that does not include parts 1 to 3, in other words the Australasia band. For example, Kosovo is listed under part 1, but if a new county were to be set up—[Interruption.]

I think I heard the hon. Member for Taunton say “Scotland”. So let us take the uncontroversial example of Scotland, which would be thrown in with Australasia. Someone flying from London to Edinburgh would suddenly be charged not £12 in APD, but £85, which is a sevenfold increase. I note the absence of the hon. Member for Dundee, East. He might be rather interested in this. It would appear that the listings could be amended by statutory instrument. I suspect that they would be. But this appears to be a cumbersome way overall of defining these distances. What started out with an idea of relative simplicity—all territories with capital cities within 2,000 miles of London would be included in part 1—has become needlessly complicated as a result of the Government’s approach.

We briefly touched on Russian geography in our debates on tobacco duty. I should be interested to know how the Government define “west of the Urals”. There are currently no direct flights from the UK to Ekaterinburg, which is a sizeable city in the Urals. Five other EU airlines fly there so it is not impossible that this could be a future destination. Is the city in band 1 or band 2? The Government say that they are splitting Russia—the only country that is split—because

“it is administratively simple to do so”.

I am not so sure. The Russians themselves do not have a ready definition of the location of the Urals—a mountain chain that begins about 400 miles north of the Caspian sea. So precisely how would one define the cities there that could be destinations? I have given the example of Ekaterinburg, which is quite a likely future destination.

So if it is administratively simple to split Russia, which I doubt, why is it not administratively simple to split the United States, for example, where the Government are basically throwing into the same band cities such as Boston on the one hand and Honolulu and Anchorage on the other?

These points might seem trivial, but elsewhere there could be political repercussions, for example by charging flights to Pakistan 25 per cent. less tax than flights to India. That would of course be drawn from the Government’s schedule according to distance from London, but the way it has been simplified into bands could cause political problems. For example, how exactly will a chartered flight to Kashmir be defined? The airline operator would basically have to decide which bits of Kashmir were properly covered in schedule 3 as being part of India and which bits belong to Pakistan and are therefore in part 2. I raise those points because someone has designed the system with little thought for some of the considerations involved.

James Duddridge (Conservative, Rochford and Southend East)

My hon. Friend has made an excellent point and raises a few things that I had not considered but which the Minister and the Department clearly should have considered in more detail. Will he be pressing for a simple map of the world outlining, pictorially and geographically rather than in words, precisely what is and is not covered?

Greg Hands (Conservative, Hammersmith and Fulham)

That would certainly be helpful, because it would start to focus minds on some of the difficulties caused by simply drawing up a list of existing countries and pretending that there are no political ramifications in doing so.

Many people are concerned that the Caribbean, which is most dependent on tourism, will be included in the part 3 territories. A family of four will pay £300 in APD from November 2010 for a return flight to the Caribbean, which is a lot of money for a family holiday. Caribbean Governments have reacted furiously to that proposal—I happen to know that because some of their high commissions are located in my constituency and around 10 per cent. of my constituents are of Caribbean origin. Under the bands, Florida would be in part 2, but the whole of the Caribbean would be in part 3. I have read in the Travel Trade Gazette that the Governments of those countries have drawn up lists of UK parliamentary constituencies where their voices can make a big difference. The Jamaican tourism Minister, Ed Bartlett, speaking at a reception here in the Palace of Westminster in April said:

“The Caribbean communities in the UK are beginning to understand this will hurt them.”

Moving away from some of the geographical problems to which the schedule will give rise, the Government’s change in policy has consequences, and there is a need to examine in some detail the case for their 180-degree U-turn since they first set out their intention to move to a per-plane tax in January 2008. When they originally launched their consultation in that month, the intention to move to a per-plane tax was absolutely clear. The Government would

“replace air passenger duty with a duty payable per plane rather than per passenger.”

In case of doubt, the consultation document was unambiguous:

“This reform will take place on 1 November 2009, and has the objective of sending a better environmental signal, and ensuring that aviation makes a greater contribution to covering its environmental costs”

while ensuring that a fair level of revenue continues to be raised from the sector in order

“to support public services.”

The document describes as a principle the need to provide incentives for the more efficient use of planes by taxing similarly sized aircraft the same, no matter how full the plane. There we have it: in January 2008 they set out a clear intention, with the reasons stated, to move to a per-plane tax rather than a per-passenger tax.

Last year’s Finance Act provided for certain powers to proceed in that direction, and Ministers again committed to a per-plane tax this time a year ago, with only the final scope and mechanism open to change, and yet six months later the change was absolutely total.

Jeremy Browne (Liberal Democrat, Taunton)

If I remember correctly, and I may not, the original tax was introduced by Lord Lamont in the early 1990s. Will the hon. Gentleman speculate as to why the noble Lord decided then not to go ahead with a plane tax and preferred a passenger tax instead?

Greg Hands (Conservative, Hammersmith and Fulham)

I am not entirely sure of the background. I thought that it was introduced in 1996, in which case it would have been under the right hon. and learned Member for Rushcliffe (Mr. Clarke). Either way, I am not sure of the reasons or the arguments used at the time. Maybe the Minister can help us.

Angela Eagle (Labour, Wallasey)

It was introduced in 1994.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank the Minister for that important correction. Either way, I am unable to reflect on the precise reasoning used at the time. I am sure that it is available in Hansard, which is online from 1989 onwards, so we could examine the background.

The Government’s U-turn is set out in “Aviation duty: response to consultation”, which was published alongside the pre-Budget report last November. It makes for interesting reading and includes sorry excuses, where they are provided at all. We can agree that the member states’ decision in October to include aviation in the EU emissions trading scheme was a significant development, but the Government acknowledge the ongoing case for a UK tax alongside the EU emissions trading scheme. The response claimed that the U-turn was:

“Consistent with the Government’s objectives to provide additional support to businesses and individuals in the short-term and maintain action on climate change”.

However, it was not consistent with their previous environmental analysis. One might infer from the talk of supporting business that the U-turn was welcome to the industry—one struggles to see how. The industry has reacted furiously to the huge hikes, which are outlined in the clause and the schedule. Hikes of anything up to 113 per cent. are projected over the next 18 months on air passenger duty. That figure obviously relates to Australasia and parts of South America, but these are big, across-the-board increases. British Airways said:

“APD was doubled two years ago, making air travel from the UK the most heavily taxed in the world...The Government’s own figures show that British airlines already meet their environmental costs, so there can be no ‘green’ justification for these additional taxes.”

Jeremy Browne (Liberal Democrat, Taunton)

I would be grateful to know the hon. Gentleman’s thoughts on whether this is more likely to make aviation from Britain uncompetitive. I have heard arguments that some people may choose a short-haul flight to a hub in the Netherlands or France and a longer haul flight from there. Is that likely to have consequences or will a wider EU application avoid that hazard?

Greg Hands (Conservative, Hammersmith and Fulham)

I thank the hon. Gentleman for his intervention and will explore that issue, but, at this point, we simply do not know. If we put air passenger duty up by these three-figure percentage rates, we cannot exclude the possibility that it will become economic to fly to Amsterdam, for example, buy an additional ticket starting there—luggage would have to be checked in there—board a connecting flight to Bangkok, for example, and end up saving money. At the moment, it is difficult to speculate. I think that the Minister feels that she has speculated on it and wants to intervene. If we put up APD to such a level, that kind of transaction starts to appear economic.

Angela Eagle (Labour, Wallasey)

Before the hon. Gentleman gets too carried away with his argument, I want to point out that 70 per cent. of passengers travel from the UK to band A destinations. The figures that he has quoted demonstrate that APD for band A will go up by £1 in November and then by a further £1 the following November; for business class travel it goes up by £2 and then £4. He should bear that in mind before he develops his argument too much, instead of getting carried away with the larger increases for longer haul flights.

Greg Hands (Conservative, Hammersmith and Fulham)

First, the increases that the Minister quotes are only the November 2009 increases and do not include the further increases in November 2010. Secondly, one must look at the long-haul flights. If one were to fly from London to Bangkok, which is the example that I gave, it could well become more economical simply to buy a flight for the London to Amsterdam leg. I believe that the Netherlands has abolished air passenger duty, so there would then be no tax on the ensuing flight from Amsterdam to Bangkok, if it was bought as an entirely separate ticket. That is the point that I am trying to make—it relates not to the 75 per cent. of people who fly to Europe but to the 25 per cent. of people who fly further afield.

Robert Syms (Conservative, Poole)

Of course, if the tax increase for flying to Amsterdam or Paris is lower but the long-haul flight increases are higher—in other word, the increases for flights to Australasia—there is then an incentive to hop over the channel to take a long-haul flight, because we are talking about an awful lot of money. Therefore, there is a differential pricing arrangement here, which may have a long-term impact on our airline industry.

Greg Hands (Conservative, Hammersmith and Fulham)

My hon. Friend is absolutely right. That is why I was looking at some of the increases. For example, the 113 per cent. increase on the tax element of an economy flight to Australia, compared to the 10 per cent. rise on the tax element of an economy flight to Amsterdam, could well make the type of ticket shopping that I have described much more prevalent.

I want to return to the reactions given by the industry to some of these changes. I mentioned British Airways and easyJet. If the Minister is right, virtually all of easyJet’s flights would be affected. It operates flights to a couple of places in Egypt, but virtually all of its flights are to part 1 territories. If the Minister is right, one would have thought that, because 75 per cent. of people go to part 1 territories, those airlines should not be too fussed about this change. easyJet would be an obvious company that would not be too bothered, if the Minister is right. However, the opposite is the case. easyJet says this:

“The Chancellor of the Exchequer has missed the opportunity to give air passengers a much-deserved shot in the arm by refusing to ditch his planned £1bn raid on the airline industry over the next two years...In today's Budget he should have waived the planned increases”—

in air passenger duty—

“in order to help an industry which will be at the forefront of dragging the economy out of recession”.

So, far from the Minister’s response that those flying to the 75 per cent. of areas that will be unaffected simply will not be that troubled by this change, the example of easyJet says precisely the opposite.

Mark Field (Conservative, Cities of London and Westminster)

I thank my hon. Friend for giving way. I am a great supporter of easyJet and I use it. However, I think that it is a pretty contentious statement to suggest that somehow the airline industry will be the industry that will be “dragging” this country “out of recession”. It is an important industry, but there are a considerable number of other industries that will also be important.

I want to ask my hon. Friend a question on this issue. Does he share my overriding concern that there will inevitably be perverse incentives as a result of this change? He has touched on some of them that were rather ignored by the Minister. There will be some very perverse incentives, along the lines that he has set out, that are likely to be fairly catastrophic, both in financial terms and, probably more important, in relation to the environmental targets of both this Government and hopefully a future Conservative Administration.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank my hon. Friend for that intervention. I will respond to the two specific points that he made. By quoting easyJet, I was not necessarily endorsing its point of view. I was actually answering the point that the Government made earlier; there were a number of interventions and perhaps we lost the thread of the argument a little bit. However, the Government said that their justification for continuing with the status quo on APD was to provide additional support to businesses. I was merely pointing out that a lot of these businesses obviously thought that the opposite was the case.

My hon. Friend is absolutely right, however, on some of the perverse incentives. We have already talked about one of them, which is the possibility of passengers buying two separate tickets to reach a long-haul destination. There is also nothing in this proposal that ends the perverse incentive for airlines to fly empty airliners around. We had thought, and in fact the Government told us, that that was one of the reasons why we wanted to move to a plane tax in the first place. So he is quite right about the perverse incentives that exist.

I will just finish on the airlines with a brief word from the travel agents, who are also important in the current economic environment. The Association of British Travel Agents has also raised concerns about the impact that APD will have on regional passengers who are forced to fly via London and have to pay the tax twice when they travel with two different airlines. Again, that is another perverse incentive and it is significant for the viability of some of our regional airports. If, as the Government say, the industry welcomes their proposals, the industry has done an excellent job in suppressing its enthusiasm for the huge tax rises.

The changes will also have a negative impact on Britain’s competitiveness as a tourist destination if passengers are forced to pay APD on their return journey. I would appreciate clarification on whether APD can be levied on transfer passengers or not. The Royal Aeronautical Society tells me—I have not had a chance to obtain independent verification of this, but I have no reason to disbelieve it—that some US interests are taking their Government to court for charging APD on some transfers, even though the passengers and their luggage stay air side at all times. I believe that other countries are also questioning such an approach. Will the Minister inform us of the latest developments in those important court cases, and what is the Government’s current position on transfer passengers?

The reaction from environmental groups has been mixed. Many welcomed the headline rises, but, like us, decried the abandoned attempt to find a per-plane methodology. Friends of the Earth responded:

“The rises in APD are welcome, but should be seen in the context of the abandoning of per-plane aviation duty.”

Greenpeace stated:

“Plans to tax flights instead of people would have encouraged the industry to fill their planes instead of flying half-empty airliners around the world. Once again the aviation industry has been given a free pass at a time when its contribution to climate change is rising.”

Furthermore, the National Society for Clean Air noted:

“Air Passenger Duty is set to be doubled. However, in light of the significant expansion in UK aviation announced in 2003’s Aviation White Paper these changes are unlikely to have significant impacts on overall emissions from aircraft.”

Charter airlines are another group affected by the measure. The APD tax structure pays no heed to a class called premium economy; it simply lumps it together with business and first class, which is hard to justify to those who simply need a small increase in leg room. We have to understand how premium economy class works on charter flights. Essentially, as I understand it, there is no difference in the seat; premium economy class merely adds a small amount of leg room. The class is particularly popular with families with young children who like to move around on planes, especially on seven-hour charter flights to somewhere like Florida or the Caribbean. It is very difficult to keep children under control or entertained without a little bit of leg room that allows them to move around. Premium economy class seats are therefore very popular with families and, as I understand it, do not cost an awful lot more.

However, those travelling in premium economy class will now have to pay double the APD of the regular economy class passenger. That will be especially true for long-haul charter flights to Florida, for example, when a family of four travels in premium economy class on a charter plane. I am not talking about business passengers flying hurriedly from London to a meeting in New York; I am talking about families on quite reasonable charter package holidays to somewhere like Florida or the Caribbean.

Jeremy Browne (Liberal Democrat, Taunton)

I anticipate getting letters on the issue from two other groups in my constituency. The first is people with disabilities that require them to move more than they might be able to in a restricted space. The other—this may sound vaguely amusing, but it is not meant to be—is tall people who quite often take opportunities such as that under discussion and may feel unfairly treated as a result of the measure.

Greg Hands (Conservative, Hammersmith and Fulham)

I am not sure which tax regime applies to those with disabilities, so I would be grateful if the Minister would explain what kind of special rules, if any, relate to them on flights. The issue of tall people was raised by my hon. Friend the Member for Wellingborough during last year’s Finance Bill debate. He referred to my hon. Friend the Member for Shrewsbury and Atcham (Daniel Kawczynski), who was not a member of the Committee, as an example of somebody who would need additional leg room. The hon. Member for Taunton therefore makes a valid point. However, for a family of four travelling premium economy in a chartered plane, this will mean £600 in air passenger duty from November 2010, compared to £160 today. That is more or less a quadrupling, an extra £440 on a family holiday to a state such as Florida.

In the present economic circumstances, the Government have baulked at introducing a per-plane tax on the scale that they originally intended, encompassing freight aircraft and other sectors. They have been forced to try to recoup some of the revenue lost by not introducing the per-plane tax from the existing per-passenger APD structure. That is why the hikes are so steep and potentially punitive for air passengers. The Government also began in the wrong place, not least when selecting a yardstick for emissions when they began their consultation. Conservative Members do not accept that a per-plane tax is unworkable. On that, we are, I believe, of one mind with the Liberal Democrats, so I look forward hearing what the hon. Member for Taunton has to say. I am not sure whether I have surprised him by suggesting that I expect him to say something on this subject, but I very much hope that he will.

There are certainly difficulties in drawing up an all-encompassing system and, to be fair, in launching the consultation the Government were aware of at least a few of them; however, they have backed down through a combination of a lack of will and poor starting points. As my predecessor in this role, my hon. Friend the Member for Putney (Justine Greening), pointed out in last year’s Finance Bill debate, the Government’s lead options going into the consultation were far from ideal.

To save the Minister from later explanations, I point out that the obvious course of taxing an aircraft’s emissions appears to be impermissible under international agreements, such as the Chicago convention. Putting tax on aviation fuel, even indirectly, is against the terms of that convention. We welcome the Government’s attempts to get other countries and international bodies to look again at the international framework. However, under that framework, a per-plane tax, if it is to be within the rules, has to find a proxy for emissions. That is where the difficulties start.

The Government hit upon the manufacturers’ declaration of an aircraft’s maximum take-off weight—MTOW—as its emissions yardstick. My hon. Friend the Member for Putney is something of an expert on the aviation sector—a number of Members who have constituencies around Heathrow airport have inevitably had to learn a lot about emissions, noise and other environmental impacts from aircraft. She warned Ministers last year:

“Emissions depend not just on take-off weight, but also on the speed of flight and the design of the plane.”——[Official Report, Finance Public Bill Committee, 12 June 2008; c. 714.]

That is an obvious but important point. Maximum take-off weight makes no distinction between newer, cleaner aircraft and older, less efficient models, so no incentive to upgrade fleets is provided. Nor do aircraft always operate at their maximum take-off weight—in fact they rarely do. The weight depends on how an aircraft is fitted out and how much fuel it needs for a particular journey.

The consultation mentioned some alternatives, which would account for certain emissions in a flight’s landing and take-off cycle, but the problem with those schemes was clear from the outset. Paragraph 3.7 of the Government’s response briefly lists some of the alternatives that the industry suggested. Many of them appear to be viable and to offer a more direct correlation with CO2emissions, but, unfortunately, the Government provide no analysis of those options. They are left there, hinting at what might have been explored had the Government not begun the process with their flawed fixation on maximum take-off weight.

The consultation also toyed with having airports collect the per-plane tax, which immediately raised the prospect of commercial airlines having to pay administration fees on top. Indeed, a per-plane regime would probably entail a whole new administrative set-up run by the airport operators. Trying to bring non-commercial flights, such as private business trips, within the scope of the tax—a laudable objective, we would all say—while maintaining a one-size-fits-all collection method always made such problems likely. I shall not offer an extensive account of the plans that have now been abandoned. The important point is that from, arguably, trying to go too far, too quickly the Government have now retreated too far and have taken harsh steps to compensate for their abandonment of their very good intent to move to a per-plane taxation system.

One is left with the obvious question: if the Government did not want to extend taxation to other parts of the industry, such as freight operators, at this time, why did they not introduce a per-plane tax for commercial passenger aircraft only, which would only affect flights that already pay APD? The commercial aviation sector favoured the existing operator-HMRC collection model. The move would have solved the administrative problem as well. Most of all, it would have introduced a disincentive to fly empty planes, which everyone regards as sensible and which will still be lacking now that APD is to be reformed and not replaced.

I have read the Treasury’s November response carefully, but I cannot see any compelling reason why the Government could not have considered some of the alternatives to maximum take-off weight in more detail. Now, we all have to pay the costs of the consequences. Instead of taxing non-passenger commercial aircraft and taxing freight and private jets and so on, there will be huge hikes in air passenger duty, which will be felt by ordinary Britons, due to the Government’s backing down and their lack of courage and persistence in looking for a new regime. However, we are where we are following the U-turn.

I should like to go back for a moment to the Government’s original plans. The Government added to their choice of maximum take-off weight as a proxy for emissions another element: distance. The take-off weight was intended, however crudely, to signify how dirty an aircraft was and applying a distance measure would then approximate emissions over the duration of a flight. They consulted on two options. The first was the actual distance flown in terms of great circle distance or GCD—the shortest distance between point A and point B, after the earth’s curvature is factored in.

I was a student in the last year of O-level maths before studying great circles was removed from the curriculum. I wondered at the time whether I would ever find a use for that knowledge of great circles due to the curvature of the earth. I have finally found it, some 28 years after sitting my maths O-level. I do not want to digress too far, but I was talking to a constituent who is a teacher—

Jeremy Browne (Liberal Democrat, Taunton)

The hon. Gentleman is talking about his maths O-level. Is he absolutely sure that it was 28 years ago? I think he is the same age as me and O-levels were less than 28 years ago.

Greg Hands (Conservative, Hammersmith and Fulham)

I have to inform the hon. Gentleman that I am somewhat older than him. I think he was born in 1970. I shall not say precisely how old I am, but I sat my maths O-level in 1981. I would have been a Ruth-Lawrence-style child prodigy had I been the same age as the hon. Gentleman and sitting my maths O-level aged 11. The head of maths at the London Oratory school told me that one of the questions in the maths GCSE was to draw a line 7 cm long, which is more of an instruction than a question. I think we should go back to the days when we studied great circles rather than having to draw lines 7 cm long—but that is enough on maths exams.

The first option used great circles. The second used banding as a proxy for distance, based on global geography which, as we know, has been something which the Government have more or less amended and kept with us. The link to the proposals before us today jumps out. The consultation only proposed three bands. However, this is how the response was recorded in the Government’s own document in November:

“There was a great deal of concern that both a banding system or the use of GCD could create a strong incentive for passengers and freight with long-haul destinations to hub outside the UK”.

Returning to the points raised by my hon. Friend the Member for Cities of London and Westminster and by the hon. Member for Taunton about the incentive that passengers will now potentially have to transfer in places such as Amsterdam, that danger was acknowledged by the Government in their original consultation. Put simply, the more costs that are loaded on to distance, the greater the incentive there is for people to jump on a short-haul flight over the channel to complete their journey from there, so that they can profit from a lower tax regime operating in some of our rival aviation hubs. The Government noted the risk of having three bands, only to exacerbate that risk by having a fourth band.

The impact assessment, published alongside the Budget, included this summary of the problem:

“Currently some passengers may take commercial decisions which reduce their APD liability by buying separate (i.e. non-connecting) air tickets, where this is possible. This will remain an option under the APD changes.”

Despite having highlighted that risk of that practice occurring, however, the impact assessment then dismisses the possibility of its occurring on a wider scale. It says:

“in these cases, there can be significant time penalties involved, since passengers not on connecting tickets must retrieve their luggage and re-check in at the European hub. There could also be higher airport charges and other costs. The added time and inconvenience will significantly limit the extent to which people choose to buy separate air tickets to avoid paying a modest increase”—

I stress those words, “a modest increase”—

“in APD on longer distance flights.”

The proposed increases are not a “modest increase” at all. They reduce the competitiveness of airlines operating out of the UK and may well cause a significant loss of business to airlines operating out of cities such as Amsterdam, Frankfurt and Paris. Ironically, the effect would also be, of course, to increase emissions. Not only will we have people avoiding the tax regime, but there will be an increase in emissions due to all of the additional flights required to cover a route that could be covered directly by one plane.

The Government’s document, “Aviation duty: response to consultation”, listed the other problems with banding. It noted:

“Many respondents agreed that banding was a simple system but there was concern that such a system would not reflect the true environmental cost of emissions and environmental impact.”

That is precisely the point that we are making, and it was made in the document in the context of banding for a per-plane tax. It applies all the more strongly to APD, which is levied on passengers.

The Government’s document also brought out the other major flaw, by highlighting the concern that

“a system based on capital cities could be blunt, placing all of the US and all of Russia within one band despite the great distances between their capital cities and the farthest destinations in each of these countries.”

We have already looked at Russia. It has been split into bands—rather imperfectly, if I may say so, but the point about dividing it up remains good none the less. Within the US, of course, the distances are massive, but the US is far easier to define in terms of where in the US one could be based—for example, in any of the 50 states. It is much easier to define than Russia, which is one continuous country. Although Russia is a federation, most of the component parts are very small republics. However, a flight from London to Boston will attract the same APD as one to Honolulu, despite covering less than half the distance. Can it be right that a flight from London to Honolulu, which might be competing with the flights to the Caribbean that I talked about earlier, will be subject to significantly less APD than a flight to Jamaica? I think that the schedule is somewhat flawed in that regard.

I know that the Government maintain that using actual distances would have too many disadvantages, but I fail to see why they make that argument. Anybody who flies often and is a member of a frequent flier club will know that the airline tells them instantly how miles they have flown. I do not know whether that is on a great circle basis or an “as the crow flies” basis, but it seems to be incredibly easy to calculate the distance. The Government claim that that would have too many disadvantages, so perhaps the Minister could explain why they believe that using the actual distance would somehow be too difficult or disadvantageous, despite the fact that great circle distance was widely favoured among the 170 responses they received in the consultation.

However one accounts for distance, the avoidance problem will increase the higher the charges applied. The Government’s U-turn has left them exposed to a revenue shortfall—because they wanted to extend aviation duty beyond the commercial passenger sector, they pencilled in the extra revenue that would raise. Even with the increases before us, the Red Book shows that the Government will be down £70 million on its projection this financial year, and £190 million next year, because of their failed attempt to introduce the reforms they had flagged so widely. That is why the increases in APD are so steep: they have to be steep to offset some of the cost of the U-turn, never mind that it is passengers who will suffer under an already discredited system.

A per-plane tax makes sense, but a per-passenger tax does not. The purpose of the tax, we are told, is to tackle emissions, but it is not the passengers who are making the emissions, but the planes. Even if it were limited to commercial passenger airline flights, a per-plane tax would represent a fundamental improvement on the measures before us. It could still be done, but the present Government have exhausted their ability to manoeuvre.

In conclusion, in the 2007 pre-Budget report, the Chancellor announced a new per-plane duty. In the 2008 pre-Budget report, he withdrew it. At the end of this debate, the Minister will no doubt say that the huge new tax increases of up to 113 per cent. are a model of good sense, but the Opposition beg to differ.

Jeremy Browne (Liberal Democrat, Taunton)

I congratulate the hon. Gentleman on a characteristically rigorous speech.

Robert Syms (Conservative, Poole)

And brief.

Jeremy Browne (Liberal Democrat, Taunton)

I certainly do not wish to speak so briefly on so important an issue. The only issue the hon. Gentleman did not cover was the classification of newly formed volcanic islands for the purposes of the clause. I now regret having been born only in 1970 and not having the advantage of studying great circles in my maths O-level. I was in the penultimate year for O-levels and do not recall having had any questions that required me to draw a straight line of a certain distance, but I would clearly have benefited from more study of great circles. It was an excellent speech, and had the exciting proposals put forward by the right hon. Member for Witney (Mr. Cameron) for free votes in Committees applied today, I would hope that many Labour Members, having heard the speech, would be tempted to vote against the Government.

Getting back to the nub of the matter, it was helpful to have it clarified that it was in the early 1990s, the last time the public finances were in a ruinous state, that a Chancellor of the Exchequer initially introduced this form of taxation.

Greg Hands (Conservative, Hammersmith and Fulham)

I follow the hon. Gentleman’s logic, but it is not fair to compare the condition of the public finances in the early 1990s with their current condition. The maximum budget deficit then was around 7 per cent., but I believe that the current figure is north of 13 per cent. It is not quite the same scenario—there is a quantitative difference.

Jeremy Browne (Liberal Democrat, Taunton)

I do not wish to go too far off the beaten track, but I accept the hon. Gentleman’s point. The public finances are in a more ruinous state now than they were in the 1990s, and certainly the budget deficit, as a percentage of GDP, is higher now than it was then. Nevertheless, there was a significant revenue shortfall, and although we were coming out of recession by that period, the Government needed to plug the gap. I remember that at the time the Government were keen to sell the initiative as being environmental, but there was a revenue-raising motivation, as I am sure there is now. I also remember critics of the measure saying that it was a tax on holidays and that, just when one was fed up with every aspect of life under the Government in 1994, they were charging to escape from it. However, we have gone full circle and it is now part of the tax regime, which I welcome.

There is an environmental rationale for taxing air flight. After all, if one has to tax something, the intellectual rationale for taxing air flights is probably stronger than the rationale for taxing work. Work seems to be the sort of activity we should be seeking to incentivise, yet we have a large amount of revenue raised through income tax. If we are to have a component of revenue-raising that seeks to effect a degree of behavioural change, but which also brings in necessary money to the Treasury, a tax on flying seems to have some merit.

Mark Field (Conservative, Cities of London and Westminster)

Although I do not disagree broadly with what the hon. Gentleman has to say, does he recognise that there is a question of certainty? One reason why there is an increasing move towards ever higher property taxes—and taxes on work, as he puts it—is that they at least provide a degree of certainty. One of the difficulties of trying to encourage or discourage particular behaviour is, of course, that the tax base dissipates—which is in some cases the very aim of bringing in the tax in the first place.

Jeremy Browne (Liberal Democrat, Taunton)

Indeed, and we have had some interesting discussions about tobacco duty and fuel duty with regard to predictability of elasticity when it comes to revenue raising, as opposed to disincentivising behaviour.

The Conservative spokesman anticipated that the effect on behaviour would be marginal to non-existent. On that basis, I suppose that there would be a degree of certainty, although the environmental benefits would not then accrue. However, the point I was making is that tax has to come from somewhere, and taxes that have an environmental component in the motivation for levying them seem to be sensible. Although total CO2 emissions from aircraft constitute a fairly small percentage in the grand scheme of things, that percentage is increasing. One does not need to have a particularly fantastical imagination to see that that increase will get bigger and bigger and will account for a larger proportion of our country’s CO2 emissions.

There is a much bigger global aspect. At present, the vast majority of the people in the world cannot afford to fly. Although increased prosperity in countries such as China and India is very welcome, it threatens potentially grave environmental consequences. To have an environmental component to taxation, and to make the effort to tax flying, seems to be a sensible measure.

That is our starting point: we are not hostile to the concept. However, I am very pleased that the Conservative party has seen the wisdom of the Liberal Democrats’ proposals to levy such taxes on aircraft, rather than on passengers. Levying a tax on passengers is a rather blunt and crude instrument. For a start, it gives airlines no tax incentive, beyond their commercial incentive, to run planes at full capacity. A further tax incentive to do so would clearly be beneficial to the environment. We even have the situation, which has been reported in the media, where so-called phantom planes fly around to make sure that the airlines have their planes in the right places for all of their flights. There is no incentive, apart from the obvious commercial incentive, to put passengers on those flights. Given the environmental impact of flying, it seems sensible to my party to incentivise airlines to carry passengers. That would be more easily achieved by taxing the flights themselves, rather than the passengers who are travelling on those flights.

The final point I wish to raise—a lot of the ground was comprehensively and skilfully covered by the hon. Member for Hammersmith and Fulham—relates to extra incentives given to introduce new aircraft. That point was touched on by the hon. Gentleman and it is not directly relevant to the clause, so I will only touch on it as well. One of the great benefits of new technology, whether in the making of cars or in the creation of aeroplanes, is that it increases fuel efficiency. The Government’s measure is rather crude, because is does not differentiate between people who travel on fuel-inefficient aircraft and those who travel on newer, more fuel-efficient aircraft.

Airliners have an incentive to reduce costs and there is a big up-front capital cost in buying an aircraft, but there are potential benefits in terms of fuel savings once that aircraft has been purchased. Much more could be done, however, to allow airliners to make claims against the depreciation of new aircraft to incentivise them further to buy such aircraft where possible. That could be skewed towards certain types of flights or aircraft if they are thought to be environmentally beneficial.

Our view is that the motivation behind this form of taxation is broadly laudable. However, the Government’s approach is ill advised: a system based on aircraft rather than on passengers would be better.

Robert Syms (Conservative, Poole)

This is the first speech I have made on the Finance Bill; it may not be the last. I declare an interest, as outlined in the Register of Members’ Interests, as a director of a building and property company. I hope that having that on record will be sufficient for the Bill’s proceedings.

I hate to disagree with my Front Bench colleague, but the original proposal, as crafted by the Government, to tax per plane, was barking. The impact that the proposal would have had on the aviation industry meant that it was not very sensible. It is good that the Government changed their minds, because we would have been in a worse situation had they not stuck with APD.

I will give a few examples. Our aviation industry is very successful—the second largest in the world, I think. That requires us to have competitive airlines operating from our airports. Furthermore, the number of jobs generated by successful airports at both the main hubs and the regional airports, which are terribly important to our economy, means that it is important that the airline industry remains competitive for the sake of a successful economy. We have also seen the successful growth of the freight industry in the UK. East Midlands airport and many other regional airports are examples of the creation of freight transport. The per-plane proposals would have given a major disadvantage to our air freight industry, which would have found itself undermined by its European competitors.

Bournemouth international airport, near my constituency, provides aircraft repairs. A Boeing, for example, can fly in and the engineering services at the airport, which is situated in Hurn, will repair it. Inevitably, planes fly in empty because they are being repaired, but, if there was a tax per plane, they could well be charged £8,000 or £9,000 just to fly into Hurn for repairs. Those are perverse incentives, and the proposal as originally crafted by the Government would not have done the job.

Jeremy Browne (Liberal Democrat, Taunton)

I understand the hon. Gentleman’s point; he is making a well argued case. However, people in my constituency tell me that it is perverse of supermarkets to fly in food from the other side of the world out of season, and that local food should be more widely available instead. Do not all tax regimes have a potential behavioural effect that disadvantages one form of production or activity while advantaging another? Is that always a bad thing?

Robert Syms (Conservative, Poole)

The hon. Gentleman makes a good point. Imported fruit from Chile clearly comes in on an aircraft and the effects are perverse. Our responsibility as politicians, however, is not to disadvantage UK businesses against their competitors. We all occasionally go through Charles de Gaulle or Schiphol airport. Our European competitors want to take business away from Britain, and we know the jobs that that business generates. We need a sensible airport policy and we need to nurture our airline industry, which is going through difficult times.

We can strip out all the excuses for APD; the basic rationale is money. That was the rationale of the Conservative Government in 1994, who needed to raise a lot of money quickly, and it is the rationale of the current Government. They are trying to raise a lot of money quickly due to the state of the public finances. I agree with my hon. Friend the Member for Hammersmith and Fulham, there is a danger that the different banding and areas will lead people to use European hubs, which will be a disadvantage, particularly for Heathrow. I hope that the Government are alive to that.

What number of passengers is the money that the Government expect to raise predicated on? Passenger numbers have declined by about 20 per cent. according to the last figures that I saw, so the measure may not raise the money that the Government think it will. I am interested to know how much the Government think that it will raise.

I would like to put certain concerns on the record. The proposal could give passengers an incentive to transfer to rival European hubs and put UK domestic connecting schedules at risk, thereby reducing frequency. We have heard about the rate of increase for long-haul flights, but do not forget that airlines invest a lot of money when they set up a new destination or route and it sometimes takes a while to get the passenger levels and the business. This measure will hit airlines, and it may be a disincentive for them to develop new long-haul routes. The additional distance bands will discourage high-value long-haul flying from the UK, which could damage the economy without any environmental benefit, because if passengers go elsewhere to fly they will still create environmental damage. There are concerns that the Treasury proposals may be inconsistent with the Stern review and with the Government’s policy of developing Heathrow. I know that there are differences across the Committee over that proposal.

I would like to hear from the Minister about the EU, which will bring in an ETS tax in 2012. Will this passenger duty cease when the EU has an environmental tax? If not, our airlines may find that they are subject to European and domestic taxation, which will be a double disadvantage. Will the Minister flesh that out? The increase in APD could have the perverse effect of delaying fleet replacement plans. As I understand it, British Airways could replace half its fleet over eight years with the money generated by the tax, so it is not small bucks. It is a lot of money.

I never speak for too long having made my point, Mr. Atkinson, so, in conclusion, I had concerns about the Government’s per-plane proposals. There may be a better solution, and my hon. Friend the Member for Fareham will no doubt look at it sensibly when he is a Minister. The Government’s proposals would not have worked, and we have come back to per-passenger duty. It is basically about raising money quickly, and, unfortunately, Governments have to find money somewhere. It is presumably better to take it from people or businesses that travel than from those at the lower end of the tax band.

I am interested in the latest calculations of what the tax would raise. We need to hear more about what happens when the EU starts an ETS and how that will interact and dovetail with APD. As we have heard, APD has been hiked on several occasions. It will be helpful to have a commitment that it will stay at this level for some time, so that businesses, which are very important for our economy, can plan for the future. Will the Government be back for a further bite of the cherry come next year’s Budget in March or this autumn’s pre-Budget report? This is a successful industry, which generates thousands of jobs and is very competitive, so we, as politicians, should be careful not to kill the golden goose.

Angela Eagle (Labour, Wallasey)

We have had a characteristically thorough debate about clause 17 and have also looked at schedule 5, which includes the banding. We have had maths and geography lessons in the debate today, perhaps even geopolitical lessons about the creation of new states.

I will do my best to answer the questions that have been put. As Opposition Members have said, the Government consulted on proposals to replace air passenger duty with a per-plane tax. Both Conservative and Liberal Democrat members tabled amendments to replace APD with a per-plane tax—their position—but they were not selected today.

We listened to respondents in our consultation process. As has been said, we announced in the pre-Budget report 2008 that we would reform the existing system and replace the two-destination band structure with a four-band structure. We had hoped to proceed with the per-plane tax, but we decided against it for a fair number of reasons. The Government proposed the per-plane tax in a different economic climate to the current one, and the decision not to proceed recognised the need to ensure at least some greater stability in tax policy at a time of economic uncertainty. It was not thought to be the best time to shift from one tax to a completely redesigned one, given the uncertainty in the economy. We were also trying to maintain environmental objectives by extending the distance banding, and we hope that we have managed to avoid at least the disruption and costs associated with the transition to a new tax.

Greg Hands (Conservative, Hammersmith and Fulham)

Will the Minister give way?

Angela Eagle (Labour, Wallasey)

The hon. Member for Hammersmith and Fulham has not even let me get going, but I am happy to let him in.

Greg Hands (Conservative, Hammersmith and Fulham)

The Minister really cannot have it that returning to APD somehow increases certainty in tax policy. It was not just a consultation, it was a clear statement of intent to move to a per-plane duty. Having once made the change and now changing back again, there is no way that anybody could argue that two 180-degree reversals in 18 months is creating stability in the tax system.

Angela Eagle (Labour, Wallasey)

We will not go into 180 degrees and 360 degrees because that is maths again. All I was trying to say was that we wanted to avoid the disruption and costs associated with a transition to a new tax right in the middle of a period of economic uncertainty that did not exist when the original change was announced. In retaining APD, the Government recognise that the system could improve the environmental signals, and hence the change to four bands and the reforms in schedule 5, referred to in clause 17.

The bands will be set at 2,000 mile intervals, and inclusion in each band will be based on the distance of a country’s capital city from London. The hon. Member for Hammersmith and Fulham asked a fair number of questions about some of the detail of that, which I want to deal with. Firstly, he talked about the methodology in schedule 5, and about new states that might come into existence. He asked whether they would end up in the Australasia band. We even got to talking about Scotland as a potential new state. I will not impinge on any of those highly controversial potential parallel futures, but I want to assure him that, as with the current air passenger duty, we have powers in secondary legislation to react to any changes in states or territories. The primary legislation gives us a power to vary by statutory instrument, so the creation of a new country could be absorbed into the system by use of secondary powers to allocate that country to a particular band. We do not have the absurdity that he was hinting at—that everything new ends up in Australasia.

Jeremy Browne (Liberal Democrat, Taunton)

I can see the practicalities of designating the capital city as the relevant consideration. In some states, however, where the capital city is much smaller than many of the other cities in that country, is it such a sensible way to make the calculation?

Angela Eagle (Labour, Wallasey)

There is a detailed way of making these calculations by measuring absolute distances to each destination. Alternatively, there is a simpler banding structure, where one uses assumptions. That structure makes the system quicker, easier and less complicated to administer.

Greg Hands (Conservative, Hammersmith and Fulham)

Will the Minister give way?

Angela Eagle (Labour, Wallasey)

I will give way when I have finished this point. That banding structure simply makes the system easier to administer for all concerned, including those airlines that have to calculate and pay the tax. That does not mean to say that anomalies do not arise from a rough-and-ready rather than an absolute approach. We have gone for the rough-and-ready approach. I understand the points that are being made about some of the anomalies with capital cities, particularly Washington in relation to destinations in other US states and in Caribbean countries. However, I suppose that a rough-and-ready calculation is precisely that, and one can always find anomalies.

Greg Hands (Conservative, Hammersmith and Fulham)

I genuinely fail to understand how it can be simpler to go for this banding structure than for a structure based on the absolute distances. It is quite clear; these distances do not change. The distance from London to Boston, for example, or from London to Honolulu, is not subject to change. Well, I suppose it could be if a new airport was built, but that is a very obscure example of how it could change.

I just cannot understand what is complicated about using the actual distance. It is what airlines use all the time, for calculating the amount of fuel that they put in aircraft, or for calculating frequent flier programmes. Everything is calculated on an actual distance basis and not on a banding basis. So how can a banding basis be simpler?

Angela Eagle (Labour, Wallasey)

I can reassure the hon. Gentleman that this system is administratively simpler for those who have to put it into effect, and calculate and levy the tax on flights. If absolutely every last mile of distance has to be calculated, that leads to a different structure for the tax. That would be a different way of doing it and it would not be rough and ready. I assure him, however, that it would be more complex in its administration.

Mark Field (Conservative, Cities of London and Westminster)

I can understand the Minister’s view that a level of certainty is promoted by what the Government are proposing. However, we are living in an internet world—a Googled world—where it is not difficult to get hold of this type of information. It may well have been the case 10 or 15 years ago that it was difficult to work out exactly how far each and every last far-flung city in China, Pakistan or India was from London. Now, however, that is information that literally everybody can get hold of at their fingertips.

So it is nonsense now for the Minister to try to defend this system. As I say, I can see that there is a level of certainty in talking about a single city in one of the 190 or so states within the United Nations. However, the reality is that this information—accurate information, along the lines that my hon. Friend the Member for Hammersmith and Fulham has explained—is very easy to obtain.

Angela Eagle (Labour, Wallasey)

I am not saying that the information is not easy to obtain. I am saying that it is administratively simpler to use it in four bands that are approximate; that is the only assertion that I am making. I am not trying to say that somehow it is impossible for us to work out how many miles an aeroplane travels from this country to any destination in the world. Of course, it is a matter of fact that we can work that information out. However, I am saying that it is administratively simpler to have four basic bands than to test every flight, and I hope that Opposition Members will accept that. It would be a different approach to base the system on actual miles travelled, and it would make the administration much more complex. It would be possible to base the system on actual miles travelled if that was the policy decision that was taken, but it certainly would not be simple.

On the definition of “west of”—

Greg Hands (Conservative, Hammersmith and Fulham)

Will the Minister give way?

Angela Eagle (Labour, Wallasey)

I was going to move on to the definition of “west of the Urals”. It is based on an existing split that is used by the industry and it follows advice from the industry on the best way to categorise a country that is, geographically speaking, as long and thin as Russia is, if I can put it that way.

The draft legislation that we published before publication of the Finance Bill contained that split. It was announced in the pre-Budget report and it was published prior to the Budget statement. The industry is content with it, and there has been no adverse reaction to it. The system is one that the industry itself uses at the moment. [Interruption.] Well, there has been plenty of time for a worry about the definition of “west of the Urals” in this context to have surfaced. It has not. Everybody understands what it means, even if it might be a bit difficult to look at geographically. Obviously, the hon. Member for Hammersmith and Fulham has a particular interest in eastern European Russian states and appears to have visited quite a few of them. I understand that his geographical assessment of the Urals is accurate, but in this context “west of the Urals” has a meaning that is broadly understood by the aviation industry and it has not raised any practical points that cause us to worry.

Greg Hands (Conservative, Hammersmith and Fulham)

The Minister is being very generous in giving way. My question is not so much about the Urals here. My question is why split Russia but not Canada or the US? Russia covers 11 time zones, Canada six and the US seven. Surely it would be possible to do some kind of split in those two countries, given that a flight from London to Honolulu is more than twice the distance of a flight from London to Boston.

Angela Eagle (Labour, Wallasey)

Well, clearly the US is a slightly different issue as its main land mass is much shorter than Russia’s. If one includes Honolulu, it gets slightly longer. When we were sorting out the bands the view was taken that the anomalies, although obvious, did not justify a split in the country down the middle in the same way as we have done for the Russian Federation. If one did it on a line between Boston and Honolulu the split would be somewhere in the middle of the Ocean. It is not a land mass in quite the same way if one looks at some of the states involved. I admit that it is rough and ready. There are anomalies. Hawaii is a rather obvious example, but it happens to be a state of the US. If it were not a state of the US it clearly would not be in its current band in this system.

The hon. Gentleman also asked whether there is a map that demonstrates the banding system on a global basis. There is and I am quite happy to give him a copy. He mentioned Caribbean communities. We are aware of their circumstances and we are listening to their representations. Clearly, it mainly involves the anomaly of Hawaii. One can either shift the bands around and have large numbers of bands to incorporate a whole range of issues, such as countries that are close to the edge of bands or countries that are far away, or one can say, “This is the system and we have to live with it and the way in which it works.”

The hon. Gentleman also mentioned the issue of transfer passengers and said he was aware of some kind of action in the courts about APD applying to them. APD does not apply to transfer passengers, and we are not aware of any activity in the courts relating to that, coming from America or elsewhere. If he has some information to impart that we are not aware of and wants to have a discussion with me outside the Committee, I will be happy to discuss it, but I admit that I was a puzzled by his comment on that.

Greg Hands (Conservative, Hammersmith and Fulham)

That point was raised with me by the Royal Aeronautical Society, which I will refer to the Minister. That is probably the easiest way to resolve the issue.

Angela Eagle (Labour, Wallasey)

I look forward with interest to any correspondence I might get from the Royal Aeronautical Society as a result of that exchange.

We have discussed the shift from per-plane taxes back to APD. During that process we listened carefully to the responses to our announcements in PBR 2008. We were particularly struck by the difficulties of developing a per-plane tax, not least because of its effect on freight and the great practical difficulties in trying to incorporate freight into the system. Although I am not allowed to look at the papers of previous Administrations, I suspect that that was why freight was not included in earlier stages when the tax was originally developed. It is difficult to include freight.

The hon. Member for Poole made an interesting contribution, particularly with regard to per-plane taxes and the difficulties they would have caused for the airports near or in his constituency. We were particularly worried about the regional impact when we had a closer look at that following representations from the freight industry and airlines, particularly regional airlines, and not only in the south of the country, but in other areas where we were worried about the potential effect on employment. It is difficult to develop a policy for an industry that is relatively untaxed, as we know, because of the Chicago convention and the way in which the airline industry has developed, and actually it is very mobile by definition. Therefore, there always has to be a balance between trying to have a tax system that is legal—because of the issues relating to the Chicago convention, to which the hon. Member for Hammersmith and Fulham was absolutely right to refer—and trying to have one that does not cause perverse incentives or have the unintended effect of driving business offshore.

Robert Syms (Conservative, Poole)

Clearly, the best environmental approach is to develop many of the regional airports, and of course freight is important, as I mentioned earlier. If someone who lives in Bristol uses Bristol airport and someone who lives in Bournemouth uses Bournemouth airport, they will not have to drive on the M25 and clog up the roads at Heathrow or Gatwick, and that is a rather good thing. It still is the case that more pollution is generated by road traffic around Heathrow than by the aircraft. One has to have a balanced approach to that, and there is actually a good argument for developing regional airports sensibly, because they have great environmental benefits.

Angela Eagle (Labour, Wallasey)

Obviously, I agree that we should definitely look at the development of regional airports as a powerful economic driver in the regions, not only because of local employment and other issues, but because we need to remember that air travel is currently relatively untaxed. That relates not only to emissions, but to noise pollution and other kinds of disruption that merit tax. We must try to get the balance right. The hon. Member for Poole has used the right word: balance, which it is important to consider when developing tax policy in those areas.

Obviously, the European Commission’s decision finally to include aviation in the EU emissions trading scheme from 2012 was welcome. That deals, partially at least, with some of the issues of pollution on a supranational basis, as the only way those issues can be resolved sensibly is by international agreement that allows tax to be levied appropriately without causing some of the perverse incentives that all Members have mentioned in their contributions.

Robert Syms (Conservative, Poole)

Clearly, we have APD, which generates a lot of money. Then there is the emissions trading system across Europe, of which there will be a cost. There is a danger that our airlines, vis-Ă -vis the US and some of the other non-European airlines, may be disadvantaged. Is that something that the Treasury is looking at and modelling? One cannot pretend that we are just going to carry on as we were when there is a new pan-European trading tax system.

Angela Eagle (Labour, Wallasey)

Yes, and we will watch that as it develops. It does not come in until 2012. Some 15 per cent. of auction rights, the rest of the trading permits, will be given away at least up until 2020. So we do not have 100 per cent. auctioning, which will limit the amount of money that can be raised by having a limit on emissions at EU level, but it is progress. I anticipate that further progress will be made internationally as well with other, similar trading systems. It is impossible to know, from here in 2009, exactly and precisely how that will develop, but it is certainly an issue that HM Treasury keeps a very close eye on. It will obviously have an effect on future taxation policy and has to be taken into account.

The hon. Member for Taunton, apart from making me feel rather old—I am not going to tell anyone when I was born, much less talk about the sort of mathematics I studied for my O-level and whether it involved great circles or any other such calculations—

Mark Field (Conservative, Cities of London and Westminster)

I rise, being gallant, to point out that, like the Minister, when I started school we did have 240 pence in the pound.

Angela Eagle (Labour, Wallasey)

The hon. Gentleman has obviously looked up when I was born. I remember decimalisation—as I am sure the hon. Member for Taunton does not. I suspect that that is his privilege and my burden, rather than the other way round.

It is clearly true that taxes have to come from somewhere. I thank him for making that observation; it is very wise. As Exchequer Secretary, it is one that I wish larger numbers of people would admit to when they come to see me. It is clear that we should try to tax bads rather than goods, but we should also remember that part of the use of APD is clearly in raising revenue, as well as attaching an environmental cost to flight.

Greg Hands (Conservative, Hammersmith and Fulham)

I am still struggling. I will go back a little bit, as I thought the hon. Lady was going to explore that in more detail. I am struggling with her rejections of a move to a per-plane basis. I think her conclusion was that it would be too difficult with freight. Nevertheless, the point I raised was that we can still introduce a per-plane basis for commercial passenger aircraft. Freight does not necessarily need to be touched. Has she has explored that?

On another point, the hon. Lady seems to be saying that the EU ETS, and pulling aviation into it, has somehow prevented a need to look at a per-plane basis. I am not sure whether I understood that correctly. Will she also tell us something about the relevance of the ETS to the consideration of whether we go to a per-plane or per-passenger basis?

Angela Eagle (Labour, Wallasey)

The relevance of the EU ETS is as a background to that. Aviation, being international, has been untaxed, not only because of the Chicago convention, but because it is quite difficult to levy a tax nationally on something that is international and can move very quickly. Therefore, the answer is to have a series of international agreements to levy taxation on, for example, fuel and a range of things, ideally going into the future. The EU ETS, and aviation’s inclusion in it, is the first example of a supranational structure that will enable us to put at least some of the cost and the environmental cost of their industry’s carbon emissions on to aviation operators. That is its relevance to our debate today.

Greg Hands (Conservative, Hammersmith and Fulham)

My first point was that, if there is a problem with freight, which the hon. Lady has talked about, it does not prevent introducing a per-plane system for commercial passenger aircraft on a stand-alone basis.

Angela Eagle (Labour, Wallasey)

Given the economic situation that developed between PBR 2008 and 2009, the timing was not correct for the disruption that would be caused by moving to a completely new tax in that area. We were worried about some of the issues with hubbing, too. The hon. Gentleman has talked about how preserving an air passenger duty would cause some difficulties with hubbing, particularly on long-haul flights, but a per-plane tax would make the situation more difficult. Overall, it is best to stick with the existing system and to implement the reforms in clause 17.

Robert Syms (Conservative, Poole)

To answer my hon. Friend’s intervention, a lot of freight is carried in the hold in passenger aircraft—once the bags have been balanced up, the freight is put in—so if aircraft that only carry freight were to be excluded while aircraft that carry passengers were to be taxed, some freight would be taxed and some freight would not. There would therefore be a perverse incentive between, on the one hand, British Airways carrying medical equipment and other bits and pieces across the Atlantic and, on the other hand, a National Express-type aircraft that is dedicated purely to freight or purely to parcels. It is therefore difficult to differentiate.

Angela Eagle (Labour, Wallasey)

The hon. Gentleman is correct; passenger planes carry freight, so if we excluded freight-only aircraft, they would have a tax advantage over other forms of freight-carrying. Such complications and practical difficulties were certainly highlighted by the consultation. It is possible either to dismiss that consultation’s findings and plough on regardless, or look at them and think about the changed economic circumstances, and we have decided that, in the current circumstances, to cause disruption by moving to a completely new basis for the tax might not be the right thing to do.

I appreciate that the hon. Member for Hammersmith and Fulham might have decided differently, but in politics it is never easy to make an announcement and then say that now is perhaps not the best time to implement it, because one gets jibes about 180° turns and U-turns. The consultation process was genuine and we modelled a range of other potential ways of levying the per-plane tax. We looked at some of the complications, not least that which the hon. Member for Poole has mentioned on exempting freight; it is not easy to exempt freight in the current circumstances. Our decision is reflected in clause 17 and schedule 5.

Clause 18

Greg Hands (Conservative, Hammersmith and Fulham)

The clause relates to landfill tax. We do not propose to divide on it, but we need to examine a little the substantial increases in landfill tax. On 1 April 2009 the rate increased from £40 to £48 a tonne. I understand that that will be followed by four further £8 increases, which is a doubling of landfill tax in five years. Looking broadly at the change in landfill tax, there are clearly benefits and costs.

The benefit of such a steep doubling of the tax will be that more recycling treatments will be economically viable for many more types of waste, not merely municipal. The landfill tax was introduced on 1 October 1996—that is what threw me off earlier into wrongly saying that air passenger duty was introduced in 1996—and since 1997, the proportion of waste sent to landfill has declined by 32 per cent., according to the Government’s consultation document issued at the same time as this year’s Budget. That decline has not all been due to landfill tax, but at least a significant part of the progress in reducing the amount of waste that we send to landfill has been partly driven by the tax treatment.

Turning to costs, however, first there is potentially a big increase in costs for some of our engineering and manufacturing companies at a time when they are generally struggling, and we might drive away some of those businesses when we need to be boosting British manufacturing. The other drawback is a likely increase in fly-tipping. We need to ask the Minister whether any of the new revenues from the doubling of landfill tax will be given to the local authorities that will have to deal with the consequences of the increase in the tax and the likely increase in fly-tipping. Those same local authorities will themselves have to pay a greatly increased rate of landfill duty. The question must be whether the net effect will simply be larger council tax bills, on top of the already more than doubling of council tax under this Government.

There would be an increased incentive for the development of alternative forms of disposal, but alternatives take time to come on stream and are not cheap. They remain welcome, however, and we recognise that a robust and predictable landfill tax regime is a prerequisite for the viability and coming on stream in the coming years of some of those alternative waste treatment techniques. Some of the developments appear to hold a great deal of promise, particularly those that would produce usable biomass from general waste. However, it would help if the Minister indicated the Government’s view of the pace required to keep such developments in the pipeline while avoiding placing too great a strain on those disposing of waste. In other words, is the 20 per cent. or £8 per annum increase for the next five years a reasonable and sustainable rate for the waste disposal industry?

The consultation document that the Government produced at the same time as the Budget bears the title, “Modernising Landfill Tax Legislation” but is mostly about countering the effects of the Waste Recycling Group court case last year, in which the Court of Appeal ruled against Her Majesty’s Revenue and Customs and placed a significant amount of waste outside the scope of the tax. The Government admit in the impact assessment that the present legislative approach

“will make landfill tax legislation as a whole more complex and less coherent.”

Broadly speaking, it seems sensible to restore the scope of landfill tax to what was originally intended, while simplifying the structure. We need to examine the proposals further before reaching a judgment on the particular remedy suggested. It will provide welcome context if the Minister explains how much revenue she believes has been lost since the ruling in 2008 and whether landfill operators are altering their procedures to take advantage of the loopholes opened.

Some of the Government’s suggestions may dramatically increase the tax on waste that currently qualifies for the lower rate. The document’s lead option for that category would restrict the lower rate to waste that is classified as “inert” under the EU landfill directive. It is not clear whether the Government regard that change as a requirement of the directive or regard harmonisation with the criteria in the directive and other parts of the European framework as desirable in itself. The Government’s references to falling behind recent developments in “thinking” rather suggest the latter—that it is in keeping with the framework rather than a positive requirement of the directive.

It is not clear what the precise implications of the change will be; perhaps the Minister could set out the Treasury’s view. Up to £160 million of additional revenue is identified in the impact assessment, but the fact that the consultation explicitly asks the industry the questions:

“Are you aware of any other wastes which would cease to be lower rated under the proposal?”

and

“Are you aware of any wastes which would be brought into the lower rate of tax under the proposal?”

suggests that the Treasury and HMRC are not completely certain of the effects of their lead option. It would be unfortunate if a consultation that began with the fallout from one court case ended up triggering many others. The consultation even asks for

“information on the extent to which the wastes listed in paragraph 3.8 are still produced in the UK”,

which surely ought to be known already, since the reason given for listing them is that they are currently taxed at the lower rate. It is rather odd if the Government are taxing wastes that they are not even sure still exist. Perhaps I have interpreted their question uncharitably and it means “produced as a product” not, as it says, “produced as a waste”. Some reassurance on that and the other points I have raised would be helpful.

Jeremy Browne (Liberal Democrat, Taunton)

I shall make a brief contribution in which I will shamelessly refer to my constituency, but it is of wider interest because Somerset has the highest rate of recycling in the country—a fact of which we are proud, because it represents the strong attachment that people who live in the county have to good environmental practice. We are keen to do better. On Friday last week, I was fortunate enough to be accompanied by my right hon. Friend the Member for Sheffield, Hallam (Mr. Clegg) when visiting the Priorswood recycling centre on the edge of Taunton. He was able to see what I have seen on many occasions since I opened it in 2005, which is the wide range of facilities it has to process plastic, different forms of glass, paper and metal. [Interruption.] I hear, out of the corner of my ear, an unnecessary political intervention. It must also be said that I noticed a very large number of Conservative election leaflets being pulped. It did not look as though they had even been read, which was a cause of distress to me, because I always think that the greater the number of people who read Conservative leaflets in my constituency, the better the Liberal Democrats will do. However, people seem to have discarded those leaflets without even taking that precaution.

Greg Hands (Conservative, Hammersmith and Fulham)

Does the hon. Gentleman share my horror at what I understand to be a Liberal Democrat leaflet put out in Cornwall that attacks a Mebyon Kernow councillor for the state of his hair?

Peter Atkinson (Conservative, Hexham)

Order. I think that we are even stevens on that point.

Jeremy Browne (Liberal Democrat, Taunton)

Thank you for your guidance, Mr. Atkinson.

I was not thinking about Cornish nationalism when I was at the Priorswood recycling centre, because I was so full of admiration for the facilities there. I was being shown around the facilities with the leader of my party. Quite a few of the people who work there and who were giving us the tour stressed the benefits, as they saw them, of the landfill tax in terms of incentivising local authorities and other organisations to recycle more.

We are not resting on our laurels. Of course, we in Somerset have the very good fortune of having a county council that is run by the Liberal Democrats, which means that environmental consciousness is right at the forefront of all its deliberations. We also have the good fortune of having the Liberal Democrats as the largest party on Taunton Dean borough council. As a resident of Taunton, I am very pleased to see the benefits of much more recycling being done at doorstep level.

I have read a lot in the national newspapers on the controversy about less frequent waste collection. However, landfill taxes and other incentives that are being put into practice by local authorities are having a dramatic impact on levels of recycling. Certainly I hear very few complaints in my area that the rubbish is only collected fortnightly, just as long as there is plenty of opportunity for collection of recyclable items. For example, newspapers and bottles are collected weekly from households in my constituency, and now plastic items, including those big, unwieldy milk containers that sometimes carry up to six pints and large containers of orange squash, are being collected from doorsteps along with cardboard. When people buy a new implement or appliance, for example, and they do not wish to throw the cardboard box away but regard it as unnecessarily burdensome to take it to the Priorswood recycling centre or to the other recycling centre in my constituency, which is in Poole, just outside Wellington, they find it frustrating if it is not collected. Even right down to cereal boxes, for example, people are having the opportunity to recycle those types of daily household items.

In conclusion, it is worth saying that it is rare indeed to find people who are keen to speak out in favour of higher taxation, particularly when the burden may fall on them, but what is quite interesting is that both the population and the people who are responsible for waste management and disposal in my constituency see the merit in having a landfill tax incentive to increase recycling. I invite everybody on the Committee who has not seen the future, in terms of recycling in our country and in terms of just how progressive and enlightened that we can be as a population, to visit Taunton Dean and Somerset, where we are rightly proud of our good record in that regard. No doubt we will do better still after we get beyond Thursday and we can come up with further imaginative schemes to improve the environment in my area.

Angela Eagle (Labour, Wallasey)

I think that there is now cross-party agreement that increasing recycling, including putting in the infrastructure that is needed to do that, and thereby landfilling less waste, is a wholly good thing. Clearly, the landfill tax is one of the ways in which we have begun to make real progress; it is an important part of the Government’s efforts to reduce the amount of waste going to landfill. There are obviously, as the hon. Member for Hammersmith and Fulham hinted, overarching EU directives in this area, and we have signed up to targets that we wish to reach. He is also right to say that having a landfill tax helps to drive investment in alternative greener technologies, which further reduce methane emissions from landfill waste. As I am sure the Committee knows, methane is a far more potent greenhouse gas than CO2, and it is really important that we reduce those emissions.

Evidence shows, I am happy to say, that the tax has been successful in reducing the amount of waste going to landfill. Figures show that between 1997 and 2008, the volume of waste disposed to landfill fell by 32 per cent., delivering carbon savings of 700,000 tonnes of CO2 emissions by 2010. In Budget 2007 the Chancellor announced that the standard rate, which applies to active waste sent to landfill, would increase by £8 per year until 2010-11. Clause 18 gives effect to the 2007 announcement by increasing the standard rate of landfill tax to £48 per tonne, with effect from 1 April 2010.

The increase is part of the Government’s effort to reduce the volume of waste sent to landfill, and is complemented by public spending on sustainable waste management. For example, we announced £10 million of new grants for businesses in 2009-10 to provide capacity to divert more than 300,000 tonnes of waste from landfill and reduce waste disposal costs through, for example, anaerobic digestion. At the Budget this year, we announced that the standard rate for landfill tax would continue to increase by £8 per tonne for a further three years, from 2011 to 2013. That is designed to encourage investment in alternatives to landfill. We will legislate for those increases in future Finance Bills, as we have done for all previous landfill tax increases.

Greg Hands (Conservative, Hammersmith and Fulham)

First, I should correct something I said. I think I said that the first £8 increase was coming in in 2009. It is actually in 2010, followed by the three £8 increases. Nevertheless, what consideration has been given to the fairly steep trajectory of the increases? It is not quite a doubling, but it is an 80 per cent. rise in the next five years. Does she think that is sustainable and that the industry can absorb it?

Angela Eagle (Labour, Wallasey)

We would not have suggested it had we thought it unsustainable. It clearly has a policy lever which, as the hon. Gentleman himself said, is to drive investment in future waste infrastructure and to do even better on recycling than we have done to date. The increases will help to drive a low carbon and resource efficient economy, which will encourage waste producers and the waste management industry to switch away from landfill towards sustainable alternative technologies, such as anaerobic digestion, recycling and mechanical biological treatment.

Greg Hands (Conservative, Hammersmith and Fulham)

The hon. Lady is being very generous in giving way. I still want to explore the rate of increase. Presumably some thinking went into choosing £8 rather than, for the sake of argument, £10 or £15. Presumably if the rate of landfill tax is increased too sharply or over too sustained a period, people will avoid it by fly-tipping. How did the Government arrive at the £8 level? Some work must have been done to discover that optimal level.

Angela Eagle (Labour, Wallasey)

Of course we model the behavioural effects of tax increases. We think the levels are sustainable. The Government recognise that fly-tipping is a significant antisocial problem affecting communities, landowners and regulators. We have been working via the Department for Environment, Food and Rural Affairs with the Environment Agency. In 2007-08, fly-tipping on public land fell by 7.5 per cent., which I hope the Committee will welcome. As well as a decrease in fly-tipping overall, enforcement action and successful prosecutions have increased by 26 per cent. on previous years. We are beginning to get to a stage where we are dealing with the problem of fly-tipping, as well as making the case, as the hon. Member for Taunton did so eloquently, about new waste infrastructure that can help to give us the capacity to recycle substantial amounts of waste.

Mark Field (Conservative, Cities of London and Westminster)

All of us feel that the landfill option is not sustainable in the longer term, so we understand the importance of the tax. However, I agree with my hon. Friend the Member for Hammersmith and Fulham about the risk of fly-tipping. Presumably the figure of £40 has not always been set in stone, so what is the evidence, from perhaps the past five years, from the increases that have led us to £40? Has there been any Government thinking about the plus and minus sides of particular increases in the past and the impact that they might have had on fly-tipping, and about other externalities that might not have been foreseen at the outset?

Angela Eagle (Labour, Wallasey)

I have just given the Committee some positive figures about fly-tipping. In 2007-08 we saw not only a decrease in fly-tipping, which I hope will be sustained, but a large increase in successful prosecutions. There are also plans in place to introduce secondary legislation in the autumn, which will provide local authorities and the Environment Agency with stronger powers to seize vehicles suspected of involvement in fly-tipping. There will be a continuous attempt to crack down on that kind of activity, recognising that if the landfill tax continues to rise, we have to ensure that a huge increase in fly-tipping is not an unintended consequence. The evidence that I have just quoted gives us cause for optimism in that respect.

Mark Field (Conservative, Cities of London and Westminster)

One hopes that an element of that precipitative reduction in fly-tipping is due to people who are averse to antisocial behaviour, but there is an argument that landfill tax should have gone up slightly more, so that more resources could go into new technology. I am trying to get a feel for whether, over the past five years, there has been evidence that perhaps we have not been investing enough in new technology, because we have taken relatively small steps upwards in the landfill tax, rather than larger steps, which might be the right way forward.

Angela Eagle (Labour, Wallasey)

There is a balance to be struck, but there is also a sequencing argument, which I am sure the hon. Gentleman accepts, in a switch from being a country that not that long ago landfilled large amounts of its waste to one that is driven to reach demanding EU targets in a few years’ time. Local authorities diverting increasing amounts of waste from landfill require a period of adjustment, and part of that is about putting in place the infrastructure needed to handle waste. We have announced plans to commit more than £2 billion to investment in waste infrastructure through the private finance initiative, and the Greater Manchester waste disposal authority’s energy from waste product project, which has just been given the go-ahead with extra help from the Treasury’s finance unit, will alone handle 5 per cent. of the UK's total municipal waste and lead to the diversion of more than 700,000 tonnes of waste from landfill. There is significant investment in big kit, ratcheting up our efforts in this area. The increases in the landfill tax are a balancing part of that entire approach.

The hon. Gentleman should look at how integrated the approach is. One cannot run before one can walk in these areas, and we need a time sequence so that we have the infrastructure in place before we can perhaps further increase the costs of diverting waste to landfill. The alternatives have to be in place and up and working, so that we can think about how we can discourage future landfilling. There is a hierarchy of waste, and there is important work to be done in ensuring that waste and packaging are not created in the first place, and that when they are created, they can be disposed of in the appropriate way, according to that hierarchy.

Greg Hands (Conservative, Hammersmith and Fulham)

The hon. Lady mentioned modelling on landfill tax. Could she tell us which variables are involved in the model, other than the rate of landfill tax?

Angela Eagle (Labour, Wallasey)

I do not have them in front of me, and there are many Treasury models on all those taxes. I want to reassure the hon. Gentleman that we do not just pluck a figure out of the air and apply it without trying to analyse what the consequences and behavioural effects will be. I will be happy to write to him if he wants more detail on models, but I do not have the details on the Treasury’s landfill tax modelling in front of me at this moment, so I cannot give the detail that he has obviously decided he wishes to see. If he will be patient, I will be happy to write to him about it.

Greg Hands (Conservative, Hammersmith and Fulham)

I am sorry, but it really is not on that the hon. Lady is unable to tell us even what the variables are. I appreciate that she is not in a position to give us the entire model, but surely she could give us just the basic variables involved. For example, is the level of fly-tipping and the cost of cleaning it up one of the variables in the model? It seems to me that it should be.

Angela Eagle (Labour, Wallasey)

These matters are all balanced, and it is clear that other areas need to be thought about as well; in fact the hon. Gentleman mentioned one of them in his original remarks when he talked about the cost to local authorities, a point that I was going to deal with. Obviously, the Government will take account of costs faced by local government when determining the appropriate settlement for local government in the next comprehensive spending review. I mentioned earlier that we have announced an extra £10 million in capital grants to deliver anaerobic digestion and in-vessel composting infrastructure, which will remove over 300,000 tonnes of biodegradable waste each year from landfill, reducing business and local government costs and methane emissions.

The hon. Gentleman asked about consultation and referred to the Waste Recycling Group case. The effect of that, as he knows, was essentially to take waste that is used on landfill sites out of tax. The change we propose in the consultation document will bring users of waste back into tax where those uses look like disposal and have the environmental impact associated with disposal, and that change will also protect revenue, which is an entirely legitimate reason for acting and changing our approach in that area. We will have the chance to debate those changes when we discuss clause 118.

Greg Hands (Conservative, Hammersmith and Fulham)

What impact does the hon. Lady assess there might be on the export of waste? There have been terrible and tragic stories in the newspapers this year about how an awful lot of waste generated in the UK is showing up in developing countries such as Nigeria, Ghana and Ivory Coast. Is one of the variables in her model the impact of the export of such waste, presumably by people trying to avoid paying UK landfill tax?

Angela Eagle (Labour, Wallasey)

Other aspects of that issue are covered by other parts of international law, not least the Basel convention on the export of hazardous waste, to which the UK is a signatory. I doubt that the landfill tax really is the driver for the export of particular sorts of waste in some of those circumstances. If the hon. Gentleman is worried about particular instances, perhaps he will let me have a look at them.

The hon. Gentleman asked how much revenue was lost as a result of the Waste Recycling Group case. We think that the repayments are likely to be around £150 million. We are obviously consulting to ensure that the tax is robust and will continue to contribute to our environmental objectives. He asked why we are having the consultation. The answer is that landfill tax has been in place for more than a decade now, and in line with the principles of continuous improvement, it is good practice to review the arrangements underpinning the tax, which is why this consultation has been issued. A review is particularly important at the current time because of changes in environmental protection regulation and waste management industry practices over the past few years. The consultation is aimed at ensuring the continued soundness of the administrative and legislative arrangements on which the tax is based.

I will deal quickly with the questions raised by the hon. Member for Hammersmith and Fulham regarding inert waste. He is right to point out that we are proposing to change the way that inert materials are currently classified, which will result in the Treasury gaining £160 million of additional revenue.

The understanding of the impact of particular waste, and in what circumstances waste can be considered inert, has—believe it or not—moved on considerably in recent years. In particular, the issue has been considered at length, resulting in European legislation and the putting in place of a sophisticated waste testing regime. Subject to the outcome of that consultation, the Government are proposing to follow the European legislation and testing regime in order to determine, for tax purposes, which wastes are inert. That will mean that we have greater certainty that lower rated wastes are properly inert, in line with up-to-date thinking. That may mean that certain waste, which was previously lower rated, may become standard rated. But this is the right outcome in environmental terms if the wastes in question are not, in fact, really inert. So we are bringing the entire structure up to date.

I hope that Opposition Members who recognised, in general, the desirability of having this kind of tax, will also agree that it needs to be up to date with current scientific and environmental thinking and will support clause 18.

Clause 19

Greg Hands (Conservative, Hammersmith and Fulham)

I just have a couple of points to raise on the clause.

The threshold increases, as outlined in clause 19, are in line with inflation; we have no particular issue with them. However, I would briefly like to raise with the Minister the relationship between gaming duty and remote gaming duty. In a written parliamentary answer, she told the hon. Member for Bournemouth, East (Mr. Ellwood) that

“HMRC are not currently able to publish a breakdown of remote gaming duty while maintaining taxpayer confidentiality.”

Now that strikes me as a very curious answer. Real casinos cannot move offshore, but online casinos can. Is it really the case that the Government are raising so little revenue from the internet form of gaming duty that saying how much they are getting would compromise individual operators? I would appreciate an answer to that question, but other than that I have no comments to make on clause 19.

Robert Syms (Conservative, Poole)

Clearly some of the international, Gibraltar-based type organisations that have been raising internet gambling have been hit on by the American taxman. One presumes that there might be an issue if we have what is, essentially, a British company being hit by other tax authorities. Why would we not want to say what we are actually raising? It is an interesting area to explore—if one can possibly explore it, since tracking people down on the internet is not a terribly easy area.

Angela Eagle (Labour, Wallasey)

We could have long and interesting discussions about the effect of the world wide web and offshoring on all sorts of tax regimes. It is something that all tax jurisdictions have to think about and develop policy approaches to in the future as the capacity for giving those services offshore, in areas that are not in the current definitions of tax areas, expands and the potential for doing that in many other areas increases. Gaming is one such area.

The hon. Member for Hammersmith and Fulham asked about taxpayer confidentiality in remote gaming duty. The fact is that one large taxpayer accounts for a huge share of total remote gaming duty revenues, and to provide those figures would effectively expose to public view the tax liability of an easily identifiable taxpayer, which is why I could not answer the question.

Robert Syms (Conservative, Poole)

What information sharing is there between Treasuries in the European Union on the issue? If one major player is generating tax revenue, other tax authorities might have agreements over what they do with those who are domestically based and bet. Do we all do our own thing, or is there some kind of discussion about whether the figures received from a particular company are accurate? I understand the Minister’s problem if there is only one company writing a large cheque every three months or so to cover an agreed tax liability that has no doubt been negotiated under certain conditions.

Angela Eagle (Labour, Wallasey)

Because only one large taxpayer accounts for the bulk of the revenue in total remote gaming duty revenues, answering the question would have disclosed its tax affairs, and we are not entitled to do that.

Mark Hoban (Conservative, Fareham)

Is it not the case that the amount of tax that that taxpayer pays is disclosed in its accounts, and that the information is available in that way? That would get around the issue of taxpayer confidentiality.

Angela Eagle (Labour, Wallasey)

It may well be, and we may want to talk about taxpayer confidentiality in all sorts of ways, but the current rules state that, as a Treasury Minister, I cannot disclose to the public, in answer to a parliamentary question, something that effectively identifies the tax liabilities of an obviously identifiable company, which in UK law is a person and which is entitled to confidentiality in its tax returns. That is the current law. As legislators, we might want to think about how the law could be represented in the future; current circumstances, however, mean that I cannot answer the question that was put.

Greg Hands (Conservative, Hammersmith and Fulham)

Can the hon. Lady suggest a way in which she could answer a question that was put differently?

Angela Eagle (Labour, Wallasey)

No, that is a matter for the hon. Gentleman; I am not going to suggest questions for me to answer. I am not quite that devious, even though I am getting on in years. I look forward to what comes my way as a result of these quick words, because the hon. Gentleman is so ingenious.

Clause 21

Greg Hands (Conservative, Hammersmith and Fulham)

Clause 21 is closely related to clause 22 and raises the amusement machine licence duty, or AMLD, rates payable on gaming machines. The clause is notable for the level of the duty increases within the various categories under consideration. The increases are not entirely uniform, but they are all significantly above the rate of inflation. The Government have yet to explain their reasoning for those increases, and the Red Book fails to mention the issue at all, beyond noting the additional £20 million in revenue that will be raised.

In fact, page 175 of the Red Book lists AMLD among those duties rising by this year’s third-quarter RPI, which is clearly wrong. The rises are about 9 per cent. on last year’s Budget, and that figure is certainly nowhere near any RPI figure that I have seen for a number of years. For example, a 12-month category A licence rises from £5,160 to £5,625, which seems to be a lot more than 3 per cent. and more like 9 per cent. A six-month category C license rises from £400 to £435. Those are rises of 9 per cent. and 8.75 per cent. respectively. We were told in the Red Book that the rises were at the rate of third-quarter RPI. They are nowhere close to that.

The amount of licence duty payable is determined, at present, by the period covered—one to 12 months—and the number and category of machines. Machines can have very different maximum prize values and minimum stakes, and it is right that duty reflects that. The Opposition have repeatedly drawn attention to the lack of sense in taxing highly addictive machines, such as the B2 fixed odds betting terminals found in bookmakers, at the same rate as the B3 machines, which are the softer form of gaming machines found in bingo halls and gaming centres. We have great concerns about the growth in the popularity of fixed odds betting terminals, which appears to be aiding migration away from arcades.

In a 2007 prevalence study, problem gambling associated with FOBTs was the second highest form of problem gambling, with a problem gambling rate of 11.2 per cent. My hon. Friend the Member for Putney (Justine Greening) raised those concerns at length last year, so I will not repeat them this year, but the minor recalibration of the duty bandings in this year’s Budget has not addressed the problem. The Budget announced an imminent consultation on switching amusement machine licence duty to a gross profits basis rather than a licence charge, but further detail is yet to be forthcoming. It would be helpful if the Minister said when the consultation will be launched and what options are being considered to reflect the different machines, and their different level of addictiveness, covered by AMLD at present. I would particularly appreciate an explanation of why she is maintaining that the figures on page 175 of the Red Book, which state that the rises are way in excess of RPI, are based on this year’s third-quarter RPI.

I look forward to hearing the Minister’s response.

James Duddridge (Conservative, Rochford and Southend East)

Thank you for calling me, Mr. Atkinson. I know that it is not traditional for a Whip to speak, but I represent Southend and this measure is very relevant. There was lots of amusement in Southend over the weekend but there was certainly no amusement over clauses 21 and 22. I would like to probe the Minister for more detail on the reasons for the larger than inflation increases and to look at whether there can be flexibility on the periods for which the machines are licensed.

In Southend some arcades are closed during the off season but still pay a significant amount for licences. In 2003 there was a big review of such machines. It was decided to leave all alone and that no further progress should be made given the difficult underlying market conditions and the real concern about the industry as a whole. We are looking at the changes in difficult economic times, at the height of recession, when people are less prepared to spend money either at home or visiting areas of entertainment and pleasure, such as Southend seafront where there are a lot of amusement arcades.

I would like the Minister to look at not only the amount, but the location of machines. I have entered into extensive correspondence with Bunter’s CafĂ(c) of 68 Sutton road—I do not expect the Minister to know the exact case. It may sound parochial, but sometimes looking at a specific issue shows how foolish legislation is. Bunter’s CafĂ(c) has always had a little machine that you could put money in and gamble, which was licensed via Southend council. Under the Gambling Act 2005 it will not be allowed to have that machine, but if it sold alcohol, it would be allowed to have it with no other changes and, presumably, would pay the increased machine licence duty. That makes no sense to me. If it is unsafe to have a machine in a cafĂ(c), because of the type of people that will be there, surely it is more unsafe, in terms of being addictive, if people can have it in licensed premises. It does not seem to make sense, even if there is an argument for children in fish and chip shops paying over money, that there cannot be a licensed machine in a cafĂ(c) but there can be one in a family room in a licensed pub. There seems to be an awful lot of inconsistency.

I want to go back to the rates. The British Amusement Catering Trade Association, which is an excellent organisation, has questioned whether this is the right time to be making these changes. Revenues in amusement arcades have collapsed by 21 per cent. and I wonder whether the Minister has a grip on the impact on the industry. I say that because on 19 May 2008 my hon. Friend the Member for Putney asked a series of questions, requesting estimates of the number of those machines in amusement arcades, both historically and the predicted levels in the future. The Minister replied that there was no breakdown of the numbers of amusement machines in arcades or of amusement machine licence duty that is collected specifically in arcades. If the Department does not have an awareness of those numbers, how can it possibly assess the impact of these changes? I can tell the Minister that there is quite a severe impact. Amusement arcades are closing and that will mean a loss to the Exchequer overall.

Also, as more legislation is imposed on these smaller arcades, a flood of them are turning into bigger arcades, with heavier gambling. So, some of the things that the Government are doing in this sector are counter-productive, both in terms of increasing revenue and of minimising the possibility of people becoming addicted to gambling.

Angela Eagle (Labour, Wallasey)

The clause will increase all amounts of amusement machine licence duty from 4pm on 22 April 2009 and the new amounts are set out in the clause. The net increase in effective tax rate on machines as a result of the clause will be about 1 per cent. Therefore, the effective tax rate on machines will remain broadly consistent with the effective tax rates on bingo, casinos and the national lottery.

These changes will ensure that gaming machines make a contribution to the consolidation of the public finances. They also have to be seen in the context of the regulatory changes led by the Department for Culture, Media and Sport, which allow business to benefit from higher stake and prize limits. Therefore, these machines will effectively be more profitable, as it is anticipated that more people will use them.

We increased these rates for the reasons that I was talking about earlier with respect to consolidation of the public finances. The hon. Member for Hammersmith and Fulham asked about page 175 of the Red Book. That page sets out the assumptions for the baseline against which the scorecard costings are calculated; it is not actually the calculation itself. So that is a definition of how the scoring is done. That was done with a forecast of RPI in September 2009, which is the usual way that these things are done. I hope that that answers his question.

The hon. Gentleman also asked about the consultation. No decisions have been taken yet, but officials have already had pre-meetings with BACTA, the organisation that has already been mentioned by the hon. Member for Rochford and Southend, East. We hope to launch the consultation on a potential move to a gross profits tax soon. I cannot give him any more details at the moment, but the process has begun with initial discussions.

The hon. Gentleman also mentioned off-season closures. Anyone who knows seaside resorts, as I do, will know that there is an on and an off season. Seasonal licences are permitted for small prize machines. Those licences basically give an eight-month licence for a six-month duty rate. If there was a move to gross profits tax, we would also want to take account of seasonality in the way that we levied that tax for small machines. So that is an issue that the operators in the hon. Gentleman’s constituency, either in the Billy Bunter cafĂ(c) or elsewhere, can make representations about, either directly or via BACTA. We look forward to having a productive discussion with him about that.

Clause 22

Greg Hands (Conservative, Hammersmith and Fulham)

Despite the fact that clause 22 is a page in length, I only have to say that, as I understand it, it is a technical provision that aims to align the definition of the AMLD bandings with those used by the DCMS, as well as raising the limits. We have no particular objection to it.

Angela Eagle (Labour, Wallasey)

The clause just makes certain that the benefit of this change goes to the people who are running the machines.

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

Mark Hoban (Conservative, Fareham)

I beg to move amendment 31, in schedule 6, page 90, line 44, leave out ‘£50,000’ and insert ‘£100,000’.

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss the following: amendment 32, in schedule 6, page 90, line 46, leave out ‘£50,000’ and insert ‘£100,000’.

Amendment 37, in schedule 6, page 91, line 27, leave out ‘24 November’ and insert ‘31 December’.

Amendment 33, in schedule 6, page 91, line 31, leave out ‘£50,000’ and insert ‘£100,000’.

Amendment 28, in schedule 6, page 91, line 32, leave out ‘24 November 2009’ and insert ‘31 December 2010’.

Amendment 34, in schedule 6, page 91, line 33, leave out ‘£50,000’ and insert ‘£100,000’.

Amendment 29, in schedule 6, page 91, line 34, leave out ‘24 November’ and insert ‘31 December’.

Amendment 30, in schedule 6, page 91, line 37, at end insert—

‘(3A) The limits referred to in subsubparagraphs 3(a) and (b) shall not apply to the accounting period immediately preceding the relevant accounting period in which the trading loss arose.’.

Amendment 36, in schedule 6, page 91, line 38, leave out subsections (4) and (5).

Amendment 35, in schedule 6, page 91, line 41, leave out ‘£50,000’ and insert ‘£100,000’.

Mark Hoban (Conservative, Fareham)

It is a pleasure to serve under your chairmanship, Mr. Atkinson. Having spoken in the opening minutes of the first sitting, I shall now, in the sixth sitting, make some more substantive remarks—at least I hope that they will be more substantive than what I said previously.

It might help the Committee if I give some background to the schedule before discussing in detail the amendments, which are probably not comprehensible without an explanation. Clause 23 and schedule 6 provide a temporary extension for carrying back trade losses for income tax and corporation tax. The provisions were originally announced in the pre-Budget report in 2008. They will enable both incorporated and unincorporated businesses to carry back their losses for three years.

The assumption is that, in the current economic conditions, a number of businesses would make losses. They are currently allowed to carry back their losses for one year, and they then carry their losses forward. Extending the carry-back by a further two years will give businesses a cash-flow advantage by reducing their tax bills for previous years. In effect, a business that expects to be profitable in future can utilise its loss relief now, rather than when it returns to profit, in a way that will generate further cash-flow advantages. The Budget changed the temporary extension from one year to two so that a company that makes a loss in 2008-09 or 2009-10 can claim tax relief for its loss. The losses that can be carried back have been capped at £50,000 a year, and amendments 31 to 35 would increase that limit to £100,000. I shall say a little more about that in a moment.

My understanding—I will be grateful if the Minister confirms this—is that the rules mean that the taxpayer will get the benefit at the highest rate of tax that they pay. Someone who runs an incorporated business and pays tax at 40 per cent. will receive a benefit of up to £20,000, whereas as a business paying a combination of the starting rate or the basic rate of tax in previous years would receive a significantly lower sum. A company paying tax at the main rate would receive a maximum benefit of £14,000, while a company paying tax at the small company rate would receive less. The relief seems to provide more help to businesses who pay higher rates of tax; effectively, it provides a subsidy to businesses that are making a loss.

As I said earlier, the scheme announced in the pre-Budget report allowed only one year of losses to be carried back. However, a number of representations were made prior to the Budget, and the Institute of Chartered Accountants suggested that two years’ losses should be available for carry-back. The Government obviously listened, but a significant cost is attached to that change.

The total cost of the measures announced in the pre-Budget report and the Budget is £475 million, which is £180 million for the relief announced in the pre-Budget report 2008 and a further £295 million for the measures announced in the Budget. In the next clause we will consider the temporary increase in first-year allowances—from 20 per cent. to 40 per cent. Will the Minister give us a flavour of the Government’s thinking about how they decided to split their finite pot of money for helping businesses between the loss relief provisions we have been debating and the first-year allowance provisions that we will debate under the next clause? Will he also clarify just how the Government came to their estimates of the costs of the measure?

Many people looking at this matter will think that perhaps, given the current economic climate, many businesses will be making losses and those losses will be available for carry-back. However, when I looked at the regulatory impact assessment that supports the measure, it surprised me that the Government had estimated that only 1 per cent. of incorporated taxpayers and 2 per cent. of companies would benefit from the proposal. That seems at odds with people’s assumption about where the economy is heading, given the scale and projected length of the downturn. It seems rather surprising that the proportion of businesses that the Government expect to benefit is particularly low. If that is a forecasting estimate—the Treasury is good at getting its forecasts wrong—the cost to taxpayers could be significant. If the figures are out by a factor of three, we are talking about a cost to the Exchequer of £1.5 billion, rather than £500 million. What comfort can the Minister give us about the cost of the measure, and how certain is he that the cost estimates in the Red Book are correct?

I have tabled three sets of amendments to this schedule. The first are very much probing amendments that would increase the threshold of losses from £50,000 to £100,000. I am trying to understand why the threshold was set at £50,000 rather than £100,000, or a lower amount. Clearly, this is a matter of changing the timings for businesses getting relief for losses made. There is a cash cost from increasing the threshold from £50,000 to £100,000, but over the lifetime of a business, there should be no total tax loss to the Exchequer. Will the Minister explain why the Government chose to set the limit at £50,000?

The second set of amendments—amendments 28, 29 and 37—tries to tidy up some of the drafting in the schedule. The dates that are used in the schedule are based on the date of the pre-Budget report in November 2008, so we have an odd accounting period, ending on say 23 November 2010. This set of amendments would move the accounting date to coincide with the more normal year end for businesses: 31 December 2010.

Hon. Members might ask whether that means that we are likely to increase the level of loss available for relief against profits in previous years, but again, because of the way the schedule is drafted, there is a cap of £50,000. I do not believe that that would increase the amount of losses that taxpayers would be able to relieve by virtue of the schedule. It would just tidy up the accounting dates and make tax compliance easier, from the perspective of businesses, meaning that they could look at their losses for an entire year rather than for parts of the year.

Amendment 30 addresses any confusion that there might be about how the cap will operate. Paragraph 3(3) sets out £50,000 as the limit for losses carried back for periods between 23 November 2008 and 24 November 2009, and the same limit for losses carried back for periods between 23 November 2009 and 24 November 2010. I assume that that is intended to mean that, no matter how many accounting periods end after 23 November 2008 and before 24 November 2009, the maximum extended carry-back total is still £50,000. If that is the correct interpretation, paragraph 3(4) is redundant, because it sets out rules for cases in which losses are made under a shorter accounting period and the carry-back is then in proportion to £50,000 at an annualised rate. If losses are capped strictly at £50,000, we do not need paragraph 3(4), hence my amendment to remove it. If the intention of paragraph 3(3) is not to cap the amount at £50,000 in a 12-month period, the provisions need to be redrafted.

I have a couple of final points. The Institute of Chartered Accountants has done rather well in arguing its case for a second year of losses and has decided to push the Minister’s patience a bit more by asking the Government, given the continued economic uncertainty, to make it clear that there is still a window open for a review, perhaps next year, if the economy has not improved, if the Chancellor’s ambitious and optimistic growth forecasts have not been realised and if the recession goes on for longer than expected. It has asked whether the Government could look at a further year or more of carry-back, and I would be grateful for the Minister’s comments on that.

Graham Stuart (Conservative, Beverley and Holderness)

My hon. Friend is giving a powerful speech on a technically challenging area. I declare an interest, both as a director of an incorporated business and a partner in an unincorporated business. The unincorporated business, interestingly enough, has a year end of 30 April, and unincorporated businesses with that year end will find on 30 April 2010 that they will be unable to use the relief because it will finish with the end of the tax year a few weeks before. That seems to be unfair on unincorporated businesses, when compared with the impact on incorporated businesses, which can continue if their year end stretches up to November 2010. Does my hon. Friend sympathise with their position?

Mark Hoban (Conservative, Fareham)

I am grateful to my hon. Friend for raising that question. That is part of the challenge, because, as he stated when we discussed the reduction in small companies tax on the Floor of the House, there is a range of models for the legal structure of businesses, and some partnerships or unincorporated sole traders will be seeking to take advantage of that. Some incorporated businesses will also seek to take advantage of that, and the regulatory impact assessment sets out the proportion of people in that category. The Government expect the measure to be taken up by about 15,000 people. They will be self-employed, but deemed to be partners in companies, so it will obviously affect them. I do not know the size of my hon. Friend’s company, but of the 75,500 businesses that could benefit, the Government expect 30,000 small to medium-sized companies and 5,500 large companies to do so. We need to ensure that the rules are reasonable and fair and that the compliance costs are kept under control as well. That is one reason for my proposed date change, which I commented on earlier.

My hon. Friend asked about businesses with a year end on 30 April. The risk is that they will end up having to shift the two-year period, so that profits made in earlier years do not apply. However, I am sure that the Minister will want to respond to my hon. Friend’s comments directly.

Finally, some are concerned about the interaction between paragraphs (1) and (2) of schedule 6 and the anti-avoidance and sideways loss relief provisions in section 74A of the Income Tax Act 2007. I have been asked whether the operation of provisions in section 74A will restrict the losses that can be used in the current tax year and each of the three preceding tax years. The purpose of the discussion is threefold—to ask the Minister about tidying up the accounting periods; to look at the way in which paragraph 3(3) works in practice and whether paragraph 3(4) is redundant; and to probe the Government’s thinking on the cost of this measure. Is this the most effective way of providing relief to businesses? Have the Government accurately estimated the cost to the Exchequer of introducing this measure?

Stephen Timms (Labour, East Ham)

I, too, warmly welcome you to the Chair of our afternoon sitting, Mr. Atkinson.

I shall respond to some of the points made by the hon. Member for Fareham. As he pointed out, clause 23 and schedule 6 provide additional support to loss-making businesses by extending the carry-back of trading losses from one to three years for losses of up to £50,000 a year. This will apply for two years from 24 November 2008 for companies, and for the 2008-09 and 2009-10 tax years for unincorporated businesses. He is right that, if someone pays the corporation tax main rate of 28 per cent., they will receive relief at 28 per cent. Similarly, a self-employed person with an unincorporated business and liable for income tax at the basic rate will receive relief at the 20 per cent. rate. He talked about benefiting from relief at the highest rate paid, which is an accurate characterisation of the way in which the measure will work.

We estimate that about 140,000 businesses will benefit over two years by an average of £4,000 per year. The hon. Gentleman asked whether that was an accurate estimate. It is based on some modelling of records of tax returns submitted by businesses and an assessment of what we can expect, given the current economic conditions. He asked whether the proportion of businesses benefiting should not be rather larger, but I remind him that substantial loss relief is available already. There is one-year carry-back for companies and non-incorporated businesses, terminal loss relief with three-year carry-back for the self-employed and companies ceasing to trade, and so on. The majority of businesses making losses in the current climate will get relief through those mechanisms, so we would expect that the number of businesses getting relief through the clause and the schedule to be of the order of magnitude that I have indicated. Is it absolutely certain that that is the right answer? No. Of course there is some uncertainty. However, it is a pretty sound estimate of what the measure is likely to cost.

Graham Stuart (Conservative, Beverley and Holderness)

The last time that I asked the Minister about elasticities he was singularly unforthcoming, although he was always polite in his reply. So, if I can follow up on the question put by my hon. Friend the Member for Fareham, I want to ask the Minister, who expressed confidence in the soundness of this estimate, what is the elasticity that might surround this estimate? In other words, how great could the losses be? Is my hon. Friend the Member for Fareham completely off the wall in suggesting that they could be three times higher than the numbers that we see before us? Can the Minister give his view on that?

Stephen Timms (Labour, East Ham)

I am not quite sure what the parameter would be in this case for the elasticity that the hon. Gentleman is questioning me about. All I can say to him is that some significant evaluation work has been carried out to come up with this figure. It is the best estimate that we can provide. I am not in a position to say to him that there will be a 90 per cent. range or anything of that kind, although I can understand why he might be interested in knowing that information.

As the hon. Gentleman knows, in the Red Book we set out our best estimates and I think that this estimate is quite a well-founded one. Having said that, of course he and the hon. Member for Fareham are right that there is inevitably some uncertainty about exactly what will happen in the next few months and years when this arrangement will be in place.

Mark Hoban (Conservative, Fareham)

I take on board the Minister’s comments, and it comes through in the RIA that some work has gone into assessing this number. However, what concerns me is that the proportion of businesses is quite small. I also take on board the comment that he made about the number of other available reliefs that could absorb losses made in the next couple of years.

Nevertheless, at what point does the Treasury say, “Actually, we got this so badly wrong that we are just going to allow this relief to be in place for one year”, effectively reversing the decision taken in the 2009 Budget to extend the relief for a further year?

Stephen Timms (Labour, East Ham)

We are agreeing in the schedule and in the clause, if it goes forward, to a relief that will be in place for the period that has been set out. I am not sure if it would be possible to reverse the measure in the finance Bill 2010; it probably would be possible. However, that is not something that I would expect to happen.

Let me respond to the interesting points that the hon. Gentleman raises in the amendments that he has tabled. First, amendments 28, 29 and 37 seek to extend the relief for companies to losses in accounting periods ending on or before 31 December 2010, instead of on or before 23 November 2010. He is right, of course, that company accounting periods are unlikely to align exactly with the qualifying windows. That will mean that accounting periods will straddle the start dates or end dates for the qualifying periods. That is not particularly problematic, although it is perhaps somewhat untidy. However, since companies have different accounting periods, it is inevitable that that will happen, whatever period we choose.

The measure is intended to apply for two years, for both companies and unincorporated businesses. Extending the provision for companies by an extra month to 31 December 2010, as the amendment proposes would mean that, for companies with accounting periods ending on 31 December, each of the accounting periods ending 31 December 2008, 31 December 2009 and 31 December 2010 would fall within the qualifying period. That would give companies scope to access relief for losses over a three-year period. Therefore, I suggest that it would give them an advantage over unincorporated businesses, which make up three quarters of the business population in the UK and whose interests have already been raised with us by the hon. Member for Beverley and Holderness. Those unincorporated businesses would be able to claim losses from only two years. Essentially, the argument is that we want both types of businesses to be able to claim in respect of two years, and the amendment would extend it to a third year in the case of incorporated businesses.

Mark Hoban (Conservative, Fareham)

The Minister has been generous in giving way. Am I right in saying that even if we extended it to a third year, the maximum loss would still be capped at £100,000?

Stephen Timms (Labour, East Ham)

The hon. Gentleman is right that the £50,000 per year loss would still apply, but the amendment nevertheless gives access to the facility for a longer period for some incorporated business, depending on their accounting period, than would be the case with unincorporated businesses. In that way, there would be an element of unfairness. If we had introduced such a measure, I am sure that it would have been challenged in the Committee.

One way in which we could have introduced the measure was by starting the period on 31 December 2008. That would have delayed implementation, but we wanted to introduce the facility as quickly as possible, so we decided to do it with effect from the date of the pre-Budget report.

Amendment 36 seeks to remove the reduction to the £50,000 limit when losses arise in an accounting period shorter than a year. Paragraph 3 of schedule 6 provides extended relief for trading losses of relevant accounting periods ending within each of the qualifying periods— 24 November 2008 to 23 November 2009 or 24 November 2009 to 23 November 2010—subject to a limit of £50,000 on the losses from each qualifying period. With such a two-year period, there will always be accounting periods that end just outside and which therefore do not qualify for the extended relief. The rule is intended to deter a company from arranging for additional periods to qualify for relief when that is not intended. Companies can change their accounting periods and there could be some unfairness as a result.

We do not want to impose unnecessarily burdensome rules to determine the eligible losses, such as requiring profits and losses of accounting periods to be apportioned, so instead we have gone for a simple approach—reducing the annual limit pro rata when an accounting period is shorter than 12 months. That is sensible and proportionate.

Mark Hoban (Conservative, Fareham)

I think I understand now the drafting of paragraph 3(3). Is the Minister’s argument that if a company’s accounting period ended on, say, 31 March 2010, and then it had another accounting period ending at the end of December 2010, it could effectively try to claim two lots of £50,000 in the period, hence paragraph 3(4)?

Stephen Timms (Labour, East Ham)

That is absolutely right. That is what paragraphs 3(4) and (5) address.

Amendment 30 seeks to prevent the £50,000 limit applying to an accounting period immediately preceding the relevant accounting period in which the trading loss arose. I might be able to help the hon. Gentleman on that. Paragraph 3 provides for an extended loss carry-back for losses incurred in a relevant accounting period—it is available for £50,000 of losses incurred in relevant periods. However, paragraph 3 is concerned only with the £50,000 of losses that may be subject to the extended relief; it does not apply to any losses in excess of the £50,000 limit. Those further losses are available for carry-back against profits of the preceding accounting period, subject to the normal 12-month carry-back rules. I hope that that explanation reassures him that the amendment is unnecessary and I hope that I have made the measure clear.

Graham Stuart (Conservative, Beverley and Holderness)

The Minister thinks that 114,000 companies will benefit. Has he done any modelling work on how many of those would have gone out of business, but will now survive as a result of the measure? Will there be a saving to the Exchequer and what will that be?—[Interruption.] The hon. Member for South Derbyshire looks despairing.

Mark Todd (Labour, South Derbyshire)

I am going to wait for the answer.

Stephen Timms (Labour, East Ham)

It is 140,000, not 114,000. I have some anecdotes. I was speaking to an accountant recently who told me that his colleagues who work as liquidators appear to be less busy this year than they were last year. He believes that it is because HMRC’s time-to-pay arrangements, introduced around the time of the pre-Budget report, are extremely helpful in enabling some companies which would not otherwise have done so to get through a very difficult period. That is not about this relief, but it is about the related measure that we put in place in the pre-Budget report.

Graham Stuart (Conservative, Beverley and Holderness)

Despite the despairing feeling of some of the Minister’s colleagues, it seems important to try to understand the impact of this. If the Treasury’s dynamic model of the economy—which we would all like to see—was available, we could model this more precisely and understand the impacts on the survival of businesses and then perhaps we could see that this is a relief that should be extended for all time. If, over time, it is neutral in its impact on the Exchequer, but leads to the real survival of businesses, some of which at least must happen as a result, then this relief could be extended for a longer period. In any case, the Government should be congratulated for having brought this forward.

Stephen Timms (Labour, East Ham)

I am very grateful to the hon. Gentleman for that last remark. I do not have access to a model of the kind that he describes. If he is able to find one, that would be a valuable contribution.

Amendments 31 to 35 seek to raise the amount of trading losses that businesses can carry back for three years from £50,000 to £100,000. I shall urge the Committee to resist these amendments. Essentially, I am arguing that we should reject them on the grounds of cost. The measure that we put in place is proportionate and targeted in the light of the current downturn. Limiting the extended relief to £50,000 a year ensures that additional resources are targeted on smaller businesses, which are perhaps the most vulnerable at a difficult time.

It is estimated that 90 per cent. of eligible businesses will be able to claim full relief on their losses at the £50,000 limit. Doubling the limit to £100,000 would not benefit the vast majority of smaller businesses, although it would benefit some larger ones. However, it would also increase the cost of this measure by about £150 million over two years on top of, according to the estimate in the Red Book, £230 million in 2009-10, plus £215 million in 2010-11. There would be a significant additional cost and we should not be committing in this way.

Again, I draw attention to the benefits that we have seen from the business payment support service, which we also introduced at the time of the pre-Budget report. We expanded that in the Budget to allow businesses expecting to make losses this year to offset them against tax bills on profits from the previous year which they are unable to pay. That is another worthwhile extension to the help that we are providing. The hon. Gentleman explained that these were probing amendments. I hope that I have been able to give him some reassurance and some explanations. I hope that he will not feel it necessary to press the amendments to a vote.

Mark Hoban (Conservative, Fareham)

I am grateful to the right hon. Gentleman for his comments and responses to my amendments. As I indicated, the amendments to increase the limit from £50,000 to £100,000 were probing amendments to get the Government to put on record their basis for choosing £50,000 as a threshold. The Minister’s argument about cost is important, but compared to the cost of the 40 per cent. first-year allowance, which is the subject of clause 24, it does not seem a huge amount. It would be beneficial to get some cash help to businesses now.

I am grateful for the Minister’s confirmation that the measure will apply for the next two years. It is important to give the taxpayer some certainty about its availability, particularly as businesses start to look at their forecasts and projections not only for this financial year but for the next one, and as they seek to understand the impact of potential losses and how they may be able to reduce their historical tax bills by taking advantage of losses that arise in the following financial year.

I am also grateful that, in his response to amendment 30, the Minister made it clear that the measure did not affect the existing tax treatment of losses set off against the preceding year’s profits. I therefore beg to ask leave to withdraw the amendment.

Clause 24

Mark Hoban (Conservative, Fareham)

I was not sure whether the Minister was going to speak to the clause—he has a text in his hand—but I will kick off the debate. Clause 24 amends the provisions of part 2 of the Capital Allowances Act 2001, which relates to plant and machinery allowances, to provide a one-off, first-year allowance of 40 per cent. on expenditure incurred on plant and machinery. The allowance is available for unincorporated businesses, such as that in which my hon. Friend the Member for Beverley and Holderness is a partner, during the 12 months from 6 April 2009, and is available for businesses that pay corporation tax, which again applies to a business in which my hon. Friend has an interest, during the 12 months from 1 April 2009. He will be noting the measures very carefully when looking at his capital expenditure plans for the year ahead.

Only a year ago, the rate of allowances was reduced from 25 to 20 per cent., but now we are doubling it in the context of the economic crisis. The timing of relief is central to capital allowances, and when the first-year allowance is increased, relief for the expenditure is accelerated when it would otherwise be spread across later accounting periods.

One of our concerns about the issue takes us back to the debate about cost and the question of what benefit we can expect from the introduction of the first-year allowance. When the Chancellor announced the allowance in his Budget statement, he was very bullish about what it meant in practice. He said:

“I want other industries to invest, too. Businesses already benefit significantly from the annual £50,000 investment allowance, which was announced two years ago. I want to go further to promote investment now. So for this year, I will double the main capital allowance rate to 40 per cent. That will encourage firms to bring forward investment, in particular those companies in the growth sectors that will deliver the rewarding jobs of the future. It will mean enhanced tax relief to support investment of up to £50 billion this year. That includes £10 billion of investment in the vital communications sector.”—[Official Report, 22 April 2009; Vol. 491, c. 247.]

Will the Minister elaborate on where that additional investment is coming from? The Chancellor explicitly expects to bring in an extra £60 billion in total, £10 billion of which will be from the communications sector. How can the Government be so certain that that will be the case?

Page 206 of the Red Book, for example, notes a contraction from 11.5 to 11 per cent. in gross fixed capital formation for business in 2009, and a smaller contraction from 4.75 to 4.25 per cent. in 2010. The Minister has been probed this afternoon and his colleague, the Exchequer Secretary, was probed this morning on what models were used to estimate those figures. It would be interesting if the Minister could tell us what the figures for gross capital formation would have been if the temporary increase in the first year allowance from 20 to 40 per cent. had not happened.

There is some scepticism among outside bodies about this measure. PricewaterhouseCoopers said:

“The problems with this measure are first that it is ad hoc and temporary. This will only help a business that is able to react quickly as there is very little time to plan and incur the expenditure. A business needs to have sufficient one off, immediate expenditure requirement to make the allowance useful, and of course, sufficient profits available against which to set it off. How effective it will be must be problematic.”

I think that the Institute of Chartered Accountants in England and Wales made similar comments in their representations. If we are going to bring forward investment of that magnitude, in excess of the amount that will benefit from the annual investment allowance, we need to use what several Government Ministers have termed shovel-ready projects—things that are ready to go. Suddenly telling businesses in April this year, “You have a 40 per cent. capital allowance for the first year; use it now” actually makes it very hard for businesses to respond promptly. In reality, what I suspect will happen is that they will get enhanced relief for expenditure that has already been planned, but further allowances will not necessarily be brought forward in the future.

Businesses will have already sat down and worked out their plans. Businesses will have done cash flow budgets for this year some time ago. They will have already put those plans in place, and so will not be in a position to respond quickly to the Government’s pledge. Of course, businesses know that there is no point in trying to accelerate things too much, because we know that by the end of March 2010, the first-year allowance will go back to 20 per cent. for incorporated business. So they know that it is a transitory allowance, and their willingness to respond quickly will be limited by that.

There have been some suggestions about how the Government could have responded and dealt with this better. They could have looked at the scope of excluded expenditure to identify investments that would not have otherwise qualified for capital expenditure, but which might have been brought forward this year. They could have looked at lengthening the period beyond one year to two years to give businesses time to bring forward that investment so that they could take advantage of the relief. Alternatively, given the expense of the measures—it costs £1.6 billion and in the previous debate the Financial Secretary was concerned about doubling the relief for losses carried back from £50,000 to £100,000 on grounds of cost—the Government could have found some way of capping the benefits arising from the introduction of the 40 per cent. rate for capital allowances and to use the money saved elsewhere in a more targeted way to help businesses.

So there is some concern about the effectiveness of the measure and what the Government are seeking to achieve. The point that the Chancellor made in the Budget statement was that the relief would stimulate additional investment. There was scepticism among accountants and business advisers as to whether that was actually going to happen. I would be grateful if the Minister could further explain the Government’s thinking on this and whether he is confident that it will bring forward additional investment, as outlined by the Chancellor in the Budget statement. Was it wishful thinking on his part, like so much of the economic forecasts that were announced in the Budget in April?

Stephen Timms (Labour, East Ham)

The clause is part of our package of targeted support for business—temporary tax relief providing real support for businesses investing for the future. The cost is substantial, as the hon. Gentleman said, and its scale reflects our recognition that business investment is key to recovery. The measure will stimulate and bring forward business investment. It is time-limited because we recognise the exceptional nature of the current downturn and want to support and encourage businesses to invest now. My right hon. Friend the Chancellor of the Exchequer said in his Budget speech that we must grow rather than cut our way out of recession, and this measure is one building block we have in place to do that.

The hon. Member for Fareham queried the balance between the cost of the carry-back measure that we debated a few minutes ago and this first-year capital allowances measure. The balance reflects the importance of encouraging investment at this point in the downturn to move us into recovery as quickly as possible. At this critical time, it is absolutely right to support businesses and their cash flow, including through the loss carry-back measure, but it is perhaps more important to provide an incentive to invest, which this measure will do.

Graham Stuart (Conservative, Beverley and Holderness)

All the outside experts tell us that it takes time, as my hon. Friend said, to plan capital investment. There seems to be no rationale for doubling the relief in this financial year rather than the one following, when it would have a far more positive effect. Cynics outside view it as having more to do with the electoral cycle than the business cycle.

Stephen Timms (Labour, East Ham)

Opposition Members may have slightly misunderstood what the Chancellor of the Exchequer said about the scale. The figure he used was £50 billion, not £60 billion: that is the amount of investment that will qualify for support from the allowances. I certainly do not wish to give the Committee the impression that there will be an additional £50 billion or £60 billion of investment. That will not be the case. However, I expect some increase because many businesses are likely to have some flexibility regarding the timing of their investment and will be able to bring it forward, compared with what they otherwise would have done.

Mark Hoban (Conservative, Fareham)

If the Financial Secretary looks back at the Budget speech, he will see a clear implicit message that the provisions would lead to additional investment of £50 billion. The right hon. Gentleman is absolutely right to say that I misquoted the number; it is £50 billion, which includes £10 billion of communications expenditure. The expenditure would have taken place and was already planned. There might be a slight increase at the margin, but it is simply already planned benefiting expenditure. The measure will not generate additional investment to bring us out of the downturn quicker.

Stephen Timms (Labour, East Ham)

It will bring forward more investment than would otherwise have been the case, but only a modest share of the total investment, which is the £50 billion figure to which the hon. Gentleman and the Chancellor of the Exchequer referred.

Mark Hoban (Conservative, Fareham)

How much additional investment does the right hon. Gentleman think it will bring forward?

Stephen Timms (Labour, East Ham)

My estimate is that it will be in the order of an additional couple of billion.

Mark Hoban (Conservative, Fareham)

So a couple of billion in additional investment for a cost of £1.6 billion in additional tax relief—is that good value for money?

Stephen Timms (Labour, East Ham)

Yes, it is, because the cost will be recovered in future years due to the way that first-year allowances work. We are bringing forward investment and the cost will be defrayed in future years. Winning that additional investment at this time, given what is happening in the economy, is a very worth while prize, which is why we are taking it forward.

Mark Field (Conservative, Cities of London and Westminster)

My hon. Friend the Member for Fareham has very transparently expressed Opposition Members’ concerns. Can the Minister give us any other example in which a multiplier effect, which he thinks will emerge in the years to come, can be bought only by an up-front cost of as much as 80 per cent. of the first year’s expense? It seems almost incredible, from our perspective, that to invest, as he puts it, £1.6 billion now for the hope of getting £2 billion in year one is a satisfactory use of allowances.

Stephen Timms (Labour, East Ham)

I think it certainly is. As I said, much or perhaps all of the cost in the first year will be recovered in future years. The device enables us to achieve significant additional investment at this critical time, thereby speeding the recovery and the point at which the economy returns to growth. That is a valuable prize. That is the reason why clause 24 introduces the temporary 40 per cent. first-year capital allowances for most business investment between April 2009 and March 2010, in effect doubling the main rate of capital allowance for new business investment over that period. That is in addition to the significant benefit that the vast majority of businesses already receive from the £50,000 annual investment allowance introduced last year. The AIA provides about 95 per cent. of UK businesses with 100 per cent. tax relief against investment in qualifying plant and machinery.

The temporary first-year allowance will provide additional support to those businesses that invest the most and will encourage firms to bring forward investment. I have certainly spoken to businesses that think they can bring forward investment as a result. It will both improve cash flow in the short term, supporting businesses that invest, and encourage investment now by reducing the cost of investment in the current year relative to later years.

Graham Stuart (Conservative, Beverley and Holderness)

The Minister is probably about to come on to this, but may I press him on the £10 billion from investment in the communications industry? Where did that number come from, and will he explain whether he expects any of the additional brought-forward expenditure to be in that particular area?

Stephen Timms (Labour, East Ham)

The figure comes from an assessment of what is going on in the communications sector. Much is happening in that sector, and one development that we are keen to see is the development of next-generation broadband services—a roll-out of broadband into those parts of the UK where services are not provided. If those investments take place in the current year, there will certainly be benefits, but communications is quite a wide sector and one in which, I am pleased to say, an encouraging level of investment is going on now. If one looks at the historical pattern, one sees that about 20 per cent. of investment has been coming from the communications sector. That is the view that is reflected in the figure to which the hon. Gentleman refers.

The measure provides real help to businesses investing for the future at a time when they are most in need of support. I put it to the Committee that supporting business investment now is a very important step in ensuring economic recovery and I commend the clause to the Committee.

Mark Hoban (Conservative, Fareham)

I am disappointed by the Financial Secretary’s justification for the measure. The whole thrust of the Chancellor’s Budget statement when making the case for the measure was the increase in investment. We can look at the Red Book. The Minister said that he thought that the measure would bring forward additional investment of about £2 billion this year. That is about 1 per cent. of the total fixed investment projected in the Red Book for 2009 and it accounts for an increase in GDP of about 0.1 per cent., so we are seeing a relatively small benefit for quite a significant hit to the taxpayer. Given that the Government forecast borrowing to be £175 billion this year and £173 billion next year, they need to be careful about their rationale for a making big increase in the relief available to companies. If the Chancellor had said at the time of the Budget that the measure was not about bringing additional investment but more about supporting businesses, it would have been a much more straightforward explanation of the increase than suggesting that it would bring forward a huge wave of additional investment.

My right hon. and learned Friend the Member for Rushcliffe was right when he said during the Budget debate that

“Doubling capital allowances for a year, however, is not likely to shift a lot, as it normally takes people more than 12 months to plan investments that they were not previously planning to make. Furthermore, at a time of falling consumer demand people will not be falling over themselves to go in for capital investment, regardless of allowances.”—[Official Report, 27 April 2009; Vol. 491, c. 612.]

That encapsulates the situation. When making the case for a significant increase in tax reliefs, we need to be much clearer about the benefits rather than suggesting that it would bring forward huge additional investment.

Graham Stuart (Conservative, Beverley and Holderness)

Through my hon. Friend, I thank the Minister for being straightforward and honest, as he always is, in sharing the Government’s view. It is a shame that the Chancellor was not as straightforward in his Budget speech. Given the news of recent days, there may be a vacancy, and I hope that the Financial Secretary will be promoted to fill it.

Mark Hoban (Conservative, Fareham)

The Financial Secretary is always transparent on these occasions, and gives a good account of why the changes are necessary.

Jeremy Browne (Liberal Democrat, Taunton)

I wish to bring the conversation back to the matter in hand. I take the point about what the right hon. and learned Member for Rushcliffe said, but to be fair to the Government, one could envisage a company that intends to invest at some point in future—such investment already being programmed into its thinking—choosing to bring it forward slightly because of the extra inducements. It may not necessarily choose to make an investment that it had no plans to make, but if it had chosen to invest, it could decide to do so a little sooner.

Mark Hoban (Conservative, Fareham)

Indeed; the Financial Secretary made that point. However, the “little bit” sooner is not the £50 billion that the Chancellor implied; it is £2 billion. That is 1 per cent. of the gross capital formation expected for this year. The amount being brought forward at the margin is very marginal, but it is being done at a cost of £1.6 billion. It seems quite a large amount of tax relief to give for the relatively small return of bringing forward that additional investment.

The intention may have been to give further support to business to invest during a downturn in the knowledge that it would not trigger additional investment but was there simply to cushion the cost. That would be a different explanation. That is the one that the Financial Secretary has given this afternoon. I understand it, and I am content with it. It is a much clearer and more robust rationale than the one given by the Chancellor at the time of the Budget, when the measure was announced.

Clause 25

Mark Hoban (Conservative, Fareham)

I beg to move amendment 38, in clause 25, page 15, leave out lines 37 to 38 and insert

‘the Treasury may by regulations make provision for and in connection with the application of all relevant enactments as follows.

(1A) The Treasury may make regulations to—

(a) give effect to the agreement referred to in subsection (1), and

(b) give effect to subsection (3).

(1B) Regulations under this section may include provision having effect in relation to any time before they are made even if the provision creates or increases the liability to tax of P or such other person as is referred to in subsection (3).

(1C) Regulations under this section may include—

(a) provision amending any relevant enactment, and

(b) consequential, supplementary and transitional provisions.

(1D) Regulations under this section are to be made by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons.’.

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss amendment 39, in clause 25, page 16, leave out lines 14 to 16.

Mark Hoban (Conservative, Fareham)

With your leave, Mr. Atkinson, and that of the Committee, I hope that we might be able to discuss the amendments and clause stand part at the same time. It would make life easier.

To call clause 25 a tidying up measure may not be to use quite the right phrase, but it stems from the agreement reached between the Government and Royal Bank of Scotland earlier this year. In a statement of 26 February, the Chancellor said of RBS that

“It has also agreed for a number of years not to claim certain UK tax losses and allowances, meaning that when they do return to profitability it will not be able to benefit from the losses accrued in the intervening period.”—[Official Report, 26 February 2009; Vol. 488, c. 369.]

It is worth remembering the scale of Government support for RBS through the asset protection scheme, which was announced on 26 February. RBS intends to protect £325 billion of eligible assets; it will bear the first £42.2 billion of loss and then 10 per cent. of the balance, with the taxpayer bearing 90 per cent.

The Chancellor’s statement in February was not particularly detailed about the areas covered, so I thought that I might chance my arm by tabling a parliamentary question to ask what would happen to losses incurred in 2008 and whether they would they be available for offset against the tax paid by RBS in previous years. The response was:

“RBS have agreed not to claim certain UK tax losses and allowances for a number of years, meaning that when they do return to profitability, they will not be able to benefit from the losses accrued in the intervening period.”—[Official Report, 13 March 2009; Vol. 489, c. 810W.]

That is effectively a repeat of the Chancellor’s words in February, and not a very clear answer to what I thought was a relatively simple question.

The clause does not help us to work out when the agreement that RBS and the Government have reached kicks in. Which losses are covered by the agreement? Is it only losses on those assets covered by the asset protection scheme? Is it losses on that element of the asset protection scheme that the Government guarantee? Is it on the £42 billion? Is it on the 10 per cent.? What happens if RBS writes off debts outside the APS pool? Will those losses be available for offset against future profits? Are they covered by the agreement? The situation is not clear. An agreement has been reached between the Government and RBS on the losses, but there is no transparency for the House or other taxpayers regarding which losses have been forgone by RBS.

It is equally unclear whether it is just RBS that is subject to the agreement or whether Lloyds has also agreed to forgo losses. The taxpayer might say, “I get some value from the break-up of RBS because I know it will pay more corporation tax in the future, but Lloyds appears still able to take advantage of the losses on assets guaranteed by the asset protection scheme without having given up those losses.” Will the Minister provide some clarity on the losses that are covered by the scheme, and on whether Lloyds bank is in or out of the agreement?

The technical problem that I have with the clause, which gives rise to my amendments, is that it is not clear what parliamentary process will be gone through when agreements are reached between the Government and P—the company that receives the guarantees is referred to as P. How will those agreements be scrutinised in Parliament? Subsections (1) and (3)(b) refer to

“such modifications as are necessary or expedient”

being made. That takes us back to the Henry VIII powers in the Banking Act 2009. I want to know what parliamentary scrutiny will be in place to ensure that the agreements are monitored. That is why amendment 38 sets out that there should be a regulation-making power in the clause, which would enable this House to have proper scrutiny of the arrangements.

Stewart Hosie (Scottish National Party, Dundee East)

I broadly support the amendment, but there are some concerns. Regarding Lloyds versus RBS, one used some of the tax assets and one did not. They also have different other terms and attachment points regarding asset protection, which would have to be established in advance in terms of regulation. Is there not a very real danger that that information could be highly market-sensitive, if unrelieved tax assets were abused or there was cash that would weaken the balance sheets? Where does the balance lie between market sensitivity and the transparency that the hon. Gentleman seeks in his amendment?

Mark Hoban (Conservative, Fareham)

The hon. Gentleman makes an important point; it is one that we wrestled with during consideration of the Banking Bill. Where do we draw the line between, on the one hand, transparency and accountability to this House on tax matters, especially when Government support is being used to bail out business and, on the other hand, what we allow to be shielded from that accountability by virtue of market confidentiality? The Chancellor’s statement on 25 February, which might be all that we have to go on, was too much in favour of market confidentiality and paid insufficient regard to taxpayers’ interests. We could have a little more information without breaching market confidentiality. We could be much clearer about whether the provision applies only to the asset protection scheme or to other losses as well. The taxpayer is giving significant support to RBS. That is in the public domain, so why is the other side of the bargain not also in the public domain?

Stewart Hosie (Scottish National Party, Dundee East)

I can see the point that the hon. Gentleman is trying to make about transparency, but let us return to the initial discussions with RBS on the APS. I suspect that the use of unrelieved tax assets versus cash, bonds or preference shares was the most market-sensitive piece of information available in the entire banking sector at that time. Had that entered the public domain, would there not have been a very real risk of a further collapse in banks’ share prices?

Mark Hoban (Conservative, Fareham)

I am not sure that I agree; this takes us back to what is covered by the deal. The losses that RBS will forgo might simply relate to assets covered by the asset protection scheme, but that information is in the public domain. One can see where the contract would be between RBS receiving public support from the taxpayer and the losses that it forgoes as a consequence. If the deal is otherwise, and if the losses forgone go beyond those in the asset protection scheme, there might be an argument about market confidentiality.

I would have thought, however, that any deferred losses no longer available because RBS has given them up—if that is material—would be disclosed in the company accounts anyway. I am therefore sceptical about the market confidentiality argument. It is a very easy argument for the Government to hide behind. That is why we need a bit more transparency now about the nature of the losses covered. If the Minister says that only losses arising in relation to assets within the asset protection scheme are covered, that will be fine and I can leave the matter there. However, a proper debate is required, and my amendments 38 and 39 give us the opportunity to have that debate on future agreements. I tabled the amendments to enable proper parliamentary scrutiny of future agreements.

We need to think very carefully about the sorts of arrangement covered by clause 25. In subsection (2), the Government have set out a series of arrangements that could give rise to an agreement between the Government and P to forgo tax losses. Those arrangements include where the Government

“guarantees or assumes a loss or other liability of P or another person...insures or indemnifies P or another person against a loss or other liability...agrees to make a payment to P or another person in respect of a loss or other liability...whether or not the person to whom the payment is to be made...or...gives other financial support of assistance to P or another person”.

That is a wide range of circumstances.

In response to the economic crisis, the Government have introduced a number of schemes to help businesses by giving some form of support. For example, under the enterprise finance guarantee scheme, there is a Government guarantee in place for loans made to small and medium-sized enterprises, so that the Government guarantee a proportion of the losses. I do not believe that there is any indication from the Government that the banks taking part in the enterprise finance guarantee scheme have to forgo any losses as a consequence of taking part in the scheme. However, it is another scheme whereby a guarantee has been issued and it could fall within the scope of clause 25.

The Government have issued guarantees for money borrowed via the European Investment Bank. Again, that type of transaction would fall within the scope of the clause. The Secretary of State for Business, Enterprise and Regulatory Reform has said that there may be some financial support available to the purchaser of General Motors in Europe. That financial support could fall within subsection (4). Would that be part of the deal?

The Committee needs some clarity about the use of the clause and about how the use of the powers outlined in the clause will be scrutinised. The Minister might argue that we should be very grateful if a business decides to give up some of its losses in return for one of these deals and that that arrangement reduces the cost to the taxpayer of those deals. However, it would be helpful if we knew that the losses that are to be forgone bear a reasonable relationship to the amount of support that we give and that a proper deal is being done.

Clause 25 is wide ranging. Most of my remarks have been made in the context of the agreement reached between the Government and RBS, but the clause has wider application. There is not sufficient parliamentary scrutiny built in to the arrangements as set out in the clause, so we should be very careful about how we enact this measure.

Of course, one of the drives behind the clause is that a company automatically qualifies for loss relief; it does not elect to qualify for it. The Government therefore need to have the measure in place to tidy up the arrangements; I understand that part of it. However, the Government could go a little further than they have in terms of ensuring that there is parliamentary scrutiny of the arrangements.

Angela Eagle (Labour, Wallasey)

I hope that I can reassure the hon. Gentleman about the nature of the clause and about the inappropriate effect that his amendment would have on it.

Clause 25 ensures that any agreement reached between a company and the Treasury or other arm of Government under which the company gives up the right to tax losses or reliefs in order to access Government financial assistance will be effective for tax purposes. The clause will initially apply to the asset protection scheme, but it could apply to other circumstances where Government assistance is required to maintain financial stability and restore confidence.

It is therefore essential that the parties to the agreement, in particular the Government, know that when an agreement is reached, it will have the effect that is intended, so that the agreement will not need to be revisited if it transpires that any agreement reached on relinquishing tax losses is not actually effective in tax law. The hon. Member for Hoban is right—

Mark Hoban (Conservative, Fareham)

Fareham.

Angela Eagle (Labour, Wallasey)

Sorry, the hon. Member for Fareham. [Laughter.] I knew what I meant. The two go together.

Mark Hoban (Conservative, Fareham)

The right hon. Member for Normanton (Ed Balls) made the same mistake in a Committee several years ago. I suggested that I might refer to him by his surname rather than by his constituency. He soon learned not to make that mistake again.

Angela Eagle (Labour, Wallasey)

I do not have quite that embarrassment with my surname.

The provisions will apply automatically to any agreement designated by the Treasury. They simply enable companies to enter into tax undertakings with the Treasury in order to access Government assistance in a way that the existing legislation precludes. Accountability to Parliament for such contractual undertakings will take effect in the normal way.

However, the amendment seeks to make each operation of the clause subject to a statutory instrument, with the result that the terms of such Government assistance would remain uncertain until a statutory instrument was enacted. That could have the perverse effect of reducing rather than boosting market confidence. That was the point made by the hon. Member for Dundee, East in his intervention on the hon. Member for Fareham.

If the agreement to give up losses were contingent on subsequent parliamentary approval of a statutory instrument, there would need to be provision in the agreement to revisit terms if such approval was not given or amended. Such a term in the agreement would mean that it could not achieve its aim of restoring confidence and stability in the market. In summary, the clause will apply only when a company has agreed to relinquish its losses and only when that agreement is pursuant to the company accessing financial assistance from the Government. We are not legislating to force tax undertakings on anyone, so a further layer of scrutiny is unnecessary and potentially destabilising, because such deals may need to be struck with absolute certainty and in a very short time scale.

Mark Hoban (Conservative, Fareham)

But a host of deals have been subject to the affirmative procedure that have flowed from the Banking (Special Provisions) Act 2008 and the Banking Act 2009. The Exchequer Secretary’s argument about uncertainty does not really hold, given that experience has shown that when an agreement has been reached, it has passed on to the statute without causing uncertainty.

Angela Eagle (Labour, Wallasey)

In the case of the asset protection scheme, the agreement on losses will be part of a wider agreement covering accession to, and the operation of, the scheme, the terms of which will be set out before Parliament after the agreement has been made. A similar process would apply for any other such designated agreement.

The hon. Gentleman asked about Lloyds. Clearly, RBS has at least entered into an agreement in principle to forgo the offsets in tax losses, but Lloyds has not. Those are the only two banks that have accessed the asset protection scheme as it is currently set out. As to whether Lloyds is involved as well as RBS, the answer is that the former is not; it decided that it wishes to pay for its access to the scheme in a different way. RBS has made an agreement concerning its UK tax losses at 2008 and for a certain number of years thereafter. The agreement will be finalised in the ongoing negotiations with the bank. There has been agreement in principle, but the detail and the due diligence is in the middle of being done. Although the agreement in principle involves surrendering the losses, the details have not yet been finalised and the work is still ongoing.

Mark Hoban (Conservative, Fareham)

I am grateful for that explanation, but will the Exchequer Secretary say when the agreement will be finalised?

Angela Eagle (Labour, Wallasey)

We hope that the two banks will have signed up to the asset protection scheme in detail by the end of the summer. There is a great deal of work going on, not least on due diligence on the assets in the scheme and on getting state aid clearance. As I said, Lloyds has not entered into an arrangement to forgo tax losses. It is paying for access to the scheme by paying £15.6 billion for participation, which will be satisfied through the issuance of B shares. That does not prejudice agreements with other banks, which might prefer to settle their fees differently.

Any bank that wishes to access the asset protection scheme, by definition I suspect, will have a different agreement—the agreement is not a template for every bank. Every agreement for every bank that wishes to enter the scheme will be bespoke and relevant to that bank’s circumstances. Of the two banks that are in the scheme at the moment, one—RBS—has agreed to forgo tax losses and reliefs. Lloyds has not; it is paying for access in a different way. Therefore, I hope the hon. Gentleman will agree that his amendments would destabilise the negotiations because of the uncertainty that they would create. I hope he will not press them to a vote.

Mark Hoban (Conservative, Fareham)

Will the Exchequer Secretary give way?

Angela Eagle (Labour, Wallasey)

In a minute.

I wanted to spend some time talking about clause 25, because the debate has rolled into that, but before I do so, I would be happy to give way—

Mark Hoban (Conservative, Fareham)

That is fine.

Angela Eagle (Labour, Wallasey)

Clause 25 is part of a package of measures designed to stabilise high street banks and boost the amount of money available for lending. The asset protection scheme has been offered, and the aim of that scheme was to restore confidence in the banks and get credit flowing again by dealing with the losses associated with impaired assets. Under the scheme, the details of which were published on 26 February, the Government will provide protection against future credit losses on certain assets in exchange for a fee. Each bank that wishes to receive support under the asset protection scheme will enter into a contractual agreement with HM Treasury.

In addition to the fee, banks may separately enter into several other undertakings in return for Government protection, including, but not limited to, undertakings to forgo tax reliefs for losses and allowances, which is where clause 25 comes in. Those undertakings would be under bilateral agreements between the two parties and would therefore not override tax law. We are bringing forward clause 25, therefore, to ensure that any such agreements or undertakings entered into by a company to forgo tax reliefs or losses are actually effective in tax law.

Robert Syms (Conservative, Poole)

Would that agreement relate only to UK tax losses and reliefs? The Royal Bank of Scotland, for example, straddles several continents. Would the clause have a perverse affect on the bank if it ever got back to profitability, as one hopes it will, so that it will shelter those profits outside the UK simply because part of the agreement is that it will have to pay tax at an earlier stage under the arrangements the hon. Lady described?

Angela Eagle (Labour, Wallasey)

No bank can avoid paying tax liabilities legally by sheltering profits in a way that is against UK tax law. The agreement is really a recognition that, in order to pay for access to the asset protection scheme, a bank, such as RBS in this case, has agreed to forgo any tax arrangements that might allow it to offset profits. It will begin to pay tax much sooner in the process when it comes back into profitability, which is a good deal for the taxpayer, a point to which the hon. Member for Fareham was kind enough to refer in his contribution.

Therefore, the answer effectively is that the bank could do nothing that would be illegal under normal tax law to avoid paying what was due, and nor could it use some of its reliefs on losses, which it would normally have access to, because it has agreed to forgo those reliefs as part of payment for access to the protection available for some of its impaired assets. Clause 25 merely ensures that that agreement, voluntarily entered into bilaterally between the company and the Treasury, is effective in tax law and that it cannot be overridden by more general provisions in tax law. Although the immediate focus of the clause is to deal with the tax consequences of the asset protection scheme, it is prudent to ensure that those provisions could, if needed, be applied more generally in future. The clause could therefore be applied to a Treasury-designated arrangement whereby Government financial support is granted to a company.

Mark Hoban (Conservative, Fareham)

Will the hon. Lady give way?

Angela Eagle (Labour, Wallasey)

Before the hon. Gentleman leaps to his feet, I will deal with the point that he might wish to make. I can assure the Committee that clause 25 will only have effect when the company has given an undertaking to surrender its right to benefit from tax losses and other reliefs under arrangements entered into with HM Treasury, or any other public body, and when the Government are providing financial support. The clause will only become relevant in those narrow and particular circumstances.

Mark Hoban (Conservative, Fareham)

The hon. Lady is absolutely right that the clause relates to those circumstances, but as I indicated in my remarks, the Government have supported several schemes in which they give financial support to see businesses through this time. We are talking about European Investment Bank guarantees, and there are other schemes. What criteria will be used by the Treasury to determine whether the agreements it has reached or the support it has given to businesses should lead to those companies forgoing their tax losses?

Angela Eagle (Labour, Wallasey)

This is not a general approach that we are going to apply across the piece. The hon. Gentleman knows that we have not applied it to Lloyds in its access to the asset protection scheme, even though we have agreed with RBS that it should forgo some of the tax reliefs and losses.

Mark Hoban (Conservative, Fareham)

Will the Minister give way?

Angela Eagle (Labour, Wallasey)

I will in a minute when I have finished what I am trying to say.

Therefore, the approach will apply only when it is explicitly part of an agreement that is made between the particular company and HM Treasury. It will not be applied retrospectively to a range of general agreements that have already been reached. This is about having access to particular assistance, in this case from the asset protection scheme, through an arrangement made between HM Treasury and the company concerned. I hope that will reassure the hon. Gentleman that this is not just a general sweeping power that we intend to apply across the piece to help and assistance that the Government may wish to give to industry in general. It is much more specific and narrow than that.

Mark Hoban (Conservative, Fareham)

I understand the Minister’s point about it being specific. She drew a distinction between the treatment of Lloyds and RBS. But once this power is in the Bill, and given the breadth of the power and the range of circumstances it could cover, businesses will ask whether they want to accept this help from the Government in return for forgoing tax losses and in what circumstances the Government would ask them to forgo those tax losses. Although the Minister says that it refers to a particular historical event, the breadth of the clause makes it more widely applicable in future to agreements reached between the Government and particular businesses. Those businesses might want some clarity about when the Government might seek to take advantage of this clause.

Angela Eagle (Labour, Wallasey)

The asset protection scheme is not one of those things that comes into existence every day of the week. We are not likely, hopefully, to need schemes such as that regularly in future. It is a response to a critical situation that has arisen in the global financial markets and the credit crunch. I hope the hon. Gentleman will accept that.

Stewart Hosie (Scottish National Party, Dundee East)

The Minister is right about the asset protection scheme: there are one or two banks involved and there may be one or two more. In terms of the potential scale, there is also the working capital scheme, the enterprise finance guarantee scheme, the capital for enterprise fund, the asset purchase scheme, the direct assistance to the automotive industry and £1.3 billion of EU additional funding. That could cover a large number of companies receiving aid in one form or another that might be invited to surrender tax reliefs as well. Should we not have some concerns that the proposal might grow arms and legs unnecessarily?

Angela Eagle (Labour, Wallasey)

Although Opposition Members have said that this is a wide-ranging clause, they have also acknowledged that it would be applied in a very narrow range of circumstances in which a bilateral agreement has been reached between HMT and a particular company in order to pay for access to Government support. Effectively, we are talking about getting good value for taxpayers’ money, if we are essentially acting as insurers of last resort to companies who have got themselves into difficulties. That is one of the ways that access to such support might be paid for in certain circumstances. In those circumstances, there must be a bilateral arrangement as part of an application to get Government support.

[Mr Jim Hoodin the Chair]

What we propose is not a general principle to be applied across the board. I hope I have made that clear and I hope that offers some reassurance to Opposition Members. In addition, subsection (3) ensures that giving up tax reliefs in return for Government assistance under such designated arrangements does not create any new tax relief either to a company that has given up reliefs or to any other person. For example, no tax relief will be due when one company in a group that has benefited directly from the asset protection scheme compensates another company for forgoing tax relief. In that circumstance, the clause denies any relief for the compensation payment. I therefore move that it should stand part of the Bill.

Mark Hoban (Conservative, Fareham)

We are debating amendments, Mr. Hood, although it has transformed into a wider debate about the clause. I would not have spent so much time on this matter if it had been restricted purely to the one transaction of RBS and the asset protection scheme. I understand why the legislative underpinning needs to be in place to enable RBS to surrender its losses. If there had been a way of drafting the measure to restrict it, I think that it would have gone through on the nod without much debate, other than my asking when the APS might be signed off.

My concern is that the clause is much more widely drafted. It relates to particular companies and financial support, but it can also be used to enable an agreement to be reached with a company to forgo its losses in return for financial support. In the Minister’s statement, there is no clarity as to the future circumstances in which the measure will be used. That is where I have a problem, as it is a wide-ranging clause that could be used in the future.

Let us return to the example of Vauxhall, or let us suppose, for example, that a rail franchise collapsed. If the Department for Transport wanted to bail out the company, the Government could say that in return for that support, they wanted the company to surrender its tax losses. That might be restricted to the losses made on that franchise, or could be related to the wider business. I am not comfortable with the breadth of the clause.

Angela Eagle (Labour, Wallasey)

The hon. Gentleman should at least acknowledge that for tax losses to be surrendered in that way, there would need to be a bilateral agreement between the company and the Treasury. That is true whatever company it is—I do not wish to speculate on which companies might be involved in that. That is a part payment for the support given, which obtains value for the taxpayer. Surrendering tax losses is merely one option. The clause makes it certain that any such bilateral agreement between a company and HM Treasury would be effective in tax law. To that extent, it is a technicality.

I hope the hon. Gentleman is reassured that for other support—of which there is a great deal at the moment, with a number of schemes that support various parts of industry—we have not insisted on tax losses being relinquished as part of the structure or payment that we expect for that support. This is a narrow provision and must be agreed between the company that is asking for support and HMT. Although it is potentially wide, paradoxically it is also narrow at the same time.

Mark Hoban (Conservative, Fareham)

I take that point and that is why in my remarks to wind up the debate I said that if the provision had been entirely related to the narrow example of RBS, it would have gone through on the nod. The fact is that it could be used more widely in the future.

The Minister talks about the RBS scheme, which is potentially a huge financial cost to the taxpayer and a big event. We have seen other examples in which seemingly innocuous clauses in Bills have been used with a wider impact at a later stage, in ways that had not been envisaged at the time. Yes, a bilateral agreement must be reached with the company, but there is sometimes an asymmetrical relationship between the Government and a company in terms of the power that each has and how one might be prepared to do the other’s bidding because of the circumstances at the time.

I am not sure that there are sufficient safeguards for the use of this power in the future, and I would be happier if it had been restricted to implementing what is seen as a one-off deal in the context of RBS and the asset protection scheme. What has happened before provides some comfort, but not total confidence, about how the power will be used in future.

As the Minister has made points about the uncertainty that might arise as a consequence of waiting for parliamentary scrutiny, I am not minded to press the amendment this evening, although I am not sure how robust her argument is. I will reflect on a different approach to tackling clause 25 on Report. I beg to ask leave to withdraw the amendment.

Clause 26

Mark Hoban (Conservative, Fareham)

I wish to explore some of the background to land remediation relief in the Bill. The Government have tabled a number of amendments to schedule 7. As I understand it, land remediation relief is given at 150 per cent. of the actual cost of remediation. Remediation costs include labour and materials incurred directly or through a contractor. When a business is profitable, the relief can be used to reduce the corporation tax payable. When a business is not profitable, it can claim a repayment capped at 16 per cent. of the lower cost of the qualifying expenditure or unrelieved losses.

I understand that the objective of the relief is to bring forward brownfield sites for development, particularly ones that have been contaminated. The draft statutory instruments that have been published alongside the clause discuss three aspects of contamination: radon, arsenic and Japanese knotweed. I will return to Japanese knotweed in a moment.

The Government have put great pressure on brownfield developments. A long time ago, the Office of the Deputy Prime Minister set a target that 60 per cent. of new developments should be built on brownfield sites. However, the definition of a brownfield site is quite elastic. Many houses have been built in my constituency on brownfield sites that other people might know as back gardens and former nursing homes. On brownfield sites previously used as industrial sites, chemicals may be left behind that have to be eradicated before the site is developed.

The pressure to build on brownfield sites meant that their value was pushed up until the recent property crash, particularly when there was a relatively low cost of remediation. The cost of remediation is a barrier to sites being used for development. It is therefore understandable that relief is made available to help mitigate the cost of remediation of the land. That is such an obvious point that it is difficult to understand why it has taken so long to get to the point in legislation where we try to improve the availability of the relief.

Lord Rogers’s urban task force, which reported in 1999, suggested that additional relief should be given to developers to decontaminate land. That did not include long-term derelict land. The Barker review of 2004 cited decontamination of brownfield sites as one of the principal barriers to redevelopment of such areas. Two years later, Professor Barker carried out another review. The Chancellor in those days was keen to commission a review in every Budget on all sorts of subjects. Professor Barker got good work out of that. Her review of land use and planning in 2006 said that the Government should consult on the reform of remediation relief to encourage new developments.

In 2007, there was a consultation on tax incentives for the development of brownfield land that looked at better targeting of land remediation relief and increasing certainty and publicity for the relief. The Government concluded:

“In light of the responses to the consultation the Government is minded to take a number of steps to improve the certainty of this relief. In particular, HMRC will be considering how to improve guidance and what mechanisms could be used to ensure that the relief is better publicised. This should help to ensure that financial planning takes full account of the relief from the start.”

We seem to have spent an awfully long time talking about and consulting on this, to get to the process before us today. Even after that long gestation period, the Government are still minded to table two amendments. I should have thought this would be a textbook bit of legislation after so much consultation, and that it would pop, fully formed, into the Bill, without needing to be amended at this stage.

An important issue that I have noted from my constituency is that the relief should be extended to Japanese knotweed. The draft statutory instrument refers specifically to the three botanical types of Japanese knotweed, which apparently holds the title as Britain’s most invasive plant. According to the BBC, its removal from the Olympic site in east London could cost hundreds of thousands of pounds. Apparently, it has bamboo-like stems and clusters of creamy flowers. It sounds exotic, but it is very expensive to remove. It can flourish in any soil, so hon. Members with poor soil in their garden might consider that it would provide an attractive plant, but it overwhelms other plants and damages ecosystems. It has the ability to grow through walls, tarmac and concrete.

Mark Todd (Labour, South Derbyshire)

It kills horses as well.

Mark Hoban (Conservative, Fareham)

Indeed. Experts say that a new plant can grow from a piece of root the size of a garden pea. It is clearly a problem, and I know that from my experience, because there was a development plan for my constituency to build the final stage of a road through a site that is known locally as Warsash motors.

Mark Todd (Labour, South Derbyshire)

I used to live down there.

Mark Hoban (Conservative, Fareham)

I know. The road was planned when I was elected in 2001, and has been completed only recently. The reason why it has taken so long to complete is that the county council looked at the cost of removing the knotweed, and thought it easier to poison it and allow it to die naturally rather than try to dig it out. So, I think that people will welcome the fact that Japanese knotweed is covered by the measure, although they might regret the fact that it has taken rather longer than expected to get to this point.

I want to raise with the Minister a few points that emerged from the regulatory impact assessment. The cost of the measure is about £30 million to £40 million a year over a five-to-10 year period, so there is an aggregate cost of somewhere between £150 million and £400 million, but in the RIA, there is no monetised amount for the benefit of that cost. Will the Minister indicate how much land she thinks will be brought forward for development as a consequence of the measure? Alternatively, have the Government been waiting so long that the measure will not bring forward any land at all? I am interested to know what work they have done to understand the benefits and the sort of sites that would come forward for development that have not been coming forward, so we can protect some of our greenfield sites and allow these contaminated brownfield sites to be developed.

According to the RIA, very few people would be disadvantaged by the measure, but one group that will be disadvantaged are those who deal with knotweed currently and send it to landfill sites. Are there many contractors who just take it to landfill sites? What will be the impact on the landfill levy of the introduction of this remediation relief, which will reduce the number of people taking knotweed to landfill sites? I presume that the cost has been netted off, or factored in, to the RIA.

Angela Eagle (Labour, Wallasey)

Welcome to the Chair, Mr. Hood. I note that the hon. Member for Hammersmith and Fulham has fled at the thought of Japanese knotweed, probably to check that there is none in his garden. It is not a plant that one would want to find flourishing anywhere near anything that the members of this Committee value.

Land remediation relief was introduced in 2001 to encourage owners and investors to bring contaminated land back into use by providing enhanced tax relief. The Government are committed to increasing housing supply and to maintaining a high proportion of development on brownfield sites. The 2004 Barker review of housing supply and the 2006 review of land use and planning recommended that land remediation relief be extended to derelict land. In the light of those recommendations, the clause and schedule will extend land remediation relief to provide enhanced tax relief for the costs of dealing with specific forms of dereliction, which, up until now, have prevented sites from being brought back into use.

The scope of the legislation is based on a consultation carried out by the Treasury in 2007 and subsequent discussions with a broad range of stakeholders, including representatives from the Government, local government, industry, development agencies and the charitable sector. We recognise that the responses to the consultation show that a lack of certainty about what qualifies under the existing relief may have reduced the effectiveness of land remediation relief. That lack of certainty has meant that industry has not factored the relief into costings, with the result that the existing relief did not exert as much influence on investment decisions as we would have liked. The changes in the Bill are intended to give companies greater certainty, enabling the industry to include the relief fully in their projected costings.

In recent years, companies have exploited the relief by claiming for work on greenfield sites or brownfield sites not contaminated by previous industrial use, which is contrary to the policy intention. Schedule 7 will therefore refocus the existing relief on contaminated brownfield sites and exclude expenditure on greenfield sites. The hon. Gentleman was uncharacteristically uncharitable about Government amendments 8 and 9 to schedule 7. They will make minor drafting improvements for the provisions in the schedule—

Peter Atkinson (Conservative, Hexham)

Order. The Minister knows that we will discuss that when we come to the schedule.

Angela Eagle (Labour, Wallasey)

I was responding to the observations that were made by the hon. Member for Fareham, Mr. Hood. I am more than happy to come back to those points, which I do not think are major, when we get to that part of the schedule.

Schedule 7

Angela Eagle (Labour, Wallasey)

I beg to move amendment 8, in schedule 7, page 96, line 29, after ‘acquisition’, insert

‘by the company of a major interest in the land’.

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss Government amendment 9.

Angela Eagle (Labour, Wallasey)

I was commenting that the hon. Member for Fareham was rather less than charitable about the fact that, after consultation in the sensitive area, two Government amendments have been tabled. They are very minor in nature, and they have been tabled because the parliamentary counsel decided that his earlier draft was unsatisfactory and had to be amended to provide clarity. I suspect that the amendment is about translating policy intention into legalese, rather than any major change in policy intention that happened between the printing of the Bill and amendments being tabled.

Amendment 8 will make it clear that the land has to have been contaminated when the major interest in it was acquired, and not when the life assurance business acquired any other interest in the land, such as a short lease. It will put the certainty of the meaning beyond doubt and will clear up points that were not as clear as the parliamentary counsel would have wished.

Under amendment 9, a company will be able claim land remediation relief under cost of qualifying works subcontracted to a connected party. As drafted, there are differences in the wording of the section that gives the relief and the section that quantifies the qualifying expenditure, which could create uncertainty. Amendment 9 removes that uncertainty by amending the legislation so that the same wording is used in all sections, which is a good principle to adopt when drafting Finance Bills, however thick they are and however many clauses they contain.

Mark Hoban (Conservative, Fareham)

I have a quick question. The explanatory notes state that one of the reasons that the amendments are being made is to show that land has to be contaminated at the time that a major interest in the land is acquired for the expenditure to qualify for relief. If someone has a site that has been invaded by Japanese knotweed, what relief is available if they want to remove it from the land?

Angela Eagle (Labour, Wallasey)

I think the best way to deal with such a specific question about Japanese knotweed would be for me to write to the hon. Gentleman. I would not want to give him the wrong advice on this evil plant.

Schedule 8

Angela Eagle (Labour, Wallasey)

I beg to move amendment 13, in schedule 8, page 101, line 4, leave out from beginning to ‘is’ in line 5 and insert—

‘A1 Schedule 5B to TCGA 1992 (enterprise investment scheme: re-investment) is amended as follows.

A2 (1) Paragraph 1(2) (application of Schedule) is amended as follows.

(2) For paragraphs (g) and (h) substitute “and

(g) all of the money raised by the issue of the shares (other than any of them which are bonus shares) is, no later than the time mentioned in section 175(3) of ITA 2007, employed wholly for the purpose of that activity,”.

(3) In the words following the paragraphs, for “conditions in paragraphs (g) and (h) above do” substitute “condition in paragraph (g) above does”.

A3 (1) Paragraph 1A (failure of conditions of application) is amended as follows.

(2) In sub-paragraph (4)—

(a) omit “or (h)”, and

(b) for “sub-paragraph (4A) below” substitute “section 175(3) of ITA 2007”.

(3) Omit sub-paragraph (4A).

1 (1) Paragraph 9 (other reconstructions and amalgamations)’.

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss Government amendments 14 to 17.

Angela Eagle (Labour, Wallasey)

The tax-based venture capital schemes—the enterprise investment scheme, venture capital trusts and the corporate venturing scheme—all contribute to the Government’s policy of improving the ability of small companies to secure longer-term support through equity investments. Such investments help small companies to grow and invest in their business, so that they are well placed to take advantage of business opportunities. Encouraging investment is even more important in the light of the economic challenges that we now face. Investment in the future is crucial if the UK is to emerge from the recession with a stronger, more prosperous economy.

At Budget 2008, the Chancellor lunched a public consultation on the enterprise investment scheme to investigate how the rules and processes that govern the scheme could be improved or simplified. As a result of representations made during that consultation, schedule 8 introduces four changes.

On the enterprise investment scheme, the schedule relaxes the time limits in relation to the employment of money invested; removes the link to other shares of the same class issued at the same time as qualifying shares; extends the period for carry-back of relief and allows the full amount subscribed for to be carried back, subject to the annual investment limit; and corrects an anomaly regarding the capital gains position of investors in the event of a share-for-share exchange. On the corporate venturing and venture capital trusts schemes, the schedule relaxes the time limits in relation to the employment of money by companies receiving investment. All four changes simplify the rules of the schemes and remove current restrictions. The Government amendments merely make minor changes.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 27, in schedule 8, page 101, line 12, at end insert—

‘(1B) The individual may elect for section 135 or section 136 not to apply in respect of the shares.’.

The amendment is straightforward. It would reinstate reliefs that were there in the first place. It also seeks to address an iniquity in paragraph 9 of schedule 5B to the Tax and Capital Gains Act 1992. The Government propose to apply sections 135 and 136 of the 1992 Act to shares to which deferral relief is attributable. Thus, when an EIS company is acquired in a share-for-share exchange, the gain that arises on the EIS deferral relief shares is not taxed, but held over against the shares received in the exchange. The deferred gain falls back into charge to tax, as would be expected. Previously, sections 135 and 136 of the 1992 Act were excluded from applying, such that an investor would have to pay tax on the deferred gain and the deferral relief shares at a time when they would have received no cash out of which to pay the tax, because they had received shares and not cash on disposal.

However, the changes that the Government propose have the effect of preventing a claim for loss relief, which was previously available, if the deferral relief shares stood at a loss against the subscription price at the time of the share-for-share exchange. That loss could be relieved against the deferral gain, which falls into charge to capital gains tax or against income by making a claim under section 131 of the Income Taxes Act 2007. In general in tax law, it is a principle that the taxpayer should not have to pay tax on a gain at a time when they have no cash to pay the tax. Under the Bill, if amendment 27 is not made, the investor will have a deferred gain falling into charge to tax when they have no cash at their disposal out of which to pay the tax and they will not be able to reduce that liability by any loss on the shares.

I think that I have proposed a fairly straightforward change, to reinstate a relief that existed before the Government proposed their amendments.

Angela Eagle (Labour, Wallasey)

It may be helpful if I explain briefly the problem that we were trying to address in paragraph 1 of schedule 8, before setting out why amendment 27 is unnecessary and undesirable.

Under the enterprise investment scheme, an investor may take the proceeds from the sale of an asset and invest them in shares. Any capital gains tax payable on gains from those proceeds is then deferred, but not cancelled. If the shares are exchanged for new shares, the deferred gain is brought back into charge. That was always intended. However, capital gains tax can also arise on the exchanged shares at the same time as the deferred gain comes into charge, which was not intended. That would happen for an EIS shareholder but not for a non-EIS shareholder exchanging their shares. The result could be a gain with tax to pay or a loss that could be set against other gains or against income. Therefore, EIS shareholders could be placed at either an advantage or a disadvantage compared with other shareholders.

The hon. Gentleman seems to be concerned that if a loss cannot be crystallised immediately, it is gone forever, but that is not the case. I hope that I can reassure him by saying that any loss arising from subsequent disposal of the new shares received in the exchange will be able to be set against other gains. I hope that the hon. Gentleman will agree that what I suspect was the reason for the amendment in the first place is actually mitigated by the current arrangements.

Allowing enterprise investment scheme investors to choose to disapply a part of the tax rules, which amendment 27 would do, would be unfair to other investors, to whom the relevant sections of the 1992 Act—sections 135 and 136—would apply. However, it would create a fundamentally wrong tax position, with the investor able to opt out of paying tax on a gain, but able to opt in to obtaining relief on a loss.

I ask the hon. Gentleman to withdraw the amendment in the hope that he is reassured that what I think is the reason why it was tabled is already covered.

Mark Hoban (Conservative, Fareham)

I shall cogitate on the Minister’s response, to ensure that I feel that she has addressed my concerns carefully. On that basis, I beg to ask leave to withdraw the amendment.

Clause 28

Mark Hoban (Conservative, Fareham)

Clause 28 and schedule 9 are technically detailed. Before dealing with the arcane details of company law and what constitutes ordinary and preference shares under schedule 9, I want to speak briefly to clause stand part and to establish some of the background to the measure.

As I understand it, the clause has been triggered by the financial crisis seen in the banking sector in the past 18 months. A ministerial statement in December last year flagged up the change to group relief and preference shares, saying that

“The first proposed legislative change will better identify who are the real equity holders in a business, for group tax purposes. This change to the group tax rules will apply to all companies. In particular, when banks and other financial institutions issue certain preference shares in order to boost their Tier 1 capital base in the form approved by financial regulators this change will ensure that their existing group structure, for tax purposes, is not broken. These preference shares are shares that carry a right to a fixed dividend or a dividend at a fixed rate, but in order to satisfy the regulatory requirements the issuer may have the right to pay a lower dividend in certain circumstances.”

Schedule 9 deals with those circumstances.

The change will mean that such preference shareholders will no longer be treated as equity holders for group tax purposes solely because that regulatory requirement is met. My understanding is that the Government want to enable groups to claim group relief when banks issue preference shares to shore up their tier 1 capital, even if those preference shares do not meet the classic fixed-rate definition. The written ministerial statement said that the changes

“will apply retrospectively for accounting periods beginning on or after 1 January 2008”.”—[Official Report, 18 December 2008; Vol. 485, c. 126-127WS.]

I would like to make some more detailed comments on the schedule, but I would be grateful if the Minister could confirm that that statement is the genesis of schedule 9 and that the change relates not only to the financial crisis, but to broader issues around the definition of shared capital.

Peter Atkinson (Conservative, Hexham)

Order. I remind the Minister not to be tempted to discuss schedule 9, because we shall come to that next.

Angela Eagle (Labour, Wallasey)

I am happy to confirm the basic analysis of the genesis of clause 28 and future schedules.

Schedule 9

Mark Hoban (Conservative, Fareham)

I beg to move amendment 23, in schedule 9, page 103, line 2, at end insert—

‘A1 (1) Section 832(1) of ICTA is amended as follows.

(2) For the definition of “ordinary share capital”, substitute—

“ordinary share capital”, in relation to a company, means all the issued share capital (by whatever name called) of the company, other than relevant preference shares (within the meaning of Schedule 18).’.

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss the following: Government amendments 10 to 12.

Amendment 24, in schedule 9, page 104, line 39, after ‘by’, insert ‘paragraphs 1 to 4 of’.

Amendment 25, in schedule 9, page 104, line 43, at end insert—

‘(6A) If a company so elects, the amendments made by paragraph (A1) of this Schedule, do not have effect in relation to shares issued by the company—

(a) before the date on which this Act is passed;

(b) on or after that date under an agreement entered into before that date.’.

Amendment 26, in schedule 9, page 104, line 44, after ‘6’, insert ‘or 6A’.

Mark Hoban (Conservative, Fareham)

My amendments are dry and technical. They define “ordinary share capital” more closely by reference to another term in the Bill, “relevant preference shares”. The objective is to ensure that group relief is available when certain preference shares are issued. The holders of fixed rate preference shares are not usually treated as equity holders. Schedule 9 changes that, so holders of relevant preference shares will not be treated as equity holders. It is important because those determinations affect the entitlement to group relief from related companies for trading losses.

Amendments 23 to 26 tidy up the definition of “ordinary share capital”. The test of a grouping for many tax purposes involves two parts: an ordinary share capital test and an economic ownership test based on the provisions of schedule 18 of the Income and Corporation Taxes Act 1988. Ordinary share capital is defined in section 832(1) of the 1988 Act as

“all the issued share capital (by whatever name called) of the company, other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the profits of the company”.

According to the 1988 Act, if the holder does not have a fixed-rate preference share, they must have an ordinary share. The challenge arises because the rate on the preference share may vary. Although the definition of ordinary share capital includes an exclusion for shares that carry a dividend at a fixed rate and is similar to the definition of fixed rate preference shares in schedule 18 of the 1988 Act, the two are not the same. As a result, it is possible for a share to be treated as part of the ordinary share capital and as a fixed rate preference share for the purposes of schedule 18. The concern expressed to me is that the introduction of the definition of “relevant preference shares” would increase the circumstances that could give rise to that confusion. Amendments 23 to 26 bring the two definitions into line, so that an ordinary share is defined as something that is not a relevant preference share.

The Government beat us to the punch with amendments 10 to 12, in that we wanted to table amendments with a similar effect. We welcome the Govt amendments.

Angela Eagle (Labour, Wallasey)

I feel that it would be beneficial to address the amendments in the name of my right hon. Friend the Financial Secretary, as they clarify the legislation. I welcome the fact that they have been widely welcomed across the Committee. I will then discuss the other amendments in the group.

The three Government amendments address representations made regarding the draft legislation for schedule 9. The schedule amends rules identifying how companies are to be regarded as belonging to the same group for tax purposes. The hon. Member for Fareham may be right to say that this is a technical and arcane matter, but it is important to a lot of grouped companies to be able to access the privileges that come with that status.

Currently, where a parent company of a group holds more than 75 per cent. of the equity in a subsidiary company, the group can benefit from rules that allow it to surrender or claim losses from companies in the group. A number of anti-avoidance rules also apply when a company or an asset leaves a tax group. The 75 per cent. equity rule was originally a straightforward test in the 1970s when the original tax rules were formed; they were then consolidated in the 1980s and still govern those areas of taxation. That rule has had to evolve to prevent avoidance, as the financial affairs of groups of companies have become more complex over time. Now, the parent company also needs to enjoy the full rights of an equity holder. Usually, those are rights attached to the ordinary shares in a company, although they might also be subject to the rights of other shareholders and certain creditors. The limitations on the types of preference shares that can be issues to external investors without threatening the structure of a tax group creates a particular problem for financial groups that need to raise additional tier 1 regulatory capital.

The changes in the schedule resolve that problem, and I think that they have been welcomed. However, we have received representations stating that, because the only circumstances in which the rules are being relaxed relate to either regulatory capital constraints or companies in severe financial difficulty, that might not cover circumstances in which a company simply has insufficient retained profits to pay a full dividend on its preference shares. Therefore, the three Government amendments, taken together, remove any doubt that the circumstances in which dividends can be reduced or not paid refer only to the terms on which the shares are issued. Amendments 10 and 11 therefore refer specifically to the terms of the share issue. A consequent change is made by amendment 12, removing a now defunct reference to the payment of dividends.

The amendments clarify that relevant preference shares do not lose that status simply because the company has insufficient profits to pay the full dividend. That includes circumstances in which a company has no profits to distribute, so that any dividend would be ultra vires, and where a dividend paid by a regulated financial institution would breach rules on capital adequacy.

Amendments 23 to 26, which were tabled by the hon. Member for Fareham, would take the changes made to the rules for tax groups by schedule 9 outside that field and into all manner of other areas of the Tax Acts. It might not have been fully appreciated by the hon. Gentleman when he tabled the amendments, but section 832 of the Income and Corporation Taxes Act 1988 is headed, “Interpretation of the Tax Acts”. It is a general definition section, whose definitions are intended to apply to many rules throughout the Acts and in a variety of different circumstances. The definition of ordinary share capital is one of those which applies for many purposes throughout the Taxes Acts.

There are two principal arguments against amendments 23 to 26. First, they are unnecessary. The objective of schedule 9 is to address specific problems that some groups have experienced as a result of the turmoil in the global economy, particularly in the financial sector, over the past year. Those problems do not relate to section 832 of the Income and Corporation Taxes Act. The groups that lobbied for changes have no problems with that section: their problems relate purely to schedule 18 to that Act. We have received positive and welcome feedback on the changes contained in schedule 9, and the amendments I have tabled will achieve what is needed in that respect.

Secondly, as I have indicated, it seems to me to be dangerous to amend a definition that affects dozens of separate parts of the Taxes Acts purely to achieve a change in one part. Analysing the effects of such a change would be a large undertaking, and I am pretty sure that it would throw up some undesirable and unintended consequences. That is not the right way to achieve a focus on the particular area about which the hon. Gentleman is worried.

If businesses are experiencing problems with the definition of ordinary share capital in other specific areas of taxation law, HMRC will be pleased to receive representations from them about it. Consideration will then be given to whether changes are necessary to the definition of ordinary share capital for those specific areas. I hope that the hon. Gentleman appreciates that undertaking. If other specific problems are brought to our attention we will certainly try to address them, but tackling a specific issue by attempting to change a general definition, which could have undesirable effects throughout the Taxes Acts, is a recipe for large numbers of unintended consequences that would make themselves known subsequently. They might have consequences for avoidance activity or a range of other undesirable outcomes, which I am sure the hon. Gentleman certainly did not intend when he tabled the amendments.

The changes brought about by schedule 9 provide companies with greater flexibility in how they raise capital from external investors, without compromising their right to the benefits of being part of a tax group. That will assist a number of banks that are seeking to bolster their regulatory capital and help to protect depositors. We will achieve our aim in ways that will not adversely affect any group or detract from the essential anti-avoidance purpose of the tax rule that is amended. I therefore urge the Committee to accept the Government amendments and the hon. Member for Fareham to not press his.

Mark Hoban (Conservative, Fareham)

I am grateful for that explanation. It reflects part of the challenge of tax law in this country. To address one issue we create a new definition, which then throws up anomalies regarding other definitions. To use an architectural metaphor, we create a baroque monstrosity of a tax system rather than a classical building. I do not know if there is much scope to have a tax law in the current exhibition on the baroque at the Victoria and Albert Museum. It would be an interesting interpretation of baroque to have tax law exhibited there. Not wishing to digress too far, there is a tax museum in Siena, which has remarkable pieces of art depicting the business and commerce in Siena. I think that that is more renaissance than baroque.

Coming back to the topic, I understand the Minister’s point. This is a challenge that we face in trying to amend law. My amendment was over-ambitious for the occasion, and those who suggested it to me will have noted the Minister’s undertaking and will reflect on it. On that basis, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 22, in schedule 9, page 104, line 21, at end insert—

‘(6A) An order under sub-paragraph (5) must specify that no company may be regarded as being or having been in severe financial difficulties in any accounting period during which it agrees or agreed to contribute to, or increases or increased the value of, the pension arrangements of any director or former director a sum in excess of £1 million.’.

This is the Fred Goodwin memorial amendment. Schedule 9 talks about a business reducing or failing to pay the dividend on a preference share in relevant circumstances, and it goes on to define those relevant circumstances as being when

“at the time the dividend is or would be payable, the company is in severe financial difficulties”.

The schedule does not define what severe financial difficulties are. I move the amendment as a probing one, to get the Government to set out more clearly what they see as severe financial difficulties. I think that the letter that has been placed in the Library in respect of the amendment says that the vast majority of businesses may clearly fall within or without the everyday meaning of that phrase. That is a perfectly fair thing to say, but we know that RBS was in severe financial difficulties and needed to be bailed out by the Government, not just once but twice. However, RBS’s financial difficulties were not that severe that it could not augment the pension of its chief executive. That makes it rather difficult to understand what severe financial difficulties means, and it would help to have some clarity from the Government. If banks are able to spend significant sums on discretionary activity, would that not suggest that they are not in severe financial difficulties? I would be grateful if the Minister could elaborate a bit more carefully on that phrase before I think about whether to press the amendment to a vote.

Angela Eagle (Labour, Wallasey)

I congratulate the hon. Gentleman on the opportunistic nature of the amendment. It demonstrates that creativity lurks everywhere. [Laughter.] One day, I might ask him what his secret is.

Amendment 22 seeks to address matters that are not directly relevant to schedule 9 but are relevant to the content of regulations that the Treasury could make under the power contained in the proposed new section of the Income and Corporation Taxes Act 1988, which is inserted by paragraph 3 of the schedule. The amendment raises a topical issue—that of so-called rewards for failure, which none of us regard as a good thing. However, if it is aimed at directors who bear responsibility for the financial difficulties of a company, particularly directors who no longer work in the group, it will miss its target. The consequences of the amendment would fall on the current employees and shareholders of a business if it was denied the opportunity to have its group structure recognised by the tax system, rather than on those who had done the damage and fled bearing the rewards of failure.

The amendment would apply whenever pension benefits in excess of £1 million were granted to directors, irrespective of whether the company, the shareholders or anyone else believed that a particular director had been instrumental in the failure of the company. It would always be possible, as I am sure the hon. Gentleman realises, to pay pension benefits of slightly less than £1 million, in which case the entire point of the amendment would be lost.

The hon. Gentleman asked what constituted “severe financial difficulties”. The phrase is fairly self-explanatory. It does not cover companies with temporary cash flow problems, or circumstances in which they could acquire funds from related companies or other sources. If there is genuine doubt, however, we are prepared to do whatever we can to provide companies with certainty of treatment.

The phrase does not cover contrived situations. If we were to become aware that some groups were attempting to use the relaxation provided by the change to manipulate tax group structures—in effect, to say who is entitled to claim group relief or some other tax relief—then we would be prepared to remove any doubt about whether the severe financial difficulty test was satisfied. In that context, it is important to apply common sense. Having demonstrated his creativity, I hope that the hon. Gentleman will withdraw the amendment.

The rest of the debate is in Hansard.