Finance Bill

Public Bill Committee, 11 June 2009.

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

Schedule 19

Ian Pearson (Labour, Dudley South)

I beg to move amendment 158, in schedule 19, page 201, line 2, leave out from ‘fund’ to end of line 3.

Good morning, Mr. Hood. It is a pleasure to serve under your chairmanship in this, the ninth sitting of the Finance Bill Committee.

Amendment 158 was tabled by my right hon. Friend the Financial Secretary and the hon. Member for Fareham, so I think that it will prove to be uncontroversial. The amendment will delete an inconsequential signpost attached to condition B of proposed new section 397AA to the Income Tax (Trading and Other Income) Act 2005, which was included to help taxpayers to interpret the legislation by alerting them to the changes made in clause 39. However, it has been suggested that the wording could be misinterpreted. To remove any doubt, the amendment will remove the wording in question.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 169, in schedule 19, page 202, line 15, leave out from ‘397AA’ to end of line 18.

I hope that this amendment will sail through as easily as the first one that we debated this morning. However, as the Financial Secretary has not appended his name to it, I suspect that it will run into heavier water.

Since 6 April 2008, individual shareholders with holdings of less than 10 per cent. in non-UK-resident companies have been entitled to a non-payable dividend tax credit. However, that tax credit was disapplied for dividends received from offshore funds in the Finance Act 2008, to counter the inequality of treatment of distributions received from onshore and offshore bond funds. Schedule 19 will restore the non-payable dividend tax credit for distributions received from corporate offshore funds that are largely invested in equities.

The 10 per cent. ownership threshold is removed for dividends paid by offshore funds, subject to anti-avoidance rules. However, when an offshore fund invests more than 60 per cent. of its assets in interest-bearing assets, or those that are economically similar, individuals receiving distributions will be treated for tax purposes as having received interest income and not a dividend or other type of distribution. As a result, no tax credit will be available and the tax rates applied will be those that apply to interest. Those rules will have effect from 22 April 2009. That starting date is the subject of amendments 167, 166 and 168, which are in the next group.

Amendment 169 relates to the provision of tax credits to individuals in receipt of dividends in non-UK resident companies, subject to certain provisions. Under the new provisions, a tax credit will be made available to shareholders in a company resident in a qualifying territory. The amendment would give certainty that, once a territory is designated as a qualifying territory and has passed the legislative test, the Treasury will not be able by regulation to disqualify it. The amendment would provide greater certainty for taxpayers that, once a qualifying territory has passed the legislative test, there can be no subsequent change to its status.

Ian Pearson (Labour, Dudley South)

The Government take a different view of amendment 169. We believe that it would remove one of the anti-avoidance provisions that we are making in new section 397BA of ITTOIA. The purpose of this part of the legislation is to provide the Treasury with the flexibility to change the classification of an otherwise qualifying territory to non-qualifying, so that the UK’s tax system can reflect and respond to future changes in foreign tax systems. It would, for example, allow the Government to respond to the development of a new regime in a tax haven.

The Government do not intend to exercise the power unless exceptional circumstances arise in which there is a substantial risk of loss to the Exchequer, and any changes would be subject to the affirmative procedure. A similar provision exists in the transfer pricing rules, so the approach is well understood. It has never been necessary to use the provision in the transfer pricing rules, but we believe that it acts as an important deterrent to prevent the most blatant forms of avoidance.

Mark Hoban (Conservative, Fareham)

For whom does it act as a deterrent? The Minister is referring to changes that may take place in a tax jurisdiction, so will it be a deterrent to a sovereign Government who might want to change their tax rules? Is that an appropriate use of British power?

Ian Pearson (Labour, Dudley South)

We believe that the legislation is an appropriate use of British power and, as I explained, that the UK’s tax system needs to reflect and respond to future changes in foreign tax systems. The hon. Gentleman will be aware of the regimes that may operate in tax havens.

We have never had to use the rule on transfer pricing, but we believe that it has acted as a deterrent. Amendment 169 would remove flexibility and curtail the Government’s ability to respond to changes in tax systems abroad, so I ask the hon. Gentleman to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

One of my predecessors as Member of Parliament for the area of Hampshire that I represent was Lord Palmerston, who was a great believer in gunboat diplomacy, as well as the builder of Palmerston’s folly across the top of Portsdown hill. I thought that the days of gunboat diplomacy had passed, but we have here the tax equivalent in a power that is intended to deter sovereign Governments, or perhaps former British colonies, from changing their tax regime. It is curious that the Government should have such a power, that a Minister should suggest that we threaten other Governments with it, and that it should be a deterrent. The provision suggests that there may be a more martial spirit in the Treasury than we suspected.

I take on board the fact that the power has not been used in the transfer pricing regime, and that it will be subject to the affirmative procedure. I am sure that tax havens are quaking in their boots because the measure has been included in the Bill. I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 166, in schedule 19, page 204, line 14, leave out ‘22’ and insert ‘6’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: amendment 167, in schedule 19, page 204, line 16, leave out ‘22’ and insert ‘6’.

Amendment 168, in schedule 19, page 204, line 18, leave out ‘22’ and insert ‘6’.

Mark Hoban (Conservative, Fareham)

Having disposed of the threat from sovereign Governments, we now come to the threat from taxpayers. The amendments are relatively simple, and would replace “22” with “6”. Hon. Members who have not perused the detail of the schedule may wonder why I tabled the amendments.

The changes in schedule 19 apply from the date of the Budget, but some tax advisers suggested that it would be better if the rules were applied from the start of the tax year. That would be advantageous for taxpayers because the rules applying from 22 April are better than the previous rules. There was some surprise among tax advisers that the measure was not made effective from 6 April 2009, in line with the announcement in the 2008 Budget, on which taxpayers may have relied.

The Chartered Institute of Taxation has noted that the draft legislation published in January 2009, which continued to be available on the HMRC website until 16 May last month, included the proposal that these changes should

“have effect in cases in which a relevant distribution arises, is paid over or is treated as paid in the tax year 2009-2010.”

When the Bill was introduced, there was some surprise that it had the date of 22 April in it. I know that that question was raised during the Finance Bill open day, when CIOT asked:

“Will the new measure to extend the entitlement to a non-payable dividend tax credit to individuals with holdings of 10% or more be made effective from 6 April 2009 rather than 22 April 2009 in line with the previous announcement in Budget 2008 upon which taxpayers may have reasonably relied?”

It went on to ask whether HMRC will be able to able to grant concessionary treatment to someone who in good faith has relied on last year’s Budget announcement.

The argument that HMRC used at the time was that the announcement was only general and should not have been relied upon by taxpayers. Normally, the Budget would have been expected to have taken place in March and the change would have been effective from 6 April—the start of the tax year. The delay in the Budget has created a disconnect and changed taxpayers’ reasonable expectation, which were—in line with the draft legislation published at the start of this year—that the commencement date would be the start of the tax year. That would reflect the general statement of intention made by the Government in the Budget 2008 when the changes were outlined.

Ian Pearson (Labour, Dudley South)

It is true that, as the hon. Gentleman says, the Budget note from last year’s Budget stated that the extension of the shareholdings of 10 per cent. or more in foreign companies would be made effective from 6 April 2009. It is the convention to make tax changes effective from the beginning of the tax year, and with that assumption date stated in the Budget note was 6 April. However, as he knows, because the Budget did not take place until 22 April, the changes to the non-payable dividend tax credit could not be made earlier without the measure including retrospective legislation. That is why the legislation is effective from 22 rather than 6 April. Given the hon. Gentleman’s point that some individuals might have relied on that to determine their tax affairs, HMRC would examine any hard cases on their individual merits, although it cannot offer concessionary treatment.

It is true that, for the legislation to come into effect before the Budget date—when it was announced—we would have to have evidence of extraordinary circumstances, such as the existence of damaging tax avoidance. That is not the case in this instance. Also, it is right to recognise that making the measure effective from 6 April could disadvantage some taxpayers—for example, those who were affected by the class of share definition—retrospectively. Again, that is why the Government decided that 22 April should be the date on which the legislation should come in to effect: to ensure that the legislation is compliant with the Human Rights Act 1998.

I have sympathy with the hon. Gentleman’s arguments. The issues to which he referred are a result of the Budget being later than normal. I have discussed how HMRC might examine any hard cases on their individual merits, and I hope that with those comments in mind, the hon. Gentleman will seek leave to withdraw his amendment.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for his response, particularly for his comments on how HMRC will look at hard cases. However, the Government clearly set out their intention to apply the changes from the start of the tax year and it was reasonable of taxpayers to assume that that would be the case. Solely for political reasons, with the delay of the Budget, taxpayers lost out. They did not lose out through their own activity, but because of the decision taken by the Chancellor to timetable the Budget for after the G20 summit. The Government should reflect on that, because they have—“misled” is not the right word—given the impression that something would happen from the start of the tax year. That has not happened for political reasons, rather than for any other good fiscal reasons, and that point should be taken on board by the Government.

In the light of remarks made by the Minister regarding the treatment of hard cases, I beg to ask leave to withdraw the amendment.

Clause 41

Mark Hoban (Conservative, Fareham)

I have just a couple of comments on schedule 20, which the clause introduces. First, a word of praise, which does not come very readily from my lips on these occasions, but there has been some very positive comment on the consultation for clause 41 and schedule 20. That consultation has worked well and improved the schedule. However, one or two issues have been raised with me.

Companies have used the late interest rules to get a tax reduction for interest expenses when they have needed it. That has particularly been the case with part equity-backed businesses. If an interest reduction cannot be used in the current year, it will be carried forward as a non-trade debit that can be offset against non-trade credits. That was not felt to be particularly useful, so companies would therefore trigger the debit when they could use it or needed it. The schedule takes the flexibility away on timing for finance costs.

The Government’s counter-argument might be that, as the legislation has been partly introduced for anti-avoidance purposes, that might well be the purpose of removing that flexibility. However, companies could still obtain tax relief when the interest is paid using companies’ non-qualifying territories—for example, Jersey. That means that they cannot refer an accruals basis for tax relief when they need to. Will the Minister comment on the interaction between the schedule and the debt cap rules? Some clarity is required and I would be grateful for his thoughts on how that clarity might be introduced.

Ian Pearson (Labour, Dudley South)

First, I acknowledge the comments made by the hon. Gentleman on how the consultation was handled. I am sure that that statement will be welcomed by my officials who have undertaken the consultation exercise. He is right to point out that there is widespread recognition for what the Government are doing; there were only some minor points raised regarding the issue of loan relationships involving connected parties.

He pointed to the issue of private equity companies. As he is aware, the legislation contains an election to enable a company to stay on a pay basis for a year after the change. That should give companies time to rearrange loans if they think they need to. The private equity industry has raised some practical difficulties with HMRC, where interest is payable to a company controlled by a number of private equity investors. Those are matters that we believe are best dealt with in guidance and HMRC is discussing them with the private equity industry.

Mark Field (Conservative, Cities of London and Westminster)

In the current economic circumstances, was any consideration given by the Treasury to extending the period of 12 months? The Minister will be aware that, particularly given the potential difficulty of acquiring funding, it may well be that that period, which might normally seem quite a sensible transition period, will not prove long enough for the reorganisation of finances for private equity companies in this difficult economic situation.

Ian Pearson (Labour, Dudley South)

Well, we always consider these matters carefully. It is our judgment that a period of 12 months is a reasonable period of time to allow companies to rearrange loans if they need to do so.

The point was made about whether or not an election should be allowed for private equity groups to deduct interest on a paid basis, if they want to. In response, I would say that allowing companies the choice to deduct interest, either when it accrues or when it is paid, would go against one of the key principles of the corporation tax rules on the taxation of interest. Interest is taxable and relievable as it accrues in the accounts. We are not persuaded that an exception needs to be made for private equity. However, HMRC will work with the industry in improving its guidance in this area.

The point about the interaction with the debt cap was made by the hon. Member for Fareham. Specifically on that point, I can say to him in response that ordinary loan relationship rules, such as late interest, are applied before the debt cap applies. That is another matter that we will cover in the guidance.

As I have said before, HMRC is in discussions with the private equity industry about these matters and we believe that they can be satisfactorily addressed through guidance. The industry is happy with that.

Clause 42

Mark Hoban (Conservative, Fareham)

I wish to raise an issue about the clause. The changes in the clause enable transactions between rated parties so that, where there is a waiver of a property or trade debt, these releases will not be taxable in the debtor company nor will there be a tax relief in the creditor company. So, within the group these changes are tax-neutral.

However, there are other inter-company balances that arise other than through trade or property debts. It has been suggested that it might be helpful to enable long-standing inter-company balances to be written off and relief to be given, so that there is no taxable transaction taking place in the debtor company nor is the tax relief given in the creditor company. I just wonder whether the Government have thought about extending the relief to companies in those circumstances.

Ian Pearson (Labour, Dudley South)

I am not sure that I have a direct answer to the hon. Gentleman’s question at this point in time. He will be aware of what we are trying to achieve through the clause. He will also be aware that the clause covers trade and property business debts. He asked why there could not be releases of any money debts between group members and he specifically made the point about the period of time. Covering other sorts of debts, such as those relating to the management expenses of investment companies, would have made the clause considerably longer and more complicated, and the representations that have been made to the Government have not suggested that, in practice, such debts cause as many problems as trade debts. However, we have not ruled out the possibility of further changes in the future. We believe that we have covered most of what needs to be done, but we would be happy to receive further representations from business and the professions about any real life problems involving money debts that are not within the clause’s scope.

Schedule 21

Mark Hoban (Conservative, Fareham)

I have just one question about schedule 21. Paragraph 2 states that

“the arrangements cause the company or any other company to gain a tax advantage (other than a negligible tax advantage).”

Schedule 21 introduces anti-avoidance provisions, but why is there not a more traditional motive test? Paragraph 2 offers a very broad definition, but when anti-avoidance is involved, one normally expects the more traditional wording where the main purpose involves tax avoidance. Paragraph 2 might cover a much broader range of transactions than would normally be covered by a targeted anti-avoidance measure.

Ian Pearson (Labour, Dudley South)

This is an important schedule in relation to targeting anti-avoidance. It is designed to stop schemes that involve abuse of the tax rules for what is known as forex matching. A number of such schemes have been disclosed to HMRC, and have been widely used in practice. It is estimated that stopping such avoidance will bring in additional corporation tax of £20 million a year and prevent further losses to the Exchequer of approximately £120 million a year. It is therefore important that we introduce legislation.

The hon. Gentleman has asked why the legislation does not contain a purpose test. Existing provisions in the tax rule for loans and derivatives deny relief for losses where the loan or derivative has a tax-avoidance purpose. Although those provisions may deny relief for losses generated by forex matching schemes, they can involve some very difficult and long drawn-out arguments between HMRC and the businesses concerned. The Bill aims to put it beyond doubt that such schemes do not work, even where they are designed to reduce the risk of a purpose test challenge. The tax avoidance purpose rule would therefore be counter-productive. It would not give certainty to compliant companies, because experience suggests that such companies are likely still to be concerned about whether their purposes could be perceived as unallowable. It might also provide avoiders a loophole through which they could escape, where contemporaneous evidence of a company’s purpose is lacking. We considered a purpose test, but there are clear reasons why we deliberately rejected it. Our approach is more robust.

Schedule 22

Mark Hoban (Conservative, Fareham)

I have just a couple of questions about the schedule. The first relates to the clarity of the guidance that has been issued so far on the matter. My second and more substantive concern may seem a curious one for me to raise given my earlier remarks about the way in which the rules on the debt cap and dividend exemption seem to be driven by the EU, and the fact that the Government have assured us that they were robust to challenge. However, it has been suggested that the rules on schedule 22 may not be robust and may be challenged on whether or not they comply with EU rules.

Let me deal with the guidance point first. There is concern that although some guidance has already been issued by HMRC it does not address all the questions raised by industry during the consultation on schedule 22. The grandfathering rules that apply until 1 December 2009 are helpful, but they should address immediate industry uncertainty.

The characteristics-based definition is potentially so wide-ranging that instead of providing greater certainty, it is likely to make the position even more unclear. It is suggested that there may be a range of offshore arrangements that are not, in substance, funds, but that may be subject to the rules. There is concern regarding interpretation around offshore companies’ fixed lives, shared buy-back arrangements and liquidation exit routes as well as special purpose vehicles under partnership. It may be the Government’s intention to ensure that such areas are not caught by schedule 22, but, as they stand, the broad nature of the rules catches those entities.

This schedule introduces into legislation the definition of an offshore fund. It can be

“a mutual fund constituted by a body corporate”

or

“a mutual fund under which property is held on trust for the participants where the trustees of the property are not resident in the United Kingdom”

or

“a mutual fund constituted by other arrangements that create rights in the nature of co-ownership”

where those arrangements are affected by non-UK law. The schedule then sets out some conditions that a mutual fund might need to satisfy to then be defined as an offshore fund. Therefore, some certainty is required. Uncertainty does not only impact on UK investors; it also creates additional complexity and administrative burdens for the offshore asset management industry, which already has quite a lot to do in getting its funds in shape to meet the rules.

The second issue goes back to the breadth of the funds that might be caught. The offshore funds’ tax regime does not comply with the UK’s obligations under agreements that create the European economic area. Previous legislation linked the definition of offshore funds to the regulatory definition, as in sections 235 and 236 of the Financial Services and Markets Act 2000, and was unlikely in practice to apply to mainstream retail investments. However, the proposed definition set out in schedule 22 appears to bring a far greater range of investments within the definition of an offshore fund—that was the comment I made in the first part of my remarks about trying to have greater clarity. The definition is so broad that the question of the regime’s non-compliance with EC law arises in practice.

I have been given the following example, in which a UK bank offers, as a retail investment,

“a debt security which redeems at any time after a minimum holding period of, say, 12 months by reference to the FTSE 100 (though any chargeable asset, or index of chargeable assets, for capital gains tax purpose would provide the same result).

In the absence of complicating factors, such an investment should be regarded as a capital gains asset for tax purposes, with any gains, made on disposal of the investment subject to tax at 18%. The offshore funds rules will not apply because the mutual fund is constituted by a UK resident company.”

However, if the same debt security is

“issued by a French or a Luxembourg financial institution under the proposed new definition”,

that definition is sufficiently broad to cause that identical investment to be subject to different rules, which would result in any gains being treated as income and therefore taxed at the higher rate. Therefore, if the Government introduce their plans for a 50 per cent. tax rate, those gains could be subject to tax at that rate, whereas the same security issued in a UK resident fund would be taxed as capital gains at 18 per cent. There appears, therefore, to be a difference between UK issuers of investments and non-UK issuers of investments, which constitutes discrimination. That, it is argued, then constitutes a restriction in the free movement of capital from UK resident investors to financial institutions resident in other EEA member states, which would be unlawful. I would be grateful if the Minister could comment on whether the Treasury believes that that differential treatment renders the rules in breach of EU law.

Ian Pearson (Labour, Dudley South)

Schedule 22 is in two parts. The first part deals with a new definition of an offshore fund for tax purposes and the second part deals with the capital gains tax treatment of participants in certain offshore funds. The hon. Member for Fareham has concentrated on the first part, and, as I think that we agree on the second part, I will not specifically refer to it.

As the hon. Gentleman knows, following extensive consultation last year the Government introduced powers, in the Finance Act 2008, to modernise the offshore funds tax regime. At that time, we said that we would consult further with industry on a new definition for offshore funds, with a view to including that in the Finance Bill 2009.

Additional consultation has led to the inclusion of a new offshore funds tax definition, in part 1. With the new offshore funds tax definition, the Government aim to provide more certainty to UK investors and funds; to achieve, to the extent possible, economic parity with the position of UK investors in UK-authorised funds; and to strengthen existing anti-avoidance rules so that UK investors who choose to invest in offshore funds do so based on a commercial decision, rather than for tax purposes. The new definition uses a characteristics-based approach, which the hon. Gentleman referred to. That aims to counter unintended tax advantage being obtained when offshore arrangements are technically outside the current definition of an offshore fund but are economically the same as such a fund.

I shall now turn briefly to the substance of the schedule, before responding directly to some of the hon. Gentleman’s questions. Paragraph 40A defines the type of body that will be an offshore fund if it meets the characteristics defining a mutual fund. Paragraph 40B sets out three conditions that must be satisfied for a fund to be a mutual fund. There are powers to make regulations to amend the third condition, using the affirmative procedure. In addition, certain closed-ended entities are excluded.

Exclusions apply for those investors in closed-ended entities who can effectively redeem their investment only on the winding-up of the arrangements. Those exclusions are applicable when either the arrangements have no pre-determined termination date or are only generating a capital return and do not give rise to any income, or when all income generated is paid to credit to the investor and is taxed as income. The powers in this part allow for future changes to the legislation by regulations, and the Government will continue to monitor the area for avoidance and will use those powers if it becomes evident that schemes are being devised to convert returns that would otherwise be income into capital gains. The Government will also be prepared to make changes in the future if it is clear that certain arrangements should be excluded from the tax definition.

This part also amends the regulation-making powers introduced by the 2008 Act to repeal the existing offshore tax funds legislation and to ensure that existing investors in arrangements that do not meet the current definition of offshore funds are not adversely impacted by the change. We have made draft regulations available to the Committee, and they set out certain exceptions for UK investors from the tax charge to an offshore gain.

The hon. Gentleman made some points about guidance. As he knows, the guidance has been published by HMRC as a draft for consultation and is based on the offshore funds definition. I confirm that further guidance will be published on the operation of the rules. HMRC is happy to make the guidance clearer, following consultation responses on specific issues.

It is also right to emphasise the Government’s position, which is that we believe that there is no discrimination here with regard to the treatment of schemes and how they comply with EU rules. We intend to treat investors in funds that provide taxable income to investors as authorised UK funds in a similar way to investors in UK-authorised funds. So there is no discrimination.

Mark Hoban (Conservative, Fareham)

I am grateful for the Minister’s comments about the compliance with EU law, but does he believe that, in the example that I gave, where a UK bank officer reads as a retail investment a debt security that redeems at any time after, say, a minimum holding period and that return is subject to the movements of the FTSE, for example, which is not dissimilar to condition C in new section 40B, that return would be treated as income? The industry believes that that would be treated as a capital return and taxed at 18 per cent., not at the investor’s highest rate of income tax.

Ian Pearson (Labour, Dudley South)

I do not want to be drawn into commenting on specific examples and giving rulings on them. I want to rest on the fact that we believe that what we are doing is compliant with EU law. Having heard what the hon. Gentleman says with regard to industry’s concerns about the treatment, I will see whether I can clarify matters, whether through correspondence or other routes.

Peter Bone (Conservative, Wellingborough)

What practical steps do the Government take in relation to the general issue of compliance with EU regulation? Do they go off to somewhere in Europe with the draft Bill and say, “Is this okay? Does it tick the boxes?” Or is it solely opinion from here? What consultation goes on with Europe?

Ian Pearson (Labour, Dudley South)

As the hon. Gentleman is aware, extensive financial and legal expertise is available to the Government. When drafting legislation, the experts are aware of EU law that is extant in this and other areas. When drafting legislation we always seek to ensure that it will be EU-compliant.

The policy is to exclude partnerships where they are tax-transparent for both income and capital gains purposes. If we receive representations saying that certain partnerships are included in the definition but should fall outside it the Government will be happy to address that in regulation.

On debt securities issued by EU institutions, debt will not be treated as a participating interest in an offshore fund, unless it gives the right to participate in profits. That point is addressed in the extract of regulations previously provided to the Committee. I am more than happy to provide, in correspondence, further clarification, if it is required, on the specific point raised by the hon. Member for Fareham.

Clause 47

Mark Hoban (Conservative, Fareham)

The clause has found widespread support within the insurance sector. There was a differential in the tax treatment of equalisation reserves between conventional insurance companies and those people who participated at Lloyd’s, particularly the corporate partnership members. The clause tries to address an important issue that has emerged over the past couple of years: for a certain group of reinsurers, it has become increasingly more attractive, for tax and regulatory reasons, to move their redomicile activities from the UK to Bermuda. The clause should help to redress some of the competitive issues. Will the Minster say a little more about what else the Government are doing to address the competitive challenge that exists in reinsurance, because London has been seen as the primary insurance market? Lloyd’s has a strong brand globally and is an important part of our financial services sector, but there has been that shift from London to Bermuda, and several people have questioned whether the Government are doing enough to reverse that move.

Ian Pearson (Labour, Dudley South)

The hon. Gentleman is absolutely right that that provision has been welcomed by the reinsurance industry, which has certainly been pressing us on this for a considerable time. The clause will put in place Treasury power to make regulations that will extend the benefit of tax relief on making equalisation reserves to corporate and partnership members of the Lloyd’s insurance market. He is right to point out that general insurance companies currently benefit from relief when they are required by the Financial Services Authority, as the insurance regulator, to make equalisation reserves, but Lloyd’s members are not required to do so. Essentially, we are seeking to level the playing field, and that has been welcomed by Lloyd’s.

The regulations—a draft is available to the Committee—follow the existing rules that apply to general insurance companies and are suitably adapted to grant tax relief where Lloyd’s members choose to maintain notional reserves equivalent to the equalisation reserves maintained by general insurance companies. The clause increases fairness and helps the competitiveness of the UK insurance market.

More generally on competitiveness, the hon. Gentleman will be aware that groups take into account a range of factors when reviewing their domicile, including regulation and its effect on credit ratings, the availability and quality of local staff, professional support services, infrastructure and also tax. We believe that London shapes up well as an attractive environment and a world-leading, professional centre with support and an unsurpassed insurance industry presence and experience.

The UK corporate tax burden compares favourably with those of similarly developed countries. Luke Savage, the finance director of Lloyd’s, has expressed strong support for the measure, which is expected to make a significant difference to members’ tax bills and improve Lloyd’s market competitiveness compared with other general insurers. That addresses the hon. Gentleman’s point about Bermuda and other jurisdictions. The Government will always want to keep these matters under review, but the clause has been welcomed by Lloyd’s and the industry. We are acutely aware of the need for a competitive regime, but tax is not the only consideration.

John Pugh (Liberal Democrat, Southport)

Does the Minister recognise that Bermuda, like the Cayman Islands, is a Crown dependency and that there is unfinished work to be done? It is not just a question of making a competitive environment; it is about doing something about a regime over which we have some control.

Ian Pearson (Labour, Dudley South)

I accept the hon. Gentleman’s point. He will be aware of the work being done on tax havens and other jurisdictions, and of the extensive amount of work involved in insolvency. It is important that we, as a Government, continue to work closely with the industry to discuss the impact of the proposed solvency II changes, and the competitive position more generally, and to take appropriate action where needed to ensure that the UK maintains its pre-eminent position in the world’s insurance markets.

Schedule 24

Jeremy Browne (Liberal Democrat, Taunton)

I beg to move amendment 176, in schedule 24, page 233, line 16, leave out ‘485B’ and insert ‘486B’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss Government amendment 159.

Jeremy Browne (Liberal Democrat, Taunton)

I shall be extremely brief. We sometimes have debates by proxy through various interest groups that are knowledgeable in a field making representations to the Government and Opposition. Amendment 176 was suggested by the Chartered Institute of Taxation as a more preferable form of drafting. I want to give the Minister the opportunity to consider what seems to be a reasonable representation and to find out whether he concludes that the proposal is superior to the current drafting.

Stephen Timms (Labour, East Ham)

Welcome back to the Chair, Mr. Hood. I would like to say a few words about clause 48 and schedule 24 before responding to the hon. Gentleman’s amendment.

Current tax law contains targeted anti-avoidance rules to ensure that amounts economically equivalent to interest are charged corporation tax in the same way as interest, instead of in a lower tax way. Clause 48 and schedule 24 replace those piecemeal measures with a rule that sets out the principle comprehensively. It is the result of consultation over the past couple of years on the use of principles-based legislation to tackle avoidance involving disguised interest. Subject to some exclusions, a return equivalent to interest will be charged to corporation tax as interest in all circumstances where it would not currently be taxed as income.

The schedule ensures that companies party to arrangements that produce interest for them in a disguised form are subject to corporation tax in the same way as if they had received actual interest. It replaces a range of targeted rules with the comprehensive rule that I have described, which charges companies corporation tax on all returns equivalent to interest in the same way as on interest, unless a specific exemption covers the returns. There are specific exceptions for arrangements where it is reasonable to assume that avoiding corporation tax is not the main purpose, or where the return simply results from an increase in the value of certain shares held by the company.

Mark Hoban (Conservative, Fareham)

One of the representations that we received from outside bodies was about the phrase

“it is reasonable to assume”

in proposed new section 486D(1). The concern is that that is a subjective test, whereas normally a much more robust test is used for anti-avoidance measures. In such cases, the principal purpose is to avoid tax, and that is demonstrable. Here, Inland Revenue or Her Majesty’s Revenue and Customs might think that “it is reasonable”. However, others might disagree about whether it is reasonable to make such an assumption. Will the Financial Secretary give some clarity as to why that wording was chosen, particularly as it was not the wording in the original drafts that were consulted on?

Stephen Timms (Labour, East Ham)

There certainly has been some interest on this point, as the hon. Gentleman says. Tax legislation already uses the words “reasonable to assume” in a wide variety of contexts, and HMRC has taken legal advice on legislation containing those words on several occasions. However, the advice would not have relevance to disguised interest legislation because of the different context.

The words in the schedule are words of limitation and would be interpreted as such by the courts. In practice, “reasonable to assume” will only rarely make a difference to the way in which the test is applied, since an unsupported assertion as to purpose would, in any case, not be accepted by HMRC as establishing true purpose, if objective evidence pointed to the contrary. Any tax avoidance test based on purpose already implicitly contains a reasonable assumption requirement. The wording in the schedule simply makes that fact explicit. We have thought about this point and discussed it with several outside organisations. We think that it is helpful to have the words for clarity.

There has been extensive consultation on that narrow point and also on the wider point of using principles-based legislation to tackle avoidance. The aim of such legislation is to stop avoidance activity in the area concerned and to allow the repeal of traditional legislation that sets out a series of detailed conditions to be met before the legislation can apply.

The traditional approach can, in effect, allow avoidance, because taxpayers can seek to sidestep the detailed conditions. It is much more difficult to sidestep an approach based on a comprehensive principle with exceptions built in. We are turning around the way in which the legislation operates, and we think that that approach will be more effective. There has been a great deal of discussion about it.

The new legislation allows the removal of 30 pages of existing detailed anti-avoidance legislation—it will be replaced with the 11 pages here—and signals that we think that the principles-based approach, which has been widely discussed, can be made to work, and that we will in future consider its use in appropriate areas of legislation as a means of tackling persistent attempts at avoidance.

Mark Field (Conservative, Cities of London and Westminster)

The Financial Secretary has gone into detail about some of the thinking here. Is he not concerned that the spirit of the age, whether on tax law or the law as a whole, is much more towards certainty—in other words, having deeper rules in a much broader context—rather than a principles-based approach? One of the concerns in what will inevitably and continuously be a competitive world, where we try to attract the best brains and businesses to our shores, is that the lack of certainty in the principles-based approach is likely to be detrimental to the better interests of this country.

I can see that there are great benefits from the Treasury’s point of view—the Financial Secretary made that explicit. In effect, he is suggesting that most avoidance schemes will be disallowed at the outset unless they can be shown to have properly sidestepped from the purposes of the Treasury, but the lack of certainty that a principles-based system brings can surely only be detrimental to the better interests of this country.

Stephen Timms (Labour, East Ham)

I suggest that our approach gives greater certainty. The problem with the old approach was that legislation set out that taxpayers could not do this, that or the other. It was pretty straightforward for people to devise slight variations on what was being prevented and then to argue they could carry on doing it. That created a fair amount of uncertainty—and certainly a lack of clarity—about the position. With this approach, however, the position is absolutely clear: if it really is interest, the tax needs to be paid on that basis. The arrangement is pretty clear and certain.

The disguised interest rules apply where a company is party to an arrangement that produces a return that is economically equivalent to interest. There are some exceptions, which are clearly set out. I do not agree that such an approach produces uncertainty; if anything, the reverse is true. We have had an interesting debate on principles-based legislation. This clause and schedule and the next clause and schedule embody that approach, which is, in a sense, experimental; it has not been tried before. The intention was to legislate in last year’s Finance Bill along those lines, but the representative bodies argued that we should take longer, because it was a significant departure from how we legislated in the past. We have been able to resolve the concerns about the principles-based approach, which I think is a good one, not least from the point of view of certainty.

The hon. Member for Taunton explained the background to amendment 176. He is absolutely right: there was an error in the schedule as drafted. We spotted the error, I am pleased to say, and it has been accepted as an error to be corrected as a matter of printing. Nevertheless, I am grateful to him for tabling his amendment and drawing attention to the error in that way.

Government amendment 159 also corrects a typographical error, but one that cannot be dealt with as a matter of printing. The error, which is in the transitional rules, would have the effect that certain types of arrangement already in place on 22 April 2009 would be excluded inappropriately from the scope of the legislation. The amendment corrects the error and ensures that the disguised interest legislation can apply to such arrangements. The amendment has effect from Budget day, on the basis that the legislation was widely consulted on before the Budget using drafts that did not include either of the errors. It can affect only transactions that were already in place on Budget day and were caught by existing anti-avoidance legislation.

I am happy to accept the hon. Gentleman’s amendment and commend the Government’s to the Committee.

Schedule 25

Stephen Timms (Labour, East Ham)

I beg to move amendment 178, in schedule 25, page 247, line 6, after ‘taxed),’ insert—

‘(aa) section 809AZCA (certain annuities),’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss Government amendments 179 and 180.

Stephen Timms (Labour, East Ham)

The second example in the Bill of the use of principles-based legislation, the schedule secures that receipts that derive from a transfer of a right to income are treated as income for the purposes of income tax and corporation tax. Like the measure on disguised interest, it is the result of consultation on principles-based legislation.

Case law shows that it is possible for companies and individuals to convert income into capital for tax purposes by selling the right to income streams. For individuals, such schemes are particularly attractive as a result of the capital gains tax increase to 18 per cent. Avoidance in this area has led to a wide range of piecemeal measures that treat sales of income as giving rise to amounts charged to tax as income. The schedule replaces the various targeted anti-avoidance rules with a comprehensive rule that ensures that a company or individual cannot avoid tax by selling income for a lump sum that is taxed more favourably than the income would have been—for example, a capital gain covered by losses.

As a result of the consultation, schedule 25, like the preceding schedule, contains specific exceptions—in this case, for transfers of income that are the consequences of the transfer of the asset from which the income arises, or where a transfer of income is the consequence of the grant or surrender of a lease over land. There are also exceptions for disposals of rights in respect of oil licences. The new legislation saves 15 pages of anti-avoidance legislation, using only eight pages, and is another example of the principles-based approach being made to work.

The Government amendments correct an error in the schedule, which replaces a number of enactments. Among the repealed provisions is a rule that currently taxes the sale of the right to annual payments as income—that is, recurring payments of an income nature that are paid under a legal obligation. That repealed provision contains a number of exceptions for sales of annual payments that are already subject to appropriate tax treatment. Owing to an oversight, the new transfers of income rules do not replicate those exclusions, but they should have done. Without the amendments, the new rules could impose an additional and inappropriate tax charge on transactions of that kind, so they simply restore the exclusions and make sure that they continue to apply under the new legislation.

Peter Bone (Conservative, Wellingborough)

Is not the Financial Secretary making the case against principles-based legislation? Instead of laying down things that one knows are wrong and saying that they must not be done, the principles-based approach sets out a principle that is thought to say what things are wrong, but can catch things that are perfectly acceptable. Is not the Minister outlining that in this exemption? Is not that the problem that principles-based legislation creates?

Stephen Timms (Labour, East Ham)

No, I do not think it is necessarily a problem. It is perfectly possible, with the new approach, to set out clearly things that are excluded, and that is what we are doing. The hon. Gentleman’s description highlights the difficulty with the old approach. If one sets out in legislation things that people are not allowed to do, it is not difficult for them to come up with a slight variation that they will do instead. The disguised interest rules that we were talking about a moment ago were introduced in 2005, but it has been necessary every year to amend them to capture the new things that people have come up with. I hope that annual amendments will not be required under the new approach.

Peter Bone (Conservative, Wellingborough)

But again, I think the Minister is making my point for me. Yes, the approach favours the Revenue in catching more avoidance, but it is catching innocent taxpayers as well. Under the previous approach, we said that something was definitely wrong and, yes, it had to be updated every year, but taxpayers who were acting innocently were not caught by it, whereas the new approach will capture people whom the Minister has not realised should be exempted, so he will have to introduce more and more exemptions each year.

Stephen Timms (Labour, East Ham)

I do not agree. It is important that we get the exceptions right and set them out clearly and correctly, which the amendments will help us to do. However, I do not agree that the approach we are adopting needs to catch people who are doing perfectly proper and innocent things. Of course, if an exception is subsequently drawn to our attention, it will be perfectly possible to include it, but I do not think we will be in the position of having to make annual changes, which was the position under the old approach.

John Pugh (Liberal Democrat, Southport)

There is an obvious analogy with the Green Book on Members’ expenses. That had to be rewritten every year, but we have now moved to a principles-based decision-making procedure. The only problem with that is that it will lead to some post-hoc judgments being made that might not be favourable.

Stephen Timms (Labour, East Ham)

The hon. Gentleman draws an interesting and perhaps illuminating analogy to assist the Committee in its deliberations.

I think that the approach we have chosen is right. This is something of a pilot and we will need to see how it goes, but the work has so far shown that it is a promising approach that we can perhaps make more of in the future. I commend the amendments to the Committee.

Mark Hoban (Conservative, Fareham)

Given that the Financial Secretary made some broader remarks about the schedule, perhaps it is appropriate for me to make some comments about the schedule and ask one or two questions.

On the principles-based approach and the breadth of the schedule, I understand the problem that the Minister wants to avoid of having to make annual changes to legislation and introduce more exceptions to capture different types of transaction. However, my hon. Friend the Member for Wellingborough put the alternative case on the breadth of the schedule and what sort of transactions it actually covers. Are we certain that swapping narrow rules for a broader-based approach is the right way to go?

An example has been raised with me that illustrates the problem that the Government are facing and the issue that my hon. Friend has discussed. Throughout the consultation process, the policy focus of this part of the Bill was on the corporate sector. There was no suggestion that the rules in the Bill would be applied to individuals to any appreciable extent. However, in the drafting, it is necessary to include in part 2 the words

“a person within the charge to income tax”,

in contrast with

“a company within the charge to income tax”,

which is referred to in part 1. The wording in part 2 captures non-resident companies that are not carrying on a trade in the UK through a branch or an agency. I understand the point of having that, but the suggestion has been made that for individuals, arrangements that divert income to another party are likely to be caught by settlement legislation. IR35—the managed service company’s rules—also apply where income from personal services is concerned.

Although the Government have said that, as a consequence of the Arctic Systems ruling, there has been some consultation on income shifting, in the Budget it was suggested that such measures would be deferred. There is concern about whether the provisions of schedule 25 are drafted widely enough to be capable of catching transactions or arrangements under which turnover generated by an individual’s personal activities can be passed to another person and caught by the income shifting rules that, so far, the Government have not sought to introduce. That goes back to the question of breadth. Although it is not the intention or the policy objective to capture individual arrangements, the breadth of the schedule allows them to be caught.

The Financial Secretary might say, by way of clarification, that the schedule is not intended to capture individual arrangements, and such a statement would be welcome. However, the concern is that any statement to that effect made in this Committee would not have the weight in court that it should have, because there is no ambiguity in the schedule. I would be grateful if he clarified whether the schedule is intended to capture income shifting between individuals. If it is not, how can it be amended on Report to put it beyond doubt that it is not a backdoor way of introducing the rules on income shifting that the Government decided to put on hold?

I also want to discuss how the rules will interact with other parts of tax law and what the priority should be. For example, the CIOT representation states that rules on loan relationships, derivative contracts and intangible fixed asset regimes should take priority over the transfer of income rules. There is also no specific provision on the interaction of these rules with capital gains tax rules. Clarity on that would be helpful.

However, the main issue that the Financial Secretary must tackle is whether the transfer of income streams between individuals will be caught by these provisions. If they are not intended to be caught, he should say how we can clarify that through amendment on Report.

Stephen Timms (Labour, East Ham)

It certainly is possible for individual transfers of income to be caught by the provisions, and deliberately so. Under the new arrangements that the Committee has debated, people could obtain a tax rate of 18 per cent. rather than 50 per cent., which is the new higher rate of income tax. Therefore, individuals do come within the schedule. However, on income shifting, I reassure the hon. Gentleman that the provisions will not be applied in situations such as the Arctic Systems case. That case involves a different type of transaction whereby income is allocated tax efficiently between two or more parties. As a result of the ownership of the asset from which the income arises, that case does not involve the transfer of a right to income. Therefore, the legislation will not apply in that case. What the schedule deals with does not happen in cases such as Arctic Systems, because there is no transfer of a right to income.

Mark Hoban (Conservative, Fareham)

Clearly there is some disagreement between the Treasury’s interpretation of the schedule and that of the Law Society and others. Is it not possible to put the matter beyond doubt by introducing an explicit exclusion for income that is transferred as a consequence of a performance of personal services, for example?

Stephen Timms (Labour, East Ham)

I think that the matter is beyond doubt, but I will happily look at it again and reflect on the hon. Gentleman’s point.

The hon. Gentleman’s second point was about capital gains tax. If the consideration is charged as income under the transfer of income rules and the transferor realises neither a capital loss nor gain on the part disposal of the asset, but is able to carry forward the whole pool of capital expenditure to deduct on a subsequent disposal of the asset, that outcome is reasonable because the whole amount of capital expenditure remains available when the asset is sold. If the asset is subsequently sold for a capital loss, that loss cannot be set off against the taxable income that previously arose, but that outcome is not unreasonable, given that it is within the transferor’s power to avoid that outcome by selling the asset rather than just the income.

I have been reminded, Mr. Hood, that the guidance on Arctic Systems and income shifting cases of that kind does make the position clear.

Schedule 27

Mark Hoban (Conservative, Fareham)

Hon. Members may have been thinking that they were just going to breeze through schedule 27 and clause 52 of the Bill. Having spent a day last year in Committee debating the way in which the residence and domicile rules were going to work in practice, I feel this could not pass without some comment. Many of the questions about the function of these rules that hon. Members raised in Committee on last year’s Finance Bill have come back to haunt the Government and have led to the changes that we see in this Bill. We raised a number of questions about the filing of returns, the de minimis limit, trading, spouses and property, all of which are dealt with in this part of the Bill.

The first question I want to raise relates to the

“application of the remittance basis without claim where unremitted foreign income and gains are under £2,000”.

That change in the Bill means there is now no requirement to file a return where gains are less than £2,000, which is to be welcomed. At the time the matter was raised, we flagged up our concern that to file such a return would be significant burden on HMRC and the taxpayer. However, in clause 52, the rules are amended to introduce a de minimis limit of £10,000, so what happens now? Is someone with foreign income of less than £10,000 still required to file a self-assessment claim, or does the £2,000 limit apply in such a case?

It is important to have clarity on that point, because there is a large number of people who work here temporarily who may have some foreign income from overseas. We discussed the large number of migrant workers last year, and my hon. Friend the Member for Hammersmith and Fulham, who is not in his place, cited the example of Polish workers in the UK who might have some residual income, say from a flat they have back in Poland—rental income or other interest.

(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92) - Schedule 27

Mark Hoban (Conservative, Fareham)

I welcome you back to the chair for this afternoon’s sitting, Mr. Hood.

I was talking about the Poles referred to by my hon. Friend the Member for Hammersmith and Fulham in the debate last year on the residence and domicile rules. I was pointing out to the Minister that there was apparently a degree of confusion about what the limit would be in what is introduced by paragraph 3 of the schedule. The explanatory notes state:

“Paragraph 3 amends section 809D(1)...which provides that an individual unremitted foreign income and gains of less than £2,000 in a tax year does not need to file a self-assessment tax return”

Paragraph 3 (3)(1A) of the schedule states that

“the individual is not domiciled in the United Kingdom in that year and conditions A to F in section 828B are met.”

In clause 52, condition B in proposed new section 828B refers to the matter of £10,000. There is a mismatch somewhere between the explanatory notes and the Bill as to what the cut-off level would be, so I should be grateful for some clarification. I shall have a little more to say about the £10,000 when we come to the next clause.

The other issue that is resolved, in part, in the schedule, is that of the trailing spouse. That was debated last year. The Government helpfully made a positive move by introducing a de minimis limit of UK source income of £100—the hon. Member for Taunton has tabled an amendment to clause 52 about that. My only concern about the issue is that the limit may be insufficiently generous, because it would give rise to taxable income of £20. Do we want a trailing spouse to go through that process simply for £20-worth of tax? Is there not a higher, more pragmatic, limit? When we debated the issue last year the Minister’s predecessor, the right hon. Member for Liverpool, Wavertree (Jane Kennedy) was very much against increasing limits. Is the Treasury much more interested in increasing limits this year? The change from £2,000 to £10,000 is one increase. Perhaps the Government should think more carefully about imposing too high a burden in respect of a relatively small amount.

The other issue that had a great deal of debate last year, both in the run-up to the Committee stage of the Finance Bill and the Bill itself, was remittances of personal property. This year the exemption has been extended so that it applies regardless of the source of income used to purchase a property. That is a welcome move by the Government, which takes account of some of the criticism made last year about the unworkability—if that is a word in the dictionary—of the reforms and has taken things further. However, one of the comments that has been made is that the exemption could have gone a little bit further than the Government have conceded so far.

The exemption does not apply when the assets cease to be personal property. That is entirely reasonable when the personal property has been sold, and I can understand that. There is concern that the exemption should be extended to include circumstances when the property has been lost or stolen. That would be a welcome relaxation of the rules.

We are grateful that the Government have made some progress in responding to the concerns we raised last year, but I wonder if the Minister could clarify the three issues that I have raised: the interaction between the £2,000 and the £10,000 limits; whether there could be a more generous amount for the so-called trailing spouse provision; and whether the exemption for personal property could be extended to include property that is either lost or stolen.

John Howell (Conservative, Henley)

I shall echo a couple of the points made by my hon. Friend. I am sure that the Minister is aware of the comments made by the Institute of Chartered Accountants on this matter. Although it has welcomed much of what is being proposed, it points out that the consultative committee established for last year’s Finance Bill needs to continue, to ensure that the changes come through. I would like to know what commitment the Minister will give about that.

I am not sure whether this is appropriate for clause 51 or for clause 52, but there is a point that needs clarification—it probably relates to both clauses: the interaction of this legislation with settlements legislation. It would be nice to know whether that issue has been addressed and whether there should be some clarification.

Stephen Timms (Labour, East Ham)

I too welcome you back, Mr. Hood, after our lunch break.

I am glad that the hon. Member for Fareham (Mr. Hoban) was able to welcome the changes in the schedule. Perhaps it was a slightly grudging welcome. Nevertheless, it was a welcome and I am glad about that.

Our aim in introducing major changes to the remittance basis last year was to maintain our international competitiveness and to increase the fairness of the tax system. Of course, the UK needs to continue to be attractive to people overseas who have the skills we need for our own economy, but it is also absolutely right that those who have chosen to live and work in the UK should make a fair contribution through the tax system to support public services. That is the balance that the new arrangements were designed to deliver.

However, the Government are certainly prepared to listen to legitimate concerns that taxpayers from abroad and their advisers have raised with us, so my predecessor, my right hon. Friend the Member for Liverpool, Wavertree, who was dealing with the Finance Bill a year ago, gave a commitment that officials from the Treasury and Her Majesty’s Revenue and Customs would meet interested parties to review the rules, to ensure that they operated as intended and imposed no unnecessary administrative obligations on potential users.

Since the autumn, officials from the Treasury and HMRC have talked with a wide range of representatives of external bodies, as the hon. Member for Henley has mentioned—I have met a number of them as well. They have identified issues that they felt should be addressed so that the new regime can be implemented as smoothly and effectively as possible. We have also taken the opportunity to make one or two other small adjustments.

The first change introduced by the schedule relates to gift aid tax relief as it applies to individuals who use the remittance basis. It was always the intention that the annual charge introduced by the remittance rules should be treated as a payment of tax for the purposes of gift aid and available to frank payments to charities. Due to a drafting error, the legislation does not deliver that result, so the amendments made by paragraphs 2 and 5 of the schedule ensure that the rules for gift aid operate as intended.

In the majority of cases, if somebody wishes to be taxed under the remittance basis they are required to make a formal claim to do so through the self-assessment system. An exception is when someone’s unremitted foreign income and gains are less than £2,000 in any tax year, when it is assumed that they will have chosen the remittance basis without any claim being made— the hon. Member for Fareham asked a question about the £2,000 and I will come to that in a moment. A case has been made that the legislation is not sufficiently clear on that point, so paragraph 3 of the schedule seeks to put beyond doubt the fact that a claim will not be required in those circumstances. Its effect will be that people in that position will be taxed on the remittance basis, but they will preserve their right to file a tax return and to be taxed under the arising basis if they wish to do so.

The figure of £2,000 is a general de minimis limit for those who use the remittance basis. The new £10,000 limit, which is introduced in the next clause, is a new tax exemption that applies to individuals from overseas, such as migrant workers who have a job in the UK and also have overseas employment income in the same year. The exemption would simply remove the obligation on people in that position to file a self-assessment return. It is a more generous arrangement for that group of people, and it applies whether or not the individual chooses to use the remittance basis; it does not affect whether they are eligible to pay tax on the remittance basis.

Mark Hoban (Conservative, Fareham)

Will the Minister clarify that point? I am a little puzzled by how the provision will work? If there is a £10,000 exemption for employment income but a £2,000 exemption for other income, how will the circumstances in which each one works be made clear to people who may be covered by the remittance basis?

Stephen Timms (Labour, East Ham)

As I said, the £2,000 is a general, de minimis limit for anyone. The £10,000 figure, which will be introduced in the next clause, applies specifically to migrant workers, who frequently will have had some employment in the same year in another country, and will have gained an income. They will have a choice about which arrangement to apply to their circumstances.

Paragraph 4 of the schedule removes the obligation to file a self-assessment return when an individual has total UK income or gains of no more than £100, which has been taxed in the UK, provided they make no remittances to the UK in that tax year. At one point, I thought that the hon. Member for Fareham was referring to trading spouses, but the appropriate term is “trailing spouses”. HMRC was told that trailing spouses typically have a bank account in the UK that earns only a small amount of income, and £100 covers such cases. The measure has been widely welcomed as a positive move.

Paragraph 9 relates to the rules applying to assets brought into the UK. As the rules stand, someone who has chosen to use the remittance basis will be subject to UK tax if they use their foreign income and gains to purchase property and assets that they bring into the UK. There are some exceptions to that general rule—for example, when the assets in question are imported temporarily, or are worth less than £1,000.

In broad terms, those exemptions are not available when the items are purchased using overseas employment income, so the exemptions may be difficult to operate in practice and might give rise to inadvertent non-compliance. Following representations, the Government decided that the rules on exempt assets should be extended with effect from the start of the 2008-09 tax year.

The hon. Member for Fareham asked why the exemptions were not being extended to assets that are lost or destroyed. I suggest that introducing such an exemption could open up significant opportunities for abuse. We must remain vigilant, and although we have been able to take on board a number of the suggestions made to us, that one could give rise to difficulties.

Paragraphs 12 and 13 clarify the interaction between the new remittance regime and the tax rules that apply to overseas trusts. The remittance regime includes transitional provisions that prevent certain income arising before 6 April 2008 from being taxed as a remittance if it is brought to the UK on or after that date. The point has been made that those provisions do not work as intended, so we are amending them to ensure that they do.

The hon. Member for Fareham asked whether the problem he described with settlements legislation has been solved—I am sorry, it was the hon. Member for Henley who asked that. I think that paragraphs 13 and 14 of the schedule cover that point, and people we have talked to have not only welcomed the change, but told us they think it solves the problem.

There follow some provisions that remove ambiguity in the remittance basis regime and ensure that they are not targeted by those seeking to sidestep the rules. The hon. Member for Henley, while welcoming the progress we have made as a result of the discussions, asked whether we were going to keep the consultative committee going. I can reassure him that we have agreed to do that. I agree that it has been a useful forum, and one whose value will continue for a period yet.

Taking the changes introduced by the schedule together makes the remittance basis more straightforward to operate in practice. I again express my thanks for the constructive approach the interested parties and outside organisations have taken in their consultations with officials from the Treasury and HMRC, as it has allowed us to make these worthwhile improvements to the remittance basis.

Clause 52

Jeremy Browne (Liberal Democrat, Taunton)

I beg to move amendment 177, in clause 52, page 24, line 13, leave out ‘£100’ and insert ‘£500’.

You will recall, Mr. Hood, that we had an extremely lengthy debate on all these matters a year ago, and that I had the opportunity to raise every issue I could conceivably think of—and many that I had not previously thought about—with regard to the topic. I do not intend to go over all that ground again, especially as it has been touched on in our discussions on schedule 27, but I have tabled this specific amendment. Yet again, I cannot claim its original authorship, because representations were made to me by the Chartered Institute of Taxation’s Low Incomes Tax Reform Group on that specific point, so it seemed reasonable to raise the issue and have a short discussion on it.

You will recall, Mr. Hood, that a year ago, we touched on the fact that non-doms are always portrayed in the media as extremely wealthy, but of course there are some who are not wealthy. Just before we broke for lunch, the point was made that fruit pickers from Poland, for example, or people doing jobs that pay only the minimum wage or a small amount above it would nevertheless be classified as non-doms. The amendment concerns the tax they would be eligible to pay on interest on money in their bank accounts. Because of sterling’s decline against the euro, people who live elsewhere in Europe, or who are paid in euros, might be able to accumulate even more money than normal. Anyone working hard and applying themselves, even if earning a relatively small amount of money, could build up a reasonable balance without it being regarded as large by any normal person’s standards, and they would be eligible to pay interest on that balance. The point was well made by the hon. Member for Fareham that that might be seen as unreasonable, although that is a subjective view.

The other point that the hon. Gentleman made was about practicalities: for someone eligible to pay £20 of tax on a balance of £100, in terms of additional interest, it seems to be quite an administrative burden to recoup a rather small amount of money. The amendment therefore proposes that the clause should specify £500 for interest payments, rather than £100, which would give people just a little more of a cushion, with regard both to practicality and to giving people an opportunity to save a small but reasonable amount of money. That would be more workable and reasonable.

Mark Field (Conservative, Cities of London and Westminster)

I wish to speak briefly to oppose the amendment. To raise £100 a year in a standard, current or gold service account seems trivial but, in the low interest-rate economy in which we now live, it would need an ongoing balance of around £20,000. It is in part a function of the low interest-rate economy—which will be with us for at least the tenure of this Finance Act—that that seems a sensible de minimis level. I understand the rightful concern that we do not want anything too pettifogging, with too many different rules. In this context, the difference between a minimum of £100 and one of £500 might seem trivial, but it would require a six-figure sum in a current account to raise £500 a year, as interest rates tend to be below 0.5 per cent., even for the most generous basic savers accounts.

The hon. Member for Taunton is absolutely right that we should encourage those non-domiciles who are not well off. In my own central London constituency, there are significant numbers of people—perhaps spouses, ex-spouses or relatives of wealthy investment bankers—who are non-domiciled but are not as well off as the general image suggests. It is fair that they should have a reasonable day-to-day balance of a few months’ living expenses under their belts—perhaps as much £10,000 or £15,000 a year—well within the constraints that the Government and Treasury have in mind. If there were significant increases in interest rates in the foregoing 12 months I hope that the Treasury would return to this and raise that minimum threshold. At this juncture, £100 is a relatively sensible one to have in place.

Stephen Timms (Labour, East Ham)

I am with the hon. Member for Cities of London and Westminster on this one in the debate we have just heard. The hon. Member for Taunton is absolutely right that a lot of foreign workers on low incomes come to the UK and might well fall within the remittance regime—people working in agriculture or construction—and it was never our intention to bring low-paid workers into self-assessment in that way, still less so when there is no tax involved. The clause introduces an income tax exemption on overseas income, which effectively removes the obligation to file a self-assessment return from anyone who has foreign employment income of less than £10,000 in any tax year, as we were discussing a moment ago.

People might also have small amounts of income from bank accounts or other investments overseas in addition to their foreign employment income. That would again trigger an obligation to file a self-assessment return and, again, that was not the intention. The change here is that people with overseas bank interest of less than £100 in any tax year will still be able to take advantage of the tax exemption. I should clarify the fact that the clause requires that the foreign income must be subject to a foreign tax. That does not mean that the person must actually have paid tax on the income in a country other than the UK. It could well be that the income in question is liable to a tax rate of 0 per cent. or could be covered by overseas personal allowances, in which case no tax would be payable on it but it would still count as subject to a foreign tax in this clause.

I think that the hon. Member for Cities of London and Westminster is right: an investment income of £100 in the current environment does equate to a significant capital saving. That is set at the right level in the current environment to ensure that the people who are the target of this measure will not be brought into self-assessment. An investment income of £500 would mean a significant capital sum. The clause deals with individuals on low incomes who come to work in the UK in the sort of situations that we have discussed. I am not aware of any evidence of a need to increase the threshold, and I am confident that nobody will be prevented from taking advantage of the tax exemption and the administrative relaxations that it delivers. I accept that we should keep the matter under review, as circumstances might change and the threshold might need to be raised, but the £100 level is right for now.

Jeremy Browne (Liberal Democrat, Taunton)

I am happy to have had the opportunity to make my point and to have heard the entirely valid arguments made by the two other contributors during our brief discussion. On that basis, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

The principle of the clause—the introduction of a £10,000 exemption—was discussed at length last year. There were various proposals at that time, one of which was tabled by the hon. Member for Taunton to change the exemption from £2,000 to the value of the personal allowance. The then Financial Secretary said that that would be far too expensive and that we should not do it, but the Government have clearly had a change of heart. Concerns were also raised a year ago about the administrative burden that such a low level would place on Her Majesty’s Revenues and Customs, but again we were assured that that was not a problem. However, here we are a year later, and there has been a sea change in the Treasury’s approach, with the introduction of a £10,000 exemption for earned income. To make sure that the Minister will not claim that I grudgingly welcome the measure, I will say that I wholeheartedly welcome it. It is a very sensible measure and one that the Government, had they listened to the representations of people such as the Low Incomes Tax Reform Group last year, would have included in the previous Finance Bill.

The Minister made a comment earlier about interest income being subject to tax. Will that also apply to employment income? The LITRG raised the issue in its representation this year, which takes us back to 828B(2)(b) which states that

“all of that amount is subject to a foreign tax.”

The Minister’s earlier reassurance in response to the amendment tabled by the hon. Member for Taunton that personal allowances and zero-rate bands will be taken into account is helpful, and applies to employment income as well as interest income. I would be grateful if the Minister could place that on record.

Is the issue raised by the LITRG something that the Government will determine on a territory-by-territory basis where income for a territory is subject to tax, or will there be a blanket exemption? If it is to be determined on a territorial basis, it would be helpful to have a list of jurisdictions where the Government believe that up to £10,000 of income has been subject to tax. That list of countries will need to be made known to migrant workers who are here on a temporary basis, as they need to be told what is and is not appropriate. A blanket exemption, however, would be administratively easier for migrant workers, as it would avoid having to communicate to them a list of exempt companies.

I would therefore like the Minister to clarify two points. First, will he clarify what is involved in being subject to foreign tax, and will he confirm that his explanation on the £100 investment income also applies to employment income? Secondly, is it a blanket exemption, or will it be applied on a territory-by-territory basis? Perhaps he could just round that off by saying why he now thinks that £10,000 is appropriate, whereas last year it was seen as being a necessary cost to the taxpayer.

Jeremy Browne (Liberal Democrat, Taunton)

I wish to speak briefly to the clause. I am reliably informed—I admit that I did not conduct this research in the Derby Gate Library myself—that in the drafting last year, schedule 7 ran to 55 pages, or 22,989 words, and there were 160 pages of explanatory notes and more than 100 Government amendments wrestling with this difficult area to try to get a grip on it and make it workable in practice. Even then, the Institute of Chartered Accountants in England and Wales described the Government’s efforts as

“incomprehensible, unworkable and likely to be undermined by poor compliance.”

On that basis, I am extremely grateful that the Government have listened to representations made by members of this Committee and others who do their best to ensure that the Government’s policies work in practice. I am extremely flattered that the general direction that the Liberal Democrats have been taking in respect of tax thresholds is being adopted incrementally by the Government, and that the intellectual argument is being won. It is important that, wherever possible, people on low incomes are given the most incentive to work and contribute to our economy. I am sympathetic to what the Government have finally managed to achieve and interested to know whether the Minister will take this consultative, wide-ranging approach in future and take on board any of the other suggestions made by Opposition parties.

Stephen Timms (Labour, East Ham)

My right hon. Friend the Member for Liverpool, Wavertree, who was then the Financial Secretary, agreed that there should be a discussion with the Low Incomes Tax Reform Group and others, and that discussion has proved to be fruitful. Of course, we always listen to suggestions made by hon. Members in this Committee and elsewhere. I shall take the remarks that have been made as a warm welcome for the changes in the clause.

This is a useful reminder that the remittance basis of taxation does not affect only wealthy people, as we have discussed. The LITRG and TaxAid pointed out that, as a result of the changes made last year to the remittance basis rules, many people on low incomes could be required to file a self-assessment return. The clause removes that obligation from any individual whose foreign income solely comprises overseas employment income of less than £10,000 and overseas bank interest of less than £100 in any tax year, all of which is subject to tax in the country where the income was earned.

To respond to the specific points raised by the hon. Member for Fareham, yes, the observations that I made in the context of investment income apply equally to employment income. The exemption is a blanket exemption rather than a territory-by-territory exemption.

I gladly express gratitude to all those who have made representations on the subject, and I hope that the Committee will be content to add the clause to the Bill.

Schedule 28

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship, Mr. Hood, I believe for the first time in this Bill Committee. I assume that the Exchequer Secretary will be dealing with this schedule. May I formally welcome her back to the Treasury? I know that this is not the first time she has been a Treasury Minister. Perhaps she is following the example of the Financial Secretary as a serial Treasury Minister. I do not know whether she will reach his total number of spells in the Treasury—I suspect she will not do so in the immediate future.

Schedule 28 deals with provisions regarding taxable benefits that arise from cars being made available to employees by reason of their employment. I have a couple of queries that I would like to raise with the Exchequer Secretary. The first matter is the abolition of the current £80,000 list price cap, which will lead to higher tax charges for individuals using more expensive cars. The Institute of Chartered Accountants in England and Wales asked whether that proposal will have an impact on the UK car industry, because the UK car industry produces a number of cars that would exceed the £80,000 list price cap. I would be grateful if the Exchequer Secretary said whether any assessment has been made of that impact.

The second issue is directly relevant to provisions regarding the taxable benefits that arise from cars being made available to employees by reason of their employment. I will mention briefly a slightly specialist point, and, to be fair to the Exchequer Secretary, it is a matter that she may find easier to respond to in writing. In April, through correspondence, I raised with her predecessor the issue of car dealership employees who are taxed on their use of demonstrator cars. The problem relates to those employees working for car dealerships who use demonstrator cars for their own private use. It has long been accepted that it would be inappropriate to tax that benefit in kind in exactly the same way as company cars are usually taxed. It is likely that the employee will use more than one car or that they have no choice over which car to drive. The car that the employee drives is likely to be disproportionately expensive compared with their salary.

As a consequence, a system has developed whereby HMRC has looked at a range of models and averaged a value to calculate a figure for the relevant benefit in kind. A new system was introduced in April that still works on the basis of averaging the value, but it is done on narrower bands. I have received representations from car dealerships and manufacturers because the consequence of that is likely to be that more car dealership employees pay tax. In addition, the measure is likely to increase the administrative burden on car dealerships. As I said, I have raised that point previously in correspondence, but given that schedule 28 deals specifically with taxable benefits and cars, I have taken the opportunity to raise it again.

John Howell (Conservative, Henley)

I wish to make a couple of points. My hon. Friend has asked about the impact of the provision and research on the car industry, but will the Minister comment on the difference in tax yield between the proposal under discussion and increasing the amount from £80,000 to, say, £100,000?

Kitty Ussher (Labour, Burnley)

It is a pleasure to serve once again under your chairmanship, Mr. Hood. As it is, or it is also a pleasure—even if I cannot speak—

Peter Bone (Conservative, Wellingborough)

Overwhelmed.

Kitty Ussher (Labour, Burnley)

Overwhelmed, indeed, by the opportunity and privilege of debating with the hon. Gentleman again today.

The points that have been made are valid. The schedule does three things: shifts down the CO2 emission threshold for the main company car tax band by 5g CO2 per km; abolishes the cap on company car list prices for the purposes of CCT; and—I think this is uncontroversial—simplifies the legislative means by which the appropriate percentage for electric cars in CCT is set.

On the point made by the hon. Member for South-West Hertfordshire, we have, of course, considered the impact on the industry. The impact, if there is any at all, is negligible, for the simple reason that only around 1,700 company cars retail at more than £80,000. The price range may be extremely wide. I think the figure of £300,000 was mentioned. People who purchase that type of car should easily be able to cope with what we propose. There is no policy reason for a cap. On the point made by the hon. Member for Henley, it therefore follows that it would not make any difference if the cap were raised to £100,000.

Peter Bone (Conservative, Wellingborough)

I am grateful for the Minister’s explanation, but given what she has just said, why are the proposals being introduced at different times?

Kitty Ussher (Labour, Burnley)

We like to give certainty to the industry, and are simply setting out what we propose to do in the appropriate years ahead. Some of those proposals have been pre-announced, fulfilling different commitments.

Abolishing the £80,000 cap will, after three years, yield about £5 million, while raising the cap to £100,000 would probably not yield anything quantifiable. I hope that that goes further towards answering the question asked by the hon. Member for Henley.

The hon. Member for South-West Hertfordshire raised an issue that, as I was aware, he raised with my predecessor in correspondence: car dealerships that might give employees a different car to drive every couple of days, or every week. As he says, while in some firms an employee might be given those different cars because they are what they would like to drive, in many other firms employees do not have a choice. He is right that in the past, just to make it simpler for the employer and the garage, we allowed average list prices. What we wish to address is the fact that those prices were negotiated with HMRC on a piecemeal basis, garage by garage, often with an individual garage in a chain of garages. That sometimes led to an arbitrariness that perhaps was not conducive to good policy making, and we are simply formalising the process by means of a national system.

It might help the hon. Gentleman to know that the effect of the change is cost neutral to us, and so while there might be differences for individuals—and they are right to raise those differences—this is not a revenue-raising measure and there will be both winners and losers. I am sure he agrees that it is better to have a proper system, rather than to deal with the issue on an arbitrary, ad hoc basis.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister for responding this afternoon on that point. I note her comment that the measure is cost neutral for HMRC, but what assessment has been made of the additional administrative burden for car dealerships? What consultation was there with car dealerships and the car manufacturing industry as a whole, and what was the response?

Kitty Ussher (Labour, Burnley)

I think that I am able to reassure the hon. Gentleman on those points. We have consulted extensively with industry bodies—for example, the Society of Motor Manufacturers and Traders and the Retail Motor Industry Federation—on the change. The feeling that we are getting back is that the change will lead to reduced administrative burdens, because of the certainty that it provides. Individual employers do not have to use an averaging process if they do not want to; they can continue with the mainstream system if they prefer that. However, the purpose of the measure is to reduce compliance costs and have a far simpler method.

David Gauke (Conservative, South West Hertfordshire)

In the correspondence that I have seen, both RMIF and SMMT have expressed concerns about the proposal. That correspondence dates back a couple of months or so, and those bodies’ position might have changed, but what I have seen suggests concerns about the proposals rather than a general welcoming of them.

Kitty Ussher (Labour, Burnley)

The advice I have been given is that the measure should lead to reduced administrative burdens, and that that is understood. We intend there to be a simplification measure. We are making the change because people have complained that the previous system of individual car averaging arrangements with individual employers and garages was unfair, and led to inconsistencies across the country. Perhaps that is the nub of the problem. If there were inconsistencies there would obviously be winners and losers as a result.

I simply want to reassure the Committee that this is not an attempt to ratchet in more funds to the Exchequer; it is simply better policy making. If in ironing out there are inconsistencies and some individual employers feel hard done by, I can understand that. But this is a better way forward. As I said, they have the option of not going down the averaging route if they prefer. I hope, having explained that, that the schedule will be accepted by the Committee.

Clause 54

Jimmy Hood (Labour, Lanark and Hamilton East)

We now come to amendment 72.

David Gauke (Conservative, South West Hertfordshire)

With your permission, Mr. Hood, as the amendment is technical in nature, I should like to include in the debate on it my remarks on clause stand part.

Jimmy Hood (Labour, Lanark and Hamilton East)

Does the hon. Gentleman mean that he does not want to move his amendment?

David Gauke (Conservative, South West Hertfordshire)

No, I want to move the amendment, but it may be helpful if I also include my general remarks on clause 54, if that is acceptable. If not, I will deal with the amendment separately.

Jimmy Hood (Labour, Lanark and Hamilton East)

I would prefer you to deal with the amendment separately. Then we can have the stand part debate.

David Gauke (Conservative, South West Hertfordshire)

Thank you, Mr. Hood, for your guidance.

I beg to move amendment 72, in clause 54, page 26, line 6, leave out

‘at or about the same time’

and insert

‘in the same registration period’.

The amendment seeks to amend one of the elements of the clause. The clause provides that for disabled drivers of automatic cars who hold a disabled person’s badge, the list or notional price of an equivalent manual car will be used instead of the list or notional price of the automatic car that they actually drive when computing the car benefit charge if it produces a lower taxable benefit. This removes the disadvantage that some disabled company car drivers might face when they must drive an automatic car because of their disability.

Subsection (3) defines an “equivalent manual car” as a car that

“is first registered at or about the same time as the automatic car”.

The phrase “at or about the same time” seems a bit vague. The amendment would replace it with the phrase “in the same registration period”. It is simply an attempt to provide additional clarity. There may be good reasons for the current wording, but the amendment was suggested by CIOT and is much more precise.

Kitty Ussher (Labour, Burnley)

I urge the Committee to resist the amendment. As the hon. Gentleman suspected, there is an extremely good reason for the current wording, which states that the relevant car price should be that for an equivalent manual car that is registered at or about the same time as the automatic car. This definition has been used in legislation for seven years and HMRC has received no representations that it is difficult to use in practice. However, if the Opposition amendment were accepted, things would immediately become far more complicated. If a reference period of six months were used, it would not be at all clear what the relevant price of a manual car would be for comparison purposes. Car list prices can change within registration periods, often quite dramatically, so the suggested wording would not always lead to a single figure. Indeed, it might encourage all sorts of negotiation about what the correct figure should be. We think that that would lead to unnecessary complication.

Mark Field (Conservative, Cities of London and Westminster)

Without wishing to paraphrase the thoughts of my hon. Friend the Member for South- West Hertfordshire on the matter, surely the registration period is an entirely certain period of time—six months. What does she understand the phrase “at or about the same time” to encompass, either from her own experience, or from any non-representations that she has had over the past seven years from interested parties?

Kitty Ussher (Labour, Burnley)

It is exactly what it says on the tin. The fact that nobody has complained about it in the past seven years means that people understand what “at or about the same time” is. It is a price that is available at or around the same time. I suppose the word “around” is used because at that precise moment there may not exactly, at that infinitesimal moment in time, be a precise comparison and so it is a reasonable time period to use. If the amendment were accepted, it could lead to some disabled drivers paying more in income tax, and that is certainly not our intention. We want to give disabled company car drivers certainty about how they will be supported through the tax system.

Mark Hoban (Conservative, Fareham)

If it is open to abuse, disabled drivers would find the best comparison price to reduce their tax liability; they would not put in a price that would actually increase their tax liability.

Kitty Ussher (Labour, Burnley)

Well, that is not at all clear from the wording that his party is proposing. There could be all sorts of different prices out there in a six-month period. There could be a price one day that is very different from a price 10 or 15 days later. There is the additional complication of burden of proof, either on one side or another, whereas the current system is easy to understand and easy to administer, so I do not see the point in changing it.

David Gauke (Conservative, South West Hertfordshire)

Does the Minister think it is possible that a registration within the same registration period would not be at or around the same time? It seems to me that our amendment actually narrows the requirement, rather than widens it. I am not sure that her case is quite as strong as she makes out.

Kitty Ussher (Labour, Burnley)

I am sorry if I am not making the strength of my case clear, but perhaps I will try again. The list prices of cars can change quite dramatically during a registration period, which is currently six months. It is not clear, therefore, what the relevant, appropriate price of an equivalent manual car would be. However, if the legislation says “at or around the same time”, then clearly, as the last seven years’ experience has shown, it is the price available at or around the same time that is taken, as opposed to any price over a six month-period, which could vary quite widely.

Mr. Gaukerose—

Kitty Ussher (Labour, Burnley)

If the hon. Gentleman wants to try again, I am happy to take him up on it.

David Gauke (Conservative, South West Hertfordshire)

Let me make it clear. I have no doubt of the strength of the way the Minister is putting her case, I just think that that strength is unwarranted. Could she be clear? Does “at or around the same time” mean essentially the nearest time to the date of registration of the automatic car? If that is the case—the wording is not as clear as it might be—then she does have a stronger case.

Kitty Ussher (Labour, Burnley)

That is the case, which is why my argument is stronger than that which the hon. Gentleman is proposing.

David Gauke (Conservative, South West Hertfordshire)

Finally, I may be persuaded by the Minister. With a certain amount of persistence, she may well have articulated her case, in which case I beg to ask leave to withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

Mr. Hood, you anticipated that I have one or two remarks to make on the clause.

We have already touched on the essential purpose of the clause. However, I just want to make one other point. The application of the clause is based upon an employee holding a disabled person’s badge. The LITRG, at the prompting of the charity Mobilise, has questioned whether the blue badge scheme is sufficiently wide to include everyone who needs to use an automatic vehicle. For example, it has stated that

“single amputees do not necessarily qualify for a blue badge, but do need to drive an automatic”.

Consequently it goes on to say:

“It would be interesting to know why a definition linked to the disabled badge scheme”

has been used in the clause.

The LITRG also noted another issue that is worth highlighting. The issue of disabled badge holders arose earlier, of course, in our considerations, in the debate that the Exchequer Secretary had with my hon. Friend the Member for Fareham about the definition used in paragraph 22 of schedule 11. I shall quote from that debate, in which the Exchequer Secretary responded to a question from my hon. Friend about why that particular provision could not be simplified to include disabled badge holders:

“The hon. Gentleman then asked specifically why in paragraph 22 we do not simply use the qualification criterion of a person holding a disabled badge. The answer quite simply is that the power to award a badge is devolved to local authorities and we wanted to ensure that we had a comprehensible and tighter set of criteria, so that the system and the resources are properly targeted on those people who need our support.”——[Official Report, Finance Public Bill Committee, 9 June 2009; c. 234.]

I would be grateful to the Exchequer Secretary if she could explain why the disabled badge qualification was inappropriate for paragraph 22 of schedule 11 but is appropriate for clause 54.

For the clause to work effectively, it will be necessary to publicise the new provisions contained within it. I should say first that we welcome the intention behind the clause; the clause is seeking to do something that is very worthwhile and just. However, as I say, if the clause is to work effectively it will be necessary to publicise the new provisions, so that employers and employees know what information to provide to HMRC to obtain the correct 2009 tax coding restriction. I would be grateful if the Exchequer Secretary could say what steps were being taken to publicise the provisions in the clause.

Mark Field (Conservative, Cities of London and Westminster)

I want to make a brief contribution on a tangential issue that arises here. My hon. Friend has rightly said that it is up to local authorities to determine whether or not an individual qualifies for a blue badge. As someone who represents a central London constituency and two central London local authorities within that constituency, I would be very reluctant to see any move away from local authorities having that power. I appreciate that it may not be in any way in the Treasury’s thinking at the moment, but I strongly oppose any suggestion that the mechanics of the blue badge disabled driver system should be determined at a national level.

Westminster city council is working closely on this issue with a number of neighbouring and non-Conservative local authorities, such as that in the London borough of Camden; in fact, Camden is of course now under Liberal and Conservative control. Westminster city council feels very strongly that it should continue to have autonomy in awarding such badges and that a national badge scheme would not be in the interests of disabled people. Although disabled people would like to have the opportunity of coming to central London, if they all did it would absolutely clog up the parking system in the area. I appreciate that that is a tangential point and does not necessarily represent the thrust of the comments made by my hon. Friend the Member for South-West Hertfordshire, but I wanted to put something on the record about it. It is an issue of considerable importance and a number of central London local authorities are acutely concerned that, although elements of the scheme have national resonance—obviously, in relation to tax benefits—those should not apply to the operation of the scheme itself.

Kitty Ussher (Labour, Burnley)

It might help if I start by explaining exactly what the clause does, because the context for this policy change might answer some of the wider questions as well. The clause supports the Government’s commitment to provide help for the disabled by changing the way in which the company car benefit charges are calculated for disabled drivers who need to drive an automatic car because of their disability.

Company car drivers holding a blue disabled person’s badge are already able to use the carbon dioxide emissions figure of an equivalent manual car when calculating their company car benefit, in place of the figure for an automatic car, which is usually a higher-emitting vehicle. The logic is that, because automatic cars emit slightly higher amounts of CO2 per km than the equivalent manual car, it is unfair that people who have to have an automatic car because of a disability that they cannot control should be penalised through the taxation system. We are making the system slightly more generous for people in that category by saying that such drivers would also be able to use the list price of an equivalent manual car to work out the benefit charge instead of the list price of the automatic car that they currently drive. That is usually to their advantage, because of the price differential between two equivalent models.

The clause would simply align the methods used to determine the list price and the CO2 emissions figures. It is a logical tidying-up exercise, but it also benefits disabled company car drivers, so it should be supported. I welcome the support from the official Opposition spokesperson. Both methods of calculating benefit will now be based on an equivalent manual car, if that is more beneficial for the disabled driver. If it is not, that does not have to be so.

Just for the record, and subject to certain conditions, the cost of accessories provided for disabled drivers is also excluded from the calculation of the company car benefit charge.

The hon. Member for South-West Hertfordshire was perhaps making two arguments that pointed in different directions. He asked, first, about disabled drivers who do not hold a blue badge and whether they should also be included. The blue badge provides a clearly defined test of disability, it has worked in this area of policy in the past and there is no proposal to change it. However, it is worth stating clearly that, in exceptional cases, affected individuals in particular circumstances will be able to contact HMRC to seek guidance about whether there is any flexibility or any prior agreement that can be reached.

Having argued that the scheme should, perhaps, be more generous, the hon. Member for South-West Hertfordshire questioned whether it could be made tighter by using the definition that we debated earlier in the week in relation to capital allowances, which also applies in respect of vehicle excise duty and is tighter than the one that applies in this area of policy.

David Gauke (Conservative, South West Hertfordshire)

Perhaps I can take the Minister back a moment to her suggestion that somebody who is not eligible for the blue badge may be able to seek guidance from HMRC and may benefit from the scheme. That is welcome, but I should be grateful if she reconciled that with the wording contained in clause 54(5), which contains new section 124A of the Income Tax (Earnings and Pensions) Act 2003. It states:

“This section applies...at any time in the year when the automatic car is available to the employee (“E”), E holds a disabled person’s badge”.

That flexibility does not appear to be contained in the legislation. I should be grateful if she clarified that point.

Kitty Ussher (Labour, Burnley)

I cannot possibly begin to describe the circumstances, because those will depend on the individual’s situation. If people feel that, in their individual circumstances, it could apply to them, HMRC is saying that individuals who are affected should contact it first before applying and it will be happy to have that conversation. If I can provide further detail, I will.

I was discussing why the gateway for disabled company car drivers is different from that in other policy areas, such as capital allowances and vehicle excise duty. The policy aim has a different origin. For example, in vehicle excise duty, the disability exemption is a total exemption from paying that duty to help those who are practically unable to walk to be driven or to drive themselves, whereas in company car tax, blue badge holders are allowed to substitute only the CO2emissions, and now the list price, of an equivalent manual car when calculating the company car benefit, to give them parity with able-bodied drivers under law.

The main point is that we are taking an existing policy that works well and simply making it slightly more generous, because we think that there is a logical policy reason to do so. We are not seeking to open a debate about the definition of disability across the taxation system. The policies have different rationales, which is where the differences arise.

I take the point made by hon. Member for Cities of London and Westminster about the burden on councils. I hope that he will be reassured that we are not opening up the entire blue badge scheme, so the relevant council officials can rest easy. Question put and agreed to.

Clause 55

David Gauke (Conservative, South West Hertfordshire)

The clause deals with the exemption of benefits consisting of health-screening or medical check-ups. It may help if I set out a little background to the measure.

Two statutory instruments introduced in August 2007 dealt with the taxation and reporting of health screenings and medical check-ups provided by employers to employees. Previously, employers and HMRC had persisted in treating the provision of periodic health screenings and medical check-ups for employees as exempt from tax and reporting requirements. There was no specific provision requiring such benefits to be provided universally in order to be tax and NIC exempt. However, HMRC took the view in 2007 that the practice was based on an understanding or assumption, rather than on strict legality. New regulations provided a significantly narrower exemption for periodic health screenings and medical check-ups.

The changes introduced in August 2007 required any provision of health screenings by an employer to an employee to be made available to all employees and any medical cheek-up to be either made available to all employees or made available to those identified by a health screening as needing such a check-up. Those regulations came into effect on 14 August 2007, but had a retrospective effect covering the 2007-08 tax year. Strong representations were made about that retrospection. HMRC agreed not to collect any tax for 2007-08 and, in February 2008, that was extended to 2008-09, so we had a period of confusion.

Clause 55 is a revision of the revised proposals of August 2007. After receiving further representations, HMRC announced on 10 December 2008 that it would include legislation in the Finance Bill

“to exempt from tax the provision of yearly health screening and medical check ups”

without the proviso that they have to be generally available on similar terms to all employees. That is essentially what is covered by the clause.

The clause is welcome up to a point. It is fair to say that the changes announced in August 2007 were somewhat botched and that there has been a lengthy period of confusion, but concerns remain that clause 55 is still somewhat restrictive. There is a restriction to one health screening or check-up per tax year, but an individual may well require more than one screening or check-up, or a check for more than one potential condition, per year. It is often impractical to ensure that an annual medical that occurs around the start or the end of the tax year is not repeated within that same year, as people can end up having two medicals in one year just by a few days. I should be grateful to know why the Government have not reverted to the position before August 2007. Why is there a restriction of one check up per year? I suspect that the answer may well be cost, but what is the cost? I am sceptical that it is very significant.

The clause will reduce the amount of red tape for employers and employees, so we welcome it as far as it goes; it is clearly an improvement on the uncertainty of the past two years or so. However, I would be grateful to know why the Government have not sought to return to the arrangement that seemed to be working perfectly adequately prior to August 2007.

John Howell (Conservative, Henley)

My family would be intensely surprised to hear me speak to this clause and encourage people to have more than one medical per year. New Speakers are reluctantly dragged to the Chair; I am more than reluctantly dragged to a medical. In the years in which I was a partner at Ernst & Young, an annual medical was required for insurance purposes, but my interpretation of annual was always somewhat loose. I understand that the medical profession have a term for that—white coat syndrome—which, in my case, I attributed to the obvious mental scarring that occurred when I shared student accommodation with too many medics.

During the course of my experience with a regime that required annual medicals, it was impossible to schedule them on a strictly annual basis. It is not a question of a couple of days; it is often impossible, with a large work force and the way in which a medical schedule is taken up and booked far in advance by a doctor, to fit a medical in within even a couple of weeks or a month of the annual date. There were many occasions when a second medical occurred within the same tax year. Also, although I never had to endure it, colleagues of mine had to return during the year, either for further check-ups as a result of their original medical, or for medicals for additional reasons. For the reasons advocated by my hon. Friend, the rules need to be further relaxed, although I assume that I will not have to be subjected to more medicals than I need.

Brian Jenkins (Labour, Tamworth)

I will not take much time, because I know that Members want to pursue the Bill as rapidly as possible, but I want some clarification from the Minister, because I would be worried if I thought that we were taking a step back.

There are employees in this country who work in hazardous conditions, which might require the employer to work with them and their trade union to ensure that they have one medical check a year. I seek assurance from the Minister that there is no way we are going to stop or financially impede the opportunity to take that check, depending upon the type of work the employee undertakes. I would of course like all employees in any company to be treated equally, and if an employer wants to undertake an annual medical check, all their employees should be treated the same, but for individuals working in hazardous conditions, we should ensure that we will put nothing in the way of checks occurring more frequently than once a year.

Alison Seabeck (Labour, Plymouth, Devonport)

In Devonport, we have a dockyard. There are frequent reports of nuclear leaks, which are exceptional, but were a leak to happen, each employee would clearly need a full and thorough health check, which might be in addition to one they have already had, so I share my hon. Friend’s concerns.

Brian Jenkins (Labour, Tamworth)

I understand totally that the employees in such areas carry dosimeters all the time, and when those meters change colour the employee must have a medical check, irrespective of when they last had one, but there are many areas in industry across the country where those conditions can arise, and I would not like the ability to have annual checks to be put back. I would like the Minister to make that totally clear.

Kitty Ussher (Labour, Burnley)

I will start by reassuring my hon. Friends the Members for Tamworth and for Plymouth, Devonport that the provisions we are debating are completely without prejudice to the relevant health and safety legislation, which of course require workers to undergo the necessary medical testing and treatment, in so far as their personal health is affected by conditions at work. That is the crucial difference, so I hope that that reassures them.

Responding to the points made on more frequent medical checks, it has never been our intention that medical treatment should be exempted from tax when provided by a company. That is no different to any other type of private medical treatment. An individual may go for a check-up in which a problem is identified that is then treated via the company, but we have no desire to treat that check-up as a benefit in kind. We therefore provide a generous taxation position; I do not know whether the Opposition would want to do so.

Before the regulations were introduced in 2007, the guidance, as has been mentioned, referred to periodic medical check-ups. That was based on the understanding that, when an employer provides employees with medical check-ups, they are commonly at longer intervals than once a year—perhaps reflecting the fact that the hon. Member for Henley is not alone in his aversion to check-ups. It is certainly our understanding that routine check-ups, rather than treatment, tend in practice to take place less frequently than once a year, which is absolutely fine as far as the regulations are concerned.

The regulations were introduced in 2007 because we needed to ensure there was a clear legislative basis for what was otherwise simply an understanding on the part of HMRC. We are changing them now precisely because of the representations we have received and simply because we want to get the provisions right. There were some anomalies that, to be honest, HMRC had not identified. The example that makes the point most clearly is that the 2007 regulations stated that precisely the same check-ups needed to be made available to all classes of people, and since some of the check-ups are for gender-related cancer, it immediately became apparent that it was absurd to require that the whole work force should be tested for testicular or breast cancer, regardless of gender. It soon became clear that something needed to be sorted out, so the clause aims simply to regularise that position.

David Gauke (Conservative, South West Hertfordshire)

Given that swine flu is back in the news today, one potential issue is that employers might want to instigate checks and make them available to their employees in an attempt to respond to it, particularly in the autumn when there are likely to be concerns about swine flu again. In clause 55, it appears that an additional check in the course of the year would be taxable. I understand why it is not addressed in the legislation, but would the Treasury be willing to reconsider if concerns about swine flu increased and such checks became widely available?

Kitty Ussher (Labour, Burnley)

We are not planning to look at this again. A company wishing to undertake swine flu checks on its entire staff would do so for both humane and business continuity reasons. It is ultimately a commercial decision for the company. There are intense efforts across Government to ensure, through the national health service, an appropriate response to any future swine flu pandemic, and that will proceed as normal, regardless of where people work.