Finance Bill

Public Bill Committee, 18 June 2009.

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

Jimmy Hood (Labour, Lanark and Hamilton East)

I understand that the Minister has a short statement to make.

Stephen Timms (Labour, East Ham)

I bid you a warm welcome to the Chair, Mr. Hood, on this beautiful morning. I have a couple of points to make. First, I would like to correct a misleading impression that I gave the Committee at the end of our previous sitting during the debate on clause 70 relating to the costing of the £45 million expected to be yielded as a result of that clause, which dealt with accommodation costs. I said, correctly, that the costing was based on 47 cases of those arrangements being used by 19 employee benefits trusts to gain a tax advantage, but it was not based on 47 individuals, because each case involved a number of different individuals. Due to the way in which information about trusts using lease premiums has been corrected, the number of employees benefiting is not recorded, but it is certainly a good deal more than 47, which helps to explain the large yield score for that measure.

Secondly, as the Committee will be aware, my hon. Friend the Member for Burnley has stepped down from her role at the Treasury, and I would like to say how much we will miss her. We had already been working with gusto on the Bill in the short time she was back at the Treasury as a Minister. We of course look forward to welcoming my hon. Friend the Member for Portsmouth, North (Sarah McCarthy-Fry), when she joins us later and congratulate her on her appointment. I think that the Committee will understand what I mean when I say that I am sure she would have wished her appointment to have been in circumstances other than those we find ourselves in today. I express my thanks to my hon. Friend the Member for Burnley for her help over the past week.

Clause 71

Mark Hoban (Conservative, Fareham)

I, too, welcome you to the Chair, Mr. Hood. I will take this opportunity to echo the Financial Secretary’s remarks about his colleague, the hon. Member for Burnley. I know that she relished her return to the Treasury, and we are all sorry that she has had to step down. I am looking forward to the hon. Member for Portsmouth, North, who is my neighbour, joining the Treasury team, and I might say a little more when she appears at our next sitting. I have grown used to seeing stories in our local paper about the Department for Children, Schools and Families being rebadged under her name, and I am looking forward to reading articles in the local news about her welcoming the appointment of a new member of the Monetary Policy Committee or discussing the level of reserves held by the Bank of England in foreign currencies.

I want to take the debate on the clause as an opportunity to set out some of the background to the changes we will discuss in more detail when we come to schedule 35 and to lay the trail that might put in context the amendments we have tabled to that schedule. When the Committee’s proceedings started four weeks ago, I said on a point of order that it was the fourth Finance Bill Committee on which I have sat as a Front Bencher, but it also happens to be the fourth Finance Bill in which the A-day rules, which were established in the Finance Act 2004, have been unpicked. We have seen changes twice to alternative secured pensions, the removal of residential and other property from self-invested pension plans, rules restricting recycling of cash lump sums and the abolition of pension term assurance. That set of proposals on A-day had been hard fought for, and it has caused a great deal of concern in the industry that so many changes have been made. Of course, the changes being made in schedule 35 are a precursor to wider changes planned for 2011-12.

The problem arises in the following way: there is logic behind some of the individual measures and some of the changes may be justified, but they send a message to potential savers that they cannot rely on a pensions tax regime being in place for the long term. Indeed, during the 2004 Finance Bill debate, my hon. Friend the Member for Tatton (Mr. Osborne) voiced concerns about the inclusion of residential property in SIPPs. We encourage people to save for the long term for their pensions through the personal accounts, which will be introduced in 2012, but people have no certainty about the tax treatment of their contributions or about how future contributions will be dealt with. That is a disincentive; why would people want to lock up their money for the long term if they are not entirely sure how the Government will tax current and future contributions?

The genesis of the anti-forestalling measures was the Government’s announcement in the pre-Budget report 2008 of the 40p tax rate from 2011-12. One of the concerns about the tax’s revenue yield expressed at the time was that people would use the generous reliefs available for pensions to off-set their increased tax bill. That point was widely flagged and the provisions under discussion, as well as the other changes announced in Budget 2009 about pension contributions, are a good example of “be careful what you wish for”, because the concerns have now been picked up by the Treasury and translated into the provisions under discussion.

It is worth noting the current position on the taxation of pensions before turning to the precise details involved. An individual who contributes to an approved pension scheme obtains tax relief at the marginal rate on their contributions, so Members throughout the House currently gain tax relief at 40 per cent. on the contributions that they make to Parliament’s occupational scheme. That has been a feature of pension taxation for some time. As part of the A-day regime, there was a shift from what was quite a restrictive maximum contribution of 17.5 per cent. of net relevant earnings for most taxpayers to a recognition that people may contribute to pension schemes in a much more lumpy and less predictable way given the changing nature of employment. The Government therefore introduced a lifetime limit and an annual allowance. The lifetime limit of contributions currently stands at £1.75 million and the annual allowance is the lower amount of either earned income or £245,000.

The Bill offers an additional layer of complexity, because the clarity set out in the A-day rules is now going to be replaced by a second test relating to people who earn more than £150,000. Their contributions will receive a reduced tax relief of 20 per cent. depending on—we will come back to this on a later group of amendments—the previous pattern of pension contributions, which is not a straightforward issue. The contributions made by individuals to their pension funds are not the only ones affected; employer pension contributions are also affected, and contributions based on relevant income will lose their exempt status and be classified as a taxable benefit.

A defined-contribution scheme is straightforward as it is easy to define an employer’s contribution. However, it is more difficult to assess the value of an employer’s contribution to a defined-benefit scheme of the nature that we in the House are fortunate enough to enjoy. The Treasury has set up a working party with the industry to work out how to value the contributions that businesses make, because, quite often, a global contribution, rather than an amount per individual, is made to such schemes. Then we get into the issue of how we apportion it and how we value the impact of the increase in contributions.

People may think that they can wait until 2011 to plan their futures so that they can see what happens with the scheme that the Government intend to introduce. However, the Government are concerned about people taking advantage of the gap between now and 2011, so have introduced the anti-forestalling measures in schedule 35 which cover the tax periods between now and the introduction of the new regime.

In the number of representations that hon. Members from all parts of the House have received, there have been some recurrent themes. Concerns have been expressed not only by individuals who have written to us about the particular impact on their circumstances, but by the pensions sector. Some comments have been made about the feasibility of the anti-forestalling measures.

Let me turn now to the concerns about how the changes may affect savings, particularly the issue around complexity leading to discouragement. The A-day regime was a very serious piece of work, which involved compromises on the part of both HMRC and the pensions industry to sweep away the eight different tax regimes that then existed for pensions, to move to a much more simple and straightforward system that people could understand. It was hoped that the regime would lead to more people increasing their contributions. However, now they see the anti-forestalling measures, and they know about the changes that are coming in 2011. We have a situation in which there are more complex rules in place. As part of the anti-forestalling measures, which run to some 18 pages, we have the prospect of future regulations. Clearly, there are issues around the valuation of employers’ contributions. The complexity of the changes could act as a further disincentive to invest in pensions. Tim Breedon, the chief executive officer of Legal & General, said:

“The planned cut to tax relief on pension contributions made by higher rate taxpayers would deter saving and would also erode recent efforts to simplify the system. To make savings attractive to people you want simplicity not complexity. And you want stability, not change.”

Nick Prettlejohn, CEO of Prudential UK businesses, said:

“The proposed changes announced in the Budget will reintroduce complexity and further confusion to the pensions landscape and erode consumer confidence.”

Rachel Vahey, head of pensions at Aegon—it was the head of Aegon, Otto Thoreson, who led the Government’s review of financial advice to encourage people to save more for their future—said:

“This undermines the A-day agreement which was designed to promote long-term pension saving, using the standard Lifetime Allowance to prevent abuse of the system by the rich. That major overhaul of the pensions tax rule was meant to last 30 years rather than three years. Pensions are for the long term so consistency is essential to give people confidence to plan for the future.”

As ever, the issue is not just the proposals themselves but the way in which they are introduced. The proposals were sprung on the industry. In the days before the Budget, one or two people suspected that there might be some cap on the higher rate tax relief, but they did not expect to see changes of such a nature.

The Government have broken a hard-earned concordat with the industry on the A-day regime. They have moved away from the concept that underpins those reforms of EET: exempt contributions; exempt investment income and taxable benefits).

Stephen Timms (Labour, East Ham)

I am following the hon. Gentleman’s argument with interest. I think that he is slightly overstating his case. Does he accept that 98.5 per cent. of taxpayers will not be affected by the changes at all?

Mark Hoban (Conservative, Fareham)

The Minister is getting into the numbers game that the Treasury seems to like at the moment. I will come back to that point a bit later. The Minister will say that the changes affect only the highest earners, but I have some examples of how the rules work in practice which show that they could affect people on relatively modest incomes who may have received redundancy payments in the past or sold a business. Such people will be affected by the changes. The Government present the measure as a tax clampdown on the rich, but there are some hard cases that will emerge from the crude way in which the Government have introduced the anti-forestalling measures. We will discuss that in more detail when we debate the amendments.

As I was saying, there is concern that principles have been undermined. It is worth reflecting on the Minister’s point that 98.5 per cent. of people will not be affected by the changes. However, part of the problem is that the measure sends a signal that will lead those people to ask, “Well, how can I be sure what will happen in the future?” What certainty can there be that the Government’s proposal will not be extended further down the income chain in the future? That is the problem that the Government have because, although they believe that the changes affect only a narrow group of people, the concern is what will happen next. People will ask, “Do I really want to lock up my money for the long term in pensions or is there an alternative form of saving on which I can rely instead, in relation to which there will be less chance of Government interference and changes to the tax rules?” The measure will have a behavioural impact that spreads beyond the narrow group that the Minister believes is affected by the changes.

The changes are being made at a time when the pension system is not in great shape. A large proportion of the population has not saved enough or does not save at all. If the message that they receive from the press, the media and the Chancellor is that the rules are up for debate or change, and that nothing is certain, they will feel reluctant to lock their money up for the long term. We cannot afford to apply any more disincentives to saving. People’s confidence in the pension regime has been shaken by the financial crisis. Even in these troubled times, many people will see housing as a more reliable asset for investment and as being something that they control. If long-term savings through pensions are undermined, the chances are that more and more people will spend money on housing and might not save at all. That will be to the long-term detriment of not only themselves and their families but the stability of the economy as a whole.

I talked about the impact on behaviour in response to the Minister’s comments. Trevor Matthews, chief executive office of Friends Provident, has said:

“Tax relief on contributions was a way of the Government saying to everyone — and I mean everyone, irrespective of earnings — that ‘saving for your pension is a good thing and we will encourage it.’ Now that contract has been broken — and if it can be broken for one segment of savers now, it can be broken for others.”

So it is not enough that the changes will be restricted to a narrow band of earners. Unintended consequences could affect the culture of saving in the UK. The National Association of Pension Funds has put forward an argument that is difficult to accept, but that reflects reality. If the managers and directors of business no longer have a stake in a pension fund, how will that affect their view of that pension fund? Will they continue to support an expensive defined benefit scheme, or will they decide that they ought to reduce the financial risk to the company and move to a defined contribution scheme? Will the changes accelerate the shift away from DB to DC schemes? That is a difficult argument, but one can see why people think that that will be the case.

The Government say that the measure is about fairness, but it is actually about how they will shore up their revenue projections from the 50p rate. If this was about fairness, the Government would have come up with a more imaginative scheme for how to use the £3.1 billion that the measure will raise to shore up savings and pensions elsewhere in the system. Instead, the additional revenue is going into the Treasury’s coffers.

Although we have not tabled amendments to this effect, there are alternative proposals that work with the system, rather than introducing additional complexity, that some in the industry felt could have been used to restrict the tax relief claimed by top earners. The Government could have decided to reduce the lifetime allowance or the annual allowance. That would have restricted the contributions made and gone with the grain of the existing A-day regime. Because this is an income-based system, there will be hard cases at the margin. Someone earning slightly less than £150,000 will enjoy full relief on their pension contributions, but someone earning slightly more than £150,000 will not enjoy that same relief. The Government need to demonstrate that they have thought through the suggested alternatives.

I have set out the background to clause 71 and schedule 35. I shall say a few words about the anti-forestalling measures to set the amendments in context. The measures will apply to anyone earning more than £150,000 who makes contributions between 22 April 2009—the date of the Budget—and 5 April 2011 that exceed the contributions previously made on a quarterly or more regular basis. The measures apply only to contributions of more than £20,000. Any contributions that breach the restrictions will be taxed at 20 per cent. Therefore, the Government’s anti-forestalling measure works out the pattern of regular savings and takes it into account when looking at the pension contributions. Where the contribution is £20,000 more than the previous pattern of savings, the 20 per cent. tax charge will be applied. At that level, it sounds like a fairly clear and straightforward system, because it assumes that people’s income and contribution pattern is fairly settled.

However, there are people who the regime may catch who do not have a settled pattern of income. They may have an atypically high income one year and if it arises in the two years prior to the year in which pension contributions are made, they will be caught by the regime. It will particularly affect the self-employed and partners in accountancy and law firms, who have variable incomes and contribution patterns. Those receiving generous redundancy packages and using it to top up their pension contributions may also be caught by the measure, as may people who have sold a business and made a one-off gain.

It is a crude anti-forestalling measure that does not necessarily take account of how people run their lives and how their income flows from year to year. Some will feel aggrieved by the way the rules have been set out. Part of the problem is that there has been no consultation; the measure was introduced in the Budget 2009. The Government are consulting on the implementation of the rules from 2011 but, as yet, there has been no regulatory impact assessment on how it will work in practice. The Government need to make clear why this anti-forestalling measure is the right way to proceed and why it will not have the negative impact that many believe it will have on the saving culture in the UK. Not only those directly affected but the wider population will see, yet again, that the message from Government is that one cannot rely on consistency, stability and predictability when it comes to the taxation of pensions.

Jeremy Browne (Liberal Democrat, Taunton)

I start by saying it is a pleasure to serve under your chairmanship, Mr. Hood, but also apologising for coming to the debate a couple of minutes after it started. I extend my apology to the two previous speakers for missing their opening remarks.

We are familiar with this important subject matter. The context is a budget deficit of £175 billion this year and, by the Government’s estimate, £173 billion next year. The amalgam of those deficits is more than the total Government spending in the first Budget of the now Prime Minister back in 1997. We are talking vast sums of money so the onus is on all of us to ensure that the money is spent as efficiently and equitably as possible because there is none spare to be used inefficiently. We also live in a society with serious income inequalities. Therefore, as well as ensuring that the money is spent as efficiently as possible, we have to consider whether it has been spent as effectively as possible. Are the people who benefit from the state’s largesse, through money that they receive or money not taken from them—the effect may be the same, but the approach somewhat different—the right people? Could the money be better targeted to achieve either economic or social objectives, or both? The reason why I give that context is my party’s view that the current situation that we are seeking to amend—though only in a modest fashion— is unreasonable. Somebody who earns £20,000 a year enjoys much less generous relief on their pension contributions than somebody who earns £120,000 a year.

Mark Field (Conservative, Cities of London and Westminster)

The reality of the relief is based on the highest rate of tax paid. That is why the relief is notionally less generous for someone earning £20,000 than someone earning £120,000. It is the nature of that system. The system is not intrinsically wrong; the relief focuses on tax that is already paid. It is relief on tax being paid.

Jeremy Browne (Liberal Democrat, Taunton)

The rationale given is that people will pay that level of tax, but they may not. Somebody may earn a higher level of income, but when they reach retirement age not actually be eligible to pay the top rate. There are difficult choices to make. Everybody in the Committee has to ask themselves whether, if we were starting from scratch, the best way we could think of to spend billions of extra pounds was to give additional relief on pension contributions to the richest people in the country. Or, as my party is proposing—I will come to this, but not at great length as I do not wish to test your patience, Mr. Hood—whether that money could be spent more efficiently and effectively on people with lower incomes. That is the sort of radical thinking that I would hope at least some of the parties represented in the Committee would be willing to consider.

When the Minister intervened on the hon. Member for Fareham, he said to the Committee that the measures being put forward by the Government affected only 1.5 per cent. of the population. What we have to remember is that people who donate large amounts of money to political parties and people who edit national newspapers are rather heavily represented in that 1.5 per cent. of the population. I would not say for one moment that that would in any way weigh upon our deliberations. I only observe that that is the case. Everybody in the Committee would do well to acknowledge that, rather than to pretend that there is not a degree of realpolitik affecting our considerations.

Perhaps I am showing my naivety as a representative of what is currently the third party in British politics in thinking that we should be bending over backwards to try to do more—

Greg Hands (Conservative, Hammersmith and Fulham)

Fourth, I think.

Jeremy Browne (Liberal Democrat, Taunton)

I recognise—

Jimmy Hood (Labour, Lanark and Hamilton East)

I ask the hon. Gentleman not to respond to sedentary interventions. I also ask hon. Members to allow him to speak without interruption.

Jeremy Browne (Liberal Democrat, Taunton)

Thank you, Mr. Hood. I am too often affected by my own modesty—[Laughter.] My party, as I should remind the Committee, finished second in the national vote share in the local elections earlier this month. But in terms of the numbers of Members of Parliament in this House, we are third.

I suppose there is a reasonable case to be made that we are not sufficiently considerate of the financial sensibilities of newspaper editors and potential big donors to political parties when we make our contributions to this Finance Bill Committee. A wiser way to order our affairs would be to give greater incentives to people on low incomes to work and have greater self-reliance; to allow them to keep a greater proportion of their income and to finance that by ending pension relief above the basic rate. That would be a better way to spend the money. It would create a fairer society and at the same time a more economically mobile and dynamic society.

Mark Hoban (Conservative, Fareham)

I am not sure from whom the hon. Gentleman has been receiving representations. If he has had letters from national newspaper editors or the few wealthy donors to his party, perhaps he should tell us. The people who have contacted me about this have been pension advisers, self-employed people and people who pay contributions on an annual basis who are in mainstream businesses. A large number of people who are affected by this have made their concerns known. He should be careful about whose motives he impugns.

Jeremy Browne (Liberal Democrat, Taunton)

A lot of people are choosing to make representations. I acknowledge that not all of them edit national newspapers. But I would be surprised if the hon. Gentleman had had large numbers of representations from people with incomes of £10,000 or £12,000 a year saying that the Government should continue to give relief on pension contributions to people earning £200,000 a year as they would prefer that to raising the starting threshold for income tax to £10,000 as proposed by the Liberal Democrats. I would be more than happy to give way to him if he wishes to read out some of those representations, but I suspect he has not had any. What he has had is representations—they are perfectly legitimate—from interested parties such as those who run pension funds and obviously want to see the maximum incentive for people to contribute to those pension funds, including high earners.

I am trying to step back and look at the scene as a whole. As I reminded the Committee at the outset, we are running a massive public deficit. In the United Kingdom people in the bottom decile pay a higher proportion of their overall income in tax than those in the top decile. So we have to ask whether we are spending money as effectively as we might by giving very generous pension relief to relatively high earners and not targeting those with much more modest incomes.

I believe we could do much more for people on low incomes to give them incentives to work. The tax burden on them, especially when they lose some benefits as they earn money, is quite often a disincentive to work. Lots of people on low incomes are, for my tastes, overly reliant on the largesse of the state. I should like them to feel a greater sense of self-reliance and to feel that their work and their endeavours helped them to get on in life. That would be a better use of this money than giving pension relief at a higher rate. My party’s position is that there should be some pension relief. We recognise that it is valid, but we would restrict it to the basic rate.

The Government have made a modest step in that direction, which I fear shows only their timidity at this stage of their life. Nothing has been done for many years, and we now have this slightly messy and slightly complicated proposal that will, as the Minister acknowledges, reach a modest number of people. It will limit the relief to people with earnings of more than £180,000 a year. That could be seen as a step in the right direction by someone who takes the view that I start with, but the Government’s timidity is unlikely to win them many friends or bring in enough money to make a substantial difference. There is a feeling that this is a gesture, rather than an attempt to recast the tax system meaningfully.

The only other matter that I want to touch on at this stage is one on which I agree with the hon. Member for Fareham, as I often do. The Government should re-examine the idea that people have normal patterns of pension contributions, because it seems to be based on a mindset that everyone has a monthly income—a sort of pay-as-you-earn income. That is often so, but may not be. People with different incomes and some who in some years may not have any income, but in other years, quarters or months earn a reasonable amount have contacted me saying that their pension contributions are haphazard, and that they are not trying to avoid taxation or behaving improperly, but that the nature of their income is that the returns are not consistent over a year or a number of years.

Mark Hoban (Conservative, Fareham)

At the weekend, I received a representation from someone who is not my constituent about exactly that point. He is a free-lance contractor and had had no income for a couple of years, but has landed a significant contract that will take him over the £150,000 threshold. He would be caught by the provision. If that income had arisen in the first year and he was paying only modest pension contributions this year, those contributions would be taxed at 20 per cent.

Jeremy Browne (Liberal Democrat, Taunton)

That is precisely my point, and would have been avoided if the Government had taken the route that I suggested of not having the strange threshold kicking in at £150,000 and having basic rate relief for everyone. However, they have taken that route, and the relief rate falls dramatically at that arbitrary figure. We cannot describe it as a poverty trap, but it is an income trap for people who may face a disincentive to go just over the threshold. They may remain just under it, which would be a slightly perverse consequence.

The nub of the hon. Gentleman’s point is that some people—those who run their own businesses are an obvious example—have big fluctuations in their income, depending on whether they secure a contract, or even on factors such as the weather that may affect their business. Those people may lose out in a way that the Government do not intend. I acknowledge that trying to alter the legislation so that those people do not miss out could provide greater scope for loopholes and may make it more complicated, but I still think that there is an onus on the Government to acknowledge the perfectly reasonable point made to the hon. Member for Fareham over the weekend by a number of self-employed people. On that note, we will have an opportunity to discuss the amendment in greater depth, but that lays out my broad approach to the Government’s thinking in this area.

Mark Field (Conservative, Cities of London and Westminster)

I agree with much of the thrust of the argument put by the hon. Member for Taunton. Ultimately, this is quite a mess. We are obviously in particularly difficult economic times—exceptionally difficult economic times. The cat was slightly let out of the bag by the Minister when he pointed out that 98.5 per cent. of people would not be affected by the provisions. The fear for many on our side is that much of this is driven less by economic, financial, or any medium-term, let alone long-term fiscal considerations, but much more by short-term political considerations.

Jeremy Browne (Liberal Democrat, Taunton)

It is symbolic.

Mark Field (Conservative, Cities of London and Westminster)

As the hon. Gentleman says, clamping down on higher rate taxpayers in regard to pensions is a very symbolic move. As my hon. Friend the Member for Fareham rightly says, we need to develop much more certainty in the pensions system. Failure to provide that certainty will be catastrophic for long-term saving. There have been the mis-selling scandals, many of which were not anything like as scandalous as the press would have us all believe. The pensions industry caved in rather too quickly to a lot of the pressure in relation to, for example, the sale of endowment mortgages and other savings-type products, and the ongoing problems with Equitable Life. As my hon. Friend rightly says, many people now think, “Why on earth put money into pensions?”

Catastrophically, in many ways, anybody under the age of 35 almost certainly will have simply looked, insofar as they have any savings, to put them into the property market, which has seen very good returns for most of the past decade or so. We will see what happens to the property market in the immediate term; it has had a more rocky time in the past 18 months. That cannot be a very sensible situation. It begs the obvious question about the in-built tax advantages of owning domestic property. If we start to unravel that, certainty about long-term savings and investments is undermined. My hon. Friend expresses a deep concern on that point.

One hears various statistics bandied around—the Minister will know them better than me—about the number of people who benefit from higher rate tax pensions relief as a proportion of the overall money that goes to pensions relief. The real issue is that we have got to encourage people who earn rather less to save more, not the other way round—not try and equalise in this way. The practical reality, and we should all be far more candid about this, is that the reason why quite a lot of people in our society do not save for their pensions is that they simply do not earn enough money to make any worthwhile saving.

Jeremy Browne (Liberal Democrat, Taunton)

Next week, I think, the Saving Gateway Accounts Bill comes back to the Commons. That is, in my view, a good attempt by the Government to achieve precisely that objective, although it is targeted at people with very low incomes. The hon. Gentleman is probably talking about people who earn slightly more, but not enough to necessarily be incentivised by these measures.

Mark Field (Conservative, Cities of London and Westminster)

The hon. Gentleman is absolutely right, but that has always been the problem; there is that group in the middle, which so often becomes larger and larger. Certainly in relation to house prices, my constituency is massively polarised between people who are, by any national standards, extremely wealthy and those who are so poor that they qualify for social housing. That is increasingly becoming a problem not just in the centre of our cities, but in many suburban areas and is an issue that faces many of us as constituency MPs. Part of the difficulty is that we need to try to encourage a saving culture. We have to be realistic. A lot of people on relatively low wages with relatively chaotic working patterns will never be able to save very much. The welfare trap is also a pretty strong disincentive. People take the view, “Why save a relatively modest amount of money if almost all of that is going to be taken away when it comes to qualifying for pensions at a later stage in life?”

On the Saving Gateway Accounts Bill, which was mentioned by the hon. Member for Taunton, I cannot help thinking that if the Government really wish to make a difference in this area they need to give the green light to people trusting in our savings and pensions products, not just for the next few years during the economic difficulties but for decades to come. One of the most important elements of that has to be certainty about treatment. My hon. Friend the Member for Fareham put it extremely well when he said that this measure undermined that sense of certainty about the pensions treatment.

In many ways, the real risk is that the overall pot that will be saved by everybody, whether they are in the 98.5 per cent. or the 1.5 per cent. of earners, is likely to diminish massively as confidence begins to drain away that pensions can be a reliable way of looking after one’s future and a way of promoting self-reliance—something that I think all of us in the political classes would support.

Stephen Timms (Labour, East Ham)

We announced in the Budget that the Government intended to restrict pension tax relief from April 2011 for people on annual incomes of £150,000 or more, as an important contribution to the fiscal consolidation that is now required as a result of the global crisis. The clause introduces schedule 35, which protects the Exchequer from forestalling between now and April 2011. That schedule comprises 13 pages. I think that the hon. Member for Fareham said 18, and I shall be vigilant for other arithmetical errors that might arise during this debate. We will, of course, have a number of debates about some of the detailed points that he has raised in his amendments.

I shall say a little about the background to the schedule. Restricting pension tax relief for those on the highest incomes will be an important part of consolidating the public finances in the medium term. To develop the perfectly fair observation made by the hon. Member for Taunton, those with annual incomes of £150,000 or more represent, as I said in my intervention, 1.5 per cent. of pension savers. Last year, that 1.5 per cent. received a quarter of all pension tax relief received by pensions savers. It is therefore right to address that disproportionate benefit as part of fiscal consolidation. I go further, and say that it would not be sustainable to allow that arrangement to continue, given the scale of consolidation that is now required by the global crisis.

Jeremy Browne (Liberal Democrat, Taunton)

That is an interesting statistic. I wonder whether the Minister knows what the proportion of total savings, or the total percentage of revenue that is—I am not putting this very precisely am I, Mr. Hood? What proportion of the total amount does upper rate relief, as opposed to basic rate relief, constitute?

Stephen Timms (Labour, East Ham)

I am sure that I do, and I as soon as I remember I will come back to the hon. Gentleman.

Mark Field (Conservative, Cities of London and Westminster)

I shall do my best to forestall and filibuster while that information comes through.

What I tried to address in my brief contribution earlier was whether more attention should not be paid by the Government to the 75 per cent. rather than the 25 per cent. of the pool, by trying to encourage the 98.5 per cent. of people who will not be affected by the measure to ensure that they invest rather more. We can bandy around statistics that show a considerable skew in a particular direction, but is not the risk that the lack of confidence and certainty that is being brought in will have a detrimental effect on many of the 98.5 per cent. who could be doing rather more to boost the 75 per cent. of relief that is passed on in their name?

Stephen Timms (Labour, East Ham)

The hon. Gentleman is, of course, right. We should be attending to the incentives to saving in pensions for people on low incomes, and we are doing that. The Saving Gateway Accounts Bill is a good example of that, and the changes that we will introduce with pension accounts in a couple of years are another. We have rightly been very diligent in improving those incentives, but I disagree with the hon. Gentleman’s suggestion, which is a red herring, that changing the arrangements for the highest-paid 1.5 per cent. will act as a deterrent for people on lower incomes. There is no basis for that suggestion. We need to be clear-sighted about the change that is being made and the effect that it will have.

From 2011, tax relief on pension contributions or pension benefits accrued, including contributions made by employers, which are currently an untaxed benefit-in-kind, will be restricted to 20 per cent. for those with incomes of £150,000 and more. Of course, 20 per cent. is the rate that people in the category that the hon. Gentleman referred to receive currently.

We have already started to talk with the industry and pension savers about how best to implement the change, and we will issue a formal consultation in due course. To have introduced the changes ahead of April 2011, before there had been time to consult properly, would have risked disruption for savers, employers and pension schemes. I believe everyone understands that this is a complex change. We need to get the details right, and that will take some time. However, a gap between the announcement on Budget day and implementation in April 2011, in the absence of the clause and schedule, would have allowed those who will be affected to attempt to forestall the new rules, and, in doing so, to obtain even more tax relief for pension saving.

Clause 71 and schedule 35 protect the loss of at least £2 billion over the next two years which could arise from people on incomes of more than £150,000 who are affected by the restriction of higher rate relief on pension contributions increasing their contributions or rate of pension benefit accruals now, to get the benefit of the higher rate tax relief that will not be available in the future.

The legislation also looks to protect normal pension-saving behaviour and, as far as possible, to allow for different types of pension arrangements without putting tax revenues at risk. I do not agree with the hon. Member for Taunton on this. The principle that regular pension saving should continue to benefit from higher rate relief up until 2011 is right, but we need to ensure that there is not an invitation to others to pile in and take advantage of relief which they would not otherwise have taken advantage of and which they will not be able to take advantage of from 2011.

Mark Hoban (Conservative, Fareham)

I do not know whether the Minister can provide some clarity on his estimates of the take from the measure. The Red Book says that the take will be £200 million for 2011-12, and in a footnote states that the yield will be £3.1 billion for 2012-13. He said that the anti-forestalling measures could save about £2 billion of revenue over the next two years. Could he be a bit more transparent about the Government’s estimates of revenue raised from the measure? They are not particularly clear at the moment, and that is not helped by the absence of an RIA.

Stephen Timms (Labour, East Ham)

The figures in the Red Book are correct: £200 million in 2011-12, and £3.1 billion in 2012-13. They represent in-year yields from restricting tax relief to people with incomes of £150,000 or more on individual contributions and those made by their employers. The £200 million yield scored in the first year is due to restricting the relief for individuals with personal pensions through PAYE.

These are cautious estimates. We made reasonable adjustments for behaviour and for flexibility around how the measure is implemented, on which we said that we will consult. Of course, there is some uncertainty about precisely what the response will be.

Mark Hoban (Conservative, Fareham)

The Minister’s case would be strengthened if a bit more information were made available to members of the Committee about the revenue raised by the measure. We suddenly go from £200 million to £3.1 billion, and he refers to £2 billion. There needs to be a bit more clarity from the Government about how they achieved those figures so that we can be certain that they stand up to scrutiny. I would be happy if he wrote to us on that.

Stephen Timms (Labour, East Ham)

I do not think that I need to write to the hon. Gentleman. The estimate that I gave of £2 billion reflects a behavioural assumption that about 70,000 people would have made additional pension contributions in 2009-10 and 2010-11 in the absence of the anti-forestalling measure announced at the Budget. That estimate is based on some detailed modelling of taxpayer data on incomes and pension contributions.

To achieve the effect that I have described, the schedule introduces a special annual allowance. Those people with an annual income of £150,000 or more are able to receive relief at the marginal rate on whichever sum is higher of their normal regular pension savings or £20,000. The aim is to remove the advantage of increasing pension savings above the normal pattern. That advantage is removed by means of a special annual allowance charge, which will apply only if three conditions are met. The first is that the person’s income is £150,000 or more; the second is that they increase their level of pension savings beyond their normal regular pension savings on or after 22 April 2009; and the third is that they make total annual pension contributions in excess of £20,000. That arrangement strikes a balance between protecting tax revenues, protecting normal contribution patterns and minimising burdens on industry.

The anti-forestalling legislation will affect only a very small proportion of people. We think that it is right that it should apply to those people with incomes of £150,000 or more. To be robust against avoidance, the definition captures those who have had incomes of more than £150,000 in this year or any of the previous two tax years. Otherwise, we do not need to affect people on annual incomes that are less than £150,000 at all.

As I have said, the schedule includes provisions to protect normal regular monthly or quarterly pension savings made under arrangements that were in place on Budget day. That applies equally to contributions made to money purchase schemes and defined-benefit schemes. Generally, protection will also apply to changes in pension contributions or benefits accruing that could occur due to events such as career progression, change of employment or early retirement. The special annual allowance has been set at £20,000, which we will have a debate about in a moment. That is to provide a reasonable balance for the groups affected, while retaining the overall aim that the interim regime should be cost-neutral. Setting the threshold for the special annual allowance any higher than £20,000 across the board would significantly raise the costs of these arrangements.

Jeremy Browne (Liberal Democrat, Taunton)

I thought that the Minister was about to come to an end. I just wanted to ask him one further question before he sat down. Can he confirm that the Government’s projected borrowing assumptions take into account the revenue that will accrue from this measure in future years?

Stephen Timms (Labour, East Ham)

Yes I can. As I have said, the measure is part of the fiscal consolidation that is required. Also, I have now remembered the answer to the hon. Gentleman’s earlier question. It is that 65 per cent. of tax relief on pensions goes to higher rate taxpayers.

We recognise that for some people with less regular contribution patterns—they have been mentioned in the debate already and we will come back to discuss them later—the £20,000 special annual allowance represents a lower pension contribution than they have typically made in the last few years. That is why, in my written statement to the House on Budget day and in subsequent discussions with representative bodies, we have made it clear that we welcome views on whether there are ways of ensuring that those people with less regular contribution patterns can be protected in the interim regime while continuing to meet our objectives. In particular, it is important that the arrangements remain effective against the risk that forestalling behaviour will significantly increase the cost of pensions tax relief for the wealthiest people.

We are continuing to talk to industry and gather information about those people who are making non-regular contributions above £20,000 a year, to inform our position. I can tell the Committee that we shall return to this issue on Report if we conclude that action on it is necessary.

There is a regulation-making power here, so that we can, if required, make provisions for other forms of regular pension contributions to be protected. The anti-forestalling legislation also includes specific provisions to prevent avoidance. The regulation-making power means that we can react quickly if it becomes clear that people are taking advantage of the regime, but the power to tighten the rules can be used only prospectively, not retrospectively. There is also a power to amend the rate of tax, which we will use to amend the rate of the special annual allowance charge, following the implementation of the new 50 per cent. rate from 2011. The power is subject to the affirmative procedure, so the regulations will be available for debate in the House.

Coming back to the suggestion that we are discouraging pension savings, I do not think that that applies at all to people on modest incomes. Even those on high incomes who are affected will still benefit from higher rate tax relief on £20,000 of pension savings in a year, and will receive basic rate tax relief on the rest, so there are still good reasons for them to save in a pension. The hon. Member for Fareham read out a couple of quotes, so let me read a few back to him from the industry. David Millar of Friends Provident, one of the companies he referred to, has said:

“Of our...members...only a very small percentage will even be touched by the change in legislation”.

John Lawson of Standard Life has said that

“anyone with taxable income of up to about £180,000”

in a year

“will still find pensions more tax-attractive than other investments.”

I look forward to the debate that we are about to have on some of the more detailed points, and I commend the clause to the Committee.

Jimmy Hood (Labour, Lanark and Hamilton East)

I can tell the Committee that I have had information from the Committee of Selection that the hon. Member for Burnley (Kitty Ussher) has been discharged from the Committee and will be replaced by the Exchequer Secretary to the Treasury, the hon. Member for Portsmouth, North (Sarah McCarthy-Fry). That change will take effect from this afternoon’s sitting.

Schedule 35

Mark Hoban (Conservative, Fareham)

I beg to move amendment 198, in schedule 35, page 279, line 18, leave out ‘£20,000’ and insert ‘£50,000’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: amendment 199, in schedule 35, page 279, line 24, leave out ‘£20,000’ and insert ‘£50,000’.

Amendment 200, in schedule 35, page 279, line 25, leave out ‘£20,000’ and insert ‘£50,000’.

Amendment 201, in schedule 35, page 280, line 25, leave out ‘£20,000’ and insert ‘£50,000’.

Mark Hoban (Conservative, Fareham)

As the Minister said in the debate on clause 71, setting to one side the issue of regular contributions, someone earning more than £150,000 a year will get full tax relief on contributions up to £20,000. The purpose of my amendments is to probe the Government’s thinking about the level at which they set that threshold. I argue that the threshold should be increased to £50,000.

As I said in the previous debate, the A-day regime replaced a complex set of rules, and was meant to simplify them and make it easier for people to save in a more sensible way. One rule that was swept away was the cap on pension contributions. Prior to the changes, people who were under 50 could make pension contributions of 17.5 per cent. of their net relevant earnings. On that basis, someone earning £150,000 could make contributions of up to £26,000. For people over 51, the rate increased from 17.5 per cent. to 30 per cent., so that on an income of £150,000 they could make a maximum contribution of £45,000.

The Minister could have drawn inspiration from the pre A-day legislation to come up with a cap as a proportion of salary when that income exceeds £150,000 or a higher monetary cap to reflect those pre-existing rules. The cap is an important issue, because it will particularly affect those without the regular contribution pattern to which the Minister referred. I know that we will talk about that in some length in the debate on the group of amendments headed by amendment 228, but it is important to point out that the measure creates a distortion in the system, because if someone is earning £140,000 at the moment, they could make a contribution of, for example, £90,000 and gain relief at 40 per cent. on that contribution. That would be a generous relief, and is a consequence of how the measure is structured. However, a person with an income of £150,000 without a regular contributions record could be limited to receiving relief at the higher rate on £20,000. A mismatch has arisen, as people earning below the threshold will do quite nicely from the tax relief, but those above the threshold without a regular pattern of contributions will be limited to £20,000. One way in which the Government could deal with regular contributions and the application of the measure to people with an irregular contribution pattern, is to increase the annual allowance to create a much more flexible regime for those earning more than £150,000. With that in mind, I have tabled amendment 198 and the other amendments in the group.

Stephen Timms (Labour, East Ham)

We set the special annual allowance at £20,000, with very careful regard to typical levels of contributions, to provide a reasonable balance for those affected while retaining the overall aim, which is that the interim regime over a couple years should be revenue neutral. The special annual allowance introduced in the schedule strikes a balance between protecting tax revenues and normal contribution patterns and minimising burdens on pension providers. Individuals will receive relief at the marginal rate up to the higher limit of their normal regular pension savings and the special annual allowance of £20,000. Amendments 198 and 199 would increase the allowance from £20,000 to £50,000 across the board. They would significantly increase the generosity of the regime and would not be well targeted. The cost of providing relief to those on the very highest incomes would be increased, costing around £750 million over the two years.

Mark Hoban (Conservative, Fareham)

I am interested by the Minister’s comment about the cost of increasing the threshold from £20,000 to £50,000 and the fact it is £750 million out of a £2 billion estimate. There is a need for clarity because, when looking at the cost, the Committee would be interested to know what element of the revenue raised by the measure comes from capping regular contributions and what element comes from the £20,000 cap. We do not have any clarity on how the measure will bite in practice.

Stephen Timms (Labour, East Ham)

The £750 million comes from the fact that under the hon. Gentleman’s amendment, many people earning £150,000 or more would be able to contribute substantially more to their pensions over the next couple of years than they would have expected. They will thereby benefit from full higher rate relief, which will not be available from 2011. There are clearly some assumptions there about how people will behave, but we are certainly talking about a substantial increase in the cost of those arrangements if the cap was lifted in that way. £20,000 has been set, so that the arrangements are pretty much revenue neutral, and there will be a small cost of £20 million over the two years from setting the cap at that level.

Amendments 200 and 201 would alter the amount of someone’s pension contribution that can be deducted in calculating whether their income is above £150,000, raising it from £20,000 to £50,000. That would be very expensive and open further opportunities for avoidance. Were the amendments to be made, anyone with gross income of up to £200,000 would be able to make pension contributions of between £50,000 and £245,000, because their taxable income would have been reduced to below £150,000. Amending the definition of income as proposed would be costly. Adopting a more generous definition of taxable income allowing for £50,000 deductions in the form of contributions alongside a special annual allowance of £50,000 would have a total cost for both measures, we estimate, of £800 million. I do not see the justification for increasing relief in that way for the best-off people in the country by such a large extent.

Mark Hoban (Conservative, Fareham)

Does the Financial Secretary not accept my point about the differential effect that that will have on people on either side of the boundary line for income? Someone earning £140,000 could make a £90,000 contribution and receive 40 per cent. tax relief, but someone earning more than £150,000 who has not had a regular pattern of contributions would only receive relief at 40 per cent. on £20,000 of contributions. There is a mismatch arising from the way in which the £150,000 limit has been introduced.

Stephen Timms (Labour, East Ham)

I am not really sure that there is a mismatch, because a person earning £140,000 will continue to be able to enjoy full higher-rate relief from 2011 onwards. We are trying to ensure that those who will be affected by the arrangement from 2011 are not in a position to be able to forestall, and that is what the arrangements effectively address. Given that explanation, I hope that the hon. Gentleman will be able to withdraw those costly amendments.

Mark Hoban (Conservative, Fareham)

The point that emerges from the Financial Secretary’s remarks is not so much the cost but the crude way in which the measure will impact on people. Someone earning less than £150,000 could potentially enjoy more tax relief than someone earning £150,000 who does not have a regular pattern of contributions. There is a clear dividing line—I hate to use the phrase—between those just under the threshold and those just over it, with regard to what they are able to claim in tax relief. Someone who does not have a regular pattern of contributions will be disadvantaged, but someone earning £150,000 with regular contributions of £30,000 could enjoy the full relief. If they do not have a regular pattern of contributions, full tax relief will be limited to £20,000. A problem is emerging, partly as a consequence of the treatment of regular contributions.

Jeremy Browne (Liberal Democrat, Taunton)

Does the hon. Gentleman accept that he is making a compelling argument for the case that I made? If everyone enjoyed pension relief at the basic rate, there would be no threshold and no anomaly. Not only would lots of extra revenue be available to have a more economically efficient and socially just country, but we would get rid of all the anomalies he is so concerned about.

Mark Hoban (Conservative, Fareham)

I am not sure that I am making a compelling argument for the hon. Gentleman’s proposals, but then I did not think that he made a compelling argument himself in the stand part debate. However, I will let that one pass by. Some people, because of the hard threshold of £150,000, will not enjoy the same pension tax relief as people earning a slightly lower salary. That perhaps goes back to the issue of a regular contribution pattern to which the Financial Secretary has referred and which we might address later. My amendment would soften the blow of regular contributions and the issues surrounding them. It may not be the most effective way of doing so, but it is a suggestion about how to tackle the matter. However, I am much more interested in the Minister’s response to tackling this issue in the context of amendment 228, so I beg leave to withdraw amendment 198.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 202, in schedule 35, page 280, line 36, leave out from ‘year’ to end of line 38.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: amendment 203, in schedule 35, page 280, line 39, leave out sub-paragraph (2).

Amendment 204, in schedule 35, page 291, line 7, at end insert

‘but this Schedule shall not apply where the individual concerned is aged 50 or over at some time in the tax years 2009-10 and 2010-11.’.

Mark Hoban (Conservative, Fareham)

The amendments deal with a different aspect of the rules. Paragraph 2 of the schedule sets out how to calculate the relevant income to determine how the 20 per cent. charge will be levied. In essence, it is a very broadly based definition of income. In paragraph 2(2), we learn that relevant income calculation applies not only to the tax year in question but to the tax year before that and the one before that. If someone was earning £30,000 a year, but had had a temporary boost in their earnings two years ago from, say, the sale of a business, he would be subject to the restrictions in these measures. This provision, therefore, captures people whom the Government might not necessarily want to catch.

Let me give some other examples. A businessman might have sold his business and had a one-off boost to income. We know that as a consequence of the recession a number of people have been made redundant. Someone could have been made redundant in 2008-09 and received a very generous package which could well have taken him into the £150,000-plus bracket. He may find another job in 2009-10 that pays £40,000, but decides that because he is now in employment he will use some of that redundancy package to top up his pension. He might make a £40,000 contribution. Because he has earned more than £150,000 in the past, there will be a restriction on the tax relief he earns, even though he may now be a basic rate taxpayer. He could have earned a bit more—say £60,000 or £70,000—and be a higher rate taxpayer, receiving relief at 40 per cent.

As a result of a one-off change in his income a couple of years ago, that person has to face a restriction on the tax relief that he will get from topping up his pension fund. That is part of the pitfall that comes from having a charge that is based on past earnings contributions rather than something that looks forward. Again, this is where the iniquity of the £150,000 limit comes in. Someone whose earnings have fallen from £150,000 to £80,000 would lose tax relief, whereas someone whose earnings were £149,000 and fell to £80,000 would not, and that does not seem right. We must think very carefully about whether the scope for manipulation of income and pension contributions is sufficient to justify punishing those people who would be entitled to relief now but will not benefit from it because of a fluctuation in their income several years ago. Amendments 202 and 203 will address that issue by removing all references to previous tax years so that a person is only judged on their income for this tax year and not for their income in previous tax years.

Amendment 204 concerns the effects of these measures on people approaching retirement. There is a tendency for people who are approaching retirement to focus a bit more on their future pension provision, and to think about making larger contributions. They have perhaps paid off their mortgage and have some more spare income. Their interests, and how they spend their money, might change, and they might begin to focus more on their upcoming retirement. They might therefore want to contribute more to their pension pot. They might want to achieve a particular level of income, so the later they start, the higher their contributions will have to be. The loss of the higher rate relief might well restrict their ability to save adequately for retirement. Furthermore, the sporadic nature of the income of someone with a small business might make it difficult for them to save earlier in their lives.

Amendment 204 would assist people approaching retirement by enabling them to top up their pension pot more flexibly. It is a fairly crude amendment, and doubtless the Minister will tell me just how much it will cost, but it raises a legitimate concern that we need to bear in mind. If he accepts my argument, perhaps we can return to it on Report to find other ways of providing for more flexibility in the system to help people approaching retirement who feel the need to top up their pension pots by significant amounts. That could ensure that they have a decent income on which to live and prevent their having to fall back on the state.

Stephen Timms (Labour, East Ham)

People in the income bracket that we are talking about are very often in a position to renegotiate their pay packages or delay the taking of income into a later tax year. That is why the schedule includes the three-year income rule. Otherwise, there would be a fairly open invitation to people to change their income and so avoid the provisions.

On the point about people receiving big redundancy payments, I should point out that the first £30,000 of any payment would not count towards income as calculated in the schedule. Even if a payment is more than £30,000 and takes the person into the £150,000-plus bracket, they will be affected by the special annual allowance charge if they make additional, non-regular pensions savings, and only then if the total savings are more than £20,000 in the year concerned. However, average total pension contributions by people in that position will be less than £20,000.

It is important to bear in mind that, for the majority of pension savers, schedule 35 changes nothing. They will still benefit from generous tax relief on their pension savings. Without the rules that we are putting in place, forestalling is more likely to be undertaken by people over 50, because they are more likely to have access to the ready cash required. They would not have to wait so long to retain the tax-free lump sum. I therefore urge the hon. Gentleman not to press amendment 204, because it would be an invitation to avoidance. Of those with an income of £150,000 or more, it is likely that many are aged over 50 and will have access to the most spare cash.

On the point about people selling a business, I can reassure the hon. Gentleman that capital gains are not included in the definition of income in the schedule. I hope that that is reassuring. He also invited me to tell him how much his amendment would cost. It would cost £300 million this year, £700 million next year and £1 billion altogether.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for providing the costs at the tail end of his speech. I knew that they would come in due course. The Minister made clear the Government’s starting point, which is to minimise any tax leakage. That is the clear thrust of the measure. A balance needs to be struck, but my concern is that, in the Government’s desire to minimise tax leakage, there is a risk that they will overlook—

(Except Clauses 7, 8, 9, 11, 14, 16, 20 and 92) - Schedule 35

Peter Atkinson (Conservative, Hexham)

I remind the Committee that with this we are discussing the following: amendment 203, in schedule 35, page 280, line 39, leave out sub-paragraph (2).

Amendment 204, in schedule 35, page 291, line 7, at end insert

‘but this Schedule shall not apply where the individual concerned is aged 50 or over at some time in the tax years 2009-10 and 2010-11.’.

Mark Hoban (Conservative, Fareham)

Welcome to the Chair for this afternoon’s sitting, Mr. Atkinson.

The Financial Secretary promised us that we would see the new Exchequer Secretary this afternoon, but I understand after talking to her that she is currently trying to complete her transitional arrangements between Departments.

Before lunch, I was concluding the debate on the amendments by pointing out that the Government’s desire to clamp down on potential tax leakage through the forestalling arrangements is at risk of masking some of the people who will fall victim to the hard edges of the scheme. The Government should think about the individuals who may be affected by the measure, in particular those who will fall foul of the £150,000 earnings barrier. Having said that, the Minister has made some important points about the cost of some the changes proposed in the amendments. As I have said before, the main show in town is the next group of amendments, and I am anxious to speak to them. I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 228, in schedule 35, page 283, line 15, leave out paragraphs 7 to 13 and insert—

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss the following: amendment 182, in schedule 35, page 283, line 40, after ‘paid’, insert

‘under this sub-paragraph or under sub-paragraph (3A)’.

Amendment 190, in schedule 35, page 284, line 3, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 183, in schedule 35, page 284, line 11, at end insert—

‘(3A) To the extent such amount exceeds that referred to in paragraph 8(3), relevant added years contributions also include contributions paid—

(a) with a view to securing that the calculation of benefits under the arrangement is by reference to a period of service in excess of pensionable service by the individual; and

(b) which do not exceed the average amount of contributions made by the individual in each of the three tax years ending 5 April 2009 (or if the individual has not been a member of the pension scheme for those tax years, the contributions made, in a case where he has been a member for only one complete tax year, during that tax year, and the average contributions, if he has been a member of this scheme for two complete tax years, for those two tax years) or if provided that if in any of those years the contribution exceeded the amount of the annual allowance for that tax year (see section 228 of FA 2004) such contribution shall be taken to be an amount equal to the annual allowance for that tax year.’.

Amendment 184, in schedule 35, page 284, line 41, after ‘paid’, insert

‘under this sub-paragraph or under sub-paragraph (3A)’.

Amendment 191, in schedule 35, page 284, line 46, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 185, in schedule 35, page 285, line 6, at end insert—

‘(3A) To the extent such amount exceeds that referred to in paragraph 9(3), relevant added years contributions also include contributions paid—

(a) with a view to securing that the calculation of benefits under the arrangement is by reference to a period of service in excess of pensionable service by the individual; and

(b) which do not exceed the average amount of contributions made by the individual in each of the three tax years ending 5 April 2009 (or if the individual has not been a member of the pension scheme for those tax years, the contributions made, in a case where he has been a member for only one complete tax year, during that tax year, and the average contributions, if he has been a member of this scheme for two complete tax years, for those two tax years) or if provided that if in any of those years the contribution exceeded the amount of the annual allowance for that tax year (see section 228 of FA 2004) such contribution shall be taken to be an amount equal to the annual allowance for that tax year.’.

Amendment 186, in schedule 35, page 285, line 39, after ‘paid’, insert

‘under this sub-paragraph or under sub-paragraph (3A)’.

Amendment 192, in schedule 35, page 285, line 44, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 187, in schedule 35, page 286, line 4, at end insert—

‘(3A) To the extent such amount exceeds that referred to in paragraph 10(3) or 10(5), relevant added years contributions also include contributions paid—

(a) with a view to securing that the calculation of benefits under the arrangement is by reference to a period of service in excess of pensionable service by the individual; and

(b) which do not exceed the average amount of contributions made by the individual in each of the three tax years ending 5 April 2009 (or if the individual has not been a member of the pension scheme for those tax years, the contributions made, in a case where he has been a member for only one complete tax year, during that tax year, and the average contributions, if he has been a member of this scheme for two complete tax years, for those two tax years) or if provided that if in any of those years the contribution exceeded the amount of the annual allowance for that tax year (see section 228 of FA 2004) such contribution shall be taken to be an amount equal to the annual allowance for that tax year.’.

Amendment 193, in schedule 35, page 286, line 13, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 194, in schedule 35, page 286, line 37, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 188, in schedule 35, page 286, line 42, at end insert—

‘(2A) To the extent such amount exceeds that referred to in paragraph 11(2) the amount arrived at under paragraph 3(2) in relation to the arrangement is a protected pension input amount to the extent that it is attributable to contributions paid which do not exceed the average amount of contributions made by the individual in each of the three tax years ending 5 April 2009 (or if the individual has not been a member of the pension scheme for those tax years, the contributions made, in a case where he has been a member for only one complete tax year, during that tax year, and the average contributions, if he has been a member of this scheme for two complete tax years, for those two tax years) provided that if in any of those years the contribution exceeded the amount of the annual allowance for that tax year (see section 228 of FA 2004) such contribution shall be taken to be an amount equal to the annual allowance for that year.’.

Amendment 195, in schedule 35, page 289, line 20, leave out ‘a quarterly’ and insert ‘an annual’.

Amendment 197, in schedule 35, page 290, line 3, leave out from ‘contributions’ to end of line and insert ‘which—

(a) are paid on a quarterly or more frequent basis pursuant to an agreement for the payment of such contributions, or

(b) if paid less frequently than quarterly, half of the sum of the two highest contributions made in the periods 6 April to 21 April in each of the tax years 2006-07, 200-08 and 2008-09 and for these purposes if only one such contribution has been made in those three periods, half of that amount.’.

Amendment 196, in schedule 35, page 290, line 3, leave out ‘a quarterly’ and insert ‘an annual’.

Mark Hoban (Conservative, Fareham)

The list of amendments is fairly substantial. It is not so much an Ă la carte or table d’hôte menu as a buffet.

Jeremy Browne (Liberal Democrat, Taunton)

SmĂśrgĂĽsbord.

Mark Hoban (Conservative, Fareham)

I was going to use that word, but my hon. Friend the Member for Hammersmith and Fulham has the monopoly in our ranks on the correct pronunciation of foreign words. I am sure that he will find the opportunity at some point before the end of the proceedings to use the word smĂśrgĂĽsbord.

The amendments are all, in different ways, designed to address the issue of the pattern of contributions that people make towards their pension schemes, which I have touched upon in earlier discussions. I am concerned that the schedule as drafted refers to regular contributions in the context of “quarterly or more frequent” payments into a pension scheme.

A number of groups of individuals, by nature of their employment or the profitability of their business, are not in a position to make a regular payment to a pension scheme. A curious situation may arise where somebody who makes pension payments of £100,000 in quarterly instalments throughout the year will get full relief under the anti-forestalling provisions, but somebody whose pension contributions are not that regular will only get full relief for £20,000. We need to think carefully about whether we are penalising people who are self-employed, who are partners in businesses, or who run small businesses, and who may lose out as a consequence.

I understand what the Government are trying to achieve: they do not want people to use the interregnum between now and the introduction of the cap on the higher rate relief in 2011 to make huge annual contributions within the level of the lifetime allowance. That is why I suggested reducing the level of the allowance during the stand part debate on clause 71. However, some people will be caught out as a consequence of the rules, because they do not make a regular pattern of contributions, and this is a serious matter for them. We need to find a way to meet their concerns, while recognising the point the Minister has made and will make again that some people will seek to use the flexibility over the next two years to reduce their tax bills.

My amendment buffet contains various groups that represent different approaches to the same issue. I would be pleased if the Minister chose from my selection, but I suspect that he will want to return to this important matter on Report.

The amendments would affect what is defined in the Bill as a protected pension input amount, at term that covers existing pension arrangements. Contributions made under pension arrangements that are already in place should be able to continue up to the current levels of relief until the new regime is introduced in 2011. Our problem is with the design of the measures.

The provisions that determine what will count as a protected input amount are drawn quite narrowly. The wording adopted throughout paragraphs 7 to 13 refers to contributions that are made

“on a quarterly or more frequent basis”.

That means that anyone who has had an arrangement to make graded contributions on an annual basis will be subject to a reduction in tax relief. As I said before, that could apply to the self-employed, those who own small businesses, or partners in lawyers’ or accountants’ firms.

A number of my hon. Friends have been in those circumstances. My hon. Friends the Members for Henley and for Poole have both been involved in businesses in which pension contributions have been managed in such a way. They will know how difficult it can be to predict their profits or share of earnings and therefore their pension contributions. Those amounts differ from year to year, depending on how successful the business is and the investment decisions that are made; as a result, their total contributions would vary from year to year. Also, they might have paid their contributions to different institutions from year to year, because one pension provider was better than another. That would have an impact under the rules. Under the provisions in the schedule, such people will lose the additional tax relief on any contribution in excess of £20,000.

The Association of British Insurers submission to the House of Lords Economic Affairs Committee’s sub-committee on the Finance Bill gave the example of an individual seeking to wind up his affairs to fund his retirement. The individual received a salary of £150,000 in 2008, but he received a reduced salary of £70,000 in 2009 because business had been affected by the economic downturn. He sold the business for £250,000 in 2009—probably less than he would have got for it before—but then paid £200,000 into his pension. Even though the individual has suffered a reduction in his earnings and has been forced to sell his business, he will not be able to gain full relief for his contributions, because his salary exceeded £150,000 in the previous year.

The Minister recognises this problem, as his remarks in the previous debate demonstrated. His written statement on Budget day stated:

“The Government recognise that those with less regular contribution patterns may be affected and would welcome views on whether there are ways of ensuring the contributions of this group are protected in the same way as those making more regular patterns”.—[Official Report, 22 April 2009; Vol. 491, c. 16WS.]

A number of proposals have emerged from our discussions with interested parties, and they are reflected in the group of amendments. Some of the amendments are mutually exclusive, but we have tried to give a feel for the types of approach the Government may wish to take.

Amendment 228 is probably the most straightforward, but also the most prone to defective drafting. It would delete paragraphs 7 to 13 and replace them with a simple regime that encompasses all the various arrangements, including annual contributions. It refers in particular to defined-benefit schemes. It represents a crude way of approaching the problem, but it would move us to an annual basis.

Amendments 190 to 196 change the language on payments in the paragraphs from “a quarterly” or more frequent to “an annual” or more frequent. It would prevent small business owners, the self-employed or those who contribute to their pensions from annual bonuses losing the tax relief they currently receive.

Amendments 182 to 188 take a different approach. They recognise that we cannot have a free-for-all in the amount of contributions that may be made on an annual basis, but take into account the history of contributions made in the previous three years and restrict the protected amount to the average of the contributions made in those three years. That has some appeal as it reflects a past pattern of behaviour and recognises that the contributions individuals make to their pension scheme may fluctuate according to the performance of their business. It has some attraction as a way of tackling the issue the Minister outlined, but without allowing much flexibility or latitude in terms of increases.

Amendments 182 to 187 aim to get the regular contributions requirement right between self-employed and employed people by making the same provisions for DB schemes’ existing cash balance arrangements and money purchase arrangements. Paragraph 11 deals with money purchase arrangements that are not part of occupational and public service pensions. Most self-employed people will fall into that jurisdiction. Amendment 188 would ensure that their annual contributions do not disqualify them from the higher rate relief.

Paragraph 16 introduces the pre-22 April 2009 pension input amount. Any such amounts do not give rise to a special annual allowance charge, but they may be deducted in the calculation of adjusted contribution for the tax year 2009-10. In that case, amendment 197 would allow an average amount to be calculated that is half the sum of the two highest annual contributions; or, if only one contribution has been made, half of that. That is perhaps a more generous amendment than the one that averages contributions over the past three years, but it too seeks to provide flexibility.

This is an important group of amendments addressing an issue the Financial Secretary identified. We need to ensure, where possible, that there are tax arrangements in place that recognise how people lead their lives and the flexibility that people may have, not through choice but perhaps through force of circumstances. They are often not able to make the relevant decisions until the end of the tax year. While the Minister has focused so far on how to stop avoidance, we should have regard to those whose pattern of income makes it difficult to make regular quarterly or more frequent contributions to pension schemes.

The amendments offer a range of options. I do not expect the Minister to leap to his feet and say, “I am going to accept amendments x to y,” because I suspect there are some drafting errors in the amendments. However, they represent a genuine attempt to introduce flexibility to the arrangements to reflect the needs of a specific group of people.

Jeremy Browne (Liberal Democrat, Taunton)

I shall be extremely brief because I generally try in Committee not to replicate speeches that have already been made, just to put myself on the record for having agreed with earlier speakers.

I will depart slightly from that sensible rule of thumb on this occasion to say that I am an enthusiast for the constructive approach taken by the hon. Member for Fareham. He recognises the legitimacy of what the Government are trying to do—we all recognise that that is a sensible approach. If one is going down the path of introducing new measures, some provisional arrangements are needed in the interim.

The hon. Gentleman also makes an entirely sensible point—one that has been made to me through representations to which I have been sympathetic and which is reflected in the large group of amendments—that there are people whose pension contributions are inevitably haphazard, because that is the nature of their income. That is most obvious for people who are self-employed, or those whose work is seasonal or has other fluctuations beyond their control. There is a danger—more than that: a likelihood—that the measures the Government have introduced, entirely understandably, will catch people they are not intended to catch.

I hope the Minister will engage seriously with the points made by the hon. Gentleman, myself and others. If the Treasury is able to find a way of drafting the legislation so that penalties are not incurred by those they do not intend to target, that would be appreciated by a large number of people.

John Howell (Conservative, Henley)

Welcome to the Chair this afternoon, Mr. Atkinson.

In keeping with my perennial diet, I shall eat only one of the dishes that my hon. Friend the Member for Fareham has set out so temptingly before us and that is the dish relating to the self-employed. The Select Committee on Work and Pensions has recently finished taking public evidence on pensioner poverty. The questions naturally ranged much more widely than that subject, although there is quite a strong link between pensioner poverty and self-employment, which I will come on to in a minute. I recommend that the Minister visits the website of the Committee and looks at the evidence that was collected.

The self-employed are a major pensions headache because of how they approach pensions. The provisions in the clause and in the schedule do not recognise that behaviour. There is no equivalent now, and none is proposed, for automatic enrolment in pensions for the self-employed. We are unusual in that compared with countries such as Canada, for example, with the result that the self-employed have a strong tendency to procrastinate in dealing with their pensions. That builds up a problem for later, when they tend to rely on selling their business or their house, in a time of recession. It also leads to considerable irregularity of payment, which has already been mentioned. Even for people who regularly earn more than £50,000, for many self-employed people that amount comes in in a very irregular fashion and the main reason for not saving is that they cannot afford to do so. One of the big factors in deciding whether they can afford to do so is directly relevant to the schedule: how much they get back. Getting back what is put in is not enough. In the words of the Pensions Policy Institute, they need to

“see the advantage of the tax relief”

in order to make that calculation. We touched on that this morning when my hon. Friend went through some of the calculations involved.

Perversely, the recent reduction of values as a result of the economic crisis may have shocked some out of that procrastination and we may actually see some becoming more regular in their pattern. However, I find it difficult to understand why there should be discrimination between somebody who contributes £2,500 monthly and someone who contributes £30,000 annually. There seems to be no logic in that sort of discrimination.

As my hon. Friend mentioned, I have been in that situation myself. In the years that I was a partner at Ernst and Young, we never made a pension payment until we had seen what the annual profits were going to be. It was a very prudent approach. The amounts certainly differed from year to year, as did the profit and the profit shares that came out. My hon. Friend’s description was quite correct. Each year we made an assessment—on our own back—of which pension providers we would invest that money with. That flexibility was not haphazard, as the hon. Member for Taunton described it, although I appreciate that some have a haphazard way of going about it; it was part of the normal business life and the normal practice of going about dealing with one’s financial affairs.

I cannot believe that the Treasury is not aware of those behaviours—after all, there has been enough flow between the Treasury and firms of accountants in exchanges of personnel and, I hope, the other way. Is the provision an afterthought—a way of dealing with an oversight of the knock-on effect of increasing the 50 per cent. rate of tax in the first place and then realising that it was too expensive to give pension relief at that rate; or was it deliberate, and are we really attacking the self-employed? If so, it would have been much more open to make it clear as a policy objective, rather than going about it somewhat by stealth, as the Bill approaches it.

Stephen Timms (Labour, East Ham)

I welcome you back to the Chair, Mr. Atkinson.

I recognise that the Opposition are, in tabling the amendments, raising an important issue, about which there is some concern. I have argued to the Committee that schedule 35 brings about a balance, on the one hand preventing people from making large increased contributions to pre-empt the reduced relief that is available from April 2011, and on the other ensuring that those who continue with their normal, regular pattern of pension saving will receive higher rate tax relief until the new legislation takes effect in April 2011.

It would have been impossible to design an arrangement that accurately predicted what someone would have contributed to their pension if the future changes had not been announced, so we decided that the fair way to proceed was to look back at past behaviour, to identify forestalling, as opposed to regular pension savings. Those regular pension contributions will continue to attract tax relief, at the individuals’ marginal rate, until the new regime is introduced in April 2011.

Schedule 35, as we have heard, defines regular contributions as those made quarterly or more frequently. It includes provisions to protect regular pension savings, made under different types of arrangements that were in place on Budget day. It is for obvious reasons more difficult to identify as normal contributions that are made less frequently, particularly when that requires looking back over previous years, not least because the A-day changes that we touched on this morning have altered pension saving habits for some people.

The Opposition amendments are intended, first, to extend protection for annual contributions. By and large the amendments—the buffet that we have to choose from—would do that with reference to an average of previous contributions made by individuals, accounting only for those years within the previous three years in which contributions were made.

The hon. Member for Fareham spent a little time discussing amendment 228 and the replacement of specific provisions in the schedule, for different pension saving arrangements, with something much shorter. That would create some significant and potentially expensive avoidance loopholes, but it could also have significant adverse consequences for some people, with the loss of the protection that the Bill provides for wholly commercial and unexceptional situations.

The amendment would also amend the definition of regular contributions, so that the highest contribution in the past tax year, multiplied by the frequency of payment, would determine the amount protected. Individuals are already protected if their regular contributions have changed as part of a contractual arrangement; but, of course, if the frequency of payment increased it would create an obvious loophole.

We recognise that for some people, particularly those in personal pension arrangements, contributions are often made annually, on an ad hoc basis, as their financial circumstances allow. I entirely accept the points made by the hon. Members for Taunton and for Henley about that. I reassure them that there is no intention of damaging the interests of self-employed people or any other group. The provisions therefore include an annual limit of £20,000 on which individuals are entitled to higher-rate relief. It is worth bearing in mind, as we debate this, that those are people in unusual circumstances—those whose income exceeds £150,000, that is, 1.5 per cent. of pension savers. That group will continue to enjoy full higher rate relief of up to £20,000 a year, even if they have made no contributions at all over the past few years.

I appreciate that for those with less regular contribution patterns, the £20,000 figure may represent a lower pension contribution than they have tended to make in the years since A-day. The hon. Member for Fareham was right to refer to my Budget day statement, which welcomed views on ways to ensure that that group’s contributions were protected in the same way as those of more frequent contributors. While continuing to achieve our core objectives, we need to ensure, as Opposition Members recognise, that the regime remains effective against the risk of forestalling, which is a real risk.

I want a fair regime that is also effective in protecting the Exchequer. We continue to work closely with industry and to gather evidence to identify who is affected and to quantify fully the scale of the issue. Currently, it is not clear how many people would be disadvantaged by the arrangements in the way that hon. Members have suggested. I hope that we can obtain information from industry on that and on the contribution patterns and levels over previous years. So far that information has been difficult to obtain.

Without effective anti-forestalling legislation, some £2 billion could be at risk. I will shortly be meeting industry representatives to explore the issue in more detail. As I said this morning, I am prepared to return to the subject on Report if necessary. In doing so, I will bear in mind the ideas in the buffet presented this afternoon. I am happy to say to the hon. Member for Taunton that I shall be working seriously and do recognise the genuineness of the points raised. With that in mind, I hope that the hon. Member for Fareham will feel able to withdraw his amendment.

Mark Hoban (Conservative, Fareham)

It has been a helpful debate and I am heartened that the Minister has not closed his mind to protection for the self-employed and those who make annual, rather than quarterly or more frequent, contributions. I hope that there are some dishes in the buffet that tempt him at a later stage to reheat these ideas for discussion on Report.

In trying to tackle forestalling, we are in danger of introducing unfairness and discrimination against people who are not in the position to make predictable pension contributions. If we are to look at income going back three years to determine whether the £150,000 threshold has been reached, we should recognise the pattern of pension contributions over that time as well, and use it as a benchmark to compare future pension contributions. We could say, “This is the pattern in the past, anything in excess of that is subject to the regime, and if it is equal to or less than that, it is reasonable”. Alternatively, for those who have not made quarterly or more frequent contributions, the special annual allowance of £20,000 could be higher, but that would add complexity and leave more scope for forestalling than the Minister would be willing to concede.

There are ways to deal with the matter. If I had felt that the Minister had closed his mind to the issue, I would have been tempted to push one of the amendments to a Division. However, the Minister has said he is open to it, although given the limited time between now and Report, his mind must remain open and work quite quickly to get to a satisfactory conclusion by Report. We shall certainly return to this on Report, bearing in mind the points the Minister made, and perhaps come up with more of a table d’hôte of amendments at that stage, rather than the buffet that is before us today. I beg leave to withdraw amendment 228.

Mark Hoban (Conservative, Fareham)

I am not going to say very much about amendment 205. While I am very keen to ensure that there is certainty in the tax regime, particularly for a set of provisions that will last only two years, given that the Minister is open to some of the debates about potential changes and there may be new evidence that arises that persuades him to adjust one or more provisions in this clause, passing amendment 205 at this point may not helpful to the interests of getting a better deal for taxpayers. Therefore, if it is feasible, I do not wish to move the amendment.

Peter Atkinson (Conservative, Hexham)

Amendment not moved.

Clause 75

Mark Hoban (Conservative, Fareham)

This is a brief foray into the heady world of VAT for me, as my hon. Friend the Member for South-West Hertfordshire, who would normally lead on this, is debating with the Economic Secretary the matter of preparing Britain's economy for the future. Therefore my remarks on VAT will be mercifully brief. Clauses 75 to 78 and associated schedule 36 introduce some changes to the way VAT is accrued and effectively implement a package of changes that govern the place of supply for VAT purposes. From 1 January 2010, the basic place of supply for services for a business-to-business transaction will become where the customer is established. This is a change from the existing rules, where it is where the supplier is established. It is a significant change and will require some change to how suppliers account for the VAT on goods. There are various exemptions, which I shall not go through, about restaurant and catering services, intermediary services and transport of goods. However, there are some administrative issue that I do want to touch upon.

Kevin Misselbrook, the customer services director for Access Accounting said:

“With these new rules, businesses will have to track the dates of delivery that the services were provided, and account for VAT accordingly. Things get really complicated with invoices that cover multiple deliveries of services, or those occasions where the service dates change...This will place an even greater burden on business at a time when what they really need is help and support as they steer their way through the current recession. Indeed many organisations may not currently be aware that the new VAT rules will be coming into force”.

He is keen to make sure

“that this issue is not buried within the Budget”.

Will the Financial Secretary set out what will be done to ensure that businesses supplying services to other businesses cross-border are aware of those changes? We will touch on the European sales list later. There are winners and losers in the changes to the place of supply. While those changes will reduce many businesses’ need to reclaim non-UK VAT or register elsewhere in the EU, businesses that are unable to recover all VAT on purchases, such as those in the financial sector, could see an increase to their cost base as services not currently subject to UK VAT are required to be reverse charged.

Many businesses are already considering the requirements and planning for the changes, although some points of detail remain to be resolved. There are some administrative changes here, so would the Financial Secretary indicate what assessment the Treasury has made of the cost of introducing them on businesses, because VAT is a complex issue? He will know that a great friend of mine is a VAT expert—[Interruption.] The hon. Member for South Derbyshire looks at me questioningly, but even I get lost when discussing VAT. It goes way beyond the running joke of the VAT treatment of Jaffa cakes, because there are some complex issues here that businesses need to grapple with. What assessment have the Government made of the cost of introducing those changes, and what work will they do to ensure that businesses are aware of the impact of those changes?

Stephen Timms (Labour, East Ham)

Clause 75, along with clauses 76 and 77, implements a package of changes to the VAT treatment of cross-border trade. It was agreed by European Finance Ministers in 2008. The clause introduced schedule 36, which changes the place of supply rules for cross-border supplies of services, and it is worth bearing in mind that it is purely about services. Those rules determine where VAT on the cross-border supply of services will be due, and from whom. They apply across the European Union, so avoiding the possibility of double taxation or non-taxation. We are also taking an opportunity to consolidate the rules so that they are more sensibly grouped together in the Value Added Tax Act 1994.

Those changes will modernise the EU VAT rules to ensure that they keep pace with changes in business practices, the impact of globalisation and advances in technology. A package of changes to simplify and modernise VAT treatment of cross-border trade was, as I said, unanimously adopted. The new rules are part of that package agreed in February 2008 and will be phased in from 1 January 2010. They aim, as far as possible, to achieve taxation at the place of consumption, so ensuring that UK VAT is paid on supplies made to UK customers regardless of where the supplier is located. I think that the new rules better achieve the aim of taxing services where they are consumed. They ensure that in the future UK VAT will apply to most services supplied to UK customers.

The hon. Member for Fareham, perfectly fairly, relayed concerns that had been expressed about aspects of the clause. If we had had those discussions much earlier in the process, many more concerns would have been expressed. People feel that Her Majesty’s Revenue and Customs, by and large, has done quite a good job in dealing with some of the potential difficulties for small businesses. He raised a question about the time of supply. The objective of the change in the time of supply rules on the cross-border supply of services is to align the time at which the supplier includes a transaction on the European Community sales list—we will talk about that shortly—with the time at which a customer will have to record that transaction as a reverse charge on the VAT return.

The hon. Gentleman asked what the cost of all that will be. An impact assessment was published on Budget day detailing the estimated cost to businesses of implementing the measures in the clauses. It is estimated that up to 220,000 businesses will be affected. They will need to understand the changes and adapt their existing accounting systems. The continuing annual costs are thought to be in the region of £5 million, making an average quantified cost of just less than £90 per business, which will vary depending on the extent to which a business is affected by the changes. The impact assessment also included a one-off cost of almost £30 million for an estimated 1.3 million VAT-registered businesses to spend an hour just checking that they are not affected by the requirement to submit the EC sales lists. We are talking about a total cost of some tens of millions across businesses.

HMRC is taking an active approach to informing businesses about the changes. The hon. Member for Fareham rightly asked how we can be confident that people will know about the changes. It is important that we achieve certainty at as early a stage as possible for changes of this kind. We were the first member state to publish legislation and interpretation—on 22 December. We published initial guidance on 1 May, covering all aspects of the cross-border VAT changes coming into effect on 1 January 2010, and that guidance will be updated as further queries are highlighted or issues already identified are resolved. HMRC and Treasury officials will continue to discuss any outstanding issues of interpretation and implementation.

John Howell (Conservative, Henley)

On interpretation, I am conscious that the Chartered Institute of Taxation has raised the concern that there would still be differences between member states. Will the Minister assure us of the process for resolving those differences, and tell us how that would be communicated to businesses?

Stephen Timms (Labour, East Ham)

The arrangements will apply to the whole of the European Union. There have been concerns about whether every country will be as timely as we will be in implementation. The indications are encouraging on that front, at least as far as the bigger countries in Europe are concerned. It has been suggested that there could be some points of details on which there could initially be some differences of interpretation, and HMRC will be ready to talk to businesses about those if they prove to be a difficulty. It is perfectly possible that there might be some teething problems, but HMRC will understand if businesses face a little difficulty to begin with because of issues of the kind that the hon. Member for Fareham has referred to. We are talking to others at the Commission to ensure that businesses receive clarification as quickly as possible.

I shall finish, perhaps slightly self-indulgently, by quoting an accounting firm that praised HMRC for the “open and pragmatic” approach being taken here. I have mentioned that we were the first to publish the legislation. HMRC has done a good job. I am not saying that there will be no difficulties, but they will be manageable and minimal.

Clause 77

Mark Hoban (Conservative, Fareham)

Let me comment in passing on the Minister’s self-indulgent remark about HMRC being congratulated on being open and pragmatic. I would have hoped that it should not be noteworthy that HMRC is open and pragmatic. It sounded as though that was the exception rather than the norm. I shall leave that thought hanging in the Minister’s mind for the time being.

I said in my brief remarks on clause 75 that I would return to the European sales list, which is a requirement for companies to make a periodic report of services supplied to other businesses in EU member states. The following information should be included in the EC sales list: the VAT registration number of the business to which services were supplied, and the total value, excluding VAT, of such supplies.

Two issues have been flagged to me, one of which has already been dealt with. That is the point that my hon. Friend the Member for Henley made about interpretation.

Robert Syms (Conservative, Poole)

My hon. Friend the Member for Henley is also on the Equality Bill, which is why he zips in and out of this Committee. He is a very important individual.

Mark Hoban (Conservative, Fareham)

Clearly, not only the Exchequer Secretary is in transitional arrangements. My hon. Friend the Member for Henley is so assiduous in his parliamentary duties that he feels that serving on one Committee is simply not enough; he must have two on the go at any point in time.

The issue that has been raised is whether the treatment of supplies is exactly the same in each member state. There is an obligation on the supplier to know what the treatment of supplies would be in the other member states, for the purposes of complying with the European sales list. The Minister went some way towards reassuring the Committee on that point by talking about the pace of implementation and the fact that the implementation of this measure will be tighter than we are normally used to with the implementation of directives. If there is any additional information that he can give on that subject, that would be helpful.

The Minister, in his response to my question, referred to the cost of changes in accounting systems. One of the issues that has been raised in that regard is that at present most accounting systems cannot cope with producing the European sales list. That is a concern, because of course the clause relates to the new harsher penalty regime and to clause 92, which deals with the obligations of senior accounting officers. There is concern that although the intention may be that businesses should comply with the measure, the systems they have in place may not be appropriate to comfortably provide accuracy of tax accounting. As the Government consider the measure, it is important that they ensure that businesses have the right IT support for the European sales lists, so that they are not subject to penalty under clause 92 or the other tougher penalties being introduced in that part of the Bill.

Stephen Timms (Labour, East Ham)

At present, VAT-registered businesses that supply or sell goods to other member states file a declaration known as an EC sales list with HMRC, to notify HMRC that a cross-border transaction has occurred but no VAT has been charged. The sales list records the member state of destination, the customer’s VAT registration number and the value of the goods supplied. HMRC forwards that information to the customer’s tax authority, so that it can cross-check that the customer has entered the purchase or acquisition in their records and will account for the VAT. Clause 77 ensures that HMRC can introduce equivalent regulations for cross-border supplies of services. The alteration is necessary because of the change that is being made with effect from 1 January 2010, which we have discussed.

In future, therefore, VAT will be paid and recovered, subject to any partial exemption restriction on most cross-border services by the business customer on their VAT return, similar to the way that VAT is currently accounted for on cross-border supplies of goods. Conceptually, there is nothing very new, but the extension to services is new. Unless the current sales list regime for goods is extended to services, there is a risk that EU tax authorities will be unaware of cross-border supplies of services and, as a result, they may lose significant amounts of VAT. This is an important provision to monitor compliance and to help in the fight against VAT fraud.

Secondary legislation will be laid later this year, with an effective date of 1 January 2010, setting out in detail the new reporting requirements for EC sales lists for goods and services. I have provided a draft for the Committee. The changes, along with those in clause 75, were consulted on before the Budget, and a summary of responses was published on Budget day. Businesses have raised concerns about the practical implementation of making the changes by 1 January 2010, some of which were echoed today. HMRC has established a joint Government-business EC sales list working group; I hope that the Committee agree that that is an open and pragmatic thing to do. The group will discuss the issue and identify ways of keeping the administrative burden to a minimum. The changes ensure compliance with the new rules contained in clause 75.

The hon. Member for Fareham pressed me a little further about consistency in rules, along the same lines as the hon. Member for Henley when he was with us. As I said earlier, I am aware that there have been business concerns about the potential for different interpretations—in particular, the danger of double taxation. It is conceivable that people could find themselves paying VAT in two countries if the measure does not work as smoothly as it should, so we have been talking to the Commission to clarify areas where there could be difficulties, and we will update the guidance as soon as those issues have been resolved.

I can tell people who may be concerned about the matter that if a business makes reasonable attempts—including, for example, discussing the VAT position with the customer—and those attempts have failed to ascertain what the correct VAT treatment is in the member state where the customer is based and to which the service is being supplied, businesses may choose to assume that the UK VAT treatment will apply to those supplies, on the basis that it should be consistent with the EC directive and therefore with the law in other member states. That is another open and pragmatic option that people might bear in mind.

There could be some teething problems, but I hope that they will quickly be resolved. As long as business is able to demonstrate that it is taking steps to comply with the new legislation at the earliest opportunity, there will be no question of HMRC penalties. As the hon. Member for Fareham said, we will be debating later the question of penalties.

On the question of accounting systems not being able to cope with the new sales lists, it is not that they cannot provide ESLs but that the time of completion is not always certain. HMRC is discussing that point with businesses.

Clause 78

Mark Todd (Labour, South Derbyshire)

I beg to move amendment 181, in clause 78, page 39, line 37, leave out ‘rate’ and insert ‘amount’.

I welcome you to the Chair, Mr. Atkinson. I have no doubt that what I have to say will test the openness and pragmatism of my right hon. Friend the Financial Secretary.

The clause is an attempt to resolve an unintended consequence of the interaction between the Agricultural Holdings Act 1986 and the Value Added Tax Act 1994, triggered by a court judgment in December last year. That judgment held that when there is a change in the amount of VAT payable, it constitutes a change in the amount of rent payable. Under the Agricultural Holdings Act, that triggers a three-year moratorium on a rent review being referred to arbitration—a common means of resolving farming rent disputes.

Before that case, it was understood that regardless of whether VAT was charged, the sum of any tax was immaterial to the legal right to determine disputed rent. In clause 78, the Government seek to resolve the problem by asserting that neither the levying of the tax, which is dependent on the status of the individual lessor, nor any change in the rate of the tax will be taken into account when determining a right to arbitration. That might appear to resolve the issue entirely, but it would seem that it does not.

Agricultural tenancies often comprise both a house and land, which are treated separately for the purposes of complying with VAT legislation. Commercial land is VATable, but a house is not. However, those two components are often pooled into one rent for a holding. The clause might not address a change in the balance of the rent between the two component parts, one of which is VATable, while the other is not. That might occur naturally according to market circumstances; for example, if the rent on a commercial holding were related to a return that one might achieve from it, and the rent on a house were related to the value of the property, the two elements might vary over time. Such a change in the balance is entirely feasible, but it does not appear to have been anticipated in the Government’s narrow change, which merely refers to a change in the rate of VAT, rather than in the amount of VAT that may be attached to the rent.

There may be two ways to resolve the issue. The first option is to accept my amendment. I would be delighted if that happened, because it would be a first for me, having served on a Finance Bill Committee at least three times, although it may be even more—I cannot remember. The second option, which might well suffice, is for the Government to give a clear statement about how the change applies and an understanding of how Her Majesty’s Revenue and Customs would treat VAT in those circumstances.

Stephen Timms (Labour, East Ham)

My hon. Friend has very helpfully set out the background to the clause and why it is in the Bill. The clause ensures that any change in the VAT paid by an agricultural tenant is not considered to be a change in rent for the purposes of the rent review provision in the Agricultural Holdings Act 1986. Changes in the VAT paid by tenants could arise because the landlord opts to apply VAT to supplies of the agricultural land, which landlords do from time to time, under schedule 10 to the Value Added Tax Act 1994, or because of changes to the VAT rate applicable to such supplies. Of course, we have had one such change recently and we will have another at the end of the year.

I am aware of the concern described by my hon. Friend that the clause as drafted might not cover VAT changes resulting from a reapportionment of rent between commercial and residential elements. We have looked carefully at the issue and my conclusion is that such VAT changes could arise only as a result of the landlord’s exercise of the option to tax under schedule 10 to the VAT Act 1994. Therefore, those changes are already covered by the current wording of clause 78(1).

Mark Todd (Labour, South Derbyshire)

I can imagine another circumstance. It is unlikely, but one of our tasks is to consider the unlikely as well as the certain. A landlord and a tenant could agree a reapportionment between them of the two elements of the lease—residential and commercial—with a consequential change in the amount of VAT payable, but subsequently fall into dispute about how future rents might be determined. If that were the case, and they had an agreement, at that point they would be bound to keep to the three-year period for arbitration. That is something that would not conform to the intent of the clause or for that matter, the intent of those who drafted the original clause, whose purpose was to deal with the protection of an agricultural tenancy.

Stephen Timms (Labour, East Ham)

The intention of the clause and its effect, according to the best advice on these matters, mean that all these situations are covered. Any consequential VAT change would still arise only because of the landlord’s option to tax. That is why in our view it is covered by subsection (1)(d)(i). I am perfectly willing to reflect further on what my hon. Friend has said and perhaps to discuss the matter further with him. If there is any remaining uncertainty there will be an opportunity to have another look at it, but I am confident that what is here does the job.

Mark Todd (Labour, South Derbyshire)

I thank my right hon. Friend for his offer of further reflection. Obviously I will think about what he has said and discuss it with the National Farmers Union, which came to me as an MP with a large agricultural interest. I beg to ask leave to withdraw the amendment.

Clause 79

Greg Hands (Conservative, Hammersmith and Fulham)

I welcome you back to the chair, Mr. Atkinson, at the start of our consideration of part 5. Perhaps I should also congratulate the Minister on his remarkable solo effort today. He has shown incredible dexterity in handling pensions, VAT and now stamp duty. Perhaps later he will be doing North sea oil. I feel slightly sorry for him. As all else crashes around him and everyone else seems to be coming and going, he is pretty much the only element still standing. It is a little bit like the Sun at the heart of the solar system as various planets and comets come in and out of orbit. Sometimes they reappear for as short a period as nine days. I think that is a shorter appearance than Halley’s comet. I simply express my admiration for the Financial Secretary’s ability to cope with the rapidly shifting sands.

Clause 79 is about the exercise of collective rights by tenants of flats. We have no objection to the clause which, as far as we can see, should allow fairer treatment of leaseholders in blocks of flats. If it does what it purports to do, my constituents will certainly very much welcome it, given the huge numbers who are leaseholders who are considering purchasing the freehold of their building. If anything, I am slightly surprised that the issue has not been dealt with comprehensively before. I understand there have been some difficulties in relation to the workings of the Finance Act 2003 and the right to enfranchise companies.

At present when leaseholders club together to buy out the freehold of a block, stamp duty is charged on the block as a whole. Because larger properties and larger freeholds are subject to higher rates, perhaps as high as 4 per cent., individual leaseholders can find that their share of the stamp duty is higher than it would have been for an equivalent individual freehold on the flat they have purchased. That does not seem fair and it was never intended to be the case. Leaseholders exercising their statutory right to acquire the freehold for a block of flats were supposed to be able to use a “right to enfranchise” company as a vehicle for the purchase. The Finance Act 2003 provided relief for those RTE companies, but to date the Government have not enacted the provisions. It is impossible to set one up and for leaseholders to get the relief they were promised. The clause takes out the references to RTE companies in the 2003 legislation. The substitutions it makes will enable all leaseholders to claim relief in proportion to the freehold that they have purchased.

The Department for Communities and Local Government issued a consultation paper last month proposing that the basis for RTEs—that is, the provisions in the Commonhold and Leasehold Reform Act 2002—should not be implemented and should be repealed. The provisions were designed to allow a majority view among leaseholders to prevail and to stop one or two blocking the process, but they hit the rocks over apportioning the costs of collective enfranchisement when leaseholders disagree among themselves. The Government now appear to have given up on their plans altogether.

Against the background of that recent history of confusion and false starts, we welcome clause 79. However, I hope the Minister can offer assurance that, if the Government change their mind again—perhaps as a result of the DCLG consultation—and activate the framework for RTE companies, references to RTEs would be reinstated in the Finance Act 2003. Leaseholders have waited long enough for relief and they should not be made to wait again.

A question has also been raised with me about changes to some definitions. Relief will now be calculated with respect to the term “qualifying” flats, rather than the existing one of

“flats in respect of which the right of collective enfranchisement is being exercised”.

Will the Minister clarify whether the new term will exclude flats that join in a purchase by paying a share of the cost but strictly speaking are not participating in the statutory process? For example, I have been told of concerns that a tenant who was too old or infirm to participate directly in the statutory process could miss out on relief under the new wording. I would be grateful for clarification on the new wording and how it differs from the previous version. I hope the Minister will give reassurance and then we can proceed.

Stephen Timms (Labour, East Ham)

I suspect I am not the only member of the Committee who is already missing my hon. Friend the Member for Burnley (Kitty Ussher) from our discussion.

The clause amends section 74 of the Finance Act 2003, which gives stamp duty land tax relief where leaseholders of flats exercise statutory rights collectively to acquire the freehold of their block. As the hon. Member for Hammersmith and Fulham accurately set out, the relief only applied where the purchaser was a statutory right to enfranchise—RTE—company. Provision for such companies was introduced by the Commonhold and Leasehold Reform Act 2002 and was awaiting commencement when the SDLT legislation was enacted in 2003. However, the provision was never commenced so, as he said, no one has been able to claim the relief. Members of the Committee may recall that a new clause to address that was debated in a Committee of the whole House on the Finance Bill last year. My hon. Friend the then Exchequer Secretary undertook on that occasion to look further at the best way to resolve this, if necessary including an appropriate clause in the present Finance Bill, as we are doing.

It is now clear that the RTE company provisions will not be commenced. The Department for Communities and Local Government published on 12 May a consultation on proposals to repeal the RTE company provisions. That sets out the difficulties encountered in seeking to put those provisions into effect, which involved the likelihood of creating an unduly cumbersome enfranchisement process with far greater potential for delay, uncertainty and burdens—outweighing any benefits.

The hon. Gentleman raised some specific points about, for example, leaseholders who are physically incapacitated. Given that a personal signature is required to participate in collective enfranchisement, leaseholders unable to sign their name cannot participate. That means that, under the terms of the relief, their interests cannot be taken into account in determining the rate of stamp duty land tax on the purchase of the freehold. This is about the basis on which the right of collective enfranchisement can be exercised, rather than the terms of the relief.

If the RTE provisions are enacted, we would certainly amend the provisions in section 74 of the Finance Act 2003 accordingly. The clause will amend the relief so that it can be claimed by nominees or appointees of leaseholders exercising their statutory rights. Those can be individuals or companies. The amendments have effect for transactions whose effective date for stamp duty land tax date purposes, which is normally the day of completion, is on or after Budget day—22 April. I am grateful for the hon. Gentleman’s support for the clause.

Clause 80

Greg Hands (Conservative, Hammersmith and Fulham)

The clause relates to stamp duty land tax for registered providers of social housing. More specifically, it relates to profit-making providers of social housing. The association of profit with social housing is not universally popular on the Government Benches. Some of the unreconstructed Government Members might seek to extend their hostility from the existence of profit-making providers to clause 80, which gives those same providers tax relief.

The Housing and Regeneration Act 2008 essentially did away with the old system of registered social landlords. It also allowed private, profit-making organisations to compete for public money. Clause 80 puts them on the same footing as non-profit-making providers, in relation to stamp duty land tax, when purchasing a property that is either already, or will become, a social home. I understand that the 2008 Act had already added references to non-profit-making providers to section 71 of the Finance Act 2003, which provided the stamp duty relief for the old RSLs. It is not entirely clear why profit-making providers were not included then. Presumably, today’s proposals either represent a change of heart by the Government—or at least an afterthought—or correct an oversight.

A stamp duty exemption, when a project is receiving a public subsidy, seems straightforward enough—giving it a public subsidy and tax relief at the same time—but it would be helpful to get some idea from the Minister of the amount of duty that the Exchequer will forgo as a result of this measure. In principle, however, we have no objection to the clause. Had he not introduced these proposals, the Government would in effect have introduced stamp duty on social housing developments, even if only for profit-making providers, which would have run counter to the spirit of the 2008 Act. As I understood it, that Act sought to create a level playing field for not-for-profit and profit-making providers.

Subsections (6) and (7) appear to merely extend the related relief for clients of the old RSLs to those of the new profit-making organisations. A social tenant who enters into shared ownership of their property will now receive the same favourable stamp duty treatment irrespective of whether the social housing provider is a profit-making or a not-for-profit body. We find no reason, therefore, to oppose the clause, but I shall watch with interest to see whether the Government Members are of the same view.

Stephen Timms (Labour, East Ham)

On the subject of unreconstruction, it is just as well that there is not a European dimension to clause 80. Had there been, we might have heard from a few more Conservative Members.

The hon. Member for Hammersmith and Fulham has correctly described what the clause does and what its purpose is, arising from the change in the Housing and Regeneration Act 2008. He asked why the change was not made in that Act, but of course this is a change that can only be made in a Finance Act. That is why it is here in front of us today. It ensures that the relief, currently available for certain acquisitions by registered social landlords and for purchases under shared ownership schemes operated by housing associations, can be extended under the new system of registered providers of social housing in England to those who may be profit-making companies, who can operate a shared ownership scheme and be eligible for a social housing grant. What this does is extend to them the benefit of SDLT relief.

Bodies that become profit-making registered providers of social housing will mainly be developers building homes for sale under low cost home ownership schemes currently attracting grant aid under section 27 of the Housing Act 1996. Acquisitions with grant aid under that section do not currently attract SDLT relief, so in this case the measure will increase the amount of relief given. As relief under the measure is tied to the receipt of public subsidy, it is unlikely that there will be a net increase in the volume of shared ownership purchases qualifying for SDLT relief. That is the basis for saying that the cost of the measure is negligible.

Clause 81

Greg Hands (Conservative, Hammersmith and Fulham)

I beg to move amendment 260, in clause 81, page 42, leave out lines 22 to 25.

Peter Atkinson (Conservative, Hexham)

With this it will be convenient to discuss amendment 261, in clause 81, page 43, leave out lines 8 to 11.

Greg Hands (Conservative, Hammersmith and Fulham)

Clause 81 continues on stamp duty land tax and relates to “rent to shared ownership” schemes. It seeks to amend schedule 9 to the 2003 Act. In general, it seeks to simplify the tax position of tenants who are in a Rent to HomeBuy arrangement with a social housing provider. As members of the Committee will be aware, HomeBuy schemes allow tenants to enter into agreement with a provider to purchase slivers of equity in a property, owning a share of the leasehold and continuing to pay rent on the remainder. That percentage can obviously vary based on local circumstances, or even by individual scheme.

One barrier to participation in HomeBuy schemes is the need to provide a deposit in order to be granted a mortgage. Rent to HomeBuy, called “rent to shared ownership” in clause 81, is the Government’s proposed solution. It is designed to help tenants enter a HomeBuy scheme at a future date by giving them up to five years’ tenancy in which to save for a deposit. The rent is discounted at 80 per cent. or less of market rates. During the rental period the tenants have first option to purchase a minimum 25 per cent. stake in the property they are occupying, either outright or through a mortgage. If they fail to do so when their assured shorthold tenancy expires, the tenancy is reviewed and may be terminated.

One might question particular details of this model—I do not think this Committee sitting is really the most appropriate way to look at that—but one might question particular details without necessarily questioning the general HomeBuy concept, which on these Benches has certainly found a great deal of favour. However, it seems wrong that a tenant who goes on to purchase a stake in a property may become retrospectively liable for stamp duty land tax—that is, from earlier in the shorthold tenancy. We therefore welcome the aim of clause 81, which is to make the charge payable when, and only when, that shared ownership commences. It also detaches occupancy under the shorthold tenancy from the start date of shared ownership: again, something that seems proper in this context.

However, the second element that I have just outlined may be unnecessary. This is where amendments 260 and 261 come in. The amendments we have tabled do not intend to alter the scope or effect of the clause; rather they reflect the concern expressed to me by the Law Society that the wider principle governing the applicability of possession towards stamp duty liability is called into question. I understand that the principle is set out in paragraph 7,900 of the stamp duty land tax manual. I am not sure why there are 7,900 paragraphs. I hope that I am reading that correctly and that it is not 79.00 or something—I am told that it is 7,900. That paragraph states that HMRC will, other things being equal, take the view that when

“the purchaser already has occupation of the premises under a different interest, for example when the purchase is of a freehold and the purchaser is a tenant, substantial performance will not be triggered at the time of the contract as long as the purchaser adheres to the covenants in the lease.”

The Law Society believes that that already protects Rent to HomeBuy tenants, and makes two arguments. First, it argues that that principle makes the Government’s new sub-paragraphs 13(4) and 14(4) to schedule 9 of the Finance Act 2003 unnecessary. Secondly, it argues that by including those new paragraphs the Government are suggesting that there is some doubt about the principle and its general applicability, which in turn might cause a loss of confidence among practitioners. Legal uncertainty is in all circumstances best avoided, and I should be grateful if the Minister would specifically address that concern.

As I have said, this is a technical matter and we do not oppose the Government’s intentions in the clause. If there are good reasons for including those sub-paragraphs, we will happily not press the amendments. If there are good reasons, however, that would also suggest that HMRC’s guidance needs reinforcement, and hence potential statutory inclusion in other areas of the relevant legislation.

Stephen Timms (Labour, East Ham)

I think that new sub-paragraphs 13(4) and 14(4) serve a useful purpose, and I will attempt to persuade the hon. Gentleman of that.

Those sub-paragraphs modify the stamp duty land tax effective date provisions for the purposes of rent to shared ownership schemes. Such schemes can be structured in a number of ways. The structure referred to in those sub-paragraphs involves a purchaser entering into a contract to purchase a share of a property through a shared ownership lease or trust but delaying completion for a pre-specified time, during which the purchaser occupies the property as a tenant and pays a reduced rent, which gives them the chance to save for the deposit that they will need to purchase their share of the property. Under the normal effective date provisions, occupation of the property in that way would cause stamp duty to be payable before completion. The modification of the effective date provisions in clause 81 ensures that the purchaser does not have to pay stamp duty until they have purchased their share of the property. Normally they would have to pay it when they signed the contract, which would be earlier than we would wish.

Alison Seabeck (Labour, Plymouth, Devonport)

I would welcome some clarification on how the community land trust model would potentially fit here. I might be completely wrong and this might be totally irrelevant, but in that model a similar equity stake in a property is bought over time. Has HMRC given any consideration to what might need to be put in place to deal with that model when it comes forward?

Stephen Timms (Labour, East Ham)

I think that I will have to reflect on that question and come back to my hon. Friend, but she is absolutely right about the importance of the arrangements.

Among the interesting aspects of my preparatory work for the debate on this clause were the figures for the numbers of people who have taken advantage of the Rent to HomeBuy option addressed here. I have been given a note that states that by the end of March that figure was just over 1,000, and by the end of May almost 5,000. The model that is addressed here is therefore proving popular, and is one that people want to take advantage of in the current difficult economic circumstances. It is right that they should be able to do that. The Conservative amendments would directly disadvantage the purchaser under such a rent to shared ownership scheme, by making them liable to pay stamp duty at the very time when they are trying to save for a deposit. That is the purpose of allowing the dates to be deferred in such a way.

HMRC will update its guidance, as the hon. Member for Hammersmith and Fulham suggested. I think that subjecting purchasers to the normal effective date provisions would make them liable for stamp duty land tax when they are trying to save for a deposit and least able to afford it. On the subject of well known paragraph 7,900, I shall point out that there are not 7,900 paragraphs; it is simply a feature of the online numbering, which perhaps gives an exaggerated impression of how many paragraphs there are.

Greg Hands (Conservative, Hammersmith and Fulham)

I have listened to the Minister’s reasoning on our two amendments and I am reasonably satisfied. I will look at the matter again in more detail and come back to him in writing. I beg to ask leave to withdraw the amendment.

Clause 82

Greg Hands (Conservative, Hammersmith and Fulham)

Mr. Atkinson, will it be convenient to consider schedule 37 with this?

Peter Atkinson (Conservative, Hexham)

Yes, if it is more convenient for the Committee to consider them as one, that would help matters.

With this it will be convenient to take schedule 37.

Greg Hands (Conservative, Hammersmith and Fulham)

Thank you, Mr. Atkinson.

Clause 82 and schedule 37 are slightly different, in that they relate to both stamp duty land tax and stamp duty reserve tax. With the clause we return, with interest, to repos, which have already featured in parts of the Finance Bill. Where, due to the insolvency of one of the parties, securities are not returned in the repo to the originator of a stock lending or repurchase arrangement, a reverse repo arrangement and/or a related transaction, the clause and schedule provide relief from stamp duty land tax and stamp duty reserve tax. As discussed on Tuesday, stock lending and repo arrangements involve the transfer of the full title to the securities involved for a limited or temporary period.

The clause arises from the fact that the stamp duty and SDRT legislation exempt the transfers from taxes because the ownership is temporary. However, a default by the borrower or purchaser under repo or stock lending arrangements such that the transfer becomes permanent reinstates the charge to SDRT that would have arisen in the absence of relief. That can happen when one of the parties to the transaction goes into insolvency, which leads to, first, the creditors of the insolvent entity having less money available due to the additional tax liability and/or, secondly, a possible restriction on the ability of the solvent entity to restore its original position.

The clause prevents that by ensuring that no stamp duty or SDRT charge arises when one party to the arrangement goes into insolvency. If the solvent party does not have the shares or other securities returned, he would probably have to purchase replacement shares from the market and thus incur stamp taxes. The Finance Bill removes the SDRT charge from purchases of replacement securities of the same kind and amount as those transferred prior to the insolvency that afflicted the solvent party at the end of the transaction.

The clause and schedule were introduced in response to the Lehman Brothers collapse in mid-September 2008, hence the start date of 1 September 2008. They have, as I see it, been welcomed.

Stephen Timms (Labour, East Ham)

I am grateful to the hon. Gentleman for correctly setting out the background to the clause. It arose because the collapse of Lehman Brothers exposed the potential for unexpected stamp duty and stamp duty reserve tax charges when stock lending and sale and repurchase arrangements terminate because of insolvency. The overall cost to the Exchequer of that relief, which is certainly a welcome help for people facing unexpected costs, is nil. There is no net benefit or cost to the Exchequer because any tax repaid as a result of a claim for those reliefs is tax that the Government did not intend to be paid anyway. It is a helpful measure and I am grateful for the hon. Gentleman’s support for it.

Clause 83

Greg Hands (Conservative, Hammersmith and Fulham)

I mentioned earlier that the post of Exchequer Secretary is currently a sort of revolving door at HM Treasury: since the clauses on oil were included in the Bill just a few weeks ago, we have gone through three Exchequer Secretaries, none of whom are present today to explain them. Yet again, I congratulate the Financial Secretary on being so multi-disciplined and able to answer on these clauses. These are important clauses on North sea oil, and it seems that that important area has been badly served by the Government, particularly in recent weeks with the rapid change in Exchequer Secretaries. Such a major part of our economy deserves better treatment.

Clause 83 is the first of eight clauses relating to North sea oil, each of which gives 83 relates to schedule 38. It is a shame that my hon. Friend the Member for Fareham and the hon. Member for Taunton are not currently in their places, because this is my first opportunity to introduce the word “smĂśrgĂĽsbord” into our deliberations. One of them said that I might know something about the word’s pronunciation, but I am not an expert on Nordic or Scandinavian pronunciation. The only thing that I know about that is that the last consonant should normally be softened, so “smĂśrgĂĽsbord” should sound more like “smorgasburgh.” I digress slightly.

Each of the smĂśrgĂĽsbord clauses is extremely short, but many of the schedules are almost interminable—in places, they are very complex indeed. Clause 83 and schedule 38 deal with the extremely important topic of decommissioning. In general, the UK faces some important challenges in maintaining revenue from North sea oil while at the same time getting the last drops out of existing fields and extending our reach to the many smaller pockets of oil and gas that are yet to be tapped.

Taxation plays a crucial role both in companies’ decisions to invest and in their decisions to decommission. It is important that the Government get a fair return on a national asset, but neither in the case of decommissioning, nor in the case of exploration, is it in the national interest to have oil in the ground, not least because unexploited oil produces no tax.

That is not an anti-green statement. As important as bringing forward alternatives and becoming more energy-efficient remains, we are likely to be dependent on oil and gas for some decades to come. It is financially stupid and less green to import more oil and gas than we have to. It also raises serious problemsabout energy security, as anyone who has observed Russia’s relationships with its eastern European neighbours may have concluded. For as long as we are stuck with fossil fuels, our own reserves are preferable in every sense. I hope that all of that is stating the obvious and is widely accepted. Therefore, we need to take great care in how we handle decommissioning. Our aim must be to recognise properly the cost in decommissioning a field effectively and safely. However, we must also do what we can to ensure that the remaining pockets of oil in a field can still be economically exploited. So the debate about schedule 38 is set in that context.

Although we have ceased to be self-sufficient, UK oil and gas still accounts for about 70 per cent. of our primary energy demand. The industry talks in terms of “barrels of oil equivalent” when it lumps oil and gas together. Using that measure, it is estimated that the equivalent of up to 25 billion barrels of oil is still recoverable across the UK continental shelf, which is sometimes abbreviated to the UKCS. The Department of Energy and Climate Change estimate is more modest than that, but it still thinks that there are between 17 billion and 20 billion barrels of oil equivalent left under the UKCS, which extends slightly beyond the North sea, as we will discuss when we debate a later clause in relation to oilfields west of the Shetland isles.

Those figures—17 billion to 20 billion from DECC or 25 billion from the industry—can be compared with the 39 billion barrels that have been recovered so far over the lifetime of the North sea fields. In other words, and to put decommissioning in context, we are just under two thirds of the way through our own North sea oil. As the UK currently produces about 1 billion barrels a year, the potential for the future is still clear. Oil & Gas UK, which represents the oil and gas industry, estimates that North sea gas could still meet 20 to 25 per cent. of our gas demand in 2020. Regarding oil, it believes that as much as 60 to 65 per cent. of UK oil demand could still be met from the North sea. That is where the decommissioning regime, which is referred to in detail in schedule 38, has the potential to come into its own.

A decline in overall annual production is inevitable, but it need not be as steep as is popularly imagined, if we can get the decommissioning regime right. Furthermore, declining production does not necessarily equate in any way to a declining industry in the manner that was previously familiar with elements of UK manufacturing. Let me explain that point: we host world-class expertise in offshore engineering, and we lead the way in subsea technology. More than 34,000 people are directly employed by the major companies and contractors on average earnings of £50,000 per annum.

I notice the curious absence of the Scottish National party spokesman from our deliberations this afternoon. I would have thought that the elements of part 6—

Robert Syms (Conservative, Poole)

I understand that the hon. Member for Dundee, East has a problem with a daughter who has a broken arm, so there is a reason why he is not here.

Greg Hands (Conservative, Hammersmith and Fulham)

I thank my hon. Friend for that intervention. I must say that I was genuinely unaware of that family problem. Therefore, I want to put on the record the fact that I do not impugn the integrity of the SNP’s spokesman or that of the SNP as a whole in not being here to express an interest in North sea oil, on this occasion at least.

Aberdeen is renowned as a centre of excellence and is home to a number of vibrant specialist companies that export their services across the world. However, the future challenges are also considerable. On current plans, of the 25 billion barrels of equivalent reserves, according to UK Oil & Gas, or the 20 billion barrels, according to DECC, that remain in the UKCS, only 10 billion barrels will be recovered—I think that that is the Government’s own estimate. That means that half of what is left, or 15 years’ worth of barrels at current annual production levels, will remain in the sea bed.

It is very important that we get the decommissioning regime right. We need to incentivise companies to get out as much as they can from beneath the North sea. That is where the high costs of decommissioning really come into play. If any members of the Committee doubt its value, they should reflect that in 2008-09, oil and gas accounted for 28 per cent. of corporate taxation in the UK, with receipts of more than £13 billion. Put slightly differently, taxation from the North sea paid for last year’s transport budget.

Clause 83 and schedule 38 are, we are told, anti-avoidance measures, which we broadly support, as long as care is taken that the measures have no, or minimal, side effects. New fields need first to be explored and then developed, and the easy targets have long since been exploited. What is left is smaller, more difficult to get to and, in the case of the west of Shetland, located in fairly inhospitable regions. About 7 billion barrels are in the form of so-called heavy oil. As someone in the industry put it when they came to see me a couple of weeks ago, heavy oil is called heavy because, if one pours it into a cup and then turns the cup upside down, it does not come out.

The existing fields present different problems, and getting the last of the oil and gas out involves not only additional investment, but also deferring decommissioning. We need to be extremely careful about how we structure the tax relief available for decommissioning as laid out in clause 83 and schedule 38. The costs of decommissioning are huge—they are far greater than the annual and diminishing returns from fields near the end of their lives—and they are met by offsetting the costs against previous tax receipts. In other words, HMRC provides a sizeable tax rebate for decommissioning. Naturally enough, the rules under which fields qualify for the rebate become the determining factor, as well as whether there is still oil or gas to be had, in the decision to cease production. In other words, companies make a logical, economic decision based on the oil and gas that might still be in the field, the costs of decommissioning, the relief that they will get and the time span over which they will get it.

Now, nothing that I have said so far is meant to suggest that the Government are not aware of the issues. Governments of both main parties have a long track record of discussions with the oil and gas industry, which recently culminated in this Government’s paper, “Supporting investment: a consultation on the North sea fiscal regime”, last November. The paper summarised last year’s round of discussions and prepared the ground for the proposals under discussion, which include schedule 38.

The paper describes the general situation quite well. For example, it states that the continental shelf is

“facing increasing challenges due to its nature as a maturing basin. The easy to recover hydrocarbons have been exploited and the remaining opportunities are, increasingly, either smaller in size or require the use of cutting edge technologies to enable extraction. One result of this is that many potential projects have become commercially marginal and unable to compete with other projects around the globe. These challenges are exacerbated by the current uncertainty over future oil prices and the high cost levels faced within the North Sea.”

That was the conclusion in response to the consultation.

The financial environment in which companies operate has changed considerably since the proposals under discussion were first conceived. Oil prices collapsed before recovering sharply but partially, and difficulties in the capital markets have caused big problems, particularly for the smaller companies that the Government have quite rightly encouraged to operate in the North sea. At present, annual investment may drop from £5 million to £3 million by the end of the year, and warnings have been sounded about an irrevocable loss of production from the fall in capital and exploration investment. While the proposals might have been well received when oil was trading at more than $100 a barrel and capital was relatively easy to come by, the Budget has done little to allay the industry’s fears in the current market. Even if the oil price returns to higher levels, the relative attractiveness of the UK continental shelf vis-Ă -vis other oil fields will remain a problem.

The Treasury’s conundrum, as ever, is to find the balance that maximises revenue, which provides the immediate backdrop to the four-page schedule under discussion. The Treasury also needs to set down a stable, predictable framework in which companies feel safe to plan. One complaint in this policy area, which I am afraid we have heard made all too often of this Government over many Finance Bills, is the level of short-term chopping and changing that characterises their approach.

Turning to decommissioning, and the substance of clause 83 and schedule 38, the Government appear to be moving to reinforce the rule that decommissioning costs can only be written off when they are actually run up. The consultation paper puts it thus:

“Virtually all capital expenditure incurred in the North Sea, including putting the plant and machinery in place, or in dismantling it at the end of the life of an oil field, now qualifies for one hundred per cent First Year Allowances (FYAs), allowing the cost to be written off for tax purposes in the accounting period in which the expenditure is incurred.”

That is the rule that they set out, but this rule is, in turn, under attack. The explanatory notes accompanying the Bill include this rather coy remark:

“The Government has become aware of arrangements that have been entered into which seek to establish a claim for tax relief for decommissioning costs several years in advance of any decommissioning work actually being carried out. This undermines a fundamental general principle that relief is given in the accounting period, for costs incurred in respect of the work actually carried out in that accounting period”.

As I understand it, these “arrangements” are the much gossiped about arrangements of one particular company, and in the tradition of anti-avoidance stuff, these companies do not tend to be mentioned in debates on the Finance Bill. I was not intending to do so anyway. However, this company, has, I understand, sought to circumvent the principle by creating some intra-group structures intended to justify an early claim for the relief on decommissioning. The principle as it stands is proper and appropriate, as it is only when actual costs are being incurred that the true cost of decommissioning can be known with certainty. We therefore support the intent of the Government’s proposals, but I would like some reassurance from the Minister that the way schedule 38 is drafted will not inadvertently create problems around so-called mid-life decommissioning.

Decommissioning is actually a legal requirement and the costs involved are huge, greatly outstripping the annual revenue that a declining field will generate—I return to the point about the equation of what is left to exploit vis-Ă -vis decommissioning costs and the relief given against them. Hence, the rules governing the relief of decommissioning costs against the tax previously paid on the income from a field assume far greater importance near the end of the life of a field than getting all the remaining oil out. As I understand it, in the Government’s proposals there is a danger of prompting the total closure of a field to secure, beyond doubt, the capital allowance for the full cost when, in fact, a limited number of platforms within the field could have continued to operate. Again, it is about trying to get as much out of the UKCS as we possibly can within a reasonable tax framework.

While oil companies would lose some revenue by doing this, guaranteeing the full capital allowance is, for them, the overriding priority. For the Exchequer, this approach makes no sense at all. The more oil that can be extracted for the Exchequer, the more tax HMRC will collect. I would appreciate the Minister’s comments on whether schedule 38 runs the risk of leaving too much oil behind.

To summarise on clause 83 and schedule 38, companies producing oil and gas in the UK and on the UKCS have a statutory requirement to decommission oil and gas fields at the end of their life. They are able to obtain relief for such decommissioning costs in the form of 100 per cent. capital allowances against ring-fenced profits once they have been incurred. The Government have stated that it has become aware that some companies—I thought it was only one company—have entered into intra-group arrangements designed to enable a claim for tax relief to be made before the actual decommissioning work is carried out. It is unclear whether the 100 per cent. ring-fenced abandonment relief, which was introduced in 2001 for corporation tax, had the intended effect that relief for decommissioning costs were only available when the decommissioning actually took place, particularly following the relaxations of the conditions for relief made in last year’s Finance Act. Certain companies have therefore entered into contracts for decommissioning services and claimed relief in respect of payments made under these contracts even though the actual decommissioning may be some years away.

The proposed changes to the legislation here apply to decommissioning expenditure incurred on or after 22 April 2009. It provides that expenditure must be incurred and paid out in respect of an approved abandonment programme and it will be allowable only in the accounting period in which the decommissioning period is carried out or undertaken. If the expenditure in respect of which a claim is made is disproportionate to the decommissioning carried out, the claim can be reduced by HMRC proportionately. We have a few concerns, which we have outlined, but nevertheless we will support clause 83 and schedule 38.

Stephen Timms (Labour, East Ham)

I start by reassuring the hon. Gentleman about the seriousness with which we are dealing with this part of the Bill. I certainly relish the opportunity to debate this area of policy, having first had responsibility for it almost 10 years ago. I am probably not the best qualified member of the Committee to debate this part of the Bill. That is probably my hon. Friend the Member for Waveney, because of his long experience as chair of the all-party group on offshore activities. I can certainly reassure the hon. Gentleman that we have consulted widely and put a great deal of work into the clauses in this part of the Bill, which my hon. Friend the Economic Secretary and I will be addressing.

The package of changes as a whole could assist in unlocking up to an additional 2 billion barrels of oil and gas from the North sea. That is an increase of 20 per cent. on the production that is currently planned. This is a vitally important resource from the point of view both of our energy security and the economy. The extra production that these changes will unlock can play an important role in the UK economy. As my hon. Friend the Member for Waveney knows better than anyone, we have extremely good links with the offshore industry. We have had those for a long time. We have forums—the Pilot forum in particular—in which we can discuss these matters and make sure that we can take full advantage of the industry’s expertise and advice in coming up with a regime that can do the best possible job for the UK economy.

The first clause deals with an avoidance problem, addressing arrangements under which companies claim tax relief for the cost of decommissioning oil and gas infrastructure in the North sea many years in advance of the work actually being carried out. These arrangements are deliberate avoidance. Schedule 38 amends the rules that provide tax relief for decommissioning costs with effect from the Budget. The rules will make sure that companies can claim tax relief for decommissioning costs only during the accounting period in which the work is carried out.

I can give the hon. Gentleman the reassurances that he was seeking. The changes proposed by this measure will not prevent companies obtaining tax relief for their decommissioning costs when the work is carried out. It is important to note that oil companies have access to a very generous regime for tax relief for decommissioning expenditure. That tax relief is there for a good reason and this change does absolutely nothing to reduce the access that companies have to that. Oil and gas companies come to the North sea under the terms of licences, which require them to decommission their installations and infrastructures at the end of an oilfield’s productive life. Companies understand that obligation. They make arrangements to meet it knowing that tax relief will be available for those costs when the work is carried out. Nothing here will diminish that access. The arrangements that the clause and schedule address are undermining those activities and seeking to obtain advantage over other companies who are not prepared to enter into an avoidance scheme of this kind. This avoidance scheme is not a consequence of last year’s changes. It provides companies with the certainty that they will receive relief for their decommissioning costs for the period in which the work is actually carried out, which up until recently was the position that everybody thought obtained.

Clause 84

Greg Hands (Conservative, Hammersmith and Fulham)

Clause 84 and schedule 39 refer to blended oil. For the benefit of newcomers to the oil debate, I shall explain briefly the three basic elements in the North sea fiscal regime. The first is petroleum revenue tax; the second, corporation tax which, as we know, is ring-fenced in the case of the North sea; and the third, the supplementary charge. PRT, which is at the heart of schedule 39, applies only to the older, larger fields at a rate of 50 per cent. of net income. It applies to specific fields given development consent before 1993. A number of allowances and reliefs apply. In practice, most pre-1993 fields do not pay it. Where they do, however, it generates considerable revenue.

While schedule 39 is about PRT, it is important when considering it to understand the effects of the other two parts of oil taxation operating in the North sea. Corporation tax applies to companies’ upstream oil and gas profits within the North sea ring fence at a rate of 30 per cent. The ring fence prevents companies off-setting losses in other downstream parts of their businesses against their upstream profits. This is an area affected, as we saw, by the previous clause on capital allowances, although decommissioning issues are also prevalent with PRT.

The supplementary charge applies, as its name suggests, as a supplement to corporation tax. When it was introduced in 2002 it was levied as an additional 10 per cent. charge on ring-fenced profits and was increased to 20 per cent. in 2006. As Members will already have calculated, this means there is a marginal rate of 50 per cent. on most fields, rising to approximately 75 per cent. on fields subject to PRT. These rates are high and, as the Government acknowledge, may be too high to attract future investment in fields where oil is difficult to extract. We will come in a later clause to consider the widening of the North sea oil regime to provide an incentive for areas such as high-pressure and high-temperature oil fields.

With that brief exposition of the three main areas, I will turn to schedule 39 itself. Oil from different fields commonly shares a pipeline back to the shore, despite the fields falling under different ownership, and it is then sold after blending in the pipe. Brent crude is itself a blend. There is an obvious need for tax purposes to establish the relative strengths in the blend and from which fields the oil came, as it is the companies that face the tax. In the case of PRT, the field of origin determines whether PRT is applicable, so it is vitally important to sort out that blend. As I said, co-mingling occurs when hydrocarbon from one field is mixed with hydrocarbon from another during transportation to the UK or its first port of discharge; and the hydrocarbon is then sold on as a blend.

When we look at our smĂśrgĂĽsbord of crude oil blends, including Brent, Forties, Flotta, Wytch Farm, Beryl, Maureen and Triton—the last three being co-mingled and lifted off-shore—the number of contributing fields in each varies from two constituents in the case of the simplest blends, such as Wytch Farm and Wareham, to more than 20 in the case of Brent, which from August 1990 also incorporated the Ninian system, and more than 30 in the Forties field. Similarly, a number of co-mingled gas systems—separate from oil—exist, usually named by reference to the pipeline or the terminal, such as SAGE, CATS, FLAGS and LOGS. There is even one named after a part of the country—Easington. I think there is only one.

Section 63 of the Finance Act 1987 gave statutory effect to the arrangement that has been used in the past for determining the taxation on those blends or co-minglements. All participators in fields contributing to a blend of oil were required to furnish details of the method of allocation by 1 August 1987, or if later, within 30 days of making the first allocation under that method. In other words, companies have to report how the blend works. Failure to comply with that requirement incurs a penalty of up to £500 per participator, with a subsequent daily penalty after the failure has been declared by the court or commissioners. Any change in the method of allocation requires details of the revised method to be notified within the same 30-day time scale. What is important is that much of that arrangement will be abolished, and I am pointing out the convenience of its abolition. I have printed out a copy of the Government’s guidance under the Finance Act 1987 on exactly what must be done prior to the creation of a blend or a reporting of the changes to a blend.

The proposals in schedule 39 simplify the rules on allocation and drop the requirement that routine changes be backed up by extensive documentation sent to HMRC. The reform has been welcomed by the industry, and will reduce the compliance work load that companies face. The Government’s criteria for reform, as set out in the consultation document “Supporting investment”, fall under seven broad headings: promote investment and production, ensure a fair return for the UK taxpayer, be non-distortionary, be equitable, improve stability, be sustainable and, most importantly, reduce the administrative burden. In that abbreviated form it is difficult to disagree with the criteria. The fuller explanations are more substantive, but we find no issue with those criteria.

Whether those seven aims have been pursued as rigorously as they might have been in the Finance Bill in general is open to debate. Schedule 39, besides being equitable in the sense of not disproportionately affecting any one section of companies, mainly lays claim to meeting the last criterion—a reduction in the administrative burden. The explanation of the criterion in annex B of the “Supporting investment” document reads:

“Any changes to the fiscal regime should not increase the administrative burden on companies involved in the North Sea, either by increasing the complexity of the current regime, or through adding to the reporting requirements. Government should also actively look to reduce the administrative burden where possible.”

It seems that by simplifying the blended regime perhaps as far as reasonably possible, the Government will at least have modestly reduced, in this one area, the administrative burden facing the oil and gas sector.

Ian Pearson (Labour, Dudley South)

It is a pleasure to serve under your chairmanship this afternoon, Mr. Atkinson. I am sure that members of the Committee will have enjoyed the dilation on the structure of taxation in the oil and gas industry given by the hon. Member for Hammersmith and Fulham, and his comments on blended oil and the bureaucracy that has been involved in the system to date. I note that he welcomes the measures in clause 84 and schedule 39. They have been subject to discussions with the industry, and I think that there is consensus on the approach that we have adopted. This is a useful simplification measure and I am glad that it is widely supported.

Clause 85

Greg Hands (Conservative, Hammersmith and Fulham)

I start by welcoming the Economic Secretary to the debate. I said at the start of the debate on clause 83 that four Ministers have been responsible for the North sea oil and gas regime since the Bill was published, but in the short space of time since then we have gone up to five. Nevertheless, I am delighted to see him in his place and look forward to hearing his views on the sector over the coming minutes.

Mark Field (Conservative, Cities of London and Westminster)

I am sure that my hon. Friend will be delighted by the absence of the hon. Member for Dundee, East, because it would have been pointed out that there are, no doubt, several Members of the Scottish Parliament who are also responsible for those matters. Dealing with the five Treasury Ministers will be quite enough for the time being.

Greg Hands (Conservative, Hammersmith and Fulham)

We have already reflected on the absence of the hon. Member for Dundee, East, but I am told it is due to an injury.

Bob Blizzard (Labour, Waveney)

His daughter has broken her arm, and he has given me his apologies.

Greg Hands (Conservative, Hammersmith and Fulham)

Yes, so I will not pursue that subject. Questions of devolution, although probably interesting, are perhaps not pertinent to clause 85 and schedule 40.

I am extremely unhappy about the way that 31 Government amendments to schedule 40 have been tabled. They might have reached the Clerks by the time limit on Tuesday, but they did not arrive with me through the internal post until 2 pm yesterday, despite the fact that I have requested, as Members may now do, as you probably know, Mr. Atkinson, to be bumped up to the maximum number of deliveries a day, which I think is four. Previously I had my post delivered once a day, but when I joined the Committee there was such an incoming load of Government amendments and personnel changes that it seemed wise to increase its frequency.

In normal circumstances, with three or four amendments, tabling them so late might be acceptable, but 31 Government amendments really is an awful lot to digest, especially when dealing with so complex a schedule. It is difficult for the Opposition to scrutinise the result properly, when there is such a number of amendments. I should point out that I submitted three or four amendments of my own, so I am not saying that the Government alone are guilty, but submitting 31 Government amendments at the last moment makes life extremely difficult, given the resources with which Opposition parties operate.

The debate will be slightly difficult because I believe that many of the Government amendments are designed to overcome the problems highlighted in our amendments. I will rely to some extent on the Economic Secretary to explain the competing merits of some of the Government amendments, relative to the merits of the Opposition amendments, because I cannot say with absolute certainty what those are, having been unable to devote the time needed to determine the merits of A or B.

Part of enabling the maximum recovery of economic reserves from the UK continental shelf in the future lies in ensuring that the licence interests are in the hands of companies that are willing to invest. The current chargeable gains system can deter companies from swapping or trading assets to achieve that, and that is what schedule 40 is intended to deal with by making it easier for companies to trade assets.

The schedule has two parts. Part 1 extends chargeable gains exemptions on licence swaps from being limited to pre-development licences, as is currently the case, to being an exemption on all licence swaps. As before, the licences will be required to be of equal value, but developed fields can now also be traded among companies. That means that companies will have greater scope to realign their assets. It should, therefore, become easier to create concentrations of fields that could make further investment more economic. In other words, in the latter part of the life of a few of those fields, being able to trade them and perhaps combine such a field with two or three smaller fields nearby would make exploitation easier and more economic. That sounds like something we want to encourage.

Part 2 of the schedule allows companies to avoid a chargeable gain on the sale of an asset, provided that the proceeds from the sale are reinvested within the North sea ring fence. Until now, a company making a disposal of a UK licence interest is subject to corporation tax on the chargeable gains that arise, although there is a possibility that the gain can be held over by reinvesting the proceeds into certain classes of asset. If the reinvestment is in a qualifying class of asset, the gain is held over until 10 years have elapsed, or the new asset is disposed of, whichever happens earlier. Part 2 takes most forms of reinvestment out of chargeable gains altogether, as long as certain conditions are met. The combined effect of both parts of the schedule should stimulate asset trading in the UKCS, either by allowing assets to be transferred to a company willing to invest in certain fields, or by enabling a series of transactions to be undertaken to align interests.

The Government have tabled 31 amendments. My understanding is that they would increase the number of licences that can be swapped in a single transaction and tighten the definitions used in part 2. Broadly, they seem to increase the flexibility of the schedule.

Government amendment 258 is especially welcome as it reflects a concern, raised directly with me by the industry, that the schedule was drafted too narrowly in excluding other companies within a group of companies from the criteria for reinvestment. That is probably the most liberalising amendment. The inclusion of other companies within a group, on the condition that they are within the ring fence, is also sensible and should increase the number of disposals, while at the same time removing the temptation for companies to find ways to work around the rules.

In her letter to the Committee setting out the amendments, the rather short-lived Exchequer Secretary—I think the hon. Member for Burnley lasted nine days, all told, but she found time to write this letter—she explained that the amendments were

“the result of consultation with the industry following the publication of the Finance Bill.”

As I have said, the industry also raised those points with me and we welcome the Government’s willingness to listen and modify their proposal.

We tabled our amendment 266 in an attempt to deal with the situation of groups. It was anomalous to require that proceeds had to be reinvested by the company—the same company—that realised the chargeable gain, rather than extending the reinvestment provision to place it on a group basis. That would have, or should have, given rise to greater flexibility. Our amendment sought to exploit the similar arrangements that related to holdover relief and to apply them to exemption. If the Minister gives an assurance that the Government amendment will, in practice, provide the same result, I shall be happy to withdraw amendment 266.

Although the Government appear to have accommodated groups of companies in response to the feedback they received, they have not gone quite as far as they could in other respects. In particular, it appears that insufficient provision has been made for companies reinvesting in so-called subsea tiebacks, where existing platforms are connected to new wells by an underwater pipe. The new well is, as I understand the situation, dug and is linked back to the platform via an additional new pipe; it is like a satellite well. I think that is how those things work.

The explanatory notes state that where a company disposes of business

“assets used in connection with a UKCS field and the proceeds are reinvested in other ring fence assets...the gain shall be treated as not being a chargeable gain.”

In other words, if one reinvests the proceeds, everything should be fine. That seems clear, but all field assets are intended to come within the scope of schedule 40. If there is any doubt, the explanatory notes repeat that point the other way round.

“where the assets are sold and the proceeds are not reinvested in the UKCS, then the disposals will be taxed in the normal way.”

There seems to be an assumption that everything should be within the scope of schedule 40. However, it seems that reinvestment in UKCS does not include the exploration appraisal and development of new wells—the so-called subsea tiebacks. Because of the way that part 2 of schedule 40 is drafted, drilling new wells does not qualify as reinvestment and is not seen as creating an asset.

I understand that the industry’s lobbying effort to exempt gains in general was explicitly raised as an issue with one of the Minister’s multitude of predecessors. It is hard to know who dealt with that lobbying effort, but the Economic Secretary is nodding, which shows that he is aware of the situation faced by some of his colleagues, past and present. Wells were explicitly raised as an issue, but the Government appear to have ignored that plea, despite the fact that it sits squarely within the schedule’s intent. Indeed, in reading the explanatory notes, one would think that wells are actually included, but I do not think that they are. The Minister needs to clarify that point.

An increasing percentage of recent UK continental shelf developments have been in subsea tiebacks, which are likely to continue to increase in the future. The new wells are linked to existing infrastructure—the platform—so there is an advantage in having the wells provide the export route for the hydrocarbons. In most cases, the developments will not support the cost of infrastructure in their own right. As I understand it, on average, approximately 40 per cent. of the cost of a subsea tieback development is associated with the wells, so a significant proportion of the funds invested in future developments will not qualify for the reinvestment relief. Bizarrely, it appears that constructing a new well does not qualify for relief, but constructing a tieback to the well does. I would be grateful if the explained what precisely qualifies for the relief and whether the explanatory notes accurately state that everything should be accounted for.

Amendments 262 to 265 are designed to rectify the problem. I am keen to hear the Government’s arguments on new wells and am willing to concede that there may be easier means to achieve the end than those that we have outlined in our amendments. If the Government can find a better way to do it, so be it, but if there is a point of principle at stake, I would like to hear it.

The raison d’ĂŞtre of schedule 40 is to encourage new investment in the North sea. It seems reasonable to extend the criteria to cover fully one of the primary forms of development that that investment needs to take, and there do not appear to be any additional costs associated with that step. Preventing reinvestment from incurring a chargeable gain should surely mean just that. I look forward to hearing the Minister’s explanation of the competing sets of amendments and that all parts of the assets described will qualify under schedule 40.

Ian Pearson (Labour, Dudley South)

Clause 85 builds upon existing reliefs and reforms the treatment of chargeable gains arising within the ring fence regime to ensure that oil and gas assets are in the hands of those most likely to develop them. The first change enacted by the clause is that, where companies swap licence interests for developed areas within the UK continental shelf, the disposal of the licence interest will not give rise to a chargeable gain or to an allowable loss where the consideration received is also a developed licence interest. That will enable gas and oil companies to swap licence interests that they do not intend to fully develop with other companies to build hubs, around which further development will take place. That will increase production and extend the life of North sea infrastructure, which is a policy objective of ours.

The second reform is that, where a company disposes of oil and gas assets used in a ring fence trade and reinvests the proceeds in further ring fence assets, the company may make a claim that any gain arising is not chargeable, provided that the reinvestment has taken place no more than 12 months before or three years after the disposal. That provides an additional incentive for companies that make disposals of such assets to reinvest the proceeds in further acquiring and developing UK oil fields and infrastructure in order to enable the development of the North sea to reach its full economic potential. Where a company disposes of assets and removes the proceeds from the North sea altogether, they will still face a chargeable gain.

There is a number of amendments to schedule 40. I apologise to the hon. Member for Hammersmith and Fulham that he did not have the text of the amendments further in advance. We have probably relied too much on the internal post system. We ought to investigate if there are better ways of communicating with Opposition Front Benchers, to ensure that they have any Government amendments in as timely a manner as possible. I will ask my officials to see whether that can be done.

Peter Atkinson (Conservative, Hexham)

Order. In fairness to everybody, I want to make it clear to the Committee that the text of the amendments was on the Order Paper on Tuesday, as I recall. I think that it is the letter that was delayed. However, the text of the amendments was here on Tuesday afternoon; I saw it. So the text of the amendments was available. In fact, I am told that it was available on Tuesday morning.

Ian Pearson (Labour, Dudley South)

I welcome that clarification. However, I am keen to ensure that our information flows are as good as possible, so that the hon. Gentleman has the information that he feels that he needs in this area.

First, I want to stress that the Government amendments are technical amendments, which build on the reforms introduced in the existing schedule. As the hon. Gentleman mentioned, they have been introduced as a result of further constructive meetings with oil and gas stakeholders following publication of the Finance Bill. That was confirmed in the letter from my hon. Friend the Member for Burnley.

The Government amendments extend the proposed legislation to ensure that it applies in the full range of asset trading circumstances that may occur in relation to the North sea. Although there are a large number of Government amendments to the schedule—31 in all—I assure the Committee that they cover only four areas. The first two relate to part 1 of the schedule and deal with licence swaps. They will allow companies to swap licence interests in developed areas for licence interests in undeveloped areas, and to swap multiple licences in a single transaction.

Greg Hands (Conservative, Hammersmith and Fulham)

I may be getting confused about something that I was not previously confused about. Is it also possible to swap assets in developed fields for other assets in developed fields, or is it possible only to swap developed assets for undeveloped assets?

Ian Pearson (Labour, Dudley South)

I will come on to that point in a moment, hopefully. However, what I said was that the change would allow companies to swap licence interests in developed areas for licence interests in undeveloped areas and to swap multiple licences in a single transaction.

The third and fourth changes relate to part 2 of the schedule, which deals with reinvestment of ring fence assets. The third change will act to ensure that, where an asset trade has involved both a licence swap and a cash consideration, companies will be required to reinvest only the cash consideration, rather than the entire proceeds of the asset trade, to receive full roll-over relief.

The fourth change will ensure that the grouping rules, which apply more widely to reinvestment reliefs outside the North sea ring fence, apply equally to the new North sea reinvestment relief. I believe that that change covers the issue raised by amendment 266, which is one of the Conservative amendments. I confirm to the hon. Member for Hammersmith and Fulham that the Government changes have the same effect as that amendment was intended to have.

As we are all evidently agreed on the importance of the grouping rules applying to the legislation, I trust that the hon. Gentleman will feel able to withdraw his amendment and that he will support the Government amendments, which we believe are technically superior.

Greg Hands (Conservative, Hammersmith and Fulham)

Will the Minister explain something in relation to amendment 266? He seems to be saying that a collection of Government amendments would have the same effect—an identical effect—as that single amendment would have. Would it not be easier to take the single, stand-alone Opposition amendment, rather than a panoply of Government amendments that try to achieve the same purpose?

Ian Pearson (Labour, Dudley South)

I am advised that it would not be easier, which is why the Government amendments have been drafted as they have.

In response to the hon. Gentleman’s previous question about swapping developed assets for other developed assets, I can confirm that the legislation already allows the swapping of developed assets for other developed assets and the swapping of undeveloped assets for other undeveloped assets to take place. The change we are proposing now completes the picture.

I hope that it has become clear from what I have said that the Government are willing to listen to what stakeholders have to say on this subject and to take action. However I am unable to recommend amendments 262 to 265 to the Committee. As I understand them, they are designed to add costs incurred in drilling a well to the definitions of relevant assets that can be reinvested in for the purposes of the reinvestment relief in schedule 40. However, they do not provide any further definition of exactly what costs are to be included within the term “well costs” and what are to be excluded. The general reference to “well costs” does not state what the chargeable gains asset is that would be being reinvested in. Indeed, from a chargeable gains asset perspective, it is not at all clear why the amendments are required, because where a chargeable gains asset is being invested in for the purposes of drilling wells, it would be covered by the Government’s proposed legislation.

If the amendments refer to general well-drilling expenditure, because that is not expenditure on either a licence or plant and machinery and hence would not itself be liable to chargeable gains, it would not come within the chargeable gains regime. Consequently it would be incorrect if it were eligible for the reinvestment relief. I remind the Committee that such general well-drilling expenditure already receives generous tax reliefs, for example through mineral extraction allowances.

The hon. Gentleman is correct in his assessment that tieback infrastructure would be eligible, although the costs of drilling wells are not. We are aware of industry’s view that exploration and appraisal expenditure should qualify for the relief, and we are willing to discuss the matter further with the industry.

As I said, I hope that the hon. Gentleman will feel able to withdraw amendment 266, as it is already covered by Government amendments, as well as the other Opposition amendments in the group. We are more than happy to engage further with the industry on these important matters.

Peter Atkinson (Conservative, Hexham)

Order. In fact, the Opposition amendments are not moved at this stage.

Schedule 40

Greg Hands (Conservative, Hammersmith and Fulham)

On a point of order, Mr. Atkinson. We have not had a chance to discuss whether the Opposition amendments are being withdrawn.

Peter Atkinson (Conservative, Hexham)

The Opposition amendments were not the lead amendments in the group. If the hon. Gentleman wants to press any to a vote, he should let me know and they can be moved at the appropriate point.

Clause 86

Greg Hands (Conservative, Hammersmith and Fulham)

Thank you, Mr. Atkinson, for your guidance on our amendments to schedule 40. I assume that it will be convenient to discuss schedule 41 at the same time as the clause. The issue addressed by schedule 41 is another aspect of the problem that I raised in relation to clause 83 and schedule 38. Because of its size the relief on decommissioning costs assumes such importance that it can override all other considerations when a field is nearing the end of its life.

One of those considerations is the potential to adapt the infrastructure already in place to use fields for gas storage, carbon capture or wind power. Having taken oil or gas out, it is possible to pump gas or the carbon emissions from an onshore power station back in. That is the basis of carbon capture and storage. But that requires leaving the pipes and all the other related infrastructure in place. Companies are under a legal obligation, as we explored on clause 83 and schedule 38, to remove all that infrastructure from the seabed when it is deactivated. As the legislation stood, had they allowed a change of use, companies would have had great difficulty in recouping the decommissioning costs later, which is the basis of the measure today.

As the Government’s November paper found,

“Industry argue that effective access to decommissioning relief is a critical issue when considering the economics of a change of use project, and that the current treatment is extremely likely to result in a change of use activity not going ahead where it utilised existing infrastructure that was expected to have a substantial decommissioning cost.”

In other words, we are looking at tax relief for decommissioning infrastructure and at whether we want to encourage its use for other purposes, such as carbon capture and storage, wind power and so on.

Carbon capture or schemes involving power generation do not fall within the North sea ring fence. Equally, there are clear potential benefits from allowing infrastructure to be reused. Schedule 41 represents the Government’s view following many years examining the problems of and opportunities for change of use. We welcome it, even though it has been a long time coming. Many changes are still theoretical and we are a long way from seeing North sea carbon capture projects or some of the other uses under discussion. However, measures that enable such projects to be at least considered are welcome.

The debate provides an opportunity to put three important questions to the Minister, which may assume greater significance if decommissioning begins to be postponed. First, what level have Government liabilities for relief for decommissioning reached? Secondly, how are the liabilities likely to be distributed over future years and decades? Thirdly, are they included in the Government’s accounts or are they another example of off-balance sheet liabilities, like PFI projects and public sector pensions? Those questions are important. I am not entirely clear how the future liabilities are dealt with on the Government’s balance sheet.

Many of the current potential change of use projects are at best marginal economically, and the potentially significant tax charges that could have arisen on implementation of the projects were a major disincentive to companies even starting to evaluate such projects, so the changes appear to move us in the right direction.

The Opposition value all efforts to make CCS and alternative energy generation more attractive through the tax regime. The changes remove a barrier, but they do not, in themselves, ensure that these important industry developments take place. Nevertheless, we welcome the provisions, but I await the Minister’s explanation of where future liabilities are accounted for.

Ian Pearson (Labour, Dudley South)

I am glad that the official Opposition welcome clause 86 and schedule 41. Their purpose is to remove tax barriers to the reuse for other activities of oil and gas infrastructure. I shall briefly go into detail on the schedule. It removes potential tax barriers where oil and gas production assets are reused for so-called “change of use” projects, particularly, as the hon. Gentleman noted, carbon capture and storage, gas storage and wind power generation.

The schedule has three main effects. First, it ensures that a petroleum revenue tax charge does not arise when a PRT asset is subsequently used for another purpose. Under current legislation, when a PRT asset is used for an activity unrelated to oil production, a portion of the PRT relief given for the cost of the asset is clawed back. That could entail a significant tax charge for the company in question and may deter it from embarking on change of use projects. The schedule removes the possibility of such a tax charge. It has been welcomed by the industry as well as by the hon. Gentleman.

Secondly, the schedule will ensure that profits from change of use projects that reuse PRT assets are not liable to pay PRT. Again, the existing rules state that income derived from PRT assets is liable for PRT no matter how the asset is used. However, change of use profits are clearly beyond the intended scope of the PRT regime, which was designed primarily to capture the super-profits from oil and gas production. Consequently, the schedule will remove such income from the scope of PRT.

Finally, the schedule will ensure that companies that embark upon a change of use project can still gain access to the same tax relief for the cost of decommissioning infrastructure that they would have had at the end of oil and gas production. Again, that will remove the existing perverse incentive to decommission infrastructure, rather than to reuse it, which is an objective we support.

The Government believe that the UK will gain major benefits from the removal of the barriers to change of use projects. As I have mentioned, such projects can make a significant contribution to reducing carbon emissions and to ensuring that the UK has a secure energy supply. As the hon. Gentleman will be aware from today’s statement in the House on climate impact projections, there is a need to continue the drive to develop a low-carbon economy in the UK. We should ensure that, where appropriate, the tax system provides sufficient incentives for things that are public policy goods and removes perverse incentives not to do such things. That is widely accepted as the right thing to do.

It is important to recognise that such projects have the potential to bring investment and employment to the North sea long after the production of oil and gas has ceased. In addition, the deferral of the decommissioning of oil and gas infrastructure by companies will benefit the UK by deferring the point at which the Exchequer must give tax relief for decommissioning expenditure. Given the economic circumstances, that will benefit Government overall.

The clause will ensure that when a company is faced with whether to decommission depleted oil and gas infrastructure or reuse it for a change of use project, it will not be deterred from engaging in activities that could be beneficial to the company and to the UK as a whole. That is why I believe it should stand part of the Bill.

The hon. Member for Hammersmith and Fulham mentioned decommissioning costs. Those are currently estimated at £20 billion. Tax relief could lead to the Government effectively paying 50 per cent. of that. The time scale will depend on how and when the assets are decommissioned. That will depend on a range of variables, such as the prevailing oil price.

I am not currently able to advise the hon. Gentleman on accounting practices, but am more than happy to write to him with the detail.

Greg Hands (Conservative, Hammersmith and Fulham)

I must say I am surprised that the Minister is unable to tell us what is the accounting practice for this potential liability of up to £10 billion. That sounds like rather a large amount of money to be unaccountable. Is he sure that he is unable to provide us with more certainty about where it is placed?

Ian Pearson (Labour, Dudley South)

I am at this stage, but the hon. Gentleman has raised a valid point. I am happy to write to him and Committee members with further information on that.

Clause 86 and schedule 41 are important and I urge hon. Members to support them.

Clause 87

Greg Hands (Conservative, Hammersmith and Fulham)

I shall be fairly brief on clause 87 and schedule 42 as we are advancing towards clause 89—

Peter Atkinson (Conservative, Hexham)

Order. I am sorry to interrupt the hon. Gentleman. Speaking of being brief, I warn the Committee that by 4 o’clock we will have sat for three hours. At about that time, I propose to have a short adjournment.

Bob Blizzard (Labour, Waveney)

On a point of order, Mr. Atkinson. Thank you for that announcement. We had an agreement to finish clause 90 and the corresponding schedule today. I think the mood of the Committee is that it would be better if we could finish it without adjourning, so I hope that we can have a common purpose and move that way. Would you permit us, if necessary to go a little beyond 4 o’clock in order to expedite that?

Greg Hands (Conservative, Hammersmith and Fulham)

Further to that point of order, Mr. Atkinson, we did not have that agreement. I was saying that we should stick to the schedule laid out by the Government at the beginning of the Bill, which would mean that we will continue discussing oil when we return on Tuesday. Clause 89, schedule 44, on which we intend to have a Division, is very substantial.

Peter Atkinson (Conservative, Hexham)

These are matters, not for the Chair, but for the usual channels. I am giving guidance to the Committee because, unlike honourable Members, the Clerk and I cannot keep going out, so after about three hours, it is useful to have a break. If the Committee is aiming to get towards the end of the business on oil, I will be flexible about when we adjourn, however, at 4 o’clock or slightly after, I propose to adjourn the Committee. That is in the hands of Committee Members and the usual channels.

Greg Hands (Conservative, Hammersmith and Fulham)

Thank you, Mr Atkinson, for that clarification. I mentioned clause 89, but we are on clause 87 and schedule 42. Schedule 42 deals with the oldest, or first-round licences, that are due to expire in 2010 and proposes a way in which extended licences can be issued, and decommissioning relief against petroleum revenue tax, PRT, can be carried over for the licence holder, after both extension and expiry. The existing position for PRT, which applies, as we know, only to fields developed before 1993, was summarised in the Government’s consultation response in November:

“When a field reaches the end of its productive life and decommissioning costs are incurred, to the extent that such costs are deductible for PRT purposes, any losses arising can be carried back for offset against profits from the field without limit, subject to the retention of the licence or within two chargeable periods of the relinquishment of the licence”.

As I understand the PRT regime, a chargeable period is a period of six months. I think the Minister is confirming that. So, under current legislation, PRT relief for decommissioning expenditure is not available to a company if those costs have been incurred for more than 12 months—two PRT periods—after it has ceased to be a licence holder in respect of that taxable field. The new rules will allow relief for such expenditure, but will also ensure that any income that may arise in respect of the assets in question will also be chargeable to PRT.

The changes, as I understand them, provide necessary clarity on what should happen if a license expires, or is due to expire, before this can happen. As it stood, if a company ceased to be a licensee, its obligation to decommission would remain, but finding itself outside the PRT regime, it would not have been able to relieve this cost against the PRT it had previously paid. Companies will now continue to be deemed to be licence holders for PRT purposes after the licence has expired. The extended licences themselves will be deemed to have expired at the point when production stops. We think this is a relatively neat solution to that problem, it has been broadly welcomed and addresses a real issue. We therefore see no reason to oppose the solution that DECC has put forward and that schedule 42 would implement.

Ian Pearson (Labour, Dudley South)

I am very pleased that the Opposition is in agreement with clause 87 and schedule 42. We have discussed this with industry, we believe it is the right way forward and I welcome the hon. Gentleman’s support.

Clause 88

Greg Hands (Conservative, Hammersmith and Fulham)

Clause 88 and schedule 43—I presume that it will be convenient to debate the schedule at the same time—relate to the abolition of the provisional expenditure allowance. Provisional expenditure allowance has, as the Government suggest, ceased to be appropriate. It was intended to provide relief against PRT for start-up costs, but as no field that has started up since 1993 is subject to PRT, it is no longer required. Moreover, its continued existence has caused claw-back problems for some companies that have been hit by what the Government refer to as unintended and detrimental tax charges. Further provisional expenditure already granted will be clawed back in the following 12 months. No one appears to be in favour of its retention, and we do not represent an exception.

As we know, PRT differs from other taxes in that expenditure relief does not reduce a company’s tax liability until the expenditure has been claimed by the company and allowed by HMRC. When the expenditure has been claimed and allowed, it reduces PRT for the next half-yearly assessment—the six-month PRT assessment period—rather than necessarily for the half-yearly period in which it was incurred.

To compensate somewhat for the consequential timing disadvantages that might, therefore, ensue, section 2 of the Oil Taxation Act 1975 provides for a provisional allowance for each chargeable period. That provisional allowance is calculated under section 2(9)(a) and section 2(11) of the Act by reference to two components. If the first is greater than the second, the difference between them is the amount of provisional allowance to be given in the assessment together with any expenditure already allowed and linked to the chargeable period. Conversely, if the second exceeds the first, no provisional allowance is due. This is a rather complicated set of provisions. We have checked the Act to ensure that we have got things absolutely straight.

The first of the two components—remember that if the second exceeds the first, no provisional allowance is due—under section 2(9)(a) of the 1975 Act is 5 per cent. of the amount included in the participator’s return—under section 2(2) of the 1975 Act—in respect of its estimate of the total sale proceeds or market values computed in accordance with section 3(2) of sales and appropriations of oil for the chargeable period. The participator’s estimate of the market value of non-arm’s length disposals is used regardless of whether the oil taxation office subsequently agrees a higher or lower figure to be included in the assessment under section 2(5)(b) and section 2(5)(c) of the 1975 Act.

If the participator fails to submit a return and an estimated assessment is made, no provisional allowance is available. Once a return is made, a provisional allowance based on the incomings returned is made automatically.

Let me return to our consideration of whether the second component exceeds the first. The second component is the amount of any expenditure claimed under sections 5 and 6—but not any related supplement—which was incurred in the chargeable period in question and which has been allowed by the oil taxation office for inclusion in the assessment for that chargeable period. That is an outline of what we have in front of us, which this clause and schedule are seeking to abolish.

As for the clawback, the 5 per cent. allowance is provisional and section 2 of the 1975 Act prescribes a clawback of the relief given. Subject to additional rules, also in section 2, any provisional expenditure allowance given in a particular chargeable period is clawed back in the next but one chargeable period.

Section 2 of the 1975 Act modifies the basic rule in two ways. Under section 2(10)(a), where expenditure allowed in a chargeable period was incurred in the immediately preceding period and provisional allowance was given in that period, a further adjustment is required. The clawback in the computation of any 5 per cent. provisional allowance given in the last but one chargeable period will be increased by an amount equal to the expenditure now allowed which was incurred in respect of the immediately preceding chargeable period—the six-month periods under which the petroleum revenue taxation operates—or the 5 per cent. provisional allowance of the immediately preceding chargeable period, whichever is the lower figure. However, under section 2(10)(b) of the same Act, the clawback of provisional allowance given for the last but one chargeable period is reduced by the equivalent amount of any increase made under section 2(10)(a) of the Oil Taxation Act 1975 in the assessment for the immediately preceding chargeable period.

My point is that those seem to be fiendishly complicated regulations, and the clause and the schedule before us appear to have the worthy aim of simplifying our tax code and seeking to extract those regulations from it. No one seems to favour their retention, and we certainly do not represent an exception.

Ian Pearson (Labour, Dudley South)

As the hon. Gentleman says, the clause and schedule are widely welcomed by the industry. As far as I am aware, nobody is against what we propose—everybody is in favour.

Clause 89

Greg Hands (Conservative, Hammersmith and Fulham)

This clause probably contains the most important changes to the North sea oil and gas regime in part 6 of the Bill, and I expect that we will want to press amendment 267 in due course.

Clause 89 refers to schedule 44. The other clauses and schedules that we have discussed so far either represent relatively small changes or seek to create conditions in which it is easier for new investment to take place. Schedule 44, however, is the only part of the Government’s package that attempts to offer direct incentives to invest, and it is therefore worth recalling what the Government have said about the need for incentives. In their document, “Supporting investment: a consultation on the North Sea fiscal regime” they described the UK continental shelf as

“facing increasing challenges due to its nature as a maturing basin. The easy to recover hydrocarbons have been exploited and the remaining opportunities are, increasingly, either smaller in size or require the use of cutting edge technologies to enable extraction. One result of this is that many potential projects have become commercially marginal and unable to compete with other projects around the globe. These challenges are exacerbated by the current uncertainty over future oil prices and the high cost levels faced within the North Sea.”

Schedule 44 is the Government’s attempt to answer that commercial marginality and struggle for capital expenditure. We see it as a fairly limited attempt to address the problem.

Oil and Gas UK was formed by and represents the industry, and has met with both the Chancellor of the Exchequer and the Prime Minister. I am not sure how many Exchequer Secretaries it has had the pleasure of meeting in recent days—as we know, there have been three in the past nine days. I am not exactly sure who it has had the chance to meet with on that front. Nevertheless, at various times Oil and Gas UK has met with the Government to discuss the future of the North sea. In its public response to the Budget—three Exchequer Secretaries ago—it said:

“Oil and Gas UK members have voiced their deep concern to us at what has been left undone by the 2009 Budget. In the current climate, the package of measures will have limited impact on the UKCS’s economics, will have little effect on the UK’s competitiveness and attractiveness to investment and will not lead to any significant increase in activity....The consequences of the failure to act decisively could be severe. Current economic circumstances are already placing industry work programmes under extreme pressure. The fiscal measures announced in April may help a small number of projects but will not reverse the significant decline in capital investment forecast by Oil & Gas UK — to around £3 billion by 2010.”

That is a fairly damning indictment of Government policy from the industry, at least in relation to the 2009 Budget, especially given the warmth of some of their other comments in relation to the actual consultation process. The industry was very open and supportive of the Government’s willingness to consult, but it has turned out to be extremely disappointed by the result of the consultation.

Oil and Gas UK does not stop there. Its response continues:

“Under-investment at this stage in the mature UKCS life risks fatally undermining the government's stated goal of maximising the recovery of the UK’s remaining oil and gas reserves. Without new injection of oil and gas from the development of outlying satellite fields, key offshore infrastructure hubs will risk seeing their decommissioning being brought forward...Once these strategic platforms and their pipelines are removed, it is unlikely that they will ever be replaced and the means to recover the estimated remaining oil and gas reserves of up to 20-25 billion barrels...will be lost.”

Again, that is a damning indictment of the Government’s approach from UK Oil and Gas. It is clear that the industry does not—I see that we are joined by the new Exchequer Secretary to the Treasury, the hon. Member for Portsmouth, North. I should start off by welcoming her to her new position as today’s Exchequer Secretary. I look forward to a number—or a panoply, or smĂśrgĂĽsbord of debates on different issues to come.

The industry does not see the new field allowance that the Government are proposing as the answer and certainly not in its current form. We have some sympathy with the argument put forward by the industry.

The Government’s proposals in schedule 38 will create an allowance against the supplementary charge—in other words, the 20 per cent. charge, which was increased from 10 per cent., that is applied to ring-fenced profits as a supplement to corporation tax. That brings the overall marginal tax rate on new fields to 50 per cent. As we know, the new allowance will apply to three kinds of fields; small fields, ultra-heavy oil fields and high-pressure, high-temperature fields.

The small fields that the Government talk about will have to be very small and the allowance is set relatively low. We do not intend to debate those at great length today. As a result of this measure, the industry expects only one or two more fields to have been brought into development than would otherwise have been the case in the short to medium term. The small-field change is not a particularly significant change in the legislation.

We touched on the question of ultra-heavy oil earlier. If you turned a cup full of heavy oil upside down, it would not come out; it is that heavy. There are huge technical problems to be surmounted before ultra-heavy oil can begin to be properly exploited, although there is plenty to be had if this can be done.

The category of high-pressure, high-temperature fields has left the industry feeling aggrieved. This is a consistent view across the major players whom I have met with in recent weeks. BP, for example, describes the field allowance as being of negligible impact. None of their HPHT discoveries would qualify for the new allowance. Only one HPHT discovery, across the whole of the UK continental shelf, is thought to meet the Government’s combined temperature and pressure criteria, and that is the Jackdaw field owned by British Gas. This would cover only one new field. Of course, that is only looking at fields which have been discovered to date—others may be found. I understand that a combined temperature and pressure rule, which the Opposition seek to amend here, is not a good way to get people to look for these HPHT fields, as there is no consistent relationship between high temperature and high pressure.

Nor, I am told, is a high-pressure, low-temperature or a low-pressure, high- temperature field any easier to handle than a high-pressure, high-temperature field. In other words, removing one of the two areas of difficulty and having it either high- pressure or high-temperature does not necessarily make it any easier to exploit.

Oil and Gas UK have written to the Treasury to make six points on behalf of the industry as a whole. First, the ultra-HPHT target is too tightly defined to deliver the required benefit. Secondly, the ultra-HPHT target does not mark the break from subsea to platform-based development. Thirdly, other HPHT fields face similar development costs to ultra-HPHT fields. Fourthly, the requirement to meet both ultra-high temperature and ultra-high pressure is simply too onerous. Fifthly, both ultra-HPHT pressure and temperature limits are set too high. Sixthly, with modifications, the field allowance still has the potential to influence HPHT exploration activity. So Oil and Gas UK are looking for modifications.

Our amendment seeks to relax the requirement in schedule 44 to meet both the pressure and the temperature criteria at the same time, so that only one of the two needs to be met. It must be either high pressure or high temperature. This would help to reduce the random, lottery-winner nature of the clause as it stands, and do more for exploration. Even this amendment would still bring only a handful of known but undeveloped fields within the scope of the allowance. It is not an extremely radical approach. We just believe that what is brought in under the schedule should be widened a little to try to encourage more exploration. I am sure that we all agree that that is of huge importance to this country and to our tax intake.

When the Chancellor announced the field allowance during the Budget speech on 22 April, he believed that it would encourage the development of the equivalent of about 2 billion barrels. As the clause stands, the Chancellor’s claim looks wholly implausible. It is open to the Government to talk to the industry and revisit the limits once the Finance Bill has gone through the House. That is fair enough.

Ian Pearsonindicated assent.

Greg Hands (Conservative, Hammersmith and Fulham)

I see the Economic Secretary nodding. The limits are open to adjustment by statutory instrument. In fact, any of the definitions of small oil field, ultra heavy oil field or ultra high-pressure, high-temperature field set out in paragraphs 20 to 23, and also the total field allowance levels specified by paragraph 24, can be amended by statutory order. That is made clear in paragraph 17.

It is worth pointing out that no costs are incurred either by our amendment, or by lowering the limits. There is some difficulty in trying to understand the fiscal implications. There is just an unquantifiable loss of revenue from fields that may have been developed anyway to be balanced against an unquantifiable increase in revenue from fields where exploration and development would not have occurred without it. We are looking at hypothetical revenue and allowances against it. I will listen with interest to the Minister’s view of this balance and where it lies. At the moment the proposals seem far too restrictive.

As I said when opening my remarks, when it comes to providing new incentives for fresh investment, schedule 44 is the Government’s only current answer. Hence it is worth noting the two policy areas it has left untouched. The first is also a geographical area—the west of Shetland area. In our debate on an earlier clause, I said that we would be returning to that geographical area later.

As I mentioned earlier, the UKCS is far more extensive than the North sea. There is also the Atlantic, where there is oil too. Even old North sea hands seem to become rather white at the knuckles when they describe the weather conditions west of Shetland and some of the other difficulties involved in working in that environment, with its deep water and atrocious weather. However, the rewards would be substantial and the Government have failed to do anything in the Bill that would make the exploitation of that area more likely.

The Government have established a joint west of Shetland taskforce with industry representatives and I would be grateful for news of any progress that that taskforce has made when the Minister—whichever Minister it is—responds to the debate.

There is a second, wider problem. The Government are only talking about providing incentives for new fields. There are no incentives for existing fields and no such incentives appear to be under consideration. Where fields are still going strong, by definition no incentives are required. However, fields nearing the end of their life are a different matter and a significant and increasing number of fields are in that category. I return to my earlier point that we are now just under two thirds of the way through the proven oil and gas reserves that are under the North sea.

Encouraged by the Government, smaller companies have already come in and are specialising in the different operating challenges that such fields—the ones nearing the end of their lives—present. Those companies possess a readiness and willingness to invest at that end-life stage. To take just one example, Talisman Energy now operates in 23 different fields, which is a higher number than for any other group on the UKCS. Therefore, although it is a relatively smaller and newer entrant to the sector, Talisman Energy operates in more fields than any of the existing big players.

However, the changed financial background against which companies have to operate will make it difficult to mop up all the remaining oil and gas. I would appreciate it if the Minister explained the Government’s approach to encouraging companies to invest in existing fields, as there is nothing in the clause—in fact, there is nothing in the entire Bill—to help those companies.

To conclude, clause 89 is the most important clause in the Bill in terms of the considerations about North sea oil. The industry welcomes the existence of the new field allowance, which is designed to help the exploitation of small fields and fields that are difficult to reach. Schedule 44, in so far as it goes, is also welcomed by the industry, but nobody thinks that it goes very far. Our amendment to schedule 44 would take it a little bit further by removing one of the lottery elements, in other words the fact that a field has to qualify for both “high pressure” and “high temperature” to qualify for the relief. Our amendment would remove that lottery element.

I hope that the Minister, in responding to the debate, will explore the possibility of going further still in this area, or at least offer some better explanations as to why the Government are unwilling to do so. While the days of plenty in the North sea are starting to fade, there is the prospect of more adventurous and still more profitable activity for decades to come. Whatever that may entail, what we know for certain is that one new field, which is what we are talking about here with schedule 44, simply will not cut the mustard. Unless we hear some convincing arguments from the Minister, we will therefore seek to put amendment 267 to the vote.

Ian Pearson (Labour, Dudley South)

Clause 89 introduces a new field allowance into the North sea fiscal regime, which will have the effect of reducing the profits liable to supplementary charge for certain categories of new field that have development concerns, on or after 22 April 2009.

The Government believe that the measure can play a significant role in ensuring that the North sea meets its full potential. We estimate that it could lead to the production of an additional 2 billion barrels of oil and gas, which might otherwise have been left in the ground. That will be of major benefit, ensuring that the UKCS continues to be a significant industrial success, with the employment skills and technological benefits that that success brings. Furthermore, it will benefit the UK more widely, by helping to secure the UK’s energy supply.

A number of stakeholders have warmly welcomed the measure. For instance, Oil & Gas UK, in commenting on the overall package of measures, said:

“We acknowledge this demonstration of the Government’s commitment to the future of this industry in the UK. The measures announced today are a positive step for those companies trying to develop small and challenging fields in this mature, high cost province.”

The Oil and Gas Independents’ Association said:

“Today’s announcement by the Chancellor will assist both small and large independent companies to continue their activities...the OGIA believes this is an important first step in making the UKCS fiscal regime competitive.”

So there is broad support for clause 89 and schedule 44.

Amendment 267 on the face of it seems relatively simple. It would change one of the qualifying criteria for an oilfield to receive the new field allowance from needing to be both ultra-high pressure and ultra-high temperature to needing to be either ultra-high pressure or ultra-high temperature. The hon. Gentleman went into some detail in explaining it. I assume the amendment has been introduced to increase the number of existing fields that are eligible for that allowance. The hon. Gentleman suggested that the Government’s measure is very limited. We certainly want to maximise the potential benefits to the UK of the Government’s policy proposals in this area.

The requirement for a field to be both ultra-high pressure and ultra-high temperature was decided upon following extensive consultation with a broad range of stakeholders. It is intended to provide significant support for investment whether in exploration, appraisal or development of some of the most technologically challenging and demanding reservoirs in the North sea. In the course of those discussions, the clear impression given to Government was that these challenges occurred when both criteria were found in a reservoir, not just one. Reservoirs with both extremely high pressures and temperatures need most support. Equally, given the size of the incentive on offer, the criteria are also carefully targeted at those developments that most need it and would not go to developments that would proceed regardless. We believe this approach is necessary to provide maximum value for money for UK taxpayers. On the basis of the evidence presented to us, to relax those criteria, as proposed in the amendment, would run the risk of giving support to fields that do not face the degree of challenge that this allowance was intended to support, at a potentially significant cost to the Exchequer, while providing little extra benefit to the UK. Therefore, while I understand what the hon. Gentleman is seeking to achieve, I cannot recommend that the Committee accept the amendment.

The hon. Gentleman asked a number of specific questions to which I shall briefly respond. Regarding the number of fields eligible for the field allowance, it is impossible to estimate the number able to claim. It will depend on the number of discoveries made by companies in the coming years. One benefit of the allowance will be to encourage companies to increase their exploration activities. It is the increase in reserves that is important, rather than the number of fields. We believe that there are around 2 billion barrels of untapped reserves that the allowance will help to recover. Professor Alexander Kemp of the university of Aberdeen estimates that 40-plus new small fields will be brought into development. That is just one estimate. The 2 billion figure includes not only existing discoveries but a range of prospects from fields that the incentive will influence now, through to discoveries and prospects that the incentive will help support in further exploration and appraisal drilling. The figure of 700 million barrels that has been quoted is a conservative estimate of the potential impact over the next 20 or so years. The final number could be much higher. Overall, the intention of these incentives is to increase activity in these challenging areas.

The proposed definitions of fields eligible for the allowance have been arrived at following in-depth consultations and discussions with a range of industry stakeholders as well as technical experts at the Department for Energy and Climate Change. They have been designed to ensure that the allowance is targeted on the areas that are most in need of support to limit the dead-weight cost to the taxpayer.

Let me make it clear to the hon. Gentleman that we are still committed to further dialogue with stakeholders. If there is a convincing case, the secondary powers in the legislation, to which he referred, will allow the Government to take appropriate action once the full and correct analysis has been undertaken.

The hon. Gentleman asked a specific question about the west of Shetland. The taskforce has made significant progress, leading to Total oil’s announcement in the new year of its intention to take forward the development of the Lagan tarmac field with its partners. That will include the vital gas pipeline to open up the west of Shetland.

The hon. Gentleman asked about existing fields. The Government considered a range of options on encouraging investment in the North sea in the run-up to the Budget. Industry stakeholders gave their views on many of the options. In our view, a satisfactory case has not been made to date for an incentive that could be introduced to encourage investments in existing fields while providing value for money for the UK taxpayer. However, we recognise the importance of existing fields to the future of the North sea, which he mentioned. We are happy to have further discussions with stakeholders on how support could be given to investment in existing fields. Today’s proposals do not cover existing fields.

I hope that I have answered the hon. Gentleman’s questions and that he will not press his amendment to a vote.

Peter Atkinson (Conservative, Hexham)

Before we come to the amendment, we must deal with the clause.

Schedule 44