Finance (No. 2) Bill

Public Bill Committee, 19 October 2010.

Christopher Chope (Conservative, Christchurch)

Before I call the Minister to move the sittings motion, I have a few announcements to make. If hon. Members wish to remove their jackets, they may do so. Will they please ensure that mobile phones and pagers are turned off or switched to silent during the sittings?

As Mr Leslie has discovered already, red document boxes are being provided for hon. Members, which is one of the privileges of serving on this important Committee. They are available in the cupboard to my right and, as a general rule, it will be appreciated if they are returned to the cupboard at the end of the sitting. Adequate notice needs to be given of amendments. Mr Caton, my fellow Chairman, and I do not intend to call starred amendments, which means that members of the Committee will need to be mindful of the short time scale if they wish to table new amendments.

David Gauke (Conservative, South West Hertfordshire)

I beg to move,

That the Committee shall meet—

(a) on Tuesdays at 10.30 am and 4.30 pm, and

(b) on Thursdays (other than 21 October 2010) at 9.00 am and 1.00 pm,

when the House is sitting.

I wish to make a few brief introductory remarks. I welcome you, Mr Chope, to the Chair. It will be a great pleasure to serve under your chairmanship and, indeed, that of Mr Caton. I note that you have already highlighted the document boxes, which you described as one of the privileges for members of the Committee; I am sure that they look forward to discovering what other privileges there are, if any. I know that you will provide your usual sage guidance and, while we tackle a somewhat technical Bill, I am sure that you will ensure that our deliberations are kept to the point. I also wish to extend my welcome to Mr Patrick, Clerk to the Committee, who will be assisting you.

This has been a political year, given the general election and the many contentious issues that face the country, and I am pleased to welcome to the Committee the hon. Members on the Opposition Benches. I congratulate the right hon. Member for Delyn and the hon. Members for Nottingham East and for Bristol East on their appointments as shadow Treasury spokespeople. They will no doubt delight at the opportunity to be members of many more Public Bill Committees in respect of Finance Bills, although I hope that they enjoy doing so from the Opposition side of the room, as I did for many years. Furthermore, I am sure that they and the Committee as a whole will be served admirably by their hon. Friends on the Opposition Benches. This Bill is shorter than most Finance Bills; none the less, I am sure that hon. Members serving for the first time in Committee will find it a challenge.

I have certainly not forgotten the hon. Member for Strangford, who I know will forcefully represent the views of Democrat Unionists. I shall be joined in later proceedings by the Economic Secretary to the Treasury, my hon. Friend the Member for Putney, and I know that she will want to extend her welcome to our hon. Friends, all of whom will be considering the Finance Bill for the first time, and also to our coalition partners, the hon. Members for Bristol West and for Solihull. I look forward to hearing enthralling and valuable contributions from them all.

This Finance Bill, more than most, has been a product of consultation and deliberation. Given that 97% of it was proposed by the previous Government, I hope that those on the Opposition Benches are already familiar with the details. We also consulted on the Bill during the summer and received more than 40 responses. I thank all those who worked with the Treasury and Her Majesty’s Revenue and Customs on the preparation of the Bill, especially those who prepared the draft legislation; the Bill is the better for that. I look forward to our deliberations over the next week and a half, and I am sure that the Committee will approach the Bill with fortitude and dedication.

David Hanson (Labour, Delyn)

Thank you, Mr Chope. I wish you a very good morning, and I look forward to serving under both you and your co-Chair, Mr Caton. Before we begin, I want to thank the team, led by Mr Patrick, that will be assisting you.

I welcome the Minister’s initial comments on the proceedings today. He is right to say that the Bill is, in large part, a Labour Government Bill that he has inherited. Although we will scrutinise it over the next few sittings, we agree with much of it. As the Minister will recognise, it is still the duty of the Opposition to table amendments, to test the Government’s thinking and to ensure that, even with the perfection that the Labour Government put in place, the Bill will be practicable and deliverable on the ground.

I welcome my hon. Friends the Members for Nottingham East and for Bristol East, who join me on the Opposition Front Benches as the new shadow Treasury team. I also welcome the Labour Whip, my hon. Friend the Member for West Ham, and my hon. Friends the Members for Islwyn, for Edinburgh East and for Wirral South, who are serving on a Public Bill Committee for the first time. I know that Members on the Government Benches will also enjoy the Committee, and I look forward to their possible contributions. However, having served in Government myself, I know that there is often a remit for Government Back Benchers, and they do not necessarily contribute as much as they might like. We will see whether any contributions are forthcoming.

I thank the Committee for providing a red document box—it is the first red box I have had since May. It is a great pleasure to get one again, and I will give it back in due course.

I thank my hon. Friend the Member for West Ham and the hon. Member for Scarborough and Whitby for their discussions on the sittings motion. However, it is important that we consider that motion in context before we finally agree it. I have some concerns, which have arisen since their discussions and are worthy of consideration. As I said, we strongly support much of the Bill, but we want to test it.

We are sitting today, this morning and this afternoon. According to the sittings motion, we will not be sitting this Thursday—presumably because of the pressures over the comprehensive spending review on Wednesday and the overflow from it. Potentially, we will be sitting on Tuesday morning and afternoon and Thursday morning and afternoon next week. Since my hon. Friend the Member for West Ham discussed this matter with the Government Whip, the business of the House has been announced for Tuesday and Thursday next week. That will be Treasury-led business, on which my hon. Friends from both the Front and Back Benches may wish to make contributions on the Floor of the House, as they follow such matters with interest.

I want to test the Minister on whether he feels that that situation is appropriate for him, the Economic Secretary to the Treasury and the hon. Member for Scarborough and Whitby; for my hon. Friends the Members for West Ham, for Bristol East and for Nottingham East and me; and, not least, for the Back-Bench Members on both sides, including the hon. Member for Strangford, whom I welcome to the Committee. Would we not potentially wish to look at the challenges that we face on two Bills that are coming up next week?

While the Savings Accounts and Health in Pregnancy Grant Bill is being taken on the Floor of the House on Tuesday, we will be at the Committee’s afternoon sitting, which will presumably commence at 4.30 and go through to 7 pm. If there is no statement in the House, the debate on that Bill will commence at about 3.30 and go through to 10 pm, as is usual for a Second Reading debate. I have studied that Bill with some interest; there are interesting matters in it about which my hon. Friends the Members for Bristol East and for Nottingham East, and my other hon. Friends and I, would wish to say a few words on the Floor of the House. Yet we might find ourselves sitting in this Committee that day.

I do not know about you, Mr Chope—I would not wish to draw you into this political debate in any way, shape or form—but the abolition of the maternity grant of £190 to mothers at their 25th week of pregnancy is a matter of concern to Labour Members. That will be a major issue, on which we will contest the Government during the next few weeks and months. Mothers receive the health in pregnancy grant—

Christopher Chope (Conservative, Christchurch)

Order. We need not go into too much detail about those other Bills.

David Hanson (Labour, Delyn)

I raise those important matters because we find ourselves in two places at once. There are matters before the Committee, but equally there are important matters on the Floor of the House about which we wish to comment. We wish to discuss the Savings Accounts and Health in Pregnancy Grant Bill.

Abolition of the health in pregnancy grant is a key issue, as is the abolition of the child trust fund in the same Bill. We debated that matter previously in Committee, but the abolition of that fund will be enshrined in the Bill. I dealt with the initial discussions on the child trust fund in Committee, and we stopped the payments to new entrants several weeks ago. I wish to deal with that matter on the Floor of the House, yet I find that I cannot be there for the opening speeches or contributions, although I could be giving the winding-up speech on the evening in question.

Without testing your patience too much, Mr Chope, dare I mention the abolition of the saving gateway scheme in that same Bill? It should have been available from July 2010 but has now been frozen and will potentially be abolished by the Government. In that Bill on Tuesday, saving gateways, child trust funds and maternity grants are big key issues, of which Labour Members were proud. We wished to see those issues developed, but the current Government are now pledged to abolish them. In my view, that will hit some of the poorest people who most need those provisions.

Before I move on to Thursday, I want to remind the Minister that next Tuesday there is a major Bill that hits poor people hardest. Labour Members wish to oppose it, but we will find ourselves in here as members of this Committee dealing with important Finance Bill matters. We will find ourselves as Treasury spokespeople dealing with issues in two places at once.

The comprehensive spending review announcements come tomorrow, and on Thursday next week we will have a full day’s debate on the Floor of the House, probably commencing around 12.30 or 1 o’clock. Again, we will find ourselves—three Treasury shadow spokespeople, the Labour Treasury Whip and interested parties on Labour’s Back Benches—with two Ministers and the Treasury Whip in this Committee from 1 o’clock until 4 o’clock next Thursday afternoon, while there is a major debate on the comprehensive spending review on the Floor of the House. Again, without wishing to widen the debate too much, I simply say that a potential 50% cut has been announced in public sector housing allocations for the relevant Government Department.

Chris Leslie (Labour, Nottingham East)

While we are discussing the programme of sittings, it occurs to me that there is one issue that I would like to address. For instance, I ought to have been in Downing street today presenting a petition from my constituents in Nottingham on the cuts to the decent homes grant. Obviously, I cannot do that today, but I would certainly like to be able to raise that on the subsequent Thursday.

David Hanson (Labour, Delyn)

I am grateful to my hon. Friend, who will know that a 50% cut in housing grant in England will be devastating in relation to the problems that all Members who represent English seats face in future housing allocations. That is just one issue that we will want to discuss on the Floor of the House while we are in this Committee.

Potential cuts of 30% at the Ministry of Justice were being touted in The Observer on Sunday. On the Floor of the House next Thursday, I will want to know how we are going to fund prison places and community-based sentences if we are facing a 30% cut at the Ministry of Justice. As the former Minister with responsibility for policing and counter-terrorism, I want to know what the expenditure on policing will be given that we face a potential 20% to 25% cut in policing and the loss of 16,000 police officers.

Those important issues will be debated on the Floor of the House next Thursday as part of the comprehensive spending review, while we, rightly, will be scrutinising the Government here in Committee with two Ministers from the Treasury team, three shadow Ministers, the Whips of both parties and Members who often contribute to such debates.

For instance, the hon. Members for Dover, for Solihull and for Elmet and Rothwell, who often intervene on matters relating to public spending issues, will find themselves tied to the Committee at a time when they should be downstairs arguing and discussing important matters of state relating to police funding, justice funding, housing cuts and the defence review—where today we find ourselves with aircraft carriers and no planes to fly on them, strange though that may seem. We find ourselves with unfair choices made in a comprehensive spending review that will hit the poorest hardest and which we want to challenge on the Floor of the House.

Kerry McCarthy (Labour, Bristol East)

My right hon. Friend has listed in detail some of the issues that we will need to debate when we analyse the comprehensive spending review. Is it not shocking that, at the very most—if there is no statement next Thursday—the debate will be timetabled for only five hours on the Floor of the House? Would not the solution be for the Government Whip to try to get a proper debate for the following week that could span a couple of days? We could then serve in this Committee a week on Thursday and also contribute to the comprehensive spending review debate, as we should.

Christopher Chope (Conservative, Christchurch)

Order. That is going too far. We are discussing this Bill and its timetable. The issue of how much time is allocated for the comprehensive spending review debate cannot be our business today.

David Hanson (Labour, Delyn)

I will try to stick to that guidance, Mr Chope, because it is important that we consider the sittings motion before us. I have tried to tailor my remarks around that motion. The Committee will be discussing the Bill’s 33 clauses and the 14 schedules to it. Those measures relate to important issues. Although there is large-scale agreement, we have tabled amendments so that we can discuss particular points of principle.

We are in a position in which there are two big debates relating to important matters for our constituents to which we wish to contribute. Without wishing to politicise this too much, the proposals in both the Savings Accounts and Health in Pregnancy Grants Bill and the comprehensive spending review will hit our constituents and the poorest in society hard. They contain unfair choices and cuts in public spending. Those cuts tackle a deficit that we need to tackle, but they are too quick, too deep, unfair and inappropriate. Those are issues that we will want to debate on the Floor of the House.

With the leave of the Committee, I might make a further contribution to this debate, but I would welcome the Minister’s initial view of whether, on reflection, he shares our belief that there might be problems with the sittings motion. Does he think that we should consider an alternative to sitting on Tuesday afternoon and Thursday afternoon next week? Will he look at my suggestions in a positive way? We could allow our sitting to continue today as planned so that the matter can be discussed through usual channels. Alternatively, if necessary, I could move an amendment to the sittings motion. We should, however, consider some arrangements that might resolve the problem.

Alison McGovern (Labour, Wirral South)

It is a pleasure to serve for the first time on a Bill Committee under your chairmanship, Mr Chope.

Does my right hon. Friend agree that many of the clauses in the Bill are important to my constituents in Wirral? I am keen to serve diligently and to examine them all, but I am concerned about some of the issues that he has mentioned, most specifically about the comprehensive spending review. Since I became a Member of Parliament, that is what people have contacted me about most, in addition to some of the Bill’s clauses that relate to tax. There does seem to be a conflict, so will he briefly comment on how we can resolve this for the good of all our constituents?

David Hanson (Labour, Delyn)

My hon. Friend is absolutely right that there is a great deal of trepidation and concern about the impact of the comprehensive spending review. Indeed, I have also received representations on the child trust fund, health in pregnancy grants, the savings gateway and other matters—those issues are important. Although the comprehensive spending review will be announced tomorrow and we do not yet know what it will contain, I read the papers, so I have seen the Government machine gently indicating some of the directions of travel. Even today, Treasury spokespeople wish to debate housing grant cuts, policing and justice cuts, today’s defence review, the potential child benefit changes and the winter fuel allowance, which might be hit. My Back-Bench colleagues in Committee may also wish to contribute, but there seems to be a clash.

I would welcome the Minister’s initial view on whether he regards that as a problem, because we do. I would like some discussion about this, and I would also welcome hearing the views of my hon. Friends about whether they, too, see it as a problem. I hope that the matter can be resolved, either outside the room today or through some other discussion and arrangement. I do not feel that we can proceed with the Committee while such important Treasury matters are being dealt with on the Floor of the House.

There are always clashes between Committee business and business on the Floor of the House, and hon. Members make a choice between them when they sit on Committees. These clashes have arisen, however, since the Bill’s Second Reading last week. Because the debates next Tuesday and Thursday are explicitly Treasury matters for Treasury Ministers and the shadow team, there should be scope for us to consider the arrangements a little more. I would welcome the Minister’s view on those points.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the right hon. Member for Delyn for his opening remarks. He raises a perfectly reasonable point, but I am not persuaded by his arguments. As he has acknowledged, there are always clashes between Committee duty and what is happening on the Floor of the House, where, I accept, there will be Treasury business next Tuesday and Thursday. None the less, there are five House of Commons Treasury Ministers and five House of Commons shadow Treasury Ministers, so it is not beyond our capabilities to deal with two matters at the same time. Indeed, that situation has arisen on a number of occasions in recent years.

It is also worth pointing out that there is currently a considerable amount of Treasury business. I have no desire to open up the whole debate about our public finances but, such is the state of them, there is a lot for Treasury and shadow Treasury Ministers to do. At a time when we must look at everything that we do to try to work as efficiently as possible and achieve more for less, it is not unreasonable for the Treasury and shadow Treasury teams also to improve productivity and efficiency and to be capable of dealing with two matters at the same time. We believe that we are capable of doing so and I see no reason why Opposition Members should not also be able to cope with such challenges.

Chris Evans (Labour, Islwyn)

The scheduling is unfortunate because we are at an important time economically—we have not only the CSR but the defence review. I have a major contractor in my constituency, so I would like to be involved in that debate. Does the Minister have any views on that?

David Gauke (Conservative, South West Hertfordshire)

As I say, there is always a difficulty for Members because there will always be plenty of things occurring at the same time. For example, I am sure that the hon. Gentleman will wish to be in the Chamber this afternoon to hear the statement on the strategic defence review. However, we must address such challenges to our individual time management on a day-to-day basis.

I am conscious, as the right hon. Member for Delyn rightly said, that the Bill is largely non-contentious. He is right to say that Opposition Members should test the Bill by tabling amendments, making speeches and asking searching questions about it. However, I see no reason why Opposition Members, who include highly capable shadow Ministers, should not be able to deal with the Bill as well as organising themselves so there is sufficient cover in the Chamber to address the matters that the right hon. Gentleman raises. Consequently, I am not persuaded by his argument, however eloquently and passionately he put it, that we need to change the sittings motion.

David Hanson (Labour, Delyn)

I have listened to the Minister, but I still think that there is an argument for us to look at the matter positively. This is no reflection on the discussions and negotiations that have taken place between my hon. Friend the Member for West Ham and the hon. Member for Scarborough and Whitby, but I think that a significant change has occurred since the initial discussions were held. I suggest to the Minister that we look at amending the motion so that we can meet his objective of completing our proceedings on the Bill in reasonable time and also allow Members on both sides of the Committee to contribute to the two important debates on the Savings Accounts and Health in Pregnancy Grant Bill and the comprehensive spending review. The Committee could then still consider the Finance (No. 2) Bill in a fruitful and productive way.

If you will allow me, Mr Chope, I would like to table the following amendment: at the end of the Government’s motion, insert, “except that there shall be no afternoon sittings on Tuesday 26 and Thursday 28 October.” That would give us the option of two sittings on 2 November, which is the Tuesday following. Our proceedings might conclude on the morning of 2 November. They might even be completed as early as the morning of Thursday 28 October—we do not know; we go at the pace we go. I do not want to cause the Minister trepidation, so I should say that we could finish the Bill on Thursday morning next week without needing to sit on 2 November. However, if we are faced with sittings on the afternoons of Tuesday and Thursday next week, when the House considers the CSR and the health in pregnancy grants Bill, it might be that my hon. Friends and I will find details in the Finance (No. 2) Bill that we will wish to test even more than we might have done.

I do not think that anything would be lost by accepting an amendment that would allow us to clear Tuesday and Thursday afternoon. We could then attend the health in pregnancy debate and stand up for our constituents who are being unfairly hit by the Conservative-Liberal Democrat Government on pregnancy grants, on the savings gateway and on child trust funds. We could also stand up for them on issues to do with cuts in housing, defence, police and justice, and on tackling the deficit. The Government could get their Bill as early as next Thursday afternoon, and certainly no later than Tuesday 2 November. I commend such an amendment to the Committee and ask whether my hon. Friends or other Members wish to speak to it.

Christopher Chope (Conservative, Christchurch)

I am willing to select the amendment.

Sheila Gilmore (Labour, Edinburgh East)

Like my hon. Friend the Member for Wirral South, I welcome the opportunity to sit for the first time on a Committee of this type. I certainly hope that I will learn a great deal from it that will be useful in the future.

I am particularly concerned about the position of all Back-Bench Members in respect of such debates, because our ability to put forward the views of our constituents and the issues that we have been taking up depends on our presence in the Chamber to indicate that we want to be part of the debate. In some ways, I think the position of Back Benchers is more difficult than that of Front Benchers, who can divide up responsibility for who is going to be where. These are extremely important issues. For example, I made a point in a Westminster Hall debate last week about the number of affordable homes being built and said that the best way to reduce the housing benefit bill would be to build more affordable homes. I was told by coalition Members that if the Government of my party had built more homes, there would not be a problem. To hear this morning that the amount being spent on affordable homes might be halved suggests that if our record in building homes was not as good as I would like, the coalition Members who made that comment last week will have to explain why they are supporting their Government’s proposal. As a Back-Bench Member, I certainly welcome the opportunity to take part in such debates, so it would make sense to rearrange the Committee sittings.

Jim Shannon (DUP, Strangford)

I thank the right hon. Member for Delyn for moving the amendment, which represents a satisfactory method to enable us all to participate in the debates in the Chamber next week. As one of the new boys at Westminster, as well as in the Committee, I assure everyone that my job is to try to enable us all to move forward on a satisfactory basis whereby we will have an opportunity to express ourselves on behalf of our constituents. I certainly want the opportunity to participate fully in next week’s debate in the Chamber, and the amendment would give me the opportunity to do so. It is not too much for any of us to ask that the amendment be considered fully and that we all have the opportunity to participate in such debates.

This perhaps tells us a lot about people, but my constituents tell me that they watch the parliamentary channel to see whether MPs are participating in business, after which they give their comments. I want to make sure that everyone has the ability to participate. The issues involved are critical. As someone who represents a constituency in which many will be disadvantaged because of the proposed changes, I want the opportunity to express my feelings. The amendment would give me that opportunity, so I ask members of the Committee to consider it appropriately.

David Hanson (Labour, Delyn)

I am grateful for the hon. Gentleman’s support. I had the great pleasure of serving for two years as a Minister of State for Northern Ireland and found his constituency to be one of the most beautiful in the Province.

I do not wish to start our proceedings in Committee with a major falling out. The amendment is there to be tested and I will welcome the Minister’s view of it. I would even be happy, if you would agree, Mr Chope, for us to have a five-minute suspension so that the usual channels may discuss the matter—that might be helpful. I served on 24 Bill Committees as a Minister, and I was involved in probably 10 or 11 others as an Opposition Member when John Major was Prime Minister, so I think that I am in order in asking for such an suspension. If that proposal is not accepted, however, I will press the amendment to a Division it because it would give us scope to meet our responsibilities on the CSR, the Savings Accounts and Health in Pregnancy Grants Bill and the Finance (No. 2) Bill.

I hope that the Minister accepts that I am trying to be helpful. We do not oppose much of this Bill. We want it to reach the statute book. We will ensure that it does so, but we might take a little longer over our scrutiny if we cannot participate in the debates on the CSR and the Savings Accounts and Health in Pregnancy Grants Bill accordingly.

David Gauke (Conservative, South West Hertfordshire)

I refer the Committee to the argument I made some moments ago that I have utter confidence in the ability of both Government and Opposition Members to perform their parliamentary duties satisfactorily, notwithstanding the fact that there is Treasury business in both this room and the Chamber next week. I also note what the right hon. Member for Delyn said about the Committee perhaps being able to complete its proceedings by next Thursday morning. I assure the Committee, and particularly those Members who are keen to participate in the spending review debate next Thursday, that Government Members will do all that we can to ensure that we move through the Bill thoroughly but expeditiously. If Opposition Members join us in the same spirit, I am sure that we could conclude our proceedings by next Thursday lunch time. We shall watch carefully to see whether they act in that particular spirit. I have no desire to fall out on this point, but it is perfectly possible that we can achieve that, although I note that we have lost 35 minutes to scrutinise the Bill that we might otherwise have had.

Chris Evans (Labour, Islwyn)

Will the hon. Gentleman take up the suggestion made by my right hon. Friend the Member for Delyn that we have a five-minute suspension so that the matter can be considered by the usual channels?

David Gauke (Conservative, South West Hertfordshire)

No, that is not necessary. The sittings motion as it stands is perfectly adequate. I hope that we can proceed to the proper scrutiny of the important measures in the Bill. If we are able to do that thoroughly but expeditiously, I am sure that there will be plenty of opportunity for all Committee members to in participate other debates.

David Hanson (Labour, Delyn)

Before we proceed to a Division, I would be interested to hear whether the Minister’s hon. Friends the Members for Bristol West and for Solihull—given their independence as Members representing a separate party in this great coalition, as well as their position as supporters of the coalition—share his views. I would welcome their interventions so that we can hear their views on the matter and whether the Government are as one on all these issues.

David Gauke (Conservative, South West Hertfordshire)

Whether my hon. Friends the Members for Bristol West and for Solihull wish to intervene is entirely a matter for them. This matter is not specifically addressed in the coalition agreement. However, for those of us who want to proceed with the Bill, it is entirely reasonable that we do so on the basis of the sittings motion.

Clause 1

Chris Leslie (Labour, Nottingham East)

I am sorry that we had such a brief debate on the sittings motion. I was surprised that many Government Members did not express their views. Hopefully, we will hear more from them during the meat—the substance—of the Bill, as we proceed through it. I was hoping that the Minister would take the opportunity to set out to the Committee the substance of clause 1, but I will make my few brief points first in the hope that he will respond to those and that the Committee will then be able to ask the Minister questions if further issues arise.

As I understand it, clause 1 amends the Income Tax (Trading and Other Income) Act 2005 to modernise and update the arrangements for adult placement care and to ensure that the various expenses and tax exemptions are relevant to contemporary circumstances, including the short-term nature of foster care and adult placement care.

As all hon. Members will know from their postbags and constituency work, being a carer is an enormous commitment requiring a great deal of patience, understanding and hard work. It offers young people and adults who need support because of their health or disability a valuable opportunity to live with people who can give them the help that they need. They can share their hobbies and interests with them, enjoy family life and fulfil their potential to the full.

Of course, given the rather circular nature of the time frame in which we are considering the Bill, the measures have their origin in a Labour Administration. I am proud of the fact that there are measures to clarify and simplify the tax treatment of both foster care and shared lives care, to ensure that the costs, expenses and capital allowances are recognised more fairly by the tax system.

The care, support and accommodation for people who need help owing to a learning, physical and/or sensory disability, or perhaps mental health problems, can be costly. Carers are specially recruited, particularly in respect of shared lives care, to provide services in their own homes. That is a positive initiative because not only does it result in less institutionalisation of those in care but it provides respite breaks for families of carers—or, perhaps, cover that would otherwise cause great strain on families and carers during emergencies.

The arrangement also helps to prepare individuals for independent living and independent lifestyles, so it is proper for the Government and Parliament to support and encourage such arrangements. I want to place on the record my own tribute to those among my constituents and across the country who give their time and efforts to be a carer, either for an adult in the shared lives placement or in foster care. They make an incredibly important contribution.

The definitions are set out and we will discuss the first schedule to the Bill later; that sets out some of the arrangements. My points to the Minister are as follows. Can he tell the Committee how many shared lives care arrangements the reliefs will apply to? It was not clear to me, either from the explanatory notes or from associated discussions on the Bill, how many people and families might be falling underneath those particular taxation arrangements. A bit of context would be useful, if the Minister can gather some inspiration.

In a similar way, I wonder whether any work is being done in the Treasury, the Department for Work and Pensions or other Government Departments to project trends in future volumes that might also exist. It is all very well having a snapshot of how many people we are talking about at one particular time, but given the complexity of the tax relief arrangements, I hope that there will be some methodology or way of predicting what the trends in such arrangements might be. We know from the 1980s care in the community arrangements that over the decades care arrangements can change and evolve. I would expect that this more pioneering form of care—the shared lives placement arrangements—might burgeon and grow in future, so I wonder whether there is facility for that in the Government.

On a technical point, can the Minister say whether the provisions relate to the UK as a whole or only to England? Again, it was not clear to me how the provisions relate. Obviously, certain matters are devolved, but that was a specific point that I thought the Minister might know. I wonder whether the Minister has had any other representations from organisations about associated issues related to the costs of foster care, adoptive care, shared lives placements and so forth. In that respect, there is a series of clauses to the Bill, which are probably some of the most substantive of the legislation.

Hon. Members have made a number of points. I was talking to my hon. Friend the Member for West Ham, for instance. She highlighted casework that she had dealt with about anomalies for parents who are involved in foster and adoptive care. For example, statutory adoption pay is available only to people in full-time employment and not to those in casual or self-employment. There is a whole set of anomalies that needs to be addressed in respect of the treatment of reliefs and the grants available to carers. I will be interested to hear the Minister’s comments on such matters.

David Gauke (Conservative, South West Hertfordshire)

I am sorry if I caught the hon. Member for Nottingham East by surprise, but I am sure that the Committee was anxious to hear from him in full early on. It is a pleasure to respond to the points and questions that he has raised.

Clause 1 introduces schedule 1, which extends the existing relief for foster carers by replacing it with broader qualifying care relief. The changes simplify the computation profits for tax purposes by allowing carers to apply a notional amount of relief rather than having to keep track of all the expenses of providing care. That is done by calculating the relief by reference to the number of people who are placed with the carer and it is a simple and clear way of calculating profits for tax purposes.

The changes will greatly assist those who operate on a small scale. Using qualifying care relief will encompass many carers who have benefited from the approach on a concessionary basis. The hon. Gentleman asked how many people will benefit as a consequence of the changes, or how many will fall within the category. The answer is about 8,000 carers. We are ensuring that their tax affairs are on a firm statutory basis.

The measure may be familiar to some Opposition Members. As with many of the other provisions in this “housekeeping” Bill, it was announced by the previous Government at last year’s pre-Budget report. Draft legislation was then published for comment. I believe that the change is worth while and welcome, so I have proceeded with it.

As part of this Government’s work to improve tax policy making, however, the clause—like all the others—was published in July to allow for additional consultation, which has been helpful. The measure has been received favourably by carers and their representatives, including The Fostering Network, and National Association of Adult Placement Schemes.

One change has been made to the schedule, to clarify its meaning, that also relates directly to the subject of consultation. In its draft form, the relief might have been construed as applying to other sources of income, so two commas were added to ensure that it can be applied only to income received from caring. I am sure that the hon. Member for Nottingham East will have spotted that, so I have saved his having to highlight it in the debate on the schedule. The change demonstrates some of the benefits of consultation.

The clause has been welcomed by both sides and will offer greater certainty to many carers. At the Budget, we announced that the rule change will take effect this tax year. The relieving clause has retrospective effect to 6 April 2010, which I am sure will not be too much of a problem.

I am sure that the hon. Gentleman will understand that the trend in the number of carers is not a matter for Her Majesty’s Revenue and Customs. Local authorities hold data on the number of carers; HMRC, which administers the relief, deals only with the tax effects and the payments. In answer to another of the hon. Gentleman’s questions, I should say that the measure covers the whole of the UK. I hope that that clarification is useful.

Chris Leslie (Labour, Nottingham East)

I am relieved to know that the measure applies to the whole of the UK. However, it begs the question, especially given the Minister’s answer that it is not for HRMC to project future volumes or look at such issues, whether he and his officials have been in consultation with local authorities across England and with the Scottish Executive, for instance. With whom in those particular organisations has the consultation taken place to make these arrangements?

This all implies that there is a potential burden being moved in the direction of local authorities to make planning arrangements, even though, as I understand it, the revenue implications will certainly fall on the Treasury. If he was not undertaking projections in-house, at least there would be some ongoing dialogue with the people who he says are responsible for the day-to-day running and projections of these issues.

Will the Minister return to the issue about the statutory adoption arrangements and the anomaly through which it applies to those in paid employment, but not to those in casual employment or self-employment? The point is quite important, and I wonder whether he will write to the Committee further about it. The matter has been of concern to hon. Members who, when looking at these particular clauses, thought that it was relevant, given the substance of what we are discussing.

David Gauke (Conservative, South West Hertfordshire)

I do not think that that last point is directly relevant to the clause, although I always welcome the hon. Gentleman’s raising such matters. I will happily write to him, even though it is not directly related to the clause.

The hon. Gentleman was right to ask about consultation with local authorities. Of course HMRC consults local authorities as appropriate, and as I mentioned in my remarks, the legislation has been out for consultation. It was first published at the time of last year’s pre-Budget report and it was republished in July, when we published the draft Bill. It was out for consultation for eight weeks. So there have been plenty of opportunities for local authorities to make their views clear.

It is also worth highlighting that the matter is one that simplifies the process and makes it easier to run for both carers and, I dare say, local authorities. I think the hon. Gentleman should feel reassured that the clause will not impose an undue burden on local authorities.

Schedule 1

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 1, in schedule 1, page 24, leave out lines 11 to 13.

The amendment would delete subsection (6) of proposed new section 804A of the Income Tax (Trading and Other Income) Act 2005, which addresses the way in which the shared lives care tax relief arrangements propose to treat a group of siblings—brothers and sisters—placed in the same household as though it was a single placement, no matter how many brothers or sisters are actually placed in the household. Clearly, while there might be ease-of-administration reasons why HMRC wishes to restrict the relief in that particular way, there are surely additional burdens and costs that grow according to the number of related shared lives placements, especially if the people involved are adults. It might be preferable to reflect that in some way in the tax relief system. I can imagine, for instance, that when there are two individuals physically together, while it is important to keep the family unit happy and cohesive, there is obviously an additional burden on the carers involved. It would be regrettable if we unwittingly put into the system a disincentive to keep a family together. I would have thought that there would be worth and value in ensuring that there was some reflection of the fact that an opportunity to keep brothers and sisters together as a family unit, albeit moving into adulthood, is something the system should reflect.

At this stage, this is a probing amendment that is designed simply to seek an explanation from the Minister on how, in circumstances where there are multiple siblings in one household and shared lives placements—that could be an extremely laudable and welcome scenario—there could be a risk of a penalty or disincentive for the carers concerned.

David Gauke (Conservative, South West Hertfordshire)

I appreciate that this is a probing amendment, and I am sure that I can provide the reassurance for which the hon. Gentleman is looking. Amendment 1 would remove subsection (6) of proposed new section 804A of the Income Tax (Trading and Other Income) Act 2005, as introduced by schedule 1 to the Bill.

The new section deals with the placement cap, which focuses the relief on small-scale arrangements by limiting the availability of the relief to arrangements where no more than three people are cared for at a time. Subsection (6), which covers siblings, qualifies the terms of this limit so that if a carer provides shared lives care for a family group, that will not automatically mean that the placement cap is exceeded. It achieves that by treating siblings as if they were one person for the purposes of establishing whether the placement cap has been exceeded. Without subsection (6), a carer looking after four siblings would exceed the placement cap. This subsection therefore preserves the entitlement to relief in those circumstances.

The hon. Member for Nottingham East rightly said that it would be regrettable if there was a disincentive to keep families together. The provision ensures that families can be kept together. It is worth noting—this might be the hon. Gentleman’s concern—that siblings are not treated as one person when determining the amount of relief available to the carer. For these purposes, the carer would treat each sibling as a separate person for whom qualifying care was provided so that the appropriate amount of relief could be calculated.

I understand that the Opposition want to ensure that there is fair treatment for carers, as we do, but I think that they might have misunderstood the purpose of subsection (6). It does not penalise carers; quite the contrary, it ensures that the placement cap, which affects the relief that they receive, is not exceeded should carers look after siblings. I hope that that explanation is satisfactory to the hon. Gentleman and that he will withdraw his amendment.

Chris Leslie (Labour, Nottingham East)

I am certainly interested to hear the Minister’s points, and I am reassured if it is the case that carers who look after brothers and sisters will not be financially worse off for doing so compared with if they looked after non-siblings or another set of individuals. I think that he is nodding his assent, which is extremely welcome. I do not know whether other organisations will have observations to make on those points but, given the Minister’s reassurance, I am more than happy to beg to ask leave to withdraw the amendment.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 2, in schedule 1, page 26, line 8, at end insert—

Christopher Chope (Conservative, Christchurch)

With this it will be convenient to discuss amendment 3, in schedule 1, page 28, line 17, leave out ‘2011-12’ and insert ‘2012-13’.

Chris Leslie (Labour, Nottingham East)

Amendment 2 would change paragraph 12 of schedule 1 to the Bill by adding—for belt and braces purposes, as much as anything else—an additional requirement on the Treasury It raises issues that were first highlighted by the Chartered Institute of Taxation, which hosts a low incomes tax reform group. It made its representations in June, pointing out that one group of carers might lose out under the proposed changes. Mr Robin Williamson, the technical director of the LITRG, asserted:

“If a person is both a foster carer and an adult placement carer”

simultaneously,

“the tax free limit on the amounts they receive from the local authority or fostering agency will actually fall.”

Specifically, paragraph 12(2) of the schedule sets a new weekly amount for an adult of £250, which I think stands in contrast to the £400 a week received for the first child in a foster care scenario. I would welcome the Minister walking the Committee through exactly how those arrangements will apply, especially in the different circumstances of shared lives placements versus foster care.

I understand that the new fixed amount per residence is worth while, but there are circumstances in which some carers who look after both foster children and an adult placement might lose out. That could be the intent of the Treasury, but I doubt it, or it could be a drafting anomaly. Carers in such circumstances might well risk losing the enhanced weekly amount of £400 under the new rules, when they would have been entitled to it previously. The proposal creates a problem for the particular set of carers who have looked after a number of young people, perhaps some of whom have passed the age of 18. The guillotine age of majority issue does not necessarily change the circumstances of the care that young people require when they move from the ages of 16, 17 and 18 to 19. Even though young people have passed the age of 18, they might still require home support although they are technically adults.

Such circumstances can occur relatively frequently, and such carers might find themselves in the predicament whereby they lose tax relief on income of up to £7,800 per year, which is £400 weekly minus the new amount of £250, multiplied by 52 weeks. That, in turn, could create a tax burden at the basic rate of £1,560—money that would then not be available for use by carers on the children and adults in their care. The Chartered Institute of Taxation has, in particular, urged Ministers to reconsider that aspect of the rules. It would be useful in a wider context to look not only at the point raised by the institute, but at the importance of the fact that the new adult placement care arrangements are coming under a relatively recent set of tax changes.

Given our debate on clause 1 and the changing nature of care arrangements, we need to have an ongoing review to ensure that carers do not fall into hardship and that they can sustain the costs involved in that care. For young people, that can include school uniforms, sports clothing, school equipment, travelling expenses, babysitting and childminding costs, gifts for birthdays and Christmas, holidays, other educational costs, glasses, playgroup fees, hobbies, sports, activities, passports, adaptations to housing and the general well-being of the child—they are just a few of the miscellaneous costs that will be incurred whether a foster carer is looking after children or in adult placement arrangements. It will be important if the Bill underlines such principles, especially in respect of adult placement care arrangements, which are relatively new to legislation. If we could draw attention to such matters and hold a review, it would be important.

I accept that Labour Members must take responsibility for initiating such technical changes—I am proud that we did so. However, we believe that it would be a fair concession to allow for a review of such arrangements, especially to test for hardship that might result from the new blanket adult weekly amount of £250. Such an amendment would be worth while.

David Gauke (Conservative, South West Hertfordshire)

As the hon. Gentleman said, such proposals were announced in the previous Government’s last pre-Budget report of 9 December 2009. The PBR stated that the changes would take effect from 6 April this year. Despite that, the measure did not feature in the pre-election Finance Bill so, although the process was initiated at that stage, it is necessary to take it forward under the Bill that we are discussing.

Amendment 2 would commit the Treasury to publishing a review into the impact of the shared lives legislation. It is fair to say that Government and Opposition members of the Committee agree that bringing together reliefs for foster care and shared lives care will benefit carers on the whole. However, the low incomes tax reform group has raised concerns about individuals who may claim both reliefs separately. We believe that that is a theoretical possibility, but the reliefs are in place to make a standard allowance for household expenses incurred, so it would be inappropriate to make two allowances available for the same household expenses. It was certainly never the policy intention that individuals in a position to claim both the existing statutory relief and the extra-statutory concession for adult placement should have an unfair advantage.

As with any policy, HMRC will be monitoring the legislation’s effect in conjunction with interested parties to ensure that it operates fairly. Although Opposition Members make an understandable point through amendment 2, I do not think that it is appropriate for the Committee to accept it. Ensuring that legislation is implemented fairly and properly is important, of course, but it would be burdensome to put such a commitment into the Bill. However, I confirm that we will ensure that we review the measure’s implementation and discuss any cases of hardship with representative bodies. HMRC takes such issues seriously and has told me that it will happily receive representations on the matter.

Amendment 3 would allow carers a further year to apply the new rules. The schedule permits carers to continue to use existing practice until 5 April 2011, although they can choose to use the new rules from 6 April 2010. The proposals were announced almost a year ago, in December 2009, and have been widely publicised and discussed with interested parties. In most instances, the schedule merely has the effect of providing a firm statutory basis for existing practice. For most carers, the transition will be straightforward and have no appreciable effect. Furthermore, after consultation with interested parties, HMRC will prepare guidance, which will be published as soon as possible to support carers in making the change.

Given that the initial announcement was made in 2009 and there is the possibility of a year’s transitional period, carers will have ample opportunity to adapt to the new regime. Also, it would not be appropriate for HMRC to continue extra-statutory treatment for a full year while the parallel legislation is already in place, because that would confuse rather than reassure.

We are have not received any representations—nor are we aware of any—asking for full implementation to be delayed. It is necessary at some point to proceed to implement a process that was initiated nearly a year ago. The Government are committed to being clear in our decisions and to providing time for proper consultation and consideration to ensure that we have made the right choices. It is right that we proceed.

The hon. Gentleman asked about children turning 18 and the guillotine or cut-off point. Children in foster care who turn 18 and are staying with a family often come within staying-put care, which may qualify for shared lives care, depending on the circumstances.

Although I believe that amendments 2 and 3 were tabled with the best intentions and our debate has been helpful, it is clear that neither is needed. I stress, however, that we will review the implementation of the measure and discuss any hardship cases with representative bodies. I therefore ask the hon. Gentleman to withdraw his amendment.

Chris Leslie (Labour, Nottingham East)

With the leave of the Committee, I shall return to the Minister’s point about amendment 2. I do not quite follow the logic that enshrining in legislation the Treasury’s requirement to conduct a review would be burdensome in any way, although I accept that he is on record as giving a commitment to conduct an ongoing review to ensure that arrangements are up to date and minimise any possible difficulties. Will he give us some indication of what sort of review process that will be? Will officials put contact details on the website for people to use if issues arise? Often, people in those circumstances do not know who to make representations to, and the large, monolithic face of the Treasury is not necessarily the easiest to make representations to, particularly in its current guise.

Amendment 3, which I did not dwell on sufficiently in my original comments, is designed to build on the transitional arrangements that the Treasury had conceived originally. The reason why we want to delete “2011-12” and insert “2012-13” in proposed subsection (2) is to give a two-year transition period so that those affected can opt for the current rules instead of moving straight away to the new arrangements.

We felt it important at least to seek a concession from the Minister because it is reasonable to allow that slightly longer transition to give busy individuals and families the proper opportunity to adjust and come to terms with the extremely complex arrangements. A two-year transitional phase would recognise the time that it takes for families and households to adjust their circumstances and shared life care arrangements to the new financial regime—circumstances that might well take many months to alter, given the human scale and the nature of the issues at hand.

Why two years rather than one? I believe that we need to give help to families in those particular circumstances because, although to many of us 12 months might be ample to move house or change particular arrangements, the financial circumstances in such arrangements require a little bit more care and attention and, possibly, time. If the financial arrangements are changing, the carer’s circumstances may well have to change, and to force that change within 12 months may prompt a premature series of changes in the carer arrangements. That might not be particularly welcome.

I ask the Minister to err on the side of generosity in that respect. I do not believe that it would have a major impact in a financial sense, but I think it could make a vast difference to the carers.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the hon. Gentleman’s further remarks. As far as a review is concerned, I do not think it is necessary to put something on the face of the Bill, nor necessarily have a full formal review with requests for consultation. The Treasury may have a large, monolithic face, but it and HMRC are in continuous discussion with organisations such as the low incomes tax reform group, and we will ensure that we discuss the implementation of this matter with it and other interested parties.

As far as the transitional period is concerned, we have to remember that the reforms are based on an existing relief. Guidance on how this works will be published by HMRC, but in the vast majority of cases, there will not be a substantial change to what is already in place. Consequently, we believe that it is right to proceed. If we tried to run a parallel system over a long time, it would cause more confusion than it would solve. I note the concerns that have been reasonably expressed by the hon. Gentleman, but we believe that it is right to proceed with the reform according to the timetable in the Bill.

Chris Leslie (Labour, Nottingham East)

I think that I have made the point on behalf of Opposition Members, and I do not want to labour it more than is necessary. The officials will also have heard the points. I beg to ask leave to withdraw the amendment.

Clause 2

Chris Leslie (Labour, Nottingham East)

The clause provides income tax relief for particular payments to special guardians, which I understand not to mean those in respect of whom local authorities have legal powers in terms of looking after children, but guardians who do not have full adoptive rights and where there are ongoing and retained rights by birth parents. The clause also makes changes in respect of other carers looking after children placed under residence orders—certain kinship carers. For those unfamiliar with the technical term, kinship carers are grandparents, aunts, uncles and so forth who look after children. The exemption, which I gather will be similar to the current tax arrangement, for payments to those who have an adopted child will apply only to qualifying carers and will have an effect on payments received on or after 6 April. Qualifying payments are payments made in relation to a special guardianship or residence order either by the child’s parents, or on behalf of the local authority, to a qualifying carer.

Qualifying carers are those who care for a child or children placed under them with a special guardianship or residence order when the carer is not the child’s parent or step-parent. Kinship carers looking after a child who has not been placed under a residence order are not qualifying carers for the purpose of the exemption, but will be entitled to the new income tax relief for shared lives care, as we discussed earlier. Will the Minister explain a little more about that treatment of kinship carer arrangements without the residence order and why such carers would not be eligible in such circumstances? There are currently special income tax rules for foster carers, those who have adopted a child and shared lives carers.

I have been told that the decision to tax carers who take on legal parental responsibility for a child in a similar way to those who have adopted a child follows informal consultation about the new income tax relief for shared lives carers. That was set out in Budget press notice 37 when the announcement was made. Will the Minister tell the Committee what that informal consultation about the new income tax arrangements involved? Whom did the Treasury consult? I am slightly wary when I see the phrase “informal consultation” in a formal policy announcement because there is a risk that although officials have their own particular networks, they might not extend their tentacles to organisations that might have a worthwhile and legitimate say but are perhaps excluded. I would prefer more formal consultation arrangements, or at least advertising on websites that are likely to be visited by those with a particular interest.

I am also interested to know whether the Minister’s officials are in touch with the relevant bodies—the Local Government Association, the Association of Directors of Social Services and, when relevant, housing bodies and other organisations involved in shared lives care policy—to ensure that there is widespread notice of the changes being made and that those new arrangements are kept under review. What is the Minister’s view on that point and can he put clause 2 in context?

David Gauke (Conservative, South West Hertfordshire)

Again, I am grateful for the hon. Gentleman’s comments. He described what clause 2 is about: essentially extending the scope of the existing exemption from income tax on certain payments made to support adoptive parents. From 6 April 2010, the exemption from income tax will also apply to similar payments made to support individuals who are not adopters but instead provide care for a child under the terms of a special guardianship or residence order. It brings into line the tax treatment of payments made to support individuals who take on parental responsibility for a child, thus putting the tax treatment of those payments on to a sound statutory basis.

The exemption replaces an extra-statutory arrangement that allowed a carer to substitute a fixed rate of expenses for the actual costs of providing care. As with clause 1, the measure was announced by the previous Government in last year’s pre-Budget report on 9 December 2009. We published the clause in draft during the summer and it has been welcomed by carers and their representatives.

The hon. Gentleman asked about the treatment of kinship without a residence order. The kinship circumstances do not include the same parental responsibilities, but those with parental responsibilities will qualify.

Sheila Gilmore (Labour, Edinburgh East)

In practical terms, the responsibility of kinship carers, especially grandparents, is equally expensive and has an impact on those carers’ overall family income. Not everyone wants to seek a residence order or believes that to be necessary, and going through the courts for such an order might be expensive. Many people carry out such tasks, so would it not be reasonable to include them? They may be receiving payments under an agreement, for example, although a residence order is not in place.

Christopher Chope (Conservative, Christchurch)

Order. The hon. Lady is making an intervention, not a speech, and she has spoken long enough for an intervention. She may make a speech at any time, if she wishes.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that intervention, but there are differences when particular parental responsibilities and costs are involved. Some people may qualify as having parental responsibilities, but the kinship approach is a slightly different test. The hon. Lady raises an interesting point, and I appreciate the reasons why some carers may not seek a full residence order arrangement with parental responsibilities. None the less, we believe that our approach is reasonable.

Chris Leslie (Labour, Nottingham East)

I just want to know the specific costs that would not fall on the kinship carer but would fall on others. The Minister said that the circumstances are different, but what expenditure would not be incurred?

David Gauke (Conservative, South West Hertfordshire)

I do not want to become over-sidetracked into a full debate on this point, but it is right to highlight the fact that a kinship carer without a residence order may qualify for shared lives care. That is a slightly different arrangement.

Alison McGovern (Labour, Wirral South)

Just so that I am absolutely clear, will the Minister explain the position of shared lives carers if they are caring for a child?

David Gauke (Conservative, South West Hertfordshire)

It is possible for a kinship carer to qualify for shared lives care, even if the cared-for person is a child. That is still available.

On the informal consultation, the hon. Member for Nottingham East asked whom we consulted. The organisations involved included the Fostering Network, the National Association of Adult Placement Schemes, the fostering and adoption team at the Scottish Executive, the low income tax reform group, the then Department for Children, Schools and Families and the Department of Health. I hope that that provides some reassurance that there was considerable consultation.

I noted that the hon. Gentleman said that he preferred a formal rather than an informal process, but it is helpful at times to have an informal process. Indeed, it is right that the Treasury and HMRC consult informally as much as possible to ensure, particularly in an area with a strong relationship with the then DCSF and the Department of Health, that we can work across Government in a co-ordinated way. It is fair to say that clause 2 has been welcomed. Despite the lengthy consultation, it has not been the subject of great criticisms or concerns.

Sheila Gilmore (Labour, Edinburgh East)

I wish to pursue further the matter of kinship carers. At the very least, we have a complex set of provisions. In the interests of simplification, they could be looked at again. It might be the case that a kinship carer is eligible for relief under shared lives care, but that is not self-evident to the average person, which might cause difficulty. There is also a placement cap for the numbers who might be cared for regarding shared lives care. We now have the opportunity to look further at this huge provision of care in many communities. A number of people perform such functions, which are identical in practical and financial terms whether or not they are subject to a legal order. If the Minister does not want to address these matters as part of the passage of this Bill, perhaps he will give a commitment to look at them in the future.

David Gauke (Conservative, South West Hertfordshire)

The hon. Lady brings considerable expertise to the debate. The clause is helpful in the case of special guardians and those in receipt of residence orders. It is welcomed by all members of the Committee. She raises some wider points of policy that I do not intend to cover in this debate, but she has put some interesting and important points on record.

Chris Leslie (Labour, Nottingham East)

The debate has been useful because it has shed a little light on the different treatment of special guardianship arrangements and kinship carers, although I am not sure whether, in the process of clarifying the arrangements, we have revealed more complexity. I am still not quite convinced of the justification for treating a kinship carer in a different financial way from that for other care arrangements. If necessary, we will want to return to the issue on Report. After listening to the Minister’s illuminating words, however, I shall not object to clause 2 at this stage. We will reserve our right to return to the matter, but it will be useful to see whether his officials can think a little further about it in the weeks to come.

David Gauke (Conservative, South West Hertfordshire)

Although I do not want to become over-sidetracked into kinship and shared lives, it might be helpful for the Committee to know—perhaps I should have pointed this out earlier—that HMRC will be publishing a draft statutory instrument as soon as possible to cover this issue. Given the points raised by the hon. Member for Edinburgh East, I am sure that she will study the statutory instrument closely.

Chris Leslie (Labour, Nottingham East)

Will the statutory instrument be subject to the affirmative or negative procedure?

David Gauke (Conservative, South West Hertfordshire)

I will have to inform the hon. Gentleman of that in due course. He asks a fair question, but I am sure that he is pleased that a statutory instrument is on its way.

Clause 3

Chris Leslie (Labour, Nottingham East)

I am looking forward to hearing from the Minister about the statutory instrument that he brought to our attention in the previous debate. I hope that it will be subject to the affirmative procedure. I look forward to being a member of the Committee that will discuss it.

Clause 3 will correct technical anomalies in the special capital allowance rules for foster carers and shared lives carers to ensure that the rules operate as intended when individuals start or finish qualifying or being elected for foster care relief. I understand that carers can stay out of the tax regime if they earn below the individual limit for qualifying care relief. If their earnings from the provision of care exceed that limit, however, they can sometimes use the normal tax rules that apply to businesses. That might seem quite unusual, given that we are discussing carers, but such a resource can sometimes be discussed—as we see in the explanatory notes—as though it were a business arrangement. That can include claiming capital allowances for certain plant and machinery.

My obvious question to the Minister is: what sort of capital plant and machinery applies in care scenarios? Will he elaborate on that and describe the particular mechanistic and plant investments that carers might seek to make to gain such a capital allowance?

I am told that the rules seek to prevent excessive claiming of those capital allowances, or double-claiming in excess of the original costs of plant and machinery that were previously relieved. What evidence does the Minister have that there have been abuses of those capital allowance arrangements in the past? Is it to do with computer purchasing or transport or kitchen equipment? What exactly is it and what evidence is there of previous abuse?

If the Minister has gained some inspiration about the sums of money that relate to this, I should be grateful to know what figures are involved in making the changes. Are we moving from one estimate of capital allowance arrangement to a new lower one? What is the Treasury’s estimate of the financial implications of the arrangements?

Will the Minister say how many qualifying carers choose to calculate their taxable earnings as profits, as though they are in a care business? Again, I am not clear about that, because there seem to be two routes that carers can go down. How many carers, does he estimate, treat the situation in that sense and may fall under the capital allowance arrangement? If we are discussing care as “a business”, at what point would qualifying carers come under the inspection regime of—I presume—the Care Quality Commission? When does the number of placements, or people in care who are being looked after by a family, grow so large that it becomes a business that merits an inspection arrangement? I should be grateful if the Minister would answer those specific points about clause 3.

David Gauke (Conservative, South West Hertfordshire)

Clause 3 amends the capital allowances rule that applies to individuals who are entitled to qualifying care relief. As I explained in the context of clause 1, qualifying care relief provides a simple set of rules for calculating profits for tax purposes, which includes special capital allowances. I ought to say that the hon. Gentleman raises a fair point about what constitutes plant and machinery in such contexts. The glib answer is: anything that qualifies within the capital allowances rules—cars, vans, computers and furniture could qualify under such circumstances. Carers are permitted to claim capital allowances for their care businesses only in periods when they calculate their profits using normal trade rules, rather than the qualifying care relief rules. It follows that carers may be able to claim capital allowances in one year, but not in the next.

Broadly, the special capital allowances rules simplify the calculations required when a carer changes from one profit calculation method to another. The changes under the clause do not reflect a change of policy, but will ensure that the special rules for carers operate consistently and equitably.

It has come to the attention of HMRC that the special rules do not always work fairly or as intended. This legislation has been brought in, not so much as a consequence of observing and identifying abuse of it, but because the law as it stands is flawed and could result in a double relief that is not the intention of the policy. The legislation will prevent double claims and that is the right thing to do.

The hon. Gentleman has asked a fair question on whether this is costing a huge amount of money. The answer is that it is not; the cost is negligible. None the less, it would not be fair to allow the regime to operate in a way we did not intend. The hon. Gentleman has asked how many people will be affected. Some 5,000 carers complete a return and have taxable profits greater than nil. I hope that that is useful background to him.

It might be helpful if I give the Committee an example of how a double claim could operate, because it is a somewhat complicated matter. Currently, an individual may be able to claim allowances in excess of the original cost of an asset. For example, an individual may claim the full cost of a £12,000 minibus in year 1, under normal annual investment allowances rules. In year 2, the carer may use foster carers rules, which are outside the scope of capital allowances. In year 3, they may return to the normal rules, which allow for a capital allowances claim to be made for the market value of the minibus. The individual would have already claimed the whole value of the capital item in year 1, but in year 3 they could claim a further 25% of the market value. Double-claiming is unfair, both on those carers whose circumstances do not permit it and on other taxpayers. To address that, and to ensure that beneficial rules for carers operate consistently in future, no further allowances will be given in respect of qualifying capital expenditure which has already been relieved. I stress, however, that carers will still get relief for qualifying capital expenditure that they incur. The change applies only to double-claiming.

The broad operation of the special capital allowances rules is unaffected by these changes. In particular, it is a feature of the rules that a carer who has claimed capital allowances in one year is not subject to a balancing adjustment on receiving qualifying care relief in the following year. The changes will take effect for accounting periods that end on or after Royal Assent. I hope that the Committee will see fit to include clause 3 as part of the Bill.

Chris Leslie (Labour, Nottingham East)

I am interested to hear the Minister’s further explanation of clause 3. He said that there is not a vast cost involved in tightening up these arrangements—he used the word “negligible”. Furthermore, he said that there do not appear to be many abuses of these double-claiming arrangements. He gave a helpful illustration involving a minibus that might have had a further 25% double relief in year 3. It strikes me that there is an awful lot of HMRC and Treasury effort put into tightening up an arrangement on people who are on low incomes. I wish that the Treasury and HMRC spent as much time tightening up tax evasion and loopholes—those multi-million pound abuses that we know are still exploited by those with the best advice at the higher end of the income scale. I make that observation simply to say that there seems to be a lot of effort and attention going into a particular tax law change where there is neither a great cost nor a massive abuse.

Having said that, there is, I suppose, merit in the theoretical. If it is academically necessary to redraft the legislation, in order to have a full belt-and-braces, tightened-up arrangement for the capital allowances, I suppose that that is worth while. We would not want to leave anomalies there for the sake of doing so. I may have missed this point, but I did ask the Minister about the inspection regime for a family organisation with large numbers of adults or children in care that becomes more business-like and reaches the point where the inspectorate would make inquiries—not with the local authority, but with the family organisation directly. Will the inspectorate get involved at that level? If the organisation is more business-like, the expectation would be that there should be a second look at how that business is operating. I do not particularly object to clause 3, but I wonder whether the Minister would elaborate on my later point.

David Gauke (Conservative, South West Hertfordshire)

First, I will respond briefly to the point about whether there is substantial abuse. It is of course right that we should seek to tighten those matters before there is a significant cost to the taxpayer, and it is in order to ensure that the capital allowances regime works fairly and consistently that we are taking those steps now. The hon. Gentleman asked about the inspection regime. From the HMRC perspective, any return can potentially be subject to an inquiry, and the definition of trade does not depend on the level of income. It is not, therefore, a question of the point at which one moves from being very small scale and left alone to being a business that is under a different regime as far as the tax authorities are concerned. Any return could be subject to an inquiry.

Clause 4

Chris Leslie (Labour, Nottingham East)

We move now to an entirely different matter; I will be surprised if any Member can find a link between clauses 1, 2, 3 and clause 4, so there will be a prize for the committed Member who manages it. Seafarers’ earnings are an important matter for those who work at sea. The clause will extend to seafarers who are resident in the European economic area the same 100% deduction from income tax on earnings from employment that is enjoyed by seafarers who are wholly or partly outside the UK during that eligible period; I understand that at present the tax relief is only available to those seafarers ordinarily resident within the UK, but clearly there are seafarers resident in other EEA states who are not ordinarily resident in the UK who might also warrant the seafarers’ earnings deduction.

Would the Minister answer a few specific questions on that change? Would he tell the Committee a little more about the eligible period? I assume that the navigation of waters beyond the UK continental shelf is our main geographical consideration in that regard, and the length of time a seafarer is away from the UK continental shelf presumably has something to do with the definition of the eligible period. Would he set out for the Committee what that is and how many seafarers are involved in that concession, as it is difficult to envisage the point on which we are legislating without a better feel for the number of people affected? I presume that we are talking about merchant seamen, fishermen and so forth, although I want to ask him about other seafarers and whether that will apply to those serving in the armed forces, whether they are in the Navy or not. It is not clear what is and is not included in the definition of seafarer.

In particular, I want the Minister to address a specific and contemporary issue that has been the subject of recent controversy: what discussions have the Government had with the Norwegian and Icelandic Governments in the drafting of that provision? As I understand it, it is a specific clause that is extending to their resident seafarers a set of tax relief arrangements that will be relevant for them. I ask that because, presumably, we will have to require some sort of reciprocity for UK seafarers who may be resident in those countries. To what extent have those Governments offered such reciprocity in tax arrangements?

Has the Minister had an opportunity to speak to his counterparts in the Department for Environment, Food and Rural Affairs and, perhaps, the Scottish Executive and the Foreign and Commonwealth Office about the impact the change might have on the current sensitive negotiations between the European Union and Norway and Iceland over the mackerel quota? Obviously, all hon. Members will be familiar with those. I gather that it has been the recent practice of the Icelandic fishing community to make unilateral changes to the fishing and mackerel quotas. That has caused considerable consternation in some quarters, potentially risking the sustainability of fish stocks and disrupting previously settled agreements. Some people have characterised it as the “mackerel wars”. Representatives of the trades within those countries are undertaking sensitive negotiations, with which the Minister will be familiar. It strikes me as something that needs further thought. When there is such great sensitivity, is this an appropriate moment for the Treasury to grant a tax concession to Icelandic fisherman?

Jim Shannon (DUP, Strangford)

The hon. Gentleman is absolutely correct in his interpretation; the fishing community are deeply annoyed and many feel that their quota has been taken away from them. “Steal” may be too strong a word, but they certainly feel strongly. I have asked for a meeting with the Minister with responsibility for fisheries, the hon. Member for Newbury (Richard Benyon), which is happening next Monday, so there will be an opportunity to raise the matter then. There is a lot of anger, dismay and concern, which the hon. Member for Nottingham East has put forward clearly.

Chris Leslie (Labour, Nottingham East)

The hon. Gentleman raises the point that this is about not simply the Scottish Executive, but Northern Ireland, and all those seafarers and fishermen and women who may come into contact with fishermen from Iceland in particular. I would like the Minister to update the Committee on those negotiations, as well as say whether a tax concession is the right thing at this juncture. It may upset the balance and, in the process, perplex fishermen in our country. Why are we giving a tax concession now to those whom they perceive as having taken unilateral actions that cut across international agreements?

Given changing technologies that broaden the classification of those involved in maritime navigation, does the Minister plan to change the definition of “seafarer”? Some of those who work in mobile drilling rigs, including semi-submersibles, jack-ups and similar vessels, perhaps in the oil and gas industry, and operate vehicles that could be used in navigation do not fall within the definition of “seafarer”. Why are those seafarers excluded?

Chris Evans (Labour, Islwyn)

Does not my hon. Friend think that “seafarer” is too general in this case? Perhaps we should be more specific about what a seafarer is. I think that he was developing that point, so I shall leave it there.

Chris Leslie (Labour, Nottingham East)

Indeed. It is the sort of issue that may pass the vast majority of the British public by. It is not something that they will be concerned with, but those who are involved in that category of industries may fall within or without an arrangement because the definition of “seafarer” may be inadequate. I would like to press the point about the mobile drilling rigs arrangement, for example. I know that, in the past, early-day motions have noted concern about the different treatment of seagoing vessels. Such treatment can result in some seafarers becoming ineligible in certain circumstances, particularly when it comes to exploiting mineral resources, and consequently, financial hardship can occur. For the moment, I want to press the Minister on those specific points.

David Gauke (Conservative, South West Hertfordshire)

Clause 4 amends the provisions for deductions from seafarers’ earnings. The change will put seafarers who are resident for tax purposes in a European economic area state but who are not ordinarily resident in the United Kingdom on the same footing as UK residents.

It may be helpful if I provide some background. The seafarers’ earnings deduction allows a UK resident to claim 100% deduction from their earnings from employment as “a seafarer”. The definition of seafarer includes merchant seamen and fishermen, but Navy personnel do not qualify and never have. The deduction was claimed by 16,000 UK ordinarily resident seafarers in the tax year 2007-08. The duties of the employment must be performed wholly or partly outside the United Kingdom during an eligible period, which the hon. Member for Nottingham East has asked about. The eligible period can be 365 days outside the UK in one period, or a combined period in which 183 days are spent outside the UK.

The European Commission decided to challenge the compatibility of seafarers’ earnings deductions with the UK’s treaty obligations by way of a formal reasoned opinion, which was issued in June. The Commission takes the view that the relief is strictly limited to those who are ordinarily UK residents.

Jim Shannon (DUP, Strangford)

Will the Minister clarify a point in relation to fishermen and their earnings? There is a difference between ordinary fishermen and share fishermen and, particularly in Northern Ireland, share fishermen have a different role. Is there a different category for them? Do they fit into different criteria or are they all treated the same?

David Gauke (Conservative, South West Hertfordshire)

Assuming the qualification of those fishermen on eligibility and geographical fronts, there is not a further distinction, as I understand it. Potentially, depending on those conditions being met, the deduction may well apply in the circumstances that the hon. Gentleman has outlined. I add that there are questions as to the definition of ship and what constitutes a ship for such purposes. The hon. Member for Nottingham East rightly recalled some of the controversy that has existed in recent years relating to oil and gas platforms that are not seen as ships. That has been an ongoing debate that I know the previous Government were very much engaged in.

We have a difficulty that we are seeking to address. I should also add, as inspiration arrives, that share fishermen are generally counted as self-employed. The seafarers’ deduction only applies to employees, so it is possible that if they are self-employed, some of the individuals that the hon. Member for Strangford has asked about will fall outside the availability for seafarers’ earnings deduction.

The Commission takes the view that the relief is strictly limited to people who are ordinarily UK residents. To avoid any uncertainty for taxpayers, the Government have decided to amend the provisions to enable seafarers who are resident for tax purposes in an EEA state and who meet the eligibility criteria to claim the deduction. The criteria require duties to be performed on a ship wholly or partly outside UK waters for an eligible period of at least 365 days. I set out the circumstances of combined trips.

Chris Leslie (Labour, Nottingham East)

On the point about being ordinarily resident in the UK, would Irish passport holders who are resident in Northern Ireland and who may be defined as GB citizens also come under the definition of ordinarily resident in the UK?

David Gauke (Conservative, South West Hertfordshire)

That would depend on the particular circumstances of those passport holders, but if they are ordinarily resident in the UK they would be ordinarily resident in the UK for tax purposes. That is not a definition that is dependent upon nationality. There is obviously a difference between nationality and residence.

The hon. Gentleman also raised the issue of Norway and Iceland. This is not part of those discussions. It is necessary to bring in this clause to comply with our EU and EEA obligations. Iceland and Norway are members of the EEA; I am not sure that there is an issue with the third member of the EEA, Liechtenstein, in this context. We wait to see. It is worth pointing out that UK citizens will be free to make similar claims in other EEA countries where there are similar rules to support seafarers. This is about bringing consistency of treatment for all EU and EEA citizens. As has been pointed out, there is an Adjournment debate on the fishing rights issue, but this is very much a different debate. I do not intend to detain the Committee on that point.

This clause has not been driven by our negotiations with Norway and Iceland. This is a pragmatic response. It provides greater clarity and is helpful here. Again, we do not expect this to have a substantial impact on the Exchequer. We think that something in the region of 5,000 individuals would benefit from the extension of seafarers’ earnings deductions. We have had consultations with the relevant parties such as the British Chamber of Shipping and unions such as Nautilus International, Unite and NUMAST, on behalf of employees. No particular concerns have been raised with us, so I suggest that the clause should stand part of the Bill.

Chris Evans (Labour, Islwyn)

My major concern, as I said in my intervention, is about the definition of a seafarer. The hon. Member for Strangford referred to share fishermen and there are all sorts of definitions that cover everything. Could the Minister define exactly what he means by seafarer as there needs to be a clear definition of the people who will be affected?

I am deeply concerned about mackerel wars. The Minister talked about consultation with the various unions. The British Ports Association has also been involved. Has anything been said in those consultations about mackerel wars and the possibility that we might be seen as coming down on one side or another? If he could clarify those points it would be marvellous.

David Gauke (Conservative, South West Hertfordshire)

As I said earlier, this clause does not relate to the mackerel wars. This is a separate issue. I do not intend to get into that matter. This is an issue that the hon. Gentleman would most effectively raise with DEFRA and DEFRA Ministers. This is on a narrow tax issue.

Chris Leslie (Labour, Nottingham East)

I understand that the Treasury wants to pull the blinkers over its face and say that it is not something that affects the Treasury, but it does affect the Treasury. The Government are supposed to be one Government, although I know that they are fragmented in any number of ways, depending on the time of day.

If sensitive negotiations are going on between people who feel deeply aggrieved because their carefully divided quota arrangements on long-standing fishing settlements have been violated by the unilateral actions of one country—in this case, the allegation is against Iceland—and if those fishermen feel that they must regain their position and settle the situation properly, how does the Minister think they would feel about the British Government’s giving a tax concession at the same time to those very Icelandic fishermen? It would feel difficult to understand, would it not?

David Gauke (Conservative, South West Hertfordshire)

It would, but that matter is not related to the clause. The clause has not been brought in as a consequence of lobbying by the Icelandic or Norwegian Governments. It is a consequence of the view taken by the European Commission about the operation of the seafarers’ earnings deduction and the belief that the rules, as they currently apply, do not comply with our treaty obligations.

We are providing clarity. There is no evidence to suggest that it will be Icelandic or Norwegian nationals who will benefit specifically from the extension, although of course if they are ordinarily resident in the United Kingdom they will be able to benefit from it, just as those seamen who are ordinarily resident in Norway or Iceland will be able to benefit from comparable arrangements.

Perhaps I may also respond to the point about the definition. It is a broad definition: someone who works on a ship. There has been some controversy before, to which I alluded, about the definition of “ship”, because that does not include offshore installations. The original policy purpose behind the seafarers’ earnings deduction was to assist the merchant navy and to ensure on strategic grounds that we have capability in the area in question. The seafarers’ earnings deduction continues to achieve that. I hope that that provides some useful clarification for the Committee.

Chris Evans (Labour, Islwyn)

On another related point, about the mackerel wars, I do not think that the Bill should be presented in isolation from the world view. We have already seen that theoretically the Government want to close loopholes. Theoretically the measure could aid Norwegian and Icelandic seafarers. In view of the fact that it is a live issue, we should not act as if we are isolated from it. Have there been discussions, or are there plans for any discussions, with DEFRA about that related issue?

David Gauke (Conservative, South West Hertfordshire)

It is not a related issue. I am finding it hard to resist making a pun and calling the Opposition’s argument a bit of a red herring. It is the Finance Bill, and such moments come all too rarely.

The issue of the mackerel wars is important, but it is not relevant to the clause. We need to make the change to comply with our EU duties and to prevent infraction proceedings. That should not be seen as some great concession to Iceland or Norway. It is necessary to enable us to comply with our European Economic Area obligations. It provides clarity. In practice, it will probably not benefit large numbers of individuals, but nevertheless it puts the clause on a good and sustainable footing.

It is worth pointing out that we think that most of the individuals who will benefit will be east European nationals. As I have said, the representative bodies and unions that have strong views on our relationship with Norway and Iceland in the relevant areas have no objections to the clause, because they recognise that it is not part of those negotiations. It is something that we need to do.

Chris Leslie (Labour, Nottingham East)

It was interesting to hear the Minister’s points. I understand the situation he is in and, despite the levity of his red herring joke, I can see how this would be of relevance to the people involved in those negotiations. Certainly, the fact that we have put the spotlight on this question suggests that it will be returned to at a later stage.

I am not quite content that I have had sufficient clarity from the Minister about the reciprocity of arrangements, or the point at which the Icelandic and Norwegian Governments will also be enacting mirroring tax provisions and ensuring that they also apply to UK seafarers in a contemporaneous scenario. Constantly reiterating that this is not relevant to the discussion does not actually make that the case—the controversy over mackerel quotas is of great concern to many people.

For the time being, however, I can see the broader strategic justification for clause 4. I will not divide the Committee at this stage, although I may return to it later.

Clause 5

Chris Leslie (Labour, Nottingham East)

Many members of the Committee will no doubt wish to comment on what are quite technical matters, and your forbearance in the Chair would be most appreciated, Mr Caton. I know that you will be fair and reasonable at all times and in all your rulings.

Clause 5 facilitates the introduction of schedule 2 on venture capital schemes. As hon. Members know, venture capital trusts give tax breaks to individuals investing in small unlisted trading companies. They offer a set of tax advantages, including, for instance, 30% income tax relief on the costs of investment up to about £200,000, a capital gains tax exemption on disposals and tax-free dividend payments. The typical venture capital trust involves a group of between 20 and 40 companies.

Currently, all venture capital trusts are companies listed on the main market of the London stock exchange. Government Members will be particularly pleased to hear that the provisions in the Bill appear to be largely driven by the need to align UK legislation with wider European Union regulations on venture capital trusts. No doubt Government Members are all good pro-Europeans, and it is healthy to see that they are taking a harmonising approach in their legislation. In particular, the regulations concern shares in venture capital trusts and the markets in which they are listed.

At present, regulations under the Income Tax Act 2007 require that the ordinary share capital be included in the official UK list. Clearly, and quite rightly, that can, to a degree, be construed as a barrier to the free movement of capital. Accordingly, the clause changes arrangements so that shares can instead be admitted for trading on any European Union regulated market. As I said, that is commendably pro-European. By allowing listing on any European Union market, and indeed any European economic area market, as set out in the Official Journal of the European Union notices annually, the new rules will, I hope, ensure the greater transparency and interoperability of schemes across national boundaries.

The schedule makes a number of other technical changes to venture capital schemes. It includes changes that regulate the composition of venture capital trusts’ eligible shareholdings and it redefines the minimum criteria required. In particular, the clause introduces a financial health check to ensure that tax reliefs would be granted only if there was a good prospect of the business remaining a going concern. That applies to shares in companies that it would be reasonable to classify as being in difficulty, which would exclude them from qualifying. That is quite an interesting innovation in policy and tax law. Obviously, it will probably be the focus of much comment and debate today.

The Opposition agree that it is necessary to align and harmonise the regulatory arrangements for venture capital trusts and enterprise incentive schemes in the wider European Union context. We also concede that it is a sensible and rational change to have a financial health check; that is certainly worth while. However, I want to probe the Minister on several aspects of the operation of the clause.

First, the Bill states:

“The issuing company is ‘in difficulty’ if it is reasonable to assume that it would be regarded as a firm in difficulty for the purposes of the Community Guidelines on State Aid”,

which were listed under the reference 2004/C 244/02. However, I am told that the Institute of Chartered Accountants pointed out that those guidelines appear no longer to have effect—a point that I think came up on Second Reading. Therefore, there could be an anomaly in the Bill, in that the particular reference to the community guidelines on state aids may be otiose and create a situation in which the guidelines have lapsed. I would be grateful if the Minister clarified whether those guidelines are still effective.

Will the Minister also precisely define the financial health check? Will it be applied, for instance, to a group of companies, and perhaps a newly created subsidiary of firms? Many hon. Members will know that corporate law is complicated. Many companies and firms are quite creative in how they can spur a series of enterprises and roll operations within various groupings of undertakings. I am concerned; if one part of a firm or group does not pass the financial “firm in difficulty” test but the larger part does, or vice versa, how will the operation of the test work? It is not clearly defined in the legislation.

In particular, I am intrigued by the steps in the Bill that allow Her Majesty’s Revenue and Customs to apply the financial health check rule retrospectively, or at least in hindsight to withdraw the relief, possibly after a difficulty has occurred, potentially compounding the problems of small and medium-sized enterprises that otherwise might well have been able to make ends meet and continue as a going concern. I am anxious that the rules should not magnify the financial difficulties of a company if it is just getting by on or above the border line, especially if there is retrospective operation of the rules. I would be grateful if the Minister walked the Committee through the process of the judgment taken by regulators, companies and investors in applying that financial health check.

A recent guide by Chancery chartered accountants stated that, as is self-evident, within the cluster of 20, 30 or 40 companies often grouped in venture capital trusts, one or two selected by that venture capital trust manager will typically fold, while others will prosper. If it is part and parcel of the normal chain of events in venture capital trusts for firms to be in difficulty, I would like to learn a little more from the Minister about how the whole tax relief arrangements for that venture capital trust might be treated.

As a subsidiary to a set of technical questions, I am also interested to know whether the Minister can say how the rules will apply to overseas holding companies—for instance, companies resident in tax havens. In those circumstances, how will information about the financial health and viability of those firms be discerned, gathered and communicated? Clearly, there is often less transparency in those overseas holding arrangements than in the UK.

I refer the Minister to paragraph 2 of schedule 2, where a set of threshold changes is suggested, with a 70% threshold for eligible shareholders. As the current arrangement provides a regulated level at 30%, I want to understand from where that ratio derived. That is, obviously, a significant change to make in one go.

I am sorry to fire so many questions at the Minister in quick succession. There are several other points that I would like to address, but if he thinks about the questions that I have asked, I will be grateful.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship once again, Mr Caton. I am grateful to the hon. Member for Nottingham East for setting out some of the background to the clause, and I hope to respond to his questions.

As we heard, clause 5 introduces schedule 2, which makes changes to the enterprise investment scheme and venture capital trusts, the two taxpayers’ venture capital schemes. The previous Administration agreed the changes with the European Commission in order to obtain state aid approval for the schemes.

It might be helpful to provide some background to the schemes. They were introduced in 1994 and 1995 respectively to give investors a range of tax reliefs in return for investing in small, higher-risk companies, and they have been successful, supporting investment of £10 billion or so to date. The schemes help such companies, which face particular difficulties in raising finance, to start up and grow by encouraging investment in them. Such companies have never been more essential to the UK’s growth and jobs than they are now.

To make the schemes comply with new state aid rules, various changes have already been made. The previous Government engaged in a two-year process to ensure compatibility with the new rules. Clause 2 introduces four final changes to the conditions that companies must meet. Those changes are set out in the schedule in detail, but briefly, they are as follows: companies benefiting from the reliefs will no longer have to carry on their trade wholly or mainly in the UK, they will have to meet an “in difficulty” test, venture capital trusts may be listed elsewhere in Europe and, although VCTs will have to hold higher amounts of equity, the definition of what constitutes equity will be slightly wider.

The hon. Gentleman asked several questions, including whether the “in difficulty” test for enterprises had expired, rendering the provisions otiose. I can inform the Committee that the guidelines were extended for a further three years by a Commission communication of 9 July 2009. Therefore, the “in difficulty” test for companies continues to apply.

In the context of enterprises in difficulty, he also asked what happens in relation to the other group companies if a company in a group is in difficulties. Essentially, the company to which the rule applies is the company issuing the shares. The position of other group companies will not generally be relevant. I hope that that provides clarification.

The hon. Gentleman also asked whether a retrospective change could be made, as it might exacerbate the position of a company moving into difficulty if the test were applied. The test applies when the shares are issued. HMRC will not seek to withdraw relief where formal approval has been given and a company subsequently moves into difficulty.

The hon. Gentleman asked about companies resident abroad, in particular those in tax havens. The schemes have always allowed money to be used overseas to some degree. The UK should still get a return on its investment when a UK company reaps the benefit of its overseas investment and, within EU rules restricting foreign investment, is liable to run into problems with the fundamental freedoms. That is why some of the provisions had to be relaxed. HMRC will still look at cases where companies are in difficulty, and at the rules that apply to companies resident abroad and how we get the information. I believe that guidance has been published on how that will be done.

The hon. Gentleman also asked about the threshold change from 30% to 70%, and where the ratio came from. That is required under EU state aid rules, and it was discussed with the European Commission as part of the approval process. The figure of 70% is an EU requirement in such circumstances. I hope that that is helpful and provides the hon. Gentleman with some clarification on the fair questions that he raised.

The clause was put out for consultation and a number of comments were received. As a result, changes have been made to some points of detail. Clause 5 provides certainty for business by ensuring compliance with venture capitalist schemes while allowing flexibility within the rules.

Alison McGovern (Labour, Wirral South)

It is a pleasure to serve for the first time on this Committee under your chairmanship, Mr Caton. I wanted to ask the Minister a couple of additional questions about the clause. The enterprise investment scheme was designed to help smaller, high-risk trading companies to offer relief to investors and it is a measure that could be particularly crucial at this time.

Creative and high-tech companies, especially smaller creative or high-tech science-led companies, could be crucial to our future. That is especially true in my part of the world in Merseyside and the north-west, where we have particular expertise and a creative, science-led economy. I wanted to ask more about proposed new section 180A, which introduces the requirement that was referred to and concerns companies based

“wholly or mainly in the United Kingdom,”

rather than those that have “permanent establishment” in the UK.

Does the Minister have an estimate for the volume of companies that will be affected? Is there any sense of what the trend might be? Will he say more about the representations that he mentioned and whether any of them covered that point? It would be helpful for the Committee to be made aware of the scale of the companies that we are dealing with, and to know how far that has been tracked by the Department.

The Minister also mentioned negotiations with the European Commission. Have any discussions involved the expertise of colleagues in the Department for Business, Innovation and Skills? They have particular responsibility for the kind of companies that I am concerned about. Will the Minister clarify for the Committee what discussions have taken place?

On firms in difficulty, we are obviously at a time when that definition will be apposite to the position that companies find themselves in. Will the Minister indicate the number of companies in the UK that could be affected by the measure? It would be helpful to have a sense of size and scale, and to know what discussions have taken place so far on how the provisions might impact on those specific companies.

Chris Leslie (Labour, Nottingham East)

I want to follow up on a point made by the Minister, and I echo many of the reasonable questions asked by my hon. Friend the Member for Wirral South. The Minister answered my point about whether the reference to the community guidelines on state aid had expired, and he said that there was an extension for a further three years. I am always concerned that legislation should be as permanent and everlasting as we can frame it to be, but if there is a continual need for the updating of references, I presume that the Minister will have the power to bring forward reference changes in the consequential supplemental clause at the end of the Bill, if necessary. Alternatively, is there a risk that the clause will be in force for only three years, and that we shall then have to return to the matter in a future Finance Bill? That is, again, a minor drafting issue.

The Minister mentioned that the financial health check applies only to the parent company, which issues the shares. I am still not quite clear in my mind about how often a parent company can be essentially a shell vehicle for a number of other activities within it. Clearly, the test is—or I presume it is—more of a voluntary requirement on all the participants, either in the company or in the purchase of the shares, and not just a requirement on the investigators and regulators in Her Majesty’s Revenue and Customs to impose the test. Therefore the disclosure burden must surely rest on those involved in the company; that might be the way of getting round the problem of disclosure, where there is a difficulty. If I am wrong, perhaps the Minister will tell me.

It is good to hear that guidance is to be issued about the overseas holding company arrangements and, I think the Minister was implying, on the operation of the scheme and the financial assets generally. If he gave the Committee a sense of when the guidance is likely to be forthcoming from HMRC, that would be useful. If it is to be in the near future, it would be a useful insight if he could circulate it, or a draft of it, to the Committee.

I wonder whether the Minister’s officials know—again, this is more for context—the cost to the Exchequer of providing the tax relief arrangements for venture capital trusts more generally. We would like to get a sense of what amounts of money—what flows—we are talking about, even if it is a broad estimate figure. A sense of the revenue implications would give us a flavour of whether the change is massively significant or quite technical. It would be useful to know the scale.

I gather that in tomorrow’s spending review, issues about the green investment bank may crop up. I know that the Minister has various individuals scaling the walls of the Treasury as we speak; I do not know whether they have been peeled off. There are questions about the trend of availability of venture capital generally to small and medium-sized enterprises, and particularly those firms that are forging away on innovations in low-carbon technologies and so forth. If the Minister shares any insight he has into whether the green investment bank will provide some of the capital that perhaps would otherwise have come from venture capital schemes, that may give us a sense of what we are talking about.

Finally, perhaps the Minister can also provide some illumination for the Committee as to a commitment that I understand the Lord Chancellor and Secretary of State for Justice gave when he was shadow Business Secretary, before the general election. He indicated that the Conservatives wanted to reform venture capital trusts to encourage investment in technology-based manufacturing, specifically. Yet I have not seen any of those commitments in the schedule or the Bill. If not now, when will the Government bring forward the changes that would fulfil the commitment made by the right hon. and learned Gentleman?

David Gauke (Conservative, South West Hertfordshire)

I am grateful to hon. Members for those further questions and shall try to deal with them all. The point was raised about how many companies will be affected, in particular by the relaxation of the definition in relation to a permanent establishment test. It is not possible to give an exact number, but we believe that a relatively small number of companies will benefit from that, largely because, under the enterprise investment scheme, investors often want to invest in businesses close to them. It is not therefore likely to have a big impact.

It might help the Committee, and partly respond to some of the other questions, if I highlight the impact of the clause as a whole. The cost is £20 million in 2011-12, rising to £30 million in 2012-13, and £40 million in 2013-14 and 2014-15. That gives an idea of the scale involved. That relates to all aspects of the clause, and I hope that it provides a useful idea of the overall cost of the measures. We should consider it in the context of the cost of the EIS to the Exchequer of £180 million, and the cost of the VCT scheme of £80 million in 2009-10. [Interruption.]

Chris Leslie (Labour, Nottingham East)

How much did the Minister say? Will he repeat that figure?

David Gauke (Conservative, South West Hertfordshire)

The overall cost of the EIS is £180 million for 2007-08, and the Exchequer cost of the VCT regime in 2009-10 is £80 million. I hope that that is useful. On the overall position on venture capital funding and the relationship with the Department for Business, Innovation and Skills, BIS produced a Green Paper, “Financing a private sector recovery”, which raised questions about how we can be most effective in supporting venture capital investments, including EIS and VCT. I therefore reassure the Committee that BIS is heavily involved in the discussions, and that the Treasury and HMRC work closely with it.

On the green investment bank, the hon. Member for Nottingham East will not be surprised to hear that the Government will make an announcement in due course, so I do not intend to say anything further on that subject this afternoon. He also asked about the guidance and I am grateful for the opportunity to clarify my earlier remarks. The guidance was made available to the Committee last night, so he should receive it shortly. If he does not, I would be grateful if he would let me know and I will ensure that that is addressed.

The issue of how tax relief for a group will operate in practice when one company is in difficulty was also raised. As I said earlier, the rules apply only to the company issuing shares, not to other group companies. If the company issuing shares can raise equity capital from existing shareholders or the market—that is to say, new shareholders—the company will qualify for the regime.

The hon. Gentleman asked about the drafting of the European Union guidelines on state aid. All EU guidelines on state aid are time limited. The Government will feed into any review or renewal of those guidelines and we will take into account any changes when and if necessary. If it is necessary to update legislation, we will have to look at that. We do not, however, envisage that it is necessary given the current extension which occurred last year.

I hope that those answers are helpful. We have had a good discussion and useful information has been given to the Committee. I think that the clause will be welcomed by various groups. It is an important area and we want to do what we can to encourage equity investment, particularly at times when credit has not always been easy. I hope that the clause is useful and constructive and will assist our position in that area.

Schedule 2

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 4, in schedule 2, page 30, line 15, leave out ‘enter into contracts’ and insert ‘do business’.

Amendment 4 relates to paragraph 1(5) of schedule 2 and appears to the untrained eye to be a pedantic technical amendment to change the terminology of a small element of the Bill—in many ways, that might be a reasonable interpretation. It is a probing amendment that follows on from points raised by the Institute of Chartered Accountants in England and Wales, which, in its submission, pointed out that there could be an anomaly in the use of the term that defines the commercial activities related to that sub-paragraph, particularly the use of the phrase “enter into contracts” rather than “do business”.

I am told that drafts of this sub-paragraph have raised a few eyebrows among those legal eagles who understand such questions. In particular, difficulties could arise when there are groups with a holding company because the draft legislation required that the issuing company—the holding company—would require a permanent establishment, and not the subsidiary company that had the trading operation in which the venture capital trust or the enterprise investment scheme funds would be employed. In many groups, the holding company is just that and does not carry on any activity other than the holding of shares in its subsidiaries—this is similar to the point that we were trying to make earlier. That is unlikely, therefore, to constitute, in a common law sense, conducting a business.

Stephen Williams (Liberal Democrat, Bristol West)

It is a pleasure to serve under your chairmanship, Mr Caton.

Given that the permanent establishment has to comply with the OECD model treaty, will the hon. Gentleman tell us whether the wording departs from that of the model treaty?

Chris Leslie (Labour, Nottingham East)

I am not familiar with that treaty and I do not have it to hand, but I am told by the Institute of Chartered Accountants that there is a risk if we look simply at the arrangements of parent companies, which can often be relatively dormant operations that contain other firms that are active. I am making a specific point about whether we should use the phrase “enter into contracts” or “do business” in the Bill, because if the matter is challenged in court and the interpretation goes the wrong way, that could unpick many aspects of legislation.

Charlie Elphicke (Conservative, Dover)

I, too, am privileged to serve under your illustrious chairmanship, Mr Caton.

Surely this point is well understood and settled in law with regard to OECD guidance on the model tax treaty. The concept of a holding company that holds shares but does not operate is also well understood, and has been by tax planners for decades.

Chris Leslie (Labour, Nottingham East)

I understand that point and the hon. Gentleman might understand it as well. We are, I hope, both individuals who take a common-sense view of such things. Unfortunately, that is often not what the courts do when looking at the technical definitions that we enshrine within our statute. The Institute of Chartered Accountants has highlighted a perceived risk, which is not necessarily born from my own line-by-line scrutiny of the Bill. It suggests that if we append the notion of entering into contracts to the activity of a group company that is essentially a shell parent arrangement, that might well be an imprecise definition of what that parent company actually undertakes. Such an approach might not capture the true spirit of the Bill, which is something on which he and I agree. Consequently, requiring the company to have a permanent establishment through which the business is carried out—indeed, maintaining the existing definition of to “enter into contracts”—could be seen to run counter to commercial realities. If existing practice in law is based on the term “do business”, and if that has worked successfully since the Finance Act 2003, it might be more prudent to retain that wording.

As I said, the point is specific, but I wanted to draw out the Minister’s definition, not least because courts will look at what Ministers say for guidance should any cases crop up in the future.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman, I think with a degree of hesitation and embarrassment, said that he was asking about a small, pedantic point, but if he cannot do so in a Public Bill Committee considering a Finance Bill, when can he? There is no reason why he should be in any way apologetic for raising such a useful point.

The amendment tabled by the hon. Gentleman and his colleagues would replace the phrase “enter into contracts” with the words “do business” in reference to the agent acting for the permanent establishment. While the amendment would follow the normal UK definition of “permanent establishment” more closely, the definition is not meant to be the same as the normal UK one.

To put it bluntly, the normal UK definition is about allocating taxing rights, so a wide definition makes some sense. However, the version being used for the VC schemes is about determining what companies may benefit from financing that is subsidised by the UK taxpayer. Consequently, because the existing rule, which requires most of the trade to take place in the UK, is being removed, it is right that we put in its place something whereby the company raising the funds must have a substantial UK presence to ensure value for money for the UK taxpayer. Of course, in doing so, we must ensure that we comply with EU state aid rules, but that is the balance that we are trying to strike.

This is not a fundamental matter of principle. The draft legislation, which is substantially as proposed by the previous Government, aims to secure the future of the schemes by making them compliant with state aid rules, while retaining some benefit for the UK. We think that the balance as set out in the schedule is correct. Consequently, I urge the hon. Member for Nottingham East to withdraw his amendment. He makes a fair point, but I hope that my explanation helps him. If we were to move in the direction set out in his amendment, we could make it rather too easy for businesses with only a slight UK connection to benefit from the reliefs, which I do not think is the intention of any member of the Committee.

As I said, the draft was put out for consultation and changes have been made in response. We have got the right wording here, so I urge the hon. Gentleman to withdraw his probing amendment. I hope that I have provided sufficient clarification of the thinking behind the wording used in this context.

Chris Leslie (Labour, Nottingham East)

Who am I to question the wisdom—sometimes—of the massed ranks of officials who support and maintain the beautifully crafted words of the Minister? Occasionally I will take up the right to question, but on this occasion I am more than happy to accept that their legal advice is superior to my judgment on this particular matter. Nevertheless, if there are, on reflection, any issues and the Treasury wishes to table any amendments on Report, we will certainly be happy to support them, as long as we maintain the spirit of the legislation by creating as watertight a series of reforms as possible. That, ultimately, is our joint goal and, consequently, I am more than happy to beg to ask leave to withdraw the amendment.

Clause 6

Chris Leslie (Labour, Nottingham East)

This clause, as a relative of other clauses in the Bill, is rooted in the European Union’s drive to ensure that any tax concessions or reliefs given to firms that might be construed as a state aid are compliant and consistent throughout the European Union and therefore are drawn up fairly. The technical shift in the definition of a firm qualifying for enterprise management incentive options moves from the notion of a “wholly or mainly” UK basis to a “permanent establishment” in the UK basis. In some respects, this mirrors the points that my hon. Friend the Member for Wirral South has raised.

Again, I want to pick up on a point highlighted in the submission from the Institute of Chartered Accountants, which raises a set of questions on the meaning of “permanent establishment”. In particular, it implies that there is a query concerning the criteria by which a company obtains the definition of permanent establishment. It suggests that the Bill could be interpreted to mean that a company employee who makes a sale in the UK on behalf of the company would thus define the whole company as having permanent establishment status in the UK. There appears to be no requirement for that employee to be resident in the UK, yet a visitor carrying on business on behalf of the company would seem to achieve that qualification.

Is there therefore a risk—perhaps because of injudicious drafting—that foreign employees might benefit from generous tax reliefs on their share options in that way? That might well be the intention of the Treasury and the Minister, but I would welcome clarification.

David Gauke (Conservative, South West Hertfordshire)

As the hon. Gentleman points out, this is another clause that we have brought in to prevent EU infraction proceedings. It is perhaps worth informing the Committee that one reason why we needed to bring in this second Finance Bill was to deal with a number of detailed technical points that we could not leave for next year’s Finance Bill. That is why we have brought forward this clause and, indeed, it is the justification for a number of clauses in the Bill.

Enterprise management incentives is a share option scheme that allows certain types of company to grant tax advantaged options over their shares to key employees. The scheme was introduced 10 years ago with the aim of helping smaller, higher-risk companies to recruit and retain high-calibre staff. The rewards that the scheme offers provide key employees with a powerful incentive to promote the success of their company. EMI is part of the Government’s strategy to help and encourage such smaller companies, which are so important to the UK’s economy.

As the hon. Gentleman pointed out, the clause removes the present requirement for EMI qualifying options that companies must broadly be carrying on a trade “wholly or mainly” in the UK. In the future, a single company wishing to grant EMI options must have a “permanent establishment” in the UK. Alternatively, in the case of a parent company, at least one company in the group that is carrying on a “qualifying trade” within the meaning of the legislation must have a “permanent establishment” in the UK.

Alison McGovern (Labour, Wirral South)

In response to some of my earlier comments, the Minister was very kind and helpful by giving a good steer on the scale of what we are dealing with in relation to another scheme. It is important for us to have a sense of that with this scheme as well. I wonder whether he or his officials have figures to hand to show the cost to the Treasury arising from this scheme. If he does, I would be grateful if he could make some remarks about them.

David Gauke (Conservative, South West Hertfordshire)

I hope that I can help the hon. Lady. In 2008-09, 2,550 companies granted EMI options to their employees. That was a 10% decrease on the previous years. The number of employees granted these options in 2008-09 decreased by 17% to 22,000, and the number of employees exercising their options fell by 45% to 4,900. I suspect that there is a cyclical element, as one would expect in these matters. The annual estimated cost of income tax and national insurance contributions released have both declined by 23% to £100 million and £40 million respectively. As I say, those downward trends reflect the difficult economic climate during the relevant year.

If I may provide a bit of detail on the clause, as I said a moment ago, a single company wishing to grant EMI options must have a permanent establishment in the UK. In the case of a parent company, at least one company in the group must be carrying on a qualifying trade within the meaning of the legislation, with a permanent establishment in the UK. This worthwhile change will increase the number of companies that can qualify for EMI.

The hon. Member for Nottingham East raised an interesting concern about employees and the sale of shares in these circumstances. As far as I am aware, that matter has not previously come up in consultation. Obviously, we published the clause in July but, before that, the matter dates back to the previous Government. If I may, I will look into the particular concerns he raised and write to him accordingly. However, he makes an interesting point. We will look into the issue and I hope to be able to inform him on it in due course.

Chris Evans (Labour, Islwyn)

As one south Wales MP to another, I would like to say that it is a pleasure to serve under your chairmanship, Mr Caton. On the 2,550 companies that the Minister has mentioned, I would like to ask what type of companies are benefiting from the scheme and which sector is benefiting the most. Also, what assessment, if any, is being made of the impact of the scheme on the high-risk companies and what benefits has it given them over the past 10 years?

Chris Leslie (Labour, Nottingham East)

While inspiration strikes the Minister on those important matters, I would like to say that I am more than happy for him to come back to the Committee on the point about the lack of a requirement for an employee to be resident in the UK and the fact that a visitor coming from abroad to carry on business here on behalf of that company appears to trigger the qualification for some of the tax relief. My point is simply that there could be a risk of tax relief tourism, and that people will put a foot in the country and therefore potentially open up the door to significant sums of UK taxpayers’ money. That is why we should reconsider that important issue at some point.

I accept that the European Union arrangements often come down from on high and that Departments tend to cut and paste them and insert them into legislation. However, we should have our own particular British approach to these things and employ a bit of flexibility and latitude to suit our country’s interests. As long as we are within the spirit of the treaty obligations, I think we would all want to adopt such an approach. I am certainly concerned about the risk of tax relief tourism, and am happy for the Minister to respond to that at another date.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the spirit in which those comments were made. Let me summarise how the hon. Gentleman’s position could be described: British tax relief for British jobs. He makes an entirely reasonable point. On the sectoral availability of EMI, it is not specifically designed to help one sector over another; it applies to overall sectors. I do not have to hand a breakdown of where EMI has applied, but if we have that information, I will certainly write to the hon. Member for Islwyn.

Clause 7

Chris Leslie (Labour, Nottingham East)

We now come to clause 7, which covers settlors returning excess payments to trustees. It takes us to a different and equally exciting part of tax law that many Committee members have been waiting for—I hope for not too long. For those who are unfamiliar with such arrangements, the settlor is the donor or trustor who gives money or assets to trustees. They are the person who originally created the trust. Some trusts are established to benefit others, such as children or other individuals or organisations, but some are set up for the benefit of the settlor—a settlor-interested trust.

The clause seems to iron out an anomaly in the circular nature of the taxation of settlors who may have interests in trusts to ensure that double taxation does not occur. That is entirely fair. However, there are various categories of trust for a panoply of family and life circumstances, many of which are wholly understandable and laudable—for example, when the beneficiaries are vulnerable or incapable of governing their own financial best interests at a given point. However, sometimes the dusty and arcane rules surrounding trust tax law may be used as a mechanism for the avoidance of significant sums of tax on income that might ordinarily be paid to the Exchequer, but for the clever legal and accountancy planning that more affluent people are able to obtain. I accept that it is for the Treasury continuously to define the rules to ensure that abuses are clamped down, but some doubts remain about the regime of trust rules in general.

Does the Minister share my belief and that voiced by the hon. Member for Dundee East (Stewart Hosie), who is not a member of the Committee, but raised the matter on Second Reading, that those who have very small and modest trust sums, perhaps in safeguard for vulnerable individuals, may be unwittingly drawn into complex self-assessment tax arrangements that could incur significant costs? What is the Minister’s opinion of the proportionality in terms of the administrative burden falling on those small trusts for such individuals, and what can he do to relieve the burden on those trusts?

In contrast, does the Minister believe that wealthy individuals whom ordinary members of the public would not consider to be deserving of special trust protection may benefit unfairly? Is his Department looking at trust tax law arrangements to tighten up a perceived unfairness, and how will he ensure that HMRC continuously reviews the laws to ensure that abuses are clamped down upon?

Finally, I am told that the Law Society has looked at the framing of the legislation, and it believes that concerns remain about the clause’s workability. It understands that other representative bodies, particularly the Association of Corporate Trustees, have called for the clause to be withdrawn. Given those opinions expressed by bodies outside his Department and Parliament, what is his response to the Law Society, and how might its concerns be addressed?

David Gauke (Conservative, South West Hertfordshire)

This clause provides for a minor technical adjustment to the administration of settlor-interested trusts. It will oblige settlors to pay to trustees any repayments of tax they receive in connection with the trust income, tax that originally had been paid in effect by those trustees. A settlor-interested trust is a trust set up by a person—the settlor—who puts property into it for the benefit of people, which may include themselves. For income tax purposes, the trust income is treated as that of the settlor, but tax is paid initially by the trustees at a special trust rate. If the settlor pays income tax at a lower rate than that of the trustees, he may be entitled to a repayment of tax on the trust income treated as his.

The trust rate increased to 50% from April 2010 and, with many settlors having a tax rate of 40%, that type of repayment will become more common. Settlors currently have to refund to the trustees any tax repayments they get as a result of offsetting an allowance or relief against their trust income, but they do not have to refund repayments obtained in respect of their personal tax rate being lower than the trust rate.

Clause 7 will introduce a consistent treatment for all repayments making sure that, no matter what the reason for the repayment, settlors will have to refund the money to the trustees.

David Gauke (Conservative, South West Hertfordshire)

As I was saying, clause 7 will introduce consistent treatment for all repayments, making sure that no matter what the reason for the repayment is, settlors will have to refund the money to the trustees. It will also ensure that, where settlors make the repayments to the trustees, there are no unwelcome inheritance tax charges. Essentially, since the settlor will be legally obliged to refund the tax to the trustees, he cannot be regarded as reducing the value of his estate when he makes the payment, so no inheritance tax is due.

Consultation on a draft of the clause produced some useful feedback from professional bodies on how settlors and trustees share information. That is necessary to enable trustees to perform their fiduciary duty of collecting payments properly due to them. In most cases, normal communication between the settlor and trustee will mean that there will be no problems, but we accept that there will be some cases where trustees will want greater certainty.

The hon. Member for Nottingham East raised concerns about the administrative burden, which was raised in the consultation. It is worth saying that settlors who do not make self-assessment tax returns can choose whether to make a repayment claim. We think that most will make one, especially where the sums are significant. The amount of the repayment is fairly straightforward to calculate, and HMRC will be issuing guidance to help people. Settlors and trustees often have a close relationship, as I said, so there should not be any difficulty in agreeing the amount to be paid, in the same way that trustees have little difficulty in agreeing, under the current rules, the amount a settlor is repaid as a result of applying their reliefs and allowances. Where greater certainty is needed, HMRC will be able to provide settlors with a certificate, confirming the amount of tax repayment they obtain in relation to the trust income.

It is worth pointing out that if the measure were not introduced, trustees would find themselves with unintended inheritance tax liabilities. Professional bodies told us that the main area of concern was certainty as to whether a repayment had been obtained and of what amount. That was, as I said, a point that came up in the consultation. We have addressed it by introducing the certification procedure, which followed the consultation. Other issues have been raised, such as regarding the treatment of losses, but they are not new, and HMRC will be working with professional bodies to ensure a common understanding of the existing rules. We are of course always willing to hear representations on how the system may be further improved, but we have responded to the concerns about the administrative burden during the consultation.

The hon. Gentleman also raised concerns about avoidance in the area, and whether there is more that we need to do to overhaul the trust regime. Some members of the Committee may recall that significant changes were made to the regime for the taxation of trusts in 2006. I remember it well, having served on the Committee that considered that year’s Finance Bill, and it was not entirely a happy process. The Government want to avoid constant tinkering with the tax system, which leads to complexity and uncertainty. We do not have any plans to make significant changes in the area, but we are always willing to listen to representations as part of the usual Budget process, and the Government are keen to reduce tax avoidance at every opportunity.

The clause has been adjusted to include a procedure for the settlor to require HMRC to provide him with a certificate confirming the amount of repayment of tax he obtains with trust income. In doing so, we have met many of the concerns that have been raised in this area.

Sheila Gilmore (Labour, Edinburgh East)

Clearly there have been representations and further changes made since the Bill was published in its original form. Nevertheless, the Law Society still seems to be of the view—and has given its view—that the measure should be withdrawn for some kind of redrafting. Does the Minister feel that that is not appropriate?

David Gauke (Conservative, South West Hertfordshire)

That is not appropriate, for the reasons that I have set out. Without the clause we would have unnecessary and unfortunate inheritance tax payments. The clause meets the essential concerns about administration.

Clause 8

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 5, in clause 8, page 9, line 31, at end add—

The amendment moves us on to a slightly different, and perhaps more accessible, part of the regime operated by Her Majesty’s Revenue and Customs. In clause 8, Members will see a series of simple powers to allow HMRC to create an online version of a form that taxpayers fill in to report tax deducted on interest, perhaps from deposits or from savings accounts. That is an entirely reasonable and worthwhile change, and I am surprised that primary legislation is required simply to allow the production of an online version of a form that, I gather, currently requires a convoluted paper-based application and then 14 days for a form to be returned for completion.

In the general sense, therefore, we believe that the new online return of income tax deducted form—CT61—is a good improvement, and will certainly ensure better compliance with tax law. We very much welcome the provision, particularly given that it will be made through the affirmative procedure in the regulation that is introduced. That is always something that I would welcome on this side of the Committee—[Interruption.] I am sure that the sedentary intervention by my right hon. Friend the Member for Delyn could not be recorded, and I did not hear what he said.

The amendment simply seeks to add, at the end of the proposed new subsection, the requirement that the regulation under the proposed new section also improve

“accessibility and convenience for the taxpayer.”

The amendment is necessary because the simple act of placing a tax form online often does not necessarily do much for its intelligibility or accessibility. I am sure that if members of the Committee have ever endeavoured to fill in their own self-assessment tax forms, or had dealings with HMRC in a personal capacity or on behalf of their constituents, they will have metaphorically torn their hair out at the complexity. Filling in the forms can sometimes feel like wading through treacle.

On this side of the Committee, we believe that far greater efforts need to be made to improve convenience and accessibility for taxpayers, not only because that is the right thing to do, given that taxpayers are residents in our constituencies, but because it is in the self-interest of the Treasury. The more compliance and the greater the understanding of the rules, the more likely it is that people will pay accurate taxes.

Richard Harrington (Conservative, Watford)

Although what the hon. Gentleman says is logical—we should all want to make things easy for the taxpayer—surely it is only rational that the CT61 be the same in written form and on the internet; otherwise, it would not be fair to people who complete the form by hand.

Chris Leslie (Labour, Nottingham East)

I completely agree with the hon. Gentleman’s entirely sensible point. Given, however, that the Bill is the only opportunity for us to amend the existing provision, we felt it important that Parliament make a clear and formal statement that we believe the balance needs to be shifted more in favour of the taxpayer, rather than simply having systems designed around the convenience of HMRC officials.

Charlie Elphicke (Conservative, Dover)

The hon. Gentleman might recall that the previous Government’s history on tax forms, particularly those for tax credits, was amazingly complex. Does this represent a change of position by the Opposition? Does he agree that the previous Government did not get it right when it came to simplicity, accessibility and convenience of tax forms?

Chris Leslie (Labour, Nottingham East)

I certainly think that we could always do better in terms of accessibility, language use and the ability to assimilate what tax rules apply to us as individuals, but that is a separate issue from whether we should have tax credits. The hon. Gentleman’s party looks set, possibly tomorrow, to hack away at the entitlement to tax credits that many of our constituents may have, which would be a great shame. Whether those tax credits are accessible depends on whether the Government fund them and allow them in the first place. We cannot put the cart before the horse. In all types of management we could do better. For that reason I felt that it was important to table this amendment.

Alison McGovern (Labour, Wirral South)

During the Second Reading debate, I made some remarks on the Floor of the House about how important it is that we as parliamentarians respect what those who work for Her Majesty’s Revenue and Customs do and that we value their service. I repeat that today. Does my hon. Friend agree that a further reason for the amendment is that it could reduce some of the difficult cases that we all see in surgery, where there is confusion or difficulty of communication between HMRC and the tax paying public? It might assist not only our constituents and members of the public, but those working for HMRC in getting the right information at the right time.

Chris Leslie (Labour, Nottingham East)

I imagine that it can be frustrating for HMRC staff to find themselves having to answer simple questions borne out of the complexity of the forms and the time lags it takes to send out paper-based arrangements, and so forth, when they are also receiving phone calls from companies, entrepreneurs or ordinary members of the public who have perfectly reasonable inquiries to make. The amendment is, as I have said, a welcome step in its own regard.

I want to ask the Exchequer Secretary whether he would take this opportunity to discuss the accessibility and intelligibility of tax forms more generally. Certainly many of my elderly, retired constituents, who may well be in receipt of much of their income through savings that they have accrued over the years and find themselves returning declarations about interest deducted at source, will be even less able to access readily the meaning behind some of the complex terminology in the current CT61 form, as well as in other forms.

Has the Exchequer Secretary thought about consulting the Plain English Campaign on the design of those forms? Can he say that if unnecessary acronyms, gobbledegook and jargon can be avoided, he will make sure that they are avoided, while at every opportunity trying to explain arrangements in layman’s terms?

Will the Exchequer Secretary answer a question specifically on the whole set of downloadable forms in terms of the wider self-assessment arrangements? I have had constituents who have noticed that when they want to fill in their self-assessment forms, they are sent a batch through the post and then have to go online to find the relevant forms to download. That can be a “hunt the thimble” exercise. Can he assure me that the web version of the arrangement will have a facility for the taxpayer to find the tax office address to which they must submit the CT61 form? It may be that the online version allows a one-click return of the form so that people do not have to print it out and go through that rigmarole. I hope that that will be possible.

Richard Harrington (Conservative, Watford)

I apologise, Mr Caton, because I forgot to say how honoured I am to be serving on this Committee, particularly under your chairmanship. However, that was not the point that I asked the hon. Gentleman to give way for.

Irrespective of the merits of making things simpler online, which few people would disagree with, the CT61 is not a good example. From memory, I think that it is quite a simple form, so it is not the right time to have an amendment on this particular clause. Perhaps a general measure could be included somewhere else. I am not sure of the Minister’s view on that, but I think that to include such a provision here would be most inappropriate.

Chris Leslie (Labour, Nottingham East)

The hon. Gentleman was doing so well in a cross-party, bipartisan—tripartisan—way; I do not know what the phrase might be. The deduction of tax from interest has complexities, not necessarily about tax from individuals’ savings. Such complexities might involve whether the amounts are in yearly or monthly terms, or whether they concern special recipients, gilt interest, or foreign debts. Some companies have deductions at an interest level that is paid gross, and there are differences in how eurobonds are treated. It would be far better to spend a bit of time designing the online form, hopefully with a one-click solution.

Far be it from me to raise the acronym of IPSA in this Committee, but hon. Members will be more familiar than many of our constituents with the ridiculous arrangement of going to the lengths of filling in an online form, pressing the button to submit it, and then—perplexingly—having to print out paper copies and submit duplicates. Such an arrangement requires an entirely unproductive effort on the part of the customer, the client and the consumer. In this case, I would not want an atrocious arrangement such as that to be suffered by our constituents when they deal with HMRC.

Lorely Burt (Liberal Democrat, Solihull)

Hear, hear!

Chris Leslie (Labour, Nottingham East)

I am glad that the proposal has some support and I should be grateful if the Minister kindly reflected on the amendment.

David Gauke (Conservative, South West Hertfordshire)

As we have heard, amendment 5 would add a requirement that any regulations made under the power provided in clause 8 must have regard to accessibility and convenience to the taxpayer. I am sure that the Committee is united in wanting to ensure that tax forms are as accessible and convenient as possible. It is important that HMRC faces a great deal of focus on that.

HMRC has carried out a lot of work on customer segmentation and it is important that the customer segmentation that it has identified as being willing and able is as big a part of the population as possible. There are many who are willing, but not necessarily able to comply as they would like to. HMRC must engage with such people and ensure that the payment of taxes when they are due is as accurate, accessible and convenient as possible. Both sides will agree with that and we can work as a bipartisan-tripartisan Committee of national unity on that matter.

That said, we believe that the amendment is unnecessary and perhaps it is worth mentioning how clause 8 will apply. It is concerned with procedures under which an individual or another non-corporate person, such as a trustee, deducts tax from interest and similar payments by them. Typically, that will occur when such a person pays yearly interest to a lender resident outside the UK.

The clause is not concerned with procedures such as those under which taxpayers report interest received by them; for example, from bank and building society savings accounts. Such payments are regulated by the tax deduction scheme for interest—TDSI, if I may use an acronym. I can confirm that the power has nothing at all to do with such interest, for which there are entirely separate statutory provisions. Nor does it have anything to do with the PAYE system.

The aim of the clause is to provide a regulation-making power for payment of interest, rather than receipt of interest. The current procedures can be difficult for taxpayers to use. For example, at present, the procedures state that the taxpayer must send an account of payment to HMRC without delay, without specifying what “without delay” means, or in what form the account must be sent.

With the new regulation-making power in place, it will be possible to modernise the old procedures. For example, it will be possible to provide a bespoke form, and consideration can be given to aligning the procedures with the equivalent rules that apply to companies, for which there are long-established regulation-making powers.

Any regulations made under the power will be subject to consultation and an impact assessment. They will also be subject to further parliamentary scrutiny. As the hon. Member for Nottingham East pointed out, they are to be made by affirmative procedure. He welcomed that, as is traditional from those sitting on the Opposition side of the Committee.

It is precisely because we are mindful of the need to have regard to the convenience of the taxpayer that the regulation-making power is needed. Without it, it would not be possible to improve the current procedures in this area, provide certainty for taxpayers or reduce compliance burdens.

The requirement on HMRC to have regard to accessibility and the convenience of taxpayers is something with which we can all concur. The hon. Gentleman suggests a wider look at online forms. The power in the clause is limited to forms that apply where income tax is deducted at source. Review of new or amended forms will, of course, be undertaken at the relevant time, when we deal with those points.

The hon. Gentleman raises a fair point about the importance of convenience and accessibility, but adding such words to the Bill, particularly given that they are not defined, would not add anything useful to the clause, so I hope that he will agree to withdraw the amendment. However, he is right to highlight the need for forms produced by HMRC to be as accessible and convenient as possible, and I think he particularly united the Committee when he highlighted an instance where that does not always happen.

Chris Leslie (Labour, Nottingham East)

The Minister’s iron grip on public policy is such that his utterances about seeking greater accessibility and convenience for the taxpayer will immediately be picked up on by his myriad officials in the room, and I am confident that they will act on them without undue delay—I forget the phrase he used, but without hesitation or any unnecessary time elapsing.

The point that the Minister makes about the taxpayers to whom the clause relates suggests that this is a much narrower set of provisions than I had perhaps realised. In that respect, I am more than happy to withdraw the amendment, but my point is an important one. We should always be vigilant about the fact that it is our constituents who have to navigate these systems, and that we have a duty to make it as simple and burden-free as possible for them to do so. I beg to ask leave to withdraw the amendment.

Clause 9

Chris Leslie (Labour, Nottingham East)

The clause is designed to tidy up the legislative rules surrounding the corporate tax treatment of dividends and other distributions following major reforms in the Finance Act 2009. Careful work by the solicitors Freshfields Bruckhaus Deringer and others has pointed out a set of anomalies that appear to have provoked officials at the Treasury to generate a new framework in which to tie up some of the loose ends that were left behind, and to reiterate the original intentions of HMRC in making that 2009 amendment to the law.

Generally speaking, in this country we permit a company to make dividend distributions only up to the balance of earnings that are available for distribution according to its most recent audited accounts. Some exceptions exist, usually in respect of distributions of shares of the company for winding up and in other limited situations.

In 2009, new rules replaced the system for taxing dividends from UK and overseas companies following a legal ruling the year before in which, after the FII Group litigation in the High Court in 2008, the European Court decided to exempt EU and European economic area residents’ subsidiary distributions from tax in the UK rather than taking an approach to taxing dividends depending on the residency of the dividend payer. That decision raised the need for HMRC to become compliant with European Union law—here we are again, all good Europeans.

At that point, HMRC could have opted either to introduce an international or an EU exemption, or to remove the domestic exemption from UK to UK dividend distributions. In the Finance Act 2009 HMRC seemed to opt for the second option, placing both UK and non-UK companies within the charge to corporate tax on income, although there were extensive exemptions to those charges. A series of technical and unintended problems arose, however. The rules were made more complex because of the differing treatment of distributions, whether they were of an “income nature” or of a “capital nature”. Unfortunately the term “of a capital nature” was insufficiently defined in the legislation, and here we are, therefore, with clause 9.

I have a series of technical questions to ask the Minister. First, will he set out clearly the alterations in yield for the Exchequer compared with the original arrangements, for instance because of the change in treatment of foreign dividends? Is it really the case that about £200 million would otherwise have been collected had EU dividends not been exempted, or do I have an incorrect figure?

Secondly, why is it reasonable in paragraph 5 of schedule 3 to make those changes retrospective in respect of distributions made on or after 1 July 2009? Is there not a danger, as ever, in retrospective taxation arrangements, and how will the election to opt out of that retrospective arrangement operate in practice? Is that done for a particular reason, and if so can the Minister expand upon the reason?

The explanatory notes state that the current rules have created circumstances in which some

“UK companies in receipt of UK distributions faced an unexpected tax charge.”

What is the scale of those unexpected charges, and is the retrospective nature of the changes designed to compensate companies for those arrangements? In my reading, that seems to be the logic behind the schedule. Those are all technical points, and I would be grateful if the Minister addressed them.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman is right to say that the measure is highly technical, and it may help if I try to take the Committee through it. Clause 9 and schedule 3 address an anomaly that has arisen concerning the scope of distribution exemption. As the law stands, there is a risk of some very large, unexpected and unintended tax liabilities arising within groups of companies. This legislation will ensure that those potentially damaging tax liabilities do not arise either in future or in past periods.

To provide some background information, UK distributions have always been exempt from corporation tax. In 2009, a new regime was introduced that extended the exemption to foreign distributions. In common with its predecessor, the new distribution exemption regime applies only to distributions of an income nature and not to those of a capital nature. Instead, those of a capital nature fall within the legislation that taxes the capital gains of companies.

Following the introduction of the 2009 rules, HMRC and tax specialists in the legal and accountancy professions looked closely at the question of which distributions qualify for exemption and which do not. HMRC took legal advice and concluded that, in certain circumstances that are relatively common within groups of companies, amounts that had historically been considered as income distributions that qualified for exemption may, in fact, constitute repayments of capital. Those amounts cannot qualify for the distribution exemption.

Although those points came to light only after the introduction of the 2009 distribution exemption legislation, they were equally relevant to the UK distribution exemption before 2009. Therefore, HMRC concluded that unexpected tax liabilities have potentially arisen in respect of transactions undertaken both before and after the introduction of the new exemption rules in 2009. That view gave rise to considerable concern, because it affected the tax treatment of certain types of transaction that are quite commonly carried out in corporate reorganisations.

Clause 9 and schedule 3 simplify and expand the distribution exemption regime in two ways. First, the exemption regime for UK and foreign distributions is extended by removing the exclusion for distributions that are of a capital nature. Secondly, the legislation ensures that certain amounts that may be repayments of capital are instead brought into the scope of the term “distribution” for corporation tax purposes. That is in line with long-standing expectations about the status of those transactions and it enables the amounts to qualify for the exemption.

It has always been the case that in certain situations distributions from the company can be taken into account in calculating corporation tax liability on chargeable gains, and that will remain the case. However, the changes being made now will clarify which distributions are charged corporation tax on chargeable gains and which distributions are exempt from corporation tax, subject only to certain narrowly defined anti-avoidance rules.

Following the announcement of this measure at the June Budget, a significant number of detailed and very helpful comments have been made about the draft legislation. I want to thank all those who took the time to make those comments, as they have led to a number of significant improvements. One addition to the draft legislation is a small but significant extension to the scope of one part of the distribution exemption rules to accommodate distributions that are now brought within its scope. The exemption that is currently given for all dividends that are not associated with tax avoidance is now extended to any distribution, subject to the same tax avoidance condition.

Another change that was made following consultation was to restrict the scope of those changes to corporation tax only. The problems that I have described arose only in respect of corporation tax. There were some concerns that the changes might adversely affect some income tax payers, which had not been intended. Income tax payers will continue to pay income tax on all distributions received with very few exceptions, such as distributions received during the winding-up of a company and repayments of share capital.

Although the provision fully addresses the anomaly concerning the scope of the distribution exemption, some of the detailed comments received after its publication have raised other important questions about wider distributions legislation. I can inform the Committee that HMRC officials have proposed a joint working group with representatives of the tax profession. The group will aim to improve common understanding of the legislation with a view to improving guidance. That will build upon the constructive dialogue that has helped so much with the development of the Bill.

The hon. Gentleman raised a number of questions about how the clause will work. First, there is the question of yield and whether the changes will reduce the corporation tax take. The changes will not reduce the take because they merely restore expectations for UK companies. It has not been HMRC’s practice to charge tax on the distributions to which the changes apply. The clause will, if one likes, restore the status quo.

The hon. Gentleman also asked why the measure was retrospective. Its retrospective nature allows companies to take advantage of the benefits of the new rules at any time. The legislation is almost always beneficial, but the opt-out entitlement allows a company to elect for any distribution made before 22 June 2010 to be unaffected by the changes. The retrospective effect will not apply unless a company so chooses—the election is made through the tax return—and that merely preserves existing expectations. Large and unexpected liabilities would arise without those reforms, and that would create uncertainty within the tax system, which we do not want. If I may anticipate the hon. Gentleman’s next question, we do not have an estimate of the potential liabilities in aggregate but, none the less, there is a concern that there might be an unexpected tax liability. The clause seeks to prevent that from happening.

The provision will end the potentially damaging uncertainty that would have arisen due to the risk of very large and wholly unexpected tax liabilities. The changes make it clear that the potential liabilities will not arise in future, and they also remove them retrospectively.

Chris Leslie (Labour, Nottingham East)

I am grateful, Mr Caton, for your indulgence in letting me respond to the Minister.

It is helpful that the Minister has been able to address some of the specific questions that I have asked. It is also useful that he has announced the proposed working group of individuals from across the tax profession, which will burrow into the legislation and ensure common understanding. With those assurances, I am more than happy to support clause 9.

Chris Evans (Labour, Islwyn)

I do not profess to be a taxation expert, but, like many members of the Committee, I received a brief this morning from the Chartered Institute of Taxation highlighting its concern about the application of the new rules for distribution in specie, not in cash. The brief provides a number of examples that demonstrate how the Bill is insufficiently clear. Unless the Minister wants me to bore him to death by reading out the examples—[ Interruption. ] I shall read them out if he wants me to—[Hon. Members: “One or two.”] I shall read out all three. The first example states:

“A ‘dividend’ is declared in a specified amount, which is then satisfied by the issue of a loan note or similar instrument. In such a case it seems that there is a ‘distribution out of assets’ for the purposes of paragraph B of section 1000 but there is no ‘transfer’ within the meaning of section 1002(2), in which case section 1002(3) does not apply to disapply paragraph B. Clearly at a later time the loan note will be settled but this will be a separate transaction and should not affect this analysis.”

The second example states:

“A ‘dividend’ is declared in a specified amount, which is then satisfied by an entry in an inter-company account. Again, as for 1, it seems that there is a ‘distribution out of assets’ but there is no ‘transfer’ of an asset.”

The third example—I promise that this is the final one—states:

“A ‘dividend’ is declared in the specified amount, which is satisfied by the transfer of an asset already held by the company. This may be a financial asset such as a receivable issued to it at an earlier time by a group company, shares or land and buildings. Again there will be a 'distribution out of assets' but in this case there will also be a 'transfer'. In this case we assume that the legislation can be applied on that basis that because the amount was declared as a cash amount then it is regarded as a transfer of cash for the purpose of (amended) section 1002(2)(a) and so again section 1002(3) does not apply to disapply paragraph B.”

The institute goes on to say:

“We would welcome confirmation that our interpretation is correct.”

It also says:

“These three situations contrast with the probably much less common situation where a ‘dividend’ is declared of an asset”.

If the Minister can give a response to that, he definitely has my admiration.

David Gauke (Conservative, South West Hertfordshire)

I am very grateful to the hon. Gentleman for his comments. He is right to say that the Chartered Institute of Taxation has asked about the scope of existing legislation dealing with company distributions and whether the new legislation will apply for certain distributions made in specie. As we have heard, the points are very detailed and, to be honest, beyond the scope of the debate on this clause. However, I can confirm to the hon. Gentleman, in response to the CIOT’s questions, that HMRC is already discussing those matters with CIOT and others. It will continue to do so as it develops guidance to cover distribution legislation, which includes, but is not limited to, changes made in the Bill.

I hope that the hon. Gentleman will forgive me for not responding in detail to his particular examples, but I assure him that the matter is very much in hand and that we have our finest minds working on it.

Clause 10

Chris Leslie (Labour, Nottingham East)

We have tabled an amendment to schedule 4, which relates to real estate investment trust arrangements, particularly regarding the proposals to facilitate the payment of dividends through stock issue. For the aid of the Committee, I should set out that real estate investment trusts are tax-efficient mechanisms through which investors in commercial or residential property can conduct efficient business. They ensure that the property rental income has tax paid on dividends but that the business does not need to pay corporation tax or capital gains in certain circumstances, thus making it easier for investments to be made in shares in firms holding property assets. By and large, the retail estate investment trust regime, which the Labour Administration were party to developing, has been very beneficial.

There might well be a variety of REITs that focus on specific areas such as office space or retail outlets. Legislation stipulates that a real estate investment trust must have three or more properties in its portfolio, with each accounting for no more that 40% of the ring-fenced assets. Obviously, that is to ensure that there is a basket of properties in a genuine portfolio to ensure that there is a spread available for people to invest in. Properties in REITs must not be owner-occupied.

A shareholder in a listed British property company faces double tax. The company pays corporation tax on its property-related business activities, while the investor pays tax on dividends and capital gains. Real estate investment trusts do not pay corporation tax on their ring-fenced assets—profits arising from property-related activity, such as earning rent—as long as at least 90% of their profits are distributed to shareholders as dividends, which brings us to the point of the clause. Taxpayers will pay more tax on dividends paid by a REIT than they do on a dividend from a non-REIT share. Each such dividend distribution is known as a property income distribution—PID. A PID will be taxed as property letting income and paid after deduction of tax. A basic rate taxpayer will pay 20%, so for every property income distribution of 100p, they will receive 80p but, on the other hand, a higher rate taxpayer will be taxed at 40% or, I presume, even at 50%. The reliefs are therefore commensurate. Shareholders who do not pay tax at all can reclaim the difference.

It is expected, however, that due to the tax benefit to the company itself, dividend payments are typically higher, offsetting the higher level of tax paid by the investor, so in the long and short circle of life of a REIT, it is still comes out as a more efficient tax arrangement. Will the Minister explain why the property income distribution is set at 90% of profits and not lower than 90%, or at 95% or 100%? I would like to know the logic behind that figure. Would a lower distribution requirement incentivise reinvestment in the quality, fabric and maintenance of the property stock? In other words, would not a facility to encourage reinvestment be in the long-term best interests of land and property values across the UK?

Charlie Elphicke (Conservative, Dover)

Should not the hon. Gentleman consult his own colleagues on those questions, given that the previous Government brought in the legislation as a grand reform?

Chris Leslie (Labour, Nottingham East)

It was a reform. There were other grand reforms that the previous Administration put in place. I might well consult my colleagues, but given that the clause is before us today, I felt that it was reasonable to ask the Minister to help the Committee on the 90% figure.

I have another question that might be even more academic in some respects: to what extent does the Minister assess that the REIT arrangements have affected property price inflation more generally in our economy, given that commentators have voiced concern more generally about the role that property plays in our economy? Obviously, a lot of inflation took place before the REIT regime was in place. However, what part has the regime played, particularly given that commercial property and its direct purchase is hugely expensive and complicated? Has opening an opportunity for investors to take a stake in areas of property that were hitherto inaccessible fuelled some of the price inflation?

Property is not a liquid investment on many occasions, but buying REIT shares rather than actual properties can give the investor greater flexibility to move in and out of the asset class—that is generally to be welcomed—just like trading a share online or via a broker. Does that extra liquidity create a multiplying or magnifying effect on prices? What analysis has the Treasury made of that when considering the thorny issue of particular asset class inflations and, as some have said, a possible historical property bubble? I do not wish to comment one way or the other on whether that is the case, but I hope that the Treasury can analyse the effect of the tax rules on the market in general. I will be grateful if the Minister can answer my points.

Justine Greening (Conservative, Putney)

It is a pleasure to serve on the second Finance Bill of the year under your chairmanship, Mr Caton.

I shall remind the Committee, as the hon. Member for Nottingham East started to, what clause 10 and schedule 4 will achieve. I will then do my best to answer his questions—perhaps that will give more background.

Clause 10 loosens the requirements for real estate investment trusts by allowing amended distribution rules. At the moment, REITs are required to distribute 90% of their profits from their tax-exempt property business each year in cash. REITs were set up in about 2004 under the last Government when this issue was first identified in order to offer different treatments for people who wanted to put investment into property between those who did so via a company and those doing so directly. At the time of their establishment, there were several facets to desired outcome. First, it was about creating liquidity. Secondly, it was about improving investor access. There was a sense that we needed to bring money into the housing industry to create more housing, improve economic stability and so help to stabilise the property investment market by rebalancing some debt with equity among property companies. There was also the desire to create more efficiency in terms of the tax issues that have been discussed. It was also hoped that REITs would improve the housing market by creating a better chance of fostering enhanced professional management of the private rented sector. In fact, those tax rules were largely successful because by the time of their introduction in around 2007, an awful lot of rental property management companies went under the REIT tax status.

The question then was to what extent we could improve the REIT status to make it more flexible for companies. At present, unlike other companies, as the hon. Gentleman said, REITs can only distribute dividends in the form of cash dividends. So clause 10 effectively gives them the flexibility in making distributions from their tax-exempt property rental business and, in particular, in meeting their profit distribution requirement. So it will help them to preserve capital, which is important for all companies, including REITs, in the current economic climate, given that we regularly discuss in the House how difficult it is for businesses to access new capital. The Government are also satisfied that this will not affect investors because they can still choose to receive their dividend in cash if that is what they want.

As the hon. Gentleman will be aware, we put a draft Finance Bill out for consultation and following representations from organisations such as the British Property Federation, which overwhelmingly welcomed these changes to give REITs more flexibility—in itself welcome—we decided to loosen the use of stock dividends by REITs. So, rather than allowing them to issue a proportion of stock dividends instead of cash dividends, it seemed far simpler for REITs in terms of both flexibility and bureaucracy to allow them to distribute all their dividends as stock rather than cash dividends. As I said, ultimately that will be an option for shareholders. If they wish to continue getting cash dividends, they can do so.

To answer the hon. Gentleman’s question about the distribution rate, it was set at 90% to ensure that there was no revenue cost to the Exchequer: although we were facilitating more investment into the property sector, which is needed if the numbers of houses that we all want are to be built, it would not be at a cost to the Exchequer. If we lowered that rate, it would potentially have an impact on the Exchequer, but as I am sure the hon. Gentleman remembers from his time in government, the property industry will clearly continue to make its representations about how it sees REITs being further developed in future.

The hon. Gentleman’s final question about the impact of the tax status of REITs and how that has affected the property market is interesting. REITs were established as a means of facilitating more investment with the aim of incentivising more house building of properties for the rental sector. I do not have the analysis in front of me today, but I should have thought that, if anything, the tax change would have had more of a downward than an upward pressure on property. Ultimately it is difficult to assess a particular change to tax in a particular part of the property market that clearly includes other stakeholders such as the construction industry. Then there are demographic changes, regional pressures and the broader economic climate to take into account. It is quite difficult to give an answer one way or the other.

Certainly, the extent to which this legislation facilitates more investment in property opens up the investment that we need to get more homes built for people. One of the main reasons that property prices have an innate upward push is this gap between demand and supply. Hopefully, this measure will ensure that we get investment coming into the sector so that we can minimise the risk of the gap growing, which is something that Members on both sides of the House are concerned about. I hope that I have answered the hon. Gentleman’s questions.

Chris Leslie (Labour, Nottingham East)

I am grateful to the hon. Lady for her answer. Broadly, I agree with many of her points, and it is helpful to have that clarification. Other changes affecting the property market include slashing the social housing budget in half, which I gather she and her colleagues will probably do tomorrow. Such a move will not do anything to help with the supply of housing stock across the country, but I suspect that that is a debate for another day.

Schedule 4

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 6, in schedule 4, page 41, line 25, at end add—

‘13. The Treasury shall publish a report in the 2011 Budget detailing the projected revenue implications of the provisions of this Schedule for the five financial years after commencement.’.

The meat of the matter within schedule 4 is specifically related to the whole point of the changes. Currently, the REIT arrangements take the yield of tax on the cash dividend of payment, and yet the change in the clause seeks to allow companies to make that dividend payment in stock. My questions for the Minister are pretty obvious. Will she tell the Committee what the current tax yield is from the cash dividend taxation regime on REITs? Perhaps she could give us the figures for the last available financial year. Will she give us a sense of what we are talking about here? As I understand it, allowing stock dividend arrangements means that the tax on those changes will only be crystallised at the point at which the stock is then sold or disposed of. Under the current arrangements, there is a revenue yield to the Exchequer at the point at which the dividend is distributed, which is not the case under the stock dividend route.

Amendment 6 calls on the Treasury to produce a report in the 2011 Budget, detailing the projected revenue implications of the provision for the next five financial years after the commencement of the Act. We feel that that would be helpful in ensuring that we keep track of the implications of this particular change for the Exchequer. Moreover, an estimate of the volume that is likely to be created by the stock dividend route would be useful. I hope that officials will not be recommending the introduction of such a change without having some idea of where the industry might go. I would be grateful if the Minister could clarify those points.

Justine Greening (Conservative, Putney)

Let me specifically address amendment 6. The presumption behind it is that the tax treatment of stock dividends will be different from that of cash dividends. That is not correct. Stock dividends will be treated in exactly the same way as the cash distributions, so there will be no loss to the Exchequer. In other words, the amendment proposing a report that charts the plus or minus for revenue is unnecessary because the change will have no revenue impact; it simply gives REITs more flexibility on how they make their distribution within their existing distribution requirement.

With regard to the baseline and the report that the hon. Gentleman wants to see showing the amount either way, that information is not available because there is such a wide range of investors involved that they would not specifically identify their PID income in a way that would allow us to collect the information centrally. We know that REITs have become the main tax vehicle for many of the companies involved in that area, so we can see the overall activity within the sector through REITs, but specific investor-level tax revenue implications are less clear. The answer to his underlying question about the difference to the Exchequer is that there is no difference.

Chris Leslie (Labour, Nottingham East)

My understanding was that although the yield for the Exchequer would be the same in the long run, in the short run it depends very much on the point at which the stocks are disposed of. Only at that point will the tax be paid and the yield gained for the Exchequer. Given that we are in a spending review period in which every single year of revenue yield matters for the profiling of public expenditure, it seems important to ascertain whether there will be a deferral of revenue, with money not coming into the Treasury as quickly as it would do in a cash dividend circumstance. I would be surprised if, as the Minister says, no stock dividend is paid at the point of issuing. That was not my understanding at all.

Justine Greening (Conservative, Putney)

I reiterate that there will be no Exchequer loss or gain as a result of clause 10 or schedule 4. There will not be that temporal issue with revenues that the hon. Gentleman suggests there might be. There will be no deferral of tax, which is why there is no difference. I hope that that has answered his question—[ Interruption. ] There is no doubt that it has absolutely answered his question, although he might not understand why.

Chris Leslie (Labour, Nottingham East)

I am interested to hear the Minister’s points, because although I of course accept that there will be no loss of yield in the long run, I am not sure that her response is sufficient to answer the point I was trying to make about the annual, year-by-year profiling of the revenues and why, if tax will be deferred until the point at which the stock is disposed, that will not affect yield. It might be because of the gaping hole in HMRC’s knowledge about the total yield, which hopefully she will join me in saying is unacceptable. To have no idea about what the cash dividend yield is for the Treasury really is not up to snuff, and I hope that her Department will tighten its awareness of what the yield is from that area. That might be why there is a lack of information.

Justine Greening (Conservative, Putney)

The hon. Gentleman is following a red herring—[Hon. Members: “That was this morning.”] I have obviously missed a more fun part of the Committee’s proceedings. He is heading down a route that I do not think is productive. I can be very clear with him; he is labouring under the misunderstanding that we will treat stock dividends differently from cash dividends, but we will not. The tax on them will not be deferred, as he has in his mind, so I can correct him on that. Hopefully he can understand, as a result, that because tax will be paid on the issue of the stock dividends, just as it is treated as a cash dividend, there will be no revenue difference. I hope that that provides him with the final reassurance that he needs.

Chris Leslie (Labour, Nottingham East)

I have no choice but to take the Minister’s crystal clear assertions on that point. I had a different understanding of the arrangement but she has disabused me of that.

Perhaps we should return to the issue after I have had chance to consult some serious brains on the matter. I still think it is not acceptable that the Treasury does not know the revenue yield. It is important that, for each of these particular large tax relief arrangements, we have some estimate of what is happening in terms of revenue yields. However, the Minister has persuaded me for the time being so, at this stage, I beg to ask leave to withdraw the amendment.