Finance (No. 2) Bill

Public Bill Committee, 26 October 2010.

Clause 11

Chris Leslie (Labour, Nottingham East)

Good morning, Mr Chope. What a pleasure it is to be back at the apex of our national debate on financial matters.

It is an honour to have the opportunity to talk about clause 11, which refers to the financing costs and income of group companies. Hon. Members will be aware that the worldwide debt cap rules came into effect on 1 January 2010. They overhaul the taxation of multinationals, restricting the UK tax deduction for interest costs of UK companies that form part of a large group. Broadly, the purpose of the rules is to ensure that the aggregate UK corporation tax deductions for financing costs do not exceed a group’s external financing costs on a worldwide basis. As far as I can tell, the rules are primarily aimed at cash-rich, non-UK parented groups that fund their UK operations via debt, and UK-parented groups with upstream loans into the UK from overseas subsidiaries. Of course, as with many changes, other groups of companies may also be affected.

Specialist lawyers and accountants have pointed out that the debt cap rules will result in additional administration, or perhaps a significant change in tax costs for many large groups, although, quite rightly, it is a measure designed to guard against excessive debt funding of UK companies. Obviously, the measure was framed and devised when we were under a different Administration—a happier Administration under which the sun tended to shine far more frequently than it does today.

The application of the rules can be complex. I am told that the basic working of the debt cap remains unaltered from the 2009 changes. As I said, the changes take effect from the beginning of the calendar year, which is the start date for the debt cap rules as a whole.

The clause makes about 14 separate changes to the worldwide debt cap rules, perhaps the most important of which is the new addition to the proposal of a gateway test. In essence, if a group passes the gateway test, it will not suffer any restriction of interest expense due to the debt cap, and it will not have to prepare debt cap calculations. The gateway is passed when the net debt of the UK-resident members of the group is less than 75% of the group’s worldwide gross debt. However, the gateway test is limited in its application. For instance, it is unlikely to exempt wholly UK groups with intra-group debt from the rules.

Further changes are made in the clause, such as ensuring that when a UK figure is being compared with a worldwide figure, the same amount is included in both figures in respect of the same borrowing. There are exclusions for certain securitisation companies. Another change ensures that long-term arrangements that have the economic effect of loans are taken into account for the gateway test. Those arrangements have been made in the clause as well.

I understand that there are specific arrangements for industrial and provident societies, which are of particular interest to me. From my perspective, they are companies that the Treasury should encourage and support. Will the Minster tell the Committee what those differential arrangements for industrial and provident societies will be? As a Labour and Co-operative Member, I am particularly interested in those, and other Members might be similarly interested.

I gather that all but one of the rules will apply retrospectively, and issues always crop up when legislation applies retrospectively. Schedule 5, which is linked to the clause, contains a lot of detail. I will not dwell on the Government amendments to schedule 5, but they might address the concerns raised by organisations such as Deloitte, which is concerned that the amendments proposed under clause 11 and schedule 5 offer only a partial solution. Deloitte has been disappointed that Her Majesty’s Revenue and Customs has not addressed what it regards as some of the consequential issues regarding the retrospective nature of the legislation. What further areas of improvement might the Minister consider for future finance legislation, because the Government amendments might not deal with all the concerns that Deloitte has raised?

Given that the measure represents significant tax changes, I wonder whether there has been a regulatory assessment of the accountancy and legal advice costs to the affected companies. On balance, the changes are probably favourable rather than burdensome but, setting aside the net tax impact of the changes, company treasurers and directors of finance are bound to face a steep learning curve, so I wonder whether the provision has undergone a regulatory impact assessment, as used to be the case under the previous Administration.

Will the Minister consider passive income, which is when multinational foreign subsidiaries generate income from assets that are—arguably—UK assets, but are artificially located offshore for tax reasons? We are discussing the global movement of capital, and many of our constituents who have written to us recently about tax changes and tax avoidance in general might not know the intricacies of such arrangements. Whenever offshore tax sheltering is raised, however, they are interested. There might be a loophole here that the Treasury has considered in the past, and I should be grateful if the Minister sets out the thought he has given to targeting passive income.

My final question for the Minister concerns whether financial services groups are to be excluded from the debt cap rules. I understand that HMRC has accepted that the proposed legislation would be “unworkable” in respect of financial services companies. That raises an eyebrow, however, because if it is unworkable for one set of companies and in one set of circumstances, why is it not so for others? There was a rumour or suggestion—I do not know where I picked this up from—that there might be another attempt to produce legislation to bring financial services groups into the debt cap rules. If so, when will that happen? Is such a measure likely to crop up as early as Report, or will it be for general future legislation?

David Gauke (Conservative, South West Hertfordshire)

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

I am grateful for the various questions that have been raised by the hon. Member for Nottingham East. They ranged broadly over the debt cap and concerned clause 11 and schedule 5, both of which I hope to address in my remarks, although we will deal with the Government amendments in a separate debate.

Clause 11 introduces schedule 5, which makes a number of changes to the worldwide debt cap legislation that was introduced last year. The basic working of the debt cap rules remains unaltered by such changes. The consultation with businesses and their advisers identified a number of situations in which the debt cap rules do not easily apply. The amendments made by the Bill can be divided into four main categories: to address mismatches between the worldwide and the UK measure of the same debt; to address the effect of the debt cap on securitisation companies; to deal with transactions that have the economic effect of loans but are not lending; and some miscellaneous, minor changes. The amendments will have effect from 1 January 2010, which was the start date of the debt cap rules. They are a response to ongoing consultation with a working group of interested parties and separate discussions with the private finance initiative industry.

I shall go through the schedule in more detail. Paragraphs 3 to 7 set out changes to the gateway test to which the hon. Gentleman referred. It is the initial calculation undertaken by the worldwide group each year to establish whether the debt cap rules apply. The main changes are the inclusion of financial arrangements that provide a return that is economically equivalent to interest and the exclusion of share capital. Paragraph 7 of the schedule removes a mismatch when different amounts are taken into account for the same liability by the worldwide group and a United Kingdom company. Paragraphs 8 and 9 amend the qualifying financial services group exemption and clarify the meaning of “financial instrument”. Paragraph 12 defines a group securitisation company and is one of the amendments that work to exclude securitisation companies from main debt cap rules.

Dual-resident investing companies are dealt with under paragraphs 13 to 16. Such companies are prevented from surrendering losses as group relief, and restricting the debt cap disallowance prevents them from using the disallowance to replicate the effects of group relief. The amendment in the schedule prevents the group from voluntarily allocating a disallowance to a dual-resident investing company and ensures that a default allocation is made first to other group companies. Paragraphs 18 and 19 include as financing income guarantee fees paid or imputed between companies. Guarantee fees are already included as a financing expense. Paragraph 21 amends the test for group treasury companies so that it applies to each company separately rather than to the financing income of the companies that is being aggregated.

Paragraph 22 prevents certain distributions of profit by industrial and provident societies from being treated as financing expense or income. Paragraph 23 removes a regulation-making power concerned with short-term debt, which was not practicable because it did not set up machinery to govern its use. Paragraph 24 adds relevant public bodies to those excluded from the debt cap rules. Paragraph 25 provides a new regulation-making power to amend the calculation of the tested expense or tested income amount if there is a mismatch between the accounts amount and the tax amount. Paragraph 26 clarifies the meaning of ancillary expenses in the available amount. The computation of the available amount is amended by paragraph 27, which excludes securitisation companies from the worldwide group while dealing with mismatches on interest and costs paid by a member of the worldwide group that is also a partner in a partnership.

Paragraph 28 provides a new regulation-making power to amend the available amount if there is a mismatch between the accounts amount and the tax amount. We shall return to that issue under the next group of amendments. Paragraph 30 excludes as the ultimate parent of a worldwide group limited liability partnerships and some collective investment schemes. Paragraph 31 amends the definitions of “UK group company” and “relevant group company” to accommodate securitisation companies. Paragraph 33 deals with companies that are party to capital market arrangements. It provides a regulation-making power so that such a company can jointly elect with another company to transfer its tax liability.

Paragraphs 36 and 37 provide that the commencement date for the amendments is 1 January 2010. Regulations made under the powers in paragraph 33 can apply only to tax liabilities due and payable after Royal Assent. A group may elect that certain amendments to the gateway test apply only prospectively. I hope that it was of help to the Committee for me to provide an outline of the schedule.

I turn now to some of the questions asked by the hon. Member for Nottingham East, such as whether any thought has been given to targeting passive income. It is worth highlighting the fact that the Government are looking more broadly at corporation tax reform. Later in the autumn, we will publish further details on possible areas of its reform. We might look at that among our consideration of many issues, and any further changes will be considered as part of that wider corporation tax reform programme. I note his concerns, and he will be aware that the Government are keen to reduce avoidance at every opportunity.

The hon. Gentleman also raised the issue of financial groups not being part of the debt cap rules. There are no plans to make further changes this year, but we will keep the matter under review. There is an issue with financial services companies and interest, because of course interest is part of what they do, as opposed to being merely a means of financing their own business. That is why there have always been particular complications in that area. As I have said, we do not intend to make any changes at the moment, but we will keep the matter under review.

Chris Leslie (Labour, Nottingham East)

It is useful to know that the Minister will keep the matter under review. Clearly, there have been concerns about certain quarters of the financial services sector that have been highly leveraged or have debt-finance arrangements that swirl around into complex sets of circumstances. If the clause is designed to guard against cash-rich, non-UK parented groups funding UK operations in a debt context, that would seem to be relevant in many ways to parts of the financial services sector. Will he give a commitment not only that this is a matter for review, but that there is a broad intention at some point to extend such rules to financial services, because that would give a useful indication of his direction of travel? I entirely understand the complexity, but it would be worth knowing whether such complexity makes it impossible to cover the sector, or whether the Treasury will endeavour to find ways to settle the matter.

David Gauke (Conservative, South West Hertfordshire)

I do not want to go any further than I already have this morning. There will be a wider review of corporation tax and how we go forward on this area. With the treatment of debt, there are particular issues with financial services companies and groups containing them that mean that we need to look at the issue carefully. I note the hon. Gentleman’s comments and we will take them into account.

The hon. Gentleman asked about the retrospective nature of the legislation. The original commencement date of the debt cap legislation was 1 January 2010. The regulations are made under the regulation-making power contained in that legislation, and so have the same commencement date as the primary legislation. That provides certainty and reduces the need for transitional arrangements. Because some of the legislative changes were announced in November 2009, there was an expectation that the rules would apply from 1 January 2010. To ensure that that does not add unfairly to the compliance burdens of groups, there is an opportunity to elect that those parts of the debt cap rules affected by the regulations do not apply until the regulations are laid.

The hon. Gentleman asked about the regulatory burdens more generally, and whether businesses and HMRC would have additional costs as a consequence of the changes. The cost of the changes in the debt cap legislation are negligible for both businesses and HMRC, which reflects the fact that the proposed changes do not fundamentally alter the operation of the debt cap rules, but ensure that they operate in the way originally intended. Most of the changes do not make a difference at all to the costs for groups, while others provide a small saving, such as the exclusion of securitisation companies from the debt cap and the changes to partnership costs.

The hon. Gentleman raised the issue of the debt cap working group. It will meet before the end of the year to continue discussions. It is made up of tax professionals and representatives from business, including the big four accountancy firms, major commercial law firms and the CBI. He also asked about further areas of improvement and highlighted concerns raised by Deloitte. HMRC will continue to work with Deloitte and other representatives, via the debt cap working group, to identify concerns and solutions.

The hon. Gentleman asked about industrial and provident societies. There is a question of why payments by industrial and provident societies are not already treated as interest under a loan relationship. There is a special rule for industrial and provident societies that treats the payments that they make to shareholders as interest under a loan relationship, whether or not those payments are legally interest. That means that, for an industrial and provident society, dividends and bonuses paid to shareholders are treated as interest. A company’s relationship with its shareholder is not one of borrower and lender, and so it is not correct that such payments are included as financing expense or income in the debt cap calculations of the company, and hence the changes contained within the schedule. I hope that that is a helpful summary of the contents of not only clause 11, but schedule 5.

Chris Leslie (Labour, Nottingham East)

I thank the Minister for those explanations and I am content with the points that he makes. These reforms form part of a wider range of changes, and I am interested that further thought will be given to corporation tax applicability and reforms more generally in the autumn. I look forward to debating that with the Minister. I am particularly pleased with his helpful explanation of industrial and provident society arrangements. I have no objections to clause 11.

Schedule 5

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 8, page 49, leave out lines 23 to 31 and insert

Christopher Chope (Conservative, Christchurch)

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

David Gauke (Conservative, South West Hertfordshire)

These amendments are to paragraphs 25 and 28 and both use the same wording. Those paragraphs contain powers enabling regulations to be made where there is a mismatch between the amount disclosed in the accounts of the worldwide group, which is known as the accounts amount, and that shown as the tax amount by a UK company. While drafting the regulations, it was discovered that the current powers did not allow us to lay regulations to correct a mismatch when an amount has been eliminated from the accounts of a worldwide group and so has not been disclosed. That might be significant, because if the interest arises on a loan between the members of the worldwide group, the interest will not be included in the consolidated accounts of the worldwide group, but it will appear as part of the tax amount of the UK company. Before an amount of interest is included in a debt cap calculation, other tax rules will have applied to it. As a result, there can be a disproportionate effect on the debt cap and the UK company may be at a disadvantage.

This is a somewhat complicated matter, so it might help the Committee if I give a simple example—I say “simple”, but the Committee will be the judge of that. Let us take a group of two companies named A and B that both prepare accounts to 31 December 2011. Company A pays bank interest of £10 million, while company B pays bank interest of £2 million, but also has a loan from company A and pays that company £6 million. The consolidated accounts for the group would ignore the loan between company A and company B and would therefore show only the £12 million interest paid by both companies to the banks. That £12 million would be the accounts amount under paragraphs 25 and 28 of the schedule. The £6 million paid by company B to company A is not disclosed in the accounts of the worldwide group and so cannot be part of the accounts amount. The tax amount for company B would the £2 million interest that is paid to the bank and the £6 million paid to company A, which makes £8 million in total. Because the £6 million paid by company B to company A is not disclosed in the accounts of the worldwide group, it is not possible to make an adjustment under paragraphs 25 or 28 to mitigate the impact on company B’s debt cap computation of other tax rules that apply to the interest.

One of those tax rules is the late interest rule, which states that in certain circumstances a company paying interest to a connected person can have a tax deduction for the interest only when it is paid and not, as is usually the case, as it accrues. For example, therefore, of the £6 million interest paid by company B to company A, £4 million of it accrued from 2003 to 2006, but was not paid until 2011. Including several years’ interest in the debt cap computation of company B might have an adverse effect on the computation of the debt cap disallowance. As I said, that intra-group interest is not disclosed in the accounts of the worldwide group, so we cannot make an adjustment to the debt cap computation to deal with it at the moment.

Amendments 8 and 9 extend the definition of “accounts amount” so that if no amount is disclosed in the accounts of the worldwide group in respect of a matter, the accounts amount is nil. Conversely, the definition of the “tax amount” of the UK company is also amended so that if no member of the worldwide group is entitled to a deduction under UK corporation tax, the tax amount will be nil. The amendments also allow for the possibility that more than one UK company will be entitled to a deduction and, if so, the tax amount in respect of the matter is the total of such deductions. The amendments enable one immediate issue to be addressed, and allow for similar issues to be resolved as they arise.

As I said, the issue is complicated, and I do not know whether hon. Members found that simple example to be simple—they would be forgiven if they did not. I hope, however, that it proves to have been a helpful explanation. The area is very technical, and I hope that the Committee is to some extent enlightened as to the need for the amendments, which support the position of representative bodies. It did not become clear that the amendments were needed until relatively recently, which was why their content was not included in the original draft of Bill. The amendments will help to ensure that the changes to the debt cap rules work correctly, which I think both sides of the Committee agree is vital.

Chris Leslie (Labour, Nottingham East)

I am sure that you will be glad to know, Mr Chope, that I am not really in dispute with the Government amendments. If there was an issue preventing a nil amount in respect of amounts not disclosed in the accounts of a worldwide group being taken within that mismatched context, that could be a problem. I found that the Minister’s simple example blew away the clouds of complexity straight away.

I am sure that the Minister will not be surprised by my question, which relates in part to the amendments. Paragraph 25 of schedule 5 cites a series of regulation-making powers that the commissioners have. I am not au fait with the mechanism for making such regulations. I presume that there is some delegation to the commissioners to make regulations. Alternatively, is there a statutory instrument, passed through either the negative or affirmative procedure? Will the Minister indicate the point at which those regulations might surface in the public domain and tell us whether Parliament will have any say over them? Otherwise, I am content with the amendments.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the hon. Gentleman’s comments. He will know that the overall debt cap arrangements were established in previous Finance Bills. As far as regulations are concerned, any statutory instrument will be subject to the negative procedure. At the moment, regulations are being drafted for only paragraph 28 of the schedule to allow changes to the available amount of the worldwide group if there is a mismatch between the accounts amount and the tax amount. The regulations will be released for a short consultation period before they are finalised and I hope that we will be able to say more about that shortly.

Kerry McCarthy (Labour, Bristol East)

Thank you, Mr Chope. It is a pleasure to speak under your chairmanship. I will reserve my main comments on the provision for when we get to the amendments that we have tabled to schedule 6. However, will the Minister briefly explain the reasons for introducing the clause, which we have already welcomed?

David Gauke (Conservative, South West Hertfordshire)

I welcome the hon. Lady to her position on the Opposition Front Bench. I am grateful for her remarks about the clause, which concerns consortium claims for group relief. It widens the circumstances in which a loss arising in a UK consortium can be set against the profits of a company that is subject to UK tax. It also separately counters avoidance by tightening rules that allocate losses to a member in proportion to its interests.

It may be helpful to say a word or two about the background. The purpose of the consortium claims regime is to support enterprise when joint trading projects are undertaken, which may be too large, too risky or too complicated to be undertaken by one company on its own. This is achieved by enabling losses and other reliefs to be claimed or surrendered, in proportion to ownership, between a corporate member of a consortium and a consortium company. A consortium claim represents one of the two types of claim covered by the UK group relief system, the other being a group claim when a parent company owns at least 75% of a subsidiary’s share capital.

The rules governing the two types of claim differ in various ways, particularly in respect of the ownership requirements. A consortium claim is possible when a consortium member holds as little as 5% of a consortium company’s ordinary share capital. If a consortium member is part of a corporate group, another member of that group may claim the losses to which the consortium member is entitled. That is commonly known as the “link company rule”. Under current rules, the link company must be UK-resident. Those provisions extend the rules to permit a claim where a link company is established in the European economic area. In such circumstances, a UK tax loss may then be set against a profit subject to UK tax.

Separately, a consortium relief avoidance scheme has recently been identified. It enables companies to manipulate the rules and obtain relief for a proportion of the consortium’s losses that exceeds their actual involvement in it. The provisions in clause 12 amend the rules. They allocate a consortium’s losses among its members by ensuring, in addition to existing requirements, that loss relief is proportionate to a member’s voting power, and that voting power is an effective means of controlling the consortium company. To address the avoidance scheme as quickly as possible, we announced that we would legislate from the date of publication of the draft clause on 12 July 2010.

The measure reflects the Government’s commitment to preventing tax avoidance while ensuring that the tax regime shows that the UK is open to business. I hope that the Committee will agree to allow the clause to stand part of the Bill.

Schedule 6

Kerry McCarthy (Labour, Bristol East)

I beg to move amendment 24, page 56, line 21, leave out from ‘related’ to end of line 23.

Christopher Chope (Conservative, Christchurch)

With this it will be convenient to discuss the following:

Amendment 25, page 56, line 28, leave out from ‘related’ to end of line 30.

Amendment 26, page 56, line 32, leave out from ‘company’ to ‘is’ in line 34.

Amendment 22, page 56, line 38, leave out ‘without the involvement of a relevant company’.

Amendment 23, page 56, line 39, leave out from beginning to end of line 16 on page 57.

Kerry McCarthy (Labour, Bristol East)

As I said, we broadly welcome the changes to the consortium conditions in the Corporation Tax Act 2010 through the relaxation of the definition of a link company so that it includes companies established in the EEA. As the Minister has explained, that currently applies only to linked companies that are established in the UK, so I have tabled a number of probing amendments with regard to the detail.

I am particularly querying why the Government decided to limit the extension to companies established in the EEA, rather than to worldwide link companies. Is there a specific policy reason why the restriction applies to companies established in the EEA? Is it because there would be an unacceptable cost if it were extended on a worldwide basis? Is restricting it to companies established in the EEA consistent with EU law? It has been suggested to us that the issue might give rise to legal challenges.

On the policy side, it has been said that the proposed amendment to the consortium claim rules is inconsistent with the rules relating to group relief that permit the tracing of groups throughout worldwide companies. Under the changes introduced in the Finance Act 2000, following the ICI v Colmer decision, the Government took the approach of allowing group relief eligibility to be traced through non-resident companies, whether based in the EEA or outside it. That was seen generally by the corporate world as a helpful development. Against that background, it is surprising that, in the much less common situation of consortium claims made via link companies, a more narrow approach has been adopted. Will the Minister explain why the Government have decided to go down that path?

We suggest that the limited relaxation of the rules to EEA companies only complicates the group relief rules overall and possibly provides a trap for the unwary. If there is no or a minimal cost to doing so, I should be grateful if the Minister explained what the predicted costs are likely to be and said whether there was a financial reason for imposing the limitation. If no cost is involved, we recommend that the relaxation should be extended to worldwide link companies.

More importantly, we believe that the provision could be in breach of EU law. I accept that it is always difficult to follow oral examples of companies when discussing complex arrangements, but let us take a situation in which a UK company owns 100% of a US company, which owns 100% of an EU company, which owns 50% of a UK trading company and assume that the other conditions for a consortium claim, with the UK company being the claimant and the UK trading company being the surrenderer, are satisfied. As it stands under section 133(6), a consortium claim would be denied. It has been suggested that that is clearly discriminatory against the EU company because it treats an investment by the EU company in the consortium less favourably than if the EU company had been resident in the UK. As such, that is a clear breach of the freedom of establishment of that EU company.

Will the Minister say whether legal advice has been taken on that point and whether he is satisfied that the issue could not be subject to legal challenge? Will he also answer my earlier question about whether there is a public policy reason or financial reason for establishing the limitation?

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the opportunity to speak to this group of amendments and I appreciate the probing nature in which they were tabled and introduced by the hon. Lady. The issue being raised is about whether the proposed changes in the Bill might not go far enough to ensure EU compliance. That view is not shared by the Government. Broadly, our position is clear: direct tax policy is a matter in respect of which individual EU member states have sovereignty over their own regimes, but we accept that that sovereignty must be exercised in a manner consistent with EU law, including the fundamental freedoms. The Government are clear that the legislation should be sufficient to comply with EU law, but go no further.

The amendments seek to go further than what we believe is necessary to comply with EU law. They seek to extend the scope for consortium relief claims to be made. First, the changes would allow claims whenever a link company was resident, which goes beyond the requirement that a link company must be UK-related or established in the EEA.

Secondly, they would remove the requirement, under the intended extension for EEA link companies, that a link company and a UK claim or surrender company that is a member of the link company’s group must be connected through a group relationship that does not extend outside the EEA. The hon. Lady gave a helpful example, which I know the Committee always appreciates. The combination of those two changes would significantly extend the range of situations in which claims would be permitted.

The Government considered those issues when they were raised during the consultation, and we do not accept that such changes are required to ensure compliance with EU law. EU law does not extend the freedom of establishment to companies outside the EEA, and the amendments would do that, in going further than EU law requires by gold-plating compliance at the Exchequer’s expense.

Kerry McCarthy (Labour, Bristol East)

Will the Minister elaborate on what he means by “gold-plating” the requirements?

David Gauke (Conservative, South West Hertfordshire)

Certainly. By “gold-plating”, I mean that were we to agree to the amendments—I accept they are of a probing nature—we would be going further than the minimum requirement for meeting our EU obligations, by extending the measure to include link companies outside the EEA. That would have a cost, which the hon. Lady specifically asked about. There is a potential cost of £5 million in tax arising from the discontinuing of litigation from earlier periods in three known cases, and there is potential for additional claims to be made. There are also likely to be consequences for HMRC’s position on wider group-relief EU litigation, with additional cost implications. So there would be a cost.

The hon. Lady raised the issue of UK group relief, and highlighted a case from 2000. The UK group relief rules were amended in 2006 to reflect the decision in the European Court of Justice on the Marks and Spencer case, which concerned group claims to group relief. The Government do not accept that that decision means that the consortium relief rules are non-compliant with EU law.

The rules relating to group and consortium claims are different, not least in that companies within a group are under common control, whereas a holding of only 5% can be sufficient to give entitlement to consortium relief. Therefore, we do not think that it follows that the analysis applied to group structures in the Marks and Spencer case also applies to consortium structures.

I may have said “£5 million” on the potential cost; I meant to say £50 million, so my apologies for that. I am sure that the hon. Lady is aware that a cost would be involved were we to accept the amendments. We do not think that they are necessary to comply with our EU obligations; we are successfully doing that as the clause currently stands, and also minimising the cost to the UK Exchequer. For those reasons, I hope that she will withdraw the amendment.

Kerry McCarthy (Labour, Bristol East)

I thank the Minister for that comprehensive explanation, and I am happy to beg to ask leave to withdraw the amendment.

Kerry McCarthy (Labour, Bristol East)

I beg to move amendment 21, in schedule 6, page 58, line 5, after ‘directly’, insert ‘or indirectly.’.

The amendment looks at the limitation of group relief based on the proportion of voting power held by a company. In tabling probing amendment 21, which simply adds the words “or indirectly” after “directly”, we pose the question as to why there should be limitations on group relief based on the proportion of voting power held by a company. It has been suggested that the schedule as drafted, which includes only directly possessed companies, could deny consortium claims in many legitimate circumstances and possibly in every case where there is a holding company.

We have looked at Budget note BN14, which has no explanation as to why the measure is restricted to directly possessed holdings. I would be grateful if the Minister clarified why that requirement is being introduced and set the Committee’s mind at rest as to whether legitimate claims would be excluded if the provision was to be accepted as it currently stands in the Bill.

I will illustrate my point with another example. I apologise in advance for its complexity, but it is unavoidable if I am to try to get the point across and get on the record how this would work in practice. Suppose that company A is a member of a consortium and owns 50% of company B, which is a holding company, and company B owns 100% of company C, which is a trading company. Company A wants to claim losses from company C.

Even if all the other conditions for the claim are satisfied, the new condition in section 143(3)(d) will arguably always deny a consortium claim, because the claimant company, company A, will not directly possess—as the wording in the schedule as drafted states—any of the voting powers of the surrendering company, company C. The same issue arises when A is the surrendering company and C is the claimant company, hence this probing amendment, which states that indirectly owned companies should be included in the provision.

The Minister may argue that section 153(3) of the Corporation Tax Act 2010 deems the consortium members to possess directly already the voting power in company C. It is by no means clear, however, that that would be accepted if it was subjected to legal challenge. I would suggest, therefore, that rather than using the term “directly possessed”, the schedule should use “directly or indirectly possessed”, so that the voting power can be traced through the holding company.

Alternatively, “directly possessed” should be explicitly defined, with a reference to section 153(3), to put the point beyond doubt. I would be grateful if the Minister clarified whether he has taken legal advice on that point, and whether he believes that the provision as currently drafted serves the purpose that it is intended to serve.

David Gauke (Conservative, South West Hertfordshire)

As we have heard, amendment 21 would alter the test limit of the allocation of losses that may be claimed or surrendered between a consortium company and a consortium member. It would extend the new test so that it included both indirectly and directly held voting power.

The Government are introducing the measure to counter avoidance. HMRC has been made aware of several schemes that have taken advantage of the rules as they stand. As with all anti-avoidance legislation, the Government are committed to ensuring that genuine commercial transactions are not affected. We have taken on board comments received during the consultation period over the summer to make sure of that.

The amendment, however, would loosen the legislation unnecessarily and weaken the avoidance rules. Including indirect voting power would mean that the voting power held by subsidiary companies could be attributed to a consortium member. While that would extend the percentage entitlement to losses in some limited situations, it would open the avoidance window that we are looking to close. Tax avoidance opportunities would continue, and I am sure that that is not the intention of Opposition Members, although I understand that this is a probing amendment.

If we were not to tighten this particular area, the cost would be likely to be somewhere in the region of £30 million a year. Amendment 21 would broaden the entitlement to losses for some consortium members in complicated situations, but it would also allow the continuation of the avoidance schemes that we wish to close. Extending the measure to indirect voting power would prevent the attribution of a subsidiary’s holding. A subsidiary can, if conditions are met, make its own claim and, in such situations, there is no disadvantage. We have made changes in response to consultation comments, but the change proposed in the amendment would weaken the legislation unnecessarily, so I ask the hon. Lady to withdraw it.

Kerry McCarthy (Labour, Bristol East)

I thank the Minister for that explanation and beg to ask leave to withdraw the amendment.

Clause 13

Kerry McCarthy (Labour, Bristol East)

We support the clause, which extends research and development tax relief for corporation tax to situations in which a company does not hold intellectual property rights relating to such R and D.

The previous Labour Government recognised the importance of providing incentives to companies to encourage research and development, so we introduced a scheme for small and medium-sized enterprises in 2000. That provided an extra tax deduction of 75% on qualifying R and D expenditure that was incurred either in house or on a contracted-out basis. If the SME was loss-making, we provided that the relief could be exchanged for a payable credit from HMRC. There was a sister scheme for large companies that SMEs could claim under if they did not meet the criteria for eligibility under their own scheme.

The relief applies when an R and D project has the aim of achieving an advance in overall knowledge or capability in the field of science or technology through the resolution of scientific or technological uncertainty, rather than simply an advance in the company’s own knowledge or capability. It therefore concerns R and D that will benefit not only a particular company or organisation, but the scientific or technological sector as a whole and, indeed, the wider British economy. That was why we thought that it was important to introduce such reliefs and tax credits.

The relief also applies when a company intends to start up a business as a result of the R and D. It therefore also acts as an incubator for new companies, which is important if Britain wants to compete, to be innovative and to succeed in the global marketplace.

Until now, legislation has required the intellectual property that is created as a result of the R and D to which expenditure is attributable to be vested in the company in question. In other words, if a company or organisation wishes to claim relief under the SME scheme, it must own any intellectual property that might arise from the project. The then Labour Chancellor announced in his pre-Budget report on 9 December 2009 that the condition relating to intellectual property would be abolished from that date, meaning that that would take effect for accounting periods ending on or after 9 December 2009. This provision gives effect to that announcement, which the Labour Government instigated. It was part of the broader picture of how we wanted to promote innovation and investment in R and D and a result of listening to what SMEs and start-ups said that they needed. As such, we wholeheartedly support the measure and the fact that it will be effective in relation to expenditure that has been incurred since the date on which the change was originally announced.

Will the Minister tell us what analysis has been made of the consequences of removing the condition relating to intellectual property? What additional benefits does he think that that will bring in helping SMEs with R and D and encouraging them to invest in more of that? Will it encourage greater take-up of R and D relief, as we believe that it will, and will that be kept under review? Are there other measures that could usefully have been considered and included in the Bill to help SMEs at this difficult time? Could we introduce measures to ensure that investment in R and D—investment in the future of not just a business itself, but the whole sector—does not fall victim to economic circumstances in which belts are being tightened? The clause is quite narrow, but we would appreciate it if the Minister would indicate the Government’s thinking about wider support, and tell us whether there is a reason why more measures were not introduced in the Bill.

David Gauke (Conservative, South West Hertfordshire)

Again, I welcome the hon. Lady’s broad support for the clause. The Budget confirmed the introduction of a measure that will make it easier for innovative small and medium-sized companies to claim research and development tax relief. R and D tax credits provide an enhanced deduction for qualifying expenditure. The system addresses the market failure reducing the levels of R and D activity undertaken by UK companies. Since their introduction, the schemes have incentivised more than £40 billion of R and D activity by more than 18,500 companies.

The clause removes the requirement that an SME must hold the intellectual property created as a result of the R and D. That means that SMEs undertaking R and D activity are able to claim without considering their IP ownership. In addition, those SMEs carrying out subsidised R and D that have been prevented from making R and D claims under the large company scheme by the IP condition are now able to claim the large company R and D relief. A number of companies undertaking R and D found that the IP condition effectively barred them from being able to claim the relief, which prevented them from making valuable investment in R and D.

The hon. Lady asked about the impact of this. Approximately 5,700 companies a year claim SME R and D relief, and the change will mean that such companies will be able to claim without distorting commercial arrangements in relation to IP. It will enable innovative companies to access R and D tax relief more easily.

Alec Shelbrooke (Conservative, Elmet and Rothwell)

This is the first time I have spoken in the Committee under your chairmanship, Mr Chope.

I agree with the points made by the hon. Member for Bristol East and I am grateful to the Minister for his explanation. Research in the higher education sector is important, as we saw in Sheffield yesterday. I hope that the measure will increase the ability of the spin-out companies that come out of the universities—they are small and medium-sized companies—to exploit that commercial property far more effectively, and perhaps go on to help to relieve some of the pressure on our higher education institutions.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend raises an important point about what we can do to develop relationships between companies and educational establishments. He highlights some of the announcements that the Government have made in that very area.

Turning to the question raised by the hon. Member for Bristol East about R and D tax credits, a consultation to be published later in the autumn will look at the tax treatment of R and D tax credits and intellectual property more generally, and this will form part of the Government’s aim to create the most competitive corporation tax system in the G20. The SME R and D tax credit scheme has been in place for 10 years. The consultation will provide an opportunity to take stock of the impact and effectiveness of the schemes. It will look at the options for re-focusing to ensure that they are effective and provide value for money while giving certainty and stability within the context of the five-year corporation tax road map. The Government certainly recognise the importance that companies place on the schemes, which is why we wish to consult fully to determine how we can provide the best support possible for an innovative and enterprising economy.

Alison McGovern (Labour, Wirral South)

This is a vital subject for us all, but especially so for my constituency, where we have science-led manufacturing. I thank the Minister for his explanation of when we will address some of the wider questions that might have been considered as part of the Bill. He mentioned the R and D tax credit scheme, which has been a great success. Will he clarify whether the consultation will also cover the broader question of investment allowances? That is of great concern to businesses in my constituency, especially those that are trying to invest in the high-tech equipment that enables them to have a global advantage over companies that do similar research on chemical production and hardware manufacture for IT. We have a real global competitive edge on those sorts of things that we would like to protect.

David Gauke (Conservative, South West Hertfordshire)

I suspect, Mr Chope, that you do not want me to go too far down that route. The intention of the consultation later in the autumn is not to reopen capital allowance issues that were addressed in the previous Finance Bill. It is important that we provide some certainty in that area, but we will want to look at how we can use the tax system to build on what has already happened in R and D tax credits and ensure that we have a corporate tax system that encourages enterprise and innovation and is the best in the G20. We did believe, however, that we should proceed, in advance of the consultation, with the change to the IP condition that was announced last year, and we have heard that there is cross-party support for the clause.

Clause 14

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 7, in clause 14, page 11, leave out line 21 and insert ‘L + RUL’.

This simple amendment regards what is essentially a typographical error in the Bill, which has resulted in the available loss formula being stated incorrectly. The draft legislation previously published contained the correct formula, which should be “L + RUL,” not “L – RUL”, as in the current print of the Bill. Should the amendment not be passed, the legislation would further restrict a film production company’s claims to the available tax credit; it would deduct the loss brought forward rather than add it, as is intended. The point might be made that the Government, given the current state of the public finances, want to turn a minus into a plus, but I am sorry that the error was in the Bill.

Kerry McCarthy (Labour, Bristol East)

As the Minister has explained, there was clearly a typographical error. In the circumstances, there is not a lot that I can say to debate whether the change should be made, so I am happy to accept the amendment.

Kerry McCarthy (Labour, Bristol East)

We broadly welcome the provision. In the 13 years of Labour Governments we took great strides in supporting the British film industry, attested to by the success of a lot of British films, both at the box office and at an artistic level, in winning awards. I am a Bristol MP, and the film industry in Bristol is a thriving creative sector. I think that three films are being filmed in Bristol in the near future, funded with support from some of these measures. We have Aardman Animations, which manages to scoop awards at the Oscars most years. It is important, therefore, that we continue to support the production of British films.

Measures to support the production of culturally British films were introduced in the Finance Bill 2006 and came into effect on 1 January 2007. The relief allows an additional deduction based on UK expenditure by companies on the production of films qualifying as culturally British, which is determined by a culture test. That raises various interesting issues that are not the subject for debate today, but the idea that we can define “culturally British” is an interesting concept.

The rules also provide that losses sustained in production can be surrendered for a payable tax credit. The key features of the support are that it is provided directly to the film production company, not only to those whose only involvement is that of providing finance.

Richard Harrington (Conservative, Watford)

It is an honour to speak in Committee under your chairmanship, Mr Chope. Although I very much support the clause, it is not true that more money is being invested in the British film industry. The credit for producers is well used and is an excellent tool, but it is necessary to say that the actual amount of British investment in British films, where the profits remain in this country, has gone down. The film industry is doing well, but it is mostly overseas capital that funds films made here because we are so good at making them. I hope that in future the Government will come up with some ideas to increase the amount of British investment in British films.

Kerry McCarthy (Labour, Bristol East)

I thank the hon. Gentleman for his intervention. The film industry is quite a thriving creative sector in the area surrounding his constituency. For example, Elstree Studios is only just down the road from his constituency—or is it actually in it?

Richard Harrington (Conservative, Watford)

Leavesden Studios is in my constituency; it is where the “Harry Potter” films are made. It is rumoured that “The Hobbit” might be made there. If it is looking for extras, I could put in a good word for some hon. Members.

Kerry McCarthy (Labour, Bristol East)

I thank the hon. Gentleman for his intervention, but seeing that he has just described me as a creature from “The Hobbit”, I might take it back. However, he was obviously talking about some of the Labour Members on the Benches behind me and not insulting me personally. I thank him for his clarification about the “Harry Potter” films. If he has his way, perhaps a film will be made in his constituency in which we all have starring roles.

There is indeed more to be done. An interesting House of Lords report into the communications industry made recommendations about what more could be done to support the film sector, despite the pressures on budgets. We have a situation in which the British Film Council is being axed and there are question marks over what will happen to support for the British film industry because of that. It is important that we recognise the incredibly valuable contribution that it makes economically as well as to the cultural life of this country and to how Britain is perceived overseas. It also has an effect on tourism in this country. It is important that we look at the wider picture.

I come now to the existing relief provided to companies that make culturally British films to be shown in cinemas, when at least 25% of qualifying expenditure will take place within the UK. Qualifying British expenditure is defined as services performed or goods supplied in the UK. I have referred to when the House of Lords Committee took evidence on that a few years ago. Most witnesses who gave evidence saw the relief as absolutely essential to the future and health of the British film industry. Tim Bevan, who was co-chairman of Working Title and went on to become chairman of the UK Film Council, said that the film tax credit was

“working brilliantly for inward investment in terms of bringing the studios into this country to make big films here”.

Michael Kuhn of Qwerty Films described it as “fantastic” and said that it had been designed “very cleverly, very effectively”. Lord Puttnam—a world-renowned producer—was slightly less effusive, saying that

“after three or four false starts…we have a system which seems to be fairly admired, which has been road-tested sufficiently”.

Gaynor Davenport, the chief executive officer of the UK Screen Association, thought that, compared with previous film support schemes, the film tax credit was

“a much simpler system which is more easily explained and more accessible for people who actually should be legitimately benefiting from the film tax incentive”.

Several witnesses noted the importance of the tax credit’s remaining competitive internationally if the UK were to continue to attract inward investment in film. It was also noted that the rates were more generous in places such as Australia, Canada and Ireland. The Lords recommended that the rate of the tax credit be kept under review by the Government, in consultation with the industry, to ensure that the UK does not become uncompetitive as a venue for international film making. Can the Minister say a few words on whether the Government intend to revisit that issue in future?

The specific provision in the Bill is a small, but still important, measure that will help to support the continuing success of the British film industry. Currently, film production companies that make films in which production spans two or more accounting periods, including some overseas expenditure, may suffer from an unintended restriction on their ability to surrender a loss for a tax credit if there is increased spending in the UK in the second or subsequent accounting periods. The clause introduces a revision to how the amount of the loss that is surrenderable for the tax credit is calculated, and thus removes the anomaly in the amount of tax credit claimable. As intended, the amount of film tax credit available is the same, regardless of the profile of the UK expenditure.

As such, we welcome the provision, but can the Minister say more about what he thinks the likely consequences of it will be? Are there any plans to do more to support the UK film industry and to keep the situation under review in years to come?

David Gauke (Conservative, South West Hertfordshire)

Clause 14 corrects an unintended anomaly in how payable film tax credit is calculated. It ensures that the amount of credit given will depend only on the total UK and foreign expenditure, regardless of the order in which the expenditure is incurred.

The new film tax relief was introduced in 2007 and, as we have heard, it has been widely welcomed. Undoubtedly, the 2007 version was an improvement on earlier versions, which were too widely used for purposes of tax avoidance and were not, perhaps, focused on providing support to film makers. To date, about £300 million has been given to companies making British films, mainly in the form of payable tax credits, so more than 400 films have been supported.

It became clear that the rules give a slightly different outcome depending on the order in which UK and foreign expenditure is incurred. The effect has been to restrict relief when UK expenditure increased in later periods. That was never the intention, and the clause corrects the problem. It brings the rules into line with the scheme as it was originally announced, which will benefit the hundreds of companies that claim the relief and will help to maintain the creative industries in the UK as a success story.

Jim Shannon (DUP, Strangford)

Does the Minister agree that the only driver for legislative change on the film tax credit has to be to help the industry—to incentivise it and make it better? In his opinion, the proposed changes are for the betterment of the industry. How will they ensure that the industry will grow and that opportunities will continue to exist? In my constituency of Strangford, and in Northern Ireland as a whole, the film industry brings a large proportion of revenue and provides jobs off that as well. Obviously, we want to ensure that that will not be lost because of such changes. Can the Minister assure me that that will not happen?

David Gauke (Conservative, South West Hertfordshire)

Like my hon. Friend the hon. Member for Watford and Middle Earth, the hon. Gentleman has highlighted the importance of the film industry to the UK economy as a whole and to individual areas. I confess that I am not as familiar with the constituency of Strangford as I am with my neighbouring constituency of Watford, but in both cases the film industry is important, as hon. Members have highlighted.

We want to encourage film production in the UK. The relief that is in place helped to secure investment into the UK of about £900 million in 2009-10, which is significant. There will be fluctuations from year to year—film is an international business and some films can involve substantial investment, which may create such fluctuations. The film relief state aid approval runs out in 2012, and that will be an appropriate time to review the effectiveness of the existing film tax relief. We will look at that. Hon. Members’ points on the significance of the film industry to the UK have been well made. As a Government, we will look at what we can do to support that industry in the most effective way possible.

Clause 15

Kerry McCarthy (Labour, Bristol East)

Clause 15 deals with the situation where there is a transfer of insurance contracts from a UK company to another company that is carrying on the insurance business but does not have a permanent UK establishment, and where the assets, immediately after their transfer, are not part of a fund equivalent to the with-profit fund for the insurance company. Currently, as I understand it, the company to which the business is being transferred will not fall within the tax law definition of an insurance company and the provision that we are looking at prevents the loss of tax in such circumstances. As such, we welcome the provision.

Currently, if the business is transferred to what is deemed to be a non-insurance company and is an exclusively non-profit business, no account is taken of the transferred liabilities’ value as the transfer charge is computed. If the fair value of the assets transferred exceeds the amount brought into the account of the transferor by those transferred assets, this provision will allow the excess, plus the value of certain liabilities transferred, to be treated as an amount brought into account, and the transferor will be taxed accordingly. That is my understanding of the reasons behind this provision, and I would be grateful if the Minister elaborated. If I am correct, we are in favour of the provisions in the clause.

I have a few questions for the Minister. I gather from eye contact and nods from Government Members that the Economic Secretary to the Treasury will be responding. Will she tell the Committee what effect the changes in clause 15 will have on revenues for Her Majesty’s Treasury, given that the clause changes tax liabilities? Have any calculations been done or any predictions been made on what the future revenue stream would be, if the clause was enacted?

Will the hon. Lady also tell the Committee whether there is any verification mechanism or external audit of the fair value of assets calculation being introduced in subsection (10)? On a point of information, will she explain what the significance is of 22 June 2010 in subsection (11)? I look forward to hearing what the Minister has to say, because this is a complex clause. I would appreciate it if she outlined what advantages it would give the UK insurance sector, as well as what impact it will have on revenues.

Justine Greening (Conservative, Putney)

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

As the hon. Member for Bristol East pointed out, clause 15 modifies the rules that apply when liabilities under long-term insurance contracts are transferred from one company to another. Such a transfer of business will involve not only the transfer of liabilities, but the transfer of assets held to meet those liabilities. The current tax rules are necessary because transferring assets in excess of liabilities could allow taxable profits to escape tax. Current rules, however, do not always give the right result.

The clause attempts to address an unintentional tax charge. A UK company wishing to transfer insurance contracts to a company outside the European economic area, or to an EEA company without a UK permanent establishment, could be taxed more than it should be. As the hon. Lady pointed out, the tax would be on the full market value of assets transferred, without any deduction for the value of the liabilities that the assets are intended to meet.

In addition, the solvency II directive will introduce significant changes to the regulation of insurance companies in 2012. It aims to produce a modernised, risk-based approach to such regulation while ensuring that there is appropriate protection for policyholders. In preparation for that change, insurers are considering whether business that is written in non-EEA countries should continue to be administered, and thus regulated, in the EEA. The prospect of a significant unwarranted tax charge inhibits what should be a commercial decision, which is bad for fostering the insurance business within our country. Accordingly, we are modifying the rules to remove inhibition to making commercial decisions. Critically, however, we are still ensuring that profits cannot escape the UK untaxed.

The rule changes have been made following discussion and full consultation with the life insurance industry. The clause fixes an unintentional tax charge that inhibits commercial transactions.

Let me try to address the points that the hon. Member for Bristol East raised. The revenue will be negligible because there is no scorecard impact. On fair value, the rules will be consistent with those that apply across the rest of the insurance industry, while the date she mentioned is simply the date of the emergency Budget.

Kerry McCarthy (Labour, Bristol East)

Will the hon. Lady explain more about the methodology by which the measure will be tested?

Justine Greening (Conservative, Putney)

The presumption is that fair value is ultimately subject to court approval. HMRC has the ability to test the measure using actuarial accounting advice, which is broadly consistent with how the matter will be approached within the rest of the insurance industry.

Kerry McCarthy (Labour, Bristol East)

I wonder whether any analysis of possible costs has been carried out. If actuaries are involved and there is a possibility of legal challenge, which could ultimately be settled in the courts, HM Treasury could incur substantial costs.

Justine Greening (Conservative, Putney)

Such costs would be minimal because we have well-established methods of assessing fair value. I have set out how HMRC can play its role in benchmarking whether that fair value seems reasonable. We do not expect a significant cost. The provision will correct an anomaly in the current system that we want to remove, and I hope that I have answered the hon. Lady’s questions.

Clause 16

Kerry McCarthy (Labour, Bristol East)

The clause is straightforward and welcome. It addresses the situation of a private dwelling house in which an adult placement carer is living. At present, an individual who owns a dwelling house that has been his or her residence for some time is entitled to private residence relief from capital gains tax when they dispose of the property. That means that if it has been categorised for capital gains tax purposes as their only—or their main—home, they will not have to pay capital gains tax when they sell it. There are certain limitations to that. If the house has been occupied as the sole or main residence for only part of the period of ownership, it is possible that the profit on disposal would be partly taxed. If part of the property has been used for other purposes during all or part of the period of ownership, any gain on the whole house will be apportioned accordingly. For example, if it was assessed that someone had used 50% of a property as their only or main dwelling house, they would not have to pay capital gains tax on 50% of the profits, but if the other half of the property had been used for another purpose—for example if it had been sub-let—they might have to.

That raises a problem for adult placement carers, who provide accommodation and support to adults in need of care who are placed in their properties. That is obviously something important that we want to encourage, because people in that situation might well prefer to be placed in someone’s private residence, rather than in a larger facility that is shared with others. Such people might have become unable to continue living in their own homes. However, it is possible that the arrangement could give rise to a capital gains charge because part of the property could be deemed to have been used for semi-commercial purposes.

Alison McGovern (Labour, Wirral South)

Will my hon. Friend clarify something for me? I know of constituents who have had adults placed in their care as a legacy of fostering a child with difficulties or disabilities. Those examples certainly reinforce her point that we want to encourage such practice, but that is not a commercial-style arrangement. Is that the kind of direction that ought to be considered?

Kerry McCarthy (Labour, Bristol East)

I hope that the Minister will clarify that in his response. I understand is that the clause applies to placements made through the adult placement service, which is regulated and therefore could not be subject to abuse—that is something that we welcome. It relates to placements that are made formally through official channels.

The situation to which my hon. Friend the Member for Wirral South refers raises some complicated concerns, because such an arrangement is almost like a semi-family situation. The property could be deemed to be being used as someone’s dwelling house, particularly if someone has been living with the family as a foster child for a long time. If such an arrangement had been made on a semi-commercial basis—for example if the adult who had been placed in the property was paying rent—that would raise some questions. I would be grateful if the Minister addressed those and stated whether the clause is restricted to people who come through the adult placement service, which is the regulated process, or whether it has wider implications.

The clause is important because it will hopefully remove some of the disincentives for people who are worried that they will be subject to capital gains tax on the profits arising from the disposal of their own dwelling house just because they have provided a valuable service by having an adult placed in their home. We broadly welcome the clause, but I would be grateful if the Minister clarified the parameters of the provision and stated the situations in which it would apply. What could be done to address some of the greyer areas around the edges, such as the situation to which my hon. Friend the Member for Wirral South referred?

David Gauke (Conservative, South West Hertfordshire)

I welcome the hon. Lady’s remarks about the clause. I did not anticipate that it would be controversial, but she raised some fair points.

Clause 16 extends the capital gains tax rules for private residence relief and ensures that people who care for vulnerable adults in their home under an adult placement scheme are not at risk of losing part of the tax relief when they sell their home.

By way of background, I should say that private residence relief is available to individuals who make a gain on selling or disposing of their only or main homes. In most cases, the relief ensures that people have no capital gains tax to pay when they dispose of their homes. It is possible that some adult placement carers are losing part of the relief on their homes. The risk arises because private residence relief is not available for any part of the home that is used exclusively for business purposes.

That limitation could have an impact on some carers. The terms of an adult placement scheme may require the carer to set aside part of their home exclusively for the use of the person in their care. That part of their home could be in use exclusively for business purposes and private residence relief might then not be available on that part of the home. As a result, the carer could face a capital gains tax bill on part of any gain that they make on disposing of their home.

Hon. Members asked whether this measure was just restricted to adult placement carers. It is, but the point is that other shared-life carers—foster carers, for instance—do not face the same issue because a part of their homes is not set aside exclusively for caring and, therefore, for business purposes. The issue arises only in the circumstance that I have described.

Kerry McCarthy (Labour, Bristol East)

Will the Minister clarify that? I am sure that Committee members are familiar with people taking an elderly relative into their home and having what is colloquially known as a “granny flat”—a separate part of the accommodation that is used solely by that relative.

Often these days, with people finding it difficult to get on the housing ladder, young couples move in with their parents—they may have had a child when young—and might live in accommodation that is similarly ring-fenced, with its own bathroom and kitchen. They may pay rent, so that there is a semi-commercial relationship with the owners of the property as well as the family relationship.

Would that also create problems in respect of people’s capital gains situation? If so, can anything be done to deal with that? The spirit of the provisions on capital gains tax properties is that they are designed more for people who own lots of dwelling houses commercially—buy-to-let or whatever; they are not designed to discourage people from taking in family members and giving them a roof over their heads when they need it.

David Gauke (Conservative, South West Hertfordshire)

The hon. Lady is right. We do not want to discourage that type of arrangement.

The issue here is that, although part of a home might, for example, be used predominantly by someone for whom care is being provided, under the local authority adult placement scheme there may be an arrangement where part of the home is used exclusively for that individual. It is in those circumstances that we run into this difficulty, whereas foster carers, for example, are not deemed to use a part of the home, or to set part of it aside, exclusively for business. We do not believe that the restrictions on private residence relief would cause a problem.

Chris Evans (Labour, Islwyn)

When the Minister says “part of a home”, what does he mean? How would he define that? Does the part of a home being used as a business have to be prescribed?

David Gauke (Conservative, South West Hertfordshire)

The issue arises in the context of adult placement schemes. In such a scheme, part of a home—a room, for example—might be designated exclusively as being for the person to whom the care is provided. We do not believe that that issue applies more widely in foster care, for example. If that experience arose, we would consider it, but we are not conscious that it has ever been an issue. The problem arises in the context of adult placement schemes, where there is a degree of exclusivity in respect of part of a home.

Kerry McCarthy (Labour, Bristol East)

I thank the Minister for giving way so generously. I assume that the reason why the provision has been introduced is that situations have arisen in which what we are discussing has been a problem for people in the adult placement carer scheme and they have been subject to capital gains liability. I assume that the provision is not intended to be retrospective.

Are any cases currently being challenged in which someone has been asked to pay capital gains tax on the disposal of a dwelling house when they are within the adult placement carer scheme? If so, will implementation of the provision affect any of those current disputes? Is the Minister aware of the number of such cases, the amounts involved and whether we can do anything to help people caught up in such a situation?

David Gauke (Conservative, South West Hertfordshire)

We believe that 100 or so people may benefit from the clarification of the law and that therefore it is the right thing to do. Hon. Members on both sides of the Committee recognise the valuable and much-appreciated service that carers provide to the community and to the individuals receiving care. The whole Committee would agree that it is not right that a carer under an adult placement scheme should lose private residence relief or that it should be at risk. Although other reliefs may shield the carer from a tax charge, the protection is not certain.

The fundamental point is that the property is still the carer’s home and they should be entitled to the normal relief. Clause 16 responds to the concerns. It removes any doubt that adult placement carers are entitled to the full benefits of private residence relief, including relief on any part of their home that they use for the care of an adult under the scheme. The important point is that the clause provides certainty. That certainty will be welcomed and ensure that carers are not unfairly penalised or put off providing care by the worry of a possible capital gains tax bill.

There are no current cases of which we are aware in which people are not going to benefit from the change because of the historical position, but the important point is that we have a clause that provides clarity in the future. We do not want to put people off providing care. That would be unfortunate and it is not the intention behind private residence relief. Therefore, we think that this is a useful step.

Kerry McCarthy (Labour, Bristol East)

Is there any possibility of the provision’s being abused? I assume that in most cases when people participate in the adult placement carer scheme, just one person is placed in their home, so it is fairly clear that they are just taking part in what we all agree is a very worthwhile venture. Would the exemption from capital gains tax apply to those who have several people and for whom the situation is almost equivalent to running a nursing home or care home but the person who owns the property happens also to live in part of that property as their dwelling house?

Are there limitations on the extent to which the provision would apply? Let us say, for example, that someone has three or four people living in the property. It is a very big property and the person occupies only a wing of it as their private dwelling house.

David Gauke (Conservative, South West Hertfordshire)

The clarification of the relief that we are providing in the clause relates only to adult placement carers—a point that the hon. Lady raised herself. It is relatively narrow, so we do not particularly see vulnerability. She outlines perfectly reasonable circumstances that we do not think will fall within the circumstances outlined in the clause, because it relates to adult placement carers. That means, by and large, circumstances in which an individual uses their home in providing support to a small number of people. We are not talking about big nursing homes, equivalent care homes or anything of that sort. We are talking about individuals using their home to provide that support. I am sure that hon. Members on both sides of the Committee will support this clarification, which I hope will prevent any uncertainty about how the capital gains tax relief will apply.

Clause 17

Justine Greening (Conservative, Putney)

The Government recognise the importance of having a stable and fair UK oil and gas tax regime that provides certainty for business. As one step towards ensuring stability, the Government have committed to legislating for the various changes to the regime, announced by the previous Administration, that will improve existing allowances and reliefs that aim to support investment.

The clause extends the scope of the chargeable gains ring fence reinvestment relief legislation. Reinvestment relief was originally introduced in the Finance Act 2009. It allows companies to remove a chargeable gain arising on the sale of an asset, provided that the proceeds from the sale are reinvested in oil and gas assets in the UK or the UK continental shelf, subject to certain conditions being met.

The relief was intended to be available in a group context when the disposal is made by one company in a group and the reinvestment is made by another company in the same group. Amendments tabled in Committee when the legislation was introduced sought to ensure that. However, a technical oversight at the time prevents the legislation from applying in such circumstances.

Reinvestment relief is now extended by the clause to include those cases where disposal and acquisition are made by different companies in the same group of companies. The clause thus ensures that the original policy intention of the reinvestment relief legislation is achieved. The legislation was intended to apply in those circumstances when it was introduced in 2009 and, to reflect that, the clause has effect in respect of disposals made on or after 22 April 2009, the day from which the legislation applies. The change in the clause allows the reinvestment relief legislation to fulfil its original policy objectives.

Christopher Chope (Conservative, Christchurch)

I call Kerry McCarthy.

Kerry McCarthy (Labour, Bristol East)

Thank you, Mr Chope. [ Interruption. ] That was certainly an overenthusiastic welcome from my hon. Friend the Member for Nottingham East; I think he is probably expecting to hear something slightly more exciting about the provision than he will actually hear.

As the Minister explained, the clause addresses a problem with the drafting of the original legislation and reinstates what was always intended. Ring fence reinvestment relief provides that when a company disposes of assets used for the company’s UK or UK continental shelf oil and gas trade, it can claim that any gain arising shall not be a chargeable gain, subject to certain other conditions being met.

The existing legislation was designed to ensure that the relief applied to circumstances where the new asset was acquired by a different company in the group to which the company disposing of the old asset belonged. The clause has been introduced to ensure that that result will be achieved.

The legislation was badly drafted in the first place and did not achieve the effect that was intended. I would appreciate it if the Minister outlined whether that has had consequences. I understand that the new provision will be backdated to the date of the original legislation and that people will therefore be able to rely on it as if it had taken effect on that date, but are there other consequences that we need to address?

Can the Minister tell the Committee a little more about the revenue implications of ring fence reinvestment relief more generally, given the importance of the UK oil and gas trade and in view of expected trends that may occur as the industry changes over time? What modelling of the costs of the tax relief has been done? Will she elaborate a little on that?

Will the Minister tell the Committee how many asset disposals we are talking about? Are there frequent changes of ownership or many asset acquisitions that fall under the terms of this tax relief, and does she expect that picture to change in the months and years to come?

Justine Greening (Conservative, Putney)

As the hon. Lady pointed out, we need to have an oil and gas tax regime that ensures that investment continues in the North sea oil continental shelf. The amendment corrects an anomaly that should never have been there in the first place. We are aware of one transaction by a company that thought group relief was available when in fact it was not. It is easy to understand why it would have been caught. When we were in opposition, we tabled an amendment to the Finance Bill 2009 to ensure that groups would be covered. In fact, the then Economic Secretary to the Treasury was very sure that the Government’s amendment would ensure that

“the grouping rules, which apply more widely to reinvestment reliefs outside the North sea ring fence, apply equally to the new North sea reinvestment relief.”––[Official Report, Finance Public Bill Committee, 18 June 2009; c. 502.]

So we are aware that one company was unwittingly caught by the bad drafting of the law.

Reinvestment relief is important. That is why we are continuing to work with the industry and Oil & Gas UK to see how we can ensure that our tax regime supports continued investment. In fact, I was in Aberdeen a couple of months ago and I visited the Forties Alpha oil rig. That is a particular example—it had been owned by BP, but its licence has now been bought by a company called Apache, which has in many respects given it a new lease of life. As a result, the reserves that we continue to get out of Forties are probably far more than if that licence had been retained by BP. Such changes are important because they remove the barriers that stop licence trading transactions from happening.

As the hon. Lady will be aware, in the final couple of years of the previous Administration, a number of changes were made to facilitate continued investment in North sea oil and gas. As an incoming Government, we are continuing to work with the industry to consider what we can do not only to unlock investment in new fields but to enable investment to take place to unlock incremental investment in existing fields.

Kerry McCarthy (Labour, Bristol East)

Is this quantifiable? Can the Minister reveal the figures that I asked for in my previous question on the economic impact, revenue stream and so on?

Justine Greening (Conservative, Putney)

Clearly, when we brief on changes such as this, we know that there is only an upside—in other words, we are unlocking transactions that would not have otherwise taken place. As for putting a value on that, that is something for the future—we will have to wait and see. However, we do know that the industry has welcomed some of the changes that we introduced, some of which were proposed by the previous Government. The changes make it more likely that continued investment can take place, which will mean a continued stream of tax revenues into the Exchequer.

Kerry McCarthy (Labour, Bristol East)

Will the Minister write to the Committee, so that we have some figures to put on the record? I appreciate what the Minister says about unlocking such a situation and how difficult it is to quantify exactly what the impact would be. However, projections and having some idea of the benefits of introducing such changes are important when looking at the bigger picture of whether more can be done to unlock further investment and commercial activity. If there are any figures or projections available on the importance of giving such relief, that information would be valuable.

Justine Greening (Conservative, Putney)

Broadly, it is estimated that 20 billion barrels of oil that could potentially be retrieved are left in the North sea. The hon. Lady will be aware of a range of industry analyses, including those by consultants such as Wood Mackenzie, who have looked at the potential future stream for petroleum revenue tax. Those analyses are clearly in the public domain. The key thing is to ensure that our tax regime enables investment in the North sea to continue.

Clause 18

David Hanson (Labour, Delyn)

I beg to move amendment 12, in clause 18, page 15, line 11, at end add—

It is a pleasure to discuss the amendment with the Committee. The Opposition support the development of the scheme as set in the clause and in schedule 7, which provides for 100% first-year allowances for expenditure incurred on goods vehicles with zero emissions between 1 April 2010 and 31 March 2015 for corporation tax purposes, and between 6 April 2010 and 5 April 2015 for income tax purposes.

The Committee will be aware, as I indicated at the start of our consideration of the Bill, that a number of measures in it were initiated before the election and would have formed part of a Finance Bill had a Labour Government remained in office. As the Minister and Members will know, things did not occur as my hon. Friends and I would have liked. None the less, our Bill, and the clause that we proposed in our initial discussions, are effectively before the Committee today. The measure before us was set out in the Labour Government’s Budget in March, and we intended to legislate on it as soon as possible in the next Parliament.

I welcome the broad moves to incentivise businesses to reduce their CO2 emissions and become greener. That will benefit businesses, while, I hope, generating purchases of these vehicles and interest among manufacturers in producing them. This is therefore a win-win situation.

The purpose of the amendment is simply to say that this is a five-year scheme and it is important to look at its impact around the halfway point. There will be lessons that can be learned. Anomalies may well be thrown up, and challenges may need to be addressed further. It is important that these things are open to public scrutiny through a public report on the benefits and usages of the scheme.

The amendment says:

“The Treasury shall by 6 April 2013”—

that is just past the midway point set out in the clause—

“produce a report for publication on the operation and take up of the scheme.”

Issues might arise, and we might want to reflect on them publicly, although I would obviously expect the Treasury regularly to monitor the scheme internally.

I would welcome public discussion on a couple of key points. First, we have set an €85 million cap on the scheme. In three or four years’ time, that might or might not be appropriate. I recognise that the Treasury can, under schedule 7, introduce regulations to make changes, but it is important to produce a report saying how the cap has operated over the three years to 6 April 2013. Have currency fluctuations meant that the cap is worth less or more than it was at the start of the scheme in 2010? Is the cap in 2013 appropriate for the last two years of the scheme? I recognise that there will be constant monitoring and evaluation, but it is important that we publish a report looking at these issues and do not just have a stand-alone piece of secondary legislation, which might be passed in a Committee like this one at some point in future, irrespective of what has happened overall in the scheme.

I am interested in the definition of “Firms in Difficulty”. We need some assessment of how many firms in potential difficulty—particularly in what might be economically challenging times over the next two to three years—would be, could be, or are applying for the scheme. How many would have got the allowance, are getting it, or could be turned down? That needs to be reflected on, in relation to the definition of firms in difficulty. There will be constant monitoring of that issue, but I would be interested—this is why a mid-point report is particularly valid—to know how many firms were turned down, and whether the definition was still appropriate at that time.

We need some public facts and figures, which, as the amendment sets out, would form a report for publication on the operation and take-up of the scheme. It is important to look at the conditions in proposed new section 45DB, which is set out in schedule 7. That new section lists a range of exclusions from the allowance. It is important to monitor, look at and develop that, taking into account the regulations at the time. I want the scheme to succeed, and it is a good scheme, but it is important to monitor it constantly.

Sheila Gilmore (Labour, Edinburgh East)

Is my right hon. Friend satisfied that the exclusions are appropriate? They include the fishery and aquaculture sectors, and firms undertaking waste management collection. Is he satisfied that those should be excluded?

David Hanson (Labour, Delyn)

I am grateful to my hon. Friend for raising that issue. I was going to test the Minister on the reasons behind those exclusions. As part of the review proposed in the amendment, we could look at those exclusions, relevant though they may be, and I would welcome an explanation from the Minister as to why those exclusions have been made. Will those exclusions continue for the duration of the scheme? Will representations be made on them in due course? If the Minister looks at page 61, as my hon. Friend the Member for Edinburgh East is doing, she will see that proposed new section 45DB(4) lists exclusions

“(a) in the fishery or aquaculture sector, as covered by Council Regulation (EC) No 104/2000, or

(b) relating to the management of waste of undertakings.”

Will the Minister tell us why those sectors are excluded? I was going to talk about that during the clause stand part debate, but the issue would form part of the review in 2013 on the operation and take-up of the scheme.

My final point is that, under the legislation, we are talking about a five-year, limited scheme. Organisations outside this House have welcomed the fact that the clause enables companies to plan ahead and look at the capital expenditure for goods vehicles for the future. As part of that commitment to planning ahead, the Minister could, through the amendment, examine the success, operation and take-up of the scheme at year 3, and all the issues that I have mentioned. She could indicate whether the scheme will come to an end in 2015, as proposed in the Bill, or whether it could, based on the assessment, continue.

It would be valuable, with regard to forward planning, to build in a test mark at 2013, so that the Minister can indicate at that stage whether the scheme will end in 2015, or whether it will be considered for continuation. What views do the manufacturers and purchasers of said vehicles have on the scheme to date?

Alison McGovern (Labour, Wirral South)

As the Minister has mentioned, some of the provisions in the Bill are designed to address market failure. I am conscious of the importance of the clause in encouraging a new way of procuring zero-CO2-emitting vehicles. The market for such vehicles is changing rapidly.

The construction of such vehicles, and the issue of whether we in Britain build high-tech that gives us a competitive advantage in the production of such vehicles, is changing rapidly, too. I know that from speaking to manufacturers. Does my right hon. Friend feel that the kind of reporting that he has alighted on would assist manufacturers in getting a direction of travel from Government that might be important for business planning?

David Hanson (Labour, Delyn)

I am grateful to my hon. Friend for making her points.

The purpose of the amendment is to bring about a formal review—for formal publication and for formal consideration—at the mid-point of the scheme so that we can take account of the many changes that might occur between now and 6 April 2013 in the manufacturing of, and the demand for, vehicles that produce lower emissions. I want to encourage the manufacture and purchase of such vehicles. I hope that the clause will bring about both those things, and by encouraging purchase, we will encourage manufacturing.

If we have a five-year limited scheme, we will have legislation in place once the Bill has completed its passage through the House and another place. The Minister will have scope under schedule 7 to look at a range of possible changes to the scheme, but while those changes will be considered by the Minister and the Treasury, they will not be subject to formal public review and there will not be a formal document on the effectiveness of the scheme.

I hope that the amendment can be accepted—if not in practice then at least in spirit—so that we can have some formal recognition of how the scheme is operating. We could look at the exclusions that my hon. Friend the Member for Edinburgh East cited and consider whether they are still relevant in 2013. We could also look at the points made by my hon. Friend the Member for Wirral South about how we continue to encourage the purchase and manufacture of low-CO2-emission vehicles. I commend the amendment to the Committee.

Justine Greening (Conservative, Putney)

If I set out the rationale behind the clause and then address the points raised about amendment 12, we can cover most of the ground that we need to.

Clause 18 and schedule 7 provide for a 100% first-year capital allowance for expenditure on zero-emission goods vehicles such as electric vans. This focused measure is intended to help to encourage the uptake of cleaner goods vehicles by providing businesses with a cash-flow boost when investing in such vehicles.

Expenditure on new zero-emission goods vehicles registered on or after 1 April 2010 for corporation tax, and 6 April 2010 for income tax, can qualify for the allowance. The time-limited nature of the scheme will encourage businesses to act now, thus giving a boost to the emerging electric van market. It will also allow us to monitor uptake and the cost of the measure, and to ensure that the relief is correctly targeted.

Alison McGovern (Labour, Wirral South)

I am interested in the Minister’s suggestion that the time limit will motivate companies to act. Will she give us a few words of explanation? What evidence has the Treasury used to arrive at that conclusion? Was there any contradictory evidence to suggest that the time limit or any other aspect of the scheme might cause people to delay any action?

Justine Greening (Conservative, Putney)

Whenever such a new measure is brought in, there is a sense of being careful to ensure that it is targeted. On the one hand, we are keen to stimulate the market in this area. It has been clearly shown that similar measures have led to a decrease in emissions from cars over time because investment in technology has improved. We are now keen to look at what we can do to achieve a similar improvement on van emissions which, as I am sure the hon. Lady is aware, are still a significant part of motor vehicle emissions in the UK. On the other hand, however, we need to ensure that any relief is appropriately targeted. The measure will hopefully not only kick-start the electric van market and send a signal that people have a time frame within which they can invest, but—and the amendment refers to this—give the Government the ability to look at the continued targeting of such relief and ensure that it remains appropriate and of good value to the taxpayer.

Sheila Gilmore (Labour, Edinburgh East)

Is there a particular reason why the relief will apply to the purchase of new vehicles but not second-hand ones? For some firms, buying second hand might be an equally good way into the market so that they can replace a polluting vehicle with a zero-emission one, but at a cheaper price.

Justine Greening (Conservative, Putney)

That is obviously an interesting comment. In many respects, our debate is getting ahead of where the market is at the moment. Last year, only about 175 electric vans were purchased. The measure is aimed at stimulating that initial purchase, rather than any secondary trading.

Zero-emission vans are an emerging technology, and their uptake will help to reduce CO2 emissions in the transport sector. Current sales are low, with only 175 new registrations of electric vans in 2009, and the Government are committed to making the transport sector greener. The scheme is aimed at supporting nascent and innovative transport technologies—not only electric vans but hydrogen fuel cell-powered vehicles. It will encourage the further development of such technologies and increase the size of the electric van market, thus bearing down on CO2 emissions.

Stephen Williams (Liberal Democrat, Bristol West)

May I ask my hon. Friend a question, although she might not have the answer immediately to hand? She just mentioned hydrogen-powered vehicles. Bristol—just so that we can have another mention of Bristol this morning—is about to have a hydrogen-powered ship in the harbour to transport goods and people. I notice that the Bill refers to “vehicles”, so would that include a ship?

Justine Greening (Conservative, Putney)

I do not believe that it would. My hon. Friend is right to point out that although we are talking very much about vans, the provision relates to goods vehicles. That is because some of the technology is literally very heavy, and we therefore needed a measure that covered heavy goods vehicles to ensure that we could capture the technology that we wanted to and encourage investment in such vans.

Amendment 12 would require the Treasury to produce a report for publication by 2013 on the operation and take-up of the first-year allowance for zero-emission goods vehicles provided by clause 18. It is, of course, important to ensure that any tax measure is implemented properly and has the desired effect. The Chancellor keeps all taxes and reliefs—including this one—under review precisely to ensure that they are achieving their aims. It is unnecessary to put the commitment in amendment 12 into primary legislation, mainly because we will be able to see the registration of electric vans within details of the registration of new vehicles, and also because industry bodies, such as the Society of Motor Manufacturers and Traders, are obviously very keen to monitor the scheme.

The right hon. Member for Delyn talked about reviewing progress. When comparable measures have gone through the House—one that springs to mind is the relief on stamp duty for zero-carbon homes—people have been able to establish the progress of the relief and how widely it is used through parliamentary questions. There is therefore no danger that we will somehow be unaware of the effectiveness of the relief, and I assure the right hon. Gentleman that the Government hope to ensure that it is effective, because that is important.

On the important point about exemptions, the reason for them is that we have to comply with state aid rules. Due to its narrow focus, the scheme is a notifiable state aid, so the legislation has to comply fully with state aid rules and we have to reflect that in the Bill. Due to its environmental nature, the scheme can be introduced under the terms of the general block exemption, but that requires restrictions to be placed on certain trade groups benefiting from the allowances and, as we have heard, a cap on the amount of aid that businesses can obtain. Designing the scheme to comply with those conditions has avoided the need to undertake a lengthy process of negotiation with the Commission. The legislation is designed to comply fully with the state aid rules.

Jim Shannon (DUP, Strangford)

One of the areas that I represent in Strangford—Portavogie village—is one of the biggest fishing ports in Northern Ireland. Many van salesmen face increasing costs and wish to consider the use of electric vans, but they do not always have the capacity to cover sufficient distance due to lack of progress and technology. I am concerned that the clause means that those people will not be able to participate. I understand the reasons given by the Minister, but will she review whether there are concessions available under European law—under the de minimis clause, for example—that would enable provisions to be made?

Justine Greening (Conservative, Putney)

I reassure the hon. Gentleman that we have sought to ensure that the measure will apply as broadly as possible within the existing state aid rules. He raises a valid point about this kind of measure’s relationship with Europe, but that is more a matter of debate for Europe than it is for us today. On the one hand, we want to ensure free competition across Europe, and the state aid rules help to ensure that. On the other hand, we want to make progress on bearing down on emissions. The clause and schedule stay within the scope of European Union legislation. As I said, the scheme constitutes a notifiable state aid, so we had to be careful about how we structured it. The hon. Gentleman’s broader point about the sectors outside the provision is fair, and I assure him that the Government will continue to look at that, because we want the application of such measures to be as broad as possible.

I hope that I have answered everybody’s queries. The clause is positive and shows that we can build on the progress of reducing car emissions.

David Hanson (Labour, Delyn)

I am grateful for the Minister’s comments. We do not disagree about the worthwhile nature of the clause, nor on its operation and practice. She reflected on the points made by my hon. Friends the Members for Edinburgh East and for Wirral South, but I want to press her a little more.

I might be old-fashioned, but I like to know the outcome of any proposed action downstream. If we do something, I like to know what we expect it to achieve and how we expect it to impact on the community at which that is targeted. The Minister has not told us how many vehicles she expects to be newly acquired as a result of the clause’s benefits. One of the reasons why I tabled an amendment to establish a midway review was so that we could test the impact that she expects. She has helpfully mentioned that about 175 electric vehicles are in current use. Under the clause, how many vehicles would there be in 2011-12, 2012-13 or 2014-15? There is a five-year proposal, and I should have thought that the Treasury would consider the numbers and the impact, in relation to judging its success or value as a taxation measure to help to stimulate the industry, and accordingly establish first-year allowances for zero-emission vehicles.

One reason why I tabled the amendment was to enable us to hear from the Minister what she expects the clause to achieve over five years by way of stimulus to the industry. At the mid-point, in 2013, I want a test of whether the Government have achieved the objective, or whether the scheme needs to be re-examined or tweaked, and whether the €85 million is still relevant without, as could happen under schedule 7, the Government necessarily changing things without reference to the wider parliamentary system.

It would be welcome to me, before I roll over on the amendment, to hear from the Minister whether she has obtained an assessment of the numbers that she can tell the Committee about, so that we can monitor the scheme’s effectiveness, irrespective of whether the report is accepted.

Justine Greening (Conservative, Putney)

I am grateful for the hon. Gentleman’s remarks, because they give me the chance to explain that the €85 million is effectively the maximum expenditure that any company could make to get the maximum benefit from the measure, to stay within our state aid rules.

It is difficult to say how many vehicles’ purchase the measure will stimulate, because it depends on a range of factors, not the least of which are progress on economic growth, and other transport issues that may have an effect, such as the price of petrol, or the extent to which cities set up localised charging schemes with or without emissions aspects. It is obviously difficult to put a figure on it. The point is that we know what the direction of travel should be: we should aim to stimulate the purchase of more electric vans. That is what the measure is intended to do, and I hope that the right hon. Gentleman will support it.

David Hanson (Labour, Delyn)

We agree with the measure, but the Minister is telling the Committee that she does not know how many vehicles it will encourage, or over what period. She does not know whether the measure will be a success at the end of five years. The rationale for the amendment is simply that at the mid-point of the scheme we should produce a report about its impact.

Alison McGovern (Labour, Wirral South)

I was a little disappointed with the Minister’s response to my earlier question about numbers—and I think that this relates to the point made by my right hon. Friend the Member for Delyn. The Minister gave the argument for the measure, but gave no detail about the evidence that had been built up into a case to prove it would work. Hence the need for a report.

Justine Greening (Conservative, Putney)

May I intervene?

Christopher Chope (Conservative, Christchurch)

Order. I understood that the hon. Lady had sat down, and that the right hon. Member for Delyn was making a speech, on which the hon. Member for Wirral South was intervening. I am sure that the Minister will have plenty of opportunity to speak further if she wishes, but perhaps the right hon. Gentleman will answer his hon. Friend’s intervention first.

David Hanson (Labour, Delyn)

I am grateful for my hon. Friend’s intervention, and if the Minister wants to intervene on me I am happy to allow it. The point has been made that the principle of the scheme is accepted on both sides of the Committee. We think it is a good scheme and wish it well, but I am not yet clear about how we measure its success or the number of vehicles that will be purchased because of it, or whether its operation will be given a positive examination after three years.

Charlie Elphicke (Conservative, Dover)

It is a pleasure to speak for the first time under your fantastic chairmanship, Mr Chope.

Do the Government not routinely provide reports and answer questions to the House? There will be opportunities for written questions and for all manner of methods of debate in the House to measure progress in 2013. If there are questions, surely it would be better to ask them at that time, rather than bizarrely putting this requirement into primary legislation. As far as I am aware, this kind of requirement is never put into primary legislation; we hold Ministers to account on the Floor of the House. That is how it has been, and surely it is how it should remain.

David Hanson (Labour, Delyn)

I am happy to hold Ministers to account on the Floor of the House and in Committee. That is what we do in opposition; I did so when I was in opposition many years ago, and I will do so again.

In order to hold Ministers to account, however, we need to know the proposed outcome of a particular activity. The Minister has volunteered that she cannot tell the Committee how many vehicles will be purchased as a result of the stimulation that this relief will give in the five-year period. The Minister cannot tell me how we will judge the success of the measure.

For example, suppose the measure is put in place—I support it, and I do not argue with the principle behind it—and I table a parliamentary question on 6 April 2013 asking how many vehicles have been purchased as a result of the scheme. If I am told that 10, 20, 50 or 60 vehicles have been purchased, how do we know what the Minister’s objective was when the scheme commenced? It could be underperforming by 100%, 50% or 20%.

If the Minister has to produce a report on the outcome and take-up of the scheme by 2013, she will effectively have to focus now on what the scheme will achieve. She will have to focus on how it will be beneficial; how it will work; whether it will be good for the manufacturers of green vehicles; whether it will be good for the purchasers of such vehicles; whether the €85 million cap is still relevant; whether the exclusions of firms in difficulty are still relevant—

Charlie Elphicke rose—

David Hanson (Labour, Delyn)

I will give way in a moment. The Minister will have to consider whether the exclusions that my hon. Friend the Member for Edinburgh East has mentioned are still relevant and whether the factories and businesses that are being developed, which my hon. Friend the Member for Wirral South has mentioned, are still in the same situation. If we know clearly what the Minister wants to achieve now, we can review with certainty in 2013 whether those objectives have been reached. We will be able to amend the scheme or advance proposals before it ends in 2015, and/or we can give businesses clarity about whether we want to continue with it after 2015 or to wind it up.

I do not argue with the principle, but the amendment is designed to extract an indication from the Minister of what she wants to achieve, how she will achieve it, and how she will make sure that businesses relate to her cause and activity. In addition, halfway through the scheme we would review it to ensure that it is doing what we both want it to do.

Charlie Elphicke (Conservative, Dover)

Correct me if I am wrong, but did the policy not originate from the previous Government? Was it not originally advanced in the previous Government’s most recent Budget? The right hon. Gentleman has a better repository of knowledge of the aims and objectives of the scheme on his own Benches, because presumably his colleagues the former Ministers generated and brought forward the measure. It is a measure that we are happy to endorse because we are so concerned about the matter, but surely this is—I regret to say—politicking of the worst kind.

David Hanson (Labour, Delyn)

We have no objection to the principle of the scheme. The Labour Government proposed the scheme, and I am pleased to see that the Minister has accepted it in principle. When the scheme was introduced in the Budget in March of last year, I was Minister for Policing, Crime and Counter-Terrorism, so I was not dealing with the matter at that stage. At some point, it is our job as the Opposition to ask the Minister what the clause will achieve. What outcomes is she seeking? Are they the same outcomes that my colleagues were seeking previously? What outcomes are the Government trying to achieve? I want those matters considered.

Alec Shelbrooke (Conservative, Elmet and Rothwell)

I am concerned about what is being said. I accept the principle, but we want to move things forward. I am worried that, for the first time in Committee, the debate is going down to the unnecessary level of stifling the ultimate aim of the clause, something with which all members of the Committee agree.

David Hanson (Labour, Delyn)

I am not trying to stifle anything. I am asking the Minister to accept that, at the point midway in the five-year scheme, she should produce a report that sets out what has been done over the previous three years, how many vehicles have been purchased because of the scheme, the cost to the taxpayer, the benefit in respect of CO2 emissions, details of the current operation and whether people have found the scheme to be worth while. The report should note that there are two years left of the scheme and state whether the Government intend to continue its operation or pull the scheme because it has not proved successful.

I want the Economic Secretary to be clear about what she wants to achieve and to be happy to have such details available for public scrutiny in due course, so we know how the scheme is operating. Those suggestions are not meant to stifle the discussion or be “politicking”—with due respect to the hon. Member for Dover. It is simply good business practice to know what we are doing, why we are doing it, what the outcomes will be and ultimately why we have proposed such measures in Committee.

I am looking to Opposition Members to see how strongly they feel about such issues, but I am minded to withdraw the amendment today for the sake of progress. The hon. Lady needs to examine such matters because we will be here in 2013 and, given current practice, sadly so will she. We will hold her to account on the effectiveness of the scheme. We might even table some questions today on the points that have been mentioned about the number of vehicles and the outcome that she expects from the operation of the scheme.

Justine Greening (Conservative, Putney)

The right hon. Gentleman sounds as though he is already tabling his parliamentary questions for use in three years’ time. I very much hope that more electric vans will be sold than the number of homes relieved of stamp duty because they are zero carbon.

David Hanson (Labour, Delyn)

I beg to ask leave to withdraw the amendment.

Chris Leslie (Labour, Nottingham East)

Good afternoon, Mr Caton. It is a pleasure to be back in business talking about the non-business use of business assets. Clause 19 has a series of reforms to tax law, which are complex and important in their impact.

It might be relevant to note that as we stand here talking about the Lennartz accounting procedure in respect of value added tax and other changes, my right hon. Friend the Member for Delyn, who would normally be here considering these particular measures, is on his feet in the Chamber talking about the Government’s proposal to remove vital money from pregnant women as they try their best to stay healthy. It is a shameful measure. Unfortunately, I am unable to attend the Chamber. However, I know that my colleagues on the Labour Front Bench are aware of my support as they valiantly try to rebut the worst excesses of the Administration’s nasty policy approach.

The clause seeks to amend the Value Added Tax Act 1994 to implement a set of changes that have become necessary as a result of European Union legislation in the form of technical directives. Government Members are always keen and punctilious when the European Union speaks; they immediately legislate to correct British law as a consequence. It is a hallmark of their politics and the clause is understandable, given their attitude to the European Union.

Under the clause, the current exemption, known as the Lennartz accounting mechanism, removes taxpayers’ ability to reclaim VAT paid on expenditure on land and property, such that it might be used for non-business or private purposes. Under the arrangement set out in the directive, the changes in the clause will remove the ability to use the current Lennartz accounting arrangements for ships and aircraft.

The use of Lennartz accounting for those assets is replaced by the ability of the taxpayer to adjust for subsequent changes in private use under the capital goods scheme—a related minor change to other parts of the 1994 Act—bringing the rules relating to the recovery of VAT on directors’ accommodation into line with European Union law and a set of other arrangements that followed the judgment of the European Court of Justice in 2007, although I might be wrong on that. Perhaps the Minister can tell me whether I have the year wrong in respect of those judgments.

As I understand it, the Lennartz arrangement enables a buyer to use assets for both business and non-business purposes, and to claim the input tax in full when the asset is purchased. It enables the buyer then to pay an amount of output tax—VAT, in this case—to relate to that non-business use at the point either of disposal or later, at a given point in time.

My understanding of the European Court of Justice decision, which was subsequently taken up in the EU Council directive, was that there was a suggestion that the United Kingdom and Her Majesty’s Revenue and Customs were not applying the arrangement correctly, that there was an excessive use of the arrangement within the UK and that therefore a change needed to be made to it.

Members of the Committee might not themselves have used a Lennartz arrangement for their own business and non-business purposes. If that were the case, I would have declared an interest. However, given that we are talking about rather wealthy individuals—those who purchase ships, aircraft or yachts—they might be more familiar with such practices than certainly my constituents would be.

However, it is important that we take the opportunity to correct the lacuna that might exist in the Bill. The clause probably attempts to do that, but several other policy changes were highlighted in the discussion on the directive that have given rise to an interesting set of questions. For example, let us consider the extent to which many taxpayers were wrongly allowed to use the Lennartz accounting arrangement and whether the Bill ensures that, when those taxpayers choose not to unravel those arrangements, there will be some obligation on them to continue to account for VAT thereafter.

The extent to which we should seek retrospectivity within our legislation is something that I have raised before in Committee. I am interested to know whether the Minister can explain the provisions in the clause that seem to ensure that the obligation to make those payments has always had effect, and that it should be treated as having always been in place. What studies have been done about the effect of that particular provision? Current legislation on the recovery of value added tax on a director’s accommodation becomes redundant, for example, as the directive and related European case law ensure that there is no entitlement to VAT recovery on the private use of such accommodation. I understand that the law in respect of those arrangements is due to be amended under the clause.

What assessment have the Minister’s officials made of the effect of removing the Lennartz form of accounting for businesses that might be affected by the change? There might be a difference in the case of those individuals who seek to use that particular accounting device, but then businesses might have a legitimate use for doing so. Has a regulatory impact assessment been made of that particular change because it could be both complex and burdensome for businesses making such changes?

Has the hon. Gentleman received many representations from external bodies advocating this particular set of cases? Was it a product of a set of tax working groups that he set up or was it the result of spontaneous representations from particular interested parties? Is it the case that those taxpayers who are not permitted to use that particular Lennartz accounting arrangement will have the parallel freedoms to apportion their economic or non-economic activities on the basis of use and intended use from the date of this announcement, or are we restricting ourselves to the Lennartz accounting arrangement? In other words, are there parallel arrangements for a wider set of taxpayers who might not fall under that particular definition of the Lennartz accounting arrangements?

Finally, it is my understanding that the Treasury will consider claims from taxpayers who have already entered into binding commitments for projects on the understanding that the Lennartz accounting arrangement will be available. Will the Minister say whether that is indeed the case and tell us how HMRC might deal with the issue? I have made a number of points, but in general we support the intentions behind clause 19.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure, Mr Caton, to serve under your chairmanship once again. Clause 19 implements part of the EU VAT technical directive. As we have heard from the hon. Member for Nottingham East, for assets such as land, property, ships and aircraft, it ensures that the taxpayer reclaims VAT only to the extent that the asset is used for business purposes. Schedule 8 protects revenue at risk following a European Court of Justice decision.

By way of background, I should say that currently a taxpayer can recover all the VAT on the cost of an asset, even if the asset is used partly for private purposes. Over subsequent years, the taxpayer pays VAT back to the Exchequer in respect of its private use. That is known as Lennartz accounting, from the ECJ case of the same name, which allowed VAT recovery on private use of the asset.

Lennartz accounting gives taxpayers a cash-flow benefit by allowing them to claim all the VAT on the cost of the asset up front. Following representations from a number of European member states, including the UK, the technical directive was agreed. Lennartz accounting has been an area in which there have been considerable changes over the past few years, following high-profile ECJ decisions and a number of avoidance issues. The UK therefore supported the case for change.

Clause 19 and schedule 8 will mean that, from 1 January next year, up-front VAT recovery on the cost of land, property, ships and aircraft will be limited to business use, with no recovery for private use. To help ensure a fair recovery of VAT over the life of the asset, the clause provides the basis for an adjustment mechanism to take account of changes in use. That will also be implemented at the same time by secondary legislation. HMRC has been working closely with external stakeholders to design an adjustment mechanism that meets business needs.

As well as implementing the EU VAT technical directive, these changes also protect revenue at risk following an ECJ decision—a Dutch case known as VNLTO. I shall attempt to help the Committee by giving the name in full: it is Vereniging Noordelijke Land—en Tuinbouw Organisatie.

Chris Leslie (Labour, Nottingham East)

Will the hon. Gentleman repeat that?

David Gauke (Conservative, South West Hertfordshire)

The answer is no. The hon. Gentleman will be aware that that decision confirmed that many taxpayers in the UK have been wrongly using Lennartz accounting. To ensure that taxpayers do not attempt to use the decision unfairly, the changes ensure that those who have already benefited from the up-front VAT recovery afforded by Lennartz accounting continue to pay the VAT due back to the Exchequer.

The hon. Gentleman asked a number of questions, and I will try to deal with them. First, he highlighted that part of this legislation is seen to be retrospective. It is worth pointing out that the revenue protection element of the legislation ensures that VAT due under existing Lennartz accounting arrangements is protected and paid to the Exchequer. These rules simply maintain the status quo and are deemed to have always been in effect. That ensures that taxpayers who embarked on Lennartz accounting arrangements before the change of policy in January 2010 continue to pay VAT that is due back to the Exchequer. Such taxpayers, having benefited from generous VAT recovery, should not be able unfairly to avoid paying VAT that would otherwise be due as a consequence of the VNLTO case. To answer a point of information, I should say that the decision in that case was delivered in 2009, while the case was listed in 2007.

The hon. Gentleman also asked about how businesses will be affected, whether there has been consultation on that matter and whether an impact assessment has been prepared for the measure. HMRC has been consulting on the detail of the changes, which will be contained in secondary legislation. Until that detail has been finalised, it is not possible to quantify costs and benefits and, therefore, to prepare an impact assessment.

A full impact assessment is expected to be published on the implementation of the secondary legislation, which is likely to be made and laid in December. HMRC has consulted us informally on the relevant part of the EU VAT technical directive. There was general acceptance of the proposed changes. HMRC continues to discuss the implementing regulations with external stakeholders and the representative bodies. I understand that, to date, there has been positive engagement and enthusiasm for simplifying the rules for the new adjustment mechanism.

The adjustment mechanism will cater for changes in business use over the economic life of the asset, and, as I said, it will be introduced by secondary legislation. It will operate as part of the existing capital goods scheme, so taxpayers do not have to deal with two separate adjustment mechanisms. That will ensure overall a fairer covering of VAT on costs that take into account the use of the asset over the economic life.

Finally, there is a minor related technical amendment, deleting current law on VAT recovery for directors’ accommodation, which is now no longer necessary as a result of the other changes in this measure. Overall, clause 19 and schedule 8 ensure that VAT is recovered fairly and only in respect of business use. I therefore urge the Committee to allow the clause to stand part of the Bill.

Clause 20

David Hanson (Labour, Delyn)

Welcome back to the Chair, Mr Caton. It is a wonderful experience to finish here having also been on the Floor of the House. We discussed the problems associated with that in the programme motion debate, but it worked out well in the end; we have been seamlessly transferred from the Floor of the House to the Committee Room. I am pleased to say that we have no objections to clause 20, and I am happy for the Minister to allow it to progress.

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to welcome back the right hon. Gentleman from the Chamber. I am grateful for his remarks. This should not be a contentious matter. Essentially, clause 20 implements the changes required to comply with the EU technical directive. The remainder of the changes required by the directive will be introduced by statutory instrument later in the year. This is a measure that relates to the wholesale supplies of natural gas. UK businesses welcomed both the introduction of the rules and the current changes.

Clause 21

David Hanson (Labour, Delyn)

Clause 21 amends group 8 of schedule 8 to the Value Added Tax Act 1994. The amendment changes the criteria for zero-rating supplies of aircraft and associated supplies. We broadly welcome the clause and have no problems with it, so we will not be pushing the Committee to a Division.

None the less, I have some quick questions to ask the Minister to clarify a couple of points. The current definition of a qualifying aircraft also extends to supplies made to state institutions, and that is preserved. What discussions has the Treasury had with suppliers of aircraft and of parts and services for aircraft and aircraft operators as part of the consultation on this piece of legislation? Has the Minister received any representations from individuals on this issue? What assessment has he made of the financial implications of this change for the aviation sector in the United Kingdom as a whole?

Again, we have no great difficulty with the clause. As has been indicated, we are, through EU law, requiring zero-rating on supplies of aircraft used by airlines operating for reward chiefly on international routes. The relief extends to supplies of parts and equipment for such aircraft and for certain services such as repair or maintenance. I wish to know whether the Minister has had any representations and to hear from him about the points I have made in discussing the clause.

David Gauke (Conservative, South West Hertfordshire)

I welcome the constructive points raised by the right hon. Member for Delyn.

Clause 21 makes changes to the conditions that must be met before supplies of aircraft can be made at the zero rate of VAT. It also covers supplies of parts and equipment for such aircraft and certain services such as repair and maintenance.

We are required to apply the zero rate of VAT to a number of supplies connected with international transport, including supplies of aircraft used by airlines operating for reward chiefly on international routes. UK law applies the relief based on the aircraft’s weight and design by way of a proxy for the EU criterion, rather than by direct reference to the user of the aircraft. While that broadly achieves the intention of EU law, as international carriers tend to operate large aircraft, there is a mismatch at the edges. For example, purely domestic airlines also benefit from the zero rate, provided that their aircraft meet the weight test.

Following a challenge by the European Commission in 2008, the UK accepted that its provisions were not in strict conformity with EU law and agreed to amend the legislation.

The scope of the UK zero rate currently also includes supplies of aircraft made to state institutions, such as the Ministry of Defence, as the right hon. Gentleman has pointed out. The zero rate in respect of those supplies remains unaffected by the proposed changes.

Therefore, there will in future be two categories of supply that might be zero-rated: supplies of aircraft to airlines operating internationally, regardless of the weight; and existing zero-rated supplies of aircraft to state institutions. Although supplies to airlines operating chiefly on domestic routes, to non-airline businesses for corporate use or to individuals will now be standard rated, businesses normally entitled to recover VAT will be able to recover the tax charge under the normal rules.

The right hon. Gentleman asked about discussions with the industry and what help it is being provided with to cope with the change. HMRC officials met with industry representatives in August 2009 to discuss the changes, followed by an informal consultation between 1 October and 30 November 2009, to establish the impact on the various parts of the industry and to help determine workable solutions to any problems. In May 2010, HMRC produced draft guidance that it shared with the industry. Following feedback and a further meeting, revised guidance was circulated to representative bodies in June 2010.

It might also be worth highlighting that the measure is likely to affect a limited number of supplies—to low hundreds of businesses—as in most cases the status of the airline will be self-evident, as most contracts are with regular suppliers.

The industry would have preferred to maintain the status quo, but it understands that the UK had no choice but to comply with the Commission’s view. Consequently, we have progressed with the clause.

Clause 22

David Hanson (Labour, Delyn)

Clause 22 also amends group 8 in schedule 8 to the Value Added Tax Act 1994 to update the status of the provider of a zero-rated passenger transport service that operates in connection with the supply of postal services. The clause also amends group 3 in schedule 9 to the same Act, restricting the scope of exemption to supplies of public postal services and incidental goods made by a universal service provider. The exemption will apply only to suppliers of services made under a licence duty, including those pursuant to a licence duty if the USP allows private postal operators access to its postal facilities. We welcome legislation to amend the VAT exemption following the case of TNT Post UK Ltd in the European Court of Justice. There is no difference between us on this particular issue, but I want to ask the Minister a number of questions.

Unlike with the previous two clauses, which were passed without controversy and on which I received no representations from the industry in my capacity as an Opposition spokesman, I have received some comments from bodies in connection with clause 22. It is important that we examine those concerns, given that that is the purpose of such a Committee, and that the Minister at least places on record his response to them.

The main representation we have received is a note from the Chartered Institute of Taxation, a copy of which I am sure the Minister will have seen. The institute’s submission to HMRC at the time of the consultation—the note is dated 3 September 2010—states that it has concerns arising from the fact that the clause is too widely drafted. It states that the clause could

“lead to relatively minor terms in an agreement for postal services affecting the application of the exemption.”

It emphasises that it is only the terms that might impact on the ability of firms other than the universal service provider to compete that are taken into account. I would welcome the Minister’s response to those concerns.

Secondly, the Chartered Institute of Taxation has raised the issue that disputes could arise between taxpayers, who might take the view that a service was freely negotiated, and the post office, which considers that it was not and that it is therefore within the exemption. Again, it is important that we consider that particular point, which is made in the letter of 3 September from the Chartered Institute of Taxation. The institute says that the emphasis should be on ensuring that the Bill is as clear as possible. Although we have not tabled amendments to the clause, this is an appropriate moment for the Minister to give clarity on those particular points made by the Chartered Institute of Taxation.

Aside from the letter of 3 September sent to Ms Jane Hyde of HMRC, I would welcome the Minister’s view about what impact assessment the Treasury has carried out on the impact of the clause on Royal Mail’s customers who are purchasing the relevant services and will now have to pay VAT. That might be referred to in the documentation, but given that I have been flitting between the Chamber and Committee, I have not noticed whether that is the case. I would welcome some consideration of whether a proper impact assessment has been undertaken and what its outcome was.

This is a speculative comment, because the House will shortly consider plans on the full privatisation of Royal Mail, but I wish to clarify whether the clause is fully provided for in the event of both Houses agreeing to the further privatisation of Royal Mail in the future. Will the clause have any impact on the current and future status of Royal Mail?

Subsection (1) sets out that a universal service provider is defined within the meaning of the Postal Services Act 2000. I expect that that Act will be changed as a result of the Postal Services Bill, which the House will consider shortly. I want to clarify whether the clause and any future changes to legislation will be compatible. Obviously, the Opposition will take a very strong and robust view on the Postal Services Bill. However, I wish to know what consideration the Minister has given to the issue, because a number of matters relating to the universal service provision, which is referred to in the clause, require at least some consideration by him. I would welcome him referring to the points raised in the letter I mentioned, as well as his comments on the impact assessment and, indeed, on the Postal Services Bill.

David Gauke (Conservative, South West Hertfordshire)

As we have heard, clause 22 amends the existing VAT legislation in relation to supplies of postal services by Royal Mail to remove some of its services from exemption. It also amends the law relating to zero-rated passenger transport services made by Royal Mail by replacing an obsolete reference to the Post Office company. Royal Mail, as the only public postal service provider in the UK, has historically been eligible to exempt from VAT all its postal services, including those provided by any of its wholly-owned subsidiaries. However, postal services provided by other postal operators, both before and after full deregulation of the postal sector in the UK on 1 January 2006, are liable to VAT at the standard rate.

Following a challenge from one of Royal Mail’s competitors, the European Court of Justice confirmed in April 2009 that Royal Mail, as the operator providing the public postal service, is the only body in the UK that is eligible to exempt postal services from VAT. In drawing that conclusion, the Court recognised that many of Royal Mail’s services are subject to regulatory conditions and requirements that have been imposed only on Royal Mail under the terms of its licence, and not on any other postal operator.

Chris Evans (Labour, Islwyn)

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

I want to pick up the point that my right hon. Friend the Member for Delyn made about the Postal Services Bill. There has been speculation that TNT or Deutsche Post could take over the running of the Royal Mail through a wholesale privatisation of the service. What effect would that have on the European Court of Justice’s judgment, and did the Government take legal advice in advance of the Bill’s Second Reading tomorrow?

David Gauke (Conservative, South West Hertfordshire)

The right hon. Member for Delyn also made several points about the Postal Services Bill. I am sure that you will be pleased to hear, Mr Caton, that I have no intention of opening a debate on that Bill this evening. Many hon. Members will recall that Lord Mandelson pushed forward such proposals not so long ago, albeit sadly without achieving much. Provisions for the universal service provider exist in other European member states, and there is an opportunity for zero-rated arrangements in those areas. We anticipate that that will be the case, even if there is a change in structure.

The matter is not directly relevant to these changes, but there is no reason why the clause could not be implemented in law. If there is a need to examine the matter again, we will have to do that on a case-by-case basis, depending on the circumstances and arrangements. However, for example, there is no reason why the fact that VAT is not payable on stamps should change where there is a universal service obligation on Royal Mail.

It is worth pointing out that Royal Mail operates under a significantly different legal regime from that of its competitors, but the European Court of Justice ruled that the exemption does not apply to supplies made by Royal Mail for which the terms have been individually negotiated, or which can be dissociated from the service of the public interest. The Court’s ruling means that the exemption for postal services must be applied on a narrower basis, and the clause applies that from 31 January 2011. That date reflects the need to regularise the position as soon as possible while giving Royal Mail sufficient time to make the necessary IT changes.

Most of Royal Mail’s services will remain free of VAT, including stamps and normal deliveries—so-called social mail—so private individuals will be largely unaffected. Those services provided by Royal Mail that are not subject to price and regulatory control in the public interest, or which are individually negotiated, will become liable to VAT at the standard rate. The principal services affected are Parcelforce, door-to-door mail—that is unaddressed mail—Mailroom and other contract services. The customers who will be primarily affected will be those businesses and other bodies that purchase the affected services from Royal Mail and are unable to reclaim all the additional VAT incurred. The Government have consulted Royal Mail, as the sole provider of the affected services, as well as the Postal Services Commission and representatives of the private postal markets.

The Government are mindful of the possible impact of proposed changes to the regulatory framework for postal services and have noted the comments made in response to the consultation, including by private operators. We will therefore review the VAT legislation in mid-2011, in line with any changes being made to the regulatory framework, and take action as appropriate to ensure that it supports the development of a fully competitive postal services market.

The right hon. Member for Delyn mentioned disputes arising over the application of the exemption. We will consider those case by case, but do not expect minor changes to affect the exemption. He also asked whether the exemption was too widely drafted and whether it would be a barrier to competition. VAT not being a barrier to competition is the key to the development of the postal services industry. We will continue to keep the VAT position under review as the regulatory framework develops, as I have mentioned.

Retaining certain services within the exemption, pending their deregulation by the market regulator, is consistent with the court’s decision and ensures that the VAT treatment does not give rise to any unwelcome distortive effects.

I was asked whether there was an impact assessment—there is not. It is normal practice to publish an impact assessment on significant policy changes, but this is a unique set of circumstances, with essentially only one taxpayer directly affected and having to incur compliance costs. As such, much of the information on costs and qualitative impacts, if published, could be directly attributed to Royal Mail. Such information is subject to considerations of commercial confidence and taxpayer confidentiality. The information that we could have published in an impact assessment has been published elsewhere. For those reasons, no impact assessment has been published.

I should like to say a word about Postbus. The clause also amends the law relating to the zero-rating of passenger transport by Royal Mail to replace an obsolete reference to the Post Office company with the designation “universal service provider”. In practice, zero-rating applies to Postbus, which is a rural bus service that Royal Mail provides in conjunction with its postal services. The scope of the zero rate remains unchanged as a result of the amendment.

Although the clause removes the zero-rating of some of Royal Mail’s services, everyday use by private individuals will remain largely unaffected. I hope that the Committee will support the clause.

Chris Evans (Labour, Islwyn)

I return again to the Postal Services Bill, in which it is proposed that Post Office Ltd and the Royal Mail should be separate companies, with Royal Mail being privatised and the Post Office remaining—there are suggestions that it could be run as a mutual or remain in public hands. If the proposal goes through, will it have any effect on the clause?

David Gauke (Conservative, South West Hertfordshire)

Not that I am aware of.

Clause 23

David Hanson (Labour, Delyn)

The clause changes section 4 of the Tobacco Products Duty Act 1979 and is designed to change the process for calculating duty on long cigarettes. The changes come into force at on 1 January 2011. Again, I welcome the measure, which was previously introduced by the Labour Government as a technical change to tackle tax avoidance. I have no problems with the clause. I just want to test the Minister on a number of issues.

First, the proposal sets the taxation changes for substitution, to ensure that long cigarettes are 8 cm long, rather than 9 cm, as in the 1979 Act. Further changes set out in paragraph (1)(b) deal with each 3 cm portion of the remainder of a cigarette being taxed at a different rate. Would the Minister give us some idea why he chose those figures? The average length of a cigarette, excluding the filter, is about 6 cm, so why was 8 cm chosen, rather than, say, 7 cm? I accept that there would be a rise in taxation, but why did he choose 8 cm per cigarette? Why have 3 cm on top of the 8 cm, which effectively equates to another cigarette? What criteria did the Treasury use? Why not 2 cm, or 4 cm? Those figures represent material changes and differences on the tax that could be raised from those who would try to use the length of a cigarette to ensure that they can avoid taxation.

Charlie Elphicke (Conservative, Dover)

I am listening to the right hon. Gentleman’s argument with interest. Is he saying that cigarettes are notably overtaxed? [ Interruption. ] I declare an interest.

David Hanson (Labour, Delyn)

I would be interested to hear what the hon. Gentleman’s interest is. If he is a smoker, the bottom line is that he should give up—[ Interruption. ] Indeed, he should follow the Deputy Prime Minister’s example and try to give up.

The point is that the measure was introduced by the previous Labour Government, and I am pleased that the Minister has taken it up, because we were concerned that people could effectively pay less tax on cigarettes. Once the larger cigarettes are in the country, they could be removed to form other cigarettes, which could then be sold on without tax having been paid. The average length of a cigarette, excluding the filter, is currently around 6 cm. The figure that was used previously was 9 cm, and the Minister has chosen 8 cm. He could have chosen 7 cm, so why did he choose 8 cm? A larger cigarette is in fact larger than the average length of 6 cm, at 7 cm. What was the rationale behind that decision?

Alec Shelbrooke (Conservative, Elmet and Rothwell)

I am slightly confused about what you are trying to drive at here. Are you talking about the taxation for Joe Public going to the shop, or about taxation for wholesalers moving cigarettes around? Your last comment confused me slightly, although that could be my ignorance.

Martin Caton (Labour, Gower)

Order. I am not saying anything. You are referring to the right hon. Gentleman who speaks for the Opposition.

Alec Shelbrooke (Conservative, Elmet and Rothwell)

I beg your pardon, Mr Caton.

David Hanson (Labour, Delyn)

I will try to help the hon. Gentleman, as I am sure will the Minister in due course. I am talking about a tax-avoidance measure. People were bringing into the country cigarettes that were longer than the average size of 6 cm. That is a way of avoiding tax, because they could bring in 12 cm cigarettes, cut them in half and effectively have two cigarettes for every one for which they had paid tax. The previous legislation, the Tobacco Products Duty Act 1979, gave the figure of 9 cm, which would equate to two cigarettes, so if someone came in with a cigarette that was 10 cm long, it would be taxed as two cigarettes, rather than one. The Bill will reduce the 9 cm figure to 8 cm. If we are trying to prevent people from bringing in more tobacco and claiming that it is one cigarette when in fact it can be chopped down to make two, what is the rationale for choosing 8 cm, rather than 7 cm, which is an alternative figure?

Charlie Elphicke (Conservative, Dover)

I put it to the right hon. Gentleman that one of the biggest problems with cigarettes is the tax differential. In the UK they are taxed very highly, but in many places on the continent they are taxed at a much lower level. That is particularly taxing for my constituents, who man the border valiantly at Dover. Does he agree with me that the border guardians, employed by the UK Border Agency, who do such a great job in trying to stamp out smuggling, should be encouraged in their jobs and that perhaps there should be less of a tax differential, because it incentivises all the dreadful smuggling that goes on?

I have no objection to the tax-avoidance measure, but I would have tested the Minister. I tried to table an amendment, but it was ruled out of order because it raised the duty, quite rightly, by reducing the length to 7 cm. Perhaps the Minister will give me a justification for the figure of 8 cm, rather than 7 cm. Similarly, as I have mentioned, clause 23(1)(b) states that each 3 cm portion of the remainder of the cigarette shall be deemed an additional cigarette. Again, if we are trying to avoid taxation, there is an argument to look at reducing that figure further. The whole purpose is to ensure that people pay duty on their 1,000 cigarettes at the agreed rate of duty. If, for example, we reduced the 3 cm on top of the proposed 8 cm, to 2 cm, it would presumably have an impact. I am testing the Minister about the justification for the figure of 3 cm as opposed to 2 cm or 4 cm. It is important that the record shows the thinking behind that decision.

This may seem a trivial point, but it is not. We are talking about the length of cigarettes, but I would welcome a view about what happens to the width of cigarettes. It is possible for duty to be levied on a cigarette that is part of the 8 cm and 3 cm, and is within the 1,000 cigarettes that form part of the taxation cohort. It would be possible for somebody, should they so wish, to manufacture a cigarette that is twice as thick as a normal cigarette, to disembowel that tobacco and reconstitute it into 2,000 cigarettes from a 1,000 cohort brought into the country. If taxation avoidance is the shared motivation behind the clause, I would be interested to know what steps are being taken on the width of cigarettes. Has the Minister given any consideration to that, as well as to measures on the length of cigarettes?

Alec Shelbrooke (Conservative, Elmet and Rothwell)

I am listening carefully to what is being said, but it seems that on the measure that you are trying to press to the Minister, a loophole could be found, whatever the response. You have moved from halving the length of a cigarette to doubling its width. If the demand is out there to do such things, surely whatever law is passed and whatever definition is used, the legislation could be got around easily. I know you are saying that you are trying to test the argument, but I would have thought that any provision could be got around.

David Hanson (Labour, Delyn)

That is an argument to do nothing and never to take any tax-avoidance measures at all. I am simply saying to the Minister that the legislation passed in 1979 sets out the length of a cigarette in relation to duty. A cigarette of more than 9 cm would qualify as two cigarettes for duty purposes. That is a way in which we can look at importation for those who wish to bring in a 10 cm or 11 cm cigarette, cut it in half and sell it as two cigarettes to people in the community, thereby avoiding duty. Whatever our political differences, we do not want to avoid taxation by back-door means. I simply say to the Minister that the length is being reduced from 9 cm to 8 cm and there could be an argument to tighten the measure further, from 9 cm to 7 cm for example. Why is it 8 cm?

I have already said this, but I shall say it again for the sake of further clarity and to ensure that we have a full debate on the matter. When we add each 3 cm portion of the remainder of the cigarette, it will be considered as a further cigarette. Why 3 cm and not 2 cm? If we are looking at tax avoidance, I would have thought that the tighter the regulation, the more opportunity there was to send a strong signal and ensure that the appropriate duty is paid. With those few comments, I am happy to hear what the Minister says.

Stephen Williams (Liberal Democrat, Bristol West)

I welcome the clause. It may dismay some of my coalition colleagues, but I do so in my role as Chairman of the all-party group on smoking and health. The measure deals with tax avoidance from a Revenue perspective, but it also achieves important public health outcomes. I can tell the right hon. Member for Delyn that whether cigarettes are measured by length, width, weight or nicotine content as a proportion of the substance that is wrapped in paper it is important to ensure that the duty is properly paid.

Contrary to what many people think, the real price of cigarettes in the 21st century is little different from what it was in the 1970s, because living standards have risen. It is true, as one of my colleagues said earlier, that taxation is relatively high here compared with taxation by some of our European neighbours, but the price that people pay for cigarettes in the UK relative to their disposable income is rather low compared with the figure 30 or 40 years ago.

My all-party group took evidence during the summer recess. While many of my colleagues were enjoying better climes, I was taking expert witness evidence in order to submit a report to the Government. The report was sent to Treasury Ministers, and I hope that officials have passed it to my colleague. It shows that price is still an important determinant in attacking a substance that is inherently addictive, and that people can be persuaded to change their behaviour as a result of the cost.

Although there are tax-avoidance reasons for introducing the clause, there are excellent public health reasons for tackling smuggling and the avoidance of duty. We can build on the important measures put in place with cross-party support in the previous Parliament to ban smoking in all public places, and I hope that we will not have to wait too long for Government approval for the regulations that will ban vending machine sales and cigarette displays.

Alec Shelbrooke (Conservative, Elmet and Rothwell)

May I apologise, Mr Caton, for getting my language wrong on my second intervention? I meant no offence.

I wish to add to what was said by my hon. Friend the Member for Dover. I believe that the focus of his comments was slightly wrong. I gave up smoking on 1 August, and I can tell the Committee that it is one of the hardest things that I have ever done. Although the price of cigarettes, and the level of tax, caused me to complain, it never stopped me buying them. We must therefore be careful when saying that raising taxation would help, because people make cutbacks elsewhere to feed their drug habit—and that is exactly what it is. I detect from what the right hon. Member for Delyn said that there is cross-party support for the measure, but I wonder whether our debate will achieve anything or whether it is just a testy argument.

David Gauke (Conservative, South West Hertfordshire)

As we have heard, clause 23 is intended to prevent the avoidance of tobacco duty. I hope that it will be some comfort to my hon. Friend the Member for Bristol West to know that in last week’s spending review announcement additional sums were given to HMRC to allow it to take further action to reduce cigarette smuggling. It is something that the Government take seriously.

Those seeking to avoid the element of tobacco duty applied specifically to the number of cigarettes produce what are known as long cigarettes, which are designed to be broken or cut into shorter sections by the smoker. The final number of cigarettes is thus greater than the quantity used for duty calculation purposes. We are aware that some brands of long cigarettes are 8 cm or more in length. Under the new rules, they will be classed as being four or more cigarettes. We therefore hope that the legislation will be useful in that respect. Clause 23 will amend legislation so that for cigarettes longer than 8 cm, excluding the filter, each additional 3 cm will be treated as an additional cigarette for the purposes of specific duty calculations. For example, a cigarette of 12 cm would be treated as three cigarettes.

The right hon. Member for Delyn asked what the reason was for those particular measurements. We are amending legislation that dates back to 1979 to ensure that UK legislation remains aligned with EU directive 95/59, which itself has been amended and updated. This is an example of our complying with European measures, and it is clearly important to co-ordinate at a European level, for reasons that I do not need to go into. Tobacco duty is an important contributor to the public finances. It contributed approximately £9 billion in 2009-10, with cigarette duty alone contributing approximately £8 billion.

Our decision to include the measure in the Budget will help to protect tobacco duty revenues. Almost all UK brands are unaffected, although one or two businesses that manufacture or are niche importers of long cigarette brands might be somewhat upset. Smoking is the single biggest cause of preventable illness and early death in the UK, so tackling tax avoidance with the measure will help to maintain the high price of cigarettes; I nevertheless note the comments made by my hon. Friend the Member for Bristol West. The measure will support the Government’s health objective of reducing smoking prevalence.

On the size parameters, the EU consulted relevant parties to decide the definitions. Width is not currently an avoidance issue, with companies making extra-wide cigarettes, because it is relatively easy to break up long cigarettes, but not wide ones. I am sure that if we start to see wide cigarettes being produced, we might return to the issue in future Finance Bills.

The clause will come into force on 1 January 2011. It supports the Government’s policy of tackling tobacco tax avoidance, while helping to maintain the high price of cigarettes. It will help to reduce smoking and lower the financial, social and personal costs associated with smoking.

Clause 24

David Hanson (Labour, Delyn)

I beg to move amendment 10, in clause 24, page 18, line 8, at end insert—

Martin Caton (Labour, Gower)

With this it will be convenient to discuss the following: amendment 14, page 18, line 15, after ‘relevant’, insert

Amendment 11, page 18, line 17, at end add—

David Hanson (Labour, Delyn)

This is an important issue, but I will try to be relatively brief. Clause 24 sets out the criteria for a range of issues in relation to landfill tax, and to determining material to be subject to a lower rate of that tax. My only complaint about the clause is that it gives the Treasury considerable leeway in determining those issues. Proposed new subsection 4 sets out the Treasury responsibilities in determining which material is to be listed under the clause:

“(4) The Treasury must—

(a) set criteria to be considered in determining from time to time what material is to be listed,

(b) keep those criteria under review, and

(c) revise them whenever they consider they should be revised.”

There is nothing at all about formal consultation with any interested parties about what could be a major change to the Treasury’s responsibilities. Amendment 10 proposes to add to the proposed new subsection two new paragraphs, (d) and (e). All that we are trying to do is to ensure that those who are interested are formally consulted and that, post that period of consultation, we know, collectively, what they have said.

Amendment 11 is, from my perspective, a probing one, about how much notice the Treasury should give of the changes that it could make in the listing of criteria for determination at a lower rate. The amendment states that six months’ notice be given, but my interest in doing that is to find out how much notice the Treasury intends to give if it does make changes to the listing. We need clarity, so that changes will not be made overnight that cause difficulty to those people whose daily business—or indeed any other matters—will be affected by the clause.

The final amendment in the group is amendment 14. Again, far be it from me to worry that the Treasury might have wide-ranging powers that it can do what it wishes with and not refer back to the House of Commons, because those are important matters of state. However, we need to look at them in detail. Clause 24(6), which I will read for the benefit of the Committee, states:

“In determining from time to time what material is to be listed, the Treasury must have regard to—

(a) the criteria (or revised criteria) published under subsection (5),

and

(b) any other factors they consider relevant.”

That simply says to the Treasury that it can go away and make any changes that it likes because it considers the factors to be relevant. It does not clarify what factors the Treasury might consider relevant, why the Treasury have considered those factors to be relevant, and how people who are affected by any changes the Treasury bring forward know that those factors were relevant. It gives the Treasury a free hand to make changes without reference to any other individual.

Amendment 14 adds that any factors the Treasury consider relevant

“must be published at the time of listing.’.”

It simply says that if the Treasury makes changes under subsection (6) (b), it must, at the time of listing, publish what those factors are. That is in the interest of transparency, so that the Treasury is not accused of doing things in its dark recesses without consultation or public transparency on those issues.

I welcome the Minister’s view on those comments. I hope that he will accept consultation and the publication of consultation responses, and that he will ensure that there is transparency in clause 24 over and above what the clause currently outlines.

David Gauke (Conservative, South West Hertfordshire)

Clause 24 brings greater clarity to the process by which the Treasury determines the materials that receive the lower rate of landfill tax. The Opposition amendments suggest yet further transparency and clarity is needed, and furthermore suggest that additional primary legislation is required to achieve that. However, as the right hon. Member for Delyn is aware, the proposals on better tax policy making that the Government published at the Budget make clear that we are already committed to ensuring that all tax changes are subject to a full process of consultation and scrutiny that goes well beyond what the amendments would achieve.

To reiterate, the Government have committed to consult at each identifiable stage for all tax changes; to give weight to simplicity in the tax system, alongside other policy objectives; to examine the case for further rationalisation of the dates on which tax changes are announced and come into effect; to apply the same principles and disciplines as are applied to the Finance Bill, wherever secondary legislation makes a substantive change to the tax code, including publishing the legislation in draft for scrutiny; and to institute a minimum of four weeks’ consultation on tax changes by secondary legislation. Those overarching principles will serve the cause of transparency and accountability far more effectively than the proposed amendments.

Amendment 10 seeks that the Treasury should consult interested parties and publish their responses. I must emphasise that the clause we are introducing is the result of a lengthy consultation process and itself brings greater transparency to the process by which the materials listed in the lower rate order are decided. Indeed, the changes that we will make next year to the list of lower-rated wastes set out in the Treasury order as a result of this clause and the publication of the criteria are the first changes to the order in 14 years. The Treasury’s decisions on the materials to be listed in the lower rate order will not be taken in isolation, but will take into account the advice and guidance from the Department for Environment, Food and Rural Affairs, the devolved Administrations and the environment agencies, and I hope that the right hon. Gentleman is reassured by those comments. Amendment 10 is therefore not necessary.

Amendment 11 would require the Treasury to give six months’ notice before any changes are made. The revised order will be laid before Parliament before the end of 2010. The right hon. Gentleman asked specifically about that. It will come into force on 1 April 2011. The landfill industry is already well informed of the changes and laying the order well in advance will give that industry the certainty that it requires. The Government also intend to provide certainty on tax changes, and therefore this amendment is not necessary.

On amendment 14, which seeks to make public any factor that the Treasury considers relevant when determining the materials to be listed, two important points must be considered. First, the amendment supposes that the clause, as it stands, gives undue scope to the Treasury to change materials that are listed in the lower rate order, but that does not fully understand the nature of the clause. The Committee should note that the clause states that the Treasury is compelled first to have regard to the published criteria under subsection (5) and then to two other relevant factors. I reassure the Committee that it is not a matter of giving the Treasury any real discretion when listing the materials, but the arrangement will ensure that the criteria that we publish, while providing greater clarity on how the lower rate is decided, will not be unduly restrictive and prevent wider issues from being taken into account. It provides for the possibility that other indirect environmental or even non-environmental factors may become important to delivery of the landfill tax’s primary objectives in the future.

Secondly, to address the fundamental issue raised by amendment 14, it is simply not possible to publish every factor that the Treasury considers when introducing a taxation change. Such decisions are made as part of the normal Budget process, when all taxes can be taken into consideration as past of an overall fiscal judgment. Therefore, amendment 14 is not necessary and not practical.

In conclusion, these amendments, although clearly tabled with the best of intentions and rightly probing our thinking in this matter, would add to the complexity of the tax codes. In addition, one of them is technically deficient, and another would be unfeasible to fulfil in practice. Moreover, they are unnecessary in the light of the more efficient, overarching changes that we have publicly committed to make to the entire tax policy making process. I therefore urge the right hon. Gentleman to withdraw those amendments.

David Hanson (Labour, Delyn)

I will withdraw the amendments, Mr Caton, but I want to test the Minister still further. On amendment 11, I have heard what the Minister has said about orders being laid before the House and all those issues, but clause 24(1) gives the following powers to the Treasury:

“(6) In determining from time to time what material is to be listed, the Treasury must have regard to—

While subsection (2) states:

“The amendment made by this section has effect in relation to disposals made, or treated as made, on or after 1 April 2011.”

I want it to be clear. When clause 24 states “from time to time”, what notice will be given, not this time, but in future times, in relation to any changes that are made? Will the Minister give an indication of what the likely time scale will be for any changes that are made under this wide-ranging clause, which gives the Minister and the Treasury powers to make such changes, and how much notice will be given? The reason that I have simply put “six months’ notice” is to test how long the Treasury will give in the event of further changes being made by the Minister.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the right hon. Gentleman for confirming that he will withdraw his amendments. As to whether the criteria that we have set out in the clause will be reviewed and revised, we will look at that each year as part of the normal Budget process. I would also highlight, as I mentioned in my earlier remarks, the commitment the Government have made to greater consultation to ensure that those affected by possible changes, whether in regulations or primary legislation, receive proper notice of them. For example there will be a minimum of four weeks’ consultation on tax changes by secondary legislation. By raising these matters he has enabled me to put on record our desire to ensure that we do not have surprises for those people who will be affected by changes when determining which material is subject to the lower rate, that there is proper engagement with the industry and that there is an opportunity for the industry to consider and adapt to changes that are made under these powers.

David Hanson (Labour, Delyn)

I am grateful to the Minister. I hope that he treats our amendments in the spirit in which we proposed them and ensures that we do have some discussion because clause 24 gives significant powers to the Treasury to revise the criteria for listing in due course. I wanted to test what the time frame would be, what the consultation would be and how individuals who are interested in those matters could contribute. The Minister has put those issues on the record and so I beg to ask leave to withdraw the amendment.

Clause 25

David Hanson (Labour, Delyn)

I beg to move amendment 19, in clause 25, page 18, line 25, at end insert ‘, subject to 12 weeks notice’.

This amendment is similar to the previous amendment. I picked 12 weeks as a random figure to test how much notice will be given to those whose daily lives will be substantially affected by the changes mentioned in the clause. There was no indication in the Bill as to when or how these changes could be brought forward. Subsection (2) states:

“That Schedule comes into force on such day as the Treasury may by order appoint.”

That is a very big power. The Treasury may by order appoint any day it so wishes. It could appoint a day by order with two weeks’ notice, four weeks’ notice, six months’ notice, 12 months’ notice or whatever it wished to do. I wanted to probe the type of notice the Treasury envisaged giving in relation to the changes that are proposed, if agreed by both Houses, under this clause.

David Gauke (Conservative, South West Hertfordshire)

Amendment 19 specifies that any order to make schedule 9 effective must allow 12 weeks’ notice. I appreciate the concern that the right hon. Gentleman has raised and the desire to ensure that HMRC provides adequate notice to taxpayers before making the changes proposed by schedule 9 is entirely understandable. My argument, however, is that the amendment is not necessary. Under previous commitments made by Jane Kennedy, when she was Financial Secretary during the 2008 Finance Bill debate, HMRC established a practice of producing a draft appointed day order in advance of the effective day where it is possible to do so. This practice has extended to an appointed day order applying the harmonised interest rules to the bank payroll tax, for example, and to several appointed day orders in relation to penalties. These include penalties for incorrect returns and failures to notify, as well as associated orders in relation to national insurance contributions.

As the Committee will be well aware, HMRC publishes much of its draft legislation for comment on its website. No adverse comments have been received on any of these regulations. Furthermore, HMRC demonstrated its commitment to continuing this process by publishing the draft order for the late payment penalty regime for pay as you earn three months before it became effective in April this year. I propose that this practice continues for orders that will be made under the power given in these provisions.

In contrast to this tried and tested practice, one well used by the previous Government, amendment 19 gives no detail about how the 12-week notice period should be implemented, and how any change would be made.

I appreciate the right hon. Gentleman’s thinking in raising the matter. Given, however, that in amendment 19 he seeks to ensure that HMRC provides sufficient notice of changes being made under the clause, and given that such notice is already provided in a clear and easily accessible manner, I ask him to withdraw his amendment.

David Hanson (Labour, Delyn)

Again, it was simply designed to be a probing amendment. Undoubtedly it is technically deficient, because in opposition we do not have the resources of the Treasury. It is intended to obtain an indication from the Minister of what level of notice would be given, and of how that notice and changes under clause 25 would be considered. I wanted him to state on the record that the changes will be subject to a proper process that is understood by those outside the House as well as by the massed ranks of the Treasury. On that basis, I beg to ask leave to withdraw the amendment.

Clause 26

David Hanson (Labour, Delyn)

I beg to move amendment 17, in clause 26, page 19, line 9, at end insert ‘subject to 12 weeks notice’.

Martin Caton (Labour, Gower)

With this it will be convenient to discuss amendment 18, in clause 26, page 19, line 26, at end add—

David Hanson (Labour, Delyn)

I will sound like a tired record by the end of the evening, because this point is similar to those that we have made about previous amendments. Before clause 26 is implemented, it should be subject to 12 weeks’ notice, which is a random figure plucked from the air to test the Minister as to how, when and under what circumstances he will advance the measures in the clause.

We want to ascertain what notice individuals will receive, how that notice will be delivered by the appropriate authorities in the Treasury, and how that will work in practice. I expect that the Minister will say more or less what he has said before, but that will be worth while in order to put it on the record for future discussions.

Amendment 18 is slightly different, because it contains the provision that the clause

“shall be subject to formal review within 12 months of the date of Royal Assent to the Finance Act (No. 3) Act 2010.”

Believe it or not, the Finance (No. 2) Bill will become the Finance (No. 3) Act when it receives Royal Assent, which new members of the Committee may find confusing. Within 12 months of Royal Assent, we would like a formal review of the operations of the clause under the proposals in amendment 18. Again, it is a testing amendment; I have received representations from, among others, the Chartered Institute of Taxation, which has expressed concern that the new provisions will affect smaller businesses disproportionately. I know that Members from all parts of the House want to avoid that.

I am happy for the Minister to outline to the Committee the reasons why he believes that the provisions will not bear down on smaller businesses, and to answer the concerns raised by the Chartered Institute of Taxation. Alternatively, he can accept amendment 18 and agree to review the situation after 12 months so that if problems are perceived with the penalties charged and the effect on companies that have to pay, the system can be examined and formally reviewed by the Treasury.

That is in contrast to the informal reviews that undoubtedly take place regularly. Either way, my purpose in tabling the amendment was to give the Minister an opportunity to allay the fears of the Chartered Institute of Taxation, either now or 12 months after Royal Assent.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the right hon. Gentleman for allowing me the opportunity to consider two amendments to clause 26. Amendment 17 is identical to amendment 19 to clause 25, which we have debated. I will not use the response “I refer the right hon. Gentleman to the answer that I gave some moments ago”, but I will give him a proper answer.

As I said, HMRC has a procedure in place to provide notice of changes of the kind proposed in the clause. The publication in advance of draft appointed day orders on the HMRC website provides taxpayers and advisers with time to adjust and certainty about HMRC’s actions. That practice, introduced by Jane Kennedy in 2008 when she was Financial Secretary to the Treasury, has been welcomed by interest groups.

Amendment 18 seeks to make the provisions in clause 26 subject to a formal review 12 months after Royal Assent. The clause completes the alignment of late filing penalties across all taxes and duties administered by HMRC by including the remaining indirect taxes and excise duties in the new late filing penalty framework that legislated for direct taxes last year. It is important to remind the Committee that all new policy measures are subject to a formal evaluation process within three years and that that requirement will apply to the changes within the clause.

HMRC is committed to reviewing the policies that it implements. An implementation oversight forum with a majority of external members was established by the previous Government to consider the changes brought about after the review of powers, deterrents and safeguards. The forum assessed whether the changes were in line with the undertakings given to Parliament and found that the first year of implementation of the new powers had been a success. It is worth quoting Andrew Hubbard, president of the Chartered Institute of Taxation and a member of the forum, who said that some of

“the early concerns about excessive and inappropriate use of the powers by HMRC have not proved to be correct… HMRC have kept to their promises and assurances about how the powers would be used”.

The new provisions in clause 26 were designed after an extensive consultative process, and the measure has been subject to three consultations since August 2008. HMRC intends to continue that collaborative approach in measuring the effectiveness of the new penalties. It would be somewhat odd to provide for such a review but not to allow for a review of the changes introduced by the right hon. Member for East Ham (Stephen Timms) last year.

The right hon. Member for Delyn alluded to CIOT comments about the concern that the fixed penalties were too high for frequent filing obligations and that that could lead to disproportionate penalties. We have considered the rates for fixed penalties carefully and agree that we do not wish disproportionate penalties to arise. That is why HMRC responded to concerns raised during the consultation by reducing the maximum fixed penalty for monthly filing from £400 to £200.

HMRC is monitoring closely implementation of the new penalty provisions. I am pleased to report to the Committee that since introduction in April 2010, the early results on the improvement of employers’ payment of pay-as-you-earn have been encouraging. HMRC will continue to work closely with private sector representatives on the implementation of late filing and late payment penalties. Given those comments and assurances, I hope that the right hon. Gentleman will withdraw his amendment.

David Hanson (Labour, Delyn)

I am grateful to the Minister for his comments. He has effectively answered the points raised. On that basis, I beg to ask leave to withdraw the amendment.