Finance (No. 3) Bill

Public Bill Committee, 19 May 2011.

(Except clauses 4, 7, 10, 19, 35 and 72) - Clause 21

Kerry McCarthy (Labour, Bristol East)

It is a pleasure to see you in the Chair, Mr Gale. I have a few brief questions on clause 21. I would appreciate clarification of the Government’s thinking on using vehicle excise duty as an environmental tax rather than as a revenue-raising measure. What consideration has been given to using VED as a way of changing behaviour, perhaps encouraging people to use cars that are more environmentally friendly? Will the Minister explain why more was not done in the Budget to favour fuel-efficient family cars? Does she hope that more work will be done on that front in future?

In November 2010, the Institute for Fiscal Studies published the long-running Mirrlees review of tax reform. As part of its work on motoring taxes, the review questioned whether a tax on vehicle purchase might be more targeted than the annual vehicle excise duty payment. Have the Government given any consideration to that suggestion, and does the Minister agree that it might better achieve the aim of encouraging people to buy cars that are more environmentally friendly?

I turn to the question of evasion. In its 2009 report on VED evasion, the Department for Transport estimated that it cost about £34 million in 2009-10. The overall rate of unlicensed vehicles in stock in Great Britain was estimated at 0.7% in 2009, which is equivalent to about 244,000 vehicles; that was down from 1% in 2008. The evasion rate for motorcycles was estimated to be 3.2%, which was up on the previous year but down on the year before that. Has the Treasury assessed the impact of those rises in evasion, and what steps are the Government taking to prevent it?

The freeze on VED for heavy goods vehicles will be a welcome boost for many hauliers. However, some will not benefit; I shall deal with that when we come to clause 22. If the measure was intended to help industry by reducing distribution costs, is there not a case for freezing VED for light goods vehicles or vehicles used by smaller businesses? Many small businesses increasingly suffer the same pressures as the haulage industry, particularly as a result of fuel costs, as we have heard in previous sittings. Has the Treasury explored the possibility of freezing duty on light goods vehicles or other business vehicles, to help small businesses and traders not in the haulage industry whose vehicles are integral to their livelihoods?

Justine Greening (Conservative, Putney)

It is a pleasure to see you back in the Chair, Mr Gale. First, I shall explain what the clause does. I shall then respond to the questions posed by the shadow Minister. The clause makes changes to vehicle excise duty rates for cars, vans, and motorcycles, with effect from 1 April 2011. Motoring is an essential part of everyday life for families and businesses. The Government recognise the real difficulties being created by record pump prices. As part of a package to ease the burden on motorists, we announced in the Budget that vehicle excise duty rates for 2011-12 would increase only in line with inflation; and to support hauliers, duty rates for heavy goods vehicles will be frozen for the 10th successive year.

The clause changes standard rates for cars purchased after 2001 in line with inflation, and by up to £25 more for higher-carbon emitting cars. Rates remain unchanged for the cleanest cars that emit less than 120 grams of carbon dioxide per kilometre. More than 80% of cars purchased after 2001 will pay up to £10 more, and of these almost half will pay only up to £5 more.

The hon. Lady asked about vehicle excise duty being used as an environmental tax. The way in which it is structured can bring about positive behaviour change. She is right to point out that technology does change; the Government therefore need to keep a watching eye on VED to ensure that it can continue to be successful, in relation to its potential to have an environmental impact. However, we also need to learn the lessons of recent years. The previous Government attempted to environmentalise VED for pre-2001 cars in 2008. Of course, that was incredibly controversial because the change would have been retrospective, and the people who owned those vehicles could not go back and change their behaviour. We are clear that ensuring that a tax is structured to drive positive environmental behaviour is one thing; ensuring that that can happen on the ground, and that people can change their decisions of the future is another.

That brings me to another point that the hon. Lady made, about the Mirrlees review. This is an interesting issue. We have talked about switching taxation away from economic goods, such as people working, to economic bads. Clause 21 changes first-year rates, chargeable on the first vehicle licence taken out on a new car, in line with inflation. First-year rates are intended to influence up front the purchasing choices of drivers buying brand-new cars by acting as a signal at the point of purchase that people can save money by choosing lower-carbon cars. In line with the EU emissions target for new cars, the rates remain zero for cars emitting less than 130 grams of carbon dioxide per kilometre, and the highest-emitting new cars pay the top rate of £1,000.

The hon. Lady is right to point out that that could have a positive environmental effect, but there are two caveats to that. One relates to the level of the first-year rate in relation to the overall purchase price of a car. Although we can send some signals and encourage behaviour, there is also a need to understand that consumer choices about cars will be driven largely by the overall price of a car. The second point is that it is important to consider other areas. For example, we have made changes to the company car tax regime to encourage a more environmentally minded decision by people who are getting a company car. That is important because many company cars feed into the second-hand car market. I can reassure the hon. Lady that we do see the potential in this area for driving positive environmental behaviour.

The higher rate of duty for cars and vans registered before 1 March 2001 increases by £10, and the lower rate by £5. Low-income households are less likely to own a car, and those that do are more likely to own cars registered before 2001. The owners of about 40% of those cars will pay only £5 more. Furthermore, clause 21 increases the standard rate of duty for vans first registered from 1 March 2001 onwards by £10. The reduced rate for vans achieving early compliance with European air quality emissions standards increases by £5. Rates for motorcycles will also increase in line with inflation. Those motorists will see an increase of no more than £4. The hon. Lady has asked what we are doing to support people with smaller vehicles that they may use for their business. I think that I am right in saying that we have frozen van fuel benefit charges, for example, so we are working to support people who need their vehicles for their business.

The Government are easing the burden on motorists at this time of record pump prices. We are providing support worth £1.9 billion, which includes a cut in fuel duty, the abolition of the fuel duty escalator, and its replacement with a fair fuel stabiliser. As part of that package, we are maintaining rates of VED in real terms to support motorists and the sustainability of the public finances, while incentivising and promoting the development and purchase of low-carbon vehicles. Hauliers have been benefiting from frozen duty rates since 2001. In 2011-12, heavy goods vehicle rates will be approximately 30% lower in real terms compared with 2001. We will continue to support hauliers in this climate.

Clause 22

Kerry McCarthy (Labour, Bristol East)

Under the clause, HGVs of a certain weight and axle configuration that do not have road-friendly suspension will attract a different rate of vehicle tax, which takes effect from 1 April 2011. That means that not all HGVs will enjoy the freeze in vehicle excise duty that was confirmed in clause 21. I accept that the rate for HGVs without road-friendly suspension has to increase to meet the EU’s minimum rates of taxation, but there is concern in the haulage industry that such an increase comes at a time when it faces pressures as a result of high fuel prices. Has the Treasury held any discussions with haulage companies on the increase in duty for HGVs without road-friendly suspension? Does the Minister know the number of HGVs that will be affected by that rate of duty, and how much revenue is the change likely to generate? Finally, what impact will the new rate of vehicle excise duty have on the haulage industry? Given that drivers are being made redundant, that companies are struggling to compete and that the industry is not in a position to reinvest its shrinking profits in more eco-friendly HGVs, is this really the right time to introduce such a change?

Justine Greening (Conservative, Putney)

The clause ensures that UK vehicle excise duty rates for lorries are consistent with European Union minimum tax rates for lorries. The background to this clause is that the EU minimum tax rates for lorries are based on the understanding that there is a cost to making good the wear and tear caused to European road infrastructure by goods vehicles weighing more than 12 tonnes.

European Union member states, including the UK, agree and accept minimums below which tax rates for lorries should not fall. The agreed tax minimums have been set in euros. As the hon. Lady mentioned, some of the UK’s vehicle excise duty rates for lorries have fallen below the agreed tax minimums due to exchange rate fluctuations; those rates are based on pound sterling to euro exchange rates on the first working day of October 2010, in line with our obligations under European law. Our aim is to ensure consistency with European rules on minimum rates of taxation while causing the least impact to lorry owners.

The clause introduces new exceptional rates of vehicle excise duty for 10 categories of lorry for which VED has fallen below the agreed European Union tax minimums. The rate increases for those categories of lorry are no greater than is required to ensure consistency with European rules on minimum rates of taxation. The affected categories are limited to lorries that do not have road-friendly suspension fitted. The majority of the affected categories are lorries that have been awarded a vehicle excise duty reduction because they met reduced pollution requirements early. In most instances, lorry owners will continue to receive a reduction from the standard rate, even after the application of the exceptional rates, as exceptional rates are set as low as permitted by European law.

The hon. Lady asked about the impact. No more than 12,000 lorries will be affected by the change, but the number could be fewer than that, as lorries fitted with road-friendly suspension will not be affected. Based on the 12,000 ceiling on the numbers of lorries affected and the minimal level of rate increase, the anticipated financial impact on the industry is no more than £500,000. The clause is designed to satisfy the requirements of European law. A failure to observe European law can lead to European Union member states being fined, and we wish to avoid that outcome.

The hon. Lady asked about consultation. Representatives from the leading industry associations were consulted while we were developing the measure. In fact, informal discussions began in early 2010. They contributed to the design of the draft legislation, which was published in late 2010. We had input from the Freight Transport Association and the Road Haulage Association, which represent large fleet and smaller independent lorry operators. Both organisations agreed that the industry would accept a transparent solution that enabled us to meet EU tax minimums. Their input was useful in allowing the Government to develop such a solution, and allowed us to provide certainty that existing rates will be maintained for the vast majority of lorry owners.

As for future changes, the transparency of the clause supports a future Finance Bill removal or amendment of exceptional rates if future pound sterling to euro exchange rates allow. The clause offers a “least impact” solution for reaching consistency with mandatory European tax rules. It has been tailored with the industry to give transparency, and it protects the majority from increases in the rate of vehicle excise duty.

Clause 23

Kerry McCarthy (Labour, Bristol East)

Clause 23 increases the climate change levy by the retail prices index. Many of the changes to the structure of that levy are brought in by part 6 of the Bill, so we will discuss those later.

I want to make some broad points about what the Government have said about their tax policy-making framework, including improving the predictability and stability of the tax regime. To further those aims, in November last year the Government released a road map for corporation tax, which aims to set out the principles that will guide reforms to the corporation tax regime, a timetable for those reforms and the details of how the Government will consult business in introducing those reforms. The Exchequer Secretary to the Treasury has said that a reason for the road map is to signal that Britain is open for business.

Another key objective of the Government is, as the Prime Minister said a year ago, to be the greenest Government ever. We do not, however, have the same clarity or predictability in the area of green taxation as we do on corporation tax. For example, the coalition agreement states that the Government will increase the proportion of tax revenue accounted for by environmental taxes, and, according to the 2011 Budget report, there will be a small cut in environmental taxes this year, but increases in future years. In evidence submitted to the Environmental Audit Committee, however, the Chartered Institute of Taxation said that there was a need for greater consistency from the Government in how they defined environmental taxes.

Last year, in response to a written question from the hon. Member for Denton and Reddish (Andrew Gwynne), the Economic Secretary appeared to imply that environmental taxes covered the climate change levy, aggregates levy and the landfill tax only, as well as revenues from the EU emissions trading scheme. However, the Chartered Institute of Taxation points out that the Office for National Statistics said in a report last year that, in addition to those taxes, environmental taxes also covered fuel duty, VAT on duty, renewable energy obligations, vehicle excise duty and air passenger duty. We have already had some debate about whether those are environmental taxes that are designed to alter behaviour towards more environmentally friendly practices.

Alison McGovern (Wirral South) (Lab) rose—

Roger Gale (Conservative, North Thanet)

I call Stella Creasy. [ Interruption. ] I have the wrong glasses. I apologise.

Alison McGovern (Labour, Wirral South)

It is an honour to serve under your chairmanship, Mr Gale, and it is an honour to be mistaken for my hon. Friend the Member for Walthamstow. If only I had her presence and reputation. Does my hon. Friend the Member for Bristol East agree that it is highly important that we get the definitions right? When we look back at what happened now for evidence that green taxes changed behaviour, we will need to know exactly what we were discussing at the time. We need to ensure now that the policy is right, because we will want to prove that the changes that the Government made actually changed behaviour. We need to have the correct definitions from the start.

Kerry McCarthy (Labour, Bristol East)

I agree entirely with my hon. Friend. If the Government want to be the greenest Government ever, it is important that green thinking pervades all the work that they do. It is important, therefore, that, when looking at issues such as air passenger duty and fuel duty, at least consideration is given to the impact not only on individual behaviour but on how, as a country, we can help meet our targets for reducing emissions.

As I said, the Chartered Institute of Taxation says that there should be a broader definition of environmental taxes than that apparently implied by the Economic Secretary when she responded to the written question from the hon. Member for Denton and Reddish. In the Budget report, air passenger duty is included under the environmental taxes heading—it was not mentioned in the Economic Secretary’s answer—but fuel duty is not. I would appreciate some clarity on that.

The institute says that if changes to fuel duty are included in the definition of environmental taxes, they are in fact being cut every year to the end of the forecast period. Does the Minister agree that a key aim of fuel duty is to encourage more efficient use of fuel, and the use of public transport for environmental reasons? Does that not qualify it as an environmental tax?

In a separate paper in February this year, the Chartered Institute of Taxation also called for greater clarity on the principles that would guide the Government on green taxation. It does not believe that an entirely new set of principles needs to be developed, but it would like the general principles of good taxation, such as fairness, certainty and minimising the compliance burden, to be modified and applied to environmental taxes. The institute has called for a statement of those principles to be included in tax legislation, and has said that it would welcome a document from the Government along the same lines as the document on corporation tax.

I want to put the clause into the context of the Government’s wider programme on green taxation and the environment. In February, the Department for Environment, Food and Rural Affairs published its vision for sustainable development. According to the document—“Mainstreaming Sustainable Development” —the Government want sustainable development to become central to the policy of all Departments, and not to be seen as a niche issue for one Department. However, a report for Friends of the Earth has recently pointed out that the Treasury is by far the most important Department in terms of delivering green goals, and at the moment it does not seem to have taken that vision on board. The report charted the Government’s progress on its green objectives, and found that on most of them it had stalled, or little progress had been made. It agreed with the Chartered Institute of Taxation that there was no clarity on how the Government would deliver their coalition agreement promise of increasing green taxation as a proportion of overall tax take. It also said that if fuel duty was considered to be an environmental tax, it would be difficult for the Government to achieve that promise.

Yesterday, the Secretary of State for Energy and Climate Change set out the carbon emissions targets for industry, but without concrete measures from the Treasury those targets will not be reached. Have the Government considered producing a road-map document for environmental taxes, given their coalition agreement objective? Are they committed to providing clarity and predictability for businesses on green taxation, given the aims set out in their new tax policy-making framework last year? What is their assessment of progress towards the coalition agreement’s aim to raise environmental taxes as a proportion of tax revenue, given the changes made in this Finance Bill?

Justine Greening (Conservative, Putney)

I should start by saying that this Government are absolutely committed to being the greenest Government ever. In fact, one of the first decisions that we implemented was to cancel the third runway at Heathrow. As a London MP, I was delighted, because much of my time as first-term MP in opposition had been spent campaigning against it. I recall vividly a conversation with the now Leader of the Opposition when he was Secretary of State for Energy and Climate Change, and waved through the plan to increase the number of runways at Heathrow. That would have had a hugely detrimental effect on carbon emissions. I have no doubt that he recalls our conversation, when I begged him to see sense. He did not, but fortunately the electorate did, and we now have a Government who realise that a third runway would have been a green disaster.

Stella Creasy (Labour, Walthamstow)

Will the Minister assess the Mayor of London’s support for a third airport in London, and tell us whether the same concerns about the environmental impact and the impact on the Exchequer have been raised in the Government?

Justine Greening (Conservative, Putney)

The Mayor of London is absolutely right to look at what he believes the infrastructure requirements are for our city. I am sure that the hon. Lady would be the first to complain if he did not. In the House, the Government’s decision on Heathrow was not just about emissions; it was about huge road pollution, air pollution, congestion, and other pollution issues such as noise, which would have blighted the lives of millions of Londoners if the last Government had been disastrously re-elected.

Ian Murray (Labour, Edinburgh South)

The Minister raises a good point about the third runway at Heathrow. I do not disagree with what she said about it, but she will recognise that the knock-on impact of that decision has been that all the late night flights to Glasgow on Thursdays, for example, have been cancelled, because bmi has used its slots for planes to elsewhere, such as the middle east, because there is no capacity at Heathrow. There is a knock-on impact on the economy, particularly the economy in Scotland, because the domestic flights have been cut at the expense of more profitable flights.

Roger Gale (Conservative, North Thanet)

Order. We are debating rates of climate levy, not the future of aviation in the UK. I appreciate that the two are to some degree related, but we need to come back to the debate in hand.

Justine Greening (Conservative, Putney)

Thank you, Mr Gale. I was musing the same thoughts as I listened to that intervention. I am sure that the hon. Member for Edinburgh South will take an interest in the Department for Transport’s aviation strategy as that is developed over the coming months.

In response to the questions asked by the hon. Member for Bristol East about what the green agenda means to the Treasury, she is right that we want to see environmental tax form a bigger part of the tax base. I was before the Environmental Audit Committee yesterday talking about how we plan to approach the matter. We held workshops with a variety of stakeholders earlier this year, to get their views on the principles from which we should work. We will wait to see what the Environmental Audit Committee report proposes for how it should be approached. My sense is that we need three principles. First, that the Government make it explicit that the tax is intended to address environmental issues. Secondly, that the tax should be obviously structured in order to achieve a behaviour change. Finally, that it should be about achieving a change in company or personal behaviour.

It is interesting to go back to the measure on road tax in 2008. That included a change to pre-2001 cars that the Chancellor said was about the environment, so technically that first principle was met. It was structured to bring those cars into the banded system, so technically the second principle was met. However, it had no ability to change behaviour, because it was about taxing a retrospective decision. My argument at the time was that it was not actually an environmental tax.

The hon. Member for Bristol East asked, interestingly, about our limited list of environmental taxes. I decided to look at how other people had defined environmental tax. The hon. Lady is right that the Office for National Statistics has a definition and the OECD has one. I wondered what my definition would be from that starting point. Interestingly, I took exactly the same view as the hon. Lady’s colleague, the right hon. Member for East Ham (Stephen Timms), in his response to my right hon. Friend the Member for South West Surrey (Mr Hunt), when he asked for a list of what the previous Government saw as environmental taxation.

I recognise that the next step we need to take is to set out the baseline. The hon. Lady will be aware that the current basic list of absolutely agreed environmental taxes was increased by two in the Budget. One is the carbon price floor and the other the carbon reduction commitment. The proportion of the tax base that shifts from non-environment to environment under that initial definition will go up from about 0.6% this year to 1% by 2015-16, when the carbon reduction commitment and the carbon price floor start to kick in more. We are moving in the right direction, but we will continue to work on this agenda. We will make a statement on how we plan to approach the issue. I hope that that addresses some of the hon. Lady’s concerns.

There is a debate about fuel duty, and I challenged the Environmental Audit Committee for its views. There are environmental aspects, because as fuel duty and the price of fuel rise, people are more likely to think that they cannot afford to use their cars, but it is certainly not structured with tackling the environment in mind. Fuel duty has been in place for years; it started long before carbon emission and road pollution went to the top of the agenda. To my mind, it is an environment-related tax, but it is not, per se, a purely environmental tax. The Environmental Audit Committee will doubtless have something interesting to say about it, and I look forward to its report.

Clause 23 increases the climate change levy in line with RPI inflation from 1 April 2012. The new rates will apply to the supplies of taxable commodities made to business and the public sector on or after that date. The rates are being increased to ensure that the climate change levy maintains its environmental impact by encouraging business to reduce energy usage. Consistent with previous increases, the rates are being announced a year before they come into effect to enable business to prepare for the change.

The Committee will be aware that the climate change levy is designed to encourage the efficient use of energy and reduce emissions by creating incentives to source electricity from renewable sources. The tax ensures that the UK fulfils its obligations under the energy products directive. The climate change levy is a UK-wide tax, chargeable on supplies of electricity, gas, solid fuel and liquefied gases to business and the public sector. It remains an integral part of the UK’s climate change and energy policy framework to meet legally binding international and domestic carbon-abatement targets. The main climate change levy legislation is to be found in schedule 6 to the Finance Act 2000, and in the Climate Change Levy (General) Regulations 2001.

In the Budget, we announced the introduction of a carbon floor price from 2013. It will be introduced by amending schedule 6 to the Finance Act 2000, which will be done under clause 77 and schedule 20. Clause 23 does not impact on clause 77 or schedule 20, and vice versa. I move that it stands part of the Bill.

Clause 24

Kerry McCarthy (Labour, Bristol East)

Clause 24 repeals the rise in the aggregates levy scheduled for this April; the levy will therefore remain unchanged from last year. I understand that this is being done for the benefit of Northern Ireland’s aggregates industry.

The aggregates levy was introduced by the Labour Government in 2002 as a behaviour-changing environmental tax. It was intended to encourage the use and development of alternative materials, as well as the more efficient use of aggregates. That is important for the environment, because aggregate extraction creates various forms of pollution, including noise, dust and visual intrusion, as well as having an impact on biodiversity. The levy is designed to ensure that the price of aggregate reflects those environmental costs. At the same time, we introduced an aggregates levy credit scheme for Northern Ireland because of specific concerns about Northern Ireland’s border with the Republic of Ireland and the different impact that the tax would have there.

The Government were seeking approval from the European Commission to extend the scheme under state aid rules, but I understand that the current state aid approval has been annulled by a European Court judgment, which has led to the scheme being suspended. Would the Minister update us on any talks being held with the European Commission on the future of the aggregates levy credit scheme? If the scheme cannot be continued under European law, do the Government intend to continue raising the aggregates levy?

As we heard in our debate on clause 23, the coalition agreement sets out the Government’s objective of green taxes rising as a proportion of total taxation. I appreciate that the decision on the aggregates levy may have been unavoidable, but it will have an impact on the Government’s attempts to achieve that objective. What assessment has the Treasury made of the effect of that setback? Should we expect a rebalancing of green taxation towards other environmental taxes, or have the Government suspended that aim while the matter is being considered?

Alongside the aggregates levy, the previous Government introduced the aggregates levy sustainability fund, which aimed to reduce the environmental impact of aggregate extraction. It provided funding for projects that research ecosystems affected by aggregates extraction; repair and conserve sites of historic importance; and improve the land and environment impacted by extraction. As a result of the Government’s spending review last year, which hit the Department for Environment, Food and Rural Affairs particularly hard, the Department has discontinued that fund.

When the previous Conservative Government introduced landfill tax in 1996, they also created the landfill tax credit scheme, which the Labour Government later reformed into the landfill communities fund. That allowed landfill operators to divert the proceeds of landfill tax directly towards environmental projects, and it was considered a key part of achieving the stated objectives of landfill tax, which included encouraging more sustainable waste management practices. Although the aggregates levy sustainability fund was not funded in the same way, it had the same purpose of reinforcing the objectives and benefits of the aggregates levy. It ensured that a proportion of the revenue from the aggregates levy—around 10% since 2003—was spent directly on restoring and improving the environment in areas that were affected by aggregates extraction.

The Department for Environment, Food and Rural Affairs carried out a review of the aggregates levy sustainability fund, and found that it had provided value for money and delivered against its objectives. The review said:

“the ALSF will not have achieved its full potential if, on 31 March 2011, the activity and the collaboration it has galvanised simply stop.”

The previous Government were clear that the aggregates levy was an environmental tax. Now that the fund has been stopped, and all revenue from the levy goes into general spending, many people will believe that the aggregates levy exists only to raise revenue. Can the Minister tell the Committee whether the Government believe that the aggregates levy is an environmental tax, or merely a revenue-raising measure? Does she not agree that the aggregates levy sustainability fund was an important way of reinforcing the declared objectives of the aggregates levy? Have the Government made any assessment of how the levy’s objectives will be impacted by the loss of the fund? Did the Government consider any alternative ways of providing at least some of the funding for the aggregates levy sustainability fund, such as a tax credit arrangement along the lines of the landfill communities fund?

Justine Greening (Conservative, Putney)

Clause 24 repeals the increase in the aggregates levy, which we see as an environmental tax, that would have come into effect from April this year. That has the effect of freezing the rate at £2 per tonne. The Government have decided to keep the rate at that level to avoid placing an additional burden on Northern Ireland quarries following the suspension of the aggregates levy credit scheme in Northern Ireland, which has significantly increased their costs.

Steve Barclay (Conservative, North East Cambridgeshire)

One of the flaws of the levy is that it does not address the impacts on local road infrastructure. In places such as the fens and the area around Mepal, which I represent, there is a massive increase in the movement of lorries as a result of the extraction of aggregates, but the community is not reimbursed for that with road schemes. We see a precedent in Northern Ireland for allowing local areas some sort of compensation. From a revenue perspective, we can also see greater scope for the Treasury in the proposed increase to the levy. I fully appreciate that Treasury Ministers will never be willing to give up revenue in a Committee in this way, but will the Minister at least ask her officials to write to me, setting out how much revenue has been raised in Cambridgeshire from the aggregate levy over the past three years, and what the forecast is, given the proposed expansion? Will she also ask officials to look at some sort of scheme involving reimbursement for road infrastructure, where particular communities, such as those in Sutton, are seeing massive increases in lorry traffic?

Justine Greening (Conservative, Putney)

My hon. Friend makes an important point, and I have no doubt that officials will write to him in response. The aggregates levy sustainability fund was predominantly used for environmental measures, but we can now ensure that it is used to fund broader public services, including infrastructure. I am sure that officials can set out some of the details that he has asked for; if that is possible, we will get them to him.

On 9 September 2010, the European General Court annulled state aid approval for the aggregates levy credit scheme in Northern Ireland, which the previous Government put in place. The Government accordingly had to suspend the scheme with effect from 1 December 2010. That scheme provided an 80% relief from the levy to quarries in Northern Ireland that committed to making environmental improvements to their operations. Following the scheme’s suspension, those quarries became liable for the full levy rate of £2 per tonne, instead of the relieved rate of 40p per tonne.

The aggregates levy credit scheme has brought about significant environmental improvements in the quarrying sector in Northern Ireland. The Government are committed to reinstating the scheme at the earliest opportunity, and I can assure the hon. Member for Bristol East that we are working with the Commission and the Northern Ireland Government to do exactly that. In the Finance Act last year, the previous Government announced and legislated for an increase in the rate of aggregates levy to £2.10 per tonne from 1 April 2011. However, given the suspension of the credit scheme, it would be inappropriate to go ahead with an increase in the rate of the levy, because it would place further pressure on quarries in Northern Ireland.

The clause would freeze the rate of the aggregates levy at £2 per tonne. That would affect 786 traders registered for the aggregates levy—mainly quarry owners—and would result in a loss to the Exchequer of £15 million in 2011-12. Freezing the rate in such a manner is an extraordinary step taken in extraordinary circumstances. To ensure that the levy continues to achieve its long-term environmental objectives, the rate needs to increase in line with inflation. It is our intention, therefore, to go ahead with the rate increase to £2.10 on 1 April 2012.

As I have stated, the Government are committed to reinstating the aggregates levy credit scheme at the earliest opportunity. My officials have worked with the Northern Ireland Executive and the quarrying industry in Northern Ireland to provide evidence to the European Commission to support a new decision to give state aid approval to the scheme. I have spoken to Northern Ireland Ministers about their support for such a decision, so that we can understand and agree on the best approach. We are legislating elsewhere in the Bill to enable the introduction of a new scheme as soon as state aid approval is received.

The hon. Lady asked about the abolition of the aggregates levy sustainability fund. Although that fund is coming to an end, other Government funding for environmental projects will continue. We have committed to increasing environmental spending by 21% by 2014-15. That includes spending on flood defences, new low-carbon technologies, and a pioneering commercial carbon capture and storage demonstration plant. The green investment bank is being developed, too. In view of the circumstances, continuing at this time with the aggregates levy increase scheduled for 1 April would be inappropriate.

Clause 25

Kerry McCarthy (Labour, Bristol East)

The clause increases the rate of landfill tax by a further £8 from 1 April 2012, which continues the previous Government’s policy of increasing landfill tax by £8 per year until 2014 and establishing a minimum level of £80 for the future.

I want to ask the Minister about avoidance of the tax. Since the increase to £56 per tonne this year, there have already been reports of increased evasion activity by businesses that are illegally dumping waste in the wrong sites. Swindon council, for example, has recognised that problem, and it has had to impose a crackdown this year. As landfill tax is a green tax, avoidance of the tax should be encouraged, while evasion must be stopped. What assessment has the Treasury made of the increased likelihood of evasion of landfill tax, following the increase proposed for 2012? What measures has the Minister taken to prevent that?

As I have mentioned, the landfill communities fund is an essential part of the landfill tax. It ensures that, in effect, a proportion of the revenues raised from the tax are diverted directly into environmental projects, which strengthens the ability of the landfill tax to achieve its environmental goals. In 2010, the previous Government increased the value of the landfill communities fund in line with inflation, and the current Government have done the same in this year’s Budget. However, they have said that future decisions on the fund’s value will be dependent on the level of unspent funds held by environmental bodies. What assessment have the Government made of the level of unspent funds held by such bodies? What representations has the Minister had from them since the announcement of her decision? Finally, does she not agree that if the Government increase landfill tax according to the previous Government’s plans, but then increase the landfill communities fund by a lesser amount, the tax risks being seen as merely revenue raising, rather than as a tax with genuine environmental objectives?

Justine Greening (Conservative, Putney)

Clause 25 increases the standard rate of landfill tax from £56 a tonne to £64 a tonne with effect from 1 April 2012. The landfill tax has been immensely successful in reducing the amount of waste sent to landfill. Since 1996, when the tax was introduced, the amount of waste sent to landfill has more than halved; it has gone from 95.8 million tonnes to 43.9 million tonnes. The benefits of that reduction are twofold. First, the economy benefits from our making better use of valuable resources, rather than simply tipping them into a hole in the ground. Secondly, greenhouse gas emissions from decomposing waste are reduced. Due to the reduction in waste sent to landfill, direct emissions from waste in 2011 are projected to be 2.6 million tonnes of carbon dioxide equivalent lower than they would have been if there had been no change. Furthermore, the UK is within the targets for the reduction of municipal waste sent to landfill set out in the landfill directive, meaning that there is little risk of incurring the substantial penalties that would be triggered if we fell short of the targets.

Ian Mearns (Labour, Gateshead)

Has the Minister considered whether the decision of the Secretary of State for Communities and Local Government to do away with penalties for people who misuse the recycling and refuse collection systems in their streets will have a detrimental impact down the line on the Government’s targets on landfill? I know that domestic waste constitutes only 8% of waste that goes to landfill, but the decision potentially sends a negative message to the public about the importance of recycling.

Justine Greening (Conservative, Putney)

If we want to influence the public’s behaviour, one key aspect is often getting some sort of buy-in. It is probably fair to say that on balance many communities felt that the approach the hon. Gentleman mentions was disproportionate.

The hon. Member for Bristol East talked about fly-tipping, and we all recognise that it is a huge antisocial problem that affects communities, landowners and regulators. We aim to reduce fly-tipping through better prevention, detection and risk-based enforcement. Local authorities in England reported an 18.7% decrease in reports of fly-tipping incidents in 2009-10 compared with the previous year. In the same period, they carried out 2,460 prosecutions against suspected waste offenders, 97% of which were successful.

Ian Murray (Labour, Edinburgh South)

The Minister draws attention to an incredibly important point, which was highlighted only this week on the Robert Burns estate in my constituency, because dumping has become far more prevalent in Edinburgh since the council took away the free uplift service for household items. It now charges £45, which means that people are dumping their goods rather than having them uplifted. Part of this is about whether there is enough support for local government to put in place measures to ensure that the landfill tax does not become a burden, and whether there are systems in place to enable them to allow residents to recycle and reuse goods.

Justine Greening (Conservative, Putney)

As a London MP in a borough that, I think, charges substantially less for that service, I cannot comment directly on the case that the hon. Gentleman has raised. Whether the service is value for money is a matter for his local community. I can assure him that the Government will continue to tackle fly-tipping vigorously, wherever it is found. Local authorities and the Environment Agency now have powers to seize vehicles suspected of involvement, but clearly local authorities need to work with communities to ensure that they make common cause on bearing down on fly-tipping. I have no doubt that successful approaches will vary from community to community across the country.

The issue is important, because if waste is not sent to landfill, it must go somewhere else. To provide certainty for the waste management industry, so that it can invest in infrastructure for alternative means of waste disposal, the Government announced in the Budget last year that the standard rate of landfill tax would increase by £8 a tonne each year until 2014. That landfill tax escalator will help the Government in their goal to reduce the amount of waste sent to landfill, and in working towards a zero-waste economy where all resources are fully valued, both financially and environmentally.

The Government also confirmed that the standard rate of landfill tax would not fall below £80 per tonne between 2014 and 2020, so businesses can have the confidence to invest in new waste treatment facilities, safe in the knowledge that it will not suddenly become cheaper in the future for waste to be sent to landfill again.

Stella Creasy (Labour, Walthamstow)

It would be useful for the Committee to get a sense of where the Government think using taxation to affect behaviour works, and where they do not. We had a debate last week about using taxation of high-strength alcohol to tackle problem drinking. My hon. Friend the Member for Edinburgh East mentioned the concerns that many of us have about fly-tipping in our constituencies, yet I note the Minister’s reluctance to look at whether taxation might be used there. It might be useful if she set out the Government’s thinking on where nudge, shove and, perhaps, indifference come in.

Justine Greening (Conservative, Putney)

The Government are extremely interested in understanding how tax can affect behaviour—far more interested, dare I say, than the previous Government were. I understand that the hon. Lady was not in Parliament then, but I was. One of the problems under the previous Government, particularly in relation to green tax, was their highly controversial plans on road tax. People who had bought a car before 2001 suddenly faced huge rises in their vehicle excise duty, apparently to make them change their behaviour when it was impossible for them do so because they already had the car. That sort of approach really damaged people’s trust in green taxation. I think what the hon. Lady is saying is that we probably need to learn from those issues and, as I would see it, huge mistakes, and realise that if we are to change behaviour, it has to be behaviour that people have not exhibited yet. We cannot change past behaviour. That is a philosophical debate that she may want to have, but for most people that would seem like common sense.

Ian Mearns (Labour, Gateshead)

I am interested in what the Minister is saying. She seems to be suggesting that bringing in measures that have a retrospective impact is something that the Government are disinclined to do. I wonder whether she has spoken to her right hon. Friend the Secretary of State for Education about that.

Justine Greening (Conservative, Putney)

The hon. Gentleman’s question was so vague as to be impossible to answer. I have no doubt that my right hon. Friend the Secretary of State for Education has his own interesting views on the use of the tax system to change behaviour. We have already debated some important clauses on alcohol, which I hope the Committee welcomed, that do just that. We continue to learn, as many Governments across the world do, about the best way to use taxation, among other policy measures, to get the right sort of behaviour and to achieve the right policy objective.

The other complication is that everywhere is different. One of our debates within the EU—I do not want to stray too far from the amendment paper—is that different countries and different communities have a different sense of what is fair and a different propensity to change their behaviour. One of the added complexities is that there may be no consistent approach across countries that we can adopt. It will be up to individual countries to understand their electorate and how they can work with the grain of their electorate’s human nature, using policy to change behaviour. The Conservative party has always understood that, because we have understood that freeing the lowest earners from income tax, for example, means that the link between effort, reward and work is strengthened. Perhaps I should now make some progress on the clause after that interesting interlude.

Pamela Nash (Airdrie and Shotts) (Lab) rose—

Roger Gale (Conservative, North Thanet)

I call Pamela Nash.

Pamela Nash (Labour, Airdrie and Shotts)

It is a pleasure to serve under your chairmanship, Mr Gale; I particularly appreciate the fact that you got my name right the first time.

I would like to expand on what the Minister has been saying about the effect on behaviour. My constituents and I would like to know what evidence there is so far that the measure is having an effect on the closure of landfill sites and is changing how we deal with our waste. In Greengairs in my constituency, there is one of the largest landfill sites in Europe, and there is no sign of that winding up its functions anytime soon.

Justine Greening (Conservative, Putney)

I have outlined to the Committee just what an impact the landfill tax has had. Clearly, we have not got rid of landfill—there is still landfill—but since the measure was introduced in 1996, we have seen a dramatic reduction in the amount of waste going to landfill. There is a broader debate, which we probably should not have now, about people’s carbon footprint and general amounts of waste, as well as what proportion of that waste can be landfilled.

The local government settlement in the recent spending review includes an allocation reflecting the costs of waste disposal for local authorities. I am pleased to report that as the shadow Minister, the hon. Member for Bristol East, mentioned, we have increased the value of the landfill communities fund, in line with inflation, to £78 million. That means that communities in the vicinity of landfill sites, such as that of the hon. Member for Airdrie and Shotts, will continue to benefit from spending on projects that improve the environment in their area.

Kerry McCarthy (Labour, Bristol East)

Will the Minister concede, however, that although the value of the fund has been increased in line with inflation, it has not kept pace with the rise in the levy, which has been increased by an additional £8—more than inflation?

Justine Greening (Conservative, Putney)

What we are trying to do with the Budget overall is to achieve the principal objective of tackling the deficit and a secondary objective, similarly vital, of stimulating growth—and we still want to make progress on our ambition of being the greenest Government ever. We are trying to find a balance between those different objectives; they are all ultimately related. We have increased the value of the landfill communities fund in line with inflation, so in real terms it will be able to be as powerful and effective as it has been in the past.

Other changes to the landfill tax are taking place at the moment, and I will update the Committee on those. The Government are in the process of devolving the landfill tax in Scotland and, following the conclusion of proceedings on the Scotland Bill, the landfill tax will be disapplied in Scotland from 2014. The Scottish Government will be given a power to introduce their own tax on waste disposed to landfill and will be able to set the rate or rates of that tax as they wish. I am sure that that will be of interest to Scottish members of the Committee.

The landfill tax has proved extremely successful in reducing the amount of waste sent to landfill in this country. The annual rate increases until 2014 have been welcomed by both industry and environmental groups, and I have to say that it is no mean feat to get a welcome from both of those at the same time.

Clause 26

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss Government amendments 102, 103, 10 to 70, 104, 71 to 93, 105, 106 and 94 and that schedule 2 be the Second schedule to the Bill.

David Hanson (Labour, Delyn)

I will kick off, if I may. Clause 26 and the amendments to it are extremely complex. I will explain our concern and why we do not support clause stand part. It is not that we are against the principle that the Minister is seeking to advance with the clause, but we do feel strongly that there is concern about the complexity of the clause, its practicality and its objectives as a whole. Clearly, it is extremely important that we get this right.

I am grateful that the Exchequer Secretary—this is a compliment to the Government—consulted on the clauses in the Bill, in December. As I look at the Bill today, I see that it was published in the name of the Chairman of Ways and Means, the Prime Minister and others, including the Exchequer Secretary himself, on 29 March 2011, following that consultation.

None the less, following the consultation and the printing of the Bill, I found myself last week facing 88 to 100 amendments to the clause from the Minister—it was 88 at my last count, but it may have gone up since then—in what is already a complex matter. Although the Government consulted on and produced the Bill as it is currently drafted, the Minister has tabled 88 amendments, so it is important that we listen to him. I will outline some of the concerns that have been expressed to me. We need to see whether the objectives that we share are best served by the structure and framework of the clause and schedule as they are currently drafted.

We tabled amendments to the clause after speaking to and receiving submissions from a range of tax experts. We concluded that the clause is unnecessarily complicated, does not do what it says it should and, even after the amendments, is not clear about its objectives. As I said, I want to make it clear that we support the policy purposes behind the measure, which are broadly to prevent abuse of employee benefit trusts and employer-funded retirement benefit schemes.

Let us look at what the Minister himself said. On 27 January, he spoke at the Financial Executives Networking Group. He said:

“In short, we need a simpler, more stable tax system.”

He went on to criticise the previous Government for “tinkering” and promised that he wanted

“stability and certainty... at the heart of our approach.”

Ian Murray (Labour, Edinburgh South)

My right hon. Friend talks about the complicated nature of this clause. Surely that flies in the face of the Government’s challenge to cut red tape for businesses. Does he have any comments on that issue?

David Hanson (Labour, Delyn)

As the Committee knows, before my hon. Friend came to the House, he ran a number of successful businesses and knows only too well the difficulties that red tape causes. Once again, I genuinely want to offer the hand of friendship to the Minister on this particular clause. I want him to come back on Report with a well-thought-out and detailed proposal that meets the Minister’s objectives and that we can support, subject to discussions. If, as he says, he wants a simpler and more stable tax system, let me refer him to amendment 105. I defy any member of the Committee, from any party, to say how this will be applicable in their constituencies today. It says:

“554Z16 Employer etc to be treated as relevant third person

(1) If B takes a step within section 554Z17 or 554z18, Chapters 1 and 2 have effect in relation to the step—

(a) as if B were a relevant third person for the purposes of section 554A(1)(d), and

(b) as if the step were a relevant step within section 554B (if it would not otherwise be).

(2) For the purpose of determining whether Chapter 2 applies by reason of the step, Chapter 1 has effect—

(a) as if sections 554F to 554N, 554R to 554T, 554V and 554W were omitted,

(b) if the step is within section 554Z17, as if sections 554P(s)(d), (3) and (4) and 554Q(1)(c) and (d), (1A) and (1B) were omitted.”

I defy any Government Member or anyone in this Committee to stand up and say that they will go back to their constituency and say to their local businesses, “Please ensure you do not contravene amendment 105 to schedule 2, page 96, line 29.” The Minister says that he wants tax simplicity; I simply say to him that that is just one example of many within the 88 amendments that he has tabled today. I defy him to tell me in one sentence what amendment 105, which I have just read out, means. I will certainly give way to him if he wishes to intervene.

Nic Dakin (Scunthorpe) (Lab) rose—

David Hanson (Labour, Delyn)

My hon. Friend has obviously studied the amendment in great detail, and I am sure he will now give me a simple version of it.

Nicholas Dakin (Labour, Scunthorpe)

I thank my right hon. Friend for giving way. It is a pleasure to serve under your chairmanship, Mr Gale. I am as perplexed as my right hon. Friend about the amendment that he read out. In his summary of the clause, Colin Ben-Nathan of the Chartered Institute of Taxation said:

“We support the government in tackling tax avoidance involving rewards paid via third parties, but we think the legislation in the finance bill is far too complicated and risks creating problems as well as solving them.”

Is that not what my right hon. Friend is proving in his speech today?

David Hanson (Labour, Delyn)

That is my intention. It is not because I want to cause the Government difficulty on the clause, because I genuinely do not. We support a number of anti-avoidance measures, and this is one of them, but the representations to which I shall refer and which the Minister has received, and the fact that he has tabled 88 amendments to the clause in the past week alone, show that the clause is not simple or understood, and does not catch his concerns clearly and simply.

The Minister said on 27 January:

“It’s our intention to put simplicity and stability first.”

Perhaps it is because I am an arts graduate and do not have the same level of financial skills as the Minister, but I do not understand how anyone can understand amendment 105. It is about growing businesses, but the only business it will grow is accountancy, because accountants will have to help businesses to deal with it.

Julian Smith (Conservative, Skipton and Ripon)

The right hon. Gentleman is giving the Minister a hard time, but he is making an excellent general point about over-regulation. I agree with him, and urge the civil service to ensure that whenever it drafts legislation it bears in mind that business people are often incredibly busy and have little time to read the small print. Drafting should be as simple as possible.

David Hanson (Labour, Delyn)

I am grateful to the hon. Gentleman for his support. Let me clarify my point for Members on the Government Benches, because it is them and the Minister whom I must convince. I do not disagree with the Minister’s objectives in clause 26 or schedule 2, but I worry about the lack of simplicity and practicality, and about whether he is starting from the wrong end of the telescope in trying to achieve his objectives. My offer to him is simple. We have tabled an amendment to delete the clause, and it would be welcome if he would withdraw the clause and schedule 2, and introduce on Report, which is a maximum of seven or eight weeks away—it will be at the end of June or in early July—a redrafted clause and a simplified schedule that provide clarity.

The hon. Member for Skipton and Ripon made some good points. We can have discussions outside the Committee, as we always do if we can, as I did when I was a Minister, and as I am sure the Exchequer Secretary will, now that he is a Minister. We can come to an agreement not to oppose the clause or the schedule on Report, and we will have clarified them for the many outside agencies that have made representations to me and to other Committee Members, and addressed their concerns.

As the hon. Member for Skipton and Ripon said, the provision is a dog’s breakfast. If it were not, the Minister would not have tabled 88 amendments to the clause. We are all busy people, and I defy anyone in the Committee who is scrutinising the Bill to be able to read all 88 amendments, to cross-reference them to the 59 pages of the schedule and to the clause, and to put them into context for the people we represent and the businesses that will have to deal with the Bill when it achieves Royal Assent in a few months. I defy anyone to tell me what those 88 amendments mean downstream.

All I am saying to the Minister is that if there is a need for 88 amendments after a consultation, which ran from December until the Bill’s publication on 29 March, can he give me a guarantee that he will not table any more amendments to the provisions? This Committee is about scrutiny and deciding whether to implement a policy that impacts on people’s businesses and lives; the approach that he has taken is not a good way to make policy and legislation.

Steve Barclay (Conservative, North East Cambridgeshire)

Does the right hon. Gentleman believe that such amendments are a new development in the civil service or, from his ministerial experience, does he recall a precedent for such things? Also, one of the difficulties that I am sure officials face is that they are starting not with a blank sheet, but a complex tapestry of existing legislation. Perhaps if the Government had not inherited such a complex tax structure as a starting point, the tabling of amendments would have been simplified.

David Hanson (Labour, Delyn)

I think this is the 36th Bill I have worked on as a Member of Parliament in my 19 years in the House. I might be wrong; it might be 35 or 37. During my 12 years as a Minister, I probably took through 21 or 22 Bills, and I can genuinely say to the hon. Gentleman that I never once tabled 88 amendments to a single clause. I cannot speak for other Ministers in other Departments, because ministerial life tends to mean that an individual focuses on what they are doing themselves. However, I cannot recall ever tabling 88 amendments to a single clause after a period of consultation and, indeed, after trumpeting the fact that the consultation was positive.

Richard Harrington (Watford) (Con) rose—

David Hanson (Labour, Delyn)

I give way to the hon. Member for Watford, who will undoubtedly try to blow my argument out of the water by giving an example of something done by previous Labour Ministers, but that will not hide the fact that the Minister knows he is making a hash of this and that the policy needs to be re-thought properly. The 88 amendments are not appropriate and, whatever the hon. Gentleman says in his intervention, it will not remove the Committee’s concerns.

Richard Harrington (Conservative, Watford)

I am grateful to the right hon. Gentleman for giving way. In fact, I was just going to comment on how well he has done following his arts degree. People may say that arts degrees are a waste of time, but I point to the right hon. Gentleman as an example of why that is absolutely not true. His erudition is very well known to the Committee, Mr Gale, as I am sure you are aware. I should also say that it is a great pleasure to serve under your chairmanship. Having done a law degree many years ago, which I accept was a complete waste of time for myself and the educational institution involved, I feel it is my duty to point out that, from memory—as a former law student, one retains things in one’s mind—in 2008 alone, the Government tabled 226 amendments to the Finance Bill. I cannot quite remember; it may have been 227 or 225.

David Hanson (Labour, Delyn)

That proves solidly that whatever a law degree does, it allows one to read a note passed by someone else. My arts degree may well have been very useful, but one of my contemporaries won an Oscar, and one presented “Blue Peter,” so unfortunately I feel that I have failed in only becoming an MP.

Ian Mearns (Labour, Gateshead)

Much as I agree with my right hon. Friend about the dilemma that we face in scrutinising legislation in an appropriate way when so many amendments have been tabled, the situation is eminently preferable to having 234 amendments tabled to a Bill on Report, as happened with the Localism Bill in the past few days. I suppose that this is the best time for scrutiny. However, from a drafting perspective, I wonder whether we should not just scrap the whole schedule and bring it back amended in the ways proposed by the amendments. Otherwise, it is difficult for us to try to scrutinise it properly, line by line, amendment by amendment.

David Hanson (Labour, Delyn)

My hon. Friend backs up the points I am making. The hon. Member for Watford and I have had some fun. There may have been 225 or 226 amendments to the Finance Bill in 2008. I do not know; I was doing something else at the time. I expect that if the hon. Gentleman looks at the Hansard for that day, he will find that the Minister or one of his colleagues made a point on the subject at the time.

Proposing 88 amendments to the schedule indicates that the Minister is not confident that what he published on 29 March meets the objectives he set. I have had representations—I shall read them out in a moment—to say that even post-amendment, the schedule and the clause will not do what the Minister wants. The provisions will still be excessively complex for the people who wish to interpret them. That is a real issue that we need to explore.

Alec Shelbrooke (Conservative, Elmet and Rothwell)

I wonder whether the right hon. Gentleman’s contemporary who won the Oscar was the previous Chancellor of the Exchequer.

David Hanson (Labour, Delyn)

I will not go down that route. That was an off remark, but I cannot think of anything witty to say; that is the way of the world.

Let me quote to the Minister the views of the Institute of Chartered Accountants, as set out in the briefing that it sent to all Members of the Committee last week:

“Draft clauses were published for comment on 9 December 2010. At that stage, the draft clauses were only 20 pages long. Although we appreciate that HMRC have listened to the concerns raised and made extensive changes to the draft clauses, the fact remains that the legislation in the original Bill has grown to 59 pages.”

That is the key point. It continues:

“On 10 May 2011 the Government tabled 15 pages of amendments to the Finance Bill provisions. These were published the following day and we have not had time to review them in detail, but our initial reading is that although they make various improvements they will add significantly to the length and complexity of the Finance Bill legislation….We doubt these latest amendments will be the end of the changes, and believe that further amendments will be required as further problems emerge. We appreciate that power is given under s 554X to make further exclusions by way of statutory instrument but this is a wholly unsatisfactory way of drafting tax legislation.”

I repeat that it thinks this

“a wholly unsatisfactory way of drafting tax legislation”.

That is being said of the provisions even after all the amendments brought forward by the Minister to date are made.

Comments made before the amendments were brought forward include the following from Grant Thornton:

“We recognise the policy reason behind the introduction of this legislation. However, as drafted, it has an adverse impact on many commercially driven remuneration packages.”

It adds, backing up the points that my hon. Friend the Member for Scunthorpe and I have made:

“The legislation is also incredibly complex to understand”.

It particularly refers to the Exchequer Secretary’s speech of 27 January, in which he said that simplicity was top of the agenda.

The Government’s decision last week to table 88 amendments shows that the clause is not workable. I am not clear yet whether the 88 amendments will meet the objectives and concerns raised. I want to give the Minister the opportunity to withdraw the clause, and come back with something more on Report.

The Chartered Institute of Taxation initially asked:

“Why is it necessary to have 59 pages of legislation?”

Our discussion is about clause 26 and the schedule as published—59 pages of legislation. That has to be interpreted by small businesses and others across the country to ensure that they do not contravene the legislation, either deliberately or accidentally. It is complex, and it will grow with the inclusion of the amendments that were tabled last week. The institute said:

“The legislation already envisages multiple tax avoidance tests and therefore a clearance system will be needed.”

It continued:

“Is the Government not in effect introducing a GAAR (general anti-avoidance rule) for employment taxes, given the very wide scope of the legislation in principle, but one to which numbers of additional conditions have been superimposed. This would seem to pre-empt the…review”

that is coming up shortly. It went on:

“The real concern here is that employers will struggle with these rules in terms of time/cost and the administrative burden, this of course will lead to widespread inadvertent non-compliance. This will be done through accident rather than through design.”

The Minister has a duty to answer those criticisms in light of the amendments he has tabled; the institute has expressed its concerns. When the dust has settled and the schedule and the clause are approved, Her Majesty’s Revenue and Customs will have to monitor and ensure compliance. I worry about the complexity of those issues for HMRC staff across the country and in the constituency of my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East. They will have to look at whether the rules are being monitored in an effective way. When the Bill is given Royal Assent, small businesses will have to agree to the regulations, understand them, implement them and make sure that they are not contravening them. The Bill is currently nothing like simple enough to achieve those objectives.

In the Finance Bill Sub-Committee of the Lords Select Committee on Economic Affairs on Wednesday 4 May, John Whiting of the CIOT, when asked about disguised remuneration, said:

“We have just submitted to the Revenue an 18-page paper on remaining concerns. There is an element of ‘if I wanted to get there I wouldn't start from here’ about these provisions. This has developed into so much detail”.

The 88 amendments will not help with that. He went on to say that the provisions were in danger, at

“59 pages or wherever we are up to, of starting to create further loopholes that people will try and exploit or inadvertently block things.”

He continued:

“We are always in favour, in principle, of having clear legislation that we can say, ‘There is the legislation, that's it’.”

That backs up the need for the simplicity that the Minister himself seeks. In his speech on 27 January, he said that the world would be rosy in the future. However, Mr Whiting said:

“We always prefer tax by law and not tax by concession or whatever. But I think now we are looking at 59 pages and saying, ‘Whoa, this is just getting too much’.”

The Chartered Institute of Taxation is saying:

“Whoa, this is just getting too much.”

Now, I accept that that is not a technical phrase. I may have an arts degree, but my skills do not translate to being able to interpret how that was said in the Committee at the time. However the phrase, “Whoa, this is just getting too much” does, I fear, indicate that—whoa!—it might just be getting a bit too much, and the 88 amendments were tabled after Mr Whiting said that.

Richard Harrington (Conservative, Watford)

I am grateful, as ever, to the right hon. Gentleman for giving way, and for quoting Latin to us. Obviously, “woah” has Latin origins. [ Interruption. ] The hon. Member for Walthamstow is very familiar with that, ceteris paribus, as she would say. The serious point that I would make, having read quite a lot of CIOT’s arguments over the years, is that its job is to say that that sort of thing is too complicated. Government have another job, which is to ensure that taxation is implemented, and not avoided or evaded.

David Hanson (Labour, Delyn)

I am afraid that my Latin is not as good as the hon. Gentleman’s.

Roger Gale (Conservative, North Thanet)

Order. I am sure that the right hon. Gentleman will wish to clarify for Hansard how he is spelling “woah”.

(Except clauses 4, 7, 10, 19, 35 and 72) - Clause 26 - Employment income provided through third parties

Roger Gale (Conservative, North Thanet)

With this we may discuss the following: Government amendments 102, 103, 10 to 70, 104, 71 to 93, 105, 106 and 94.

That schedule 2 be the Second schedule to the Bill.

David Hanson (Labour, Delyn)

It is a pleasure to be back in Committee this afternoon. When we left off this morning, I had just cited the House of Lords Select Committee on Economic Affairs Finance Bill Sub-Committee sitting on 4 May with Mr John Whiting. We were debating the merits of the phrase

“Whoa, this is just getting too much”,

which Mr Whiting elucidated to Members of another place. He said that with the 59 pages of provision, it was just getting too much,

“particularly when you need a lot more to change it. I go back”—

Richard Harrington (Conservative, Watford)

Will the right hon. Gentleman give way?

David Hanson (Labour, Delyn)

I will finish the quote and then I will certainly give way to the hon. Gentleman. Mr Whiting then said:

“The trouble is we are so far down the track I suspect we are committed to adding another half dozen pages to this 59.”

Richard Harrington (Conservative, Watford)

I am grateful to the right hon. Gentleman for giving way and to you, Mr Gale, for your patience on this matter. This will be my final intervention on the issue. I tried to contact Mr Whiting’s office at lunchtime to get clarification of what he meant by the word “Whoa”. Unfortunately, he was out at lunch, and I can only assume that he was pursuing his hobby of driving a horse and cart, he told the horse to pull up and then continued dictating his article to his secretary.

David Hanson (Labour, Delyn)

Would that that were the case. The word “Whoa” was actually uttered in Committee in another place and is recorded in Hansard. It was used not in an article, but to indicate Mr Whiting’s genuine level of shock at the number of pages in schedule 2 as constituted at the time, never mind how long it will be with the amendments—I think that there were 88 at the last count—that the Minister has tabled.

At the same sitting, Mr John Kimmer of the Association of Taxation Technicians said:

“The phrase in the draft legislation that I was particularly concerned about was, ‘It is reasonable to suppose that in essence this is a tax avoidance motive’. That, to me, is far too woolly. We have now got to 59 pages of anti-avoidance legislation and I think the point my colleague made is why not start from somewhere else and say, ‘These arrangements are fine, everything else is not’? I am sure that could be done in a lot less than 59 pages”.

Also at the sitting on 4 May, Mr Richard Murphy of Tax Research UK said:

“There is more unanimity on this table than I expected to some degree, to be honest, because I entirely agree…These are not employee benefit trusts; they are tax-cheating arrangements. Let’s be blunt about it. That is what they should be called. The way they are being sold is wrong.”

He said that in December 2004, my right hon. Friend the Member for Bristol South (Dawn Primarolo)

“simplified the taxes for this country enormously by saying all employee remuneration would be subject to PAYE. It was a fantastic move. It worked in a very clear move to clamp down on these things. This should have been covered except for specific carve-outs. I cannot understand why we have not carried on with that principle now. She was right. We need to go that way again.”

The key point is that the schedule is simply too complex for people dealing with it outside the House. The Minister may believe that he has simplified it. It consisted of 59 pages before the amendments. The number of pages may be more or less now; I have not had time to count them. However, he needs to recognise that there is real concern outside the House about the schedule and the clause.

Ian Murray (Labour, Edinburgh South)

I read the 88 amendments four times during lunch and after my face inserting itself into the bowl of soup I was having because I fell asleep, I still could not understand them. Is there not a danger that the complication that has been inserted into the legislation to deal with tax avoidance could in fact open up more loopholes as a result of the legislation being too complicated?

David Hanson (Labour, Delyn)

That is another of my key concerns. I am grateful to my hon. Friend for giving up his lunchtime to read the 88 amendments that the Minister has tabled. My purpose today is simply to say to the Minister—and I hope this answers my hon. Friend’s point—that he has some clear objectives in the clause and in the schedule to tighten up anti-avoidance legislation. However, the way in which the schedule is drafted, and the way in which, even now, because he has realised it is very difficult, he has tabled amendments to try to clarify some of the exemptions, still means that it is a very complex piece of legislation. All he really seeks to do is to ensure that he tightens up on loans that are never likely to be repaid, tightens up on assets available to an employer by putting them into a trust without the employee paying tax on them, and make sure that the £50,000 pension cap is effective. Those are the three objectives he has set himself, yet he has taken 59 pages, a schedule and a clause with 88 amendments to get to a stage where he cannot yet even give me a guarantee that he will not amend the measure still further.

Nicholas Dakin (Labour, Scunthorpe)

After I read the 88 amendments this lunchtime, I began to read the briefs that have been issued. One is from the Institute of Chartered Accountants, which succinctly picks up the points made by my right hon. Friend:

“These highly complicated rules are difficult to understand, highly uncertain in their operation, likely to be very expensive to operate and practically very difficult for HMRC to administer. Further, many employers may find themselves caught by the rules due to ignorance”.

Does my right hon. Friend share the institute’s concerns?

David Hanson (Labour, Delyn)

I do, and I am grateful to my hon. Friend for looking through the amendments this morning. Let me try to be fair to the Minister. The Treasury has, in response to the consultation, tabled 88 amendments. I want to hear from the Minister when he makes his winding-up speech whether he is satisfied that those 88 amendments answer the concerns that have been expressed about clarity, complexity and objectivity, so that businesses will understand the final version of the schedule in a workable and practicable way.

In response to the concerns expressed by the Chartered Institute of Taxation, to which my hon. Friend has just referred, the Treasury said in a press statement to the Financial Times on FT.com:

“In line with the government’s new approach to tax policymaking, the legislation was published for consultation at the end of the year”.

Good—we applaud that. It may be something that previous Governments should have done. The Treasury press statement goes on:

“The amendments are clear evidence of the government’s commitment to listening to consultation responses from representative bodies and industry experts”.

Again, let us take that at face value. The Bill was published on 29 March. The consultation took place in December last year. Consultation finished, comments were made and the Bill was published. Then, four days before consideration in Committee, 88 amendments were tabled with no real explanatory notes, trying to support the changes that the Government believed they should make. We have received submissions from a number of bodies, which I quoted this morning and will not repeat, saying that they do not believe that those amendments have made a difference, clarified the situation or eased the complexity of the legislation. I simply say to the Minister that this is an extremely complex matter and the legislation needs to be very tight and understandable so that it can be taken on board and implemented downstream.

Again, the Quoted Companies Alliance sent a very helpful brief to Members of the Committee before the amendments were tabled in which it said:

“The current draft legislation on disguised remuneration in the Finance Bill 2008 is overly complex and not sufficiently targeted. This goes against the Government’s current commitment and the coalition agreement to reduce red tape for businesses and to simplify regulation…The legislation is very difficult to understand even for experienced share scheme practitioners and is incomprehensible for many of those in companies responsible for operating the rules”—

“Incomprehensible” is a very strong word—

“This complexity, 60 pages of statute”—

It has increased by one, according to the alliance, from 59 pages—

“30 pages of explanatory notes, 19 pages of frequently asked questions, highlights the complete failure in the drafting and targeting of these provisions and a lack of co-ordination between the different sections of HMRC and those drafting the legislation”.

If the Minister wants to intervene to say that that is not factually correct and that his 88 amendments will stop the “incomprehensible” nature of the legislation, he should do so.

I am not trying to cause the Minister difficulties—we share the sentiments behind his proposals. We want to see a tightening up, because people should not have loans paid to them that that they never pay back. People should not have assets put into trust and not pay tax on them, but that can be done in a much simpler and more effective way. I will happily give way to him if he believes that his changes do not make the scheme incomprehensible as the Quoted Companies Alliance suggests before, during and after his amendments. We will happily slow down our discussions and make progress on the Bill, but I do not believe he can. If wants to give his justification, I am happy to take an intervention.

David Gauke (Conservative, South West Hertfordshire)

I’ll let you finish, David.

David Hanson (Labour, Delyn)

The Exchequer Secretary, helpful and charming as ever, will allow me to finish, so I shall progress, as they say, as there is more to discuss and examine. He will have received other briefings, such as the one that we have received from the Quoted Companies Alliance, suggesting a series of amendments. When he winds up the debate, I should like him to tell us whether all the points that have been made in the briefings have been dealt with to his satisfaction. We have a duty to explore and discuss the briefing from the Institute of Chartered Accountants in England and Wales, which states:

“We submitted a Parliamentary Briefing to members of the Public Bill Committee on 12 May 2011. This set out key concerns about these provisions.

The previous day the Government published an extensive list of amendments that have been tabled in respect of these provisions…we had not had the opportunity to review the latest set of amendments. In view of the general concern about these provisions and the requests that we have received about whether we have some more detailed comments, we have prepared this more detailed briefing”.

The ICAEW said last week that it has not had an opportunity to consider the amendments in detail, yet the Committee is being asked to consider these matters and to support amendments that will impact on all our constituents and businesses throughout the United Kingdom in a worrying way.

Paragraph 4 of the ICAEW briefing states:

“Our major concerns with these proposed rules still remain.”—

That is after the amendments were tabled—

“We believe that this legislation is still too widely targeted.”—

That is after the amendments were tabled—

“It catches too many innocent and/or commercial transactions.”—

That is after the amendments were tabled—

“It remains the case that as drafted tax liabilities will still arise in circumstances where the employee in question may receive no value from the arrangement, either when the taxable ‘relevant step’ is taken or at any later time.”

That is after the amendments were tabled. I am not here to be a mouthpiece for the ICAEW, but its members know what they are talking about, and they have a point to make. Although the briefing says that it has not received full details of the amendments, its assessment after an initial cursory glance is that they will not change anything.

I return to the Minister’s speech on 27 January this year, in which he said:

“We need a simpler, more stable tax system”.

That is what I should like to focus on today. Here is his opportunity to have a simpler, more stable tax system; withdraw the clause; withdraw the schedule; go back and talk to officials; look at the objectives he is trying to achieve and bring the measure back in a simplified and more understandable form on Report. He will have our support for that. He will then undoubtedly have the opportunity to consult the ICAEW, the Quoted Companies Alliance, Grant Thornton and a range of tax experts who are saying to me— and I am reflecting this to him in Committee—that the rules are overtly complex, do not achieve what they are intended to achieve, and will not be workable on the ground.

The ICAEW said:

“These are our views. In view of the short timescale for comments, we may return to this matter with a further a parliamentary briefing at report stage.”

It that the way to legislate? Under the Minister’s own terms, we have had consultation, amendments, a brief that people cannot comment on, and we hear that the matter might have to be looked at further on Report. If that is the case, does he intend to table more amendments on Report if the ICAEW or any other body make further comments?

I mention that because, as the Minister and the Committee know, the Finance Bill is one of the few that does not travel to another place. One hundred years ago, the House of Commons fought hard to ensure that the unelected peers in another place did not influence and interfere with financial matters, and I am proud to say that Labour MPs, although few and far between at the time, were at the forefront of arguing for reform of the Lords and for the Finance Bill to be dealt with in the Commons.

If the Minister tables amendments on Report, or if proposals are agreed in Committee, there is no revising Chamber. We are making legislation. If the ICAEW or the Minister raise concerns, the Government could table amendments on Report that might not even be discussed as a result of time constraints. I remind the Committee that the Report stage might last one or two days—I do not know, as the usual channels have not discussed it. Amendments will be tabled on a range of matters, and we may raise topics that have been considered in Committee if we want to reflect on them again. We can debate these matters all day and all night, as he knows.

It may have taken a long time to make it, but my simple point is that it is important that we get this right. The fact that the Minister has consulted on the Bill, has had to amend it and is still receiving representations saying, “We’re not happy. It’s not going to work. We support the objectives but may need to bring forward further parliamentary briefings at report stage”, as the ICAEW has said, suggests that this is not a very tight ship for the objectives and that he should look at it again.

I have received representations from Handelsbanken through McDermott Will & Emery LLP. Handelsbanken is one of Sweden’s largest banks, headquartered in Stockholm with a market capitalisation of about £13.2 billion. It is established under Swedish law, but its key consideration regarding the proposals is about shares given to its employees collectively in recognition of the integral role that they play in generating bank profits. The brief raising Handelsbanken’s concerns runs to about 11 pages, which I do not intend to read in full. [Hon. Members: “Go on.”] If hon. Friends tempt me, I may do so. [Interruption.] And I will do it in Swedish. Handelsbanken makes a serious point that the Minister should consider in point 5.6 of its submission:

“For the bank, the new part 7a presents an unpalatable dilemma. Either gross up UK employees for their tax liabilities or subject UK employees to a less favourable position than their counterparts in other jurisdictions, which may lead to less quantifiable but potentially greater costs through demotivated staff.”

Ian Murray (Labour, Edinburgh South)

I am grateful to my right hon. Friend for being so generous. However, there is not only a European dimension to this; there is an international one. There is a Chinese company called Huawei that employs about 3,500 people in this country, and is owned by its employees. Although the company is not listed on the stock exchange, each employee is offered a certain degree of shareholding, based on longevity of service and their level in the company. Companies such as Huawei that are based in this country may find this legislation very difficult in terms of who owns the company and how shareholding is constructed. So it is not just about Europe; there is an international dimension as well.

David Hanson (Labour, Delyn)

I hope that my hon. Friend will be able to develop that point further during our discussions today. There are key issues which we need to consider. There are three objectives in the legislation, as I see them. First, that loans should not be made that are never likely to be repaid; we agree that that should be tightened up. Secondly, that making assets available to an employee by putting them into a trust without the employee paying tax on them is an important issue we need to tackle. Finally, we need to look at the pension cap.

I cannot see why, with the great power of the Treasury, the Minister cannot look at legislation that deals with those three issues without the list of exemptions that he has put down in the 59 to 60, 61 or 62 pages of the schedule that he has at the moment. I return to the fact that the rules proposed are too complex. The chairman of the Chartered Institute of Taxation employment taxes sub-committee, Colin Ben-Nathan, has said:

“We think that employers will face real difficulties in trying to assess how they stand with this new legislation and that they are likely to need to take advice to arrive at a considered view.

Even then that does not necessarily mean that HMRC will agree with the view that has been taken, leaving employers open to potential uncertainty on whether or not tax charges arise and at what point. We suspect many employers will want to seek clearance from HMRC on their particular arrangements and we wonder whether HMRC…”

—this is the key point—

“…has the resources to cope and what the turnaround time will be.”

Before we sanction this legislation today, we need a clear indication from the Minister of the assessment he has from officials of the likely workload for HMRC staff, given the complexity of the clause and schedule 2. I am only reflecting views from outside the House, in a way that I hope is constructive for the Minister. If the chairman of the Institute of Taxation is saying that this will lead to a greater workload for HMRC, what assessment has the Minister made of that workload? What assessment has he made of the impact on HMRC staff? What assessment has he made of the level of resources he will raise from these measures versus the cost of enforcing them?

Nicholas Dakin (Labour, Scunthorpe)

Is my right hon. Friend aware that there is a 15% overall resource cut in HMRC, with a further 25% efficiency savings? This is a very pertinent question. I hope that the Minister is able to pick up the point my right hon. Friend is making.

David Hanson (Labour, Delyn)

My hon. Friend anticipates what I am going to say. The CSR announced by the Chancellor of the Exchequer on October 20—I quote from Tax-News.com, which is an accurate reflection of these matters—

“aims to slash public spending by GBP80bn over the next few years, and means that HMRC will see its resource spending cut by GBP300m to GBP3.2bn by 2014/15.”

The Minister has announced additional resources of around £900 million for HMRC, but overall that is replacing a cut elsewhere in the Budget. I think that it is important that the Minister answers my hon. Friend’s point about what demands businesses will place on HMRC as a result of this clause and schedule 2.

Ian Murray (Labour, Edinburgh South)

I am very grateful for my right hon. Friend’s unstinting generosity in giving way. There is a bigger issue for HMRC. I am sure that every member of the Committee has had a significant increase in constituency casework, due to HMRC cases in which the administration is either breaking down or not operating at all. A key issue is that the number of employees and staff resources at HMRC seem inadequate for what they are doing. While I appreciate the points made about an increase in resources, the HMRC offices in Edinburgh are hugely stretched. Indeed, the number of cases relating to HMRC that I get through my surgeries is rocketing. That is a concern for the public, and certainly for small businesses in my constituency, who will have to deal with the regulations and might find it very difficult to establish a conduit with HMRC.

David Hanson (Labour, Delyn)

My hon. Friend makes a very important point. Looking at the impact of the potential reductions on HMRC, one thing that has been identified by tax professionals outside the House is that they expect that efficiencies

“will be achieved largely through efficiency savings, for example by automating a number of manual processes and reducing ‘face to face’ contact between the department and taxpayers”.

I do not know whether that is accurate; I am putting it on the record so that the Minister can respond. If, however, we introduce complex schedules—I do not think anybody denies that they are complex—and new arrangements that impact on businesses, in order to tighten up two or three key issues that schedule 2 is designed to target, then people who advise businesses will tell them that they need to contact HMRC. More advice will be required, more exemptions will be sought, and more clarification will be needed. That will involve face-to-face contact. Has the Minister undertaken an assessment of the HMRC workload created by the clause and other parts of the Bill? We are concerned that it will have an impact.

Ian Mearns (Labour, Gateshead)

Considering the complexity of the schedule, has my right hon. Friend thought of asking the Minister whether he has made an assessment of the budget for training HMRC staff on its implications? The complexity of the schedule and its revisions has been reiterated by hon. Members from all parties today. How will HMRC staff be able to explain the clause to the taxpaying public?

David Hanson (Labour, Delyn)

I am grateful to my hon. Friend for his contribution, because there will be implications. There are implications in relation to HMRC staff understanding the clause and the schedule, and businesses, predominantly, understanding the clause and the schedule. The clarity in the clause and the schedule will not assist businesses. They will have to take further tax advice. Tax advisers, whose concerns over this clause have swamped my inbox with e-mails, say that it is too complicated and should be simplified.

I will go back to basics. In his response, the Minister should give a clear indication of his objectives for clause 26 and schedule 2. If his objectives are as I understand them, they are relatively straightforward and simple; he aims to tie up three loopholes. Why, then, do we have 59, possibly 60, pages to the schedule? Why do we have a clause in the Bill that brings the schedule into effect? Why do we have 88 or 90 amendments to the schedule, remembering that the Minister might table further amendments on Report, as might others? Why are we exempting a lot of business aspects while not focusing on the real issue? Why are we doing all of that when, with Opposition support, the Minister could simply bring back a revised clause that deals with the two or three issues that form the basis of the anti-avoidance measures that he is trying to introduce?

I want to make two final points before the Minister responds—or my hon. Friends make some comments. We have discussed complexity, simplicity and understanding. Aside from that, how does the Minister intend to enforce this legislation? Accountants and others have told me that it is difficult to understand, so what is the mechanism for enforcing the clause in the country at large? How will HMRC undertake its enforcement role?

Mary Glindon (Labour, North Tyneside)

Before we move too far ahead, I have another point to make about HMRC staff. A recent survey found that only 25% of HMRC staff felt proud to be working there. The effect of the cuts and job uncertainty places a lot of stress on people who already have a stressful role in dealing with the public. As we know, most people are perhaps not in the best frame of mind when they speak to tax officers. A tax officer then has to deal with a complicated issue while keeping good customer relations. I fear that those relations may be damaged further if a more complicated scheme is implemented.

David Hanson (Labour, Delyn)

My hon. Friend backs up my point. The Minister established the Office of Tax Simplification, but, if members of the Committee look carefully at the 80-odd amendments before us, he is now introducing extremely complex legislation. I am not saying that—I am not a tax lawyer, and I have not spent my life looking at tax legislation—but tax lawyers and people who have spent their entire life looking at tax legislation are saying it. They have told me that this is the most complicated piece of tax legislation they have seen in the past 10 years. The legislation comes from a Minister who established the Office of Tax Simplification and who is trying to ease burdens on businesses. He has introduced a provision that will further complicate what should be simple measures.

Tom Blenkinsop (Labour, Middlesbrough South and East Cleveland)

My right hon. Friend makes an excellent case. I read the ICAEW representation to the Committee, and it refers to proposed new section 554A(1)(c) of the Income Tax (Earnings and Pensions) Act 2003, which will introduce tax on rewards or recognition. That could potentially drag in people such as waiters and other service sector workers, who would have to pay tax on tips. Earlier we heard how the Government are trying to take more people out of tax, but, potentially, there could be a ridiculous situation in which waiters would have to fill out self-assessment forms on the tips they receive.

David Hanson (Labour, Delyn)

My hon. Friend raises a key concern, which others have also raised with me. It is a question of definition, as well as a question of enforcement. He leads me to my second and final point, which is on the problem of definition. If something is defined as employee remuneration, it should be subject to PAYE, either because it is caught now or under the retrospective legislation that was promised earlier. The new rules are trying to target something that feels like employee remuneration, but technically is not. Will a season ticket loan that is repaid monthly to cover a train ticket, for example, fall within his proposed legislation?

Ian Murray (Labour, Edinburgh South)

My right hon. Friend’s generosity is fantastic, as is his contribution to this debate. He talks about employee loans, so I wonder whether he knows the answer, or could encourage the Minister to give an answer, to this question. Will Independent Parliamentary Standards Authority regulations fall under any of these clauses?

David Hanson (Labour, Delyn)

My hon. Friend makes a point, but I will address remuneration and other issues related to MPs when we get to, I think, clause 34. I would like to know whether IPSA has a view on the issues related to ourselves. Obviously, I declare an interest in that matter, Mr Gale.

My understanding is that HMRC is not seeking a definitive subjective test as to what “employee remuneration” is. Therefore it is trying, in the clause and the schedule, to catch everything and by the exemptions it is making a very big hash of this issue—hence the 80-odd amendments. Does the Minister believe that the matter before us today is clearly defined?

Tom Blenkinsop (Labour, Middlesbrough South and East Cleveland)

Again, I go back to the document that the ICAEW presented to the Committee. That document mentions loans at one point, as my hon. Friend the Member for Edinburgh South said earlier. Loans have huge consequences for short-time working agreements. During the previous recession, I was a trade union official and I negotiated short-time working agreements to keep people in work and keep factories going, so that people were in work for temporary periods. But we also negotiated loans for those workers, from their employer or through a third party, to tide themselves over until production went back up again. Under the changes that the Government are introducing, the ICAEW says that such loans might now be taxable.

There is another point in relation to voluntary organisations. If an entity or an establishment is a trust, it might make loans to someone, for example so they can go to university. Are such loans taxable?

David Hanson (Labour, Delyn)

I would welcome clarification from the Minister, but my understanding is that the purpose of the measure is to tighten the arrangements for loans that will not be repaid. In my view, however, the clarity is not there and the complexity of the administration still leaves something to be desired.

Karl McCartney (Conservative, Lincoln)

I am pleased to hear that we will be talking about IPSA and I cannot wait to add my two penny-worth when that topic comes up.

The right hon. Gentleman has said at many points that he wants to be helpful. Back in 2000, the Government he was a part of introduced IR35. It took a full seven years before that was changed, with the managed service company regulations that were introduced exactly seven years later; I think that they were introduced on 6 April 2007. Obviously, those regulations were very complex, but many people in business wanted to see them introduced. It took the previous Labour Government seven years to make that change.

David Hanson (Labour, Delyn)

Unfortunately, in my big mound of papers I cannot put my finger on the information about IR35 to respond to that question. In some representations that I and other members of the Committee have received from outside the House, we were asked exactly how the legislation that is being proposed today relates to IR35. One of the reasons why there is a lack of clarity is that we do not know how the legislation proposed today and IR35 will match together.

We can all revisit the past. We are here today to scrutinise clause 26, schedule 2 and the 88 amendments that the Minister has tabled. I simply say to the hon. Member for Lincoln and to other members of the Committee that we are not speaking for ourselves; we are speaking for people outside the House and acting for them as a voice in the Committee. Those people outside the House are saying to the Minister, through members of the Committee, that these regulations are complex and unworkable, and they will create additional burdens for businesses. Moreover, they will not catch the targets that they are intended to catch and we will end up with businesses flouting the objectives and therefore crossing into enforcement issues. There will be greater pressure on HMRC staff to provide advice on this matter, simply because the legislation is so complex.

I do not want the Minister to throw these regulations out. I simply say to him that he should look at them again, bring them back to the Committee and consider the complexities that the hon. Member for Lincoln has mentioned in relation to IR35, as well as the complexities in relation to all the other matters that we have discussed today.

I look forward to hearing what the Minister has to say. I have spent considerable time on the clause. That is not because I wanted to fill time. That is not the objective today, although it has been on some occasions. [Laughter.] The objective today is to reflect seriously the points that have been put to us by organisations outside the House. The Minister has a duty to explain the clause and his views on these issues. I hope that he will answer our questions. I urge him to reflect strongly on my request that he pulls the clause and brings it back at a later date.

Several hon. Members rose—

Roger Gale (Conservative, North Thanet)

Order. The Opposition Front-Bench spokesman has spoken for several minutes. I think it would help the Committee if we heard from the Minister now. That will not preclude any further debate.

David Gauke (Conservative, South West Hertfordshire)

I appreciate the manner in which the right hon. Member for Delyn has set out his case. He entitled to raise concerns about disguised remuneration, and to give voice to some of the criticisms that outside bodies have made. I appreciate the fact that he is supportive of what we are trying to do in principle, but perhaps I can flesh out the matter a little more and put the measures that we are debating today in some kind of context.

The Government are absolutely committed to tackling tax avoidance. We will take the necessary steps to protect the Exchequer and to maintain fairness, but we have to accept that tackling such issues is not easy. We know that an industry is dedicated to finding any weaknesses that exist in our defences, so we have committed ourselves to more effective consultation, to ensure that legislation is well targeted and minimises the impact on commercial activities. I believe that we are taking a big step forward.

Schedule 2 makes provision to address particularly troublesome and prolific efforts at avoidance by employers who disguise remuneration through a third-party relationship in a bid to avoid, defer or reduce tax relating to employment income. The scale of the attempted avoidance is extensive, complex and opaque, and perhaps that point has not been brought out fully in the debate until now. The Office for Budget Responsibility has certified that HMRC’s estimate of the revenues generated by this measure—about £750 million a year—is correct. HMRC estimates that about 5,000 employers have implemented such schemes; the actual number of schemes is likely to be much higher as there has been extensive marketing. It is a problem that is growing, and without action we would expect significant further losses. To use a phrase that is familiar from today’s debates, as far as the losses are concerned, “Whoa, this is getting too much.”

The right hon. Member for Delyn has touched on the Government’s approach, and, yes, we have sought to consult much more and to be more deliberative in how we make tax policy. I am pleased to hear the right hon. Gentleman’s welcome for that general approach. If we can achieve consensus on how we make tax policy, that is all the better. There are particular issues with avoidance, and it has always been clear that avoidance creates difficulty in how we make tax law.

It is right that a measure such as this should focus on abusive arrangements and should not, as far as is practicable, affect those arrangements that do not seek to avoid tax. Let me first explain why we took the approach that we did, and specifically why we did not develop an anti-avoidance purpose test, as some have suggested we should have done. Our response to the problem of disguised remuneration aims to build on the lessons that have been learned from tackling avoidance on employment income over almost two decades by Ministers in Labour and Conservative Governments, because this is not a new problem. HMRC has learned that narrowly focused legislation is no obstacle to the ingenuity of the tax avoidance industry, no matter how sharp-eyed the official or draftsman. Where that approach has been taken in the past, avoidance in the employment income arena has simply adapted.

Ian Murray (Labour, Edinburgh South)

I am grateful to the Minister for giving way at the beginning of his speech. Does he have any examples of financial institutions using such mechanisms to avoid paying banker’s bonus tax by shifting some of the burden to third parties or through share schemes?

David Gauke (Conservative, South West Hertfordshire)

I am not in a position to quote specific institutions. I am not informed of individual companies’ tax affairs, as is right and proper. The hon. Gentleman is right to highlight the concern. Disguised remuneration is likely to apply where it is greater. There is no doubt that some of the schemes have applied in the financial services industry. I do not want to pick on one sector—and it is not possible for me to give a sector breakdown, if I might anticipate a future intervention. There is no doubt that disguised remuneration schemes have been used as a form of tax avoidance by some financial services institutions and others.

As I say, tax avoidance in this area is a long-standing concern. For example, from 1991 to 1998, various financial instruments were used for tax avoidance. After that, we saw gold bullion being used, platinum sponge, tradable assets, fine wine, gemstones, exotic tangible assets, slightly less exotic intangible assets and so on. Each time, the schemes got more complex with more steps to achieve the desired outcome, and so did the legislation. Yes, legislation in this area is already complex, but it has been driven by the complexity of tax avoidance behaviour.

Ian Mearns (Labour, Gateshead)

As the Minister was speaking, I was thinking of the sort of places where people might want to hide the value of earnings. For instance, in sports clubs, there might be a wage ceiling in a sport. Because of the public image of sport, people might want to try to hide their true earnings. Is there not a simpler way to do this, by introducing some general tax avoidance rules and regulations?

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman touches on one of the arguments made for an alternative approach, and I will come on to that in a moment. A lot of the debate is about whether this is the right way to do it. I want to set out the argument to show that we have a problem; tax avoidance is extensive in this area. The estimate of £750 million is something about which all Members of the Committee will be concerned and which they would seek to address. Until now, it has not been adequately addressed; there has been a piecemeal approach that has not got to the heart of the matter. We have had a lot of targeted measures that have themselves been quite complex, as has the legislation. Each time Government have done that, the avoidance has moved to a different area, and disguised remuneration through third parties is the next chapter. We want it to be the last chapter, which is what we are trying to achieve today.

Bridget Phillipson (Labour, Houghton and Sunderland South)

I understand that the Minister wishes to simplify a complicated system, with all measures put in place to ensure effective operation. Will he describe the conversations he has had with HMRC to ensure it has the capacity and work force to enforce the measures?

David Gauke (Conservative, South West Hertfordshire)

I intend to turn to HMRC’s work force and its capacity, after explaining what we are trying to do a little more. The right hon. Member for Delyn and others also put that fair question. First, I will set out how we are addressing the situation in the legislation.

We have had to adopt a broad approach that captures the essence and range of avoidance activity. We have used carefully targeted carve-outs to ensure that arrangements that do not involve tax avoidance are not affected. The hon. Member for Gateshead asked why we should not have a purpose test or smaller targeted measures, as suggested by the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales. Our proposal is an alternative way of articulating that broad approach. However, having looked at that suggestion closely over some time, we are not convinced that it would be effective against the widespread, diverse and, in particular, informal avoidance that occurs. While any rule would no doubt be more succinct, it would have to apply to all instances where a third party provided a loan or other asset to an employee, where that provision related to the employment. It is our view that such a rule would be insufficient on its own to provide clarity and certainty to businesses about how the legislation would operate in any given situation. Instead, taxpayers would have to rely on detailed but non-statutory guidance. There is a role for non-statutory guidance, and there is a role under the approach that we are taking here. I will say a little more about that in a moment, but we do not believe that that solution would be simpler or more certain, and it would certainly be less transparent.

Nicholas Dakin (Labour, Scunthorpe)

The Exchequer Secretary is carefully spelling out his approach, which is helpful to the Committee. Will he reassure us that this measure is simple for businesses to understand and simple for HMRC to administer?

David Gauke (Conservative, South West Hertfordshire)

As I acknowledged in my opening remarks, the simplicity in this context is all relative. I will not claim that the proposal is hugely simple. It is not. It is complicated and complex, but we believe that complexity is necessary and justified in these specific circumstances, because the measure is trying to address avoidance that is in itself very complex. If there was an approach available that was simpler and more effective, we would it, but that option is not available to us. That is why we have not taken the approach advocated by some of the professional bodies and suggested by Opposition Members. We do not think that it would work, and we would find ourselves coming back in a year or so and still facing similar problems as the debate and the focus of avoidance move on. Targeted anti-avoidance rules in this area, partly because of the informal nature of some of the arrangements, would not be as effective as the measures that we have set out.

Nicholas Dakin (Labour, Scunthorpe)

Are concerns being expressed outside the House that the complexity may mean that people who are trying to follow the law do things incorrectly through ignorance and, therefore, find themselves in trouble? Is that a likely result of this approach?

David Gauke (Conservative, South West Hertfordshire)

Perhaps I can address that point later, because we have sought to ensure that there are sufficient carve-outs in the right places, so that people are not inadvertently brought in. It is also right to say that the vast majority of remuneration arrangements that do not involve payments through third parties will be excluded from the arrangements. They will not be swept up, and that should not be a problem. It will be an issue only in a minority of cases.

Ian Murray (Labour, Edinburgh South)

This is obviously an incredibly complex area, and the whole Committee is grappling with not only the clause and the schedule, but the amendments to the schedule. Will the Exchequer Secretary give us a practical example of where he thinks tax avoidance is taking place, in terms of how companies operate? How would the clause stop that?

David Gauke (Conservative, South West Hertfordshire)

The type of arrangement that we are talking about is where a third party makes what looks like a loan to an individual—it does not immediately look like employment income—but it is not intended that the loan will be repaid, and the money ends up in the hands of the individual. No tax is paid, so economically, it is the same as income being paid, but without the tax. That is a very simple example of the mischief that we are trying to address.

Ian Murray (Labour, Edinburgh South)

May I probe a little further? In that example, would the loan from the third party not sit on the third party’s accounts as a long-term liability, and would drilling down into that long-term liability not show whether there was any intention of the loan being repaid?

David Gauke (Conservative, South West Hertfordshire)

The difficulty is how that is enforced by HMRC. What is its capability fully to identify that, and what if, for example, that loan comes from an offshore entity? There is no simple solution to that problem.

Bill Esterson (Labour, Sefton Central)

I am glad that my hon. Friend the Member for Edinburgh South gave that example, because in my understanding, that issue has been dealt with in previous legislation relating to directors. I wonder if a simpler measure that extended that legislation beyond directors to other employers would deal with that specific example. Moreover, he is right that drilling down into accounts would address the problem. Surely ensuring that sufficient staff are employed in HMRC would be the way to achieve that goal.

David Gauke (Conservative, South West Hertfordshire)

As I say, our view is that expanding a targeted anti-avoidance rule would not work, nor would trying to extend the existing system. The solution needs to get to the heart of the problem. The legislation is complex; I do not deny that in any way, and I think that all hon. Members would agree. I get the impression that every member of the Committee spent their lunchtime reading through the amendments, and I think that there is unanimity on the point that the proposals are complex. We would argue, however, that they are necessary.

The argument that we have heard today is that the measure should be delayed, and a small, targeted measure introduced, but that would really only be dancing round the issue; it would leave us pretty well in the position from which we started, with the broader elements of the avoidance passing by unaddressed. The approach taken in the legislation before us may not be preferred by many, but we believe that it will work.

David Hanson (Labour, Delyn)

We propose that the Minister withdraws the clause and the schedule, and considers a revised, simplified proposal over the next few weeks. He could talk to bodies outside about the practicalities and implementation, and then bring back proposals on Report. I know that that can be done from my experience in government. It would not delay matters any further, because the measures do not come into effect, although they are backdated, until Royal Assent.

David Gauke (Conservative, South West Hertfordshire)

Let me say a word or two about the process that we have followed and why I believe that we are on the right track. We have consulted very widely. This is the first anti-avoidance measure that has been subject to consultation; that has never happened before. We published a draft schedule on 9 December 2010, which generated considerable interest, and we rightly made amendments as a consequence. There has been a very constructive dialogue, which I welcome, and I want to take this opportunity to thank all who contributed to it. The legislation is undoubtedly in much better shape than it was on 9 December.

In response to that dialogue, HMRC made significant changes to the legislation, which was published on 31 March 2011, to ensure that various commercial arrangements were not brought into the charge. The consequent amendments built on the feedback provided to ensure that the scope and detail of the exclusions are appropriate. Yes, we have come forward with various additional amendments in Committee; as the hon. Member for Gateshead pointed out, this is the stage at which that should be done. It is not unprecedented. My hon. Friend the Member for Watford, with his extraordinary recall of detail, pointed out that while the Government have tabled 90 amendments on disguised remuneration, in 2008, the previous Government tabled 226 amendments on residence and domicile. I did an informal check on the response of the official Opposition, and my hon. Friend the Financial Secretary to the Treasury, who was the shadow Minister leading then, said that we welcomed the amendments and indeed had called for a number of them.

Moreover, 2008 was not a one-off. In 2009, there were 166 amendments to the Finance Bill. Governments should listen and make amendments to reflect constructive comments. Yes, we have tabled a number of amendments, and in an ideal world we would not need to do that. We would publish legislation with which no one found fault. However, it is important that we continue to listen and engage. Indeed, a number of sensible and constructive comments came in after 31 March, and we have tried to reflect them.

It is important to look behind the headline numbers and focus on what these amendments really involve. As I set out in my letter advising the Committee of the amendments, they fall into eight themes or strands and certainly do not represent 90 substantive new ideas or free-standing changes. A significant number of the amendments are consequential, and all of them result from the consultation carried out by HMRC. It is right to say that most of the amendments relate to relieving provisions. They describe the types of transactions that will not be caught by the schedule. This will give taxpayers clarity about what is not included. We recognise the risks of people trying to find and exploit loopholes, so they are underpinned by anti-avoidance measures.

The right hon. Member for Delyn highlighted section 554Z16 and asked me to explain it. I will not attempt to do so in full, but it is worth pointing out that the provision disapplies much of the chapter. It is a simplifying measure—it is not simply written, I agree—that makes the practical operation of the legislation much simpler, because it makes it clear that the other provisions can be ignored for this purpose.

Tom Blenkinsop (Labour, Middlesbrough South and East Cleveland)

I return to paragraph 11 in the document from the Institute of Chartered Accountants, which is on the five-year rule that applies to share options for employees. It refers to

“the existing 5 year rule for forfeitable shares in Chapter 2 of Part 7”,

and states:

“If an employee receives forfeitable shares and the forfeiture period lasts more than 5 years, the employee must pay tax on (at least) the ‘actual’ market value at the date of grant… By contrast, the new Part 7A provision imposes tax at the 5 year point even though the employee at no time receives any benefit, and may have no funds with which to pay the tax.”

That has obvious consequences for not only employee share schemes and social enterprises, but the Government’s policy on a 10% employee share scheme for the Royal Mail when it is privatised.

David Gauke (Conservative, South West Hertfordshire)

Indeed. If I understand correctly, there is an amendment that extends that to 10 years, because we have listened to some of the concerns on the issue.

It might be useful for me to say a word or two about some of the areas that we have specifically carved out, including deferred remuneration arrangements using third parties, group company transactions, employee car ownership schemes and refinement of conditions on benefit packages. The changes that have been made since December ensure that existing pension funds in unregistered arrangements retain their existing tax treatment, rather than being covered by this legislation.

The hon. Member for Middlesbrough South and East Cleveland has asked about waiters and tips. Tips have always been taxable, and the proposal does not affect that. Season ticket loans have also been mentioned. They should not be affected; they tend to be provided by the employer or a group company, and that is clearly carved out. The hon. Member for Edinburgh South mentioned IPSA, at which everybody’s shoulders dropped. Loans are made for rental deposits, for example, and IPSA is a third party—he was astute in identifying it as the type of third party that could be covered—but there is a carve-out for that, simply because of the peculiar arrangements that are involved for MPs and because remuneration is paid through a third-party statutory body. I do not intend to be detained at great length on that point.

Ian Murray (Labour, Edinburgh South)

I will not mention IPSA, but the Minister has mentioned third parties. I refer him to what the document that my hon. Friend the Member for Middlesbrough South and East Cleveland mentioned said about what might constitute a third party. The document lists a whole plethora of potential third parties that are all, in fact, very much in line with normal, day-to-day business, particularly for small businesses that do not have the capacity to run their own payroll. The document mentions bodies such as an employee benefit trust, a vendor or purchaser, a payroll agent, a liquidator, a relocation agent, a conference organiser, and even travel agents or lawyers and accountants, all of which small businesses may look towards. How can we ensure that small businesses that use those third parties, which might make a transfer such as a loan to an employee, are indemnified against being accountable for that in such third-party relationships?

David Gauke (Conservative, South West Hertfordshire)

To use the example of waiters, we need to remember that if an employee is being paid income from a third party, it should be taxed as such. We intend this legislation to apply, for example, to a loan where there is some question over whether it will be repaid. We have tried to include the necessary carve-outs to reflect proper commercial arrangements. We have responded to some of the constructive comments that have been put to us, to ensure that arrangements that involve a third party for good commercial reasons are not swept up into this legislation.

HMRC has published two sets of frequently asked questions addressing the main themes that have been raised by respondents. Those will be updated shortly, and full guidance will be provided. The advantage of guidance is that it can give examples, which legislation is ill suited to do. I hope that that will assist businesses.

Julian Smith (Conservative, Skipton and Ripon)

Does my hon. Friend agree that guidance for businesses, particularly small businesses, is vital, as is the clarity and simplicity of that guidance? Will he encourage those who are drafting the guidance to make it as simple as possible? I should like to mention the Anderson review on guidance, which was carried out under the previous Government. It was a positive report, and I encourage him to look at it.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend is right to mention that point. We intend the guidance to be as clear as possible, so that it assists businesses in interpreting the legislation.

We had a useful consultative process, but I acknowledge that we did not accept every suggested change. Doing so would have compromised the protection against avoidance, especially where the use of loans is an issue. Loans are used in some of the most common forms of avoidance, so there cannot be a blanket exclusion. I should add that the legislation contains a power to make regulations for further exclusions. That is needed to take account of future changes to the way in which employers choose to reward their work force. Although businesses might need to adjust their behaviour to satisfy themselves of the impact of the legislation, we do not believe that any innocent arrangements will be caught.

The mischief that we are talking about involves diverting the rewards of employment through intermediaries, most commonly an employee benefit trust. Many of those are based in foreign tax havens. The purpose of those arrangements is to avoid tax by providing what is actually employment income in a disguised form via a third party, rather than it going from an employer to an employee directly.

The arrangement can appear to mean that the employee has no absolute entitlement to reward. Some of the more egregious instances have involved the trustees acting as little more than a corps de ballet following carefully choreographed and predetermined steps mapped out by tax advisers. The purpose of that is to disguise the true nature of the employment income they help provide. That avoidance can also occur in employment-related share schemes. Clauses 66 and 67 limit how much tax-privileged deferral of remuneration is available through registered pension schemes. That will raise £4 billion a year. Without the action we are taking here, unregistered occupational pension arrangements would have greater tax advantages than their registered counterparts for savings above the new annual and lifetime allowances.

Schedule 2 will ensure that third-party arrangements used by employers to provide reward to employees cannot be used for tax avoidance. It creates an income tax charge where a third party provides an employee with reward, recognition or a loan in connection with the employment. The tax charge will be based on the full amount of the sum, the money used to deliver value to the employee, or cost or market value—whichever is higher—where an asset is used. The legislation will mean that employees benefiting from such schemes will have to pay more tax, but no more than employees who receive their reward directly from their employer. In addition, regulations will be brought forward to apply a class 1 national insurance contribution charge to amounts taxable under the measure.

Ian Murray (Labour, Edinburgh South)

What happens if one of the loans is given to an employee and is seen as a salary reward, but an agreement is put in place between a third party and the employee to pay back that loan at 1p a month for the next 640 years? Would that constitute repayment, and therefore not be a benefit?

David Gauke (Conservative, South West Hertfordshire)

My understanding is that such an arrangement would be caught by the measures we set out in schedule 2. The hon. Gentleman demonstrates the ingenuity that exists in this area. An arrangement that was clearly uncommercial in its repayment terms would not be a means of avoiding the legislation.

Ian Murray (Labour, Edinburgh South)

I want to probe that further. My right hon. Friend the Member for Delyn made the point about how complex the regulations are, and 88 amendments are proposed to an already complex piece of the Bill. We are seeing over-complex regulation for a good cause. That essentially just sets hares running when it comes to avoiding this complex legislation. Once all those layers are put on top of each other, a very smart QC and an accountant will ensure that large businesses can avoid the regulations through loopholes, while small businesses will be completely drowned in paperwork with no support from HMRC to help them through.

David Gauke (Conservative, South West Hertfordshire)

In the example that the hon. Gentleman provides, the loan would be from a third party. Under schedule 2, that is caught as remuneration, and consequently the tax charge would apply to that remuneration. Whatever the repayment terms, the arrangement would be caught, unless it falls into one of the carve-outs we have set out in the legislation. The purpose of the carve-outs is to address genuine commercial arrangements, which that would not be.

The hon. Gentleman says that the proposal will be difficult and that there may be loopholes, but that is what we are trying to address. Our belief is that the approach in schedule 2 is a more effective way of preventing loopholes that allow those who can afford expensive lawyers to fight this and that and wriggle out of paying the proper amount of tax. Our approach minimises that risk and puts the Government in a stronger position to address what, as I say, is a substantial level of avoidance—£750 million a year—and that is why we are determined to proceed with the measure.

Tom Blenkinsop (Labour, Middlesbrough South and East Cleveland)

I have a general query about the exemption of car ownership schemes in proposed new section 554N. Would that also include employees of taxi firms, which technically loan the vehicle to the individual, and delivery drivers and other employees who are given a vehicle to look after and to drive from home to work? Would that now be taxed?

David Gauke (Conservative, South West Hertfordshire)

I would have to reflect on the hon. Gentleman’s example, and if I reflect quickly enough, I may find that I am able to respond to him in the course of the debate. If I cannot, I assure him that I will write to him, but I shall see if I can find inspiration to address his concern.

If we are looking at those who may be innocently caught by the arrangements, which is the hon. Gentleman’s broader point, in situations where there is any remuneration and where the employee pays the tax as it currently stands, they will not be affected. If an employee is paying the tax on that remuneration, they should be fine. It is when they try to avoid paying the tax that schedule 2 will apply. The legislation does not prevent people paying remuneration in a particular way. It just ensures that the tax is paid. I will think further about the example that he gave, but if an individual receives remuneration through the form of a loan, they need to fall within one of the carve-outs. Those carve-outs are designed to pick up genuine commercial arrangements, and during the process we have refined, improved and expanded the list of carve-outs, so that we catch those who should be protected.

Nicholas Dakin (Labour, Scunthorpe)

The Minister mentioned people being innocently caught by the arrangements and carve-outs being made to pick them up. Is he saying that he and officials are engaged in a continuous process to ensure that nobody is disadvantaged as they go about their proper business?

David Gauke (Conservative, South West Hertfordshire)

We believe that have reached the point where we have protected all the commercial arrangements that we can without jeopardising the essence of the measure. We do not currently intend—to answer the question of the right hon. Member for Delyn—to come back with further amendments on Report. There is a provision in schedule 2 that allows further regulations to be made to provide further relieving measures and additional carve-outs. We think that we have got there, but the reason for the provision is that remuneration packages can evolve and develop, and it is right that we have the opportunity to examine those new developments and refine the carve-outs to pick up genuine commercial arrangements.

Ian Murray (Labour, Edinburgh South)

The Minister is spending a considerable amount of time explaining the measure to the Committee, and it is very useful for us. Many of the letters in the stacks of paper in front of me are from organisations concerned about the clause, and he is doing a great job answering some of those concerns.

May I take the Minister back to my previous intervention? I am concerned by the loan example that he gave. He said that if the loan was not repayable on a commercial basis then HMRC, through these clauses, would have an opportunity to look at it. Two questions fall from that. First, who determines what a commercial basis is? Employees often get a preferential or even interest free rate for loan repayments. Secondly, if such a loan repayment plan was put in place, and HMRC thought that it was inappropriate, could it be changed? What if there was a condition on that loan that it was repayable in full from the borrower’s estate at death?

David Gauke (Conservative, South West Hertfordshire)

We are trying to pick up those loans that are paid out but never paid back. In schedule 2 we have a series of carve-outs designed to pick out arrangements that are clearly made for genuine, non tax-driven commercial reasons. That is the structure of schedule 2. We believe that a broad treatment that will pick up most loans coming from third parties, and then carve-outs, is the best way to address the issue.

May I put the clause in context, and remind the Committee that we think that around 5,000 employers use these arrangements, but most employment income will not be affected. Normal remuneration structures involving another company in the same group will not affected. We have made that clear in the Bill, and will do so in the HMRC guidance as well.

Thinking further on this issue, I would also like to make a point about taxi drivers. It will depend on whether the taxi driver is employed or self-employed. If the car is already a benefit of the employee then it will not be affected. It is not remuneration if the owner is using the car to be a taxi driver. If, however, the car is taken home at the end of the day then it is taxed as a benefit, but schedule 2 should not be relevant, as it relates to third parties.

Tom Blenkinsop (Labour, Middlesbrough South and East Cleveland)

What if a taxi driver has access to multiple cars and flexibility in taking it home?

David Gauke (Conservative, South West Hertfordshire)

That is an issue that is already within the tax system. Is this a benefit in kind already? There is nothing in schedule 2 that should change that arrangement, nor whether it is taxable. I do not think that that will be affected by schedule 2.

Nicholas Dakin (Labour, Scunthorpe)

While the Minister is dealing with these concerns, I thought it might be useful for him to deal with something highlighted by the Institute of Chartered Accountants. It says that there is a likely problem, in that the employer

“can still be a ‘third person’ if he acts as a trustee. This is not qualified in any way so an employer that is a trust (something which is common in the charitable and voluntary sector) and which gives an employee a season ticket loan would be caught and the loan subject to tax when advanced even though it will be repaid.”

This is a good opportunity for the Minister to reassure the Institute of Chartered Accountants on this concern.

David Gauke (Conservative, South West Hertfordshire)

As long as there were no circumstances that cast doubt over the genuine nature of the employment, a trustee that is also an employer would not be viewed as a trustee when acting in their capacity as an employer.

Ian Murray (Labour, Edinburgh South)

Will the Minister give way?

David Gauke (Conservative, South West Hertfordshire)

I want to make some progress, but the hon. Member intervened so charmingly that I will give way. [ Laughter. ]

Ian Murray (Labour, Edinburgh South)

I hope that the hon. Member for Watford, who has a photographic memory, will remember that the word “charming” was used, so he can remind us of it in 10 years’ time.

I wanted to make a point about the make-up of organisations and companies. What happens if a director of a company puts money into it as loan stock, and then the company, during the course of the repayments of that loan stock, is sold, which would mean that the company was sold without that directorship? The director would become a third party of that business, and the business would start to repay the loans, perhaps. How would that be looked on in terms of the HMRC regulations? The loan would, at first sight, seem as if it were going to an individual from an unconnected third party, but essentially, a commercial transaction would be taking place between the third party company and the original director from the first business.

David Gauke (Conservative, South West Hertfordshire)

I am always slightly nervous about trying to give detailed advice, almost, on specific circumstances. What the hon. Gentleman has described does not sound like something that the legislation should affect, because the proposals cover a loan going to an employee from a third party. Loans from directors to companies, and so on, do not seem relevant. If I have misunderstood what was described, I will let him know. I may need to write to him, but I do not think that the proposals would be caught up in the circumstances that he has mentioned.

Ian Murray (Labour, Edinburgh South)

The word “director” has perhaps confused the issue. A director of a company has put a loan into company A, but company A is sold to company B, and that director therefore becomes an employee. He is no longer a director. He has become an employee, so for the sake of what the Minister is describing this afternoon, an employee would be receiving a loan from a third party.

David Gauke (Conservative, South West Hertfordshire)

As the hon. Gentleman describes it, I think that the loan would be going from the employee, first, to one company, and then there would be some corporate restructuring, and the flow of funds at that point would be going from the company to the employee, not the other way round. As I say, if I have understood that correctly, I do not see that those circumstances would be affected by schedule 2. I must press on and say a word or two about the amendments; after all, there are a few of them.

The changes have been made in response to the ongoing dialogue with representative bodies, and they will ensure that the legislation is better targeted. The changes will provide greater exclusions, where relevant, or they will clarify the existing position, and we want to do so in a way that retains the target of avoidance and does not increase the risk to the Exchequer. The changes will relax some conditions that excluded a tax charge; expand the definition of a group; ensure that the tax position that follows permanent “unearmarking” is right; and, better allow settlements with HMRC.

In relation to pension arrangements, schedule 2 provides an up-front tax charge where employers pay contributions to unregistered pension schemes to avoid the new restrictions on pensions tax relief. We are removing the possibility of unintentionally imposed tax charges, depending on the value of the security provided and not on the value of the contributions the employer was to pay. Such concerns are dealt with by the relevant amendments, ensuring that the tax charge is appropriately focused.

There are also amendments that ensure that the legislation does not interfere with the legitimate use of deferred remuneration and share schemes to reward employees. Although there were a number of exclusions within the initial draft legislation, in some cases, those were too narrow. The related amendments mean that the employers can continue to use employee share schemes and pay remuneration in genuine deferred arrangements, without unexpected tax charges.

The Government amendments demonstrate the benefit of our commitment to consult and to listen to what interest groups have to say, and they will ensure that the legislation is effective and that unintended consequences will be avoided.

Stella Creasy (Labour, Walthamstow)

This debate is interesting, because it throws up a number of anomalies. Will the Minister say what discussions there has been about how the proposals might impact on dividends? The Government are keen to promote co-ops of various types, and as a Labour and Co-operative Member, I feel the need to speak up for the Co-operative movement. I am concerned that there has not been much thought about the impact on the payment of dividends for different models of co-op. For example, what impact might it have on a workers’ co-op as opposed to what might be called the John Lewis model? Will the Minister say a little about how the amendments would affect them?

David Gauke (Conservative, South West Hertfordshire)

We have tried to respond to concerns raised about share schemes and similar arrangements. I am not conscious of any representations received about co-operatives. However, ordinary dividends will not be caught by these arrangements; they are not covered by schedule 2. Concerns have been raised about the application of schedule 2 to share schemes and we have, as far as possible, tried to accommodate them.

A number of hon. Members asked about the practical impact on Her Majesty’s Revenue and Customs, and the resources it will have to monitor and enforce schedule 2. A lot of resources are currently devoted to monitoring existing schemes. I accept that the change will take some time to bed in. We do not envisage a long-term change for resourcing in this area, because we think this is the right approach to address the concern. HMRC will need to provide guidance and advice as the rules bed in. However, resources will be released because it will no longer have to monitor and challenge the schemes on a case-by-case basis. That should strengthen HMRC’s ability without increasing demands on it. It does not create any new requirement for HMRC to identify and deal with avoidance and non-compliance; that is already there. Instead, it strengthens the tools that it has available.

Stella Creasy (Labour, Walthamstow)

I would like to add my experience as a member of the Public Accounts Committee. I am sure my fellow member, the hon. Member for North East Cambridgeshire, will also want to comment. PAC report 27 scrutinises the ability of HMRC to deal with investigations and compliance. I have the Treasury minutes—which the Minister’s officials were keen to see—and the Government partially agree with the Committee’s concerns that the Department does not have sufficient understanding of the costs and returns of different enforcement activities. What analysis has the Minister made of HMRC’s ability to enforce these proposals. Does he expect the matter to come before the Public Accounts Committee in due course?

David Gauke (Conservative, South West Hertfordshire)

As I say, the assessment, approved by the Office for Budget Responsibility, is that the measures in schedule 2 will prevent losses of £750 million a year, with a significant increase in revenues coming through that. The hon. Lady is right to highlight that point. Working closely with HMRC, I can say that its understanding of the benefits of enforcement action has improved. HMRC welcomes the additional powers, and we believe that they will be effective.

Several hon. Members rose—

David Gauke (Conservative, South West Hertfordshire)

I really want to make progress. I will make this point regarding the cost of the resource required to intervene in the area. Savings will be available to HMRC, so it will be less expensive to monitor this area. We will be losing a significant cost.

Nicholas Dakin (Labour, Scunthorpe)

The Minister is beginning to reach the crux of the matter regarding HMRC—whether it has the capacity, skills and knowledge, when it is under such budgetary pressure, to do the additional job that this complex system will put on it shoulders.

David Gauke (Conservative, South West Hertfordshire)

As I say, we are confident that it does. The system strengthens HMRC’s ability here. It is a complex area, but it involves a substantial saving of tax, and we believe that this is the right approach.

Bridget Phillipson (Labour, Houghton and Sunderland South)

Even if the Minister is right that HMRC will have the capacity to cope with the changes, am I right in thinking that staff may require training? What assessment has he made of possible additional training to ensure that staff are fully aware of the changes? If further training is required to ensure that HMRC staff fully understand the rules that they are expected to enforce, what estimate has he made of its cost?

David Gauke (Conservative, South West Hertfordshire)

Of course, HMRC staff need to have an understanding of the law as it changes, but we have a Finance Bill every year, and it is a matter that can be addressed within the existing HMRC training budget. I must remind the Committee of the expense and difficulties involved in monitoring and enforcing the law in this area, and schedule 2 will strengthen HMRC’s ability in that.

Ian Murray (Labour, Edinburgh South)

Will the Minister give way?

David Gauke (Conservative, South West Hertfordshire)

No, I want to conclude at this point. Tax avoidance is a significant issue and a substantial risk to the Exchequer. It is a widespread problem that is difficult to target. We do not want to dance around the issue any more. For every step, the avoidance industry makes a counter-step, but we have marked its card and taken a big step forward. We have consulted widely and have further targeted the legislation in response, but the risk tackled by schedule 2 is broad and long-standing. Schedule 2 is needed to maintain a fair tax system. I hope that I will have the support of the whole Committee in accepting the amendments, the clause and the schedule.

Ian Murray (Labour, Edinburgh South)

Today’s debate has highlighted the complex nature of a Finance Bill in these particular circumstances. One of the overarching aspects from this morning is that my right hon. Friend the Member for Delyn, who introduced the debate, is merely the asking the Treasury team and the Minister to reflect a little on the complex nature of not only schedule 2 but the 88 or so amendments to it, and to bring back a more coherent and understandable approach on Report.

When it comes to financial knowledge and Finance Bills, we are all lay people, and I have found it difficult to follow what the amendments are trying to achieve. There are some phrases in the amendments, such as

“554Z19 Valuation of step within section 554Z18”

in amendment 105, that use terminology that I have not come across before. I am not really sure exactly what it relates to and how we should cross-reference it. At the very least, the Treasury team could bring back on Report a coherent analysis of what the provisions actually mean, what they meant in December, what changes the consultation exercise allowed the Treasury team to make and the consequences of those changes. That would provide the Committee and, indeed, the House with some kind of explanation about which direction we are travelling in.

Ian Mearns (Labour, Gateshead)

I have been in this place for a year, but I am still daily finding things that are part of the steep learning curve. When the Bill was originally presented to us, it came with a good set of explanatory notes, and they helped us to understand the implications of the clauses, subsections and schedules. However, the Government amendments do not come with explanatory notes, and that makes it difficult for us as financial lay people, as my hon. Friend pointed out, to understand the implications of things that the Minister is asking us to agree to.

Ian Murray (Labour, Edinburgh South)

I am grateful to my hon. Friend, who is often my partner on a Thursday travelling north on the east coast line, when we discuss these matters in detail. I am happy to give way to the Minister on the question of my travelling partners.

David Gauke (Conservative, South West Hertfordshire)

I actually wanted to intervene on the hon. Member for Gateshead to say that explanatory notes on these amendments were sent to the Committee.

Ian Murray (Labour, Edinburgh South)

I am grateful to the Minister for drawing that to our attention. While we have been enthralled by the debate, I have been reading some of the provisions and still have no idea what they mean. I am disappointed that my hon. Friend the Member for Gateshead has the Adjournment debate this evening on the east coast line, because otherwise we would be sitting for three hours on the train north discussing the schedule in great deal and no doubt musing over some of the provisions and trying to understand them a little bit better.

My hon. Friend makes a good point. While the schedule is in the Bill and there are the explanatory notes—and the Minister generously told us that there is another explanatory note on the amendments—I am still not sure exactly what we are doing here and how that relates to what we had before. Many of my hon. Friends, who have been asking direct questions, are throwing up practical examples that may be useful in this particular complicated sense.

Bill Esterson (Labour, Sefton Central)

The reason for my intervention is that I was not aware of the additional explanatory notes. I wonder whether my hon. Friend had received them.

Ian Murray (Labour, Edinburgh South)

I am not aware that I have received them, although there have been numerous e-mails from a host of providers and third-party lobbyists who are concerned about this. If the Minister could get copies to us now that would be incredibly useful. I am sure his team can rustle them up.

Richard Harrington (Conservative, Watford)

This is certainly not the reason for my intervention, but we were all e-mailed the additional explanatory notes and there is a copy that we could pass on to the hon. Gentleman as a matter of courtesy. The point I wanted to make was that we have now gained some idea from the Minister of the complexity of the anti-avoidance industry. We all agree that the purpose of the legislation is to avoid some of the tricks which, although legal, we want to exclude. By definition, the legislation should be complicated for lay people such as the hon. Gentleman and me, because it is meant to deal with the complexities of the anti-avoidance industry. Would he agree that this kind of complexity is necessary for highly detailed tax legislation?

Ian Murray (Labour, Edinburgh South)

I am grateful for that intervention. We all agree that the anti-avoidance measures in the Bill are welcome. The Opposition’s contention is that they are so complex that they will swamp not only small and medium-sized enterprises but HMRC. Indeed, the main people we want to catch with these regulations are the bigger offenders and they will find ways and loopholes around them. There is perhaps a small democratic deficit if members of the Committee are not really sure what we are talking about and what we are agreeing to in a very complicated Finance Bill. We should have that explanation.

Tom Blenkinsop (Labour, Middlesbrough South and East Cleveland)

The real factor is that yes, it is complex, but employees seem to be most caught in this web of complexity. As a trade union officer in the steel industry, I relocated people and negotiated relocation packages with Tata to move people from places like Workington or Hartlepool to Scunthorpe and other steelworks, and such loans may now be taxable under these regulations. In industries such as chemical and steel, self-employed contractors are often given money to provide their own personal protective equipment, which is part of health and safety regulation. Would that be taxable? We are looking at practical examples of how the changes will affect the average working person.

Ian Murray (Labour, Edinburgh South)

My hon. Friend makes the pivotal point that we are looking at employees who may be innocent bystanders in the examples that have been highlighted. The taxi driver example emphasised how employees might be the unintended recipients of a large bill from HMRC, given that employers put together a complex remuneration package for such employees. Things such as moving home or, to coin a phrase, “getting on your bike” to get work and employers paying for that package of measures may be taxable under these proposals.

Although the Treasury Minister is, without question, very much on top of his brief, the fact that he has had difficulties answering some very basic questions at the coalface shows the complex nature of the subject. I can imagine small and medium-sized enterprises all over the country scrabbling for the hotlines to HMRC as soon as the Bill is enacted, to try and get some information about what is going on.

The document from the Institute of Chartered Accountants in England and Wales has been referred to in great detail today, and I am sure that the Scottish equivalents will be similar. The institute questions at great length, on several pages, when an employer is a third party. I am not quite sure about all the specifications that it gives, but several examples are provided; we can all think of small businesses or employees in our constituencies who might fall into those categories. The document mentions at great length benefits such as share plans; it mentions shareholders; and it mentions dividends. The Minister dealt specifically with dividends in his answer to my hon. Friend the Member for Walthamstow, but the Institute of Chartered Accountants states that although tax on the dividend is now collected in PAYE, arrangements for recognition or award to an employee may be put in place that will result in those problems. Indeed, it mentions that

“shares acquired from, eg, an EMI option exercise, and dividends that flow from those shares, are arguably part of the same ‘arrangement’.”

Where do we draw the line? The document describes, as I have highlighted, the way in which small and medium-sized enterprises use third parties to deliver basic services:

“Many employers engage external suppliers to perform administrative functions such as operating the payroll, bookkeeping, company secretarial services (completing share transfer forms and submissions to Companies House, etc), administering employee share plans, stockbroking, etc.”

A plethora of third-party organisations determine individual remuneration packages in various ways without being involved in the business themselves. The Institute of Chartered Accountants provides a list, which is not exhaustive; I will not read it all out, but it includes, for example:

“Founder/new investor/shareholder…Flexible benefit administrator …Payroll agent, Relocation Agency…Conference organiser…Subsidiary LLP.”

The relocation agency goes back to the point that was raised by my hon. Friend the Member for Middlesbrough and—

Tom Blenkinsop (Labour, Middlesbrough South and East Cleveland)

Middlesbrough South and East Cleveland.

Ian Murray (Labour, Edinburgh South)

That one. Limited liability partnerships are interesting, because HMRC has had to put in place a plethora of additional information because they fall under both partnership and limited company rules, so they are dealt with differently. The list continues with

“Pension plan trustees, stockbroker, Government department”

and little things such as

“Travel agent, Lawyer with a client account”

when they are dealing with buying and selling either property or businesses. All those—there are, indeed, more on the list—can potentially be seen as

“‘relevant third parties’ whose involvement in holding, earmarking and transferring cash, shares and other assets, may create tax charges that would not otherwise arise.”

The Institute of Chartered Accountants in England and Wales thinks that many third- party organisations may force employers to take potentially offending services back in-house to avoid falling foul of HMRC regulations. I do not think that the institute is saying that everyone operating in those types of business will fall within the regulations—far from it. However, the last thing a small or medium-sized business needs, when it complies with every piece of legislation and regulation, is HMRC crawling all over their accounts and books to try to determine a complicated matter that that business is using for day-to-day operational purposes.

Stella Creasy (Labour, Walthamstow)

It is important to think about how practical some of the arrangements will be, and what they will mean for HMRC. I hope that the Minister has read the original report and the response to the Treasury, because we found that only 20% of cases referred to the dedicated investigation teams were adopted. That created a high level of disillusionment among HMRC employees. Part of the problem had to do with training, understanding the tax codes, and understanding how to deal with compliance. That is one reason why a quarter of the civil investigation cases undertaken were completed within the 18-month target. Does my hon. Friend share my concern that if it is not clear to the Committee and those working in the tax industry how the measures will work, it will have a further de-motivating effect on HMRC staff, who have to tackle compliance to ensure that we get all the money owed to the Exchequer? Does he agree that one of the problems with complexity is that enforcement is also harder?

Ian Murray (Labour, Edinburgh South)

My hon. Friend makes a valuable point. The more regulation put in place, the more difficult it is to enforce. I bet that everyone on the Committee has had two constituents come to their surgery with similar cases where HMRC has advised different things. That must be part of the training at HMRC. Staffing and staff morale are key issues. Many employees who work in the HMRC offices in Haymarket Yards in Edinburgh have come to my surgeries to express their concern at the lack of not just financial resources, but staff resources. Although the Government have committed to putting in extra resources, at a local level—I concede that this might not be the case across the country—more experienced HMRC staff members on higher salaries are being moved on, retired, or made redundant. They are being replaced by younger, cheaper graduates and trainees. The brain drain from the HMRC office in Edinburgh is having a significant effect on personal taxation. Indeed, if that kind of personal taxation problem is not dealt with, all these complex rules coming in on top of those problems will make HMRC’s work very difficult.

There are two other things that I would like to mention. The first is the red tape challenge that the Secretary of State for Business, Innovation and Skills has championed. If anybody visits the red tape challenge website at redtapechallenge.cabinetoffice.gov.uk, they will see that the Government particularly intend to cut red tape and regulation for small and medium-sized businesses. That is the thrust of the Chancellor’s growth package. The website shows various aspects of regulation and legislation that they want to cut.

An example is hallmarking, a practice that has gone on for many hundreds of years and is renowned around the world. Indeed, the assay offices across the UK—there is one in Edinburgh where many of my constituents work—are concerned that scrapping hallmarking will cost jobs in Edinburgh, and we will lose an ancient industry. The Minister is looking at Mr Gale for some guidance as to whether I am keeping to the amendment. On the one hand the Government are saying, “Let’s scrap 600 years of tradition to cut red tape for small businesses,” and on the other they are producing a plethora of documents and regulation that people cannot understand or will not be able to follow. In addition, there are concerns that the people at HMRC who could give guidance to small businesses will not be able to do so in the current economic environment.

A second point on the red tape challenge relates to the Equality Act 2010. Along with other Members of the Business, Innovation and Skills Committee, I have pushed the Business Secretary to denounce the front page of the red tape challenge website, which asks whether the Equality Act should be scrapped to reduce regulation for small business. The Act provides for growth and employment opportunities across the equality spectrum. Do the Government want to slash and burn what is being called red tape, but I consider a significant move in primary legislation towards a progressive society? At the same time, they are throwing in all these regulations to try to close loopholes related to tax avoidance—regulations that are so complex they are in danger of not doing the job for which they are needed.

Bill Esterson (Labour, Sefton Central)

Having run a small business for many years under both a previous Conservative and a Labour Government, I must say that I was not aware of any great difference between the two in the level of regulation or red tape. I wondered whether my hon. Friend was suggesting that there was a deliberate ploy by Government to push the burden away from Government and on to small business. For instance, the reduction in staff employed to enforce the rules would force small businesses to take on the role of policing such regulations.

Ian Murray (Labour, Edinburgh South)

My hon. Friend makes an incredibly important point about where the liability lands. My right hon. Friend the Member for Delyn earlier made a point about enforcement. Any tax or company law avoidance is a criminal offence and should be dealt with properly. People who try to avoid tax in the ways set out in the legislation are committing a criminal offence that should be treated as such.

The Minister mentioned the Office for Budget Responsibility in response to an earlier intervention. Has the OBR factored in the additional burden on business, and will any of this affect the growth agenda? The OBR has obviously assessed the Bill as a whole, through the Chancellor’s Budget statement in April. However, I wonder if it has assessed whether this particular part is a stimulus for growth or not. Everyone would want us to close loopholes that enable tax avoidance and evasion. However, how compatible are the £750 million going to the Treasury, the additional moneys to HMRC, the additional burdens on small business, the potential impact on growth, and the contradiction between the red tape challenge and the additional burden of complex regulations?

Paul Blomfield (Labour, Sheffield Central)

My hon. Friend makes an important point about growth, to which it would be helpful to hear the Minister’s response. The Institute of Chartered Accountants says:

“These highly complicated rules are difficult to understand, highly uncertain in their operation, likely to be very expensive to operate and practically very difficult for HMRC to administer. Further, many employers may find themselves caught by the rules due to ignorance.”

It goes on to make the crucial point:

“We believe that this measure therefore fails to meet the Government’s own growth agenda benchmark and is likely to hamper rather than support growth.”

It would be helpful to hear the Minister’s response.

Ian Murray (Labour, Edinburgh South)

My hon. Friend really gets to the nub of the Chancellor’s Budget. The Chancellor proclaimed and trumpeted that this would be “a Budget for growth”. He championed in the press a few days before the Budget that it would add “fuel to the economy”. It was probably the only time in the history of the world when a Chancellor has come to any Dispatch Box in any Parliament and championed a Budget for growth that has reduced growth every year; the independent Office for Budget Responsibility has adapted the growth figures. That is the nub of the point that my hon. Friend the Member for Sheffield Central made.

Ignorance is no defence in law, but some employees will be trapped by the proposals and will get a bill from HMRC. To go off on a slight tangent for a second, the biggest complaint I get about HMRC is that it is incredibly aggressive in claiming back money and dealing with individuals. As ignorance is no defence in law, employees could be caught in the provisions through ignorance, and HMRC will go after them quite vociferously. Indeed, I had an 82-year-old man at my constituency surgery a few months ago who had received a letter from HMRC saying—I paraphrase—that it would be sending HMRC officers to his house to pin his valuables and assets in order to pay off his debt of £56.73. That debt did not actually exist; it was an administrative error.

Steve Barclay (Conservative, North East Cambridgeshire)

Does the hon. Gentleman believe that HMRC was aggressive in its pursuit of Vodafone during the term of the last Government?

Roger Gale (Conservative, North Thanet)

Order. I am the most tolerant of Chairmen, as you all know, but I think there are boundaries to this discussion.

Ian Murray (Labour, Edinburgh South)

Thank you, Mr Gale. You are a very good Chair, and I will follow your guidance and treat the last intervention with the silence it deserves.

Alison McGovern (Labour, Wirral South)

My hon. Friend was making an important point about the functioning of HMRC, especially where there is complexity, as there is in the provisions before us. I, too, have had people coming to my surgery about that. Would he agree that part of the problem is sometimes the language that is used by HMRC in its communications, and that this complexity will not make things any better?

Ian Murray (Labour, Edinburgh South)

My hon. Friend gets to the heart of the problem with HMRC. Indeed, we have all experienced problems with it. While tax collection, the closing of tax loopholes and stopping tax avoidance are important, HMRC does not always get it right, and it goes after people aggressively. That makes these complex regulations all the more disheartening for small businesses. All they really want to do, particularly in the current climate, is run the business, tread water, do well, get through this particular bit of uncertainty, re-elect a Labour Government and allow the economy to grow disproportionately after that.

Bridget Phillipson (Labour, Houghton and Sunderland South)

Before my hon. Friend moves on, I am sure he shares my view that the staff who work for HMRC are dedicated, very knowledgeable people who will adapt to any circumstances. However, does he share my concern that the Minister is perhaps being unduly optimistic when he makes the assessment that additional training above and beyond that normally undertaken following a Budget will not necessarily be required, especially given the complexity of what we are dealing with?

Ian Murray (Labour, Edinburgh South)

I am grateful for that intervention. Indeed the Minister is an optimistic person. There is always a ray of sunshine over the Dispatch Box when he comes into the Chamber to answer questions. I do not mean to come across as criticising HMRC staff, because they do a marvellous job under incredibly difficult circumstances. I think it was my hon. Friend the Member for Middlesbrough South and East Cleveland who mentioned that when the public or small businesses—or anyone, in fact—contacts HMRC, they do so, in the main, for all the wrong reasons. From the start, therefore, the circumstances are particularly difficult, and the vast majority of HMRC staff do a marvellous job dealing with such problems, often in situations that are incredibly stressful and hostile.

Finally, I would like to discuss loans.

Bill Esterson (Labour, Sefton Central)

Before we move on to loans, my hon. Friend made a point about how the changes will impact on staff. Surely the key issue is that there will be fewer staff, due to the very high numbers of redundancies being pushed through by the Government. That will put staff under increasing pressure. The levels of training and new knowledge required, therefore, will be far higher than would normally be the case after a Budget. That is the key issue; there is more information for fewer people to learn and apply.

Ian Murray (Labour, Edinburgh South)

My hon. Friend is absolutely right, and the information that has come directly from the Treasury about HMRC is that there will be a 15% overall resource cut, and a 25% efficiency saving, which has been mentioned already. The £900 million for tax avoidance is certainly not new money, because it is a replacement for those efficiency savings, or for that shrinking budget. That was emphasised by the Chartered Institute of Taxation, and we have heard this already, but it bears repeating. It has said that as it stands,

“the legislation, which includes 14 separate tax avoidance tests, was likely to leave employers seeking clearances from Revenue & Customs on their particular circumstances.”

Considering how complicated those circumstances may be, we could reach a situation where every single business in the country—whether small, medium-sized, or bigger, and whether the people in them are self-employed or otherwise—might contact HMRC with incredibly complex personal circumstances. HMRC would have to give a judgment on their concerns. That judgment may not necessarily be correct, because the regulations that the Minister is promoting are so complex that they would make an insomniac sleep. As we have discussed, they were incredibly complicated to run through at lunchtime.

HMRC therefore has a problem. I feel sorry for its staff, and I would be interested to hear how the Public and Commercial Services Union would respond to issues that we have raised, from the point of view of supporting the majority of the work force at HMRC, whom it represents.

Nicholas Dakin (Labour, Scunthorpe)

My hon. Friend makes a powerful point about capacity at HMRC. Does he feel that HMRC can no longer do more with less, and that that needs thinking about very carefully?

Ian Murray (Labour, Edinburgh South)

It seems a strange irony that the body responsible for collecting all taxation in the country, and for regulating the collection of taxation, whether through self-assessment, PAYE, corporation tax or VAT, has a shrinking budget. In times of austerity, people may think that HMRC would be given more resources. This statistic is from memory, so it may be incorrect, but for every HMRC employee, around £400,000 is collected for the Exchequer—my memory is not as good as that of the hon. Member for Watford, even though I studied law, too. I cannot remember why I studied it in the first place.

There is a real dilemma here. In times of financial difficulty, when every single penny coming into the Exchequer is needed, and there is somewhere between £40 billion and £120 billion of either uncollected tax or tax avoidance in the economy, depending on what estimates are used, we should plough money into HMRC, so that it has the resources to collect those funds. In my view, the legislation is overly complex, because HMRC is under-resourced, and if it were not under-resourced, it would be far easier to look at tax avoidance measures.

I will now move on to loans, which the Minister has discussed in great detail. The Institute of Chartered Accountants in England and Wales made its view clear in the first sentence of its response to the proposals:

“The exemption for loans is not broad enough.”

The Minister spoke eloquently and at great length about carve-outs, but the ICAEW has stated that the exemptions for loans are not broad enough. It mentions reward and recognition for employees in that regard, and the issue of what could constitute an unpayable loan.

Let us take the example of an employee who is awarded £1,000 in a reward scheme. Who determines whether that is a loan? Who determines whether that is to be repaid? Who determines whether there is tax avoidance in that payment? The business that gives that reward and recognition to that employee would have to phone up HMRC and—I do not say this flippantly—perhaps spend half an hour, 45 minutes or an hour trying to get through. It will then speak to an adviser and have to be put on to a specialist unit, because not all HMRC staff can be retrained. That specialist unit will have to ring them back, as anyone who has recently dealt with HMRC will know, and they often ring back with a different perspective on the question asked, instead of replying to the one that needs answering. This whole churn is going on while the poor employee is waiting for the bonus, and while the squeaky-clean employer is, quite rightly, going round trying to find an answer to their questions about the perceived loan that is being given. That is why I thought that it was important to press the Minister on loans that are given to employees.

An employer could give a loan of £1,000 through a third party to an employee and that could be repaid at £50 a month with no interest. Is that market value for loan repayment? I would suggest not, because the amount paid for a £1,000 loan over a period of time would certainly be more than that if interest were payable on it. If it was determined that that was not market value, would the employee be hit with anything up to 40% tax on that loan as a benefit through the payroll system? What happens if the loan is constructed so that it is paid back at 10p a week for life and then, when the employee passes on, the remainder of that loan is repayable from the estate? That is a commercial loan, and many loans—perhaps not even through companies—are constructed in that way. Indeed, buy-back mortgages for elderly people work in that way. They can borrow money on their house, and the house then reverts to a third party. I know that that is slightly different, but it is a practical example of how people in their day-to-day lives view such benefits, and they could be caught in the middle.

To conclude, my hon. Friend the Member for Sheffield Central mentioned that the proposal fails the small business agenda, and it certainly does. If anyone has run a small a business or knows someone who has, it will be clear to them that all the owner wants to do is run the day-to-day affairs. Every single small business owner in the country has a great affection for their employees and vice-versa—I am not sure that there are many exceptions to that—and they want, therefore, to reward employees in the best way possible. They do not want to avoid tax or go through loopholes, but they may be reluctant to reward, given the complexity of the proposal. Even after the amendments were brought forward following the consultation, the Institute of Chartered Accountants in England and Wales said:

“We still believe that the current structure and fundamental principles…are wrong. While we understand the wish to avoid leaving scope for abuse we do not accept that it can be right to impose severely penal tax charges on a wide range of very common commercial remuneration arrangements.”

I repeat that this clearly fails the small business agenda.

We have had a long debate today on what everyone will agree is an important clause. I re-emphasise that any tax avoidance measures are welcome, but they have to be clear, as simple as possible and understandable. That is why we are asking the Treasury team to go away before Third Reading and find a simplified way of presenting the information, so that we can make a proper determination on it. That would be the best way to proceed. Some of the debate that we have had today highlights the complexity of the legislation and why we need to reflect on what we are trying to achieve.

David Hanson (Labour, Delyn)

We have had a useful discussion of the concerns about clause 26 and schedule 2. On some issues, I wish the Minister harm politically, and we debate those concerns. On this occasion I do not, and I hope that he will accept that. We are simply trying to reflect strongly the concerns outside the Committee on these key issues. My hon. Friend the Member for Edinburgh South has reflected those concerns very well on behalf of people outside the House.

I am acutely aware that we are dealing with serious matters in trying to tighten up three areas. As we have discussed, those areas are: loans that will not be repaid; making assets available to an employee via a trust; and questions on an effective pension cap. Clause 26 and schedule 2 will bring about £750 million into the Treasury, and they will tighten up the existing loopholes. I do not oppose the principle behind what the Minister has said, and for that reason I will not oppose the Government amendments. This might seem illogical, but I want to give him an opportunity to have a break over the next four to five weeks to look at the issues seriously. [Interruption.] The Minister says “a pause,” and in the current spirit of cross-party co-operation, let me say that pauses for thought are often worth while. We are having them on Trident, on the health service and on a range of other issues. It is important that the Minister uses the next four to five weeks to look at the matter seriously.

Although I will not oppose the amendments, if the Minister is not willing to withdraw the clause and schedule as amended, I will ask my hon. Friends to vote against them. That is not because we want to forgo the £750 million. If the Minister decided after the pause that he wanted to bring back the clause in the same form, we would not oppose it on Report or Third Reading. I want to give him an opportunity to reflect on what the Opposition have said on behalf of a number of organisations outside the House.

I conclude by saying that the Institute of Chartered Accountants states in paragraph 4 of its latest submission, which was written after the amendments were tabled:

“Our major concerns with these proposed rules still remain. We believe that this legislation is still far too widely targeted. It catches far too many innocent and/or commercial transactions. Our particular concerns…are set out below.”

There are three pages of concerns, which are not addressed by the amendments, including about definition, enforcement and complexity. On those questions, the schedule will fall short of achieving the objectives that we both share, even when amended.

There are real concerns about definition in the Bill. For example, the words “reasonable chance”, which will not be amended, are used on page 65. “Reasonable chance” is open to so many definitions and so much legal interpretation that the resulting lack of clarity will damage the Minister’s objective. The Minister could reconsider the Bill and discuss it with colleagues outside the House before bringing back clear legislation that meets the three tests that he has set. Then we would not have to have the range of exclusions in the Government amendments. Those exclusions will ultimately lead to further confusion and complexity downstream.

The Minister should not take our opposition to his revised clause as a spending commitment or as a concern for the loss of that revenue, because it is not. Let me be clear about that. If the Minister will not accept our suggestion of a pause for thought, that is our attempt to force him into one. If that fails, we will look at it outside, and might table our own amendments on Report to clarify the matter. I could have tabled hundred of amendments to this legislation; I chose the task of applying a “delete” option to the clause, because we feel the clause needs a substantial rethink. We will not oppose the amendments, but if the Minister will not withdraw the schedule and the clause, we will vote against and give him a chance to reflect more comprehensively over the next few weeks.

David Gauke (Conservative, South West Hertfordshire)

I can understand why the Opposition would want to raise questions about legislation, particularly when it is complex and controversial. I can understand representative bodies raising concerns. However, I have to underline to the Committee the fact that we are talking about an independently verified assessment that the measures will bring in additional revenues of £750 million. If there were an easy way to do it in simple terms, we would have done it. I would rather the legislation were on two pages, not 66. However, we do not believe those other options would be as effective, or, if they were, they would be equally complex.

It is important that we move on, and that the Committee shows its determination to tackle this form of tax avoidance. Were we to reject this legislation, the signal we sent would be most unfortunate, suggesting a lack of willingness. If there were an alternative way to do it, the Opposition could have tabled amendments. This matter has been debated, it has been out in the open and we introduced the draft legislation in December. If there is an easier solution, we would welcome constructive amendments. We do not believe that is the case. The Committee would make a significant mistake if it struck down this clause and schedule. If hon. Members want to address this serious problem and loss of revenue to the Exchequer, there are better ways of allocating £750 million than opposing the legislation. I urge the Committee to support the clause and schedule.

Schedule 2 - Employment income provided through third parties

Undertakings given by employers etc in relation to retirement benefits etc

Roger Gale (Conservative, North Thanet)

Before we proceed to clause 27, I wish to make an observation. According to the information provided to me by the usual channels, which might have been updated since in the light of experience, we are running considerably behind schedule. It is not the Chairman’s job to dictate the terms of the business of the House, and I do not wish or intend to do so. It is, however, my job to protect the well-being of those serving on the Committee. If, therefore, we have not reached a point by 4 o’clock at which the usual channels deem it appropriate to adjourn, I shall suspend the sitting for half an hour for the comfort of staff and Officers of the House. That will mean that we will sit again at 4.30 pm for a period of time as yet to be determined.

Clause 27 - Tainted charity donations

Kerry McCarthy (Labour, Bristol East)

I beg to move amendment 96, in clause 27, page 19, line 3, at end add—

‘(2) The Treasury shall prepare a report by 1 January 2012 on the impact of Schedule 3 on charities and community amateur sports clubs.’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss clause stand part.

Kerry McCarthy (Labour, Bristol East)

The clause introduces schedule 3 to allow the new anti-avoidance measures to prevent the abuse of tax reliefs on charitable donations for income tax, corporation tax and capital gains tax. I think we all agree that the whole point of charitable donations should be to benefit a charity, so it is right to continue to crack down on misuse for tax avoidance purposes. Our amendment is designed to ensure that the Treasury reviews the impact of the new rules to determine the most appropriate and effective means of doing so.

The Finance Act 2006 introduced the substantial donor rules, which applied where a donor made a charitable donation of at least £25,000 over 12 months or at least £100,000 over six years. The substantial donor rules limited tax relief where the donor entered into a subsequent transaction with the charity from which the donor benefited. It is necessary to tackle such tax avoidance measures, of course, but charities raised concerns about the application of the 2006 rules in practice. Some reported that innocent donations were being wrongly caught and that the rules had the potential to deter much-needed and genuine substantial donors.

Given the increased burden on the charitable sector from the big society agenda and the cut in local authority grants, charities are basically being asked to do more for less money. Now is the time when charities can least afford to lose potential donations. Charities also reported that the substantial donor rules added to their administrative burden, as they were required to hold records on both substantial donors and their connected parties. As the charities were responsible for ensuring compliance, it was they who were held responsible for any penalties.

Following consultation with charities, it was clear that there was scope for improvement, and that was why the 2009 pre-Budget report announced the intention to replace the substantial donor rules with new rules to deny tax relief on donations to charities when the donor was party to an arrangement the purpose, or one of the main purposes, of which was to extract value from the charity. That is the context of schedule 3, which accordingly introduces a purpose test and sets out the three criteria that must be met for a donation to be classed as tainted and consequently as ineligible for tax relief.

The Treasury’s consultation on the draft legislation stated:

“The new legislation is intended to catch only donors (or persons connected to them) who, in respect of a donation to charity, have entered into arrangements with the purpose of receiving an advantage from the charity.”

The intention of schedule 3 is, accordingly, to ensure that anti-avoidance legislation targets only people who have made a donation for personal gain, does not wrongly catch out or discourage genuine philanthropic donors and does not penalise the charitable organisation unless they have knowingly entered into the avoidance arrangement. Can the Minister tell us how many, or what proportion of, charitable donations over the past five years have been deemed to breach the existing substantial donor rules, and whether the Government have an estimate of the proportion of them that were wrongly judged to have broken the rules?

I am also interested to know whether the Government have any indication of the number of potential substantial donors who were deterred by the regulations, because it is important to have as much information as possible about the apparent weaknesses of the previous system to ensure that the provisions in schedule 3 are the appropriate solution.

A common concern raised during the 2008 consultation was that the substantial donor rules were complex and insufficiently targeted, and it is not clear—as I shall come on to discuss—whether schedule 3 addresses that concern. The Government published draft legislation in December on the tainted charitable donations provisions and the consultation on it was welcomed. The responses were informative but, although many of them welcomed the review of the substantial donor rules, the draft proposals did not receive a glowing endorsement. For example, Russell-Cooke solicitors noted that:

“on a close analysis, these new rules may also catch genuine donations (for example, a sale at an undervalue), and many are now querying whether or not the tainted charity donations rules will improve the current position.”

James Kessler, QC, the author of “Taxation of Charities”, described the proposals as

“lengthy, complicated and wide ranging”,

and concluded that

“the tainted donation rules are unfit for purpose, and…would seriously damage charities and charity fundraising.”

Worryingly, he also highlighted a number of inaccuracies in the explanatory notes, including the wrongful assertion that a donation to a hospital in return for treatment would qualify for gift aid. Under the Income Tax Act 2007 that is clearly not the case, as there is an obvious benefit attached to the donation. I am glad to say that that inaccuracy has been corrected in the final version of the notes, but it raises questions about the level of consideration given to the existing legislation and to the draft proposals.

The intention is clearly to ensure that innocent donors and charities are not penalised, but James Kessler unfortunately came to the conclusion that the tainted donor regulations

“are not better for the charitable sector than the substantial donor rules. They are in fact worse.”

Similarly, the Law Society warned that the suggested replacement of the substantial donor rules is complex, and the uncertainties that are likely to result seem contrary to the Government’s stated aim to promote greater predictability, stability, simplicity, scrutiny and transparency in the UK tax system. That body has also expressed its concern that the legislation may not be easy to follow and apply in practice.

Some modifications have been made to the draft legislation—the Minister might want to comment in more detail about the changes that were made in response to the consultation—but things that the Law Society, and others, have reservations about, including the lack of a minimum level for donations that could be considered tainted, and the potential for charities to be held jointly and severally liable, remains in schedule 3. Although many people criticised the previous rules for being insufficiently targeted, it seems that they are now concerned about the potential impact of broadening the scope of the anti-avoidance measures to include all donations, not just, as within the substantial donor rules, donations of more than £25,000 or £100,000 in the given period. Have the Government given any consideration to whether that might discourage donors? Also, will charities have to be cautious with all donations to ensure that none of them may be considered tainted?

A prime objective in replacing the substantial donor rules seems to be to ensure that charities do not pay the penalty for a donor’s mistake or abuse of the system. However, it seems that that objective will not necessarily be achieved. Proposed new section 809ZN, which is in schedule 3 of the Bill, makes it clear that a charity will be held liable only if it was “party to” the arrangements, but whether a charity was or was not aware of such arrangements could be open to misinterpretation. Will the Minister give more information about where the burden of proof will fall and what criteria will be used to judge a charity’s liability? Are the Government satisfied that there are sufficient safeguards to ensure that charities are not wrongly accused?

Regarding the three Conditions set out in proposed new section 809ZJ in schedule 3, the Institute of Chartered Accountants expressed concerns that Conditions A and B could bring within the new provisions many arrangements that are not the intended target of this new legislation. It is important to ensure that the regulations do not target genuine philanthropic donors, and Condition A accordingly requires some proof of intent. Although the explanatory notes to the Bill provide a number of examples in which Condition A may or may not apply, the term “reasonable to assume” that Condition A relies on to a large extent seems rather vague and open to subjective interpretation. Will the Minister provide more information about who will be the arbiter of that issue and the criteria they will use?

In contrast to the substantial donor rules, the tainted donation rules include only people living together as husband and wife or civil partners, trustees and connected companies, rather than most immediate family members. Although that may represent a simplification, the new rules introduce the problem of associated donations, whereby all tax reliefs are disallowed on donations connected to the tainted donation even if they are not tainted directly. Accordingly, doubts have been raised about whether that achieves the Government’s aim of focusing on the purpose of an arrangement.

On publishing the draft legislation, the Treasury estimated that the tainted charity donation provisions would cost £10 million per annum, due to the projected rise in tax relief claims. Will the Minister say how that estimate was arrived at, how many donors the provisions are expected to affect and by how much charitable donations are expected to increase?

It is also unclear how the rules on tainted donations will be applied and how tainted donations will be monitored if the starting point is to be tax return audits. With no limit on donations, it seems that every donation on which relief is claimed could be examined, so how will HMRC decide which claims should be investigated and how will HMRC apply the purpose test?

If new rules are to reduce the administrative burden on charities, they need to be simple to understand and administer, but they have been described as user-unfriendly and the Treasury itself concedes that they could mean that donors incur more costs in seeking accountancy advice on the validity of their donation arrangement. Therefore, we want to ensure that schedule 3 is not unnecessarily complex and represents a significant improvement on the substantial donor rules in terms of ease of administration for HMRC, the administrative burden placed on charities, the incentive for potential donors and, of course, the reliability of the test.

The reservations that I have outlined indicate that there are doubts about how the tainted donation rules can be applied in practice and about the impact that they will have on charities. It is also clear that the consultation on the substantial donor rules proved very informative in highlighting the weaknesses and unintended consequences of that regime. Therefore, I encourage the Minister to consider our amendment, so that the impact, effectiveness and scope for potential improvement to the provisions are kept under review.

Justine Greening (Conservative, Putney)

Clause 27, along with schedule 3, introduces new anti-avoidance rules to replace the anti-avoidance rules on substantial donors to charities. As we have heard, the path that we have taken to the clauses that we are discussing started back in 2008, when the first formal consultation on the existing anti-avoidance legislation was undertaken. In Budget 2009, there was an announcement that further informal consultation would take place with charities, their representative bodies, large donors to charities and charity tax professionals to develop a replacement for the existing rules. That informal consultation took place during the summer of 2009.

In the 2009 pre-Budget report, there was an announcement that the existing rules would be replaced with new rules based on a purpose test. As part of clause 27 and schedule 3, we set out that purpose test. On coming to office, the Government confirmed in the June Budget our commitment to replacing the existing rules.

It is probably worth setting out why it is important to take donor abuse seriously. Charities and their donors receive a generous package of tax reliefs designed to encourage and support charitable giving, in fact in total the reliefs are worth more than £3 billion each year. Unfortunately, as the Committee can imagine, that generosity attracts not only people who wish to support charitable activities but those who seek to gain a financial advantage for themselves by avoiding tax, so we need anti-avoidance legislation to ensure that we can counter that abuse.

A significant area of abuse of charitable tax reliefs is donors’ abusing their control of a charity. Large donors are often in a position of influence and may look for ways to extract the funds that they have donated to the charity after they have received tax relief on them. It is worth pointing out that the vast majority of such donor-controlled charities act with complete propriety, but a small minority are involved in abusive behaviour, which puts at risk the good name of all charities in the UK. The new rules will counter that behaviour. They will also mean that the taxpayer’s money that we, as a country, want to use to support charities will go more holistically towards doing so, and we will not see an element of it being, in effect, siphoned off to people who should not have been eligible for tax relief in the first place.

It is widely accepted that the rules were poorly targeted. The burden was on the charity, both administratively and financially, and it, not the offending donor, was liable for any tax loss if an offending donor was caught. Furthermore, the rules caught unintended transactions and discouraged large, genuinely philanthropic donations to charity. Quite simply, the substantial donor rules were not fit for purpose, and work on reforming them rightly began under the previous Government.

HMRC’s consultation has been broad and inclusive, and everyone agrees that, although it is essential to counter real abuse of tax reliefs, we cannot leave legislation in place that deters genuine donors from supporting charities. The change is supported. Nicola Evans, of the law firm Bircham Dyson Bell, said that it

“removes many of the problems that previously existed around perfectly legitimate arrangements”.

The Chartered Institute of Taxation said in written evidence to the House of Lords Select Committee on Economic Affairs that the

“evolution of the improved rules...is a good example of how anti-avoidance legislation can be improved through consultation”.

The hon. Member for Bristol East mentioned James Kessler, and he is a part of the HMRC working group looking at the rules, but most people in the working group have welcomed the changes. Those who oppose them generally do not approve of any anti-avoidance rules at all. Therefore, the opinions that she quoted are, first, not the views of the majority and, secondly, certainly not the views of the Government, because we want to ensure that the £3 billion of taxpayers’ money for tax relief on charitable giving has integrity. The new rules are the culmination of an extensive consultation, which ensures that unintended transactions are not caught.

At the centre of the new rules is a new purpose test that must be satisfied before they are triggered. First, has the donor, or someone connected with them, entered into arrangements with the intention of receiving some sort of financial advantage from the charity over and above any tax relief properly due on the donation? Secondly, would the donation and the arrangements have been made independently of each other? If the donor would not have made the donation without the prospect of a financial advantage, the donation will be deemed to be a “tainted donation”, and the tax relief that would have been due on it will be denied.

The vast majority of donations to charity are not caught by the legislation, because the vast majority of donors do not donate to gain a financial advantage. When abuse occurs, it will be the dodgy donors, rather than charities, who will have to pay the additional tax. The one exception is when a charity knowingly becomes involved in an arrangement that results in a tainted donation, but it is not possible to obtain the tax from the donor. That, however, would be a last resort and it is only in place to prevent such deliberately contrived arrangements that would seek to undermine the rules.

The new legislation will also largely repeal, in two years’ time, the current rules in relation to substantial donors to charities. In the meantime, there will be a transitional period, during which people who have made donations before 6 April 2011 may still be caught by the substantial donor rules. The only limited scope for a substantial donor to be caught after the two-year transition period is when they enter into a contract before April 2013, but payment under that contract is deferred until after that date. This is anti-avoidance legislation and not catching that situation would allow people to circumvent the old and the new rules.

The new rules will cost an extra £10 million to the Exchequer, but that is an extra £10 million in tax relief, because donations that have been disallowed or discouraged under the old rules will no longer be caught. Effectively, that means that more will be given to charity. The hon. Member for Bristol East has asked what impact the clause will have. It is anticipated that it will mean an extra £10 million in tax relief to charities.

As I have said, the consultation undertaken over a number of years, under both this Government and the previous one, has helped to develop the underlying principles for the new rules. The group of interested parties that we set up to work alongside HMRC helped significantly in the development of those principles, and their comments on the draft clauses have resulted in several significant changes, ensuring that the rules target real abuse of charity tax relief.

On amendment 96, the impact of all the measures has been published in their respective tax information and impact notes. The note for this measure was published alongside the draft legislation on 9 December. I shall explain it further for the benefit of the Committee and hope to resolve any remaining queries. Charities will be helped by the new rules, because they move the compliance burden away from charities and on to donors. As I have said, the cost of £10 million to the Exchequer represents additional tax relief on donations, so those charities that will benefit will do so, all together, by £10 million each year.

We have not made an estimate of the additional cost for individual donors, but it is likely to be very small. Obviously, most donors simply make a donation and then enter into an arrangement with the charity. Those donors will be unaffected by the new rules and will incur no costs. The majority of donors who enter into arrangements with a charity will not be caught by the new rules, because their purpose will not be to obtain a financial advantage. They will not, therefore, need to consider this legislation. As for those individuals who seek to gain a financial advantage, HMRC does not generally estimate the administrative burden of trying to avoid tax. Presumably, the harder and higher, the better.

My final point on the amendment is that the door has not closed on this legislation. The impact of the new rules will be reviewed by a sub-group of the HMRC charity tax forum, which has proved helpful in working with me as a Treasury Minister and with HMRC over recent months to help us develop not just this legislation but the whole philanthropy package that we introduced in the Budget. I am sure that we will discuss that package later. The first meeting of the HMRC charity tax forum to review the new rules is anticipated by the end of the year. If it becomes apparent that innocent donors are being caught by the new rules—although we do not anticipate that—we will, of course, look at what changes we might need to introduce in a future Finance Bill. I hope that I have reassured the hon. Lady that we keep a watching brief on the issue. We want to make sure that, although they are complex, the rules operate as intended.

In conclusion, the new tainted charitable donation rules represent a huge improvement on the substantial donor rules. The new rules have been broadly greeted by a number of charity representatives, who are keen for them to be included in the Bill. The new rules remove the administrative burdens imposed on charities by the substantial donor rules. The vast majority of donors will be unaffected. A donor will always know if they have entered into arrangements with the purpose of getting a financial advantage in return for a donation. It will be the donor, not the charity, that is liable for any tax charge. The new rules will protect the Exchequer from the abuse of the UK’s generous charity tax reliefs, leaving charities to concentrate on building their relationships with donors and making their contribution to the country and our big society. This is but one measure that has led the Charities Aid Foundation to say that the Chancellor

“delivered for charities and those who want to support them.”

I therefore reject the hon. Lady’s amendment, but I hope that she will concede that we have some safeguards in place. We believe that these rules will work much more effectively.

Kerry McCarthy (Labour, Bristol East)

It certainly was my intention to press this amendment to a vote, but in view of the assurances that the Economic Secretary has given on the measures that will be taken with the working group to keep the provisions under review, I beg to ask leave to withdraw the amendment.

Clause 29 - Loan relationships involving connected debtor and creditor

David Hanson (Labour, Delyn)

I have just one question. The clause appears to apply to controlled foreign companies, which we will consider later in the Bill. How do the new rules interact with the CFC reforms from 2012 onwards?

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that question.

David Hanson (Labour, Delyn)

It is not a point of substance. Perhaps the Minister could clarify that in a note following the Committee? I would be happy with that.

Clause 31 - Company ceasing to be member of group: availablitly of relief

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 107, in clause 31, page 20, leave out lines 14 and 15 and insert—

‘(c) subsection (2) may operate to prevent subsection (1) applying by virtue of paragraph (b), unless subsection (2AB) applies.

‘(2AB) This subsection applies if company A’s ceasing to be a member of the first group at the same time as one or more associated companies forms part of arrangements the main purpose, or one of the main purposes, of which is the avoidance of a liability to corporation tax.’

Briefly, the amendment improves the targeting of the anti-avoidance measure introduced by clause 31. It does so by ensuring that the new rule has no adverse impact on commercial transactions that do not have a main purpose of avoiding corporation tax.

The amendment responds to comments on the clause from a number of accountants and from the Law Society, for which we are grateful. I urge the Committee to accept the amendment.

David Hanson (Labour, Delyn)

I have a question on clause 31 as a whole. The clause amends an aspect of de-grouping charge rules in the corporation tax regime for chargeable gains. I want to raise the issue of intangible assets, which are not included in the clause. I am interested as to why they have not been included. For example, if I bought a hotel, I might also buy the goodwill for that hotel. If I sell the hotel, the intangible asset will still attract a tax charge if the goodwill was bought after April 2002. There seems to be an inconsistency between the pre and post-2002 intangible arrangements. There seems to be no sensible reason not to revise the intangible asset rules to harmonise the treatment of tangible and intangibles in this matter. I welcome the Minister’s comments now, or, if not now, I would welcome some reflection post-Committee.

David Gauke (Conservative, South West Hertfordshire)

Clause 31 ensures that companies cannot avoid corporation tax on chargeable gains by using complex arrangements that seek to exploit a perceived loophole in the de-grouping charge rules. A de-grouping charge ensures that tax is paid on gains when, instead of selling an asset directly, a group of companies sells a company that owns an asset. Otherwise, there could be a loss of tax, whether as a result of normal commercial arrangements or through tax avoidance.

The right hon. Member for Delyn asked me about intangible assets. I understand that that is not relevant to clause 31. When we consider clause 45 in due course, intangible assets will be relevant in that context. However, that is not the case in the context of a company ceasing to be a member of a group and the conditions under clause 31.

Clause 34 - Investment companies

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following:

Government amendments 113 to 117.

That schedule 7 be the Seventh schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

These amendments make changes to ensure that schedule 7 applies to controlled foreign companies in the same way that it applies to UK investment companies. Schedule 7 allows companies, including CFCs, to elect prospectively to change the currency in which they prepare their accounts—their functional currency—for tax purposes. It also stops changes in companies’ functional currency having a tax effect until the accounting period following the change. The deferral of a tax effect to the change in functional currency blocks an avoidance scheme that allowed companies retrospectively to crystallise foreign exchange losses for tax purposes. Following the publication of the Bill, it came to HMRC’s attention that certain provisions in the CFC code prevent the restriction on the timing of the tax effect of a functional currency election from applying to CFCs.

The amendments ensure that UK resident companies with interests in CFCs will not be able to change the functional currency of the CFC with the benefit of hindsight to realise a foreign exchange loss for tax purposes to reduce or avoid a CFC apportionment. The amendment will apply to multinational groups with CFCs and protects tax revenue in the low hundreds of millions per year.

Although the amendments may at first sight appear to be pre-empting the wider CFC reform, their effect is to ensure that schedule 7 applies to CFCs in the same way as it applies to UK investment companies. Schedule 7 benefits companies by allowing them to elect prospectively to change their functional currency for tax purposes. The amendment is, therefore, not counter to the direction of CFC reform. The amendments ensure that the avoidance opportunity that the original measure was designed to close is blocked for controlled foreign companies in the same way that it is blocked for UK investment companies. I therefore urge the Committee to accept the amendments.