Finance (No. 3) Bill

Public Bill Committee, 7 June 2011.

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

Clause 47 - Controlled foreign companies

David Hanson (Labour, Delyn)

I beg to move amendment 100, in clause 47, page 28, line 11, at end add—

‘(2) Notwithstanding the provisions of paragraph 14 of Schedule 12, the Schedule will not come into force until a full impact assessment on developing countries’ tax revenue has been laid before and approved by the House of Commons.’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss amendment 101, page 213, line 31, in schedule 13, leave out

‘on the day on which this Act is passed’

and insert

‘when a full impact assessment on developing countries’ tax revenue has been laid before and approved by the House of Commons.’.

David Hanson (Labour, Delyn)

Welcome back to the Chair, Mr Hood. Looking around the room, it seems like only yesterday, but we have been away for a week. I am sure that everyone has had a marvellous time. I place on record my best wishes to the hon. Member for Elmet and Rothwell, who—unlike the rest of us, who have obviously been sweating hard over the clauses before us—used the week away productively by getting married. I wish him well, certainly on behalf of the Opposition.

We tabled the amendment because, whatever the issues around the changes to controlled foreign companies, it is important to make a full assessment of the impact of developing tax issues in developing countries before we approve clauses 47 and 48 and the appropriate schedules. Clause 47 deals with the way profits made by foreign companies and multinationals are treated in the UK for tax purposes. It deals with the treatment of profits made by subsidiary companies, which are companies within a wider group of companies that make up a multinational structure. Those are known as controlled foreign companies.

In the past, multinationals based in the UK have had to pay corporation tax not only on profits that they have made in the UK, but on profits they have made through subsidiaries and branches abroad. The system gave credit for any overseas tax in working out the corporation tax liability, but taxation occurred either when the profits were sent back to the UK or, where the company was in a low-tax territory, by deeming the profits to have arisen in the UK. The CFC rules have stopped companies moving their profits out of the UK to avoid tax, but they have also provided a disincentive to base in the UK. Multinationals have threatened to move their headquarters abroad and some have done so. I will touch on that again shortly.

In government, the Labour party was committed to moving towards a more territorial regime—a regime where profits made in the UK are taxed in the UK but profits made in other countries are not. We consulted extensively on how the rules could be changed to provide more certainty for business to ensure that the UK remained an attractive place for multinational companies to be based, but also to ensure that the UK tax base was not eroded by profits being moved offshore. The general direction of policy was set in this area when we were in government, and the Minister can be assured that we generally support the direction of travel, but we have some concerns, which is why I tabled the amendments.

I am concerned that the Government have not fully thought through the detailed consequences of their changes, particularly the impacts on developing countries. It is not just for me to say that: sometimes I reflect my opinion and sometimes I reflect the opinion of organisations outside the House, which I share and which I feel need to be developed. The Minister will know that ActionAid—a British charity founded in 1972 and working in 50 countries —has raised similar concerns to those in amendments 100 and 101, and it is important that he addresses them.

ActionAid has a range of issues it wishes to see developed further, and the Minister will be aware of the detail. It calls on the Government to do what we have proposed in the amendment: consult developing countries on the proposed changes and consider the impact of the reforms on them—for example, by looking with other Departments at capacity building on corporate taxation, and further extending activity begun by the Labour Government on support in the G20 for country-by-country financial reporting. We could then see where multinational companies were paying tax, and how much. If there were any tax avoidance, tax efficiency or, as some would say, tax dodging—however we want to phrase it—it would be highlighted so that multinational companies were accountable for the taxation that they need to pay as their contribution to society.

Nicholas Dakin (Labour, Scunthorpe)

I thank my right hon. Friend for spelling out concerns about the proposals. ActionAid is an organisation with a good pedigree and it needs to be taken seriously when it puts these considered and careful thoughts to the Committee. The Government should take it seriously and come back on the points raised.

David Hanson (Labour, Delyn)

ActionAid is a worthy organisation willing to look at the issues in detail and take positive action itself. It moved its headquarters from the UK to South Africa in 2003 to help to support developing countries. It is trying to shine a light on concerns over ensuring that multinational companies pay a fair share of tax in the appropriate country, and do not use the ability to move business around the world to avoid taxation—a practice particularly disadvantageous to developing countries.

A particular problem is that CFC rules act as a brake on tax avoidance by UK companies, no matter who would lose out from the avoidance. The proposed reforms will release the brake where the tax being avoided is that of a country other than the UK. ActionAid has raised issues about a number of countries and, as the Minister will be aware, recently produced a document on the company SABMiller, which shifted profits out of developing countries through royalty payments to the Netherlands, management fees to Switzerland, procurement via Mauritius and interest payments to Mauritius, so easing its tax burden to the disadvantage of the countries where it was based. It is feared that that will become easier and more common.

The key point is that, although richer countries such as the UK might have the legislative and administrative capacity to cope, the reforms could lead to an intensification of tax avoidance by UK companies in developing countries. ActionAid has estimated that as much as £4 billion in tax in developing countries could be avoided as a result of the proposals before the Committee. I do not know whether that figure is correct; I do know that the Treasury has looked at it, because it received freedom of information requests on the issue. We need an assessment from the Minister of whether that figure is accurate.

I have some FOI responses to ActionAid’s £4 billion estimate from officials at the Treasury and the Department for International Development, who looked at the issue in detail. One reason why I tabled the amendment is that those responses show that the Government have not really considered the impact of these measures on developing countries or on the tax take in those countries. In a trail of e-mails that I received recently under FOI, on 16 March an official in Her Majesty’s Treasury, whose name has helpfully been blanked out—they may even be in the room as we speak—told an official in DFID:

“The AA response to the consultation is on the proposals for taxation of foreign branches and CFC interims. The calculation of cost to developing countries is very crude and is simply based on one fifth of profits being moved out of entities in developing countries. I would assume this proxy is based on the impacts of both these reforms due to the scope of their response… we strongly disagree with these numbers but”—

this is very illuminating—

“have not done any work on this.”

ActionAid says that the proposal will cost developing countries about £4 billion, and the Treasury says that it believes that that figure is very crude. If, as the official states in the e-mail, the Treasury has not done any work on this, will the Minister tell me on what basis he disagrees with the £4 billion figure from ActionAid? That communication proves that the Treasury has not done any work on the matter, so how can the Minister say that the £4 billion figure is wrong?

Later in the e-mail chain, an un-named HMT official states in an e-mail to other un-named officials in HMT and in DFID that

“we think a big focus will be why is there this give away to big business in a time of spending cuts”.

I could not agree more. Does the Minister believe that there is a give-away to business in this time of spending cuts, and how big is it? How much will the proposals save big business and how much taxation will big business avoid as a result of them?

Nicholas Dakin (Labour, Scunthorpe)

Is not that exactly the point that ActionAid is making? Its concern is precisely that the proposals may turn out to be a give-away to big business and a loss to the people whom it should properly reach.

David Hanson (Labour, Delyn)

That is ActionAid’s concern; it believes that developing countries may lose £4 billion in taxation as a result of the proposal. If an un-named Treasury official is saying to an un-named DFID official that

“we think a big focus will be why is there this give away to big business in a time of spending cuts”,

the Minister needs to tell me exactly how much he assesses that to be, and whether he shares ActionAid’s commitment to £4 billion. Again, although we are talking about rubbish in e-mails, those e-mails also state that the Treasury has not done any work on the figures and factual information.

An e-mail from an un-named official in DFID to un-named officials in HMT, on behalf of the Ministers in the Department, is potentially even more illuminating:

“Basically, spads want to know whether the Budget is when the stuff is going to hit the fan so that they can start thinking about a plan.”

I would like to know whether the stuff has actually hit the fan and whether they have a plan, because that is what SpAds—special advisers—in DFID are asking. Putting that together with, “We have not done any work on this,” and, “We think it is a big give-away to big business at a time of spending cuts,” and considering that ActionAid anticipates £4 billion being lost to developing countries as a result of the proposals, the amendment is justified.

Alison McGovern (Labour, Wirral South)

Is my right hon. Friend aware that most UK aid spent by DFID assists poor countries in tax collection, because that is the best way for such countries to develop themselves out of poverty? There is a clear conflict between two parts of Government: one side is trying to help developing countries with tax collection while another appears to be doing something else.

David Hanson (Labour, Delyn)

It is important that the Minister tell the Committee what discussions he has had with DFID on those very points. As my hon. Friend says, it is extremely important for developing countries to have a strong, effective tax-raising base with a developed civil service developing and undertaking the type of tax work that we would expect in a developed country such as the United Kingdom. As she says, handouts from western countries are one thing, but development of a strong tax base and delivery of taxation measures are a quite different approach.

It is important that the Minister give some indication of the discussions he has had with DFID over and above the helpful FOIs that I have recently received. According to those FOIs, DFID is worried about when the stuff is going to hit the fan, so that it can start thinking about a plan. That is not saying when the stuff is going to hit the fan; it is saying, “So we can start thinking about a plan.” What is the plan? Is the plan to say that this does not mean anything? Is the plan to spin out the discussion, or is it to look at whether the £4 billion is a genuine figure? The Minister has some answering to do, including on behalf of his colleagues at DFID.

It is important that we look at the issue, because we expected, and the FOI requests indicate, that a new CFC consultation document would be published in May 2011. We have been away, but it is now June 2011. I looked at the Treasury website this morning and no further consultation document has been forthcoming on the next round of CFC consultations. The consultation document is TBC—to be confirmed—for June. It is important that the Minister is open with the Committee about the next stage of the consideration of CFCs. When is the next consultation likely to be and how does it fit into the regime that we have before us? The FOI e-mails before me discuss how the two link together and what action the Government need to take.

The amendment makes a simple request:

“Notwithstanding the provisions of paragraph 14 of Schedule 12, the Schedule will not come into force until a full impact assessment on developing countries’ tax revenue has been laid before and approved by the House of Commons.”

Accordingly, we should consult developing countries more widely. ActionAid itself says:

“The Treasury has not assessed the impact its proposals are likely to have on developing countries.”

ActionAid also says that the Treasury has not consulted anybody except business. Well, business is hardly likely to give a full view of the picture of tax avoidance. The Government need to publish an assessment of the impact that the proposed changes will have on developing countries, consult those developing countries and address the points raised by my hon. Friend the Member for Wirral South on how we look at the issues in the round to develop a stronger base for taxation in those developing countries.

ActionAid looked at a simple list of 10 publicly listed companies whose segment reporting allows for analysis of their financial results in developing countries. The sample showed pre-tax profits in such countries of £16 billion in 2009, which is of general interest to the Committee, and I want to look further at that issue.

The combined market capitalisation of the sample of 10 companies was £345 billion, which led to an estimate of UK listed companies’ profits in developing countries of £83 billion. Applying an average global corporation tax rate of 25%, the nominal tax bill for UK companies in 2009 was £21 billion. If developing countries were to lose one fifth of that amount to tax avoidance following the CFC rules, the loss would be the said £4 billion. ActionAid looked at African Barrick Gold, Anglo American, Barclays, G4S, Reckitt Benckiser, SABMiller, Standard Chartered, Unilever, Vodafone, and Xstrata, and that conclusion of £4 billion was based on those 10 companies.

It is important that the Minister examine that issue, and if he does not respond to me, he should respond to the concerns that have genuinely been expressed by a third-party non-governmental organisation about the impact of these measures. The Government should monitor the consequences carefully, because there are concerns that the costs could be higher than expected. Some tax experts believe that the Government are underestimating the long-term costs of the changes, and that the costings do not take sufficient account of the fact that companies will restructure to take advantage of the new regime.

The Government announced that there will be further significant changes to the CFC rules in the 2012 Finance Bill, which could cost the Exchequer £210 million, £540 million, £770 million and £840 million over the next four years, from 2012-13. Those are significant sums at a time when there are, as we know, cuts across the board elsewhere. That again returns us to a point that has been made not by me, but by officials in the Minister’s own Department, when they said that

“we think a big focus will be why is there this big give away to big business in a time of spending cuts”

—perhaps to the extent of £840 million a year by 2015-16.

The Minister needs to tell the Committee what his costings are, and not only for this year, because we need to know about the future CFC rules. He has not yet had the courtesy to bring those rules forward for public consultation, despite the fact that, before the clause came before the Committee, he said that we would have the consultation document in May. I admit that our discussions are going slower than they might have done, but that is no reason for him not to have produced the consultation document. Even in his March documents, he said that it would be produced in May. It is now June, so it will happen after we have considered these measures in the Committee. This is not a simple one-off package; it is part of a wider series of Government measures. We need to look at those, and the Minister needs to enable some discussion and consultation about where we are with regard to current and future plans.

Nicholas Dakin (Labour, Scunthorpe)

My right hon. Friend’s point is well made. At a time of austerity, when people have to tighten their belts for all sorts of reasons and things are not happening, to go ahead with what is potentially a give-away, and without assessing that beforehand, would be most unwise.

David Hanson (Labour, Delyn)

I am grateful to my hon. Friend for his intervention.

On 9 November 2009, the Treasury had a Treasury and HMRC stakeholder event, where a helpful slide presentation was given on the policy principles behind both these clauses and future proposals. On CFC reform, the following was indicated:

“There is a continuing need for CFC rules to protect the UK tax base from erosion. However, it is essential that the rules keep pace with the changing economy… the Government considers that there is scope for modernising the CFC rules in a way that will enhance UK competitiveness while providing adequate protection of the UK tax base.”

The slide continued:

“No Ministerial decisions have been made yet on details of new regime. Final decisions on the implementation of any revised CFC rules will need to take into account the economic position and wider Government finances”.

We will consider clauses 47 and 48 this morning, and we had indications from the Minister that a further consultation document could be published before we considered them, but that has not yet been produced by the Government in respect of 2012. We still have no detail on how the situation will look in the longer term. It is important and integral that the Government commit to improving transparency, particularly in the taxation of branches, so that multinationals can be held to account. The changes have the potential—I say potential, because the Minister can defend his position if it not the case—to reduce transparency, but there is still much detail to be pinned down, particularly with intellectual property. The consultation document, which was expected in May, has not been produced. I would like to know a definitive date for when the next consultation document on CFC rules will be produced, because that is integral. That document should certainly be produced before we conclude consideration of the Bill on the Floor of the House on Report, but I would welcome some confirmation.

Ian Mearns (Labour, Gateshead)

I would also welcome from Ministers not only an indication of when they intend to produce a consultation document, but a list of who they would see fit to consult. There is clearly a view that not all the interested bodies have been consulted.

David Hanson (Labour, Delyn)

I am grateful to my hon. Friend for his intervention, because it takes us back to our amendment, which simply asks for further discussion with developing countries before the assessment comes into play and before a resolution is laid before and approved by the House. Again, unless I am mistaken—the Minister will have an opportunity to tell me if I am—the only people who have been consulted are the businesses themselves. There has been no discussion with other nations, organisations or volunteer agencies about the proposal, apart from the Minister’s helpful production of the clauses in December last year, which led to the response that I have brought to the Committee today from ActionAid, which indicates that it is concerned about a £4 billion loss of income to developing countries as a result of the proposals.

Again, if that figure is wrong, the Minister needs to tell me why and to give me some detail, rather than, as appears to be the case in the FOI request, simply saying that it is wrong because it is wrong. I need to know whether he thinks that that £4 billion is wrong and whether he believes that the tax situation will be accordingly disadvantageous for developing countries.

In considering this matter, I would welcome the Minister’s comments on another issue, which relates to the position with the European Union, which I know is a favoured institution of the Minister and one that he pays full tribute and honour to at every opportunity. He will know that in mid-May, either just before or just after the start of the recess, the EU passed some comment on the imposition of the CFC rules. I have a quote from a news article written at the time—I also have the EU statement, which I will find in a moment, somewhere in my pile of papers—which states:

“The UK must amend its legislation on the tax treatment of controlled foreign companies, as it fails to fulfil European Union (EU) Treaty obligations or adequately take into account relevant court rulings, the European Commission has said. The formal request was made on May 19, and takes the form of a reasoned opinion, representing the second step in EU infringement proceedings. In particular, the Commission points to the continued taxation of the UK profits of subsidiaries established in the EU or in member states of the European Economic Area… The Commission stresses that the UK’s legislative response to the landmark Cadbury Schweppes case in 2006 does not eliminate the discriminatory restriction of the anti-abuse CFC regime, as the rules fail to exclude from the CFC regime all subsidiaries established in EU/EEA member states which are not purely artificial”.

We need a response from the Minister on the latest second-stage proposal from the EU. I have found the European Commission document, “Taxation: Commission requests UK to further amend its treatment of controlled foreign corporations”, which is dated 19 May. It states:

“The European Commission has formally requested the United Kingdom to amend its legislation to better take into account the rulings of the EU’s Court of Justice on the tax treatment of controlled foreign corporations (CFCs). Despite the 2006 Court’s ruling in the Cadbury Schweppes case, the UK is still not complying with EU law on the freedom of establishment and free movement of capital.”

Whatever my view or that of the Minister, it is important that he give an update on how he intends to respond to that request.

It is also important for the Minister to indicate whether the type of case which I will now bring to his attention will be caught by the said CFC rules. I came across a helpful article in the Daily Mail. As you know, Mr Hood, the Daily Mail is always a sound journal, which never inflates its opinions in a wrong or discriminatory way on any matter. It is obviously a source of truth and justice on every issue. A City Focus article written by Mr Rob Davis entitled, “So that’s where your office is, Ivan” looks at the position of the world’s biggest commodity firm, Glencore, which has

“A nondescript office in an unremarkable street above a branch of Next”

on the island of Jersey. It goes on to state that

“the holding company recently floated on the London Stock Exchange…paving the way for the £6.7bn listing.”

That is

“A far cry”—

it says this in the Daily Mail, so it must be true—

“from its pristine operational headquarters in…Switzerland…a rather modest home for a multi-billion dollar enterprise.”

The article goes on to state that by basing itself in Jersey,

“Glencore avoids the Controlled Foreign Companies rules”

of the UK. The Minister has a duty to respond to that. I am happy to supply him with the article if he wishes to look at it in detail. Why is Glencore, which is headed by Ivan Glasenberg and has a £6.7 billion listing on the London stock exchange, able to avoid CFC rules in the UK by basing and incorporating itself in Jersey instead of the UK?

On amendments 100 and 101, I want a full assessment of developing countries’ tax revenue before the proposals are introduced. The article states:

“the firm paid £142m in income tax on profits of £3.2bn, but incurred…no corporation tax because it was structured as a partnership, owned by its staff”,

and avoided CFC rules

“by virtue of this ‘office’ in Jersey”.

It continues:

“it will make no contribution…to Britain’s sparse coffers.”

Far be it from me to support something the Daily Mail has said. It has, however, drawn attention to the fact that, however the CFC rules work, they have the potential, according ActionAid, to be disadvantageous to developing countries. The Daily Mail article of 1 June shows that the CFC rules potentially allow Glencore not to contribute to the UK economy, as it can base itself in Jersey to avoid them. Will the Minister comment on that?

Ian Mearns (Labour, Gateshead)

I wonder whether the Government consulted Glencore on this issue. How does such a story show the ordinary people of the United Kingdom that we are all in this together? It is quite clear that we are not.

David Hanson (Labour, Delyn)

In Glencore’s defence, my hon. Friend will be pleased to know that it has said it is not gaining a tax advantage but simply avoiding a tax disadvantage. What it has done is perfectly legal. That is the way of the world. I do not know whether it was consulted. Perhaps the Minister could tell me who was consulted on these proposals and what responses he has had to his publication in December of the draft clauses. It is not just the potential loss of £4 billion that ActionAid predicts; companies are also basing themselves in areas where the CFC rules do not apply. Before we give credence to the clause and schedule, and to clause 48 and its schedule, the Minister needs to tell us what he thinks the financial impact of these proposals will be on developing countries.

Alison McGovern (Labour, Wirral South)

As a member of the International Development Committee I spend a lot of time talking to people about why and how the UK gives aid. Is my right hon. Friend aware of the anger that exists when the Government appear to have policies that go against developing countries that could save all of us money, and how frustrated people are when things are not thought through properly, leading to such disadvantage to developing countries?

David Hanson (Labour, Delyn)

My hon. Friend makes an extremely important point. The UK owes a historical debt to many countries throughout the world. Much of the wealth and prosperity that we have shared in this country—and which has helped us to develop things in this great city of London, in my home city of Liverpool and elsewhere—has been made through the exploitation of what are still developing countries. We have taken physical or economic resources out of those countries to build up our country. We therefore have a moral duty to ensure that we do not just help and support developing countries through economic aid given by DFID and through other Departments, but that we look at the tax regime and how it helps them to build a strong tax base which they can use to build up their infrastructures.

In responding to the debate, the Minister needs to give his assessment of the financial impact of the proposal on developing countries, and whether he agrees with the ActionAid £4 million figure. He needs to tell us what consultation on the changes he has had outside business—with developing countries, with non-governmental organisations working in developing countries and with international bodies. He needs to tell us what help and support he will give across Government to help increase capacity building for corporate taxation in developing countries. He should also look at helping to develop the agenda for country-by-country financial reporting, which will expose where multinationals pay tax, and to whom and where they do not pay tax.

The Minister will know that in government my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) was instrumental in getting this issue on the global agenda in the London G20 summit in 2009. My right hon. Friend the Member for East Ham (Stephen Timms), when he was a Treasury Minister, supported calls for better information exchange on country-by-country reporting and built an OECD agenda on this. It is important that the Minister indicate how he is going to build on Labour’s leadership in that area for future G20 discussions, to ensure transparency on taxation and that the rules do not disadvantage developing countries. I would be grateful to hear from him and from any other Members who wish to expose related issues.

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to serve under your chairmanship again, Mr Hood. I also join the right hon. Member for Delyn in congratulating my hon. Friend the Member for Elmet and Rothwell on his wedding over the recess—clearly the political wedding of the period. I congratulate him and Mrs Shelbrooke.

I turn to clauses 47 and 48 and the related amendments. It is worth putting the matter in context. As part of the aim to attract and retain private sector investment in UK, the Government are undertaking a significant programme of corporate tax reforms. Those reforms will mean a competitive and stable tax system providing business with the confidence to invest and expand in the UK.

Clause 47 introduces improvements to the controlled foreign company rules to make the current rules easier to operate ahead of full reform in spring 2012. Clause 48 introduces reforms to the taxation of foreign branches to align their tax treatment with that of subsidiaries.

I welcome the broad support that the right hon. Gentleman gave at the beginning of his speech. He highlighted that the previous Government spoke about moving towards a more territorial system. As the speech went on, the level of his support seemed to diminish, and I am not entirely clear whether the official Opposition support what we are trying to do with CFCs and foreign branches.

David Hanson (Labour, Delyn)

I can help the Minister. I have said that we support the general direction of travel, as it is one that we commenced. The crucial difference is that, although we commenced the direction of travel, we had not reached the stage we are now at, where there has been no assessment of the cost or consultation with developing countries. I want clarity on those issues before we agree to support the clauses.

David Gauke (Conservative, South West Hertfordshire)

I would perhaps draw another distinction between the period when the previous Government were in power and now. During the previous Government’s time, a number of multinational businesses redomiciled out of the UK. Since the announcements on this matter, we have had indications from the likes of WPP that it is coming back. That is the biggest distinction that can be drawn.

Reforming the CFC rules is a key change, needed to create the most competitive corporate tax system in the G20 and to encourage more businesses to be based in the UK. The question of CFC reforms’ impact on developing countries has been raised during engagement on the CFC reform proposals with ActionAid and other interested parties, and we have considered that issue carefully. The UK’s CFC rules are designed, and always have been, to protect the UK’s tax take from the artificial diversion of profits overseas. Similarly, other countries have CFC rules that are designed to protect their local tax bases.

The changes to the taxation of foreign branches in clause 48 include rules that ensure that profits to be exempt must be properly attributable to branches, and result from genuine economic activity in the relevant jurisdiction. That will prevent profits artificially held in other jurisdictions, including the UK and developing countries, becoming exempt. Therefore, the changes to the taxation of foreign branches will have a negligible impact on developing countries. The UK is committed to helping developing countries to reduce tax avoidance and protect their own tax base. Our corporate tax system is not the best way to help those countries; it is designed to protect the UK’s taxing rights, not those of other countries. Rather, it is for the countries themselves to have effective systems that build and protect their own tax base, and to ensure that they can access and act upon tax information.

As the hon. Member for Wirral South has said, the UK provides considerable support to developing countries through DFID and Her Majesty’s Revenue and Customs to provide robust, fair and sustainable domestic taxation systems. The right hon. Member for Delyn is right that administrative capacity is important for developing countries. That is where our focus lies.

Our tax-capacity building work and technical assistance help to ensure that developing countries are in the best position to collect the tax they are owed. We are helping them to design and operate their own tax rules effectively so they can assess and collect the tax that is properly due. Furthermore, at their last meeting, G20 Finance Ministers urged jurisdictions to extend further their networks of tax information exchange agreements. They also encouraged jurisdictions to consider signing the multilateral convention on mutual administrative assistance in tax matters to ensure that developing countries can benefit from improvements in tax transparency.

The Government do not consider that a full impact assessment of CFC interim changes and the reforms to foreign branch taxation on developing countries’ tax bases would be appropriate. Such an impact assessment would need to focus primarily on the nature of tax regimes in the developing countries, making it an assessment not of our tax rules, but of the tax rules of other countries. Such an assessment would not be relevant to the task of creating the most competitive corporate tax system in the G20 and encouraging more businesses to be based in the United Kingdom.

A question was asked about the £4 billion assessment of the cost to developing countries of CFC and branch reform. It is not clear how that estimated cost has been calculated. Initial analysis undertaken by the Treasury and HMRC indicates that the £4 billion is a significant overestimation. Making any analysis of the impacts across a range of countries where the information is not readily available is inherently difficult and uncertain. Any attempt to estimate the interaction between changes to the UK tax rules and tax revenues in other countries will involve a number of assumptions. The Government do not think that any such calculation would be sufficiently robust or accurate to be of value.

The Government are committed to providing advice and guidance to developing countries to enable them to create and maintain their own effective tax regimes. That approach should ensure that those countries have appropriate taxing rights over businesses that operate there.

David Hanson (Labour, Delyn)

When did the Treasury undertake the analysis of those matters? If the £4 billion figure is not correct, what cost has the Treasury ultimately settled on?

David Gauke (Conservative, South West Hertfordshire)

As I have just said, the Treasury’s view is that it is not possible to come up with a number that is sufficiently robust or accurate to be of value.

David Hanson (Labour, Delyn)

The FOI e-mail of 16 March from Treasury official blank to Treasury official blank and DFID official blank, which I have before me, says that

“we… have not done any work on this.”

Has the work been done since 16 March? If the officials had not done any work on it by 16 March, when was the work done?

David Gauke (Conservative, South West Hertfordshire)

I will not give the right hon. Gentleman precise dates, but initial analysis has been undertaken by officials. The advice I have received is that the £4 billion figure is a significant overestimation. It is difficult to come up with a definitive number, however, because of the complexities and uncertainties involved, but on the face of it, the ActionAid number does not bear a great deal of scrutiny.

Nicholas Dakin (Labour, Scunthorpe)

I understand the Minister’s difficulty in being clear about the numbers, but the numbers are important. If it is clear that £4 billion is too much, are we talking about £1 billion, £2 billion or £3 billion? What order are we talking about?

David Gauke (Conservative, South West Hertfordshire)

As I say, it is not possible to come up with a number because of the uncertainties in this area. The initial view is that the £4 billion figure is a significant overestimation and that it is not possible to come up with a robust number to provide the detail that hon. Members want.

David Hanson (Labour, Delyn)

The Minister will recall that amendment 100 says that the schedule

“will not come into force until a full impact assessment on developing countries’ tax revenue has been laid before and approved by the House of Commons”.

All we ask is for that assessment to be done, a figure to be produced and the House of Commons to say, “Thank you very much, Minister. We support it or we do not.” At the moment, he is asking us to pass legislation when he cannot give a figure on the impact on developing countries’ tax bases, and that at the same time, as my hon. Friend the Member for Wirral South pointed out, that DFID is trying to do exactly what the Minister is trying to undertake in a different form.

David Gauke (Conservative, South West Hertfordshire)

As I say, it is not possible to provide a precise number. There is simply too much uncertainty; it would involve an understanding of the interaction between changes to the UK tax rules and tax revenues in other countries, which involves a large number of assumptions, some of which would inevitably be somewhat questionable. As a consequence, we do not believe that we could come up with a calculation that would be sufficiently robust or accurate to add any value to the debate.

I also make the point that the purpose of the CFC regime has always been about protecting the UK’s tax base, not to assist developing countries. The better way to do that is by building up tax capacity, which is what DFID and HMRC are doing, putting considerable resources into it. The Government are delivering on the commitment to spend 0.7% of GNP on international development, something never done before and on which we lead the world.

Paul Blomfield (Labour, Sheffield Central)

I want to press the question of the £4 billion. ActionAid is clearly a credible organisation, with which the Minister suggested there have been discussions. It came up with the figure of £4 billion, on the basis of its own analysis. If, as the Minister says, it is not possible for the Treasury to come up with a sound assessment, on what basis does he rebut ActionAid’s figure of £4 billion?

David Gauke (Conservative, South West Hertfordshire)

This is an area where large numbers often get thrown around. They can attract the eye, but do not necessarily stand up to greater scrutiny. The Treasury’s view, based on initial analysis, suggests that that figure is a significant overestimate of the cost.

Alison McGovern (Labour, Wirral South)

I want to be clear, because any projection concerning the economy using previous behaviour to predict future behaviour involves a large number of assumptions and is inherently full of risk. This week’s International Monetary Fund projections drew attention to the risks around its calculations. Is the Minister saying that this matter involves extra complexity, or is he saying it is complex and the Treasury does not wish to commit resources to do that bit of modelling?

David Gauke (Conservative, South West Hertfordshire)

To come up with a precise number, we would have to have a definitive and exhaustive understanding of the tax systems of all the developing countries likely to be affected. The Treasury does not have that, nor is it likely to acquire it. The purpose of the CFC regime is to protect tax revenue within the UK. The best way to assist developing countries is to improve their tax capability, by improving their administrative capability. The Government do that and put in a lot of effort, as the hon. Lady mentioned.

Alison McGovern (Labour, Wirral South)

The Minister is generous in giving way. Can I be clear? He says that we could not get hold of that information. Has he checked with DFID colleagues? It is highly likely that a global financial institution such as the World Bank, which we fund, would have access to that information.

David Gauke (Conservative, South West Hertfordshire)

I dispute the “highly likely” assessment; that is a bold assumption in itself. This is an area where it is not possible to provide the precise numbers. We think that the methodology used by ActionAid results in a significant overestimate.

Nic Dakin rose—

David Gauke (Conservative, South West Hertfordshire)

I shall give way one last time, but we have gone round the track on this a few times.

Nicholas Dakin (Labour, Scunthorpe)

I thank the Minister for his patience in allowing us to probe him a little further. He said earlier that the Treasury has analysed this, and I understand the complexities he describes. In the interests of transparent and open government, is he happy to share the Treasury’s analysis so that we can see exactly the point he is making and agree with him?

David Gauke (Conservative, South West Hertfordshire)

As I say, it is an initial analysis without the full body of work, which would be considerable and possibly not something that could even be achieved by the Treasury. There was an initial assessment after 16 March and the view is that that figure is a significant overestimate. That is not unusual in this field, where large numbers tend to be thrown around about tax avoidance and tax gaps, and where the methodology frequently does not stand up to great scrutiny.

All consultation documents are published on the Treasury website with an open invitation for responses. Officials can engage with businesses and professional firms with experience of a range of clients when developing policy. Indeed, that is something that this Government have strengthened and improved. We are committed to consulting on tax policy reforms and will set out our approach to that. Again, that has been welcomed by the right hon. Member for Delyn. Effective consultation helps to ensure that changes are well targeted and have no unintended consequences, and that the legislation is right first time. The Government engage with parties that will be affected by policy changes as that provides a better understanding of the impacts of those changes on business and on the Exchequer.

I have met with representatives of NGOs and officials from DFID to discuss country-by-country reporting. If anyone wants to respond to consultations, they can do so. The consultation on CFCs, which will inform the legislation that we are likely to have before us next year, will be published later this month. We will reflect on the comments from the EU in that consultation and we want to ensure that the consultation is as well developed as possible. I know that the right hon. Gentleman is anxious to read every page of it, but he will have to wait another week or so.

Delaying the introduction of these clauses would create further uncertainty in this area of reform. Businesses have been waiting for the CFC reforms to be concluded since 2006 and this uncertainty has been blamed for driving some businesses out of the UK. The introduction of branch exemption in this Finance Bill will allow those in the insurance sector to restructure before the Solvency II EU regulatory changes. Delaying the legislation would undermine the Government’s commitment to certainty of tax treatment. Therefore, these clauses should be introduced without delay, as a certain and competitive tax system is crucial for private sector investment and growth. I therefore ask the right hon. Gentleman to withdraw the amendment.

David Hanson (Labour, Delyn)

I am afraid that I am not very happy with the Minister’s response. He has not addressed the points made by my hon. Friends the Members for Gateshead, for Sheffield Central and for Wirral South. We fully accept that this is about helping to repatriate taxation to the UK and ensuring that taxation in the UK is fair, and we wish that general move well. I must say, however, that there is a potential consequence for developing countries, and ActionAid has estimated that to be some £4 billion. I remind the Committee that no work had been done on that figure by 16 March, according to a HMT official at 18:39 in e-mail chain A, which I must take at face value, to a DFID official and another HMT official regarding CFCs and ActionAid’s point, and the Minister is saying that an interim assessment was undertaken between 16 March and now.

All we are asking is for the Minister to tell us precisely what that interim assessment shows, because he is asking us to commit the House of Commons to supporting clause 47 and, shortly, clause 48, which impact on CFCs. If we are to believe ActionAid—why should I not believe an NGO such as ActionAid?—which has worked on this, the clauses could cost developing countries £4 billion. If that is true, it is a considerable amount of money for those countries.

I have no reason to disbelieve ActionAid, but I was willing to give the Minister the benefit of the doubt and let him say to me that ActionAid’s figure is wrong, that he has done a proper assessment and that the figure is £2 billion or £1 billion, or even that there is no impact at all. However, he has not yet been able to put any definitive figure on the impact on developing countries. I remind the Committee of the only thing that we are asking for in amendment 100:

“Notwithstanding the provisions of paragraph 14 of Schedule 12, the Schedule will not come into force until a full impact assessment on developing countries’ tax revenue has been laid before and approved by the House of Commons.”

All we are saying is, “Please, Minister, make an assessment of what the impact is of this particular clause on developing countries.”

ActionAid has given just one example. In Ghana, which is not one of the world’s richest countries,

“one pound in seven of tax revenue comes from corporate taxation, mostly from large taxpayers including subsidiaries of UK multinationals.”

I do not know what the impact of the clause will be on Ghana. Can the Minister tell me today what impact it will have on Ghana’s developing tax base? If he cannot, why is he refusing to accept amendment 100 and why is he not allowing us a full impact assessment of the effect on the tax revenue of developing countries? I do not want to vote for something that could impact on one seventh of the tax revenue of the state of Ghana, which is one of the poorest countries in the world.

Ian Mearns (Labour, Gateshead)

I hark back to when the Minister was replying to the debate and he reiterated the Government’s commitment to 0.7% of GDP going to overseas aid, but that will be self-defeating if UK companies with bases abroad are to default on their tax in third-world countries. What is the point of helping countries with up to 0.7% of British GDP if we then deduct from their other revenues?

David Hanson (Labour, Delyn)

My hon. Friend makes an important point, because many developing countries, according to ActionAid—if I am to believe what it says, this is a correct figure—do not receive even 15% of their national wealth in tax from corporate businesses, because they do not have the capacity or the organisation to do so.

Amendment 100 does not mean that we do not want the clause to progress or that we do not agree with the direction of travel of repatriating businesses to and keeping them in the United Kingdom. It simply asks what the impact will be on developing countries. If it is not the £4 billion that ActionAid states, what is it?

Alison McGovern (Labour, Wirral South)

Does my right hon. Friend share my concern that the Minister’s responses to my interventions demonstrated a lack of understanding of how we could find out the answers to some of those questions? In the case of Ghana, which my right hon. Friend mentioned, we could ask the Royal African Society, experts at DFID or experts at Chatham House. There is a range of people who might have the answer to that question, but the Minister did not seem inclined to ask them.

David Hanson (Labour, Delyn)

It is interesting that the Minister can give an indication and some figures, which I quoted to him and which he has not contradicted, on what the cost will be in the United Kingdom, but he cannot give an indication of what it will be in developing countries. I have the help and support of ActionAid to raise these issues, and I have one researcher; the Minister has the whole of the Treasury. When I was a Minister, if I wanted to know something I would ask officials, who would go away and produce information. If I pressed them hard enough, they would produce a report on such matters for me.

I will withdraw the amendment if the Minister tells me that, between now and consideration on Report, or by Royal Assent, he will look at these issues and produce an assessment of ActionAid’s figures, and that he will consider the matter in more detail than has been the case since 16 March. I remind the Committee that no work has been done on this, as the HMT official told the DFID official on 16 March in the e-mails that I quoted. I am sorry to say that it seems as though no assessment whatever has been made of the impact of these changes.

Nicholas Dakin (Labour, Scunthorpe)

The Minister has indicated that an analysis has been done that was clear enough to demonstrate that £4 billion is way off the mark. Would my right hon. Friend find it helpful if the Minister shared that analysis with him, according to the principle of open and transparent government?

David Hanson (Labour, Delyn)

I am grateful to my hon. Friend for that intervention. As I said, if the Minister were to do so, I would withdraw the amendment, in which we request

“a full impact assessment on developing countries’ tax revenue”.

If analysis has been done that shows that £4 billion is not the correct figure, perhaps the Minister will share it with me now or make a commitment to place a copy in the Library of the House. Let us be fair to him and say that he should do so by 30 June, which would give him time to consider the matter, include a few more blanks like the ones in the e-mail chain and delete appropriate individual names. We could have an assessment of what that £4 billion really is. I shall support the measures, but I am not willing to do so until we know what the impacts will be.

I hope that the Minister will accept the amendment. We will reflect on the measures after that, but I hope he will accept the suggestion of a full impact assessment. If he does not, he is saying to the Committee and to the House that we will support clause 47 even though we do not know what that means for Ghana and other developing countries, and we do not know what it means for those whom ActionAid seeks to support. For those reasons, unless he gives me further comfort, I do not feel minded to withdraw the amendment. I am ever the optimist, however, and am hopeful that when I sit down, the Minister will stand up and agree that the amendment has some merit, so that I can withdraw it on the basis of assurances received from him following the interventions made by my hon. Friends.

Jimmy Hood (Labour, Lanark and Hamilton East)

When the right hon. Gentleman sits down, the Chairman stands up. I understand that he wants to press the amendment to a vote.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: Government amendments 118 to 122.

That schedule 12 be the Twelfth schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

Clause 47 and schedule 12 introduce improvements to the CFC rules, which will make those rules easier to operate and more competitive, where possible, ahead of full reform in 2012. The existing CFC rules protect the Exchequer from the artificial diversion of UK profits to overseas low-tax jurisdictions, but those rules could be modernised better to reflect the way that businesses operate in a globalised economy, while ensuring that adequate protection for the UK tax base is retained. As a result, CFC reform is a key part of the corporation tax changes that we set out in the corporate tax reform document, which was published in November 2010. The changes in clause 47 are the first step towards a CFC regime that helps to achieve our aim of having the most competitive corporate tax system in the G20 and providing the right conditions for business investment and growth. That will be achieved by adopting a more territorial approach that refocuses CFC protection on artificially diverted UK profits and gives groups greater freedom to manage overseas operations.

The clause introduces three new exemptions. The first provides more certainty for business by removing certain intra-group trading activities from a potential CFC charge—intra-group service companies, for example—where a risk is not posed to the UK tax base. The second exempts CFCs that derive their profits from foreign intellectual property, where, similarly, a risk is not posed to the UK tax base. Those two exemptions provide certainty to UK multinationals that such commercial overseas operations, which could be caught be the current rules, will be exempt ahead of full CFC reform in 2012.

The third exemption provides an exempt period of up to three years for overseas subsidiaries that, as a consequence of a reorganisation or change to UK ownership, come within the scope of the CFC regime. That will provide a group with appropriate time to reorganise its overseas affairs, so that it complies with UK CFC rules. The aim is to make the UK a more attractive location for headquartered companies, and for the UK investment that can arise as a result of that, as well as assisting UK businesses that undertake overseas acquisitions.

The third exemption is subject to amendments that correct a technical defect that was included in the original draft legislation, but which has only recently been identified. The defect concerns the conditions that a foreign subsidiary must meet if it is to qualify for the exemption. As drafted, the requirements relating to control of the subsidiary are more tightly drawn than intended, and they could prevent such subsidiaries from benefiting from the exemption in circumstances where they should be free to do so. The amendments address those unwanted restrictions and ensure that the exemption will work as intended.

A further change made by clause 47 provides an alternative to the exemption for CFCs with low profit levels. The threshold for the new de minimis exemption is £200,000, which is four times the threshold of the existing test. To reduce the compliance burden, the measure of profits is based on the CFC’s accounts, rather than on its taxable profits. Finally, the transitional rules for exempting certain types of holding company have been extended by one year. Those final two improvements aim to ease the compliance burden of the existing rules. The changes take effect for accounting periods beginning on or after 1 January 2011, apart from the extension of the transitional holding company rules, which is deemed always to have had effect.

This measure has been subject to an open and transparent consultation on both the general principles and the detailed clauses. Following an initial announcement in June 2010, we published detailed proposals on 29 November 2010 as part of the corporate tax reform document. Draft legislation was published on 9 December 2010 for consultation. Representative bodies, companies and firms of professional advisers provided more than 20 responses to the draft legislation. The Bill published on 31 March included a number of changes reflecting those responses. Those changes include relaxing several of the conditions for the intra-group trading and intellectual property exemptions to ensure that they achieve their proposed objectives.

Reforming the CFC rules is a key element of a competitive corporation tax regime. We have already had clear signs that businesses see our CFC reform proposals, including the changes made by this clause, as evidence that the UK’s corporate tax system is once again becoming an attractive environment for international business.

David Hanson (Labour, Delyn)

May I say what a surprise and what a pleasure it is to see you in the Chair, Mr Murray.

I am content with the Minister’s explanation. We had a good debate on amendment 100, which was defeated. Despite my strong and deeply held reservations on the need to consult and assess developing countries, we will not vote against clause stand part or the schedule.

Schedule 12 - Controlled foreign companies

Clause 48 - Profits of foreign permanent establishments etc

Ian Murray (Labour, Edinburgh South)

With this it will be convenient to discuss the following: Government amendments 123 to 128.

That schedule 13 be the Thirteenth schedule to the Bill.

David Gauke (Conservative, South West Hertfordshire)

Clause 48 and schedule 13 provide an opt-in exemption from corporation tax for the profits of foreign branches of UK companies. Where an election is made, a UK company with a foreign branch will now only be subject to corporation tax on its UK profits. That change will contribute to the competitiveness of the UK tax system by ensuring that the UK remains a location in which businesses want to locate and invest.

The Government aim to create the most competitive corporate tax regime in the G20. We are sending out a signal that Britain is open for business. The corporate tax road map published in November set out the key changes that will ensure that the UK’s corporate tax regime becomes an asset. We have already discussed the keystone measure—the cuts in corporation tax—that will support a private sector recovery that generates growth, creates jobs and contributes to the public finances.

David Hanson (Labour, Delyn)

I am grateful to the Minister for his explanation of clause 48 and schedule 13. Let me give notice that I intend to press amendment 101 to schedule 13 to a Division when the opportunity arises. I want to ensure that we have the same principle that we have just debated apply to clause 48 as well, but I will not go over old ground for the sake of the debate here today.

I have a couple of points on clause 48. The Minister has helpfully explained that branch exemption and distribution exemption, as introduced in 2009, effectively mean that profits earned through foreign operations of UK resident companies will not generally be taxed in the UK except by reason of the controlled foreign company rules or other rules intended to prevent the artificial diversion of profits from the UK.

One legitimate area of concern is that because both subsidiaries and branches of companies are eligible for exemptions there could be a significant loss of transparency, which the Minister has touched on. None the less, I would welcome his further assurances that branches that do not have the same reporting requirements in many countries that subsidiaries have will not result in a reduction of transparency of taxation measures.

I am concerned that the difference between a branch and a subsidiary is clear. There are countries where that difference is palpable. I want the Minister to tell me whether he and his officials have considered that difference, whether he has any concerns about the reduction in transparency that those changes will bring, particularly with regard to the treatment of branches, and whether he will give us an assurance that he will continue to press in the G20 for greater transparency so that multinational companies can be held to account for their actions. I will be grateful to the Minister if he can give me a response. If he cannot, I will push amendment 101 to a Division.

David Gauke (Conservative, South West Hertfordshire)

First, may I say that I am grateful to the right hon. Gentleman for his support of what we are trying to do in clause 48 and schedule 13. He is right to make the point that the regime for subsidiaries was introduced by the previous Government, and the clause and schedule ensure greater consistency between subsidiaries and branches. We believe that is the right thing to do because it will help to create a level playing field across different business operating models and in some respects tax considerations should not drive the choice of business model—subsidiaries versus branches.

A UK-resident company must prepare accounts showing worldwide profits, including all branches. So there will still be that level of transparency. It will not be affected by clause 48 and schedule 13. The right hon. Gentleman touched on the broader issue of greater transparency within the tax system and I have made the point in public before that companies should be willing to go out and explain their tax arrangements in greater detail so that there is a better understanding of taxation of multinational companies.

Obviously, at an international level there is considerable momentum towards increasing transparency, which is something that my right hon. Friend the Chancellor has spoken about very widely in relation to extractive industries. We support greater transparency in that area specifically, but also more generally we look favourably on steps to ensure that the opportunities for avoidance that may have existed historically can be reduced. We think that the measures contained here are proportionate, appropriate and a step in the right direction. We want to move towards a more territorial regime in which we tax the profits that arise within the UK but do not try to tax profits that arise elsewhere. That is the direction that we are pursuing in the clause. I hope that it will have the support of all members of the Committee.

Schedule 13 - Profits of foreign permanent establishments etc

Clause 49 - Meaning of “investment trust”

David Hanson (Labour, Delyn)

I will not detain the Committee for long. I want to ask the Minister a couple of questions about process, rather than content. It is a moveable feast, and I am on my own today. The Minister will know that the clause allows the Treasury to make regulations about the circumstances in which the commissioners for Her Majesty’s Revenue and Customs may approve applications from a company to be an investment trust. At line 11 on page 30, the clause states:

“A statutory instrument containing the first regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of the House of Commons.”

On page 31, clause 50 states that draft regulations must be

“laid before and approved by a resolution of the House of Commons.”

Are those to be negative or positive resolutions, and how will they be brought forward? Proposed new chapter 3A of part 13 of the Corporation Tax Act 2010 states that

“The Treasury may by regulations provide”

that a transaction be specified. I am interested in the practicalities of that, to clarify how the Treasury intends to bring forward such regulations. I have no particular concerns about the proposals in clause 49, but I seek clarity on the resolution procedure and—if he knows the answer—on when the Minister expects such regulations to be brought forward after Royal Assent.

Mark Hoban (Conservative, Fareham)

I am grateful to the right hon. Gentleman for raising those questions. Let me first say a little about clause 49. It makes changes to introduce a new tax framework for investment trusts, including the removal of rules that have imposed unnecessary restrictions on the commercial activities of investment trusts in the UK. The changes introduce a new, modernised framework that provides increased certainty for investors and reduced costs to businesses. It is worth bearing it in mind that the rules have remained unchanged since 1965, so they are perhaps overdue for reform and modernisation given the change in the investment landscape over the past 46 years. The changes have been greeted with support from the investment trust community, which welcomes the proposals that we have set out.

In respect of the questions that the right hon. Member for Delyn has asked, the first exercise of the powers in both clauses 49 and 50 will be subject to the affirmative procedure, so there will be a debate in Committee. Subsequent uses of those powers will be dealt with through the negative procedure, under which hon. Members will be required to pray against those motions to enable a debate to take place. I assure the right hon. Gentleman that the first use of the powers will be subject to the affirmative procedure, so there will be the opportunity for proper parliamentary scrutiny as a matter of course.

The changes will be brought forward in the autumn of this year. I hope that, with the Committee’s support, clause 49 will stand part of the Bill.

Clause 50 - Power to make provision about treatment of transactions

David Hanson (Labour, Delyn)

I do not intend to delay the Committee for too long. The Opposition support the clause, which enables the Treasury to provide certainty on the tax treatment of transactions made by investment trusts by providing that they are not treated as trading transactions. The only reason why I wish to comment on the clause is that representations on clauses 49 and 50 were made to me by the Association of Investment Companies.

The association, like me, recommends that the clauses are accepted without amendment. However, I am intrigued to note that it said in its letter:

“There are still further details to work on in the regulations of the Bill. However, given the very constructive engagement between the Government and industry to date, the AIC is confident that an optimum result will be achieved.”

Will the Minister give an indication of what further work is required and what discussions he has had with the association? I naively presumed that the clause was the completed article and that all such discussions would have been finalised before the Government brought the provision to Committee, yet the association indicates that further work is to be done on regulations. Perhaps the Minister can help. Is this the final version, or is there further work to be done?

Mark Hoban (Conservative, Fareham)

As the right hon. Gentleman will be aware, the clause is perfectly formed. It simply gives the power to make regulations but does not set out the details. However, a draft set of regulations has been published. As my hon. Friend the Exchequer Secretary said earlier, we seek to consult and engage with the industry on the fine detail of regulations to ensure that they work. We are going through that process now.

We published a draft of the regulations before consultation, but we need to work with those of our colleagues in BIS who have responsibility for company law to ensure that we get the drafting right so that they meet the needs of investment trust companies and fit within the framework of company law. I assure the right hon. Gentleman that work is proceeding; we have put the regulations out to consultation, and are working with the Association of Investment Companies and with BIS to get the detail right.

David Hanson (Labour, Delyn)

I am grateful for the Minister’s response, but I would welcome confirmation that his answer to the question that I asked about clause 49 applies also to clause 50—that the Treasury’s regulations, made under proposed new section 622A(1), will use the affirmative resolution procedure.

The Minister has indicated that the draft resolution guidelines are not yet finalised—I was aware of that—and that there is still some work to be done, but how does he intend bringing them forward and, just for clarity, when does he intend placing them before the House following Royal Assent?

Mark Hoban (Conservative, Fareham)

I thought that I had answered the right hon. Gentleman’s question about process when dealing with clause 49. He will see from proposed new section 622A(3) that the first regulations made under these powers will be subject to the affirmative resolution procedure—that is fairly standard practice—and that under subsection (4) subsequent regulations would use the negative procedure. As I said earlier, we will publish the final guidelines in October.

David Hanson (Labour, Delyn)

Just for clarity, the clause does not mention the positive or negative procedures.

Mark Hoban (Conservative, Fareham)

The right hon. Gentleman has experience as a Minister, as he reminds us from time to time, and I am sure that he will recognise that the wording of subsections (3) and (4) is fairly standard for the positive and negative procedures. He may wish to raise the matter with the Modernisation Committee, suggesting that other language should be used. However, I believe that we should stick with tradition, as those two subsections demonstrate from their meaning that they refer to the positive and negative procedures.

Clause 51 - Taxable benefits: calculating the appropriate percentage for cars

David Hanson (Labour, Delyn)

I want to discuss the clause because it raises interesting issues on which it is important that the Minister responds. It relates to taxable benefits on company cars and, with effect from 6 April 2013, modifies the current appropriate percentage bands and carbon dioxide emission thresholds by revising the relevant threshold down to 95g of CO2 per kilometre from the current 100 grams.

The background to the clause is relatively straightforward in that the appropriate percentage of CO2 emissions multiplied by the list price of a car, adjusted for any taxable adjusted accessories, provides the level of chargeable benefit for company car tax for employees and the level of class 1A national insurance contributions for employers. From 6 April 2012, the graduated table of company car tax bands will provide for a 0% band for zero-emission cars, which is welcome, a 5% band for ultra-low emission cars, which means emissions of 1 to 75 grams of CO2 per kilometre, and a new 10% band for other low-emission cars, but with a 1% increase for each rise in emissions of 5 grams of CO2 per kilometre above 100 grams of CO2 to a maximum of 35%.

The clause changes the 10% band for low-emission cars to 76 to 95 grams of CO2 per kilometre from 6 April 2013. The rule under which there is a 1% increase in the appropriate percentage for each rise in emissions of 5 grams of CO2 per kilometre above 100 grams of CO2 to a maximum of 35% will apply instead to each rise in emissions of 5 grams of CO2 per kilometre above 95 grams of CO2. Long-winded and complex as it is, that means that there will be an impact on nearly all company car drivers from April 2013.

I would welcome the Minister’s confirmation that this is in effect a tax rise for all those who drive a company car that is anything other than ultra-green in its CO2 emissions. I will not urge my hon. Friends to vote against the proposals, but I recall that before the election, the Labour Government were accused on a number of occasions of introducing “stealth taxes”—I think that was the phrase, as my hon. Friends may recall in due course. Will the Minister confirm that this is a tax rise for company car drivers from April 2013? How many people and businesses will the changes hit? What incomes do they have? What is the likely total tax take of the change?

I refer to another esteemed organ of the media: The Daily Telegraph, which, like the Daily Mail, I agree with and look at; I obviously support everything it says. I understand that it is the gospel truth on these matters. It said on 23 March 2011:

“The Chancellor has increased the amount they pay by one per cent with drivers of larger cars…being hardest hit…This will mean, for example, that the driver of a two litre Ford Mondeo, who is a higher rate taxpayer, will face an annual tax bill for the car of £2,127, an increase of £76. It is estimated that the change will earn the Treasury an additional £125 million”

a year.

“Only drivers of company cars emitting less than 95 grams of CO2 per kilometer—such as the Toyota Prius —will be exempt from the increases. “

I would welcome the Minister’s confirmation that company car drivers will pay more. That is not because we are going to vote against the clause, but because I would like to hear from the Minister that she is increasing taxation on company car owners and drivers by that amount. Will she give me figures on what it will mean for an additional normal car, and what it means in total for the Treasury take?

Bill Esterson (Labour, Sefton Central)

My right hon. Friend rightly asks a Government Minister to put it on the record that this is a tax increase. Does he agree that it is ironic that the Government are taking this line—not just for the reason he rightly gives—since for many years they have claimed to be a friend of the motorist? Although I do not want to vote against the measure, I think it is important that the Government are honest about what they are doing.

David Hanson (Labour, Delyn)

I am grateful to my hon. Friend. The Daily Telegraph, which rarely gets these things wrong, has said:

“On taking office the Coalition promised to end what it described as the ‘war on the motorist’. But last night the company car tax rises drew an angry response.

‘This budget isn’t particularly good news for company car drivers,’ said Kieren Puffett, Editor of the Parker’s car buying website.”

That was in the Daily Telegraph; it must be true. The coalition did promise to end the war on motorists. I want the Minister to tell the Committee that this measure will increase the cost to company car drivers. I want an assessment of how much and how many company car drivers will be hit.

Karl McCartney (Conservative, Lincoln)

As ever, I am honoured to serve under your chairmanship, Mr Hood. Is the right hon. Member for Delyn aware that there are fewer ministerial cars under the coalition Government than under the previous Government? What car does the right hon. Gentleman drive, if he drives at all?

David Hanson (Labour, Delyn)

First, there are fewer ministerial cars under this Government than the previous one. I previously used a Government car, as on occasions I had to leave the confines of the Department to come to Divisions, and I found it useful to have that support.

Justine Greening (Conservative, Putney)

Is the right hon. Gentleman saying that he took a ministerial car to get to a Division?

David Hanson (Labour, Delyn)

The Minister will know that meetings in the Home Office to discuss security threats affecting airports and trains—which I dealt with as Minister responsible for counter-terrorism—were on occasion disturbed by Divisions. I came to the House from the Home Office, which is more than eight minutes’ walk away, to vote. That is not a particularly contentious point. Ministers in the current Government will, on occasion, jump in a car when a Division bells rings, to go from a Government office to the House of Commons to vote. That is a side issue in today’s discussions.

To answer the hon. Member for Lincoln, with due respect it is none of his business nor anyone else’s what car I drive now. If he wants to talk to me afterwards I will put it on the record outside. It is not a company car and it is not a Jag or a Rover. The clause is about company cars. My car is paid for from my salary as a Member of Parliament, which is the only income that I, unlike some other Members, receive. That is a matter for me and my bank. The clause is about company cars. Will the Minister and the hon. Gentleman tell me that the clause raises the cost of company cars, is a stealth tax and has a green purpose, which we support, as mentioned by my hon. Friend the Member for Sefton Central? I want to hear from the Minister how much the measure costs. Will she confirm the £125 million figure from the Daily Telegraph? Will she give me the average increase for company car drivers of the cost of the measure? Will she give an estimate of the total number of motorists who will be hit by the rise?

Alison McGovern (Labour, Wirral South)

Does my right hon. Friend agree that when the history of this Government is written, and there is a footnote about cars, the car that will be remembered is the one that drove behind the Prime Minister as he cycled into the House of Commons?

David Hanson (Labour, Delyn)

The key issue [ Interruption. ]

Jimmy Hood (Labour, Lanark and Hamilton East)

Order.

David Hanson (Labour, Delyn)

My hon. Friend has made her point in her own inimitable way.

I just want the Minister to stand up and say that she has raised taxation on company cars and that she has done it to be greener. I want her to tell us how much it raises and how many company car drivers are being hit by the measure, simply so that we can have that on the record.

Ian Murray (Labour, Edinburgh South)

My right hon. Friend mentioned the article in The Daily Telegraph and the section that refers to “the war on motorists”, but is this not another example of the Government’s war on the squeezed middle? A significantly larger number of people are being pulled into higher-rate tax. Living standards are plummeting to the levels of the 1920s. The measure is just another tax on people who work very hard for very little.

David Hanson (Labour, Delyn)

My hon. Friend makes a valuable point. I am only quoting from The Daily Telegraph, so it may be wrong—who knows?—but it says that

“the driver of a two litre Ford Mondeo, who is a higher rate taxpayer, will face an annual tax bill for the car of £2,127, an increase of £76.”

That, coupled with the increase in value added tax and the loss of child care benefits, as we discussed in earlier sittings, and with a range of other measures, is an important issue. I will not vote against the clause, but I at least want the Minister to stand up and give some response. I am sure that she will say that the Government have increased the threshold for which the reimbursement is taxable from 40p to 45p a mile, which is welcome, but will the Minister please tell us exactly how much is being raised, how many people are being hit and what the average cost is? Will she also tell us whether the resources gained from that additional taxation will go to the transport budget and help to meet the potholes repair bill, or will they just go towards the general deficit?

Bill Esterson (Labour, Sefton Central)

My right hon. Friend is asking the right questions. Does he agree that, along with the proposal, it would be useful for the Minister to provide a combined analysis of the increased cost of motoring, the VAT increase and the various fuel duty increases that we have debated in Committee? We would then have an assessment of just how much more motorists have to pay.

David Hanson (Labour, Delyn)

That would be helpful, because the combined impact of all the changes is significant for motorists.

I say to the Minister, so that she can reflect on these matters, that the measure, while it will increase costs for motorists and company car users and while it will raise money for the Treasury, is specifically designed to be a green measure and, therefore, to help to reduce the environmental impact of larger vehicles. I ask the Minister again what assessment she has made of the environmental or behaviour-changing effects of the proposals? Does she have a target to get company car drivers, and therefore fleet buyers, to reduce the litre size of the engines of the cars purchased? At the moment, she has indicated that the measure will, on average, impact on the two-litre motorist. Has she done any modelling in the Treasury of the potential impact on the size of cars bought by fleet buyers? We need an assessment of whether the change in taxation will change the behaviour of those who currently have company cars and who will hold them for the next three, four or more years. Has the Minister made any assessment of the number of people who will be affected by the change based on not only their future behaviour but their previous behaviour? That is important.

When introducing the measure, the then Financial Secretary, Mr Paul Boateng, said in a written answer:

“The new company car tax system from April 2002 is designed to achieve lower levels of harmful emissions from cars.”—[Official Report, 4 July 2001; Vol. 371, c. 171W.]

That will only be the case if lower levels of emissions are put in place for fleets of company cars. Has the Minister modelled that in any way, shape or form? If she has, could she share that modelling with the Committee?

Many employees who have company cars are given them for four years or, in some cases, even longer if they are on longer-term contracts. Decisions have been made based on the current rate of taxation. This change was announced in the 2011 Budget and will come into effect in two years’ time. Therefore, people will be hit in two years’ time who may still have their current cars. What is the Minister’s assessment of the impact? She appears to have assessed that the measure will raise £125 million for the Exchequer in 2013-14. How many company car drivers will that hit in 2013-14 and, indeed, what will the impact be of the £130 million in 2014-15 and the £135 million in 2015-16? What are the numbers and what is the impact? Will the Minister give that information to the Committee?

Justine Greening (Conservative, Putney)

Mr Hood, it is a pleasure to see you in the Chair today. Clause 51 makes changes to company car tax rates that will take effect from 2013. The shadow Minister calls it a stealth tax, but I hardly think that a tax that will be introduced in two years can be described in such a way. In fact, company car tax provides for the benefit-in-kind charges under income tax and employer’s national insurance contributions that apply to company cars. As I said, these rates were announced at least two years in advance precisely to give business some certainty about the level of tax involved in the provision of a company car. That broadly mirrors the previous Government’s approach in giving advance notice of company car tax regime changes.

As we have heard, the typical lifespan of company cars is around four years, so less than half of current cars will be affected. The right hon. Member for Delyn asked about the number of cars that will be affected. About 30 million cars are driven around the UK and about 1.1 million of those are company cars. We assess that less than half of current company cars will be affected by the measure.

As the right hon. Member for Delyn pointed out, the company car tax regime was reformed in 2002, and is now based on CO2emissions. As we explained, that has had the effect of encouraging the uptake and development of more fuel-efficient cars in company fleets and has resulted in average new car emissions being reduced by around 30g/km by 2010. The changes made by the clause are in response to the continuing and rapid advances in vehicle technology. For example, industry data show that for the average brand new company car, the average CO2emission level fell from 166.6 g/km in 2006 to 153.4 g/km in 2009. That is a reduction of 2.7% per annum, which I am sure all hon. Members welcome. To help to encourage businesses and drivers of company cars to drive the most environmentally-friendly cars, the clause sets out key changes to apply in 2013-14.

From 6 April 2013, the appropriate percentages for all vehicles with CO2emissions between 95g/km and 219g/km will be increased by 1 percentage point. Effectively, that will result in a freeze in rates for cars emitting under 95g of CO2per kilometre. Committee members will know that it is an EU target that all new cars will emit only 95g or less by 2020. So to achieve this overall measure, the relevant CO2thresholds in the graduated table of company car tax bands will be moved down by 5g per kilometre. Zero CO2-emitting cars retain the appropriate percentage of 0%, and the 5% rate will also remain for ultra-low carbon cars emitting between 1g and 75g of CO2per kilometre. The right hon. Member for Delyn referred to the importance of the company car fleet, which feeds into the second-hand car market, so encouraging the uptake of cleaner company cars will also have beneficial effects on the second-hand car fleet in due course.

It is not easy to estimate how much extra company car drivers will pay, because that will depend on the list price, the CO2 emissions, and the employee’s income tax rate in 2013, but an illustrative example is that a Ford Focus driver paying the basic rate of income tax could see an increase of around £34.

The hon. Member for Sefton Central asked about the Budget’s overall impact on motorists. It introduces a £1.9 billion package to support motoring and motorists, and we have worked to ensure that it will alleviate the substantial pressure on the cost of living that has resulted from high oil prices feeding into high petrol prices.

Ian Mearns (Labour, Gateshead)

Yet around the end of May, the Daily Mai l said that the Budget proposals for company car drivers amounted to stealth taxes that are detrimental to business drivers.

Justine Greening (Conservative, Putney)

Well, as I think has been pointed out, the company car drivers who will bear most of the tax increase will be those with the biggest and most CO2-emitting cars. Ultimately, we must strike a balance between ensuring that the company car tax regime keeps up with changing technology, and that the tax regime has the same impact on people who are lucky enough to have a company car—most people with a job in this country do not have a car as part of that job—and encourages them to pick an environmentally friendly car.

Another key part of the Budget is the second tranche of the rise in the personal allowance, which will help more than 1 million people by taking them out of tax altogether, and 23 million more broadly by reducing their income tax. We are introducing support across the board to help people who are in work. Overall, the changes incentivise manufacturers to develop and businesses to purchase low-carbon vehicles while ensuring the sustainability of public finance, and helping to reduce the UK’s CO2 transport emissions. The measure strikes the right balance.

Clause 52 - Furnished holiday lettings

David Hanson (Labour, Delyn)

I want a short debate on the principles of clause 52 and the accompanying schedule 14, and some of the comments that have been made on them. They make three changes to the special rules for the tax treatment of income from the commercial letting of furnished holiday accommodation. They extend the rules, restrict tax relief for losses, and tighten qualifying criteria.

The first change extends the special rules to the letting of property outside the UK but in the European economic area. The second change removes income tax relief for losses against general income and terminal losses, and removes corporation tax relief for losses against total profits. The third change extends the length of the periods for which the accommodation must be available to be let, and is actually let if it is to qualify as holiday accommodation. The first and second changes take effect from the 2011-12 income tax year, and for corporation tax beginning on or after 1 April 2011. The third change takes effect for income tax from 2012-13 and for corporation tax on or after 1 April 2011.

The Minister will know that those proposals caused some discussion prior to the election when they were proposed by the then Labour Government, and that some changes have accordingly been made. I should like some clarity from the Minister on a number of areas that are still a cause for concern.

As we know, clause 52 covers the changes on how aspects of income and gains from furnished holiday lettings will be taxed. A property letting qualifies as a furnished holiday letting if it passes a series of tests outlined in the legislation, such as the number of days it is let out for and the time it is available to let.

I have had a number of fair representations from the Chartered Institute of Taxation relating to the available-for-let test. The current proposal is to increase the test from 140 days to 200 days a year, which could create some difficulties for some businesses that operate furnished holiday lettings—in particular, where planning or other conditions attached to a property restrict the periods during which a property can be occupied.

The CIOT makes the strong point that the let test increase from 70 to 105 days will be problematic in some parts of the United Kingdom. My hon. Friend the Member for Edinburgh South and the hon. Member for East Antrim—if he was here—will be interested in this issue because the length of the days in the far north of the country means that the tourist season in both Scotland and Northern Ireland is very short, so dealing with that higher let-out day count from 70 to 105 days will be difficult.

I could have tabled an amendment that covered those particular issues, but I thought that it would be better to test out the Minister in our clause stand part discussions. Can he assure me that he has considered the issue in detail and that he is satisfied that the let test from 70 to 105 days will not adversely affect those distant parts of the United Kingdom, such as Scotland and Northern Ireland, where the tourist season is particularly short? Do the Government intend to keep the qualifying period under review in the light of the effect that these changes might have on some of the more remote tourist areas in the United Kingdom?

The old test of 70 days was roughly equal to the UK holiday letting season, and the 105 days might be more difficult to achieve. The new rules will also extend to countries in the EEA. What assessment has the Treasury made of the specific cost to the Exchequer of extending the plans to countries outside the UK? These points are worthy of a response from the Minister because they have been raised before and are still a matter of some concern.

There have also been discussions on the uncertainty among taxpayers on the distinction between a trading business and a rental business such as a furnished holiday letting. I would welcome some clarity from the Minister on the boundary between self-catering accommodation, bed-and-breakfast and budget hotels, because it is difficult to determine.

What comment does the Minister have on the representations that have been made by the Institute of Chartered Accountants in England and Wales that the distinction based on whether a furnished holiday letting owner lives on site and therefore is in occupation is based on established case law? Such an interpretation is not widely applied. The Minister needs to address this lack of clarity over the distinction and the lack of guidance from HMRC.

One of the issues that the CIOT has put to me about this particular clause is that there should be, as part of the review of small business taxation, some clarification of the boundary between those who operate trading businesses and rental businesses to provide greater certainty for taxpayers. It has also asked how and when the impact of these changes will be felt. In particular, it is referring to the economic impact on the recovery. Is the Minister likely to review this policy at any time? Will he look at this on an annual basis? Is this now set in stone for the period of the clause? What assessment would he make of the fragile potential tourist industry and the impact of these changes?

The definition of furnished holiday letting is based on the number of letting days and it could be argued that that is a blunt instrument because the number of letting days varies in different parts of the United Kingdom. Is there any assessment of having a different letting day period for different areas? I know that is difficult but the Minister will be aware that Northern Ireland, the north of Scotland, west Wales, west Cornwall and the Scilly Isles have different lengths of tourist season from other parts of the UK where there are furnished holiday lets.

Those few comments reflect the points that have been put to me and I wonder whether the Minister can satisfy those outside the House who have concerns.

David Gauke (Conservative, South West Hertfordshire)

Clause 52 makes changes to the furnished holiday lettings regime in a way that is fair to UK businesses. It supports the Government’s objective of maintaining a competitive and stable tax system that is compliant with European law. To that end, current legislation on furnished holiday lettings will be amended to ensure that the tax treatment of those with furnished holiday letting properties within the European economic area is the same as the tax treatment of those with furnished holiday lettings properties within the UK; to support the role of the tourism industry in the UK economy and the employment and enterprise it provides; and to ensure that the tax rules for furnished holiday lettings are appropriately targeted, affordable and provide value for money.

The furnished holiday lettings rules allowed beneficial tax treatment to UK property businesses, but not to those in the EU. That may not have been compatible with EU law, so the previous Government announced in 2009 that they would abolish the regime after a temporary extension to the EEA. It is worth putting this debate in some kind of context, because the plans that we inherited would have abolished the furnished holiday lettings treatment for all businesses, regardless of days of availability of letting. As part of the wash-up before the election, we negotiated the removal of the clause abolishing the regime. To have pressed ahead would have had an adverse effect on UK businesses and the UK tourism industry. Instead, we committed in the coalition agreement and the June Budget to finding a path that would retain the rules, consulting the industry to ensure that the solution was workable, fair and fiscally responsible.

The changes made by schedule 14 will affect around 65,000 businesses, most of which are run by individuals. The existing furnished holiday lettings legislation applies to properties that are used to provide commercial furnished holiday lettings. Income from such lettings is technically property income—the old schedule A for those who remember these things. But the income qualifies for certain specified tax treatments for trades: enhanced capital allowances, sideways loss relief, certain capital gains reliefs and pensionable relevant UK earnings. To qualify for that tax treatment, the business must be carried on commercially, and with a view to a profit, and pass certain other tests. Two of the tests concern periods of availability to let at 140 days and actual lettings of 70 days per year.

To ensure that the extension of the relief to the EEA is affordable, changes to the legislation are being made to target the tax allowances at businesses run on a truly commercial basis. Such commercial businesses support the UK tourism industry and the economy. Accordingly, we have retained the reliefs related to capital allowances, capital gains and pension advantages as these are most beneficial to commercial businesses. However, the provision for sideways loss relief has been removed. In addition, to reflect the modern extended holiday season, the period for which a property is required to be available is increased to 210 days and that for which it is actually let to 105 days.

As part of our consultation during the autumn, the Government acknowledged the possible obligation to extend the regime to EEA properties. Accordingly, the consultation proposed to change the qualifying conditions and limit some of the tax advantages to offset the additional cost to the Exchequer of the extension. At the same time properties let as commercial businesses would continue to benefit from favourable treatment.

A number of comments were made during the consultation and we tried, wherever possible, to accommodate them. First, some respondents were concerned that the increase in the thresholds for qualifying days would be difficult to meet. The original proposal was changed to allow a period of up to two years when the need to meet the actually let threshold could be waived, providing there was a genuine intention to let. Additionally, the Government have decided to delay the introduction of the threshold change by a year to help businesses adapt to the new requirements. Secondly, some respondents were concerned that the new thresholds would have a negative impact on more remote letting, especially in Scotland—a point raised by the right hon. Gentleman.

It may be more difficult for certain outlying areas to meet the tests every year, but the new period of grace should go a long way to help those businesses meet the tests. We do not believe that we can introduce differential thresholds. That would raise state aid difficulties. The new thresholds were those that we were advised by the main interest group would reflect a level attainable by properly commercial businesses. We have consulted extensively, as I said, but received no proposals on geographical or seasonal definitions, which would allow thresholds to be varied in a way that meets policy objectives and legal requirements.

The Government recognise that remote locations face particular challenges. They also have particular attractions. The Government encourage people in remote locations to find innovative ways of exploiting their advantages and overcoming their obstacles so as to meet new occupancy thresholds. The period of grace is designed to help businesses that fail to meet the occupancy threshold for up to two years. Therefore, a business needs to meet the thresholds for only one year, not three. The introduction of the increased thresholds has been delayed by a year to allow businesses to adapt their letting strategies. Those should be particularly helpful to regions where the new rules may be more challenging.

In response to the consultation, some respondents regretted the removal of sideways loss relief, especially in the early years, but the package should be viewed as a whole. Although loss relief is restricted, beneficial capital allowances and capital gains treatments have been retained.

The right hon. Member for Delyn asked how much it cost to extend the revised rules to the EEA. Extending the regime to EEA states and reversing the repeal of the furnished holiday lettings rules is estimated to cost the Exchequer £20 million in 2011-12. However, the changes made by the Bill will rapidly reduce the costs going forward, as the restrictions to loss relief and the increase in the thresholds feed through. It is anticipated that there will be decreased yield from chargeable gains in the longer term, but insufficient information is held to produce a robust estimate of that decrease.

The right hon. Gentleman asked about the distinction between furnished holiday lettings and, for example, bed and breakfasts and hotels and so on. The distinction depends on whether the business is a trade or property business. Furnished holiday lettings are actually property rental businesses that are treated as trades for certain tax purposes. The activities performed by the proprietor do not amount to a trade. However, if the proprietor provides significant services—for example, meals—the business may be a trade, in which case it would enjoy all the trade tax benefits. The status of the business will depend on the individual facts of the case.

The right hon. Gentleman asked whether there is an intention to review the issue. There is no intention for a formal review but, as he will be aware, all taxes are reviewed from time to time. We do not have any intention at this point of reopening this particular area. We believe that the retention of the furnished holiday lettings regime has been widely appreciated by the tourism industry. The changes to rules will provide for EU-compliant legislation in a targeted and cost-effective way. We have a good compromise, which protects revenue but maintains the furnished holiday lettings regime that the previous Government sought to remove. We believe that it serves a valuable purpose and we are pleased to have been able to continue in this targeted way.

Clause 53 - Leases and changes to accounting standards

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 185, in clause 53, page 32, leave out lines 18 to 32 and insert—

‘(7) Where a person prepares or is required to prepare accounts in accordance with new standards for a period of account, the Taxes Acts (other than this section) have effect as if the person prepared or was required to prepare accounts, for that period, in accordance with the corresponding old standards.

(8) For the purposes of subsection (7)—’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: Government amendment 186.

Clause stand part.

David Gauke (Conservative, South West Hertfordshire)

Clause 53 introduces legislation to ensure that the existing tax rules that rely on the accounting treatment of lease transactions continue to operate as they currently do. Much of the corporation tax and income tax code for lease transactions is based on accounting definitions and the resulting entries in accounts prepared in accordance with either UK generally accepted accounting practice or international accounting standards.

Fundamental changes to lease accounting are expected in international accounting standards during 2011. The changes proposed will remove the distinction between finance leases and operating leases, amend or remove other currently defined terms and alter the way that amounts are quantified for accounts purposes.

UK generally accepted accounting practice may also introduce similar fundamental changes to lease accounting as early as 2013. If the proposals go ahead as planned, the current tax rules will not work as originally intended and, in some situations, will not work at all.

Clause 53 will require businesses that account for lease transactions to treat them, for tax purposes, as if the proposed changes to lease accounting had not taken place. The clause will apply to any business, whether as lessee or lessor or both, that accounts for lease transactions using a lease accounting standard that is newly issued or changed on or after 1 January 2011. The clause is not intended to alter the current tax treatment of leases in any way, and as such is expected to be revenue neutral.

Amendments 185 and 186 ensure that the clause operates correctly in all cases. The draft legislation was published for consultation in December 2010. No comments were received during the consultation period. As such, the legislation was unaltered when the Finance Bill was published in March. However, it has recently been brought to our attention that in certain limited circumstances, when a business chooses to change from one standard to the other, it would be required to ignore the move for all tax purposes, not just for purposes related to the taxation of leases. That would create not only an administrative burden for the business but also potential avoidance opportunities, as profits might be deferred or removed entirely from the tax net. To prevent this unintended consequence, the amendments will ensure that the generally accepted accounting practice that a business uses for calculating taxable profits is the same as that used in the accounts for all matters except for leasing transactions. The proposed amendment also simplifies the legislation.

Clause 53 is an interim measure. When the dust has settled and we have some certainty regarding the accounting changes, we will review the appropriate way forward for leasing taxation in the light of the new rules. The review will focus on providing stability and certainty for the future, and, of course, any consultation would be carried out under the new tax policy-making framework.

The clause will require tax profits and losses for lease transactions to be calculated as they are currently, irrespective of any changes made to the way the lease transactions are accounted for. This will provide some clarity to businesses involved in those transactions in the interim period before the new accounting standards are introduced. I therefore commend the clause and I urge the Committee to accept the amendments.

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

Clause 57 - Tonnage tax: capital allowances in respect of ship leasing

Bill Esterson (Labour, Sefton Central)

The clause deals with tonnage tax capital allowances in respect of shipping, amending various provisions of the Finance Act 2000 on the writing down allowances available on the first £40 million of expenditure on a ship, bringing them into line with the rate available on a ship used by a company that has not elected for tonnage tax.

Companies operating ships subject to the 2000 Act were encouraged to train one UK rating for every 15 crew employed; my understanding is that there was a voluntary agreement. The aim was to encourage shipping companies to employ UK staff. The measure was introduced because of widespread and long-standing concerns about the underemployment of UK staff by shipping companies running ships from the UK, often at low pay rates, thus undercutting the wages that they would pay UK staff.

The low employment of UK staff is a long-running issue, and the issues around flags of convenience are extremely complex. Can the Minister consider whether there are ways of supporting the UK shipping industry and, in particular, how the Bill and the clause might be used to secure increased employment of UK staff in the shipping industry? Of course, at such a time, anything that can generate jobs is to be welcomed.

On Merseyside, the growth of the economy will be strongly linked to the success and development of the port of Liverpool. Many of my constituents would love the opportunity to work in the shipping industry, and to take advantage of the potential expansion of the docks.

Ian Mearns (Labour, Gateshead)

I am taken with the point my hon. Friend is making. If we want to see rebalancing of the economy—in particular towards manufacturing, leading to exports—we certainly need a healthy shipping economy, to facilitate our expansion. I hope that Ministers will look favourably on what my hon. Friend is saying.

Bill Esterson (Labour, Sefton Central)

My hon. Friend is absolutely right: we need to use ports and the shipping industry as an important component in rebalancing the economy. An export-led recovery is an element in achieving that—if not, indeed, the crucial element. Ports such as Liverpool and those in the north-east that my hon. Friend represents are an essential component of that recovery and regeneration, and I welcome measures such as those proposed in the clause.

Ian Mearns (Labour, Gateshead)

I apologise, because I should have said earlier that when rebalancing the economy, and hopefully moving towards exports driven by manufacturing, we must take into account the favourable rate of the pound sterling compared with other currencies. A lot of people in my region tell me that that is an aid to them in terms of the export market they are trying to tap into. The whole picture must be sorted out so that shipping—British shipping in particular—is able to receive the benefit of that rebalancing of the economy.

Bill Esterson (Labour, Sefton Central)

My hon. Friend is absolutely right again. [ Interruption. ] He is almost inevitably always right. His point about the value of exports is important, and that is where the clause will be beneficial. It is worth bearing in mind that as of a few days ago, the pound stood at $1.64; a year ago it was $1.45. The concern is that that moves against helping exporters. [ Laughter. ] It is the other way round; it helps exporters. Ministers must be mindful that we need to avoid sterling being overvalued. We must get our heads around these technical points—[ Interruption. ] I am sure that other hon. Members will happily intervene to give lessons on such matters.

The point about the number of jobs available on UK-run ships is important, and I would be interested to hear the Minister’s comments on how the Bill might be used to achieve those ends. On Merseyside, as in many other places, the level of cuts in jobs—particularly in Her Majesty’s Revenue and Customs, the police service, the NHS, schools, colleges, universities and councils—means that new jobs are desperately needed. Any measures would be welcome.

The port of Liverpool is potentially the single biggest investment opportunity for the north-west in terms of growing the economy and providing high-quality jobs and opportunities for industry and trade. As the far east becomes an important trading partner, and as China and India rapidly grow their economies, Liverpool will achieve growing importance due to its geographical location and ability to provide trade links with that part of the world.

Alison McGovern (Labour, Wirral South)

My hon. Friend will know that the historic port of Liverpool now involves several ports, including those on the Wirral in my constituency. There is a huge opportunity to develop jobs in the shipping industry and support our manufacturing industry. Does he agree that that is one of the biggest transformational actions that we would like to see on Merseyside, and that it has the possibility to contribute a huge amount to skills and levels of employment?

Bill Esterson (Labour, Sefton Central)

Being another Merseyside MP, my hon. Friend is well aware of the situation. She has explained well the importance of the port in generating opportunities for business, and the jobs that come from it. She has been a strong advocate for the development of business across Merseyside generally, as well as in the Wirral particularly.

I invite the Minister to consider a suggestion. I mentioned earlier the current voluntary process whereby shipping companies are asked to train one UK rating for every 15 staff employed. Is there a way to link that idea to the clause, so that we can support UK jobs and the shipping industry, by requiring UK-run shipping operations, if they want to qualify for the allowance, to adopt that approach, being allowed to employ only 15 overseas staff for every UK rating that they train? That is already available as a voluntary approach; including it as a requirement in the clause would be an opportunity. I welcome the Minister’s thoughts on that opportunity to create jobs in the shipping industry.

Mark Hoban (Conservative, Fareham)

It is a pleasure to serve under your chairmanship, Mr Hood. I understand the motivation behind the hon. Gentleman’s question. He did, indeed, table an amendment that was not selected for debate this afternoon.

In my constituency, which I have represented for 10 years today, we have Warsash Maritime Academy, one of a small number of training centres across the country devoted to training cadets and others for work in the Merchant Navy. It has a long and successful tradition of recruiting and training staff at all levels. It is important; I have a particular interest in ensuring that ships, wherever they are flagged, continue to employ people trained in the UK, particularly at Warsash Maritime Academy.

Bill Esterson (Labour, Sefton Central)

I will not detain you much longer, Mr Hood. My dad was responsible for the Merchant Navy college when he was an Inner London Education Authority inspector some years ago, so there is a shared interest. Will the Minister comment on how we address the matter of flags of convenience as well as the other issue that I raised?

Mark Hoban (Conservative, Fareham)

I do not want to wander too far off the point of tonnage tax, for all sorts of reasons, not least to try to remain in order. I want to tackle the issue of the link between clause 57 and the training commitment that the hon. Gentleman proposes. The Government do not wish to dilute the training incentive that exists within the tonnage tax regime. In order for companies to benefit from the regime, they must commit to train one cadet for every 15 officers employed by the company. We think that that commitment strikes the right balance between ensuring the UK skills base is maintained, and having a simple regime that provides certainty for companies.

It might be helpful to say a couple of words about the effect of clause 57, to give some backdrop. Clause 57 reduces the level of writing-down allowances that can be claimed within tonnage tax to the same level as that for ships outside the regime. That change is required under EU law. We do not expect the impact of clause 57 to be such that it would affect a company’s ability to carry out training. I do not think that the argument made by the hon. Gentleman, which is reflected in his amendment, would have the desired impact in practice. Capital allowances are available to companies outside the tonnage tax regime, such as banks and financial institutions that own ships that are then leased to shipping companies within the regime.

In effect, what the hon. Gentleman suggests would benefit the banks, which are not involved in the training of cadets on a ship that has been leased. The benefits would shift from the company that leased the ship to the bank, and I am not sure that the hon. Gentleman wants the banks to have more tax benefits than they already have. Furthermore, exempting certain companies from the effect of clause 57 would mean that they received more state aid than had been agreed with the European Commission. We would have to approach the Commission to make such a change, and we believe that such an approach would be unsuccessful.

As I said earlier, I share the idea that seafarers’ skills and training are important, but these things are policed and dealt with not by the Treasury but by the Department for Transport, which is responsible for all matters relating to the training of seafarers. I am sure that the hon. Gentleman knows that the UK tonnage tax is very different from that of many other countries, as it includes a requirement for training. The best way to improve training opportunities in the UK is for the unions, the shipping companies and the Department for Transport to work together; that direct route would be far more effective than trying to link the capital allowances to training through the tonnage tax. The latter would be a more convoluted route and less likely to have the impact that the hon. Gentleman desires, which is to improve opportunities for UK assistance in training for the Merchant Navy and for sail on other ships.

Clause 60 - Index-linked gilt-edged securities

David Hanson (Labour, Delyn)

I look forward to working with you in the Chair, Mr Hood.

I have a couple of quick questions for the Minister. The explanatory notes helpfully supplied by Her Majesty’s Treasury to all members of the Committee state in paragraph 7 of the section on clause 60:

“At present, there is not a reliable government estimate of the number, or size of pension schemes that are affected.”

The clause amends the corporation tax definition of an index-linked gilt-edged security. The Committee will know that the current definition provides that an index-linked gilt-edged security is one in which payments are wholly or partly determined by reference to the retail prices index. This is to be changed, and such securities will be ones where the payments are determined wholly or partly by reference to the index of prices published by the Statistics Board.

Paragraph 5 of the explanatory note states:

“In July 2010 the Minister for Pensions announced that, from 2011, the ‘general level of prices’ for determining the statutory minimum percentage increase for revaluation and indexation of private sector occupational pensions, Pension Protection Fund compensation and Financial Assistance Scheme payments is the consumer prices index (CPI).”

Paragraph 6 states:

“As a result, for those pension funds whose trust deeds refer to the ‘general level of prices’ for the revaluation of deferred pensions and the indexation of pensions in payment, the CPI applies as the statutory minimum increase rather than the retail prices index”.

However, as paragraph 7 states, no reliable estimate has been made of the number or size of pension pots to be affected.

My question is simple. It is becoming rather a habit, but how can the Minister bring a proposal to the Committee—clause 60 is yet another example—when, as he admits in the explanatory notes, he does not know the number or size of pensions schemes that will be affected? As a starter, I ask the Minister for his assessment of the impact of the changes. How many pension schemes will be affected? What is the size of those pension schemes? How many individuals are there? Is there a costing in the Treasury for an up or a down in the overall value of the schemes? Putting, “We’re very sorry, guv. We don’t know,” in an explanatory note is not satisfactory, so will he give some indication of that?

Mark Hoban (Conservative, Fareham)

While the right hon. Gentleman is right to highlight the issues raised in the background note, and while it is right to say that there is no reliable Government estimate of the number or size of the pension schemes affected by the increased use of the consumer prices index, the purpose of the clause is actually to create certainty for pension schemes that use index-linked, gilt-edged securities. Let me set out what that change is. In clause 60, we are looking to make changes to ensure that the corporation tax treatment for all index-linked, gilt-edged securities issued by the Government is consistent, regardless of the index of prices used to determine payments.

By way of background, it is right to say that, in July 2010, the Minister with responsibility for pensions announced that, effective from 2011, CPI would be used for the revaluation and indexation of private sector occupational pensions, Pension Protection Fund compensation and financial assistance scheme payments. As a result, for those pension funds, the trust deeds of which refer to the general level of prices for the revaluation of deferred pensions and the indexation of pensions in payment, the CPI would henceforth apply as a statutory minimum increase, rather than the RPI. Those changes may affect the value of many pension schemes’ liabilities and the preferred mix and type of hedging instrument schemes used to manage liabilities.

In the past, Governments have only ever issued RPI-linked gilts. The availability of a CPI-linked gilt will afford some pension funds an instrument with which to better hedge some liabilities. Under the current corporation tax rules, an index-linked, gilt-edged security is defined using the RPI to calculate payments, so if a gilt-edged security linked to a different index of prices is issued, the corporation tax treatment would be unclear and a different tax treatment would be applied. The clause changes the definition of an index-linked, gilt-edged security to remove any doubt surrounding their taxation. The legislation governing the taxation of index-linked, gilt-edged securities uses the index of prices by which payments on that gilt are calculated to identify the gains arising from the inflationary uplift and removes them from the charge to tax. The clause will ensure that that continues regardless of whether RPI or CPI is used to calculate the inflationary uplift.

The changes made by clause 60 will ensure that the current corporation tax treatment of index-linked, gilt-edged securities will be applied to any future issuance by the Government. That should be welcomed by gilt market participants and should reassure them. UK pension funds are the largest single investor group in that index-linked market. I say to the right hon. Gentleman that the main focus of the clause is actually to provide greater flexibility for pension funds, to enable them to use CPI-linked gilts to hedge their future liabilities and to ensure that the tax treatment of those index-linked gilts is clear and beyond any doubt. It is creating certainty for pension funds, and it is up to them to decide whether to use the powers.

David Hanson (Labour, Delyn)

I am grateful, and, in passing, can I congratulate the Minister on his 10th anniversary of becoming a Member of the House? It was a great day, with 413 Labour MPs elected on 7 June 2001. My majority was 9,000 on that day, and it has dropped considerably since then, but let us not touch on that one.

I accept what the Minister has said, but the point is that paragraph 7 of the explanatory notes for clause 60 still says that

“there is not a reliable government estimate of the number, or size, of pension schemes that are affected.”

I understand the reasoning behind it, but I am simply asking whether the Treasury has done any modelling whatever or estimated the number of pension schemes that are likely to be affected? At what stage will he monitor the impact of clause 60 in the future? I feel that, in terms of the Minister’s objectives, it would be helpful to know his assessment of the likely impact of the clause.

Mark Hoban (Conservative, Fareham)

I do not want to create a long-running saga out of what is a relatively small but helpful clause. The point is to facilitate CPI-linked gilt-edged issuance. Should the Government decide to proceed down that route in the future, pension funds will have to decide how they approach this matter and whether there is any appetite for CPI-linked gilt-edged issuance. It is only when the pension funds themselves have reached a decision that we will know what appetite there is and what the impact will be. Rather than waiting for a problem to emerge or for a clamour for action once a problem has been identified, the Government are now making it possible for pension funds to make those changes. The funds know that the opportunity may be there for the Government to issue CPI-linked gilts in the future. It is only once they have decided what they are going to do that we can respond to that demand.

Clause 63 - Reduction of supplementary charge for certain new oil fields

David Hanson (Labour, Delyn)

The clause deals with the reduction of supplementary charge for certain new oilfields and makes two changes to the field allowance legislation. The first change amends the time at which the initial licensee is to hold a field allowance. Where a production income occurs in the same accounting period as that in which development authorisation is given, the change enables the field allowance to be activated in that period.

The second change amends the definition of “new oil field” for the purposes of the field allowance. That will enable certain previously decommissioned fields to be treated as new oilfields for field allowance purposes. Both changes have retrospective effect as from the introduction of the field allowance legislation.

New field allowances were introduced by the previous Labour Government as a means of encouraging the development of certain types of oilfield that could prove marginal due to tax costs. They did that by exempting a portion of income from the fields from supplementary charge, which means that they pay only 30% corporation tax.

The allowances were previously allowed only for fields that were given development consent by the Department of Energy and Climate Change after 22 April 2009. However, that could prevent fields that were given development consent but then decommissioned from being recommissioned, as they would still have to pay a supplementary charge due to their development date being before April 2009.

The clause states that if all the field’s assets have been decommissioned, the approval date before the decommissioning will be ignored, which effectively means that the date of DECC approving the field is the one that should be taken for determination if the allowance is available. The measure is sensible and encourages all the fields to be redeveloped with new technology. However, if we consider the clause in connection with clause 7, which we discussed on the Floor of the House, we see that there are linkages between the effects of both clauses. Both deal with the issue of the supplementary charge. Will the Minister update us and tell us what progress she is making in her discussions with the oil and the gas industries about the supplementary charge in the legislation overall?

Following those discussions, Centrica, which is the parent company of British Gas, last week decided against reopening one of the largest gas fields following the Government’s decision, under clauses 63 and 7 of the Bill, to raise taxes on production. The firm now says that it will buy in cheaper from abroad. The energy field concerned is the South Morecambe gas field, which is one of the three largest production areas that make up the offshore Liverpool-Morecambe Bay gas field. Recent concerns about the opening of the field are linked to the measures in the Bill.

This week, my hon. Friend the Member for Barrow and Furness (John Woodcock) raised that concern in the local area. Centrica’s decision not to reopen the field 20 miles off the coast of Barrow, following scheduled annual maintenance, was announced on Friday 3 June. The reasons given were that the new supplementary charge proposals—of which clauses 63 and 7, which we have considered, are part—mean that the field is now not productive for Centrica to keep open. My hon. Friend has indicated that, as well as the loss of gas production, some 200 jobs are at risk, which is a matter for discussion with Centrica. He says that it is alarming that the proposals before us have led to such concerns.

Initially, will the Minister update us on the discussions that she has had not only about clause 63, but about the supplementary charge generally? On Second Reading, we tabled an amendment that asked the Chancellor to produce, before the end of September, an assessment of the impact of the supplementary charge on business investment and growth, and on the long-term sustainability of oil and gas exploration. On the UK North sea facilities, Centrica’s chairman, Sir Roger Carr, has said that

“it’s probable that these changes will affect our plans to invest in the UK North Sea, which will have an impact on jobs and North Sea investment”.

There have also been recent discussions about the impact of the changes on North sea development, and since our debates on the supplementary charge, the chairman of the CBI has written to the Government urging them to reconsider moves relating to the charge. As those matters are linked, it would be helpful if the Minister updated us.

There have been issues about consultation on the supplementary charge regime, and again, we made such points in Committee on the Floor of the House. My hon. Friend the Member for Bristol East stated that consultation on the proposals has been slim. On the Government’s plans, we need transparency about the proposals that are being brought forward. Oilfields are long-term investments that require long-term certainty and stability. The industry has said to me that it believes that the value of investments in the UK oil and gas industry has fallen by a staggering 24% as a result of the 2011 Budget, and that point relates to the proposals in clauses 63 and 7. The Minister needs to examine the long-term potential for the industry, and the long-term investment in it.

Since discussing clause 7—this is linked to clause 63, Mr Hood, because both concern the supplementary charge regime—the Treasury Committee has said:

“The decision to increase the supplementary oil and gas levy by 12% without warning, less than a year after the Government had undertaken to provide a ‘stable’ tax regime… may weaken the Government’s credibility in seeking to establish a stable tax regime in this and other areas.”

Our good friends at the Chartered Institute of Taxation, who have provided a lot of briefings to the Committee, have also said that

“the last minute and precipitate change in Oil tax rates”

—for the supplementary charge—

“for an industry that is particularly dependent on long-term planning seems wrong”.

My initial points to the Minister are on clause 63, therefore, but they are coloured by clause 7. Where are we in relation to her discussions with the industry on these matters? There is concern from such august bodies as Aberdeen university to suggest that, over the next three decades, the Government’s changes introduced through the Bill could slash oil and gas investment in the UK by some £30 billion. Production could be reduced by up to a quarter, leaving the UK more reliant on imported oil and gas. That is important because only today in my constituency, ScottishPower—[Interruption.]

Jimmy Hood (Labour, Lanark and Hamilton East)

Order. I am listening intently to the right hon. Gentleman and I am hearing a murmur from the Government Back Benches that is putting me off. If the Chair can hear the murmur, I am sure that other Members are unable to listen as closely to the right hon. Gentleman as they should. I ask hon. Members to stop murmuring and to pay attention to the right hon. Gentleman.

David Hanson (Labour, Delyn)

Thank you, Mr Hood. The point I was making is that these are important issues because the worry that has been expressed to me from organisations ranging from the CBI to the Treasury Committee and Centrica itself is that the measures in the clause and in clause 7, which we considered on the Floor of the House, are detrimental to investment in the oil and gas industry over the long term.

Not two hours ago, ScottishPower announced a 19% increase this August in the cost of gas to my constituents. It is a quite a significant company now. It operates not just in Scotland, but supplies people throughout north Wales, the north-west and other areas. If the measures in clauses 63 and 7 are leading to a lack of investment in the oil and gas industry in the North sea, and with Centrica’s announcement only last week about the Morecambe Bay gas field, the potential is there for gas prices to rise even further from what are already appalling prices.

Justine Greening (Conservative, Putney)

I want to understand what point the right hon. Gentleman is making. Is his hypothesis that the higher the gas price goes, the less likely companies in the UK are to want to invest in gas reserves in the UK continental shelf? That seems to be slightly counter-intuitive. Most people would have thought that the more valuable UK gas reserves became, the more likely they were to be worth taking out of the ground.

David Hanson (Labour, Delyn)

The point I am making is that only today it has been announced that gas prices in my constituency will rise by 19%. The headline in the North - West Evening Mail last week was, “Gas production halted at field after tax increase”. If production is taken out, that could cause the price to rise still further or lead us to consider importing gas in the future.

Justine Greening (Conservative, Putney)

Again, is the right hon. Gentleman’s hypothesis that it would be wrong for Centrica to raise prices because of increased gas prices worldwide when it had gas it could access at a much cheaper cost to pass on to its consumers right on its doorstep in the South Morecambe field? Is that his argument?

David Hanson (Labour, Delyn)

The argument I am making is that we face oil and gas companies throughout the United Kingdom saying that the measures in clauses 7 and 63 could lead to extra costs for them. In the case of the Morecambe Bay field, that will lead to the loss of production because Centrica does not feel that it is beneficial for it to develop that field due to the taxation. We already face higher gas prices—for example, the 19% rise announced today by ScottishPower—so my worry is that companies will invest less in oil and gas production because of the changes in the Bill relating to the supplementary charge, which puts at risk some of the future development that could match capacity to help to meet those particular needs.

Ian Murray (Labour, Edinburgh South)

My right hon. Friend highlights the point of the Bill: the measures in clause 7 and in clause 63 are against jobs and growth because of the lack of production. Is that not another example of the Government’s obsession with clearing the deficit without thinking about jobs and growth?

David Hanson (Labour, Delyn)

My hon. Friend makes a valuable point. He knows the impact that the Bill’s proposals will have in Scotland in particular. Some of the issues were dealt with under clause 7, but they are linked to clause 63, and my aim is to get from the Minister her assessment, some six or seven weeks since we first discussed the matter on the Floor of the House, of progress in the discussions on the issue of supplementary charge as it affects clauses 63 and 7. She has had meetings with the oil and gas companies, and discussions are ongoing, but I want to get from her a flavour of where we are on such matters.

The issues that have been put to me—relating to clauses 63 and 7, and other matters to do with supplementary charge—are the lack of consultation and the surprise and shock of the measures being proposed in such a way in the Budget. The proposals, the lack of discussion and their short-term nature potentially hamper investment in what should be an industry of the future for Scotland and for the United Kingdom—that is, investment in maximising our gas and oil reserves, in particular in the North sea but not exclusively so.

Pamela Nash (Labour, Airdrie and Shotts)

Does my right hon. Friend agree that in not consulting with the industry the Government have taken a rushed and damaging decision? The damage has been compounded by them not consulting adequately with the industry, and the faith of the oil industry in the Government is now in tatters, as shown by the Centrica decision.

David Hanson (Labour, Delyn)

I am grateful to my hon. Friend for that intervention. She knows, from her perspective in Scotland, of the potentially damaging impact of the proposals. I repeat, because the issue is current, that gas production was halted at that field only last week, following the tax increase. My hon. Friend the Member for Barrow and Furness is concerned not only about jobs, but about the industry. The report from Centrica says:

“We welcome the ongoing dialogue that the government is having with industry around the damaging impact the increased tax levels has on North Sea gas security and investment.”

Supplementary charge is the key to the clause, in relation to our discussions on reopening fields, and key to the issues discussed under clause 7. I would welcome an update from the Minister, so that we do not read only in the paper that Centrica is having ongoing discussions, and so that we know what the Minister is doing and what is her assessment of where we are on such issues.

That will suffice for the moment. I await the Minister’s response.

Justine Greening (Conservative, Putney)

The clause makes two changes to the field allowance legislation that applies to oil and gas production companies. The changes were those requested by the industry and, as I am sure the right hon. Gentleman is aware, they fit with a couple of other clauses. They will ensure that the existing legislation operates appropriately.

Before I go on to discuss in a little more detail what clause 63 does, I shall respond to some of the points made by the right hon. Gentleman. We have to return to the background to the rise in supplementary charge. As a Government, we were faced with some large rises in fuel duty proposed by the outgoing Labour Government. We had to decide whether it was right for those duties to rise, as proposed by the previous Government.

We felt that the cost of living was a hugely important issue for people in this country and that the impact of the rise in the oil price as it fed through to the price of petrol at the pumps was serious. With the limited fiscal means available to us, we wanted to do what we could to alleviate the tough and damaging effect on the economy recognised by a range of stakeholders, including the CBI. The pressure was on not only households with motorists, who were finding it hard to cope with the price of petrol, but companies, many of which had fuel as one of their key costs and relied on hauliers to get goods to where they needed to be to sell. We were determined to ensure that we did what we could in the Budget to support motorists and ensure that motoring remained affordable, and, in doing so, to introduce a package that had broader support for the economy—but of course, that had to be paid for. We felt that the most effective way to do so was to raise tax from the one sector of the economy that was doing well from the high oil price. That, of course, was the oil industry.

Labour Members may feel that we did not get it right and that it would have been better to leave the oil industry to make significant extra profits and leave the motorists and hauliers across the country to face the higher fuel duty rises proposed. We took a different view, and wanted to see what we could do to support motorists and hauliers. Far from bringing forward the fuel duty rises that were proposed, we managed a fuel duty cut.

Bill Esterson (Labour, Sefton Central)

The Minister makes some good points about the importance of supporting small businesses and motorists generally on the cost of fuel. Does she therefore agree that we should reverse the VAT rise, which has increased the cost of filling up a 50-litre tank by £1.35?

Justine Greening (Conservative, Putney)

I do not want to stray too far from the topic or I will be out of order, but the hon. Gentleman must be aware that VAT had to rise because the outgoing Labour Government left us with a huge fiscal deficit, and we all know that the previous Labour Chancellor proposed the rise too. Labour’s attitude had been to ignore it; our attitude has been to try to deal with the structural deficit. In fact, only yesterday the International Monetary Fund backed our plan, which shows that the country is on the right track. The shadow Chancellor may ignore those reports, but they show that we are on the right track.

Clearly, we want to ensure that we do what we can to support the oil and gas industry. Clause 63 addresses two matters on fuel allowances that the industry raised. By removing some income from the scope of the supplementary charge, the field allowance provides an incentive to invest in certain types of new fields. [Interruption.]

Jimmy Hood (Labour, Lanark and Hamilton East)

Order. The hon. Gentleman must not read papers in Committee.

Ian Mearns (Labour, Gateshead)

I was not reading the paper, Mr Hood, I—

Jimmy Hood (Labour, Lanark and Hamilton East)

Order. I call the Minister.

Justine Greening (Conservative, Putney)

Thank you, Mr Hood. The first matter is in respect of fields that have been decommissioned. A company may decide that such a field should be redeveloped, which we would very much welcome. From a policy perspective there is no reason to treat such a field differently from a new field. It is appropriate that the field allowance should be available in such cases, but because the field is not “new” within the terms of the legislation, no allowance is available. We want to address that problem.

The second matter is in respect of the accounting period for which the field allowance is first able to reduce taxable profits. The allowance cannot currently reduce profits until the accounting period following that in which the development of the field is authorised. The delay in obtaining the benefit of the allowance is unintended and inappropriate, particularly if a company develops a field quickly, because it can find that the benefit of the allowances is unavailable until the following accounting period. We want to address that problem.

The clause makes two changes. First, it treats a field of which all the assets have previously been decommissioned as a new field, therefore such a field will potentially be eligible for the field allowance. Secondly, it enables the field allowance to reduce taxable profits for the accounting period in which the development of the field is authorised. We published the draft clause back in December, and we discussed it previously with industry advisers. No comments have been received.

Broader discussions with the industry are ongoing. It is probably not wise for me to give a running commentary on those discussions because it would not be helpful to the industry.

The right hon. Member for Delyn mentioned Centrica and its decision on the South Morecambe field. It is not unusual for Centrica not to reopen the south Morecambe field in the summer. The 2010 Centrica accounts show that the field reopened later in the year in 2010 when the gas price increased, so it is quite possible that that approach will be taken this year. The right hon. Gentleman is right to flag up concerns about jobs, and Centrica has confirmed that no job losses will result from the commercial decision to shut the South Morecambe field temporarily.

More broadly, the analysis, which was carried out not only by Wood Mackenzie, but by Professor Kemp at Aberdeen university, shows that the tax increase on the supplementary charge is likely to have only a small impact—a reduction of about 2%—on projects and new fields. Understandably, investment is driven by movement in the oil price or companies’ screening hurdles, which can have far more effect. Nevertheless, as we pledged in the Budget, we are working with the industry to address the marginal fields that have been impacted. We are looking at how we can use field allowances and the broader oil and gas tax regime to ensure that those marginal investments still go ahead.

Having addressed the points raised by the Committee, and having given some explanation of what clause 63 will do—the clause brings forward changes that have been requested by the industry—I move that the clause stand part of the Bill.

David Hanson (Labour, Delyn)

I accept what the Minister has said. The new measure is sensible and encourages the redevelopment of older fields with new technology. It also enables the allowance to be claimed in the accounting period in which the field is authorised, which means that the legislation will now work as intended. I am happy with that.

The clause mentions the supplementary charge, and I wanted to stray slightly by asking the Minister for an update on her discussions with the oil and gas companies on the supplementary charge proposals as a whole. I fear that I have not got much further, but I have received an update of sorts that said, “We are in discussions.” That does not tell me anything more than I have read in the paper. I would like a little more from the Minister on what those discussions have meant, because she will be aware that there has been considerable concern in the oil and gas industry about the impact of the supplementary charge proposals as a whole on the potential for investment, the potential for developing new fields, the potential for extending existing fields and the potential for reopening fields that are currently not being utilised to the full. The latest briefing that I have been provided with raises issues such as trust, employment, security of energy supply, exploration of new reserves and wider energy sector tax revenues, all of which are important.

I would like to press the Minister a tad more. As part of the supplementary charge issue generally—the words “supplementary charge” are in clause 63—will the Minister give an indication of when she expects to complete any discussions with oil and gas companies? What mechanism will she have to report back to the House on any outcomes from those discussions, not only on their welcoming of clause 63, but on their engagement with the Minister on clause 7? It is important that the Minister gives us some indication of what the outcome of those discussions is likely to be. I accept that a running commentary is not always helpful, but before we leave this clause, it would be useful to have an indication of the time scale involved, and know when the Minister will report back and whether the measures in clause 63 will be impacted on by the wider discussions with industry about clause 7.

Justine Greening (Conservative, Putney)

In response to the right hon. Gentleman’s further questions, he will be aware that we have talked to industry about a number of issues. One issue that is important to industry, for example, concerns certainty about decommissioning relief, and a working group has been established to look at that. As we made clear at the time of the Budget, we are also looking at field allowances and clause 63 seeks to make those work more effectively. As the right hon. Gentleman will know, the nature of the UK continental shelf means that there is an increasing challenge in the new fields that companies are looking at, whether they are of tight gas or heavy oil. There are a number of technical challenges, and the field allowance regime was brought in to provide a more nuanced tax regime to help unlock those additional opportunities. We are in the business of talking to the oil and gas industry about how to ensure that field allowances work more effectively.

The right hon. Gentleman will be aware that we have had extensive discussions with Centrica about the impact on gas. I have already said in Parliament that Treasury officials went to Centrica’s offices to talk on its home turf about its views on the increase in supplementary charges. It is probably not for me but for the Chancellor to talk about what measures—if any—will come through and when. The usual time frame for announcing such measures is the Budget, so it is probably not wise for me to go any further than that today. I reassure the right hon. Gentleman that we are working with industry and making progress on issues such as decommissioning relief. Over the coming months, no doubt he will hear more of the results of those discussions.

David Hanson (Labour, Delyn)

I fear that I am not much further on, but I understand the Minister’s perspective and why she is not able to give a running commentary on those matters. I felt it was important to try to get at least some indication as to whether the talks she is having will influence the Bill, as opposed to a future Budget. The Bill has not yet completed its passage through the House of Commons, and it remains to be considered on Report. Following her initial announcement and discussion on Second Reading, the consideration in Committee of clause 7, and of clause 63 today, does the Minister anticipate any further proposals being examined and brought back for consideration pending Royal Assent, not in a subsequent Budget in 2012 but in the Bill? I thought that the Minister might follow up on her discussions and have some news for us on the concerns that have been raised by many Labour Members—and elsewhere—about the potential impact of the whole package of clauses 63 and 7. It appears that we shall have to wait for a future Budget, which in itself provides an indication of the response to the consultation that is being undertaken. With those comments—I fear that “head” and “brick wall” are words that go together on this matter—I shall sit down and wait for a future discussion.

Clause 64 - Chargeable gains: oil activities

David Hanson (Labour, Delyn)

I have a few small questions on clause 64, which might overlap into schedule 15, although I hope the Minister can answer if possible under clause 64.

Clause 64 effectively brings in schedule 15, which amends the oil chargeable gains licence swaps legislation and extends the scope of the ring fence reinvestment legislation to exploration, appraisal and development expenditure. That, again, is welcome and we will not oppose it; the Minister has our support on that matter. However, I wish to press her on the impact of one particular item, which may be better taken under schedule 15, rather than clause 64.

Jimmy Hood (Labour, Lanark and Hamilton East)

Order. If both Front Benchers agree, we can take clause 64 stand part and schedule 15 stand part at the same time.

David Hanson (Labour, Delyn)

Thank you, Mr Hood, for the matters overlap; this is a straightforward question. Schedule 15 is divided into two parts. Part 1 covers swaps, where companies swap their oilfield licences rather than buying a new licence outright. They can also apply if the licence is acquired partly for cash and partly for another licence. If it is a pure swap, the old licence is treated as disposed of for no gain or no loss, and the acquisition cost for the new licence is treated as the no gain, no loss value of the old licence. If it is a partial swap, the licence portion disposed of is still no gain, no loss. That legislation was introduced in 2009, and the schedule updates it, which I welcome.

The first change is to treat any enhancement expenditure on the asset that the buyer reimburses as incurred by the buyer. The second is to allow swaps to be treated as made on what the parties agree to be the effective date of the swap, even if the swap is not completed at that point. That is the point on which I wish to press the Minister. That effective date is when the economic benefit passes, even if formal title has not passed. It is common for oil and gas asset disposals to have an effective date and a later completion date. The change is in line with the original intention of the legislation and is reasonable. Any subsequent increase in the non-licence consideration will also be caught.

What might happen in the event of a subsequent decrease in the non-licence proportion? There is no such provision in the schedule as I read it. If that occurs, what will be the Minister’s response? At the moment, the increase in non-licence consideration will be caught, but a decrease may not be. I do not know whether there is any impact in that respect. As I read it, there is nothing in the schedule or the clause looking at that point. It may have no consequence, but I felt it worthwhile to point out that provision to the Minister, so that she can examine with officials whether it has a consequence.

I would also welcome clarification of the Minister’s understanding of the definition in the schedule of

“Exploration, appraisal and development expenditure”,

which is the phrase used on page 230 in part 2 of schedule 15,

“Reinvestment of ring fence assets”.

Paragraph 5 says:

“1981 Exploration, appraisal and development expenditure”,

and goes on to list a range of definitions of those three terms. It has been put to me that that is a flexible approach, which is fine, but it means that the definition is not under the direct control of Parliament and may not be based on generally accepted accounting practices. Will the Minister clarify those two issues? First, what happens when there is a decrease in a non-licence proportion? Secondly, will she give me a firm definition of “exploration, appraisal and development expenditure”, and does she believe that that definition is based on generally accepted accounting principles?

Justine Greening (Conservative, Putney)

It is probably worth briefly running through clause 64 and schedule 15 to say why they are in the Bill and what we intend them to achieve. They introduce small but important changes to chargeable gains legislation that will apply to oil and gas companies. The changes relate to two areas of the fiscal regime and are intended to encourage further investment in oil and gas fields.

The existing oil licence swaps legislation provides that no chargeable gain arises on the swap of oil and gas licences in the UK and the UK continental shelf in some circumstances. That legislation was introduced to encourage and enable the transfer of licences so that they would be held by companies that were likely to invest in them. However, it does not adequately address the circumstances that arise in practice, and in many cases the legislation simply cannot apply. The existing ring fence reinvestment legislation provides that no chargeable gain arises in some circumstances when disposable proceeds are invested in new oil trade assets. One requirement of the legislation is that the disposal and acquisition qualify for roll-over relief. Again, that legislation encourages the disposal of licences and at the same time encourages investment of the proceeds in the UK continental shelf.

A lot of such investment comprises expenditure on exploration, appraisal and development, such as the cost of drilling wells, which does not qualify for roll-over relief. The right hon. Member for Delyn asked about the definition of expenditure on exploration, appraisal and development, and the measure uses generally accepted accounting principles. I hope that that provides the clarification he wants. However, as a result, the ring fence reinvestment legislation cannot apply, and that is the situation that we want to remedy. The changes made in the clause and in schedule 15 address those issues and ensure that oil licence swaps legislation applies by reference to the date on which the economic benefits under the licences concerned are treated as passing, rather than by reference to the date on which the swap arrangements are entered into.

The right hon. Gentleman also asked about valuation reductions. The point is that the parties want the swaps legislation to apply with reference to the position agreed on the effective date, and that any non-licence consideration should not affect the outcome, whatever way the non-licence consideration payments flow. He raises an interesting point, but in practice the way the legislation is now structured should ultimately have no impact. In fact, the changes in the clause and the schedule should ensure that the technical problems facing us in the existing legislation fall away.

The schedule will also ensure that for chargeable gains purposes the base cost reflecting any expenditure incurred arises to the appropriate company. On the ring fence reinvestment legislation, the incurring of expenditure on exploration, appraisal and development is treated as expenditure on assets that qualifies for roll-over relief, thus enabling the legislation to apply.

Clauses were published in draft in December, having been discussed with industry advisers. Comment was received on only one aspect—a definition—and a solution to the issue identified was discussed and agreed with those who commented. The draft legislation was amended accordingly. The changes introduced by the clause and the schedule have been developed with the industry. They will enable the existing legislation to apply more widely, which will help to assist the transfer of UK continental shelf assets, ensuring that assets are held by those companies that are most likely to invest in them. The changes will help to ensure that the UK maximises the economic production of its oil and gas reserves.

Clause 65 - Benefits under pension schemes

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss, That schedule 16 be the Sixteenth schedule to the Bill.

David Hanson (Labour, Delyn)

Thank you, Mr Hood, for facilitating discussion of the clause and the schedule at the same time. That is helpful, because they are inextricably linked.

The clause and the schedule amend part 5 of the Finance Act 2004 as it relates to certain tax rules for registered pension schemes that apply to individuals reaching the age of 75. From 6 April 2011, the effective requirement to buy an annuity by the age of 75 will be removed and the alternatively secured pension rules will be repealed. Individuals will be able to leave their pension funds invested in a draw-down arrangement and make withdrawals throughout their retirement, subject to an annual cap. The maximum withdrawal of income that an individual can make from most draw-down funds on reaching minimum pension age will be capped at 100% of the equivalent annuity that could have been bought with the fund value. That is what I want to explore with the Minister.

The maximum capped amount will be determined at least every three years until the end of the year in which the individual reaches the age of 75, after which reviews to determine the maximum capped withdrawal will be carried out annually. Individuals who can demonstrate that they have a secure pension income for life of at least £20,000 a year will have full access to their draw-down funds without any annual cap, which is the key point that I want to discuss with the Minister.

The tax rules require that tax-relieved pension savings must be used to secure an income by the age of 75. That requirement is intended to ensure that pension savings accumulated with the help of tax relief are used to provide an income on retirement. That is a sensible approach to ensure that they are used appropriately, because they have been accumulated with help and support from the state.

Most members of defined contribution schemes secure a retirement income by buying an annuity. Until now, members of defined contribution schemes who do not want to buy an annuity have been limited to two options: before the age of 75, an unsecured pension arrangement that enables individuals to leave their pension fund invested while drawing down an income, or after the age of 75, an alternatively secured pension arrangement, which is similar to the previous example, but with a lower maximum draw-down limit.

Under the new rules, the concepts of unsecured pension arrangements and alternatively secured pension arrangements will disappear, and there will be a single alternative to an annuity, which is the draw-down pension. The key point about that, which I want to develop with the Minister, is that the maximum withdrawal of income that an individual may make from most draw-down funds will be capped at 100% of the equivalent annuity that could have been bought with the fund value. However, individuals who can demonstrate that they have a secure pension for life of at least £20,000 a year will have unrestricted access to receive their draw-down fund as pension income.

The issues are quite simple. I would welcome some assessment from the Minister of how many pensioners have a guaranteed income of £20,000 a year for the rest of their life. Under the clause, pensioners with that guaranteed income have a beneficial ability to draw down funds from their pension scheme. For everyone else, the amount that they draw down—take out of their pension fund—will have a cap of the equivalent annuity that could have been bought with the fund. In other words, they will be no better off than if they had been forced to buy an annuity.

I want to get some idea from the Minister of how many pensioners he believes will make use of the provisions that allow them to draw down funds based on their income of £20,000 a year. I would also like him to give some indication of the effect that these changes will have on the proposals for saving generally. The Government recently consulted on giving people early access to their pension savings and, as a recent press release from the Treasury states, this is their conclusion:

“While early access has some merits, there is insufficient evidence that to suggest it would act as an incentive to save more into pensions.”

Although I accept that early access to pensions is a different question from using the annuity, the two are obviously related, and the Government have said that there is no evidence that using the annuity will encourage any more saving in pensions either. As well as asking the Minister for his assessment of the number of individuals who will be able to access income of £20,000 a year—not only now, but years hence—I wonder what evidence he has that the proposals will help savings in general to be increased still further.

A third concern is whether these proposals, as they are developed, could be used for avoiding inheritance tax. That is a charged issue and, dare I say it, there are potential differences between the three Liberal Democrat members of the Committee and the Conservative party on the question, although the coalition agreement will smooth those things over for the moment, and the Liberal Democrats will undoubtedly support the proposals today. However, for the benefit of the three Liberal Democrat members of the Committee, I shall explain the potential impact of the clause on inheritance tax.

Ministers have clearly said that they do not want to charge inheritance tax on funds that remain on death and have removed some inheritance charges, but because people would no longer be required to buy annuities there is a risk that the changes could provide a straightforward avoidance route. It is possible that wealthy people could put assets into pension funds, with the usual tax benefits, and leave them there until they die, when they would be passed on to the children with no inheritance tax charge. I would welcome the Minister’s comments on the question of inheritance tax as it relates to the pension proposals before the Committee.

Schedule 16 introduces a tax charge of 55% on lump sums left in pension pots at death by those over the age of 75. That is calculated to be the equivalent of the 40% inheritance tax charge, with an additional 15% to take account of the tax relief given on pension pot accumulations. However, the amount of tax relief can vary hugely, depending on people’s circumstances. The 55% rate will therefore over-recover tax from some and under-recover tax from others. Will the Minister give his view on the impact of the clause on inheritance tax avoidance?

The schedule also provides us with the opportunity to consider inheritance tax generally, on which subject there is a difference between the Liberal Democrats and the Conservative party. When I last counted there were 41 pages of legislation—it may have grown slightly since then—but I believe that those provisions will benefit a few of the wealthiest people while doing little or nothing to encourage more saving.

My questions are as follows. How many people do the Government believe will benefit from the change? Will the Minister put my mind at rest, and tell me that it will not be only the wealthiest? Does he believe that more pension saving will take place, and if so will he give us some evidence of how the measures will encourage pension saving?

Why is there no inheritance charge tax on assets left at death? I give the Minister the benefit of the doubt, but will he assure me that it is not a deliberate attempt to leave a loophole open? I would welcome his explanation of why inheritance tax is not to be charged on assets left at death. That would be in line with the normal use of inheritance tax, and I am sure that the three Liberal Democrat members of the Committee would not wish to encourage inheritance tax loopholes.

What assessment has the Minister made of the impact of lifting the inheritance tax threshold to £1 million, given the incentive for these changes? Is it still the Conservative party’s intention to do that, or has it been sacrificed with trade-offs with the Liberal Democrats? On page 75 of the consultation document, the Government admit that the 55% charge will over-recover tax from some and under-recover tax from others. Does the Minister intend that to be the position? Why have the Government not done anything about those particular issues?

In summary, there are some general questions on which the Minister should reflect to see whether he can satisfy the concerns that have been expressed to me by colleagues both inside and outside the House.

Mark Hoban (Conservative, Fareham)

Let me give some further background to the clause before I deal with the right hon. Gentleman’s questions. He will be aware that this has been a hotly debated topic. It was raised many times in the previous Parliament and not just by Conservative Members in this House and the other place. I recollect that Baroness Hollis, who was a social security Minister under the previous Government, was also a champion of the end to compulsory annuitisation. The requirement to secure an income by the age of 75 has existed since 1976. At that time, the average life expectancy of a healthy 65-year-old male was 13 years. The life expectancy of a healthy 65-year-old male has now increased to 21 years. For a female, it is currently 24 years. As longevity continues to increase and people work for longer, the existing rules will become more restrictive for an increasing number of people. We believe that people should have more say over how and when they use their pension savings to provide an income in retirement.

Removing the requirement to annuitise at the age of 75 will make the tax system simpler by avoiding unnecessarily restrictive and outdated rules. Together with the changes in clauses 66 and 67, this will ensure that the pensions tax regime is both fair and sustainable. It will also give individuals, employers, providers and schemes appropriate flexibility to make arrangements to suit their circumstances and preferences.

Let me set out the changes that have been made by this clause. They will primarily benefit those people who have to find contribution schemes. Let me highlight four types. Individuals with defined contribution pension savings who have yet to take a pension will be able to defer taking benefits from their scheme rather than having to buy an annuity at age 75. Individuals who wish to leave their pension fund invested as part of an income drawdown arrangement will be able to do so beyond the age of 75 subject to the annual drawdown limit to which the right hon. Gentleman referred. Individuals with a lifetime pension income of at least £20,000 a year, known as a minimum income requirement, will be able to gain access to their drawdown pension funds with no cap on the withdrawals that they make. That is known as the flexible drawdown. The age 75 ceiling will be removed from most lump sums to which a member is entitled.

The detail of these changes were subject to extensive consultation last summer. We received 185 responses from a wide cross-section of individuals, pension professionals, advisers, trade bodies and academics. The consultation highlighted the clear preference of most respondents for the new rules to achieve their objectives of minimal complexity, and we listened carefully to those requests.

Simplicity underpins many of the key elements of the clause under debate today. In particular, a single level minimum income requirement will be applicable at all ages, before someone can access flexible drawdown. Where someone is not on flexible drawdown, there will be a single annual withdrawal limit. There will be a single recovery charge on unutilised funds remaining on death of 55%. As the right hon. Gentleman said, the recovery charge can be as high as 82% for those above the age of 75. Perhaps he should also have mentioned that lump sum death benefits relating to individuals who die before the age of 75 and before taking a pension are tax free. Lump sum death benefits relating to individuals who die before age 75 after taking a pension are liable to tax at 35%. That is under measures put forward by the right hon. Gentleman’s Government when they were in office. Therefore, rather than having no tax, or having tax paid at 35% or up to a rate of 82% on an unutilised pot at death, we have moved to a single tax rate of 55%. I must say that I have received much correspondence from colleagues suggesting that the 55% rate should be reduced, and their constituents have written to them asking for lower rates to be introduced, but I believe that 55% achieves the right balance, and let me say why.

By setting the charge at 55%, we have sought to recover the amount of relief received by a typical individual who may be subject to the charge. The governance modelling suggests that a 55% charge would ensure that there are no tax advantages for pension death benefits compared with other assets on which inheritance tax is payable. Accordingly, it is not appropriate to levy inheritance tax on top of the recovery charge. We recognise that most of the people who will take advantage of the measure will be those who paid the higher rate of tax, and a 55% rate is, therefore, applicable. That would lead to cases in which people received tax relief at the basic rate of an over-recovery, but it is better to have a single simple rate, rather than a variable rate that depends on the rate of tax someone may have paid at some point in their life as they built up their pension pot.

The single rate is appropriate. It means a higher tax charge for those who die before the age of 75 and a slightly lower tax charge for those who die afterwards, but it ensures that the tax relief that the Government have given to encourage people to build up a pension pot is actually fully recovered at the point of death. That is the right way to do it. Of course, if the unutilised pot is used to provide a pension for a dependent, which may be a spouse or a minor, that will be tax-free, as is the case at the moment. That is the right level of protection to ensure that tax relief is recovered by the Government.

The right hon. Gentleman asked about the take-up for the measure, and our assessment is that up to 200,000 individuals currently in a draw-down arrangement could initially benefit from not having to purchase an annuity at age 75. Around 50,000 individuals currently in a draw-down arrangement could initially benefit from flexible draw-down. A further 12,000 individuals a year may be able to access flexible draw-down in a steady state. Recent independent estimates by the Pensions Policy Institute suggest that up to 700,000 people currently between 55 and 75 could benefit from not having to purchase an annuity, and that includes individuals who have uncrystallised pension savings. PPI also estimated that some 200,000 people currently between 55 and 75 could benefit from the flexible draw-down.

The initial Government estimates were published in the tax information and impact notes of 9 December 2010. One of the reasons why there is so much appetite for the measure out there is not so much to address the challenges faced by pensioners today, but, as we all recognise, rather that there has been a significant shift from defined benefit to defined contribution schemes over recent years, and the proposal ensures that people who are in DC schemes can benefit from increased flexibility in the future. They may decide that they want to work for longer. They may wish to put off the date of retirement and not to be required to buy an annuity. They may have a complex mixture of assets in retirement. By bringing forward the measures, we want to ensure that they are given the maximum flexibility while safeguarding the interests of the taxpayer more broadly.

I must say that I have had correspondence from a whole range of people—from the self-employed to high earners—who are keen about the proposal, because they believe that it will encourage them to save more for the future. They resent having to buy an annuity at 75. They want the flexibility that the measure brings to give them more control over their pensions and their savings. That is one of the themes that run through the Government’s approach to reforming pensions and savings. We want to give people more flexibility not only in the way they accumulate their pension savings and their savings more generally, but also in the way they use the pension pots that they have built up when they have chosen to retire. This measure captures the right balance, ensuring that taxpayers’ interests are safeguarded by clawing back the tax relief given. It also ensures that people have some choice and control over their savings. It will in the long term prove a further reason for people to build up savings.

Clause 66 - Annual allowance charge

David Hanson (Labour, Delyn)

I beg to move amendment 188, in clause 66, page 39, line 7, at end add—

‘The Chancellor of the Exchequer must, no later than 1 April 2012, compile and lay before the House of Commons a report containing an assessment of the impact of this section and Schedule 17, including the impact in creating marginal effective rates of taxation of over 100 per cent. (when considering the impact of this section and the relevant income tax rates in force)’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following:

Clause stand part.

Government amendments 129 to 133.

That schedule 17 be the Seventeenth schedule to the Bill.

David Hanson (Labour, Delyn)

On 14 October 2010, the Treasury announced that it would reduce the annual allowance from the current level of £255,000 a year, to £50,000 a year, and the Finance Bill confirms those figures. Amendment 188 is our attempt to tease out from the Government how they are addressing circumstances in which people in defined benefit schemes have a large deemed charge in a single year and are therefore hit by additional tax charges. The reduction in the allowance will bring many more individuals within the scope of the tax changes. Those changes will apply to all pension scheme members, whether they are in defined benefit or defined contribution pension arrangements, and will include both occupational and personal pension schemes.

Substantial numbers of people are now likely to be affected, and I would welcome the Minister’s assessment of the impact of the changes as far as numbers are concerned, particularly those in final salary schemes who have long service or have had large salary increases. The Government estimated in 2010 that 100,000 people would be affected. I would welcome confirmation from the Minister that that figure is still in place, or whether it has been revised up or down since the initial assessment. As there is no current intention to increase the allowances, my worry is that many people may be caught up in future years, as salaries and incomes change. Up to 200,000 people could face additional tax in future if inflation increases and tax allowance limits remain the same. Even if only the originally estimated 100,000 are affected, a much larger number will need to be involved in checking to see whether they are affected.

My first point is that we need some current assessment—not for October 2010, but for June 2011—and for future years, of the numerical impact of these changes in the annual allowance. My second point is that the tax charge may be quite substantial for those affected. For example, an executive earning around £150,000 a year with 20 years’ service, in a final salary pension scheme, will face tax of £12,200 on a pay rise of £9,000, which is a marginal rate of tax of 135% on a pension increase plus 50% income tax. That makes a combined tax rate of 185% on the pay rise.

We can have many debates about how to tax higher earners but, under clause 1 of this very same Bill, the Minister indicated that the Government would undertake a long-term review of the 50p rate of tax. Yet we face a situation in which final salary pension schemes might well be threatened with a combined tax rate of 185% on the pay rise being brought forward.

A number of affected employees will face complex choices, about whether to accrue benefits and pay the tax, or not to accrue benefits and face a much poorer retirement. Wealthy individuals who might want to save more than £50,000 in a pension scheme will not be the only ones affected. Many individuals currently choose to pay off debts—for example, mortgages—and not to save into pensions, given that debt interest is usually much higher than interest on savings; they might then be planning to save hard for retirement using spare income, having paid off the mortgage. The effects of the measure will mean that they are less likely to be able to do that in the longer term. The total pension would be reasonable, but it would have been funded in the second half of their working life rather than uniformly throughout their life, and that could create some difficulties. I wish the Minister to examine such issues and to give some response today.

Potential concerns include parents returning to work after a period of raising a family, who might feel under-pensioned; they might therefore wish to divert significant amounts of their income into ensuring a decent pension in old age. They, too, might be hit disproportionately by the proposals before the Committee today. Entrepreneurs are another good example: they might have had a long period of building a business and putting their resources into it, expecting rewards for their hard work to flow in only after some years. Their ability to save for a pension might only arise once the business starts to pay decent profits, which could be towards the latter part of their careers. All of those groups—those who pay off debts first, those who are out of work and then in work because of family commitments, and those who are building a business—might find themselves disadvantaged by the proposals.

Complexity in tax legislation on pension schemes potentially creates barriers to encouraging people to save. Clearly, there is a large reduction in the amount of the annual allowance in the clause. Before April 2009, individuals could contribute significantly more of their income into a pension and benefit from tax relief at the marginal rate of tax on such contributions. The changes will have a significant impact on the ability of individuals to save.

In addition to the preamble, I have two particular areas on which to question the Minister today. First, the costing of the changes: when the Government came in, they said that they did not want to continue with the changes we had proposed to restrict pensions tax relief but, to square that, they needed to raise the same amount of money for the Exchequer. The costings for how much the changes will raise may be over-optimistic. A commitment from the Minister today about the cost of the changes and a robust assessment of the stress testing of those costings would be helpful.

Secondly, as I outlined, in some circumstances the new annual cap of £50,000 on contributions before a tax charge is triggered will create some difficulties—not in every case, but for some people. Those are people in defined pension schemes with large deemed contributions if they get a promotion. I want some explanation of the Minister’s view of those changes.

In summary, I have drawn attention to changes that will have a significant impact, although admittedly on a small group, who are probably higher earners. However, it is important for the Minister to give an explanation to the Committee of the impact of the changes, so that we can assess them fully before agreeing to the clause.

Mark Hoban (Conservative, Fareham)

It is worth giving some background to the change. The Government provide generous tax relief to save for a pension, to encourage individuals to take responsibility for retirement planning and in recognition of pensions being less flexible than other forms of saving.

Under the previous Government, the cost of tax relief, net of income tax on pensions paid, doubled to nearly £20 billion per annum by 2009-10. To ensure that pension tax relief remains fair, affordable and sustainable, we confirmed in the June Budget last year that we would proceed with the previous Government’s aim of reducing the cost of tax relief on pensions by £4 billion every year.

The right hon. Member for Delyn will remember the previous Government’s plans. They were complex and seen as unfair and anti-competitive. He raised the issue of cost and asked how much revenue would be raised by the measures. For the period between 2011-12 and 2015-16, the proposals put forward by his colleagues when in Government—once updated to reflect new economic data—would have raised £15.6 billion in total. Across the same period, the measures that we have proposed will raise £16.6 billion. Therefore, we will raise additional tax revenue as a consequence of introducing this legislation, and I hope that the right hon. Gentleman will recognise that.

Those estimates are compiled by HMRC. They are robust and we have tried to take into account data on earnings, growth, and ways to prove the model in terms of assessing the impact of the measures. They are our best estimates, and we believe that the amount of revenue raised will be marginally greater than that which would have been raised under the previous Government’s proposals.

The previous Government’s approach to achieving a reduction in pension relief introduced significant additional complexities to the tax system; it undermined pension saving and damaged UK businesses and competitiveness. We believe that an approach which limits the amount of tax relief for those who make the highest contributions is better than restricting the rate of tax relief available to those on incomes above an arbitrary threshold. In our proposals, those whose pension contributions exceed £50,000 will not receive any tax relief. Under proposals put forward by the previous Government, even those earning the highest salaries and paying the highest rate of tax would have received tax relief at a rate of 20% per annum.

We wanted to ensure a more flexible and simpler system, and we consulted on that basis. Several commentators commended our approach; the Institute for Fiscal Studies stated that perhaps the most welcome change in the 2010 Budget was the decision to rethink the previous Government’s “complex, unfair and inefficient” plans for pension contribution relief for high earners. The responses to the informal consultation held last summer confirmed our view that reducing the allowances to tax-privileged pension saving would be fairer. That approach preserves incentives to save and lessens the impact on the ability of UK businesses to attract and retain talent. It is also more straightforward to understand and implement.

In October, we announced that from the 2011-12 tax year, the annual allowance for tax-privileged savings would be reduced from £255,000 to £50,000. Such a move recognises that it is right to provide generous tax relief to save in a pension, but that it is also right to ration that relief at a more appropriate level. The CBI responded positively to our approach, saying that

“these new proposals are a significant improvement on the approach proposed by the previous Government, which was simply unworkable.”

Clause 66 reduces the annual allowance to £50,000 for tax year 2011-12 and beyond. Individuals making annual pension savings above that level will face an annual allowance charge to recoup the tax relief that has been granted to them. The reduced allowance of tax-privileged saving will apply to all individuals receiving UK tax relief in all types of registered pension schemes. An annual allowance of £50,000 is a level that far exceeds average annual contributions. That will protect those on moderate incomes on whom a lower limit would have impacted. The reduction in the annual allowance goes hand in hand with the reduction in the lifetime allowance to £1.5 million, which we will cover in detail when we discuss clause 67.

The reduction in the lifetime allowance allowed a higher level of the annual allowance to be set than we originally proposed, while still raising the intended revenue. That combined approach also provides individuals with greater flexibility around when they make their annual pension contributions. With the changes to the lifetime allowance in clause 67, the reduced annual allowance will generate £4 billion-worth of annual revenue in steady state, thus protecting public finances.

Reducing the allowances will affect individuals with the highest levels of pension savings only, leaving the vast majority of pension savers unaffected by the changes. In fact, less than 1% of pension savers will be affected. That alternative approach to restricting pension tax relief has been welcomed by pension and employer groups, and we have continued to work in consultation with them to finalise the design of the new scheme.

As a result of ongoing consultation with the pension industry since the publication of the Finance Bill on 31 March, changes have been indentified that would make the application of legislation simpler, and therefore reduce administrative burdens on the pension industry. Government amendments 129 to 133 ensure that the legislation will work as we intend.

Amendment 133 addresses a simple drafting issue. The annual allowance charge operates by reference to pension savings made over a certain period. In changing the dates of when that period begins and ends, the Bill inadvertently provided for, in certain circumstances, a period of 364 rather than 365 days. The amendment corrects that so that the period will be 12 months unless the scheme or, in other circumstances, its members nominate otherwise.

Amendments 130 to 132 concern individuals who have high annual allowance charges. The schedule provides for them to nominate to meet their tax charge out of their pension savings. If they so nominate, an offsetting adjustment is made by the pension scheme to reduce the individual’s pension savings to reflect the tax paid on their behalf. Schedule 17 provides for the amount of the adjustment to be reflected in the valuation of the individual’s savings when determining their annual allowance charge in the year the adjustment is made. Amendments 130 to 132 address an imbalance in carrying out the adjustment between individuals in defined benefit or cash schemes and those in defined contribution schemes. Amendment 129 relates to the year in which a pension comes into payment.

In calculating the increase in pension rights, there is a choice between continuing to use a notional valuation and using the actual amount of pension benefits taken. Schedule 17 provides for the notional amount to be used, but representations received since the Bill was published have shown that that is confusing for individuals, who could expect the actual amount of their pension to be taken into account. The representations also show that the practical application of the provision is administratively burdensome for pension schemes. Using a notional value in those circumstances also has the unintended consequence of excluding all enhancements paid to an individual who retires early on grounds of ill health. It was not the intention to preclude ill-health retirements that do not meet the definition of serious or severe ill health from the annual allowance charge. Amendment 129 removes that disjoint and makes a value used in the year of retirement easier to understand for those taking benefits.

Amendment 188, in the name of the right hon. Member for Delyn, requires the Government to lay before the House by 1 April 2012 an assessment of the impacts of clause 66 and schedule 17, including the impact of creating marginal tax rates of more than 100%. He has given more explanation of why he tabled the amendment. He talked about marginal tax rates, but I point out to him that under the scheme the previous Government proposed that it was possible for income to rise by only £2,000 before having a marginal tax rate of 650%. We very carefully learnt lessons from the flaws in the design of that scheme. [Interruption.] He has become Mr Macavity—he was not around at the time, because he was in the Home Office. It is a fair comment, as we cannot all be held to account for the detail of legislation proposed by our colleagues.

The right hon. Gentleman needs to be a little careful because the measure does not alter the rate of tax relief. It will still be at the marginal rate. The measure simply imposes a stricter rationing on how much tax-privileged saving any one person can make. There will be no relief over £50,000 of saving. As such, tax charges are a direct result of a change in the level of pension contributions, rather than a change in income. In that sense, the concept of marginal effective tax rates is not a useful way—[Interruption.]

Jimmy Hood (Labour, Lanark and Hamilton East)

Order. I have to tell the Opposition Front Benchers, as I have told the Government Back Benchers, that they should pay more attention to a Member when they are addressing the Committee.

Mark Hoban (Conservative, Fareham)

Thank you, Mr Hood.

The concept of marginal effective tax rates is not a useful way of considering the measure’s impact on individuals. Marginal effective tax rates relate to how an additional pound of income affects the rate of tax that an individual faces.

The right hon. Gentleman got to the nub of the question in his remarks on the impact that the measure could have on people. He asked whether it would affect only 100,000 people. The 100,000 estimate is based on a detailed model that makes use of data from HMRC’s operational income tax systems and the administrative returns provided to HMRC by all pension providers. The methodology is consistent with previous estimates of the policy and the previous Government’s approach. The methodology underpinning the estimate was set out in the Budget 2011 policy costings document and has been scrutinised and certified by the Office for Budget Responsibility.

The 100,000 figure is lower than the number of people we expected to be affected before the details of the regime were announced in October. We were able to reduce the number of people affected because we were able to increase the annual allowance above the amount initially expected. Additionally, the factor of the value of an increase in savings to defined benefit pension schemes is also lower than originally expected, which has helped soften the impact.

That does not mean that 100,000 people will be paying tax charges from their pension benefits. We expect that individuals and employers will look to adapt their pension saving behaviour and remuneration terms to aim off and ensure that their pension contributions remain below the annual allowances, so that they will never face a charge. We expect about 40% of people to aim off in 2011-12 and for that to increase to 65% of defined benefit scheme members and 90% of defined contribution scheme members by 2015-16,

The other issue raised by the right hon. Gentleman is the impact that the measure will have on flexibility, the way in which people save for their retirement and the extent to which that triggers a large tax bill. I will take a few moments to set out the steps that we have taken to mitigate that impact.

To reduce the likelihood of individuals exceeding the annual allowance, we first set a more generous annual allowance than originally proposed. Secondly, we ensured that individuals would be able to carry forward any unused allowances from the previous three years. Citing the right hon. Gentleman’s example, someone who is out of the market for three years would effectively accumulate a £50,000 annual allowance in each of those three years, which they could use in a year in which they were in employment and pay higher pension tax contributions. Similarly, someone setting up a business could achieve exactly the same goal. They could choose not to make pension contributions for three years and use the accumulated unused annual allowance to make a larger contribution in one particular year.

We recognise that there may be circumstances, despite the mitigation measures, in which people pay a higher charge. Individuals with an annual allowance charge exceeding £2,000 will be able to elect to meet their full charge from their pension benefits instead. That recognises that a substantial increase in pension wealth has led to the liability in the first place.

I hope that I have reassured the right hon. Gentleman that we have thought carefully about the impact of the measure on people who may in one year face a sudden one-off increase in the value of their pension and consequently face an increased tax charge. There are ways in which they can mitigate that. I think the overall package of measures that we have here achieves our goal of making sure that the cost of pension tax relief is fair, affordable and sustainable and that there is sufficient flexibility in the scheme.

David Hanson (Labour, Delyn)

Our amendment simply asks for a review of these matters. I appreciate the Minister’s explanation but I still feel that we need to examine the impact of this downstream. In the interests of having a participatory democracy, I would like to enable members of the Committee to participate by dividing on this issue.

Schedule 17 - Annual allowance charge

Clause 67 - Lifetime allowance charge

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: Amendment 189, in schedule 18, page 290, line 2, leave out ‘£18,000’ and insert ‘£21,500’.

Amendment 190, in schedule 18, page 290, line 9, leave out ‘£18,000’ and insert ‘£21,500’.

Amendment 191, in schedule 18, page 290, line 17, leave out ‘£18,000’ and insert ‘£21,500’.

Amendment 192, in schedule 18, page 290, line 24, leave out ‘£18,000’ and insert ‘£21,500’.

That schedule 18 be the Eighteenth schedule to the Bill.

David Hanson (Labour, Delyn)

I shall be quick because the amendments are relatively self-explanatory and I hope the Minister will consider accepting them. If an individual’s pension and savings pot is very small, it is defined in the Bill as trivial. When he retires, an individual can choose to take it as a lump sum or a commutation. Under the old rules, that could be done if the pension pot was less than 1% of the lifetime pension allowance. The Minister has, I accept, listened to representations about this. Given that the Bill brings down the lifetime allowance, the figure needs to be changed. The Government have therefore gone for a figure of £18,000 and below for the new definition of trivial.

The only problem is that the effective date of implementation of the trivial commutation limit of £18,000 is for 2012-13. However, by the end of 2012-13, the trivial commutation limit will have already been fixed at £18,000 for three years. It strikes me that it would be possible for the Government to consider raising the limit slightly; we suggest the figure of £21,500 in the amendments. That would allow a few more of the poorer pensioners, who have slightly bigger but still relatively small pension pots, to take them as a lump sum. The cost to the Exchequer would be negligible, because the Government would still get some tax from lump sum payments.

The amendments are designed to tease out the answer to the following questions. On what basis has the Minister fixed the limit of £18,000? Why has it not been raised in line with inflation, over the course of the years in which it has been operating? Does he intend to raise it in future years? At the moment, freezing it at £18,000 for an effective three-year period to 2012-13 means that the value of £18,000 is diminished accordingly. Our suggestion is to index it initially at £21,500, which could be reviewed in due course. I welcome the prospect of finding out whether the Minister will accept the amendment. In anticipation that he may not, I would like to know when he intends to monitor the change in the value of £18,000, or if it is fixed in perpetuity.

Mark Hoban (Conservative, Fareham)

The clause and schedule seek to reduce the lifetime allowance from £1.8 million to £1.5 million. That takes it back to the same level as on A-day in 2006, and it would raise around £0.5 billion in annual revenues. The reduction means that the annual allowance will be higher than we originally proposed, which will help protect those on moderate incomes. There are provisions in the schedule to protect those who have pots in excess of £1.5 million already, but I will not go through those as they are clearly not the point that the right hon. Gentleman is keen to focus on.

The right hon. Gentleman is right to say that the limit is set at £18,000. In the past, the limit has been effectively 1% of the lifetime allowance. Clearly, reducing the lifetime allowance to £1.5 million gives us the opportunity to decouple that link, which is helpful. The right hon. Gentleman’s amendments would increase the amount to be paid out to registered pension schemes in certain circumstances without incurring unauthorised payment charges. It is proposed that the limit should be raised from £18,000 to £21,500.

Pension tax rules currently allow pension pots to be taken out as a lump sum, if an individual’s aggregate pension savings are below a specified limit. Some 25% of the lump sum can be paid tax free, while the remainder is taxable as income. That is known as trivial commutation, but the rules also extend to a number of other, different circumstances, which are also covered by the amendments.

We need to bear in mind the point that the right hon. Gentleman made in an earlier debate. We are seeking to encourage people to build up pension pots to support themselves and provide an income in retirement. Evidence shows that an annuity can be purchased with as little as £5,000. The median wealth held by individuals in a defined contribution occupational pension is £6,500, while in a defined contribution personal pension, it is £12,000. Those are both way under the £18,000 limit currently in statute, and the £21,500 level proposed by the right hon. Gentleman. Against the background of the relatively low amounts held in defined contribution schemes and the fact that annuities can be bought with as little as £5,000, the current limit is set at an appropriate level. It is not right to increase it by £3,500 at this point.

What we have said—and this returns to the consultation document that the right hon. Gentleman mentioned earlier, when we discussed early access—is that we will explore reform to trivial commutation rules to improve flexibility for those with very small levels of savings in personal pension schemes. We will keep the lifetime trivial commutation limit under review, and we will consider any evidence on the benefit of an increased limit. I hope that that provides the right hon. Gentleman with the reassurance that he is looking for.

David Hanson (Labour, Delyn)

To encourage the Minister, I record the fact that the Opposition believe that £21,500 would be fairer over that period. I shall press the amendment to a Division.

Schedule 18 - Lifetime allowance charge

Clause 68 - Borrowing by section 67 pension scheme

David Hanson (Labour, Delyn)

I have one quick question. Will the Minister assure me that the article in The Daily Telegraph of 31 May—[ Interruption. ] I am encouraged by support from the Government Benches for my clear reference. That newspaper expressed the concern that under the NEST scheme, which we introduced, fund managers could put money into unsuitable forms that would eat up much of the savings in fees. Because of coalition support for the proposal, which we agree with, automatic enrolment in pension schemes could expose people to unscrupulous schemes. Will the Minister assure me that the concerns expressed by Mr David Pitt-Watson of Hermes Fund Managers are unsubstantiated?

Mark Hoban (Conservative, Fareham)

Unlike the right hon. Gentleman, I am not an avid reader of The Daily Telegraph. I appreciate that that may come as a disappointment, but I am not in a position to comment on suggestions made by Mr Pitt-Watson, who I believe at one stage was to become the general secretary of the Labour party. If the right hon. Gentleman will permit me, I shall read the article and write to him appropriately.

Schedule 19 - The Bank Levy

Kerry McCarthy (Labour, Bristol East)

I beg to move amendment 187, in schedule 19, page 297, line 1, at end insert—

‘(4) The Secretary of State will review the steps for determining the amount of the bank levy outlined in paragraph 6(2) and lay a report before the House of Commons, before 31 December 2011. This review shall include the Government’s analysis behind the rate and threshold chosen for the bank levy and provide a forecast for the change in both gross and net yield that would be achieved if the Secretary of State were to reduce the amounts in Step 5 from £20,000,000,000 to £10,000,000,000.’.

Amendment 187 is a probing amendment. Our intention is to highlight the complete inadequacy of this measure in ensuring a fair and balanced burden of taxation. The target revenue for this tax is too low and the Government refuse to consider any taxation on the banks below that low level. The issue is an important part of the Finance Bill, which many Members will want to debate. There are many more aspects of the schedule that Members will want to discuss beyond the issue brought forward by our amendment, so rather than pressing the amendment to a vote now or opposing the clause, we should like to return to the issue on Report. In the meantime, I should like to take advantage of this opportunity to press the Minister on a few issues.

Opposition Members support the principle of the bank levy. It is important to ensure that the banking sector makes a fair contribution towards the costs of the financial and economic crisis and that the burden of taxation is shared out fairly when taxes have to be raised. A specific tax on the banks is a good way in which to achieve both objectives. That is why the Opposition called for a repeat of last year’s bank bonus tax. What we have from the Government is wholly inadequate.

Although we support the levy in principle, questions must be asked about the amount and why that level was chosen. When the bank levy was debated on the Floor of the House last month, my hon. Friend the Member for Nottingham East said that we were unable to table an amendment to this Bill that would raise the level of the bank levy. That is why amendment 187 calls on the Government to report on why these particular rates and allowances were chosen for the levy and what the effect would be of lowering the allowances in terms of the amount of tax raised.

Many measures that the Government have taken have supposedly been beneficial to people, but when they are put in the context of other policies, we see that the Government are not really helping ordinary people at all.

Bill Esterson (Labour, Sefton Central)

I am glad that my hon. Friend has made the point about not helping ordinary people. The Treasury’s original design for the bank levy showed that it would raise £3.9 billion and not the £2.6 billion that is currently forecast. Does she agree that that additional £1.3 billion would make all the difference as it would take the pressure off hard-working families, who are being penalised by the Government?

Kerry McCarthy (Labour, Bristol East)

That is the issue to which I want the Minister to respond. Of all the priorities for taxation, he—I say “he”, but I am perhaps slightly elevating his position and should say “the Government, of whom the Minister is a very valued member”—chose to give with one hand and take away with the other, for which the Government were criticised by the director of the Institute for Fiscal Studies.

For example, the personal allowance for income tax is supposed to give people an extra £40 a year, but it is wiped out by the Government’s hike in VAT, which will cost the average family with children more than 10 times that amount—more than £450 a year. The 1p cut in fuel duty, which this Committee has already discussed, is peanuts compared with the 9p or 10p a litre that the Government will have added to fuel taxation by August 2012.

The Government’s proposals for a bank levy are no exception. The £2.6 billion forecast to be raised by the bank levy may seem like a lot until it is put in the context of the £4.9 billion that the Government plan to take away from families with children in cuts to child benefit, child tax credit, the child trust fund and the Sure Start maternity grant. The bank levy could be put in the context of the £10.6 billion a year that the Government will take out of people’s pockets by 2014-15 by switching to CPI indexation for benefits, tax credits and public service pensions. Compared with that, the bank levy will be little more than a drop in the ocean in terms of rebalancing the burden of taxation.

The levy could even be put in the context of the implicit subsidy that the taxpayer has been providing to all large banks in the UK in the expectation that the taxpayer will bail them out if they fail. According to the Bank of England, that subsidy is worth £100 billion a year. There was clearly scope to go much further and to make a genuine impact. Will the Minister tell the Committee what steps were taken to determine the level of the bank levy and what assessment the Government have made of the amount of tax that could be raised by setting the threshold at a lower rate—specifically at £10 billion, as detailed in our amendment?

The Government have demonstrated that the low level of taxation in this case was their choice. The target revenue of £2.6 billion is no accident. In their consultation on the bank levy, they stated that they intended to raise £2.5 billion when it was fully in place. Following the consultation, they found that their proposals would have raised nearly £4 billion. Ministers could have stood by their original design, but instead they took active steps to reduce the amount, principally by changing the proposed £20 billion threshold into a tax-free allowance.

We did not receive a full explanation from the Minister on the Floor of the House, so perhaps he will explain to the Committee now why the target of £2.6 billion of revenue was chosen. What estimates were made of the impact of that level and any other levels on the industry and on revenue for the Exchequer? Why were the Government so averse to raising more than that through the original mechanism? They also refused to tax the banks via a bank bonus tax, which the Opposition suggested. The bonus pool for 2010 across the City of London has been estimated at some £7 billion. There is, understandably, still a great deal of public outrage about that because it is an incredible figure, particularly when banks are still failing to meet their responsibilities to wider society. As we discovered recently, the Project Merlin banks are missing their lending targets by some £25 million a day.

We called on the Government to repeat the bank bonus tax that the Labour Government introduced. Unfortunately, the Chancellor refused to take that option. The bonus tax raised £3.5 billion for the Exchequer, and that would ensure a fair contribution from the banks. It would also provide funds to be invested in a real plan for growth in the economy, which we sorely lack.

The plan that we proposed before the Budget this year was based on a conservative estimate that a repeat bonus tax would raise £2 billion. We proposed using that to create 110,000 new jobs, construct 25,000 new homes and boost investment in local businesses through the regional growth fund by £200 million. The Government’s refusal to repeat the bonus tax means that banks are looking at a tax cut this year worth about £1 billion, which the Government are granting by watering down a bonus tax of £3.5 billion to a bank levy worth just £2.5 billion. That does not include their cuts in corporation tax, which will give back to the banks £100 million this year, with many more cuts planned by the end of the Parliament.

In the same year, families have lost thousands of pounds in tax credits and benefits, and are paying hundreds of pounds more in tax. Families with children are being hit especially hard, with cuts to child care support alone amounting to up to £1,560 a year. This is also the year when those families are seeing reductions in NHS staff and police numbers, with reductions of more than 11% in some local council grants from the Government, and cuts or closures in their local public services.

The bank levy is an important issue and many hon. Members will want to speak about it on Report. Our amendment would address just one of the many concerns about the Government’s proposal, so we will not press it to a vote today, but will the Minister explain why the Government took active steps to reduce the amount taken by the bank levy following their consultation, when at the same time they raised taxes and cut payments and services for ordinary families?

Does the Minister accept that the banks have a bigger role to play in contributing to the cost of the financial and economic crisis, which began in the financial sector? The Government had a choice on ensuring the fairest possible distribution of taxation. Given the relatively puny amount that they expect to raise from the banks, and the steps that they have taken to keep that amount down, ordinary families would be right to wonder whose side the Government are on.

Mark Hoban (Conservative, Fareham)

Clearly, many hon. Members who spoke about this matter in the Committee of the whole House may want to speak at length on Report, but mercifully not this evening. It was always our intention that the levy would raise around £2.5 billion. That is what we set out to achieve, and that is what we are delivering through clause 72 and schedule 19. We will move to the more substantive stand part debate a little later.

The levy will be paid by between 30 and 40 building societies and banking groups. We think the amount that we seek to raise from that is an appropriate contribution. It was set with consideration for the wider environment, including the international programme of regulatory reform, global economic conditions and the need to maintain the competitiveness of the UK sector. The rates of the levy were chosen to deliver that. Other countries have chosen different headline rates, but we need to bear in mind the relative size of the banking sectors, and the design of the bank levy, in different countries. If we look at the combined effect of rates based on the scope of the bank levies in relative terms, the UK levy is larger than that of France and that of Germany.

The hon. Member for Bristol East suggested that the banks were getting a good deal out of the proposals and referred to the reduction in corporation tax that we announced in the Budget. She suggested that banks were benefiting by £0.1 billion, but I point it out to her that that estimate of £0.1 billion relates not only to banking, but to insurance and pension funds and to auxiliary financial services. Clearly, banks are paying more as a consequence of the increase in the bank levy that was announced in the Budget than they are benefiting from the reduction in corporation tax rates.

On the allowance and threshold, when we announced the bank levy last year we stated that there would be a threshold of £20 billion. As part of the subsequent consultation exercise, however, we explicitly sought views on whether an allowance would be preferable to an all-or-nothing threshold. The respondents to the consultation made it clear that a threshold would provide a cliff edge, which banks would avoid by restructuring, and they even suggested that banks or building societies might avoid growing their UK operations to avoid the threshold. I think that that is a fair point.

We have decided, therefore, that there should be an allowance on the first £20 billion of liabilities that are liable to the levy. The sector is not paying any less levy as a result of that, because we have made it clear from the start that developments in the design of the levy would improve its effectiveness but would not reduce the overall expected yield. The rates were set only when the design had been finalised, and to meet our detailed yield. Those details, along with many others, have already been made public.

I am sure the hon. Lady recognises that the Government have taken substantial steps to explain the basis of our decisions. As she will know, all tax measures now have a tax information and impact note that sets out clearly information about the impact of the measure. That has provided a significant amount of analysis on the levy so far. I do not believe that there is a need to produce any further analysis of the rates and threshold of the bank levy.

The second part of amendment 187 also concerns the allowance, and it seeks a forecast of the change in yield that would be achieved if we were to reduce the allowance from £20 billion to £10 billion. As I have explained, the Government did not introduce an allowance to reduce the overall yield from the levy. Instead, the allowance ensures that the levy is proportionate to the risks inherent in banking businesses of different sizes. That means that smaller banks and building societies and foreign banks with a small UK presence—those whose liabilities are less than the £20 billion annual allowance—will not pay the levy.

I do not know whether the hon. Lady has discussed her amendment with the Building Societies Association or whether it would be content to see the threshold of the allowance reduced and more of its members’ money—which could otherwise go to their depositors in higher savings rates or lower borrowing rates—swallowed up in that way. That would be the consequence of reducing the threshold and the allowance to £10 billion.

We have also had to balance the probability that the failure of a bank might pose a systemic risk against the relative burden that is imposed to gather additional revenue at the margin. Although size is not the sole factor in determining risk to the system, it is an important one. Setting a lower allowance would risk imposing an unnecessarily high burden on institutions that do not pose a systemic risk to the UK economy in the way that large banking institutions do. Analysis of the change in yield from a reduction in that allowance would not, therefore, be appropriate or worth while.

The hon. Lady expressed support for the principle behind the bank levy, which is welcome. Such support was not forthcoming at the general election. The previous Government explicitly ruled out the unilateral introduction of a bank levy—I am pleased that her party has recanted.

We should bear something else in mind. The hon. Lady mentioned the bank payroll tax introduced by the previous Government, but she must recollect that the then Chancellor said that it was a one-off measure and could not be repeated. It is, however, much better to have a permanent tax on banks, and the levy tackles that. Each and every year, our permanent bank levy raises more than the one-year bonus tax proposed by the previous Government. Our levy is raising more money from taxes on banks than the bank payroll tax introduced by the then Chancellor did in the only year of its operation, and he explicitly ruled out a repeat of exactly the same tax measure.

It is not necessary to produce yet another report on the bank levy. Sufficient information is in the public domain to enable people to reach their own conclusions on the rates, the thresholds and the allowance. Therefore, if the hon. Lady presses her amendment to a Division, I shall encourage my hon. Friends to oppose it.

Kerry McCarthy (Labour, Bristol East)

I see that the Minister was paying rapt attention to my opening remarks, because I said twice that I did not intend to press the amendment to a vote.

The Minister’s answers were unsatisfactory, simply repeating what was said earlier without providing any new information on how the decisions were reached. In particular, the banks saying, “We don’t like the sound of that, and we’ll take our ball away if you bring the levy in at a higher rate,” is something the Opposition would greet with some scepticism. Basically, that is what banks and companies do when we talk about taxing them—indeed, individuals do so as well, although, obviously, people at the lower end of the scale are not in a position to make such threats.

As indicated, however, I do not intend to press the amendment to a Division, although we hope to return to the issue on Report. Therefore, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 134, in schedule 19, page 302, line 30, after ‘liabilities’ insert ‘(“M’s liabilities”)’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: Government amendments 135 to 182.

That schedule 19 be the Nineteenth schedule to the Bill.

Mark Hoban (Conservative, Fareham)

I am tempted to talk about the amendments at some length. I am sure that people would be interested in details relating to the application of the netting rules to certain lending transactions called reverse repos or those relating to covered bonds. However, I suspect that the appetite of my hon. Friends is not quite as great as I would have thought.

In respect of the amendments, we have sought to ensure that the netting provisions in the schedule operate as originally intended in respect of certain reverse repo transactions where securities received as collateral are sold, and also that the netting rules apply correctly to the UK permanent establishments of foreign banks.

The amendments flow from correspondence received after publication of the Bill, questioning whether the legislation was sufficiently clear. We have tried to ensure that the provisions will operate as intended and that the various transactions are within the netting provisions.

Amendments 181 and 182 provide for an expanded definition of the trade or business of a covered bond vehicle, increasingly important for the funding of banks. The amendments will ensure that all covered bond limited liability partnerships within banking groups are excluded from the levy’s joint-and-several-liability provisions, again as was originally intended.

I commend the amendments and the schedule to the Committee.