Finance Bill

Public Bill Committee, 12 June 2012.

(Except clauses 1, 4, 8, 189 and 209, schedules 1, 23 and 33 and certain new clauses and new schedules) - Clause 18 - Qualifying time deposits

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I beg to move amendment 23, in clause 18, page 11, line 30, at end add—

‘(3) HM Revenue and Customs shall draw up plans to ensure that investors who are eligible to receive interest payments gross are made aware of the need to register with their account provider, to ensure that they do not overpay income tax.’.

Peter Bone (Conservative, Wellingborough)

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

Catherine McKinnell (Labour, Newcastle upon Tyne North)

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

Clause 18 relates to qualifying time deposits and will take effect from this financial year. Prior to the Bill, individuals who invested in qualifying time deposits were paid interest gross and they—or their accountants acting on their behalf—made the appropriate arrangements for paying the tax due to Her Majesty’s Revenue and Customs. The clause means that account providers—banks and building societies—will instead deduct sums representing income tax at source from anyone investing in a new qualifying time deposit on or after 6 April 2012, and those deductions will be paid directly to HMRC.

The provision will align tax collection arrangements for qualifying time deposits with those already in operation for many comparable savings or investment products. It will also reduce the burden on individual taxpayers, which is a worthy aim that we support. It also means that more of the tax due on savings income will be collected by the Revenue. As the impact note states, that could bring in as much as £40 million a year in additional Exchequer revenues, which is again something that we support.

Fewer investors will be eligible to receive interest payments gross than would have been if the qualifying time deposits exemption had remained. Those who are eligible to receive interest payments gross will need to complete form R85. Will the Minister clarify what estimate has been made of the number of individuals likely to invest in a qualifying time deposit in the financial year 2012, and how much that estimate may have been reduced by the removal of the qualifying time deposits exemption?

It is important that those investing in qualifying time deposits and other investors who are eligible to receive interest payments gross are made aware of the need to register with their account provider, so that they do not overpay income tax. It is obviously in everybody’s interests that people do not overpay income tax. I am sure that the Minister has seen the result of the freedom of information request—it was widely reported in the media yesterday—which showed some of the frustrations that can occur when tax calculation mistakes are made. That is why our amendment calls on HMRC to draw up plans to raise awareness of the change. Is a basic communication plan in place for basic rate taxpayers who will be affected by the change in their tax code?

The Low Incomes Tax Reform Group has looked at the problem and has noted that it is especially an issue for pensioners. I know that the Exchequer Secretary is aware of the scale of the problem of the overtaxing of pensioners’ savings. In a previous Finance Bill debate, he referred to the pensioner “Taxback” project, which repaid 50,000 pensioners some £20 million in 2005. The bereavement helpline has recently been introduced and has been warmly welcomed. It is already assisting people, and we hope that it will do so much more in future. The £3 billion tax bill for pensioners that will result from the unfair granny tax, on which a U-turn is not as yet proposed, will make it even more important that they do not overpay on their savings tax. Is HMRC doing enough to ensure that those people do not overpay?

The Low Incomes Tax Reform Group makes recommendations that would go some way to improving the situation, and I would be grateful for the Minister’s comments on them. First, it suggests that HMRC should encourage banks and building societies to provide information to taxpayers more proactively about the possibility of registering R85s. It also suggests that all deposit-takers stock up-to-date copies of the form and help sheet to give to customers on request. Secondly, it believes that it would be helpful if deposit-takers automatically issued certificates of tax deducted to taxpayers, without having to be asked. Thirdly, it suggests that HMRC’s “Taxback” campaigns do not go far enough. Instead, it makes the case for HMRC to engage further with stakeholders in looking at the information that people get from deposit-takers about interest and tax deductions at source, and how that can be matched to individual taxpayer records, so that refunds can be automated.

There is already a proposal in the Budget to issue new personal tax statements, which will detail income tax and national insurance contributions paid, average tax rates and how that contributes to public spending. It is thought that if savings income and tax deducted at source is not included, the statements would be incomplete and misleading. I shall be interested to hear from the Minister on what proposals there are to match all those tax sources together within that proposed statement.

We support HMRC’s customer commitment to ensure that taxpayers pay the right amount of tax. I am sure that the Minister will agree that taking action to strengthen that commitment would be welcome. For that reason, I ask hon. Members to support our amendment.

John Mann (Labour, Bassetlaw)

It is a pleasure, Mr Bone, to be back here after the recess, under your exuberant chairmanship. It is good to see the Government Whip here on time for the new mini-Session, together with a full team of Ministers—I spotted all three a minute or two ago. It is good to see that they remain busy, U-turns, of course, taking up a considerable amount of their time. [ Interruption. ] We do indeed now have the full team of three Treasury Ministers.

There will be plenty of opportunities this morning for more U-turns. Here we have another one. I know that U-turns are in fashion—[Interruption.] In vogue, as my hon. Friend the Member for Newcastle upon Tyne North says. The next U-turn will concern pensioners, the Government having dealt with caravans, charities and pasties. This proposal is a modest start to a series of U-turns that we expect the Government to make, because, more than anyone else, the Budget hits pensioners. Here is a modest opportunity. I look again at the ranks of the Government Back Benchers: does any of those sincere hon. Members wish not to vote for this amendment, which would encourage, indeed allow, fewer people to overpay income tax unnecessarily? The majority of those people are pensioners. Can there be any reasonable person in this room who would say to a pensioner, “We are not prepared to assist you; we will allow you to overpay income tax, and then taxpayers will pay officials to correct those mistakes”? That is not logical.

My hon. Friend the Member for Newcastle upon Tyne North aptly and eloquently outlined a modest little suggestion that would aid the taxpayer, Government and pensioners. Can it be possible that the Government are so nervous about the suggestion of a further U-turn, when we all know that there will have to be further U-turns on pensions, not least draw-down pensions? Those are not the subject of the amendment, so I will not go into them, but they are part of the Budget’s victimisation of pensioners above all others. Looking at the faces of Opposition Members and even Liberals who have made it here today—

Mark Garnier (Conservative, Wyre Forest)

Government Members; you are the Opposition.

John Mann (Labour, Bassetlaw)

Are we? I am jumping two years ahead of myself. The Opposition are getting more confident these days. When I look into the eyes of Government Back Benchers, I can see that they want to support the amendment. They know it is right and sensible. I suspect that Ministers will accept the proposal, knowing that it will cut bureaucracy and red tape, minimise public expenditure and help British pensioners not to overpay tax.

Seema Malhotra (Labour, Feltham and Heston)

It is a pleasure to serve under your chairmanship, Mr Bone. Does my hon. Friend agree that making tax processes as simple as possible is about not only providing good service to the citizen, but ensuring that people do not incur unnecessary cost? The average time that people wait for HMRC to answer a call has risen from one minute and 53 seconds in 2009 to five minutes and 45 seconds. People have to pay for those calls, so pensioners will have to pay to get advice when the system could have been made simpler for them.

John Mann (Labour, Bassetlaw)

My hon. Friend makes an excellent point, which I had not considered. Today’s weather must have fuzzied my brain when I was thinking through the matter. She rightly points out that in addition to the problems I have outlined, people will have to pay to hang on the phone. We live in a complex, intricate world and we all agree that making it simpler for the British citizen, and particularly for the British pensioner, is a good thing. Here is the opportunity to do that.

Jacob Rees-Mogg (Conservative, North East Somerset)

The hon. Gentleman is being a bit mealy-mouthed. Should we not go a good deal further and get rid of tax on savings below the inflation rate, and get rid of tax deduction at source? That is an area where the Government’s convenience is better served than Her Majesty’s subjects.

John Mann (Labour, Bassetlaw)

I would not say that you are giving me the evil eye, Mr Bone, but I can see from the glint in your eye that I should not stray too far into that territory. I will simply say that I have put forward proposals during the past six or seven years relating to pensioners and taxation. I look at how, in my constituency, hard-working former coal miners and textile workers with pensions are taxed, and see how unfair that is. The hon. Member for North East Somerset and I should get our heads together and come forward with a cross-party proposal to persuade the decision makers in Government. I will have to persuade my Front Bench—I will leave the Liberals to him—of the common sense of what he is suggesting.

We are beginning to reach consensus on the U-turns that are required, which is good news. I look forward to this overly modest proposal being adopted. The Government’s plans will, as my hon. Friend the Member for Feltham and Heston said, cost pensioners money, waste their time and cause them the inconvenience and distress of waiting on the phone at their expense. Here is an opportunity to do things sensibly; can the Government resist?

Mark Hoban (Conservative, Fareham)

Yes is the answer, Mr Bone. It is a pleasure to serve under your chairmanship. I am glad that the recess has re-invigorated the hon. Member for Bassetlaw and that he has come back full of vim and vigour.

The measure is relatively straightforward, as the hon. Member for Newcastle upon Tyne North pointed out. Qualifying time deposits are savings and investment products in which, among other criteria, a single deposit of at least £50,000 is invested for up to five years. The latest estimate is that up to 30,000 individuals hold such deposits, and the hon. Lady was right to say that the clause applies to new deposits. It is not clear yet what the clause’s behavioural impact will be, but clearly, for some taxpayers, having interest paid gross will be beneficial, and the fact that tax will now be deducted at source, at the basic rate, may mean that some people look to other forms of savings. The clause will ensure that income earned on qualifying time deposits is subject to tax in the normal way, so it does not create a new tax burden; it merely simplifies arrangements for tax collection on qualifying time deposits.

We have made the change by removing qualifying time deposits opened or made by individuals after 6 April 2012 from the list of exemptions to the general principle that banks, building societies and other financial institutions should deduct tax at source from the interest that they pay to customers. As a result, tax will be deducted from the deposits at the basic rate under the tax deduction scheme for interest.

The clause brings qualifying time deposits in line with other comparable products, removing any requirement for basic rate taxpayers to notify HMRC separately of tax that is due on their interest. Investors in qualifying time deposits who are not eligible to pay tax on their savings income—for example, because their total income is below the personal tax-free allowance—can register with their provider to continue to receive interest without tax being deducted.

Amendment 23 would commit HMRC to ensuring that eligible investors are made aware of the need to register with their account provider in order to receive interest without tax being deducted, but such a change is unnecessary. HRMC already takes a range of steps to make eligible savers aware of how they can register to receive interest tax-free. Specific help and guidance on that point can be accessed from HMRC’s website or through contact centres, and HMRC produces a help sheet on how to register for gross interest, as well as a tax checker that allows savers to calculate whether they are eligible to register. Additional help is also available through the Money Advice Service.

The hon. Lady also referred to the Low Incomes Tax Reform Group’s suggestion that banks and account providers should play a more proactive role, and she is right. They have regular contact with savers and make account information available to their customers. I know that many account providers make considerable efforts to inform eligible customers of how to register to receive interest gross, and I encourage them to continue to do so.

A project under the previous Government attempted to raise the profile of the issue. In 2009, the “Taxback” campaign had mixed results. There was a risk that a letter telling a person that they might be eligible to receive interest gross could create further confusion. In fact, many calls received in response to the “Taxback” campaign, which was targeted at recipients of pension credit, were from people telling HMRC that they already received their interest gross, or people asking not to be contacted again. Although I am keen to ensure that HRMC helps savers to understand whether they are eligible for gross interest and how they might register, it is right that the interventions should be more targeted and cost-effective.

The hon. Lady asked about the personal tax statements that we will introduce. The intention is to capture all sources of income; again, that will help to raise the issue’s profile and ensure that as many people as possible register to receive their interest income gross. I hope that the hon. Lady is reassured that work is being done to encourage the people who are not eligible to pay income tax to register to receive their interest income gross. HMRC and the Money Advice Service can help with that. Account providers, as the hon. Lady said, have an important role to play in this.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I imagine that Labour Members are not particularly reassured by the Minister’s comments. My hon. Friend the Member for Bassetlaw set out, in a rational argument, why the amendment is reasonable. It asks the Government to

“draw up plans to ensure that investors who are eligible to receive interest payments gross are aware of the need to register with their account provider”.

The message that we are getting loud and clear from the public is that they want to see proactivity from HMRC. They expect a decent service from the organisation, and they want to avoid a situation in which they have to contact HMRC to try to rectify mistakes after they have occurred, because the time it is taking members of the public to do that is getting longer, not shorter. On that basis, it seems sensible to suggest that the Government “ensure”—that is the key word in the amendment—that they engage with providers to make sure that mistakes and overpayments do not occur, and that steps are taken before the change to make sure that savers are aware of the implications for their tax position, so that they do not have to reclaim overpayments, but instead can pay the correct amount from the start. For that reason, I urge members of the Committee to support our amendment.

Clause 19 - Profits arising from the exploitation of patents etc

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I beg to move amendment 24, in clause 19, page 11, line 36, at end add—

‘(2) The Chancellor of the Exchequer shall review the impact of this provision on businesses and shall consider where there are other opportunities to introduce targeted support for business. A copy of the report shall be placed in the House of Commons Library.’.

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

Clause stand part.

That schedule 2 be the Second schedule to the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Before the recess, we thought that the dust had settled on this year’s Budget, and that we would be debating the intricacies of the changes being made by this Finance Bill. However, over the recess we learned of not one, or two, but three U-turns, and a 90° turn that has been described recently as a clarification. This has left the public in quite a spin. Now that there has been a welcome reversal of the pasty tax, the caravan tax and the charities tax, as well as clarification on the skip tax, we wait in hope of an announcement of the removal of the granny tax and, most of all, a reversal of the tax cut of £40,000 for 14,000 millionaires.

One measure in this Budget that is certainly welcome, and which we hope will not be followed by any U-turn, is covered by the clause and our amendment. Indeed, it is an idea that was introduced by the Labour Government, which is why, viewed in the light of the chaos and confusion created by the Chancellor’s Budget, his attempts at attributing GlaxoSmithKline’s decision to build its first UK factory in 40 years to his shambles of a Budget seemed at the time, and certainly seems now, rather ludicrous.

Let me remind hon. Members of the Chancellor’s comments on the BBC’s “Breakfast” programme the morning after the Budget announcement:

“You have GlaxoSmithKline, one of the world's biggest companies, one of the great British success stories, saying the Budget has changed their view of Britain as a place to invest. They’re going to create 1,000 jobs here. Now, surely my responsibility as the country’s Chancellor is to get the economy moving, to get jobs created, and when big companies say that about Britain, people should sit up and notice that we are changing the British economy for the better.”

I do not think that leading the country into a double dip recession was quite what the Chancellor had in mind when he made those comments. Clearly the news that GlaxoSmithKline was to build its first new UK factory in 40 years and in doing so create 1,000 much needed jobs is warmly welcomed, but it was Labour’s proposal that gave GlaxoSmithKline the confidence to invest and create these jobs. In 2009, following the Labour Government’s pre-Budget report, its chief executive officer welcomed the idea of the patent box, saying:

“The patent box is exactly the sort of active, long-term and creative support that we need from the Government to ensure that the UK remains an attractive place for highly skilled sectors such as pharmaceuticals. For GSK, assuming the new regime will apply to patents currently under development it will have the immediate impact of making the UK a priority area for future investments”.

A year later, GlaxoSmithKline confirmed that the successful implementation of the patent box would ensure that the UK was the location for its next biopharmaceutical manufacturing plant. In our 2009 Budget, the Labour Government set in motion the idea of the patent box as a way of encouraging innovative activity. The industrial activism clearly worked, and I would welcome the Minister’s estimate of the number of jobs, in addition to those announced by GlaxoSmithKline, that he thinks could be attributable to Labour’s patent box. That is the first part of our amendment.

The amendment goes on to urge the Chancellor and the Government to look at how they can support business in a more targeted way. From my reading of this year’s Budget, there were just two measures along the lines of targeted support for businesses. The first—the patent box—was the previous Labour Government’s idea, as was the second: tax relief for the video games industry to be legislated for in 2013. While hugely supportive of the announcement, the video games industry must also be scratching its head at how quickly the Chancellor turns.

In the Chancellor’s first Budget, he announced the scrapping of Labour’s plans for a tax relief for the video games industry. Developers had previously heralded those plans as inspired. In our last Budget before we left office, we set out plans to introduce the relief, but the Chancellor scrapped them in 2010, saying that that tax break was poorly targeted. If we fast-forward to the March Budget this year, the Chancellor re-announced Labour’s policy of two years ago, claiming it as an effective way to support the video games industry.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Does my hon. Friend find it all the more astonishing that the Scottish Affairs Committee undertook an inquiry into the issue and made recommendations to the Government? They did not take up those recommendations at the time, only to U-turn later.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Indeed, that is shocking, and I shall describe some of the reaction from the industry when the initial proposal was scrapped. The research was ignored—it was dismissed, as it was clearly not considered relevant—yet there was a U-turn not two months later, but two years later. That U-turn is welcome all the same, but it prompts the question whether the Chancellor did his homework in the first place, in listening to experts in the field who know what the industry now needs to encourage investment.

Sheila Gilmore (Labour, Edinburgh East)

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

Has my hon. Friend considered whether and to what degree the Government have assessed the damage done to the industry, which is so important to places such as Dundee in Scotland, by the decision not to give it the relief over that period? Obviously, we are pleased that the relief will now be given.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My hon. Friend makes an important point. I was about to put that question to the Minister. Two issues should be considered. First, how many investors or potential developers, having had the good news that they would receive support and a tax relief on investment and then having been told that such a relief was poorly targeted and would be scrapped, have failed to go ahead with their projected plans? Do the Government have any indication of the numbers involved?

Secondly, there is the broader issue of business confidence—of confidence in this Chancellor and this Government, in promises made that are then broken and in policies made that are then reversed. To what extent can the fact that business is sitting on investment at the moment and not investing, as a result of which we are in a double-dip recession, be attributed to the uncertainty created by our very own Treasury? That prompts this question: what are the Government doing proactively to propose ideas that will inspire confidence in industry?

Will such promises be delivered? The second part of the amendment would require the Chancellor to consider

“other opportunities to introduce targeted support for business.”

He would also have to place a copy of his report in the House of Commons Library. The business community is crying out for not only stability, but investment. Rapid U-turns and shifts in policies are creating uncertainty and, I have no doubt, are stalling the investment that this economy so desperately needs.

The Government should not underestimate the uncertainty that such flip-flopping can cause. On hearing the news last year that the Government would not go ahead with the tax-relief plans, The Independent Games Developers Association, the trade association representing the video games industry, called the Chancellor’s announcement a “betrayal”. The director general of the Entertainment and Leisure Software Publishers Association said,

“It’s a terrible blow. Our industry will be rightly puzzled as to how tax breaks can be lauded before an election, only to be seen as ‘poorly targeted’ and scrapped just six weeks later.”

I would be grateful if the Minister could estimate the number of developers who lost out as a result of that decision. Is there a way to estimate how much investment was lost in the period of uncertainty between the announcement that scrapped the incentive and the recent announcement that it is likely to be re-introduced next year?

Will the Minister confirm whether there are other areas where the Government are considering introducing targeted support for businesses? The message from businesses is that they are struggling—they are struggling to borrow from the banks; they are struggling to get investment from the £754 billion currently being sat on by businesses. The Committee has heard how the forecasts for growth and business investment have been slashed by the Office for Budget Responsibility; they are down from an 8.9% growth forecast in 2011 to the most recent and far more sombre forecast of 0.7% growth. It remains to be seen whether that forecast is also not over-stating reality, given the double-dip recession that the Government led us into.

The Government must take steps and the purpose of the amendment is to assist them in that. They need to instil confidence and provide incentives for businesses to start investing. Labour’s patent box is a welcome measure in the Budget, but the Government can do much more to look for opportunities for a more targeted approach. Knowing that the Government are behind an industry or technology can reduce uncertainty and promote confidence and, most of all, investment. The amendment hopes to change the tide of events currently pursued by the country. I urge hon. Members to support it.

Nigel Mills (Conservative, Amber Valley)

It is a pleasure to serve under your chairmanship, Mr Bone. I rise to speak not on the amendment but on the clause stand part debate on this welcome measure; it is testimony to exactly how Government should respond to lobbying. There was clearly a lot of concern in the pharmaceutical industry, mainly that there were many disincentives against holding intellectual property in the UK. We saw tax being lost as new drugs ended up being owned off-shore.

We have ended up with a wide-ranging relief that applies not only to the pharmaceutical industry but to every industry that uses or registers patents. That is the right way to respond, rather than focusing on one particular industry where we see a problem. It may have been more charitable to refer to this as the “patent capsule”, as a tribute to the industry that generated it. We have here a sensible and welcome proposal that I happily accept was originally talked about under the Labour Government, but has been brought forward and funded by the current Government. We want to see this come into operation and work.

I have a few questions on the detail. Why do we not have some detail? What sounds like a simple idea to let companies with profits from patents be taxed on that income at 10% has turned into about 40 pages of legislation and 80 pages of guidance. I suspect that is due to a fear that businesses will try to refresh every old patent or try to get every pound of income they possibly can into this net to reduce their corporation tax. We have had to go through a series of legislative steps to determine how we calculate IP profit, what expenses have to be there and what avoidance arrangements there are.

There are a few things that merit clarification. Perhaps the Minister could first help me with how exactly we apportion income. Say I am selling a car. I suspect that the patent on most bits of a car expired a long time ago, but if I have a patent on a new braking system and I can sell the car for £20,000 and make a whacking profit, does the fact that I have a patent on a small part of the thing I am selling mean that all the profit I get is in this lower tax rate? Alternatively, must I apportion the fact that most of the car’s technology is no longer covered by patent—at least not one that I hold—and is only the relatively small premium I can get from that new braking component covered? I assume that the second case would apply, but I could not quite work out how, through all the apportionments in the Bill, I would get to that if I owned all the IP for the car completely.

My second area of concern is the anti-avoidance rules at paragraph 357F in the schedule. Paragraph 6.1.2 of the guidance published by the Treasury effectively lists a whole load of situations where the anti-avoidance rules would not be applied. Most of them are perfectly sensible, but I am a little concerned that we are already issuing guidance that says that there are some situations that we do not mean to be caught by the legislation and which the Revenue can take away by guidance—particularly, for example, transferring qualifying IP into the UK.

We clearly want people to bring qualifying IP into the UK so we get the tax benefits from it. That is, I suspect, part of the idea of this scheme. Yet as the anti-avoidance provisions are drafted, that would not be allowed and people would not be allowed to get the 10% tax rate if they did that. The Revenue is having to clarify and take that out in guidance.

It would probably have been better to have had some of those things listed in the Bill rather than in guidance. Most of the things there are relatively sensible. Companies would not expect to make an election to trip them into the anti-avoidance legislation; I should be a little surprised if that was an interpretation. The drafting of the anti-avoidance clause at paragraph 357FB(1)(c) catches people if their main purpose in being party to a scheme is

“to obtain the chance of securing a relevant tax advantage.”

We are lowering that threshold; it used to refer to being party to a scheme to secure the advantage, not to have a go at securing it. Presumably if people do not secure it, they do not need to be in the anti-avoidance section—they have already been caught.

Finally, a lot of the industries we are trying to encourage as part of generating growth probably do not get to register patents for the valuable IP they produce. I clearly accept that we would not want to incentivise trademarks or marketing intangibles. But it is clear from the shadow Minister’s comments that there are important growth industries that are producing complicated pieces of computer software in code. As I understand it, it is not possible to have a patent on software or code under UK laws, but in the US and some other places it is possible to patent code.

Those businesses will not be eligible for the relief and that might be one of the reasons why we have to go for a targeted thing separately. Once the legislation is working effectively, are the Government prepared to consider whether there are other types of IP we should bring in to encourage that activity and get those valuable assets in the UK that we so desperately need to grow our economy and also to protect our taxpayers?

John Pugh (Liberal Democrat, Southport)

The Labour party’s amendment as a demand is quite legitimate, and we should find out what exactly the Government intend to do through the measures they are adopting. I generally support a review of measures, particularly measures like tax exemption for things like video games: I just think that the Government are not necessarily the appropriate body half the time to do it.

I should like to refer briefly to the case raised by the hon. Member for Newcastle upon Tyne North. The video games industry was a very interesting debate at the time. There were Adjournment debates on it. As I understand it, the case was not overwhelmingly made that should the relief end, all businesses would go off to Canada or wherever simply because there was insufficient evidence. I had a personal interest in it because I was surprised by the number of small video games designers in my constituency and scattered throughout the Merseyside area.

There was a general presumption against exemptions for particular industries simply because it adds to tax complexity. A general case can be made for trying to avoid exemptions wherever possible. That seemed to be the line that the Treasury was pursuing; it simply did not see the need. One gets into analogous discussions where people argue that tax exemptions must be given to wealth creators. Other people—usually on the Labour side—say that such exemptions are completely unnecessary because the effect that the Government fear, namely that the wealth creators will decamp, will not transpire. Similar debates take place about the pharmaceutical industry.

Such things cannot be known a priori; they can be known only from data and evidence. The Government have had the data on the video games industry, the evidence is there and they have responded as we would expect them to. That is evidence-led policy. When the Government initiated the change, it was not possible to say in advance whether it would have the effect that it did, but now that the Government have the evidence and have responded appropriately, we have to welcome the outcome.

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to serve under your chairmanship once again, Mr Bone. Clause 19 introduces the patent box. The patent box will apply a reduced 10% rate of corporation tax to profits from patents and related types of intellectual property. The patent box will help to maintain the UK’s position as a world leader in patented technologies and encourage companies to locate high-value jobs associated with patents here.

Encouraging businesses to develop and use their patents will play a key part in supporting a strong and growing private sector. Clause 19 and schedule 2 could benefit up to 5,000 of our most innovative companies. They will benefit a wide range of sectors, particularly high-tech industries such as life sciences, manufacturing, electronics and defence. They are equally applicable to the smallest and to the largest companies.

The patent box will benefit active, innovative businesses that hold or exclusively license patents. Companies must have developed the patent themselves or be actively managing it in order to be eligible for the patent box. Companies can benefit however they choose to use the patents in their business. The technology can be licensed, included in patented products, or used in internal processes or to provide services.

Companies will be able to apply the 10% patent box rate to profits that are attributable to patents, but not to profits that are attributable to routine activities or to commercial brands. For many companies, the rules allow a largely formulaic approach to simplify the potentially difficult task of determining patent profits. This should improve certainty and minimise administrative burdens. My hon. Friend the Member for Amber Valley asked what would happen in the case of a car, an element of which related to a patent. All turnover from the car would be included, but a routine profit element would be excluded—10% on certain costs—as would a marketing return profit. Not all the profit on such a car would be included, therefore, but there would be an amount to reward the technological innovation and intellectual property in the patent.

The patent box will be phased in over five years from 1 April 2013, with the full benefits available from April 2017. It is expected to cost £350 million in the first year, rising to £960 million in steady state.

I will also outline for the Committee future changes. To qualify, the patent must have been granted by the UK or European patent office. Schedule 2 includes a power to include patents granted by the patent offices of other EEA countries. A statutory instrument will be introduced before April 2013 under the negative procedure to include patents from EU countries with similar patentability criteria and patent examination processes to the UK. A draft has been provided to the House.

Powers are also included to permit the Treasury to make consequential changes as a result of changes in EU or national law relating to patents and other qualifying rights; to adjust the definitions for the types of expenses used to calculate the excluded routine profits of the company; and to update references to international standards for calculating tax profits. The powers will be used to keep the regime up to date and to provide additional clarity if required. We will also keep the regime under review to ensure that it is benefiting business in the way intended, and we will take appropriate action if aggressive attempts are made to exploit it for tax avoidance.

Amendment 24 proposes that the Government publish a review of the impact of the patent box on business and of opportunities to introduce other targeted support for business. As I have discussed in relation to clauses 5 and 6 on corporation tax rates, the Government continue to prioritise reforms to the corporation tax system as part of their action to repair the UK’s model of economic growth. It is because the private sector is critical to the economic recovery and tackling the deficit that the UK must demonstrate that it is open for business.

The Government have taken action to improve the UK’s tax competitiveness in a number of areas. This action includes reductions in the main rate of corporation tax, which will benefit all companies; reform of the controlled foreign companies regime; and introducing an above-the-line research and development tax credit, which will support further R and D investment in the UK by improving the visibility and certainty of the credit. The patent box is also a key part of that commitment.

In November 2010, the Government published the corporate tax road map, which set out a five-year plan for the Government’s approach to reform of the corporate tax system. The proposals were subject to open and transparent consultation with business. The Government have helped to provide stability by delivering the reforms to the timetable first set out 18 months ago in the road map. It is the Government’s view that, in general, a low corporation tax rate with fewer reliefs and allowances will provide the best incentive for business investment, with the fewest distortions. The corporate tax road map has given certainty to business that the tax system will be stable, and therefore the Government are not intending to make any further significant changes at this time. Producing another report on introducing further targeted reliefs is therefore unnecessary.

The Government also routinely publish detailed information on the corporation tax system: HMRC publishes detailed statistics on corporation tax receipts; the OBR publishes information on the corporation tax forecast in its economic and fiscal outlook; and, at Budget, HMRC publishes detailed information on proposed changes, in particular tax information and impact notes and the policy costings document.

HMRC’s existing arrangements will ensure that the impact of the patent box is effectively monitored. This will include capturing data on the level of uptake of the regime and the benefits that the regime delivers to business. However, full information covering the impact of the regime will not be available for several years. The immediate impact is clear from the reactions of business to the introduction of the regime.

I am delighted that already the introduction of the patent box has resulted in £500 million of investment by GSK, including a new manufacturing plant in Cumbria and generating about a thousand new jobs. GSK’s announcement of its intention to invest was first made in November 2010 in response to the corporation tax road map, not in 2009 when the previous Government announced the patent box. It was, after all, contingent on the successful design of the regime: something that we have been able to deliver.

John Pugh (Liberal Democrat, Southport)

The Minister mentioned that the regime will be monitored. Will information be publicly available as a result of the monitoring process?

David Gauke (Conservative, South West Hertfordshire)

The information that we obtain through monitoring the regime can be made available through the usual means. We will be happy to share information with hon. Members who are able to obtain information through parliamentary questions and so on. We will certainly give consideration as to how that information can be best shared. I appreciate my hon. Friend’s interest in this area. I welcome the chance to discuss the issues raised in the amendment. I do not think there is a case for the Government to produce a further separate report on these subjects.

The hon. Member for Newcastle upon Tyne North remarked that the previous Government made an announcement in the run-up to the 2010 general election, and therefore the previous Government should take all the credit for the announcement that GSK, for example, is investing in Cumbria. I am struck by how often we hear arguments that, notwithstanding the desperate state of the public finances that we inherited and the unbalanced economy, the previous Government can accept no blame for the existing difficult economic conditions. I am interested, however, that in the context of the patent box—a policy announcement that was some distance away from having a developed, implementable regime—the previous Government take the credit.

During the process, significant changes have been made to the original proposal to ensure that the regime is competitive and cost-effective. The Government have conducted extensive consultation on the patent box, and there has been very positive engagement with business and representative bodies on all aspects of the policy design. The final provisions have been warmly welcomed. I am pleased that Opposition Members support the patent box’s introduction and that they agree that it will encourage innovative businesses to invest in the UK. It is, however, stretching it a little for the previous Government to take all the credit for the proposals.

In terms of the impact, figures from the Institute for Fiscal Studies show that the patent box will lead to more than double the number of patents being held in the UK. The specific design of the patent box has been developed with considerable input from businesses during the consultation to ensure that the final regime is practical and competitive, and we hope that it will be warmly welcomed.

My hon. Friend the Member for Amber Valley asked whether the provisions should be extended to other forms of intellectual property. A broader box would be very expensive. Most companies hold some kind of intangible assets, and cutting the main rate of corporation tax has been our general focus. Given the state of the public finances, decisions must be made about where the impact can be most useful. Copyright, for example, is automatic on all written material and no inventive step is required. It is therefore difficult to use copyright as a market innovation in the same way as patents. We must bear in mind that this area is competitive and that capital is mobile, so it is important that the UK is as competitive as possible.

The hon. Member for Newcastle upon Tyne North made a point about the tax reliefs announced for the creative industries, including video games. The Budget stated that three creative sector reliefs will be introduced in 2013, and those measures are designed to incentivise investment. Generally, as I have said, the Government have adopted the corporation tax system with a lower rate and a broader base, but in respect of the reliefs, evidence has been provided showing that market failures exist. Internationally, there has been a move towards introducing such reliefs, as it is a very competitive area. Although it may be the case that the previous Government announced the introduction of a relief for video games, when we arrived in government in 2010, little work had been done or evidence collated to support such a relief. That work has now been undertaken, which is why the decision has been made for targeted reliefs to be introduced for three creative sectors—high-end television, animation and video games.

I am glad that the patent box has widespread support. It will encourage innovative business to invest in the UK and locate high-value jobs and activity here, as well as enhancing the competitiveness of the UK tax system for high-tech companies. I am delighted that the clause is part of the Bill.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Once again, the Minister’s comments are deeply concerning, in terms of the complacency with which this Government seem to view this country’s economic situation. Moreover, we are in a double-dip recession, the economy is not growing, and serious action needs to be taken to try to stimulate growth.

I accept the Minister’s warm welcome and praise for the patent box initiative. I also welcome the probing questions that the hon. Member for Amber Valley asked about the technicalities, and the implications of the patent box for businesses, in order to ensure that, before the Bill is passed, the Government iron out any issues. Our amendment focuses on the impact of the provision, which the Minister said will be available, in due course, on an ongoing basis. My hon. Friends and I accept that, but he seems to dismiss the requirement to consider

“other opportunities to introduce targeted support for business.”

Our point is that the Government have introduced the ideas and suggestions advanced by the previous Labour Government, but have so far come up with very few suggestions on how to stimulate growth in the economy.

David Gauke (Conservative, South West Hertfordshire)

Will the hon. Lady clarify her position? She will be aware that the main rate of corporation tax has fallen from 28%, which was what we inherited, to 22%, which helps all businesses that pay the main rate of corporation tax. Is she saying that she would prefer us not to have done that? Would she prefer us to provide more targeted reliefs to help specific sectors, rather than make a general reduction in corporation tax?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I have two comments to make. First, we have not seen that reduction yet; it will be made over several years, and its impact has yet to be felt. We are in a double-dip recession. Those are the economic facts. Secondly, we have discussed at length Opposition concerns that this Government and Chancellor seem to approach the economy as a one-club golfer: corporation tax cuts is all that they seem to have to offer to business. There could be much more innovative and ingenious approaches. Particularly in this economic climate, the Government should address themselves to finding ways to get investment into the economy and to the businesses that need it, and to get growth into our economy.

David Gauke (Conservative, South West Hertfordshire)

The hon. Lady will be aware that the patent box is effectively a corporation tax cut. Is she saying that some corporation tax cuts are good and some are not good?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

The Minister is twisting my words somewhat. He is trying to confuse a very straightforward discussion about the cut in the headline rate of corporation tax being all that this Government are offering, and this cut in corporation tax—the patent box—and potential tax reliefs for video games. Other than that cut, very little is on offer to give businesses the confidence that this Government are behind them, are backing their industry and are going for growth.

Ian Mearns (Labour, Gateshead)

Over the weekend, I had a significant discussion with people at a company in my constituency who are expert in producing marine and yacht paint and protective coatings, including fire retardants. They have a major onsite research and development arm in my constituency. One of their major problems is that once they have produced and patented a product, they do not receive assistance from the Government to get it into the European market, where there are restrictions. They have not received any such help from the British Government, which is needed because the European testing authorities take up to five months to clear British products for sale in the European market.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

My hon. Friend raises an important example of the point I am making. The Government believe that, if they get out of the way and cut taxes, industry will spring up from below, businesses will thrive, we will have growth and the economy will move forward.

John Mann (Labour, Bassetlaw)

I encourage my hon. Friend to stick to her guns. The Opposition Front-Bench team are calling for lower taxation and more support for businesses, not least in light of the evidence recently supplied by the OECD that British industry, because of the banks’ interest rate hikes, is now paying the highest effective interest rate in the 27 member states of the European Union.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I thank my hon. Friend for that sobering statistic. The point is that it is not enough for the Government simply to stand aside and get out of the way. The clause introduces the patent box, which is a prime example of where the Government can make a real difference. By the same token, our amendment calls on the Government to consider other opportunities for targeting support at businesses and specific industries. I am shocked, and I can hear from the murmurings behind me that Opposition Members are also shocked, that the Government seem reluctant to invest time in doing so.

Aidan Burley (Conservative, Cannock Chase)

The hon. Lady says that the Government need to think of ways to support business other than through tax cuts. The previous Committee I sat on in this room increased from one year to two years the amount of time that an employee has to work for an organisation before he or she can make an unfair dismissal claim against that employer. Businesses, especially small businesses, had been crying out for that move to make it easier to hire and fire people. Does she support that move?

Peter Bone (Conservative, Wellingborough)

Order. We are straying a little wide of the mark. We need to come back to the clause and the amendment.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Thank you for calling the Committee to order, Mr Bone. I would briefly say that it is not sufficient for the Government to get out of the way, and the point raised by the hon. Member for Cannock Chase is another example of that.

Peter Bone (Conservative, Wellingborough)

Order. Actually, the shadow Minister is not going to say a brief word about that measure; she is going to come back to the clause.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

Thank you, Mr Bone.

The Government could introduce many other more innovative measures, and I will cite just one that is in Labour’s five-point plan for growth. There should be a one-year national insurance break for every small firm that takes on extra workers. I would have thought the Government would support such an initiative; I know that businesses do. Rather than making it easier to sack workers, the amendment would make it easier for businesses to hire workers, which would get our economy moving. That is why I urge hon. Members to support our amendment.

Clause 20 - Relief for expenditure on R and D

Nigel Mills (Conservative, Amber Valley)

I beg to move amendment 32, in clause 20, page 12, line 3, at end add—

‘(2) The Chancellor of the Exchequer shall review the extent to which intellectual property created as a result of research and development expenditure which falls within Part 13 of CTA 2009 is vested in companies whose income is not within the charge to corporation tax, and place a copy of the report in the House of Commons Library.’.

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

Clause stand part.

That schedule 3 be the Third schedule to the Bill.

Nigel Mills (Conservative, Amber Valley)

I do not propose to take up much of the Committee’s time with amendment 32. We have just seen the Government’s carrot to encourage businesses to hold IP in the UK, and we all understand why it is important for our economy to be based on such knowledge and on the high-tech sector. Clause 20 and schedule 3 demonstrate the Government’s other angle of trying further to encourage businesses to enter into research and development, in the hope that we will end up with valuable IP that is owned in the UK and creates jobs in our businesses.

The purpose of amendment 32, on which I suspect I will not test the Committee’s view, is to ask whether there is a risk that R and D tax credits and incentives will effectively incentivise offshore entities to have their research done in the UK without the valuable IP that may result being owned in the UK and generating tax receipts. I am not sure from a public policy perspective that that is what we are trying to achieve. We want that valuable IP to be owned in the UK and to create jobs and tax revenues here, not in Switzerland or somewhere else.

Through amendment 32, I want to ask whether the Minister is aware that that might be a problem. I believe the rules allow an offshore company to contract with a UK company to have research done here, with the clear proviso that any fruits of that labour will be owned by the company that commissions the research, not the one that carries it out. That has been a constant theme throughout the R and D rules, certainly for large companies. Originally, for small and medium-sized companies, the company that claimed the credit had to own the resultant IP. I am not asking for that, but I am asking that the IP be effectively owned in the UK, or at least that the income that it generates is within the charge to UK tax.

In a time of fiscal constraint it is difficult for people to understand why we would want to incentivise offshore companies to have their R and D done in the UK but allow them to own the valuable assets that result, keep them offshore and not pay UK tax on them. If such companies own the assets offshore, I suppose there might still be an attraction to the research being done in the UK; we would get value from that because our science base is used and we get the income and the tax flows from having the work done in the UK. I am not totally convinced, however. If I were a big Swiss company spending millions on research, I would want that research to be done by the best scientists who had the best chance of producing a valuable product, which I could sell to make back the millions I have spent on that research. I suspect that I would choose the best researchers who were most likely to produce some valuable output. If that happens to be people in the UK, which I am sure it is in many cases, I am not sure that the existence of this tax credit will make a material difference to where I choose to have that work done. The other argument might be that if we do not do this, all our valuable scientists might emigrate to Zug or the Cayman Islands, effectively to get the people commissioning that work the tax credit there.

I suspect that if I were a very successful, highly desired scientist—which I am not—and I wanted to go to Zug, I could probably pay a third of the income tax I would pay in the UK. So if I move there for tax advantages, I might do it for my own advantage rather than my employer’s. If I have not done it for my own sake, I am not sure that this little 3% on the bottom end would make that difference. We now have the carrot in place for people to have their IP owned in the UK. It is clearly right that we do everything we can to encourage people to do that research, for our businesses to do that, and to get those new products and new and exciting things owned in the UK. But should we be incentivising them to do that work in the UK if that product is not owned here should they be successful in that research?

John Mann (Labour, Bassetlaw)

I congratulate the hon. Member for Amber Valley on his boldness in tabling what may well be a probing amendment. He is the only Conservative Back Bencher who has had the courage and wisdom even to question something in the Bill so far. It is quite extraordinary how we do our politics, and that this is the way things tend to be done. The advice that I would give, having pursued many of my own amendments in previous Bill Committees, is that doggedness in pursuing the right argument through a range of different methods can often have positive results. It needs a lot of pressure on Ministers and a recognition that the role of Whips is not to tell us what to do but simply to advise us what the business might be over the next few weeks so that we can schedule our time more effectively. I look forward to the hon. Gentleman, as I was, being appointed to the Unopposed Bill Committee, which meets in strange places and strange ways to deal with things that no one else ever wants to discuss.

I share the hon. Gentleman’s concerns, although I do not necessarily agree with some of the angles he views this from. The fundamental weakness in the way we have tried to develop innovation in this country, going back over many Governments and probably two generations, is our attempt to compartmentalise it. That is the weakness of what the Government are doing here. There is one paragraph in the schedule which is helpful and which I fully support. But compartmentalising in the hope of getting something is a fundamental weakness with unforeseen consequences. The hon. Member for Amber Valley highlights a major one.

Back in the 1980s, we were ahead of the world in some of the creative industries, and we got nowhere. A good example was interactive video. I myself was involved on the periphery. I won the top world award for interactive video in 1988 as a project leader. Britain was in the lead in the technologies that were available then, but within a decade we had totally lost that lead. We lost out on everything—CDs, DVDs, 3D and the rest. But we lost out on the technological lead. Part of the problem was then that it was very old style. It was Government grants then. The problem with Government grants was not that they were not helpful but that they were project based. That was not good enough to create innovation. One could apply existing knowledge to a project base; that is part of the danger of compartmentalising. What I would like to see from Government and my own party is innovation around enterprise zones. For example, I would like to see Sheffield city region, of which my constituency is part, zoned as a whole. I do not want people shifting their business from one piece of land in the region to another, so that my area battles—we have particularly good pieces of land available—against the other side of Sheffield city region, almost the M1 versus the A1. Which bit of land should be incentivised?

Frankly, the good business entrepreneur with a good idea will pick the cheapest bit of land. It is a marginal impact, though I do not discount the fact that sometimes that can be important. Usually, it is not. Far more significant would be an overall cohesive policy that links to the research base of the universities, with a long-term plan that ties in those investors. The plan should say, “Here is the establishment in the universities; here is what we are prepared to give you. You come and dictate some of the way in which that goes forward, not just for next year but for the next decade and beyond.” That way, we can begin to create some of the world-leading and, therefore, innovative and patented developments.

In sports technologies, this country and Sheffield are ahead of the world. However, there is a knowledge gap in development of the next phase of marketable products. There is a requirement for innovation that also links to health products; for instance, how to apply the latest digital technology to health or sports performance. How can that be marketed as a saleable product? That time is clearly going to come; there will be a requirement for brilliance in innovation. We do not tie those things together in this country. Sheffield city region is a perfect example of where zoning could work; all work in that ambit would get the various Government incentives. One could, for example, see the city of Cambridge and its hinterland and other areas getting a specific advantage, giving us the concept that the university and its resources are there to back potential winners, similar to the way that Silicon valley was conceptualised around Stanford university.

That can involve a few risks, but on the back of that those companies get wedded into the area because of the creative atmosphere and environment. Why would they move elsewhere if they are settled in an area? It is the source of intellectual stimulus. That is how Silicon valley managed to succeed. We have rather missed the point. I am clear that that has occurred across successive Governments. I am not simply criticising this Government, although I am criticising them to this extent: the irony of the last debate was that it was about who should take the most responsibility for a rather old-fashioned view of patenting. Should it be the previous Labour Government or the current coalition?

With this schedule we are in the same mindset: it is far too limited. That is why in a range of technologies—digital technology is another example—this country was, not in the lead but catching up, and then fell well behind. Others developed the technology. Take the microphones we have in this room: we were world leaders. Tannoy and Auditel were world leaders.

When it came to the shift to digital, we did not put in the investment, because all we did was offer around small grants. That was a fundamental weakness in the British approach. Having said that, I will commend one small aspect, as I understand it, of what the Government have done in the Bill. They have removed the de minimis opportunity for the micro-business. I used the example of digital technology. My family’s company was the first importer of digital microphones into this country. A number of adaptations could have been done that might have beaten the patent test for the big multinationals that had developed the technology, and that would have allowed us to experiment and create some bespoke technology. One needed to experiment. Even if the micro-business understands what is going on, it cannot suddenly say, “Here’s £10,000 for research and development this year, and another £10,000 for next year.” That is what is required to pay the rates bills and other bills to keep the business afloat.

Once a company is big and successful, it has more ability to speculate, but often the micro-business will hit on the crest of the wave of where the technology is going. That was the example in Silicon valley, where the ultra micro-business suddenly realised that there was a way forward. It was not a case of blue-sky thinking— “I’m going to invent something that no one’s ever thought of”—but a case of seeing what was there and adapting the technology. That is how real innovations take place. That is real entrepreneurship. We in this country are not creating the space to allow that to happen so, for the sake of the nation and our manufacturing and innovation, it would be a good idea for the Government to be honest in reporting back the successes and the failures and how they work.

What the Government are doing for the real entrepreneurs and innovators is far too limited. They are using the same mindset as the previous Labour Government, which used the same mindset as the Major Government. We could go back to the ‘70s. We could almost say that this is Wilsonian in its style. In my view, that is a weakness that we have to break. We are looking at too many bits and pieces rather than taking a bigger, calculated gamble. I would like to see the Government come forward—it may not happen in an amendment to the Bill—with greater boldness. Therefore, I commend the hon. Member for Amber Valley, who, after the boundary changes, may or may not be my neighbour if Bolsover goes in with him. However, in a spirit of generosity, one should work with potential neighbours—if we are both successful. I commend him on his boldness, and I encourage others to come forward with their own amendments, because the Government, strangely, do not have and never have all the answers. There will be some, even on the Back Benches of the Houses of Parliament, who have good ideas to put forward. I congratulate the hon. Gentleman.

Grahame Morris (Labour, Easington)

It is a pleasure to serve under your chairmanship once again, Mr Bone. I want to echo the sentiments of my hon. Friend the Member for Bassetlaw and compliment the hon. Member for Amber Valley on having the strength of character to put forward a probing amendment. It raises interesting questions. After all, our role in Committee is to scrutinise the Government’s proposals, so I would like to pose a series of questions to the Minister, not least to seek clarification on how we are to define research and development. My hon. Friend mentioned particular niche industries. Clearly, Labour members of the Committee agree that one of the keys to success is investment in research and development, which is a vital part of our UK economy and ensures international competitiveness.

Will the Minister explain what R and D covers, because there seems to be a broad definition? I can fully understand how important it is to come up with a system that will support research and development. It is important for business, but it is also important that it is simple for HMRC to administer this particular proposal.

Will the Minister confirm whether the measure is part of the plan to boost growth? When will the changes come into effect? Are they to be implemented on 1 April 2013? I understand from reading the Government’s consultation document that the Chancellor announced in the Autumn statement last year that the Government intended to introduce an above-the-line research and development credit in 2013 to encourage research and development by larger companies. I also understand that the proposal is to encourage research and development from small and medium-sized enterprises.

I fully accept and agree with the proposal in the consultation document, which indicates that the UK Government

“is committed to putting research, development and innovation at the heart of its growth agenda and ensuring that the UK provides an internationally competitive environment for all companies to innovate.”

However, I would be interested to know which particular companies the Government feel are likely to benefit most from the tax relief. According to the Office for National Statistics, in the UK economy £26 billion a year is spent on research and development and only 12% of that is from Government, non-profit or research councils. Allowing relief for that seems to be a common-sense approach that the Opposition would support. It is also a good idea to allow small businesses to benefit more from research and development relief, so scrapping the £10,000 limit is welcome.

There are, however, some problems. There is a real worry that if the chief beneficiaries are likely to be large multinationals, the measure could be seen as a tax cut for such organisations. It is important to ascertain the details of the relief proposed in the clause. My concern is that the definition of what constitutes research and development is too loosely applied. For example, we would normally assume that oil and gas exploration is fairly speculative, but could it be counted as research and development? One would assume that it constituted a profit-seeking endeavour. It is not an attempt to refine a process or to improve sustainability or efficiency, which are what we would normally assume to be research and development objectives.

At present, the ONS and the Government use a very loose OECD definition of what constitutes research and development. Has the Minister considered tightening up that definition? It currently allows for manipulation by accountants by the shifting of incurred costs through normal processes or the day-to-day functioning of business into the research and development category. I would welcome any clarification that the Minister is willing to give.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I join my hon. Friend in commending the hon. Member for Amber Valley for tabling this probing amendment and for raising some of the important issues that the Government need to consider in terms of their research and development investment strategy.

I want to talk briefly about clause 20 and schedule 3 and tax relief for expenditure on research and development. My hon. Friend the Member for Easington raised some queries about the clause, but it does make some important changes to the existing relief and it is vital that those changes are measured against the level of impact that they have on decisions made by businesses to invest in research and development—particularly here in the UK. The hon. Member for Amber Valley made a point about the importance of measuring that value to the UK economy. It boils down to how many jobs will be created in the UK by the relief that is afforded. I am interested to hear from the Minister what consideration has been given to the queries raised by the hon. Member for Amber Valley. How will the Government ensure that the investment is properly targeted on the UK economy and on how such investment will benefit it?

Paragraph 2(5) of schedule 3 will cut the rate at which losses can be surrendered for the payable tax credit from 12.5% to 11%, which follows a reduction from 14% to 12.5% in the Finance Act 2011. The explanatory notes state that that is required

“to keep the value of the relief within the 25 per cent. threshold set out in EU State aid rules.”

Will the Minister elaborate further and explain its significance in more detail? Does it mean that some businesses will be worse off and, if so, what estimate does he make of the overall impact of the reduction? Does it mean that some businesses will not be helped as much as was implied in the 2011 Budget? Will he clarify the impact on loss-making businesses?

Some of the changes set out in the schedule are certainly welcome. The Institute of Chartered Accountants in England and Wales has stated that scrapping the minimum spend of £10,000 will help more small businesses to take advantage of the relief. We know how important it is to provide support for small businesses and how little the Budget offered them, so the change is particularly welcome in that context. I would be grateful if the Minister provided us with more details. How many additional businesses does he estimate will be able to benefit from the relief, following the abolition of the minimum expenditure rule?

As I mentioned earlier, in his autumn statement, the Chancellor announced that the Government intended to introduce an above-the-line R and D tax credit in next year’s Finance Bill, which will encourage R and D activity by larger companies. My hon. Friend the Member for Bassetlaw made a passionate case for attracting businesses to invest in research and development in this country. The above-the-line R and D tax credit is certainly a welcome step in that direction, because it will put the clear financial benefits of such investment into the hands of decision makers, which will make it easier for companies to conclude that investment in research and development in the UK would be positive and viable. We welcome the commitment that small and medium-sized enterprise R and D incentives will not be reduced by that change. Will the Minister comment, if he can, on the interaction between the two reliefs?

My final point relates to how research and development fits into the broader context of manufacturing and the overall investment process. Under clause 19, we talked about the patent box, which will provide companies with a clear incentive to invest in research that leads to patents and to the benefits from the new tax reliefs. We have also discussed the R and D tax reliefs that will arise from such research and development. However, one concern is that those reliefs will be paid for by the removal of the manufacturing investment allowances. In some respects for some businesses, that will rip out the core of how they turn research and development projects—the patents that they eventually acquire—into working, viable manufacturing businesses.

Today, we have received the shocking news that manufacturing output has actually fallen. The Office for National Statistics figures—April’s figures came out today—show a 0.7% drop in manufacturing output in April, which is a huge concern and needs to be considered in light of the patent box support and the R and D tax credits that are being provided, but, by the same token, also in light of the manufacturing investment allowance, which was taken away in the last Budget and which we will be seeing the effects of from this year. The Government need to look at their proposals in the round, because, while the individual measures are welcome, when they are looked at in totality, many businesses, particularly small ones, are left without the incentive to invest in manufacturing capability.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Does my hon. Friend agree that it is particularly concerning that the ONS has commented that the manufacturing data has been

“dragged lower by falls in pharmaceutical products and preparations, as well as in other manufacturing and repair”?

Those are exactly the kind of areas that we need to ensure that we support.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I absolutely agree. One of the points that has been made about the patent box—the pharmaceutical industry has particularly welcomed the patent box—is that it will not benefit the companies that manufacture pharmaceutical products here. It will encourage research and development, but we need to ensure that the incentives are there for companies to invest in their manufacturing capability. The pharmaceutical industry is one that I feel particularly keenly about, because Sanofi Aventis is based in my constituency and recently announced that it would close its manufacturing centre there. These are the types of businesses that need the incentive to invest and enable Britain to start making and building more things, and to move into growth, and these are the kinds of things that are being removed with this Budget. While giving with one hand, with R and D tax credits and the patent box, the Government are at risk of stifling the investment that is required to transform that process into actual manufacturing capability. The ONS figures released today are deeply concerning, and I hope that the Government take on board the major concerns that are being expressed, in the Committee and outside, about our manufacturing capabilities.

David Gauke (Conservative, South West Hertfordshire)

Clause 20 makes changes to improve and simplify a number of the rules governing tax relief for expenditure on research and development, particularly for SMEs. These changes will improve the competitiveness of the UK tax system by increasing the incentive for companies to carry out R and D in the UK. That will boost productivity and growth, with targeted support for young and innovative businesses as they grow. In November 2010, we opened a consultation with business on ways to enhance further the R and D tax relief schemes for large businesses and for SMEs. Larger businesses favour changing the way in which R and D relief is given and want to move to an above-the-line credit. That will increase the profile of UK R and D activities, particularly in multinational groups, by changing the relief from a deduction against profits to a credit that directly reduces R and D costs in company accounts.

As my right hon. Friend the Chancellor announced in the Budget, we will be introducing this change in Finance Bill 2013, following consultation on its design. Smaller companies, however, were far more concerned with improving the current scheme. They wanted more relief, and the removal of some of the barriers to benefiting from the scheme. The clause addresses those concerns.

The changes that the clause makes will increase the rate at which tax relief is given to over 7,000 companies that claim under the small company R and D scheme, from 200% of qualifying expenditure to 225%. As that rate of relief increases, state aid considerations require us to reduce the proportion of that relief that can be paid to loss-making companies in the SME scheme, so the payable tax credit rate for loss makers who wish to surrender some of their tax losses reduces from 12.5% to 11 %. It is worth pointing out that no business will be worse off from the change in rates, which is balanced by the reduction in the corporation tax rate, which is beneficial. I hope that that provides some reassurance to the Committee.

Clause 20 also widens access to the R and D scheme. Government assistance is particularly important for the smallest companies that are just starting out on the road to growth and creating employment. We have recognised that by abolishing the £10,000 minimum expenditure for R and D tax credit claims. Smaller growing companies are also more likely to subcontract elements of their R and D activities to third parties if their own employee base is too small to manage all of a project. We are therefore removing the cap on the amount of relief that they can obtain by way of a payable tax credit when they make a loss. Previously, that could not exceed the amount that a company paid in PAYE tax and national insurance contributions for its employees.

In a related area, we have also widened the scope of the relief so that it is available for all expenditure on externally provided research workers, rather than just those supplied directly by a single intermediary.

Perhaps I could speak about the going concern test. We have made a change to ensure that taxpayer support is not wasted on failing companies by clarifying the condition requiring a company to be a going concern at the time it makes a claim. In future, a loss-making company that is in liquidation or administration will not be eligible to claim R and D relief by way of a payable tax credit.

Finally, one minor technical change has been made to the draft legislation issued for consultation last December to ensure that the provision on externally provided workers is clear.

Before turning to the amendment, I will pick up some of the points raised by hon. Members. The hon. Member for Easington raised the definition of R and D in the context of R and D relief. The current definition for tax purposes is set out in the 2004 guidelines issued by the Department for Business, Innovation and Skills. It includes those aspects of design intrinsic to R and D, including product development activities, when that involves making advances in science or technology to overcome the scientific or technological uncertainty.

Which companies will benefit? Most of the changes in these measures will benefit small and medium enterprises rather than large companies, and will focus on R and D. The hon. Gentleman asked about oil and gas exploration, and that is not excluded in the definition of R and D for these purposes. He also asked about the date of introduction. The changes that we are debating today will be introduced from April 2012. The above-the-line R and D credit for larger businesses, on which we are currently consulting, will be introduced in next year’s Finance Bill, in effect from April 2013. We all look forward to the opportunity to debate those measures next year.

Turning to amendment 32, tabled by my hon. Friend the Member for Amber Valley, I understand that he is worried that the taxpayer is supporting the development of intellectual property which ends up in the hands of companies outside our jurisdiction. He may prefer us to support only those companies whose R and D activities are aimed at creating intellectual property that will remain in the UK. Any change of that nature would deny R and D tax credits to companies undertaking R and D for a client that will own any IP created, but whose income is not subject to corporation tax. I certainly sympathise with my hon. Friend’s concerns, but I believe that any move in that direction would be ineffective, and would result in the denial of relief to claimants that we all want to continue to support. In particular, such a change would certainly be detrimental to the UK’s thriving contract research sector. Such companies conduct R and D as the central activity of their business, and are significant contributors to the UK’s invisible exports of services such as pharmaceuticals and defence. They work for clients who are generally unrelated parties and will often not take ownership of any intellectual property created in the course of their work. Such a change would be more likely to reduce both inward investment into the UK and our invisible exports in R and D services, through a reduction in the level of R and D carried on here by and for multinational enterprises.

Any move to restrict who can claim tax credits based on where the ultimate client is situated may not be compliant with the UK’s obligations under the EU treaty. Doing so would seem to treat work carried out for a domestic client more favourably than for a client based in another member state, potentially inhibiting cross-border trade in R and D services within the European Union.

John Mann (Labour, Bassetlaw)

I am listening carefully. May I just confirm that we are not able to do what we might choose in respect of our R and D tax policy because of EU law? Which piece of EU law did a previous Government agree that restricts our ability to determine what we do today?

David Gauke (Conservative, South West Hertfordshire)

Were we to modify our R and D tax credit regime in such a way as to discriminate against companies that hold patents and intellectual property in another part of the European Union, that would potentially inhibit cross-border trade in R and D services and could breach our single market obligations. That is where the amendment could bite. We in the Government do not think that we should make such a restriction, but if we did we would run into difficulties with some of the fundamental freedoms in providing cross-border services.

John Mann (Labour, Bassetlaw)

The Minister seems to suggest that the relevant legislation is the Single European Act, signed by Mrs Thatcher in 1986, but I want to clarify that. It has long been a principle that we in this country should be free to set our own taxation without the European Union interfering. The Minister is giving a clear example of the EU dictating to the Committee, Parliament and the Government that we cannot set a tax that we want to set because a previous Conservative Government signed a European Act. The public need to be clear and we Committee members need to be clear, for the record, that that is what the Minister is saying.

David Gauke (Conservative, South West Hertfordshire)

That fundamental freedom is contained in the EU treaty—essentially, the constitution that was not a constitution. I recall members of my party voting against that EU treaty and the Act that brought it in. My memory fails to recall whether I saw the hon. Member for Bassetlaw in the Lobby with us. I am sure that he will tell me if he was not.

John Mann (Labour, Bassetlaw)

Unfortunately, when the Single European Act was voted through by the Conservative Government, I was not present because I had not yet been elected. I shall ask the Minister my question again, because I am not getting clarity. He used the word “freedoms”. Does he think it might be wise to strike that from the record, because he is saying that there is a lack of freedom for the Committee to determine our taxation policy on R and D for businesses, owing to what the European Union dictates? For the record, we need to be clear that that is what the Government are proposing and what the Minister is recommending to us with the clause.

David Gauke (Conservative, South West Hertfordshire)

The expression “fundamental freedoms”, if I remember correctly, comes from the EU treaty voted through by the previous Parliament, when both the hon. Gentleman and I were Members of this place. We have heard him make many speeches during our debates about how Whips are present to provide advice, but I seem to recall that in the previous Parliament he followed the advice of his party’s Whips and voted in favour of that EU treaty.

John Mann (Labour, Bassetlaw)

To my knowledge, I have not voted in favour of anything that restricts the right of Parliament to set taxation law. When I have asked questions, the ability to set our own taxation has always been stated to be a principle. The Minister is unable or unwilling to confirm precisely which Act we are talking about; if it is the Single European Act, we are going back some considerable time. If that is the Act that we need to amend to give the House, and the British people through us, the right to set our own taxation policy, we need to be clear. The issue is not a minor one—it may be minor in the context of one clause in the Bill, but it is not minor in terms of the responsibilities of the Bill Committee to Parliament. Parliament will want to know if its rights to set taxation law is being impinged upon by the European Union. If so, it will want to know not vague references but precisely which bit of European legislation restricts our right as a Committee when we report to Parliament to set taxation law as it relates to R and D and support for business. I am not hearing an answer.

David Gauke (Conservative, South West Hertfordshire)

I shall make another attempt. In the previous Parliament, the various EU treaties and the powers under them were consolidated into a single EU treaty that was then enacted. So there is a fundamental freedom to provide services, and member states have the ability to set taxes, of course, but where there is a clash with the fundamental freedom set out in the treaty on the functioning of the EU then we face restrictions. I, for one, am not going to deny that: there are constraints on what we can do with R and D tax credits. State aid requirements, for example, mean that we do not have complete flexibility as to what the rates are—the 11% rate, rather than the 12.5% rate, is as high as we can go within those requirements. Also, there are potential constraints in the particular policy being probed by my hon. Friend the Member for Amber Valley. I do not wish to conceal that in any way from the Committee.

Nigel Mills (Conservative, Amber Valley)

I presume that the Minister is not saying that there are no circumstances in which the UK Government can restrict reliefs to entities and individuals that are within the charge to UK tax. That must have been a fundamental defence by the UK for various reliefs on asset transfers, loss transfers and things like that. I assume that he is making his points narrowly about the proposal that I made on the scope of the services freedom, rather than as a general change in UK tax policy.

David Gauke (Conservative, South West Hertfordshire)

I am not making any particular change of policy. The rate of payable credit available to loss-makers has to be reduced to 11%, however, to ensure compliance with EU law. That is the highest value permissible under aid intensity levels set out in European Commission guidelines. That is the point that I am making.

This is a vital and growing area for the UK economy. We need to be certain that the taxpayer gets best value for what we invest in the incentive and, indeed, that is one of the themes in the rest of schedule 3. The changes brought about by the clause and schedule will encourage more small businesses to engage in research and development. Limiting the application of the clause to IP retained in UK companies would reduce its impact and the incentives that it provides to business. Growth through support for innovation and the development of new high-technology businesses are central themes in the Bill. They are vital to the future of our economy, and the changes help to ensure that the UK is open for business.

Nigel Mills (Conservative, Amber Valley)

It has been an interesting debate on an important topic. I was keen to press the Minister to set out his views on whether we should effectively be giving incentives for assets that do not end up in the UK, and I still have concerns. If the amount becomes significant, then it ought to be considered. However, I have no intention of testing the Committee’s view, so I beg to ask leave to withdraw the amendment.

Clause 21 - Real estate investment trusts

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

That schedule 4 be the Fourth schedule to the Bill.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure to be back in the Finance Bill Committee under your chairmanship, Mr Bone. I am sure that we have all had a very enjoyable break and are desperately keen to be back discussing the future of real estate investment trusts. I can see by the looks of excitement on the Government Benches that everyone has their speeches ready.

It is important to put it on the record that the clause aims to make improvements to the real estate investment trust regime by addressing barriers to entry and investment, and by reducing the costs of complying with its requirements to help support the expansion of the property sector and so encourage further investment and stimulate the construction industry. When considering what I would say on this matter, I used my trusty red pen and marked down that at this point I must not tempt the wrath of Mr Bone too much by straying on to any other issues that relate to the macro-economic situation or the construction sector. However, it is worth noting that in the summary of impacts published by the Government, they state that the changes:

“should facilitate increased investment in REITs and the private rental sector. This may in turn stimulate the construction sector. No significant macroeconomic impacts are anticipated.”

That is important to mention ahead of the comments that will undoubtedly be made if I mention Labour’s five-point plan. Of course, there are other, additional ways to stimulate the construction sector, not least of which is to find other ways of investing in the housing sector, to ensure that we have a social housing programme and a programme to ensure that any repairs, retrofitting and various other things are taken forward.

Charlie Elphicke (Conservative, Dover)

The hon. Lady talks about welcoming the idea of REITs for social housing. Are we now to understand that the Labour party therefore welcomes the effective privatisation and market quoting of social housing?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Well, there is a big difference between supporting this particular initiative—which was, of course, introduced by the Labour Government; I will go on to say a bit more about that—and supporting wholesale privatisation of social housing, and I am sure the hon. Gentleman is well aware of that. I hope that we have his support not only for social housing through the various means by which in general it is provided but for the fully mutual co-operative housing option that all too often does not receive the support it deserves.

Charlie Elphicke (Conservative, Dover)

I have a lot of sympathy with the hon. Lady on the idea of mutuals and social enterprises for housing, particularly social housing, and it is right to develop that. Let me press her again. A REIT is a quoted enterprise on the stock market that would own social housing. Are we to understand that the Labour party is in favour of social housing being quoted on the stock market?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

As I said to the hon. Gentleman, I will come on to some of those points when I discuss the detail of the legislation. It is important to set this in context as one method of trying to stimulate further work in the social housing sector, although not the only one. In due course, it would be interesting to extend the support that the hon. Gentlemen seems to be indicating to other ways of ensuring that affordable housing is available, in particular for the co-operative model.

I will resist the temptation to talk about other housing issues that relate to people being removed from their local areas because no adequate social housing is available for those on the homeless list, or the impact of the so-called bedroom tax—that is another area in which a Government U-turn would be welcome, but I do not want to stray too far from the clause.

Clause 21 aims to change the barriers to entry to the scheme and come up with some improvements. Specifically, the entry charge paid by a company joining the regime is to be abolished; the requirement for a REIT to be listed on a recognised stock exchange is to be relaxed; and, the diverse ownership requirement a REIT has to meet is being reduced. The condition improvements state that,

“the rules regarding the REIT’s assets are being relaxed to reduce the likelihood that commercial decisions are being influenced by the conditions of the REIT legislation; the condition regarding the level of borrowing for a REIT is being made simpler to comply with;”.

It is important to understand the background to this provision, and the hon. Member for Dover referred to some of the changes that are going to be made. Real estate investment trusts are a tax advantage vehicle that was originally introduced in the Finance Act 2006 and subsequently incorporated into further legislation in part 12 of the Corporation Tax Act 2010. As I said, that was set up by Labour to encourage investment in the property sector, and the regimes came into force on 1 January 2007. As of 1 April 2012, I understand that there were 24 REITs in the UK, with a particular focus on commercial property investment and an aggregate market capitalisation of approximately £20 billion.

REITs are exempt from corporation tax on the profits and gains arising from the property rental business, and they must distribute 90% of the profits from the property rental business to shareholders in whose hands that income is treated as income from property. In that way, taxation of income from property is moved from corporate to investor level.

There have been some concerns that the UK regime has not yet had the success of similar regimes such as, for example, those in the US. That is partly, it is argued, because of the depressed property market, and partly because of the number of conditions that a company has to meet to become a REIT. In particular, the entry charge has been identified as one thing that has served as a deterrent. Unlike some Government Members— I am not trying to provoke a row or argument by saying this—I never thought that any Government of any colour had all the answers when pieces of legislation were introduced, and it is always important to improve legislation where we can.

On this occasion, I have resisted the temptation to table amendments to the clause and ask the Government to carry out further work, and I will say something about that at the end of my contribution. It is important, however, to recognise that this legislation was set out by the Labour Government, and we want to see improvements to the regime.

In their response to their consultation, “Investment in the UK private rented sector” in September 2010, the Government indicated that they would look further at the barriers to entry to the REITs regime with a view to facilitating greater take-up and, in the longer term, the establishment of residential REITs. Further consultation with interested parties suggested that the best way to support the REITs industry, and in particular, the development of residential REITs, was to reduce the barriers to entry and ensure that the regime did not inhibit good business practice. That is why the Government, as I understand it, announced in the Budget 2011 that, subject to informal consultation, legislation would be included in the Finance Bill 2012 to support good business practices and remove the barriers to entry and investment in the REITs regime. A subsequent consultation took place between April and June 2011, which provided the opportunity to firm up and improve some measures that have been included in the Bill.

In the Budget 2012, the Government announced that they would consult this year on the REITs regime, and specifically, the role that REITs can play in supporting the social housing sector, as well as whether to change the treatment of income received by a REIT when it invests in another REIT. I have not tabled an amendment to the clause because I recognise that a consultation is under way, and I am willing to look, as I am sure we all are, at what the Government may propose. Dependent on the outcome of the consultation, which will run until the end of June, the Government may suggest further changes in the Finance Bill 2013. If we are spared from reshuffles or other acts of greater powers, I am sure that we are all already looking forward to that Bill—I see that the Whips are thinking, “If we ever get to the end of this one”, so I will not press that point.

I want to raise a few issues about the summary of the proposals. The clause has an extensive explanatory note and although I will not go through every point in detail, it is worth putting on record some changes that are being made to the Corporation Tax Act 2010.

Section 528 of that Act requires that a REIT is listed in a recognised stock exchange. It also requires that a REIT is not a close company—in other words, that it cannot be controlled by a small number of people, which is described as the non-close company requirement. Section 530 requires that a REIT distributes 90% of its profits from its property rental business to investors, while section 531 ensures that a REIT is primarily a property investment company by requiring that profits and assets of the property rental business of the REIT are 75% or more of the total profit or assets of the REIT. Section 538 requires a company joining the REIT regime to pay a conversion charge equivalent to 2% of the value of its assets involved in its property rental business. Section 543 restricts the amount of borrowing undertaken by a REIT in respect of its property rental business by charging to tax the amount by which its financing costs exceed a limit. Section 556 determines the treatment of assets involved in the property rental business, and specifies that when the asset is disposed of, the REIT does not benefit from the exemption from tax. Those are only some of the issues that the extensive explanatory note lays out.

Among the proposed revisions are that the entry charge will be removed, on the understanding that that will make REITs more competitive with other forms of investment, such as funds and authorised unit trusts. The requirement for a REIT to be listed in a recognised stock market is to be relaxed so that listing on other foreign exchanges will be possible. That is supposed to encourage smaller entrants to join the regime, with the suggestion that by keeping operational costs down, REITs may be more attractive to the residential sector. Cash and cash equivalents will be a good asset, which was not the case in the past. That point was raised by the industry during the previous consultation, and the industry wishes to see that cash can be included in the test that 75% of the total value of assets must relate to the property rental business.

A REIT is currently exempt from corporation tax on both rental income and gains on sales of investment and properties used for a property rental business. Tax is instead borne by the investors on their share of rental income and gains, which are distributed to them by the REIT as a property income distribution. There is to be no breach if the distribution is made within six months to settle an underpayment, whereas previously a period of three months was allowed. That relief has limited application because it applies only if a stock dividend is offered in particular circumstances.

One important change is that institutional investors will now include charities and registered providers of social housing, as well as partnerships, sovereign wealth funds, pension funds, insurance companies, and managers and trustees of authorised unit trusts and open-ended investment companies. That is intended to increase the diversity of ownership. There will also be a power to make regulations to add, modify or remove categories of investors on the list. Will the Minister tell us what she has in mind in that context?

There is also to be a grace period for new REITS of three accounting periods—up to three years—which prompts a question that I want to ask the Minister. In the explanatory notes and the schedule, different periods are referred to at different times. Sometimes the legislation refers to three years, but at other times it relates to three accounting periods, yet those terms are not absolutely interchangeable. There are also some issues around changes applying from different dates. For example, paragraph 21 of schedule 4 sets out that paragraphs 14 to 20 apply from the date of Royal Assent, and paragraph 26(1) sets out that the same applies to paragraph 22— I hope that the Minister or some other inspiration is following this—but paragraphs 23 to 25 apply

“for accounting periods beginning on or after”

Royal Assent. Such things may seem technical or unimportant, but I raise the matter to give the Minister the opportunity to clarify the position and to draft any amendments that may be required.

The legislation also provides for the introduction of anti-avoidance to prevent the extension of the close period for a transfer of business. The profit finance ratio cost will be amended, and I understand that the industry was particularly keen for that to happen. I hope that I have made it clear that we do not oppose clause 21, and we await further consultation with interest.

The Bill lists a new range of institutional investors, and although the concept of allowing institutional investors is welcome, it is disappointing that the definition does not include other REITs or companies that are diversely held. The legislation also gives the Treasury power to make regulations to extend the list of institutional investors. What additional groups does the Minister intend to include through such regulations?

It would also be helpful to hear from the Minister about the problem of practical barriers. Notwithstanding that the improvements to the regime will be welcomed, does she accept that there are still barriers for residential REITs, in particular because the rental income received from residential property is generally low, and yields from such property are usually realised by fairly regular re-sales of properties? A high turnover of properties may mean that such companies do not qualify as property rental businesses for the purpose of the regime, so they could not become REITs. Will the Minister address that, either now or in the upcoming proposals in the year ahead?

Charlie Elphicke (Conservative, Dover)

I just want to touch on social housing REITs. No doubt the hon. Lady is, like me, an avid reader of Inside Housing. On 18 May, a story stated:

“Associations to raise £500 million with stock exchange ‘privatisation’ plan…A consortium of 10 housing associations is to list a company made up of 10,000 social homes on the junior London stock exchange in September.”

Does she support that plan—yes or no?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I do not have the advantage of having an iPad close to hand so that I can receive inspiration. Of course, as a former housing spokesperson in the Scottish Parliament, I take a great interest in social housing. I gently suggest to the hon. Gentleman that the fact that housing associations have chosen to raise finance from a range of sources—partly because the Government do not always supply that funding—does not equate to privatisation. That is a fundamentally important point in our allowing social housing associations to raise money from various sources.

Sheila Gilmore (Labour, Edinburgh East)

Housing associations frequently raise money through banks and other private institutions as part of their building programmes because the grant never covered the full cost, even when it was higher. That is a money-raising issue. Housing associations are controlled by strict regulation, and I hope there is no suggestion that that regulation will disappear.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend has a long and honourable history of addressing housing issues during her time as a councillor in Scotland’s capital city of Edinburgh, and she speaks with a great deal of authority on such matters, to which she is fully committed.

It is important to stress that the changes are an opportunity. Once again, partly because of the way in which the process of considering and scrutinising the Bill is constructed, I find myself almost trying to explain what the Government are doing, rather than the Government explaining it themselves.

I do not want to tempt fate or risk your annoyance, Mr Bone, given that we are approaching the end of the sitting, but it is important to stress that although we welcome the proposed changes, this is not the only way to ensure that the construction industry is stimulated and housing issues are addressed. There is no opportunity today for a wider debate on a range of housing matters but, as my hon. Friend has suggested, this is potentially one way to ensure that housing associations and other social housing providers can raise funds in a new way.

Sheila Gilmore (Labour, Edinburgh East)

When REITs were originally introduced, they were intended to be—and were encouraged to be—part of the residential property market. They do not necessarily address only social housing; they also address the resurgence in the private letting market and they fulfil a need that has been clear in the past few years. Many people in housing were disappointed that, in their initial shape, REITs did not seem to be particularly successful in assisting the residential market. Hopefully, the changes in the Bill will allow that to happen.

As we all know, the private letting market tends to be disparate—some of it is good, and some of it is bad. The ability to operate on a larger scale and in a more organised manner improves management and stability quite a bit, which is good for residents. One of the big problems with private letting is its short-term nature. That obviously has an impact on the individual who wants to live in that kind of accommodation, but it is also a disadvantage to communities. Many of us struggle with communities that are suffering from the impact of short-termism from the point of view of landlords and the tenants who live in these properties.

A more institutional approach to private letting, which REITs would offer in theory—that was the debate I recall taking place in the housing world at the outset—would encourage a more systematic and larger scale approach to its provision. That might make it much easier for people to live there in the longer term. Many have suggested that that might be advantageous to the economy, not just the individuals involved. One theory—I am not sure whether it is proven or simply debated a lot—about why some countries in Europe have more stable economies is that they have not gone quite so enthusiastically down the route of home ownership and an element of the private letting market has given them stability. I do not know whether that is necessarily a universal view, or even whether it holds, but it suggests that there is something worth encouraging in the private letting market.

If we had greater investment and people saw this as something in which they wanted to invest for the long term, providers could offer longer leases. That would be a very healthy development in the market and could improve a lot of communities. Without my venturing into the role of private letting for social housing, it has a worthwhile one to play. If these changes make it possible for this concept to move beyond largely commercial property and offer such an advantage, it is something that we would want to support, as my hon. Friend the Member for Kilmarnock and Loudoun said.

Enlarging those who could be part of a REIT and enabling social housing providers, charities and others to be part of one is quite an important step, although it requires some caution from those who enter into it. Some social housing providers are interested in looking at how this might assist them to expand their provision and find sources of financing, because things have become increasingly difficult. If we are serious about wanting an expansion of social housing, it is not surprising that social housing providers want to look at this as an option for them to get financing elsewhere. Sadly, they are finding it increasingly difficult to get sufficient grant funding, as grant levels have fallen in both England and Scotland in recent years. That means that we either have less housing provided, or try to find other means of funding it.

The traditional means has been through bank lending, but although one might argue that many housing associations are good, stable, long-term investments, some providers have found it difficult in the past two or three years to obtain the bank lending that they got previously. Some banks that supported this form of housing have moved out of the field and no longer provide the same loan assistance. In the absence of some of the more traditional ways of funding social housing, it is not at all surprising that people are interested in at least exploring this option, if it enables them to provide badly-needed housing.

(Except clauses 1, 4, 8, 189 and 209, schedules 1, 23 and 33 and certain new clauses and new schedules) - Clause 21 - Real estate investment trusts

Peter Bone (Conservative, Wellingborough)

I remind the Committee that with this we are considering:

That schedule 4 be the Fourth schedule to the Bill.

Sheila Gilmore (Labour, Edinburgh East)

I do not intend to detain the Committee too much longer.

A consideration of whether to use a real estate investment trust to raise investment for social housing has been made more necessary by the position in which a lot of housing associations and other providers find themselves. In 2011-12, only 15,700 affordable homes were started in England. If the Government’s intention—or hope—to create 170,000 affordable homes by 2015 is to be achieved, something will have to be done, because some 42,500 homes need to be built in each of the four years from 2011-12 to 2015. The first year of that period has not delivered the required number, so there is a lot of ground to make up, and that is why housing associations and others are looking for other means of bringing investment into the sector to achieve these ends. It is worth considering using this mechanism to bring investment into the sector.

Charlie Elphicke (Conservative, Dover)

Getting investment into social housing is critical. The hon. Lady will know that the number of social housing units fell during the past decade or so, so more social housing units are needed to make up for that. The problem is that social housing rents are sub-market and REITs, as equity, have a return rate required by investors of about 10%, compared with a rate of 5% or 6% attached to other forms of debt or quasi-debt. Is it not a challenge to square the funding circle for sub-market rents for social housing on the one hand with the high return rate demanded by equity investors on the other?

Sheila Gilmore (Labour, Edinburgh East)

I suspect that it may be a challenge. Although these changes may make it possible for charities and registered social landlords to choose to become part of a REIT, that might be extremely difficult in practice. The concept of affordable rent is at risk, not just because of this form of investment, but because of the general decline in grant assistance. The cost of building a new home has to be covered from somewhere and, unless costs are driven down substantially, lower grants mean that finance has to be raised another way.

In respect of the more traditional route of raising finance through bank loans, which I have already described as difficult, there is a feeling in the sector that if it is to create the same number of houses on a smaller grant—wherever the additional investment is coming from—there is a question about what the appropriate rent would be to finance such borrowing. If rents are to be raised, a question arises about the degree to which the homes that are built may still be called affordable homes. That might lead to a problem with the Government’s welfare reform programme and the desire to drive down the cost of housing benefit, so a lot of things must be considered.

It would be wrong for the sector not at least to have opportunities to find out whether such a process is feasible. A REIT may work best for the private rented sector rather than the public rented sector.

Charlie Elphicke (Conservative, Dover)

I agree that that makes enormous sense for the private rented sector. My worry is that if the return rate is too high, there will then be pressure for higher rents, and that as the overwhelming majority of social rents are paid for by the taxpayer through housing benefit, we will—following the money—put more strain on the public finances. That is why we should be very cautious about introducing equity-style returns into the social housing sector, because it will be paid for by the taxpayer at a time when the public finances are under considerable pressure.

Sheila Gilmore (Labour, Edinburgh East)

I very much share those concerns. We have to find ways of resolving these tensions. Indeed, the problem then becomes wider, because if we do not create more affordable homes that have low rents and rely increasingly on what has been traditionally the affordable sector producing housing at higher rents, or if we continue to rely as heavily as we have in recent years on the private rented sector to provide a place for people who can afford it only through housing benefit, we will create further pressures on the housing benefit budget and also considerable pressures on individuals. I think that we all share the belief that it is not right for people to be trapped into what always used to be described as the poverty trap; they are trapped in a situation in which they literally cannot afford to work because the rent on their home is so high.

We have not seen that happening so far in the affordable sector, but I think that we have seen it in the private rented sector. There is almost a kind of Hobson’s choice if we are not prepared to subsidise fully affordable housing. However, I am moving further from the subject before us, so I simply say that there is a role for REITs in the residential sector. It may well be that they will be more appropriate for private rented provision, and they might indeed improve the quantity, quality and management of the private rented sector, which would be to everyone’s benefit.

Chloe Smith (Conservative, Norwich North)

I am delighted to hear the Committee so chirpy on our first day back after Her Majesty’s diamond jubilee.

If I may, I will go through what the clause does and the schedule it introduces, and I will also answer some of the questions that have been put. I welcome the interest that has been shown on both sides of the Committee in real estate investment trusts.

Clause 21 introduces schedule 4, which makes improvements to the REIT regime. It does so by reducing barriers to entry to the regime and by easing administrative burdens. Turning briefly to the wider context, these changes, alongside much wider planning reforms, will help to support the expansion of the property sector, encourage further investment and stimulate the construction industry. I suspect that we all welcome those aims, and I know that we all welcome the focus on increasing the amount of affordable housing, as has been shown in this debate.

To put the measures in context, hon. Members will be aware that Budget 2012 announced a consultation on the potential role of REITs to support the social housing sector and on the technical changes that would be required to enable REITs to invest in REITs. I add that the REIT regime is always kept under review to ensure that it is fit for purpose—it is, after all, something that has evolved since its introduction in 2007—and I know that that was the focus of the comments from the hon. Member for Kilmarnock and Loudoun.

For the benefit of those hon. Members who are not quite so clued up as the hon. Lady, I shall say a little more about what REITs do. REITs are tax-exempt vehicles that were introduced to encourage investment in the property sector. The response to the consultation on investment in the UK private rented sector in September 2010 set out that we would explore ways to improve the REITs regime, with a view to facilitating in the longer term the establishment of residential REITs. Further to consultation with interested parties, we announced at Budget 2011 that the barriers to entry for new REITs would be reduced to support the industry in general. During that informal consultation, we received 53 written responses from a wide range of interested parties including REITs, house builders, fund managers and property investment companies. Without exception, they saw the measures as a positive step. Draft legislation was published last December, and changes have been made in response to the comments that we received.

Schedule 4 relaxes a number of requirements on REITs to remove barriers to entering the regime, including the requirement that a REIT be listed on a recognised stock exchange. That will be relaxed so that REITs can be listed on trading platforms such as the alternative investment market and foreign equivalents.

There are two relaxations of the REIT non-close company requirement, which requires that a REIT be diversely owned. The first is that new REITs will be given three years from joining the regime to meet the non-close company requirement. The second is that certain institutional investors will not make a REIT a close company for the purposes of the REIT regime.

The schedule lists the type of institutional investors that will not make the REIT a close company. There is a power to make regulations to add, modify or remove categories of investors to or from the list. The hon. Member for Kilmarnock and Loudoun asked about that, and I can confirm that the Government looked at financial institutions that would be able to invest in a REIT and that would be attracted to the tax treatment offered by the regime. We wanted institutional investors to be investing on behalf of others and to have a degree of regulation. The hon. Lady will know that the Bill allows us to make changes as we go on.

I will dwell briefly on a couple of the hon. Lady’s questions to ensure that I answer them. She asked about accounting periods, and I will try to make the position clear. There are various dates involved, and there is a good reason why: in simple terms, some measures affect new REITs, while some affect existing REITs. Some of the changes that affect new REITs will take effect from Royal Assent which, as she rightly identified, we hope will be later this summer. Some apply to existing REITs, so they need to apply to the relevant accounting period. That explains the difference in the timings that she identified in the schedule and the explanatory notes. For absolute clarity, I refer her to the HMRC information note, which makes the operative date clear. I shall read it out for the record:

“The measure as it relates to the barriers to entry to the regime will have effect for companies that join the regime on or after the date of Royal Assent…For the balance of the measures they will have effect for REITs in the regime on or after the date of Royal Assent to Finance Bill 2012.”

The hon. Lady also raised a broader point about the features of the property market, one of which can be—particularly in the private rented sector—relatively high turnover. Those issues may have been well considered in the consultations that I have referred to, but she makes a fair point. There are shorter and longer products on the market, which are convenient for different people. Short tenancies are one such product, and there are other types of tenancies that suit others. The changes made by schedule 4 will make REITs more able to take decisions that make commercial sense, and they can define for themselves what commercial sense means in the context of a market that in some cases has high turnover.

I took a detour from my explanation of what the schedule does to deal with the point about institutional investors, but I return to that explanation by saying that the balance of business test will be relaxed to require that property rental business assets and cash are 75% of a REIT’s assets for the purpose of the test. The requirement to pay a conversion charge of 2% of the value of a REIT’s property assets on joining the regime will be abolished, which is a particularly clear removal of a barrier to entry.

The profit-finance cost ratio, which is also used to ensure that REITs do not over-borrow, will be simplified so that financing costs will consist only of interest and interest equivalents. The amount of tax paid when financing costs exceed the limit will be restricted to a proportion of the property profits. Finally, the legislation makes it clear that that treatment of assets that are disposed of will not apply where the disposal is to a company that is part of the same REIT group.

In summary, the changes introduced by clause 21 and schedule 4 address barriers to entry to the REIT regime and reduce administrative burdens on existing REITs. We hope that that will encourage greater investment in the property rental sector and will stimulate the housing market.

Clause 22 - Treatment of the receipt of manufactured overseas dividends

Catherine McKinnell (Labour, Newcastle upon Tyne North)

It is a pleasure to serve under your chairmanship again this afternoon, Mr Bone.

I seek a couple of points of clarification from the Minister on clause 22. The clause seeks to clarify the legislation on manufactured overseas dividends, thereby blocking a tax avoidance scheme. The legislation provides that, where MODs are received under deduction of tax, some or all of that tax may be treated as overseas tax. The clause makes it clear that, where there is a difference between the tax deducted and the tax treated as overseas tax, the difference is not treated as income tax. The clause makes a similar change for deemed manufactured payments under some stock lending arrangements.

The clause affects overseas dividends received on or after 15 September 2011, and I seek clarification on that date. Under the avoidance scheme, the recipient of a manufactured overseas dividend claims to have received it under deemed deduction of UK income tax, and seeks to set off the dividend against its corporation tax liability via double tax relief. Will the Minister clarify when the scheme was first disclosed to Her Majesty’s Revenue and Customs? How soon after that disclosure did the Government take the action that they are now putting into statute to clamp down on the avoidance? What receipts are expected from the measure?

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship this afternoon, Mr Bone, just as it was this morning.

Clause 22 will ensure that manufactured overseas dividends cannot be used to claim repayment or to set off income tax that the Exchequer does not receive. The changes were announced in a written ministerial statement on 15 September 2011 and take effect from that date.

We introduced the clause to block an aggressive avoidance scheme that HMRC had been notified of under the rules requiring disclosure of avoidance schemes. The scheme involved the receipt of a manufactured overseas dividend that, it was claimed, entitled the recipient to repayment of income tax that had been notionally deducted from the dividend but that had not, in fact, been paid.

Clause 22 ensures that, with effect from 15 September 2011, companies cannot use MODs to obtain repayment of income tax that has never been paid. The changes affect only companies engaged in tax avoidance schemes involving MODs. The changes are expected to increase receipts by approximately £40 million per annum and also to protect against future revenue losses.

The Government launched a consultation on 27 March aimed at simplifying the tax rules on MODs and manufactured payments generally, with a view to making avoidance more difficult in future. Any changes following the consultation will not take effect before the Finance Act 2013. The hon. Lady asked when this particular arrangement was disclosed. It was disclosed in June 2011 and the statement was made on 15 September. The clause ensures that the MODs legislation works in the way that businesses not engaged in tax avoidance understand it to work. By blocking the disclosed avoidance scheme, it promotes fairness for all taxpayers.

Clause 23 - Loan relationships: debts becoming held by connected company

Nigel Mills (Conservative, Amber Valley)

I beg to move amendment 13, in clause 23, page 14, line 36, leave out subsections (8) to (12).

Peter Bone (Conservative, Wellingborough)

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

Nigel Mills (Conservative, Amber Valley)

I am sure that you have never been welcomed to the Chair as often as you have been today, Mr Bone. I tabled this amendment to secure a debate on the Government’s use of retrospective taxation measures. The Select Committee on the Treasury noted that there were potentially four such measures in the Bill, of which this is the most significant, in terms of revenue raised. I would not like anyone to think that when I tabled the amendment, I was motivated in any way by sympathy for Barclays bank, which entered into aggressive tax avoidance arrangements. Given the esteem in which banks are held in this country and the way that they have been bailed out, Barclays was remarkably badly advised to have gone down the line of aggressive tax planning. If any body were not justified in tax planning, a bank would be top of that list.

Nevertheless, Government and Parliament should be careful about where we seek to use retrospective legislation. It is a pretty fundamental point of the rule of law that individual citizens or subjects should know what the law is and be entitled to plan their affairs based on the law. If the Government realise that that law is not appropriate or is not correct, then that law can clearly be changed, but that change should apply only from the point at which notice is given of the change. We could find numerous examples in the Bill where the Government have announced changes or the intention to introduce a change. Perhaps the detail will come along later, but clearly all taxpayers can understand that there is a potential change coming. What we have in this clause is a backdated change that effectively cancels the effect of a measure that may or may not have been in compliance with the tax code; the Government were clearly not entirely confident in the tax situation.

There is a real principle here about whether the Government should use retrospective taxation effectively to change the law to make it apply in a way that is different from how the person thought it would apply when they entered into a transaction. I suspect that in any field other than taxation, we would be very concerned. I do not think we would like to see the criminal law being amended retrospectively to make something we did yesterday a crime when it would not have been a crime then, based on the law as it stood. Not that all retrospective legislation is inappropriate; I think in the last Session both Houses of Parliament quite happily passed a retrospective bail law to put the situation back to what both the Government and most defendants thought it was. The clear point there was that that was restoring a situation that everyone had thought pertained, as opposed to creating a situation that perhaps one side wished was the case but may not have been.

It is important that the Government now set out when they are prepared to use retrospective legislation and when they are not. We have obviously had the Rees doctrine in place for a long time. My right hon. Friend the Member for Charnwood (Mr Dorrell) set out the principle when he was a Treasury Minister:

“Where it is discovered that the tax law does not have the effect that the Government and taxpayers generally thought it had, there are circumstances in which it is right to introduce legislation to restore the position retrospectively to what it was thought to be.”—[ Official Report, 29 June 1992; Vol. 210, c. 378-79W.]

The key point is the effect that the Government and taxpayers generally thought a measure had, not simply the effect that the Government might have wished it had.

Those of us concerned about the use of retrospective legislation are in pretty good company. In 1987, the former Prime Minister, Tony Blair, said:

“Parliament should oppose retrospective legislation, for a number of reasons. The principal democratic reason is that people are perfectly entitled to do whatever the law permits them to do and that it is wrong afterwards to make it unlawful.”—[Official Report, 15 July 1987; Vol. 119, c. 1179.]

Who are we to disagree with Tony Blair? For those not convinced by what the former Prime Minister said, the Exchequer Secretary to the Treasury himself said the following in debate four years ago:

“For investors, the idea that UK tax law is likely to be changed retrospectively is unattractive, and the UK is, for various reasons, acquiring a reputation for having an uncertain and unstable tax system, which is bad for the UK economy.”––[Official Report, Finance Public Bill Committee, 22 May 2008; c. 367.]

He was entirely right four years ago.

I accept that sometimes compromises have to be made in government. Clearly, if there are large amounts of tax at stake as a result of aggressive tax schemes, there may be a need to close those promptly to protect the Exchequer, especially in the current situation. However, we must be careful that we do not create the impression of a tax regime in which people cannot plan their affairs based on what the law is, and in which there is a risk that the situation regarding what they may quite reasonably do today, thinking it legal, could somehow change retrospectively, with unfortunate tax results.

We may accept that where people are engaging in predominantly aggressive tax avoidance, that is fair game, but the risk is that people undertaking innocent transactions may get caught up in the crossfire. There is also the general reputational risk of a tax regime where that can happen. People might think, “I am not sure I want to invest there and expose myself to those vagaries.” They want the Government to set things out, because they want a certain, stable and predictable tax regime in which people can invest with certainty and know what the situation will be. A combination of the use of retrospective legislation and having a general anti-abuse rule, which I know the Government are consulting on today, creates quite a poisonous mix. It is hard to know exactly what the law is that we are being expected to comply with. It can be changed by legislation, or it can be effectively changed by a tax inspector in the course of their job.

I am not the only one who is concerned. In paragraph 89 of its excellent report on the Budget, the Treasury Committee raised concerns. I am sure that the hon. Member for Bassetlaw was keenly involved in that. It asked the Government to set out a policy on when retrospective legislation should be used. I hope the Minister can do that.

On the rule on taxing a release of debt, I can see the logic; if there is a UK lender and a UK borrower, and the loan is impaired and written off, the UK lender gets a tax deduction. It is right that the borrower, who now owes a lot less, should get taxed on that effective profit. That symmetry is entirely reasonable in the tax regime, but the rule causes huge complexity for struggling companies that face insolvency, because if they enter a formal insolvency procedure, there is no tax on the waiver of the loan. If we try to apply this structure outside a formal process, that tax liability is triggered.

I was practising a few years ago and the insolvency issue used to come up. We had insolvent companies, and we tried to find a way to rescue the trade and make it viable, and to protect the jobs. We did not really want to go down the formal administration process, with all its costs and various horrors. This provision could make that quite hard. If someone goes down the administration route, they avoid the tax, so what people were trying to do was get into that situation without the full administrative procedure. I do not pretend that that is what the people we are talking about here were worried about. This is not perhaps an area where there is no commercial reason at all for concern about the operation of the rules, which is why I am a little concerned about why the Government decided that of all the tax avoidance issues that they have chosen to legislate on, this was the one that justified the full retrospective effect of backdating a change to before the Government announced that there might be some change.

It would be useful if the Minister set out the Government’s policy on the use of retrospective legislation—when they think it is appropriate, and what criteria they use to decide that it is necessary—so that we can be sure that it is used only in exceptional circumstances where there is really abusive behaviour and significant amounts are at stake, and that it does not creep into being a general approach to tax policy for this Government.

John Mann (Labour, Bassetlaw)

The Government Whip is not keen on Labour Members speaking in these debates. He wants to get through the business a lot quicker and to get votes through. That is his prerogative, but if he really wanted to do that, he would have a word with the Ministers, who have tabled more than 200 amendments. It is a bit rich for a Government Whip who is trying to manage business to kick off and say that we are not getting through business fast enough when they do not have Ministers who can schedule business properly. They have to keep amending the Bill—as I say, they have more than 200 amendments, unless they are withdrawing them. The Government Whip turned up late to one sitting; I would be more than happy to stay late tonight to debate the issues with him.

Richard Harrington (Conservative, Watford)

The hon. Gentleman is very experienced in parliamentary matters—far more so than I. From memory, can he tell me how many amendments the Labour Government tabled in such Bill Committees?

John Mann (Labour, Bassetlaw)

As the hon. Gentleman might recall from pre-recess days, I was never invited to sit on a Finance Bill Committee, because of the Government Whips. That is why I was put on the Information Committee and Unopposed Bill Committees, as the hon. Member for Amber Valley will find out.

Nigel Mills (Conservative, Amber Valley)

I have already had the pleasure of two years on the Administration Committee; I am not sure what else the Government could do to me.

John Mann (Labour, Bassetlaw)

I suspect that the Government saw the hon. Gentleman coming and thought, “Here’s someone who wants to speak for the country—someone independent-minded who will point out obvious flaws in Government business.” So far, he is the only one on the Government Benches prepared to do that, but I can see others thinking that there are flaws that they wish to address. That is one good reason for supporting his amendment. A second good reason is the articulate way in which he introduced it. Who could not be convinced by his arguments? He has convinced me.

Richard Harrington (Conservative, Watford)

Again, I would like to record how grateful I am to the hon. Gentleman for giving way. His time is usually taken up by his own erudition. I would like to use this opportunity to ask whether one of the Ministers can tell us at some stage how many times the Labour Government tabled amendments to Finance Bills, and how many amendments there were. He has made the serious allegation that the Government are tabling a lot of amendments to take up our time. As one new to this parliamentary activity, I would be pleased to learn whether the number is far more or less than it used to be.

John Mann (Labour, Bassetlaw)

Well, we will all await with interest the response to that intervention, myself included.

There are two good reasons to support the amendment. The hon. Member for Amber Valley, my would-be future neighbour, cited the most compelling one: Tony Blair, as a young MP in 1987, seeing democracy emerging before him, felt that it was appropriate to point out that retrospective legislation is a bad thing, and who are we to disagree with such an outstanding Prime Minister? I am virtually convinced for that reason alone.

The hon. Member for Amber Valley has had the courage to table the amendment. It strikes me that his proposal is sound and that the Government are unsound. Given that at least two Members present are on the Treasury Committee, deliberated on the issue and reached consensus, I know that he is looking forward to at least two votes in support of his amendment: one from me, and a second from a Member on the Government Benches. It is only right that we members of the Treasury Committee show consistency in our wisdom in criticising the Bill. I suspect that the Government feel that the amendment is so well worded that they have to accept it. I look forward to hearing that.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I wish not so much to comment on the amendment of the hon. Member for Amber Valley, although I join my hon. Friend the Member for Bassetlaw in commending him for tabling it, but to seek clarification on the clause, which affects debts held by connected companies and has retrospective effect from 1 December 2011. Before the legislation, profits made as a result of such arrangements were not taxable, and companies would regularly seek to exploit the tax loophole. The clause addresses such aggressive avoidance measures, as the Minister states, ensuring payment of more than £500 million in tax, protecting further billions of pounds in tax from being lost, and maintaining fairness in the tax system—laudable aims. As the impact note states, the measure could bring in as much as £385 million in the first year, although subsequent declines in revenue are anticipated as the schemes increasingly fall out of use.

Turning to the origins of clause 23, Barclays bank, which was revealed as the bank involved in that tax avoidance measure, disclosed its use of the two schemes to HMRC in February this year, prompting the Government to introduce the legislation and to take the unusual step of giving it retrospective effect so as to cover arrangements entered into as far back as 1 December 2011 and up to 27 February 2012, when the decision was taken. It has been widely documented that Barclays was surprised by HMRC’s reaction to the two schemes, which it believed were in line with those employed by other banks. Barclays has subsequently voiced its concerns quite publicly. The hon. Member for Amber Valley has put on record his concerns about the use of retrospective tax avoidance action by the Government, and I shall be interested to hear the Minister’s comments on the amendment.

I would like some clarity on the impact of the measures in the clause, given the importance of the matter. Is HMRC aware of any other companies or British banks entering into such arrangements? If so, is it intending to come to any settlement with them? Has HMRC investigated or at least estimated how many such schemes are being used, and how many will close as a result of the clause? Turning to the retrospective nature of the legislation, how was the date—1 December 2011—decided on, and what does HMRC intend to do about schemes in place before that date? If the scheme and the determination of its abusive nature came to light before the announcement was made in February, why in particular was the 1 December date chosen? Finally, as there have been no tax information and impact notes since the Budget, what are the confirmed revenue numbers for the closure of the scheme?

Nigel Mills (Conservative, Amber Valley)

It would be useful to the Committee if the hon. Lady could set out the Opposition’s view on the use of retrospective legislation. Labour used it occasionally while in government—is that something the Opposition now regret and wish they had not done, or is it something that they would like to see used more often?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I had reached the end of my comments, and it would be useful at this stage to hear from the Minister with the Government’s response to the hon. Gentleman’s amendment. A particular decision was taken in this case to apply the legislation retrospectively. That is what is encapsulated in my questions—why was 1 December 2011 chosen?

Charlie Elphicke (Conservative, Dover)

Let me put two points to the hon. Lady. First, did not the previous Government use retrospective legislation time and again? Secondly, when there is egregious tax avoidance by a large financial institution, should we not stop it—and stop it quickly—to safeguard taxpayers’ interests?

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I absolutely agree with the hon. Gentleman’s second point. The point I am making is that the legislation is backdated to 1 December. If the tax avoidance scheme had come to light on 1 December, why did it take until February to take appropriate action to close it down?

The Government’s use of retrospective tax avoidance action depends very much on each case, and we have discussed at length the circumstances in which tax avoidance is abusive, aggressive and egregious. All those matters need to be discussed at length, so I hope that the legislation on the general anti-avoidance rule that will be dealt with in the coming year will make things clearer. The hon. Member for Amber Valley raised valid points, and companies need to know where they stand with the law. Retrospective action is not ideal, but when circumstances mean that it is necessary, I agree with the hon. Member for Dover that action must be taken.

David Gauke (Conservative, South West Hertfordshire)

Clause 23 amends legislation that applies to debts that are held by a connected company. It introduces a targeted anti-avoidance rule and a retrospective provision in relation to arrangements designed to work around existing rules. During my remarks, I will address the amendment tabled by my hon. Friend the Member for Amber Valley.

It may help the Committee if I say a word or two about the background. Normally, a company is taxed on the commercial profit that arises when it must pay back less than the amount that it borrowed, but special rules apply to connected companies. In such cases, a tax charge arises when a company connected to the borrower buys the debt, or when debt is held between companies that become connected. Those rules were amended in the Finance Act 2010 to block schemes under which banks bought back their own issued debt that was trading at a discount in the market. In other words, they could buy their own debt for less than the amount they originally borrowed without paying tax on the difference.

At the time, the Government made it clear in two written ministerial statements that they expected such profits to be subject to corporation tax. Despite those clear statements, a bank entered into a scheme using contrived arrangements that, again, sought to ensure that the profit on the buy-back of its own debt was not subject to corporation tax, and a substantial amount of tax—around £300 million—was avoided. In a written ministerial statement on 27 February, I announced amendments to the rules so that companies cannot get round the legislation in the future.

The measure will take effect retrospectively to 1 December 2011 to ensure that banks and any other company that use this or a similar scheme after that date will be taxed on the transaction as it should be. The hon. Member for Newcastle upon Tyne North asked why the specified date was 1 December. That is essentially the first date on which HMRC was aware that the scheme or similar schemes were being used. The hon. Lady said that the scheme was notified on 1 December, but that is not the case. It was notified in February, but its use dated back to 1 December, so that is the date in the clause.

We did not take this action lightly. The scheme involves a large potential tax loss. There is a history of abuse of debt buy-back, as is shown by the written ministerial statements, and the bank in question has adopted the code of practice on taxation of banks, under which it commits not to engage in such tax avoidance schemes.

Ian Mearns (Labour, Gateshead)

I am interested in the figures that the Minister cites. He said that something like £300 million involved just one bank. Has HMRC or the Treasury investigated how much could be recoupable from banks that use this mechanism?

David Gauke (Conservative, South West Hertfordshire)

HMRC is not aware of other examples of similar avoidance in this area. Of course, under disclosure of tax avoidance schemes legislation, it is necessary for a taxpayer to notify in such circumstances. Considerable attention has been placed on such schemes, so the current assessment is that HMRC is not aware of other taxpayers who have made use of the mechanism.

Ian Swales (Liberal Democrat, Redcar)

Will the Minister clarify whether the connected companies have to be UK companies, or is this intended to catch arrangements made overseas? There are some well documented cases of debt being held by related companies in countries such as Luxembourg, which is clearly designed to avoid UK tax.

David Gauke (Conservative, South West Hertfordshire)

This relates only to UK connected companies, if that provides clarification. For the reasons I have outlined, the Government believe that this is a wholly exceptional circumstance in which action to change legislation with full retrospective effect is justified.

I appreciate the points raised by my hon. Friend the Member for Amber Valley. It is right to make it clear that retrospection should be used only in wholly exceptional circumstances. He asked if I could set out in more detail the Government’s position on retrospection. We set out our position in the protocol on unscheduled announcements of changes in tax law, which was published in “Tackling tax avoidance” at Budget 2011. The protocol makes it clear that the deterrent effect of making changes with immediate effect needs to be balanced against the need to maintain the UK tax system’s reputation for predictability, stability and simplicity. It states:

“In particular, changes to tax legislation where the change takes effect from a date earlier than the date of announcement will be wholly exceptional.”

As we said in our announcement of 27 February 2012, we believe this is a wholly exceptional circumstance and that retrospective action is therefore justified. In this case, a very large amount was at stake, a part of the tax code that had been repeatedly exploited was involved, and the bank was in breach of its obligations under the banking code of practice. For fullness of disclosure, I should add that the Chancellor made it clear in his 2012 Budget statement that we are ready to take retrospective action if there are continued attempts to avoid stamp duty land tax, but I put on record that we will take that step only in wholly exceptional circumstances.

My hon. Friend the Member for Amber Valley brought his experience to bear on a point about a restriction of the use of debt buy-backs preventing company rescues. This measure would not prevent company rescues. HMRC has made clear in draft guidance that none of the current exceptions to the tax charge that arises on the acquisition of debt by connected companies have changed. The arrangements under which HMRC gives clearances in company rescue situations, such as debt equity swaps, will continue to apply. The retrospective legislation combats specific avoidance arrangements that were designed to avoid a tax charge that would otherwise have arisen and, as statements made when the legislation was last amended made clear, that should have arisen. The new provision will tax the full economic profit that a group makes when impaired debt of a debtor company becomes held by a connected company and is then released.

To return to the clause, in general it makes three changes to the existing legislation. First, when companies with existing debt become connected, the calculation of the deemed release is amended to prevent avoidance. In response to comments on the draft legislation, published on 27 February, clause 23 also amends the wording of the current legislation to iron out a feature that sometimes gives rise to queries about its application in the context of the loan relationships rules on connected companies.

Secondly, it introduces a targeted anti-avoidance rule, to prevent future tax avoidance in this area. Thirdly, to ensure that the particular avoidance scheme would not succeed, it introduces a retrospective provision to counter the contrived arrangements used by the scheme. This an appropriate point for me to address, in detail, the amendment that would remove subsections (8) to (12) of the clause, which introduce the retrospective element.

I have referred to the protocol on unannounced tax changes, and the Government have set out their policy on the area. The present case is an exceptional one, and, for the three reasons that I have outlined, we believe that it is justifiable to use retrospective legislation.

The Government are clear that aggressive tax avoidance schemes are unacceptable. The use of retrospective legislation demonstrates that we will not tolerate aggressive attempts by companies to abuse the tax system with contrived arrangements, to avoid paying their fair share. I therefore hope that my hon. Friend the Member for Amber Valley will be persuaded—having probed very effectively and shown all the diligence that one would expect, which no doubt he will demonstrate on the Information Committee in years to come—to withdraw his amendment. I hope that the clause will stand part of the Bill.

Nigel Mills (Conservative, Amber Valley)

I am grateful to the Minister for that clarification. I think that we can all see that, given the example of a bank signing the agreement and entering into a scheme with the amounts of tax in question at stake, if any case was going to be in the line of acceptability for retrospective legislation, this would be it. Therefore I am happy in this situation to withdraw the amendment. I was trying to get the Government to clarify what they perceived as acceptable use, and we have had some progress on that, for which I am grateful.

I beg to ask leave to withdraw the amendment.

Clause 24 - Companies carrying on businesses of leasing plant or machinery

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 15, in clause 24, page 15, line 32, leave out ‘moving into tonnage tax’ and insert ‘joining tonnage tax group’.

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

Government amendments 16 to 22.

Clause stand part.

David Gauke (Conservative, South West Hertfordshire)

I am not sure whether this is the first time we have considered Government amendments to the Bill.

John Mann (Labour, Bassetlaw)

It will not be the last.

David Gauke (Conservative, South West Hertfordshire)

It will not be the last, I confess.

Clause 24 makes changes to the sale of lessor company legislation to ensure that it remains effective. The sale of lessor company provisions were introduced to prevent groups from turning a temporary tax timing benefit into a permanent tax saving. Companies carrying on a business of leasing plant or machinery are able to defer profits for tax purposes through a claim to capital allowances. In many instances the capital allowances produce tax losses in the lessor company, which can then be used by the wider group to reduce its taxable profits.

Prior to the introduction of the sale of lessor provisions in the Finance Act 2006, the company could be sold to a loss-making group once the allowances were exhausted and the company was about to become tax profitable. Once in the loss-making group the tax profits could be reduced by the new owner’s losses. The sale of lessor provisions address the risk that the leasing profits might escape taxation in the new ownership by bringing an amount equivalent to the deferred profits into charge. After the sale a matching expense restores the timing benefit to the lessor company and prevents the deferred profits from being taxed again.

The changes introduced by the clause will target known schemes involving big ticket leases, where substantial amounts of tax could be at risk. The changes were announced at Budget 2012, with immediate effect to prevent forestalling and to protect other revenues at risk; draft legislation was also published. However, we have continued to engage with industry groups. That is why we have tabled amendments 15 to 22, which will preserve the intent of the clause, while preventing unintended consequences.

The first change introduced by the clause will prevent the lessor company from carrying back losses arising after the sale against profits derived from the sale of lessors charge. Using those losses against the charge means that the selling group keeps the timing benefit that it has enjoyed. However, the Exchequer has to wait until the losses of the buying group, augmented by the sale of lessors relief, are exhausted before tax can be collected on the deferred profits. The restriction will restore the intended effect of the legislation, in that it will prevent the temporary tax timing benefit from becoming a tax saving.

The second change targets arrangements that exploited a mismatch in definitions, which allowed a ship leasing company to join a tonnage tax group that included the lessee company without breaking its existing group relationship. No charge was calculated under the sale of lessors provisions and the lessor company was able to enter tonnage tax, where profits are computed for tax purposes on the basis of the tonnage of the ship and not on the normal corporation tax basis. As a result, profits deferred for tax purposes up to that point would have fallen out of charge unless special rules within the tonnage tax regime operated to calculate a balancing charge for an asset sold shortly after entry. As introduced, the clause countered that arrangement by triggering the sale of lessors provisions when the company entered tonnage tax.

Representatives of the shipping industry pointed out that that approach could affect companies that entered tonnage tax in circumstances where there is no change in group membership, the lessor company having always been a member of the same tonnage tax group. Amendments 15 to 22 address that, so that the clause will now ensure that, for the purposes of the sale of lessors provisions, there will be a change of ownership when a lessor company enters a tonnage tax group. The amendments will also prevent the possibility that profits could be taxed twice, by preserving any unused relief calculated under the provisions for use against certain balancing charges arising after the company enters tonnage tax.

The changes target contrived arrangements and situations in which there is a risk that tax on profits will be lost, and they preserve the revenue protection provided by the sale of lessors provisions. I hope that the clause will stand part.

Catherine McKinnell (Labour, Newcastle upon Tyne North)

I wish to comment on clause 24 in its entirety and on all the amendments. Earlier, my hon. Friend the Member for Bassetlaw pre-empted the Minister’s introduction of this first set of Government amendments and eloquently stated his frustration at the Government’s having to table such amendments at this stage. I accept that the amendments fall within the remit of clarification rather than of U-turn, which I am sure is a relief for the shipping industry and members of the public.

There has been no formal consultation process on the Bill, which explains why the amendments are necessary. The Government have justified having no consultation on the need to take quick action to implement a revenue-protection measure, which is a laudable aim. However, following the discussions with the shipping industry that the Minister has outlined, the amendments were tabled to obviate significant unintended consequences for companies, including the possibility of a potential double charge in certain circumstances. Will the Minister say whether the HMRC is now satisfied that, despite the lack of consultation on the clause and aside from discussions with the shipping industry about the amendments, the changes will not unfairly impact on relevant stakeholders? Does not the fact that the shipping industry felt moved to seek amendments to the clause show that some form of formal consultation prior to implementation was needed?

Given that there has been no consultation, has HMRC at least investigated how many businesses are involved in this type of tax avoidance? Has it investigated how many businesses have moved from the corporation tax method to the tonnage tax method as a result? Lastly, the impact note sets out the projected figures for the clause’s Exchequer impact up to 2017, but no calculation has been provided for how much revenue the scheme could bring in. Will the Minister share that information with the Committee today?

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the hon. Lady’s questions. She asked about consultation, and to a large extent, answered her own question by making it clear that this is anti-avoidance legislation. Such measures have a risk of forestalling, and the Government have taken many steps to increase the amount of consultation and the publication of draft legislation. By and large, most draft legislation is published in November and December in advance of the Finance Bill the following year, which gives interested parties an opportunity to analyse it and draw HMRC and the Treasury’s attention to any unintended consequences or weaknesses in the drafting. That step taken by the Government has been widely welcomed, and it has contributed towards an improved quality of legislation.

However, there are difficulties with anti-avoidance measures because of the danger of forestalling. Publishing a measure for consultation without bringing an anti-avoidance measure into effect can, in some circumstances, put tax at risk. Having said that, even when the Government have been required to act quickly, we have been willing to listen and take action where necessary in response to any concerns that have been expressed.

We are content that the measure is appropriately targeted. It is supported by the shipping industry, which is content with the clause as amended by amendment 15, and amendments 16 to 22. The measure effectively targets the avoidance risk and will not have an impact on commercial situations, which means that we now have the appropriate legislation.

In answer to the hon. Lady’s question about cost, or rather, the additional revenue that will be raised, we are talking about small sums of money. We are not making great claims. The impact assessment suggests that it is a negligible sum. It is more about protecting revenue in future, rather than bringing in additional sums. However, although the measure is designed more for revenue protection than anything else, it is none the less important that we protect revenue where we can.

The hon. Lady also asked about the scale of the impact and the number of companies that are likely to be affected, but I cannot give her the precise number. The provision only protects revenue, rather than raises additional sums, so it is difficult to make a precise assessment of the numbers that are likely to be affected. However, if I am able to provide additional information, I am happy to write to her and provide further clarification.

Clause 25 - Corporate members of Lloyd’s: stop-loss insurance and quota share contracts

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I will be relatively brief, because the clause is perhaps not hugely controversial as far as politicians are concerned, although I am sure that there has been some considerable debate within the industry to ensure that the clause, eventually tabled by the Government, makes changes that it can at least live with, if not what the industry necessarily would have tabled.

The clause will amend the tax treatment of premiums incurred by the corporate bodies in Lloyd’s for member-level stop-loss insurance. It aims to align the timing of the tax deduction for the premiums with the recognition of the profits to which they relate. The premiums incurred by the corporate bodies in Lloyd’s for stop-loss insurance taken out at member level will be taxed on the declaration basis and not on an annual basis, as is currently the case.

It is important to recognise that the declaration basis is a tax treatment specific to Lloyd’s. It allows the recognition of the profit or loss arising directly from the corporate body’s syndicate membership for any particular underwriting year to be deferred for tax purposes until after that underwriting year has closed. The underwriting year closes after three years, with the result that the profit or loss is recognised for tax purposes in year four, the period in which the profit or loss is declared. The measure also includes an anti-avoidance provision in respect of quota share contracts.

As I said at the outset, I do not intend to go through the whole history of the issue. However, following the announcement of the measure in Budget 2011, the Government held informal consultations, as I understand it, with Lloyd’s and other interested parties. Following the consultation, when the draft legislation was published, the Government decided to make further provisions to deal with multi-year contracts and renewals of contracts taken out before 6 December 2011.

It is important to recognise that the new rules will affect only stop-loss policies, which are defined for such purposes as any insurance taken out by the corporate member against losses in its underwriting business except for quota share contracts.

I have a question for the Minister. The summary of impacts indicates that the measure is expected to

“increase receipts by approximately £200 million a year over the period in which the timing advantage unwinds. The final costing will be subject to scrutiny by the Office for Budget Responsibility”.

Is the estimate still the same? Has any revision been made to that due to the work done so far, or will we have to wait to see how that plays out in future years?

Mark Hoban (Conservative, Fareham)

It is a pleasure to serve under your chairmanship this afternoon, Mr Bone.

As the hon. Member for Kilmarnock and Loudoun said, the measure is a straightforward one, addressing the issue that emerges when corporates in Lloyd’s take out cover against losses and have claimed the cost of that in advance of the profits being incurred, and the timing difference that works in their favour.

We have had quite extensive discussions with Lloyd’s, as the hon. Lady referred to, so she got this point right: the measure has been greeted with a degree of support—“consent”, I suppose, is probably a better way of describing it. It applies only to corporates, not individuals.

The estimate referred to by the hon. Lady is the estimate we gave at the time of the autumn statement. We have no reason to believe that the estimate is in any way incorrect. We expect it to raise the revenue that we indicated at that time.

Clause 26 - Abolition of relief for equalisation reserves: general insurers

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Clauses 26 to 30 relate to the claims equalisation reserves. With your permission, Mr Bone, and in order to make it easier for the Committee, I intend to speak to clauses 26 to 30 collectively, rather than individually, although I understand that we would have to vote on them individually.

Peter Bone (Conservative, Wellingborough)

Order. If it is convenient for the Committee, we will take clauses 26 to 30 together.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Thank you, Mr Bone. I do not think that hon. Members would have been as excited if I had spoken to each individual clause for the same length of time. It would be helpful to take the clauses together, given that they all relate to the claims equalisation reserves.

The measures will repeal the current legislation for the tax treatment of claims equalisation reserves. For general insurance companies, the tax treatment of equalisation reserves is governed, as I am sure that all Government members of the Committee know, by sections 444BA to 444BD of the Income and Corporation Taxes Act 1988. Section 47 of the Finance Act 2009 and the Lloyd’s Underwriters (Equalisation Reserves) (Tax) Regulations 2009 provide for same tax treatment for Lloyd’s corporate and partnership members that maintain an equivalent reserve to that maintained by general insurance companies.

Because of European Union regulatory changes, the Government are abolishing the ability of corporate members of Lloyd’s and insurance companies to obtain a tax reduction for transfers to equalisation reserves. Funds in existing equalisation reserves will be taxed, spreading the release evenly over the six years from the date that the solvency II capital requirement came into force. Clauses 26 to 29 make the changes in relation to general insurance companies, while clause 30 makes them in relation to secondary legislation with regard to Lloyd’s.

The measure deals with the taxation impacts arising from the removal of the regulatory requirement for general insurers to maintain claims equalisation reserves as a result of the implementation of the solvency II directive. The measure repeals the current tax rules and the parallel rules for Lloyd’s, and provides for a transitional period over which the built-up reserve will be charged to tax.

The measure was originally announced in the 2011 Budget and, again, an informal consultation with an industry working group took place between April and August 2011. Both the Association of British Insurers and Lloyd’s—representing general insurance companies and corporate and partnership members at Lloyd’s—were included in the consultation. It would be fair to say that some concerns were raised during the initial stages. Colin Graham, the UK insurance tax leader at PricewaterhouseCoopers, said:

“This could put UK-based insurers at a competitive disadvantage to insurers based in some other countries at a time when the Government is seeking to attract industry back to the UK. Relief already claimed will reverse, costing the industry £500m over six years from 2014 onwards.”

Will the Minister address the importance of a competitive UK tax regime to attract investment, particularly at this point in time? Does he have any concerns about the competitiveness of the UK tax regime? What assessment has been made of the measure’s impact?

To return to the point of the clauses, an equalisation reserve—also described as a claims equalisation reserve—is a reserve built up, generally from profitable years, as a cushion against periods with worse than average claims experience. Insurance companies in the UK—but not Lloyd’s members—are required by the Insurance Companies (Reserves) Regulations 1996 to establish equalisation provisions. Those provisions, which are in addition to the provisions required to meet the expected ultimate cost of settling claims outstanding at the balance sheet date, are required by the Companies Act to be included in technical reserves, even though they do not represent known liabilities at the balance sheet date.

From 1996, general insurers were allowed to treat amounts transferred into CERs as tax deductible, and amounts transferred out were treated as taxable receipts. In 2009, rules were introduced to allow equivalent deductions for Lloyd’s corporate and partnership members. Not every territory in Europe has a regulatory requirement to maintain equalisation reserves. Again, I wonder whether we can impress that on the Minister in the context of these clauses, because it could be argued, and indeed some people have taken the view, that CERs are not required because any business risks would be provided for in the company accounts.

I mentioned earlier that during the consultation process, industry groups were very unhappy about the proposals. They were calling for CERs to continue for tax purposes only, as I understand is the case in Luxembourg. However, I also understand that at that time Her Majesty’s Revenue and Customs and the Treasury were not convinced by the arguments advanced by the industry groups. I think that it would be fair to say that they have now accepted the changes, but perhaps it is the case that they knew that the changes were coming and therefore have reluctantly accepted them, rather than rocking the boat.

I have a couple of points in relation to aspects of clause 30 that relate specifically to Lloyd’s and Lloyd’s corporate members. I have mentioned the regulatory requirement for general insurance companies—but not members of Lloyd’s—to maintain CERs in respect of certain lines of business. It is important to recognise at this point that the clauses deal with both the situation in relation to Lloyd’s and the wider insurance sector.

I may want to impress further points on the Minister, but it would be helpful if he could respond to those points. It is worth noting that clause 26 repeals existing tax legislation providing for tax relief for CERs maintained by general insurers and introduces transitional rules to tax built-up CERs over six years. Essentially, one sixth of a company’s existing CERs will be brought into tax each year for a six-year period.

Clause 27 sets out a provision that an insurance company may make an irrevocable election to treat the built-up reserves as taxable in one calendar year as opposed to being spread. That will enable companies to plan the taxation of the reversal of CERs and potentially to optimise tax loss planning.

Clause 28 relates to double tax relief. The clause is relevant where a company has built up CERs that will be taxable and carries on business through a permanent establishment outside the UK for which DTR is due in respect of any income or gain. A proportion of DTR may be offset against the premium income.

Clause 29 specifies that where there is a transfer of whole or part of the business to another insurance company—within the charge to UK corporation tax—the transferrer and transferee may jointly make an irrevocable election within 28 days of the transfer for the deemed receipts to be allocated between them. For the year of transfer, an apportionment would be made between the transferrer and transferee based on the date of transfer. The remaining deemed receipts would then arise in the transferee. It seems that if such an election were not made, the deemed receipts would arise in the transferrer on the cessation of trade.

As I have mentioned a couple of times, not every part of Europe has that regulatory requirement. I wish to press the Financial Secretary on that point and ask him what further comments the industry has made, if any. Is he confident that there is consensus on this issue, as there was on the earlier ones? As I have said, I might have other questions on the clauses that I want to return to.

Peter Bone (Conservative, Wellingborough)

I thank the shadow Minister for outlining clauses 26 to 30. I remind the Committee that we are debating clauses 26 to 30 together, so if anyone wants to speak on any of them, now is the time to do so. Does the Financial Secretary wish to speak?

Mark Hoban (Conservative, Fareham)

I will say very little, Mr Bone, because the hon. Lady has done my job for me in setting out briefly but succinctly the point of each clause. I shall, however, make one or two comments.

For most insurers—not for Lloyd’s—claims equalisation reserves flow from existing insurance regulations. What we are seeing is their replacement by the EU directive, solvency II, which is due to come into place in, I think, 2014. An extensive part of the Bill, to which we will come quite soon, I hope, deals with the broader reforms of life assurance taxation to reflect solvency II.

One thing that flows from solvency II is the removal of the need to have claims equalisation reserves, so there will be no regulatory requirement to hold them, but that prompts the question of what should happen to the taxation of such reserves in future. A number of industry participants have asked the question that has been asked here, about whether the measure would remove or erode UK insurers’ competitive advantage. When we signalled our intention to remove the claims equalisation reserves, or change the tax treatment of them, we made the point that if insurers could provide strong reasons to maintain the tax treatment on competitiveness grounds we would listen to the arguments. The evidence that we received from insurers was not, however, strong enough to justify retaining the current treatment, so we opted to change it, but recognised that significant claims equalisation reserves had built up and that it was therefore appropriate to soften the impact on insurers by enabling the unwinding of the reserves to be spread over six years, so we did listen to the industry in that respect.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Perhaps the Financial Secretary has answered my question, by saying that the evidence was assessed as not being strong enough, but will he say a bit more about the arguments that the industry made at that point? Was it content that the six-year unwinding process was the solution?

Mark Hoban (Conservative, Fareham)

The reality is that the industry accepted that its arguments were not that robust, and the industry’s consent to introduce the changes has been gained. Reserving systems vary from country to country, and a number of countries have yet to decide exactly how they will approach the issue under solvency II. One of the benefits of solvency II is to produce a single regime for solvency purposes across Europe, so one would hope that the tax treatment in individual countries would flow from that.

We have put in place changes to the taxation of foreign profits—particularly as a consequence of the reforms that my hon. Friend the Exchequer Secretary has driven through—that are particularly valuable to the insurance industry and to those who wish to take advantage of solvency II to use London as the headquarters of their European operations. The insurance industry supports our tax changes, and we are starting to see the benefits emerge, as companies decide to move their domicile to the UK. I am content that we have the right position.

My final point is on clause 30, which applies the rules to Lloyd’s. As I pointed out earlier, it was the case that Lloyd’s was not required to set up equalisation reserves, but the 2009 statutory instrument to which the hon. Lady referred provided the opportunity to do so. Clause 30 ensures that there is consistent treatment of those reserves across all insurers, including Lloyd’s.

Clause 31 - Tax treatment of financing costs and income

Peter Bone (Conservative, Wellingborough)

With this we may consider schedule 5 stand part.

Rachel Reeves (Labour, Leeds West)

It is a pleasure to serve under your chairmanship this afternoon, Mr Bone. Hon. Members will be aware that the debt cap rules that we are debating under clause 31 came into effect on 1 January 2010. They overhaul the taxation of multinationals and restrict the UK tax deduction for interest costs of UK companies that form part of a larger group. The rules are designed so that the aggregate UK corporation tax deductions—the financing costs—do not exceed the group’s external financing costs globally. They are aimed at cash-rich UK-based groups with upstream loans into the UK from abroad, as well as non-UK parented groups that fund their UK operations via the route of debt finance.

Clause 31 represents a number of changes to those measures that were introduced in January 2010 and included in the Finance Bill that was considered last year by hon. Members. I understand that clause 31 arose from discussions with industry groups. I would like to ask the Minister a number of questions in relation to the clause. Will the Minister confirm that those discussions with industry groups referred to meetings of the debt cap working group, or did they refer to other industry group meetings on the issues raised by the clause?

Various questions were raised at the time of last year’s Finance Bill that I am not sure have been fully addressed, which is why I ask the question about the meetings with various parties over the past year. Is the Minister confident that the changes we are debating in relation to clause 31 will ensure that the system that will stand in place if the Bill is passed will work effectively? If not, does the Minister envisage further changes or improvements in future Finance Bills, or is he confident that the changes set out in this Finance Bill to change what we discussed last year in Committee will complete the issue in hand?

In the Bill Committee on last year’s Finance Bill, the Minister gave hon. Members an assurance and said:

“The cost of the changes in the debt cap legislation are negligible for both businesses and HMRC”—[Official Report, Finance (No.2) Bill Committee,26 October 2010; c. 73.]

Has that proved to be the case, and will the changes before us today affect that in any way? In other words, what are the financial implications of the changes that we are discussing today for tax revenues and the turnover or profits of the businesses that will be affected by these changes?

I also have some specific questions about financial service companies and whether they are captured. I do not think that they are. If not, why not? Is it still the case that HMRC, the Treasury and the Minister consider that clause 31 is unworkable in respect of financial service companies? What progress have the Government made on applying similar rules to financial service companies if, indeed, that is being looked at? If it is not being looked at, will the Minister set out why those rules would not be appropriate for those sorts of companies?

Can any mitigating measures be taken so that at least the spirit of clause 31 would be applicable to all companies, not just non-financial service companies? It is particularly important to consider this issue at a time when bank lending to small businesses in all our constituencies is drying up. Bank of England lending figures from May showed that net lending to British businesses has fallen year on year in every month since May 2010. With British businesses struggling in this double-dip recession—we saw the numbers for manufacturing this morning—we know that small businesses in our constituencies face difficult times. It is clear that we need to consider the issue of bank regulation extremely carefully.

Steve Barclay (Conservative, North East Cambridgeshire)

I am a little puzzled as to why the hon. Lady took the data from 2010, not 2008. Was it not a former Chancellor’s understandable risk-averse requirements around capital for banks and his concern about taxpayer liability that changed those capital requirements and impacted on the banks’ ability to lend?

Rachel Reeves (Labour, Leeds West)

A number of things are impacting on the banks’ ability to lend. It is partly down to the changes in capital requirements, but they are obviously a good thing, as banks will hopefully be less reliant on taxpayers if they get into difficulty in future.

Another thing that affects the banks’ ability to lend is the continuing payouts of large bonuses and, in some cases, dividends. It is also about the lending targets and the framework that the Government set. After the current Government came to power, they set the Project Merlin agreements with the banks to get them lending again. With net lending falling, that clearly has not been the case, and that is one reason why we have argued for more robust and tougher arrangements not just for banks that have been bailed out by the taxpayer but for banks that have relied on quantitative easing and the insurance schemes that were put in place by both the current and the previous Government.

Steve Barclay (Conservative, North East Cambridgeshire)

I thank the hon. Lady for giving way for a second time. I note that she did not address the question regarding the material change in capital requirements for banks happening in 2008, not 2010. However, on bonuses, does she regret the guaranteed bonuses that were allowed by the regulatory regime under the last Government? It was those bonuses that meant that, even after the financial crash, banks were legally compelled to pay massive bonuses irrespective of their performance, because the previous Government allowed guaranteed bonuses to be decoupled from bank performance.

Rachel Reeves (Labour, Leeds West)

I did address the hon. Gentleman’s first point in my response. Having higher capital requirements of course affects the banks’ ability to lend, but it is not the only thing affecting that ability. It is right that banks are being made to put aside more capital, because one reason why they had to rely on taxpayer bailouts in the face of the financial crisis is that they did not have the buffers of capital that would have been put aside had they been more prudent. I welcome higher capital ratios and the fact that banks must put more aside—although there are issues with it working in practice, to which the hon. Gentleman is perhaps alluding.

Bonuses should be just that. They should be awarded for exceptional performance, and it is right that the regulators—the Financial Services Authority and now the Bank of England—have more robust procedures for the regulation of remuneration packages. I would like shareholders to have much more say over the remuneration of top people in firms, which is why it is extremely disappointing that the Government are considering watering down shareholder responsibilities, perhaps with a three-year review rather than an annual review. Pay, bonuses and remuneration are set every year, and it is therefore right that shareholders should vote every year, not every three years. [Interruption.] If the hon. Gentleman wants to make another intervention, I am more than happy for him to do so.

Peter Bone (Conservative, Wellingborough)

Order. I might be being unusually thick, but I really cannot quite see how this argument is relevant to the clauses that we are supposed to be discussing. However, I am sure that I should be informed more.

Rachel Reeves (Labour, Leeds West)

I am happy to continue with the text, but when we talk about the changes to the way in which the debt cap rules are applied, it is important to consider that these rules do not apply to financial service companies. Such companies are a large part of the UK economy—part of the economy responsible for some of our current troubles, so it is right that we take time to focus on their tax treatment as well.

To go back to the specific issues in clause 31, members of the Committee will also be aware of the tax arrangements of Vodafone, which were revealed over the weekend, and of the fact that Vodafone pay little or no corporation tax in this country despite doing huge amounts of business here and making large profits in this country. The revelations were described as

“a series of legal accounting manoeuvres involving a complex net of offshore companies”.

Part of clause 31 relates to companies in this country that are often financed by debt finance and are part of large multinational groups. Will the Minister confirm whether schemes such as the one set up by Vodafone, which has caused such an outcry over the past few days, will fall under the rubric of this amendment and whether its tax affairs would be changed in any way by the debt cap changes that we are debating under this clause? Specifically, what steps is he taking to consider passive income, which is income generated by multinational foreign subsidiaries from UK assets that are artificially located offshore for tax reasons? Furthermore, would any part of these debt cap rules apply to such circumstances?

Ian Mearns (Labour, Gateshead)

My hon. Friend poses an important question. All of our constituents share the desire to ensure that those in high echelons of business, who are making significant profits, pay their share of the country’s tax burden. The way in which this Bill Committee and this House deal with such issues will determine how we are judged by the ordinary citizens of this country. We must ensure that large companies pay the right tax.

Rachel Reeves (Labour, Leeds West)

Part of the reason why these debt cap rules were put in place at the beginning of 2010 was to stop companies that are part of large groups from using offshore arrangements to avoid paying corporation tax in the UK by artificially moving income so that they can minimise their tax payments, thereby depriving the Exchequer of valuable income. It is particularly important to address such arrangements at this time when ordinary families and businesses are struggling with their tax burdens—whether it be the increase in VAT and national insurance contributions, the loss of working tax credits, or some of the new VAT changes. Despite some of the U-turns that we have seen, VAT will still be applied to things that were not previously subject to it.

In those circumstances and in that environment, it is even more important that all businesses, especially big businesses, are seen to, and do, pay their fair share of tax. That is why these debt cap rules were originally introduced at the beginning of 2010 and why the Government should go back, as they did in the previous Finance Bill and as they are doing this year, to ensure that those rules are working effectively. I hope that these changes will bring in more money for the Exchequer, and I look forward to hearing whether the Minister agrees with that.

Even now, despite efforts by the previous Government and by this Government to crack down on tax avoidance, companies such as Vodafone are still getting out of paying their fair share of tax. I therefore share my hon. Friend’s frustrations, and those of his constituents who get particularly annoyed when they see their taxes going up yet some of the richest people not paying their fair share.

If Vodafone is not affected by these changes, how many of the estimated 1,800 companies or groups that I think fall under the rubric of clause 31 and the debt rules for large groups does the Minister think will be affected? How does he expect their tax liabilities to be changed because of the rules? How much money did the debt cap rules raise previously, and how much does he expect them to raise in the remaining years of this Parliament and beyond? Will some companies see their tax liabilities fall because of these changes, or will tax liabilities only increase? Are specific types of company likely to see their tax liabilities increase more than others? Will the rules affect larger groups or those with more offshore arrangements? Will particular industries be affected by specific changes to the rules? I hope that the Minister will clarify some of those important points on the debt cap rules because it is in the interest of all of us in the House that the measures work effectively for our constituents, small businesses and families.

Ian Mearns (Labour, Gateshead)

Some hon. Members will be aware that I am currently doing a fellowship with the Industry and Parliament Trust that involves working with small and medium-sized enterprises, as well as some larger companies. I think there is a measure of incredulity among the owners of small and medium-sized enterprises, as well as some large businesses, when they see companies such as Vodafone not paying what everyone would regard as their share of this country’s tax burden.

Rachel Reeves (Labour, Leeds West)

I pay tribute to my hon. Friend for his work with the Industry and Parliament Trust. Those of us who have an association with the trust will know the excellent work that it does to ensure that Members on both sides of the House are in touch with industry and understand some of its concerns, and it is valuable to bring those experiences to the House and to Bill Committee such as this. My hon. Friend makes the point that small businesses, as well as many medium-sized and large businesses, try to do the right thing, invest, employ people, grow their businesses and pay their fair share of tax, and they want to see that everybody is doing that, not only them.

The businesses that I talk to in my constituency of Leeds West get frustrated because they do not have a choice about what taxes they pay. They cannot afford fancy lawyers and accountants to do the paperwork for them; they have to pay the taxes that they know they need to pay, and they cannot work the system to reduce their tax bill. It is therefore right to close loopholes, which is what the clause seeks to do. I welcome that and look forward to the Minister’s response on the specific points that I have raised.

Nigel Mills (Conservative, Amber Valley)

I shall speak briefly on this clause. While I was still in practice, I had the misery—it was an incredible misery—of trying to interpret how such rules would affect various groups of companies that were doing nothing remotely aggressive or making any attempt to avoid tax, but merely had a normal commercial level of debt and happened to be a subsidiary of a foreign group. The rules, I think, were an attempt to tackle some tax abuse that was clearly out there, but from memory I do not think that they were the Revenue’s first choice from a menu of options to try and tackle that abuse, although all the other options were too difficult or could not be done. It was, therefore, left with this option, which was not even the second choice.

The calculations required to weave the legislation through the EU compliance the Minister spoke about earlier are incredibly complicated. They are trying to prove an incredibly bizarre concept. The UK group is allowed debt of up to the same amount as the worldwide group. If a worldwide group has £1 billion turnover and £500 million debt, a UK group with a £10 million turnover is okay as long as its debt does not exceed £500 million. The bizarre concept clearly catches a load of large groups—the hon. Lady quoted 1,800. The vast majority will have no adjustment.

Looking back over the three years since the measure was introduced, does the Minister think that it was a very sensible measure? Was it a sledge hammer to crack a nut? Is the combination of all the other rules that tackle excessive debt and debt taken on for an allowable purpose or the new controlled foreign company rules sufficient to tackle the abuse? If it is not sufficient, will the general anti-abuse rule he wants to introduce be enough? Can the whole worldwide debt cap now be consigned to history as a badly conceived idea that was very hard to implement and very hard to comply with?

The amendments are largely sensible. There are some anti-avoidance ones, but also some that take out a few of the real anomalies in the calculations. Some groups that effectively have no net debt somehow have a disallowance, because they got some debt created by some very strange calculations that had to be done. I welcome the amendments, but I ask the Minister to see whether the tax that is really raised is sufficient to justify the compliance burden. There is a huge amount of other rules that could be used to tackle the abuse sufficiently, which I wholeheartedly agree needs to be tackled. Is this is one area of tax simplification that we could manage and so lose the rules completely?

Fabian Hamilton (Labour, Leeds North East)

It is a pleasure to serve under your chairmanship this afternoon, Mr Bone. I want to make a few comments on the clauses. They generally attempt to close down abuses and tighten up on tax avoidance. If I may, I want to refer to some points that my hon. Friend the Member for Leeds West made and some points that my hon. Friend the Member for Gateshead made in his interventions. I also want to refer to points that I made when we discussed corporation tax.

A number of Members this afternoon have made mention of the situation regarding Vodafone. My hon. Friend the Member for Leeds West especially drew attention to it, but we would all be highly concerned at a large multinational corporation continuing not to pay tax as it should in this country by arrangement through legitimate, and it seems legal, avoidance measures. Companies, such as the one I used to run and the many thousands of small businesses that are the seedcorn of job creation and economic growth, as my hon. Friend said, are forced to pay the taxes that they are required and asked to pay, because they cannot afford the accountants and lawyers who might use existing and legitimate legal avoidance measures.

Clause 32 extends the definition of “normal commercial loan” to include loans that carry a right to conversion into shares or securities in quoted companies that are not connected to the company that issues the loan. That means that such loans will be within the definition of normal commercial loans and the holders of such loans will not be treated as equity holders.

Peter Bone (Conservative, Wellingborough)

Order. Sorry to interrupt the hon. Gentleman, but we have not quite got to clause 32. We are still on clause 31.

Fabian Hamilton (Labour, Leeds North East)

I apologise, Mr Bone, you are right. I am looking at the wrong notes, but I think that the points I made still apply. I want to make a general point, but when we debate clause 32, I will come back to what I was about to say. My point is generally valid. [ Interruption. ] Thank you, I aim to entertain this afternoon.

Members of the general public will be baffled when they see some of the techniques that huge multinational corporations, which are making big profits not just in this country but in other countries throughout the world, are using to avoid paying the tax that smaller companies making similar profits would have to pay in this country. Clauses 31, 32 and 33 aim to close down those abuses, but the question is whether they do so accurately and whether it is in a way that most members of the public are able to comprehend. I know that my constituents, like the constituents of every hon. and right hon. Member in this room, will be completely baffled as to why some can get away with it and others cannot.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend is making a powerful case about what the general public would see as fair and reasonable. Does he, like me, welcome the fact that the Government are apparently going to take some action on stamp duty avoidance? If it is right to do it on the avoidance of stamp duty, it is also right to do it in the context of companies such as Vodafone.

Fabian Hamilton (Labour, Leeds North East)

I entirely agree with my hon. Friend. The impression and feeling that I get from my constituents and from others whom I meet is that nobody likes to pay more tax than they have to, but people do not object to paying tax if they believe that it is fair and equitable and that everybody pays the same, according to the rules that are laid down, and that no one is treated separately or with any sort of favour. The problem we have is that companies such as Vodafone—there are others—are treated separately. They have a privileged position, which undermines the views of most members of the public, who want to pay the tax that they believe that they should pay or they deserve to pay or need to pay. It must be fair and equitable. Anything that tightens up the rules that ensure that all companies and all organisations pay their fair share should be welcomed.

Ian Mearns (Labour, Gateshead)

My hon. Friend is making a powerful point. This all underpins the credibility or otherwise of this House to legislate for fairness. If ordinary citizens and taxpayers out there do not feel that what is being done on their behalf—in their name—is fair, it calls into question whether they can find ways of dodging the tax system as well. We all like to think that the taxes that we raise are fair and are used to fund the public services that we all need and want to have. It undermines the system, however, if people do not believe that the whole system is credible.

Fabian Hamilton (Labour, Leeds North East)

I thank my hon. Friend for that very good point. It is not only that the public have to feel that paying tax is fair and that everybody pays their fair share but, if we are seen not to be ensuring—I hope that the clause will help this—that each company, each corporation, each business and each individual pays their fair share, that undermines this House too. We know that these days politicians are held in fairly low esteem, but if we can show the public that no one gets away without paying their fair share, that might do something to lift the reputation of hon. and right hon. Members from across the House.

When my hon. Friend the Member for Gateshead talks about fair taxation, I think about the documentary programmes and the knowledge that I have of that wonderful small country, Norway. When we look at the Norwegian system and listen to what earners at all levels say about the tax that they pay—in many cases, their tax burden is considerably higher than ours—they say that they are happy to pay that tax because they can see, openly and transparently, how it is spent on the services that they want. They can openly see that it is fair and that everybody pays their fair share according to what they can afford, and they can take advantage of the public services offered. It seems to me that we have a fair way to go before members of the public in this country feel the same way about our tax system.

Julie Hilling (Labour, Bolton West)

Does my hon. Friend agree that that sentiment is also shared by other Scandinavian countries, including Finland and Sweden, where the people want to contribute to the tax system because of the benefits that they receive back?

Fabian Hamilton (Labour, Leeds North East)

Yes, my hon. Friend is absolutely right. The Nordic countries offer a model for how taxation can be fairly collected and fairly spent in an open and transparent way that we perhaps have yet to achieve fully. I will add to her examples. In two weeks’ time, I will be privileged to take a group of hon. Members to Iceland. It is a small country. [ Interruption. ] It is not a junket. [ Laughter. ] We know the reputation that Iceland has unfortunately had owing to the crisis in 2008, with the collapse of Icesave, Landsbanki and other Icelandic banks. We know also that in a referendum the Icelandic people refused to collectively pay back the amount of money that had been lost. However, the action taken by the Central Bank of Iceland has been exemplary. Iceland has turned its economy around, so that now its proportion of debt to GDP—it is obviously a much smaller country than the United Kingdom—has reduced considerably. Its percentage unemployment has gone down and it is turning the whole thing around very rapidly. That is a lot easier in a small country, but we would do well to consider the lessons that the governor of the Central Bank of Iceland can offer our Government on how to turn these things around—how to pay debt off and how to ensure that everybody pays their fair share.

In conclusion, and perhaps we can refer to Iceland and the other Nordic countries soon—

Richard Harrington (Conservative, Watford)

I am listening very carefully to what the hon. Gentleman has to say and I am very sorry that I shall not be able to join him on that visit to Iceland. It seems that he is suggesting that the Government’s economic policy to sort out our problems should be to default on our debts and then say that we are restructuring everything. Did I misunderstand the hon. Gentleman, because that is exactly what happened in Iceland?

Fabian Hamilton (Labour, Leeds North East)

I am sorry that the hon. Gentleman misinterprets what I am trying to say. What is impressive is that the Icelandic Government and the people of Iceland, while refusing to sign up to the referendum proposition that was put to them, have said that they will pay. The governor of the Central Bank of Iceland, who we will meet in two weeks’ time, said to us last year that every individual who has lost money through the collapse of Icelandic banks will be repaid. It will not happen next year, but they will be repaid. As a nation and as a public, they are determined not to default on their debts. They will do that, but they want to be given time so that they can grow their economy sufficiently to ensure that that is done.

I hope to catch your eye as we go through the later clauses, Mr Bone.

Aidan Burley (Conservative, Cannock Chase)

Before the hon. Gentleman finishes, I wish to say that I agree with the principle of what he is saying. Will he extend his argument about everybody paying their fair share of tax to civil servants who set up companies to avoid being on the payroll and to BBC presenters, some of whom are paid on the BBC payroll and some of whom set up their companies and are paid off the payroll? Will he extend that principle to everybody being paid on the payroll? Should the practice that grew up under the previous Government of highly paid civil servants, such as the head of the Student Loans Company, being paid through their private company rather than the payroll, be abolished as well? Is that the Labour party’s position?

Peter Bone (Conservative, Wellingborough)

Order. Clause 31, “Tax treatment of financing costs and income”, can in no way be referenced to personal service contracts. Will the hon. Gentleman finish his speech?

Fabian Hamilton (Labour, Leeds North East)

Thank you, Mr Bone. I presume, therefore, that I may not answer.

Peter Bone (Conservative, Wellingborough)

Correct.

Fabian Hamilton (Labour, Leeds North East)

Okay. Well, I will not. I will just thank the hon. Gentleman for his intervention and conclude by saying that I hope that clause 31 and the subsequent two clauses will do their bit to ensure that avoidance measures are tightened up so that everybody, from large corporations to small individuals, pays their fair share of tax openly and transparently.

David Gauke (Conservative, South West Hertfordshire)

Clause 31, for it is clause 31, makes a number of changes to the debt cap legislation and ensures that debt cap rules are simpler to apply and eliminate situations in which the rules apply unfairly. It also introduces schedule 5. Let me provide a little bit of background for Committee members. As we heard, the debt cap legislation was introduced in the Finance Act 2009. The debt cap rules restrict the amount of interest that large groups can deduct for the purposes of corporation tax. The restriction is made by comparing net UK financing expenses of the group with the amounts shown for finance costs in the consolidated accounts of the worldwide group. The debt cap rules apply only to 1,800 large groups. The majority of the changes are being made to ensure that the rules operate as intended, and their cost is nil. I hope that that answers one of the questions raised by the hon. Member for Leeds West.

Rachel Reeves (Labour, Leeds West)

So the benefit to the Exchequer from these changes will be zero: they will not bring in any additional revenue.

David Gauke (Conservative, South West Hertfordshire)

The intention is to ensure that the rules apply fairly. We do not expect this to be a revenue-raising measure. The financial implications of the debt cap changes are negligible, the changes will ensure that the rules work fairly, and we do not expect them to have an impact on business.

Rachel Reeves (Labour, Leeds West)

Will the Minister give way again?

David Gauke (Conservative, South West Hertfordshire)

I will, but before I do, I should say that the changes will apply to all groups that have to submit debt cap computations for their accounting periods ending after the date of Royal Assent. Until those groups submit their tax computations, we cannot know how many of the 1,800 companies will be affected by the changes. Overall, we think that the measure will be neutral. Some groups will benefit from the relieving provisions, such as changes to the de minimis and some will have extra tax to pay, for example, if they are within the anti-avoidance rules. At the moment we have to make an assessment, which is that it is neutral. This is not a revenue-raiser. There will be a cost for some companies and a benefit for others.

Rachel Reeves (Labour, Leeds West)

For what reasons would a company pay less tax? Although the Minister does not know yet what the tax implications will be, what is his and the Treasury’s estimate of how many of the 1,800 companies will end up paying more, and how many will pay less?

David Gauke (Conservative, South West Hertfordshire)

I refer the hon. Lady to the comments that I made a moment ago.

One relieving provision contained in the Bill relates to the de minimis rules and may result in companies having to pay less tax. We will have to wait until the tax computations come in to find out about the number of companies involved. This is a complex area and the number of companies concerned will depend on their circumstances. Our assessment is that the measure is neutral.

Seema Malhotra (Labour, Feltham and Heston)

Will the Minister clarify why he is proposing the changes and what was not fair about the previous arrangement?

David Gauke (Conservative, South West Hertfordshire)

If I may continue, I shall perhaps be able to answer the hon. Lady’s question.

In the broadest terms, the changes make the debt cap operate more fairly. The consultation process was well received. The Law Society, the Chartered Institute of Taxation and Deloitte’s all commented favourably on the engagement by HMRC and the Government in respect of this matter. The key issue raised by accountancy firms, law firms and representative bodies was the proposed form of the de minimis election, to which we have made changes as a result of the consultation. The election will not be backdated to 2010 because that would have meant increased compliance burdens and uncertainty for business, as tax returns for 2010 based on the old rules would already have been submitted to HMRC. Those changes were warmly welcomed and the measure was announced in Budget 2011. The changes being made deal with areas that created real difficulty for businesses, which were raised during consultation.

I will try to pick up some of the additional points that were raised during the debate. First, the debt cap rules commenced on 1 January 2010, so they were first applied to groups’ accounting periods ending on 31 December 2010. As a result, HMRC is only just starting to see returns for that period and later ones. As a result, the amounts that the debt cap has brought in during this year cannot be fully quantified until later this year.

Nigel Mills (Conservative, Amber Valley)

Perhaps it would be helpful if the Minister explained how easy it has been to roll out training for HMRC inspectors on that point. Has he any idea how many inquiries have been launched so far on that topic? My understanding is that the training process has taken some time, and I am not sure whether any inquiries have been launched.

David Gauke (Conservative, South West Hertfordshire)

I am not able to give my hon. Friend an answer for the moment, but I will ponder further while I speak and see whether inspiration arrives.

The hon. Member for Leeds West asked about the consultation process. I confirm that there were meetings with the debt cap working group, which represents large groups, and their advisers. There were 16 responses to the consultation and seven to the draft legislation, and the main respondents were accountancy firms, law firms and representative bodies.

The issue was raised about whether the clause applies to financial services companies, and why the rules were not being applied to such companies. Financial services companies are specifically excluded from the debt cap, because the application of the debt cap rules on banks’ ordinary trading assets and liabilities would have had a disproportionate effect on their debt cap computations.

Having thought further about the number of inquiries on the debt cap—[Laughter.]—I can tell the Committee that evidence so far suggests that most groups are applying the debt cap rules correctly, so few inquiries have been made so far. Why that piece of information escaped me earlier I do not know, and I apologise to the Committee for not being on top of that.

A question was also asked about Vodafone. The hon. Member for Leeds West should not be surprised by the fact that I cannot comment on the affairs of individual taxpayers, and I would not have thought that she would expect me to do so. The tax affairs of the UK’s largest businesses are dealt with by dedicated teams in HMRC who routinely risk-assess the returns of the companies they deal with. Those returns will include the debt cap computations, where the rules will apply to all relevant companies in exactly the same way.

Fabian Hamilton (Labour, Leeds North East)

On the last point, can the Minister reassure us that the rules are genuinely applied equitably to the companies that fall within that special group in HMRC and to all the other companies that HMRC has to deal with?

David Gauke (Conservative, South West Hertfordshire)

Yes, HMRC seeks to deal with all taxpayers fairly, and to ensure that taxpayers pay the tax that is due under the law.

Steve Barclay (Conservative, North East Cambridgeshire)

Is it not the case that the deal with Vodafone, which was reached in July 2010 and which has caused concern to the Public Accounts Committee, was reached under procedures set up for the Department by the previous Government and was reached by officials without Ministers seeing the detail, because Ministers are excluded from seeing individual taxpayers’ deals? If there are concerns in the House about this issue, they should be addressed to the officials responsible for that deal.

David Gauke (Conservative, South West Hertfordshire)

It is right, both as a correct assessment of the current situation and right in the sense that it is the right principle that Ministers are not involved in the affairs of individual taxpayers. I hope that principle—that it is not for Ministers to make decisions on the individual liability of a taxpayer—retains the support of all parts of this Committee.

With regard to the specific high-profile cases, my hon. Friend, who is a member of the Public Accounts Committee, will of course be aware of the work that Sir Andrew Park has been doing in making assessments of some of them. I understand that Sir Andrew, or the National Audit Office, will set out conclusions in the near future.

Fabian Hamilton (Labour, Leeds North East)

The Minister is absolutely correct—of course Ministers should not have a say or have any sight of any tax arrangements that are made. In that case, does he agree that it is utterly irrelevant which Government are in power, and if Government Ministers cannot influence a case—as they should not—why mention the fact that it happened to be the last Government under which the arrangements were made?

David Gauke (Conservative, South West Hertfordshire)

I am not attempting to make any party political point on this particular issue. It is for HMRC to administer the tax law. I believe that it seeks to do so and does so in a way that is fair and reasonable. I think that all parts of this House want to ensure that the correct amount of tax is collected, and that is the task for HMRC.

Ian Mearns (Labour, Gateshead)

I know that the Minister will not comment on the tax affairs of an individual company, but there are some well advertised and documented cases where it seems to the man on the No. 53 Saltwell Park omnibus that some large organisations are not paying—from the perspective of the ordinary taxpayer—what would be a fair share of the overall tax burden. The problem is, and it is a problem for us all, is that that brings into question the legitimacy of the taxation arrangements that we come to as a Parliament.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman raises a number of interesting points. I will not spend long doing so, but let me make two points. First, it is of course right that everybody should pay the right amount of tax. The right amount of tax is, of course, what we determine by way of the law and taxpayers have a duty to comply with the tax law. I do not think that anyone would disagree with that and it is the role of HMRC to ensure that the right amount of tax is collected in accordance with the law.

Secondly, the hon. Gentleman makes an important point about legitimacy. There is a balance to be struck between scrutiny—ensuring that companies pay the right amount of tax—and recognising that there is sometimes a great deal of complexity in these matters. Very often, multinational companies have profits from a number of different countries and there is a question of which jurisdiction the tax should be paid in, as opposed to whether tax is paid at all. Sometimes companies have losses that they can use to set off against future profits, and very often these are quite complicated matters.

There is also a responsibility for all of us, in terms of the legitimacy of the tax system, to ensure that we choose our words carefully. Sometimes it seems to me that there have been some press reports where the allegations have been perhaps stronger than the evidence suggested.

Ian Swales (Liberal Democrat, Redcar)

I will return to a point I raised earlier because it is more relevant to this clause. Does the Minister believe that these provisions will make it less likely that essentially UK-based companies will move their debt to jurisdictions such as Luxembourg, thereby lowering their tax bill through interest payments to what is actually a related company, with the interest receipts being taxed at the lower level in the country concerned? That practice has been highlighted in the media recently.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend is taking me into technical measures when he asks whether the clause will have that effect. The Government’s overall approach, as with previous Governments, has been to ensure that the right amount of tax, a fair amount of tax, is paid. The way that interest accountability operates is complex, so I do not want to be drawn too much on particular circumstances, although he raises an important point.

Charlie Elphicke (Conservative, Dover)

I thank my hon. Friend for giving way. He is generous in taking interventions and in not making party political points, which is a generosity that I do not share.

Having what the lawyers call a policy/operational dichotomy is fundamentally right. Ministers set the policy and the civil servants do the operations. Ministers cannot handle individual taxpayer cases because of the risk that they might do something that is arbitrary or unfair. That is the key principle: a separation of policy from the operations of individual taxpayers.

Nevertheless, there seems to be a lot of disquiet concerning the Vodafone and Goldman Sachs cases, and no doubt other cases, that the policy set by the previous Government seems to have been unduly lenient and allowed the Revenue to make some disgusting, cosy deals. The previous Labour Government allowed big business to rip off the tax system, and it seems to me that the policy should be reviewed. The coalition should not slavishly follow Labour’s policy.

Peter Bone (Conservative, Wellingborough)

Order. Interventions are supposed to be short; they are not supposed to be speeches.

David Gauke (Conservative, South West Hertfordshire)

All I will say is that Sir Andrew Park has been considering some of the high-profile cases, but there are circumstances in which it makes sense for HMRC to reach a settlement with a taxpayer, rather than going through the full process of litigation. That process, which has been in operation since 2007, has resulted in revenues that were not previously possible. Greater light will be shed on some of the individual cases in the near future. Clause 31 and schedule 5 ensure that the debt cap rules operate simply and fairly, and I hope that they may stand part of the Bill.

Clause 32 - Group relief: meaning of “normal commercial loan”

Rachel Reeves (Labour, Leeds West)

Clause 32 extends the definition of “normal commercial loan” to include loans that carry a right to conversion into shares or securities in quoted companies that are not connected to the company issuing the loan. I understand that that means that the group status of the company will not be affected if it issues that type of loan, because the holders of such loans are not considered to hold equity in the issuing company.

I have some specific questions for the Minister. First, will the change in definition have any knock-on effects for the commercial banking sector, and any impact on consumers, both individuals and small businesses, who take out loans as a matter of course? I presume the answer is no, but I would appreciate clarification on that point.

Secondly, if the holders of the loans covered by the clause will not be treated as equity holders, does that have any implications for the amount of risk that they hold and therefore the cost of the loans? Thirdly, will the Minister enlighten hon. Members as to how many such loans are made annually? What impact is clause 32 likely to have on the number of loans issued? Fourthly, what are the revenue implications of clause 32 and, specifically, what types of business are most likely to be affected in terms of both the size and the type of business they conduct?

Peter Bone (Conservative, Wellingborough)

Did you wish to speak, Mr Hamilton?

Fabian Hamilton (Labour, Leeds North East)

I think, Mr Bone, that I have perhaps made the points that I wanted to raise.

Mark Hoban (Conservative, Fareham)

This is quite a helpful clause. It is not meant to tackle evasion or some loophole. It is meant to encourage different forms of lending and to enable a situation where a lender can choose, rather than having their debt repaid in cash, to have it repaid through the issue of share capital. That is quite helpful, particularly given some of the challenges that businesses face in achieving funding. The current rules work against that in the sense that there is a risk that the issuing company may be de-grouped as a consequence of somebody else having a beneficial right to those profits. This is facilitating finance rather than working against the interests of businesses.

As the hon. Lady rightly suggested, the answer to her first question is no. With her second question she raised the capital treatment of this in the context of Basel II and then clearly Basel III and CRD4. With your agreement, Mr Bone, I will write to the hon. Lady on this. It is a technical, complex point, and I would want to come back on that. Her third question was whether this will help business. I think it will. I do not believe it will have an adverse impact on other groups. The tax impact note suggests that there is no adverse impact on small businesses. I think potentially it will help businesses. I think it will help to improve administrative processes, for example, for the issuer. It makes it easier to enter into this sort of loan agreement. It has no revenue implications and the tax impact note makes that point. I think it is a measure to be welcomed, which I think is the spirit in which she engaged in scrutiny of this clause.